NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS
OF PRESENTATION:
The
consolidated financial statements include the accounts of the
Company, Organic Products Trading Company, LLC
(“OPTCO”), Sonofresco LLC (“Sono”) and
Generations Coffee Company, LLC (“GCC”). All
significant inter-company balances and transactions have been
eliminated in consolidation.
USE
OF ESTIMATES:
The
preparation of the Company’s financial statements in
conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Significant estimates include
allowance for uncollectible accounts receivable and reserves,
inventory obsolescence, depreciation, intangible asset valuations
and useful lives, taxes, contingencies, and valuation of financial
instruments. These estimates may be adjusted as more current
information becomes available, and any adjustment could have a
significant impact on recorded amounts.
CASH:
Cash
consists primarily of unrestricted cash on deposit at financial
institutions and brokerage firms.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
PREPAID
GREEN COFFEE:
Prepaid
coffee is an item that emanates from OPTCO. 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 $41,176
and $45,049 as of October 31, 2016 and 2015, respectively. The
prepaid coffee balance was $435,577 and $620,452 as of October 31,
2016 and 2015, respectively.
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:
|
|
|
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
|
INVENTORIES:
Inventories are
stated at the lower of cost (First in, first out basis) or market,
including provisions for obsolescence commensurate with known or
estimated exposures. There are no reserves for obsolescence as of
October 31, 2016 and 2015.
MACHINERY
AND EQUIPMENT:
Machinery and
equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Purchases of machinery and equipment and additions and betterments
which substantially extend the useful life of an asset are
capitalized at cost. Expenditures which do not materially prolong
the normal useful life of an asset are charged to operations as
incurred. The Company also provides for amortization of leasehold
improvements.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
COMMODITIES
HELD BY BROKER:
The
commodities held at broker represent the market value of the
Company’s trading account, which consists of option 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 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:
|
|
|
|
|
|
Option
contracts
|
$
(83,753
)
|
$
(134,613
)
|
Future
contracts
|
218,475
|
(349,222
)
|
Commodities due to
broker
|
$
134,722
|
$
(483,835
)
|
The
Company classifies its options and future contracts as trading
securities and accordingly, unrealized holding gains and losses are
included in earnings.
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.
At
October 31, 2015, the Company held 38 futures contracts (generally
with terms of three to four months) for the purchase of 1,425,000
pounds of green coffee at a weighted average price of $1.23 per
pound. The fair market value of coffee applicable to such contracts
was $1.21 per pound at that date. At October 31, 2015, the Company
held 20 options covering an aggregate of 750,000 pounds of green
coffee beans at $1.25 per pound. The fair market value of these
options, which was obtained from observable market data of similar
instruments was $42,750.
Included in cost of
sales for the years ended October 31, 2016 and 2015, the Company
recorded realized and unrealized gains and losses respectively, on
these contracts as follows:
|
|
|
|
|
Gross realized
gains
|
$
1,443,046
|
$
1,292,471
|
Gross realized
(losses)
|
(1,000,976
)
|
(6,778,407
)
|
Unrealized
gains
|
618,558
|
1,089
|
Total
|
$
1,060,628
|
$
(5,484,847
)
|
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
GOODWILL
AND TRADEMARKS:
The
Company has determined that its goodwill and trademarks, which
consist of product lines, trade names and packaging designs have an
indefinite useful life. The value of the goodwill and trademarks
was allocated based on an independent valuation. Goodwill and
trademarks are not amortized but are assigned to a specific
reporting unit or asset class and tested for impairment at least
annually or upon the occurrence of an event or when circumstances
indicate that the reporting unit’s carrying amount of
goodwill and trademarks is greater than its fair value. As of
October 31, 2016 and 2015, the Company has determined by using a
qualitative assessment that an impairment did not exist. In 2011,
the Company adopted Financial Accounting Standard ASB ASU 2011-08
Intangibles – Goodwill and Other – Testing Goodwill for
Impairment, which allows an entity to first assess qualitative
factors to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. Under this
amendment, an entity would not be required to calculate the fair
value of a reporting unit unless the entity determines, based on a
qualitative assessment, that it is more likely than not that its
fair value is less than its carrying amount. The amendment includes
a number of events and circumstances for an entity to consider in
conducting the qualitative assessment.
CUSTOMER
LIST AND RELATIONSHIPS:
Customer list and
relationships consist of a specific customer lists and customer
contracts obtained by the Company in the acquisition of OPTCO and
Sono which are being amortized on the straight-line method over
their estimated useful life of twenty years.
ADVERTISING:
The
Company expenses the cost of advertising and promotion as incurred.
Advertising costs charged to operations totaled $170,774 and
$157,922 for the years ended October 31, 2016 and 2015,
respectively.
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. Deferred tax
assets and liabilities are individually classified as current or
non-current based on their characteristics. 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.
EARNINGS
PER SHARE:
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 6,082,777 and
6,212,929 for the years ended October 31, 2016 and 2015,
respectively.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
FAIR
VALUE OF FINANCIAL INSTRUMENTS:
The
carrying amounts of cash, accounts receivable, notes receivable,
accounts payable and accrued expenses approximate fair value
because of the short-term nature of these instruments. The carrying
amount of the bank line of credit borrowings approximates fair
value because the debt is based on current rates at which the
Company could borrow funds with similar remaining maturities. Fair
value estimates are made at a specific point in time, based on
relevant market information about the financial instruments when
available. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
REVENUE
RECOGNITION:
The
Company recognizes revenue in accordance with the authoritative
guidance. Revenue is recognized at the point title and risk of
ownership transfers to its customers upon the Company’s
shippers taking possession of the goods at the time of shipment
because i) title passes in accordance with the terms of the
Company’s purchase orders and with its agreements with its
customers, ii) any risk of loss is covered by the Company’s
customers’ insurance, iii) there is persuasive evidence of a
sales arrangement, iv) the sales price is determinable and v)
collection of the resulting receivable is reasonably assured. Thus,
revenue is recognized at the point of shipment to its
customers.
Returns: The
Company does not accept returns for damaged goods on packaged
coffee and usable green coffee, as the customer takes possession of
our product at the point of shipment. In the event a customer
claims receipt of damaged goods, the Company, acting as an agent on
behalf of the customer, may file a claim for reimbursement with the
shipper. The Company is not obligated or required to act as an
agent on behalf of its customers, but may make the business
decision to do so as a convenience to its customers. The shipper
keeps the damaged product. The Company will then ship a completely
new order to the customer once a claim has been filed and the
Company receives reimbursement or credit from the shipper for the
initial shipment. The Company does evaluate the need, if any, of an
accrual for returns for damaged goods. To date, returns for damaged
goods have been immaterial. The Company estimates that, based on
historical trends, that future returns for damaged goods should
also be immaterial.
In the
event that the Company ships an incorrect order or has returns for
short dated product, the Company will accept those two types of
items back as returns. The amount for these two types of returns
are estimated, accrued and recognized at the date of sale. These
amounts are included in the determination of net
sales.
Slotting fees:
Certain retailers require the payment of slotting fees in order to
obtain space for the Company’s products on the
retailer’s store shelves. The cost of these fees are
estimated
,
accrued and
recognized at the earlier of the date cash is paid or a liability
to the retailer is created. The amounts are included in the
determination of net sales.
Sales
discounts: The amount of sales discounts are estimated, accrued and
recognized at the date of the sale. These amounts are included in
the determination of net sales.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
REVENUE
RECOGNITION (cont’d):
Volume-based
incentives: These incentives typically involve rebates or refunds
of a specific amount of cash consideration that are redeemable only
if the reseller completes a specified cumulative level of sales
transactions. Under incentive programs of this nature, the Company
estimates and accrues the cost of the rebate when it is taken by
the reseller. These amounts are included in the determination of
net sales.
Cooperative
advertising: Under these arrangements, the Company will agree to
reimburse the reseller for a portion of the costs incurred by the
reseller to advertise and promote certain of the Company’s
products. The Company estimates, accrues and recognizes the cost of
cooperative advertising programs in the period in which the
advertising and promotional activity first takes place. The costs
of these incentives are included in advertising
expense.
SHIPPING
AND HANDLING FEES AND COSTS:
Revenue
earned from shipping and handling fees is reflected in net sales.
Costs associated with shipping product to customers aggregating
approximately $1,506,000 and $1,352,000 for the years ended October
31, 2016 and 2015, respectively, is included in selling and
administrative expenses.
CONCENTRATION
OF RISK:
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash deposits at financial
institutions and brokerage firms.
Accounts at each
institution are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to certain limits. At October
31, 2016 and 2015, the Company had approximately $1,539,429 and
$220,422 in excess of FDIC insured limits,
respectively.
The
accounts at the brokerage firm contain cash and securities.
Balances are insured up to $500,000, with a limit of $100,000 for
cash, by the Securities Investor Protection Corporation
(“SIPC”). At October 31, 2016 and 2015, the Company had
approximately $348,041 and $2,818,431 in excess of SIPC insured
limits, respectively.
See
Note 10 for concentration of risks with respect to trade
receivables and purchases from accounts payable
vendors.
OPERATING
LEASES:
The
Company has operating lease agreements for its corporate office and
warehouses, some of which contain provisions for future rent
increases or periods in which rent payments are abated. Operating
leases which provide for lease payments that vary materially from
the straight-line basis are adjusted for financial accounting
purposes to reflect rental income or expense on the straight-line
basis in accordance with the authoritative guidance issued by the
FASB. The excess of straight-line rent over actual payments by the
Company of $231,216 and $222,055 is included as deferred rent
payable as of October 31, 2016 and 2015, respectively.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cont’d):
EQUITY
METHOD OF ACCOUNTING:
Investee companies
that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to an Investee depends on an evaluation of
several factors including, among others, representation on the
Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities
of the Investee company. Under the equity method of accounting, an
Investee company’s accounts are not reflected within the
Company’s Consolidated Balance Sheets and Consolidated
Statements of Income; however, the Company’s share of the
earnings or losses of the Investee company is reflected in the
caption “Loss from equity method investments” in the
Consolidated Statements of Income. The Company’s carrying
value in an equity method Investee company is reflected in the
caption “Equity method investments” in the
Company’s Consolidated Balance Sheets.
The
Company’s investment in a company that is accounted for on
the equity method of accounting consist of the following: (1) 20%
interest in Healthwise Gourmet Coffees, LLC, a distributor of low
acidity coffees. The investments in this company amounted to
$100,000. The loss recognized amounted to $972 and $833 for the
years ended October 31, 2016 and 2015, respectively. The net value
of this investment as presented on our consolidated balance sheet
at October 31, 2016 and 2015 was $95,598 and $96,571,
respectively.
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.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY
(cont’d):
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.
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.
NOTE
4 - INVENTORIES:
Inventories at
October 31, 2016 and 2015 consisted of the following:
|
|
|
Packed
coffee
|
$
1,804,633
|
$
1,441,451
|
Green
coffee
|
11,434,024
|
11,730,006
|
Roasters and
parts
|
210,007
|
-
|
Packaging
supplies
|
827,626
|
691,361
|
Totals
|
$
14,276,290
|
$
13,862,818
|
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
5 - FORMATION OF SUBSIDIARY:
On June
23, 2016, the Company formed a wholly-owned subsidiary named
Sonofresco, LLC a Delaware limited liability company.
Pursuant to the
terms of an Agreement for Purchase and Sale of Assets dated June
23, 2016 (the “Sono Agreement”), by and among the
Company, Coffee Kinetics LLC, a Washington limited liability
company (the “Seller”), the members of the Seller and
Sono (the “Buyer”), the Company, through its
wholly-owned subsidiary Sono, purchased substantially all the
assets, including equipment, inventory, customer list and
relationships (the “Assets”) of the Seller. The
acquisition was accounted for using the purchase method in
accordance with ASC 805, “Business Combinations.” The
Buyer purchased the Assets for a purchase price consisting of
$819,564 in cash and 38,364 shares of the Company's
redeemable common stock (the "Sono Shares")
with a value of $200,004 (the "Common Stock Payment
Amount") issued on June 29, 2016.
As part
of the transaction, all of the employees of the Seller became
employees of the Buyer. In addition, on June 29, 2016, the Company
entered into a one-year advisory agreement (the “Advisory
Agreement”), with one of the Seller’s executives (the
“Executive”), on an independent contractor basis, to
ensure continuity of the business and to continue to operate the
business located in Washington. The Advisory Agreement will
automatically renew for an additional one year term upon the
expiration of the first year term unless terminated by the Company.
After completion of the first year term, the Advisory Agreement is
subject to renewal by mutual agreement of the parties. Pursuant to
the terms of the Advisory Agreement, the Executive is entitled to
cash compensation of $50,000 per annum. If the Advisory Agreement
is terminated prior to the end of the first year term, the
Executive is entitled to receive an additional $50,000 termination
fee. If the term of the Advisory Agreement is extended past the
first year term, subject to certain exceptions, the Executive will
be entitled to the $50,000 termination fee upon termination of the
Advisory Agreement.
The following table
summarizes the estimated fair value of the assets and liabilities
assumed at the acquisition:
|
|
Assets
acquired:
|
|
Accounts
receivable
|
$
84,142
|
Inventory
|
269,565
|
Equipment
|
40,000
|
Customer
list
|
120,000
|
Goodwill
|
577,905
|
Less: liabilities
assumed
|
(72,044
)
|
Net assets
acquired:
|
$
1,019,568
|
Purchase of assets
funded by:
|
|
Cash
Paid
|
819,564
|
Redeemable
Common Stock
|
200,004
|
|
$
1,019,568
|
Pursuant to
the terms of Sono Agreement, the value of the Sono Shares was based
on the three day average of the closing price of the Company's
common stock for the three trading days immediately prior to June
23, 2016. In addition, pursuant to the terms of the Sono Agreement,
during the twelve month period commencing on June 29, 2016 (the
"Closing Date"), if Seller informs Buyer of its desire to sell all,
but not less than all of the Sono Shares to the Company, Buyer
agrees to repurchase all but not less than all of the Sono Shares
at the Common Stock Payment amount.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
5 - FORMATION OF SUBSIDIARY (cont’d):
Pro Forma Results
of Operations (unaudited)
The following pro
forma results of operations for the years ended October 31, 2016
and 2015 have been prepared as though the acquisition of Sono had
occurred as of the beginning of the earliest period presented. This
pro forma financial information is not indicative of the results of
operations that the Company would have attained had the acquisition
of Sono occurred at the beginning of the periods presented, nor is
the pro forma financial information indicative of the results of
operations that may occur in the future:
|
Year ended October
31,
|
|
|
|
|
|
|
Pro forma
sales
|
$
80,132,616
|
$
119,711,018
|
Pro forma net
income (loss)
|
$
2,290,084
|
$
(1,433,493
)
|
Pro forma basic and
diluted earnings per share
|
$
.38
|
$
(.23
)
|
Basic and diluted
weighted average common shares outstanding
|
6,082,777
|
6,212,929
|
The
operations of Sono have been included in the Company’s
consolidated statement of operations since the date of the
acquisition on June 29, 2016. The total revenue included for the
period is $560,736.
NOTE
6 - MACHINERY AND EQUIPMENT:
Machinery and
equipment at October 31, 2016 and 2015 consisted of the
following:
|
|
|
|
Improvements
|
15-30
years
|
$
202,285
|
$
199,035
|
Machinery and
equipment
|
7
years
|
6,004,156
|
5,274,277
|
Furniture and
fixtures
|
7
years
|
883,250
|
612,944
|
|
7,089,691
|
6,086,256
|
Less, accumulated
depreciation
|
|
4,819,828
|
4,241,256
|
|
$
2,269,863
|
$
1,845,000
|
Depreciation
expense totaled $578,572 and $537,890 for the years ended October
31, 2016 and 2015, respectively.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
7 - 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 “Financing
Agreement”). Prior to the Modification Agreement, the
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 “Loan Facility”). On February 3, 2011,
the Company amended the 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 Financing Agreement was set to
expire on March 31, 2015. Pursuant to the Modification Agreement,
the Financing Agreement was modified to, among other things, (i)
extend the term of the Financing Agreement until February 28, 2017;
(ii) increase the maximum amount of the 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.
Other
than as described above, the Financing Agreement remains in full
force and effect. Pursuant to the Modification Agreement, the
Company is able to draw on the loan Facility up to an amount of 85%
of eligible accounts receivable and 25% of eligible inventory
consisting of green coffee beans and finished coffee not to exceed
$1,000,000. The Loan Facility is secured by all tangible and
intangible assets of the Company.
The
Loan Facility contains covenants that place annual restrictions on
our operations, including covenants related to debt restrictions,
capital expenditures, minimum deposit restrictions, tangible net
worth, net profit, leverage, employee loan restrictions,
distribution restrictions (common stock and preferred stock),
dividend restrictions, and restrictive transactions. The Loan
Facility also requires that the Company maintain a minimum working
capital at all times. The Company was in compliance with all
required financial covenants at October 31, 2016 and
2015.
As of
October 31, 2016 and 2015, the outstanding balance under the bank
line of credit was $5,121,375 and $4,317,121,
respectively.
Also on March 10, 2015, the Company, as
guarantor, and OPTCO (the “Borrower”), as borrower,
entered into a new loan facility agreement with Sterling. The new
loan facility is a revolving line of credit for a maximum of
$3,000,000 (the “New Loan Facility”). The New Loan
Facility terminates on February 28, 2017. The Borrower is
able to draw on the New Loan Facility at an amount up to 85% of
eligible accounts receivable, not to exceed 25% of all accounts of
the Borrower. The New Loan Facility is payable monthly
in arrears on the average unpaid balance of the line of credit at
an interest rate per annum equal to the Wall Street Journal Prime
Rate (currently 3.5%). The New Loan Facility is
secured by all tangible and intangible assets of the Company. In
connection with the New Loan Facility, the Company entered into a
security agreement with Sterling and provided Sterling with a
guarantee of the Borrower’s obligations.
As of October
31, 2016 and 2015, the outstanding balance under the New Loan
Facility was $1,837,000.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
8 - INCOME TAXES:
The
Company’s provision
(benefit) for income taxes in 2016 and 2015 consisted of the
following:
|
|
|
|
|
|
Current
|
|
|
Federal
|
$
219,562
|
$
(73,407
)
|
State
and local
|
155,083
|
36,610
|
|
374,645
|
(36,797
)
|
|
|
|
Deferred
|
|
|
Federal
|
941,150
|
(657,500
)
|
State
and local
|
50,125
|
(69,350
)
|
|
991,275
|
(726,850
)
|
Income
tax (benefit) expense
|
$
1,365,920
|
$
(763,647
)
|
|
|
|
A
reconciliation of the difference between the expected income tax
rate using the statutory U.S. federal tax rate and the
Company’s effective tax rate is as follows:
|
|
|
Tax at the federal
statutory rate of 34%
|
$
1,263,427
|
$
(711,680
)
|
Other permanent
differences
|
(32,944
)
|
(30,359
)
|
State and local
tax, net of federal benefit
|
135,437
|
(21,608
)
|
|
|
|
Provision for
income taxes
|
$
1,365,920
|
$
(763,647
)
|
|
|
|
Effective income
tax rate
|
37
%
|
(37
%)
|
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE
8 - INCOME TAXES (cont’d):
The
tax effects of the temporary
differences that give rise to the deferred tax assets and
liabilities as of October 31, 2016 and 2015 are as
follows:
|
|
|
Current deferred
tax assets:
|
|
|
Accounts
receivable
|
$
67,034
|
$
53,605
|
Net
operating loss
|
|
714,150
|
Unrealized
loss
|
|
180,112
|
Inventory
|
64,384
|
49,853
|
|
|
|
Total current
deferred tax asset
|
$
131,418
|
$
997,720
|
|
|
|
Non-current
deferred tax assets:
|
|
|
Deferred
rent
|
107,635
|
82,666
|
Deferred
compensation
|
227,947
|
179,614
|
|
|
|
Total non-current
deferred tax asset
|
$
335,582
|
$
262,280
|
|
|
|
Total deferred tax
asset
|
$
467,000
|
$
1,260,000
|
|
|
|
Current deferred
tax liability:
|
|
|
Unrealized
gain
|
$
49,873
|
$
|
|
|
|
Non-current
deferred tax liability:
|
|
|
Fixed
assets
|
$
503,052
|
354,650
|
|
|
|
Total deferred tax
liabilities
|
$
552,925
|
$
354,650
|
A
valuation allowance was not provided at October 31, 2016 or 2015.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are expected to be deductible, management
believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced
in the near term if estimates of future taxable income are
reduced.
As of
October 31, 2016 and 2015, 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 October
31, 2016 and 2015, the Company had no accrued interest or penalties
related to income taxes. The Company currently has no federal or
state tax examinations in progress.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 8 -
INCOME TAXES (cont’d):
The
Company files a U.S. federal income tax return and California,
Colorado, Connecticut, Idaho, Kansas, Michigan, New Jersey, New
York, Texas, Rhode Island, South Carolina, Virginia
and Oregon state tax returns. The Company’s federal income
tax return is no longer subject to examination by the federal
taxing authority for 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, New York, Kansas, South Carolina, Rhode Island, Connecticut
and Michigan and Texas income tax returns are no longer subject to
examination by their respective taxing authorities for the years
before fiscal 2011.
NOTE
9 - COMMITMENTS AND CONTINGENCIES:
OPERATING
LEASES:
In
February 2004, the Company entered into a lease for office and
warehouse space in La Junta City, Colorado. This lease, which is at
a monthly rental of $8,341 beginning January 2005, expires on
January 31, 2024. Rent charged to operations amounted to $95,504
for the years ended October 31, 2016 and 2015.
In
October 2008, the Company entered into a lease for office and
warehouse space in Staten Island, NY. This lease, which is at a
monthly rental beginning November 2008, expires on October 31, 2023
and includes annual rent increases. Rent charged to operations
amounted to $143,171 and $146,423 for the years ended October 31,
2016 and 2015. The Company also uses a variety of independent,
bonded commercial warehouses to store its green coffee
beans.
In
March 2015, the Company entered into a lease for office space in
Vancouver, WA. This lease, which is at a monthly rental
beginning April 1, 2015, expires on March 31, 2017. Rent
charged to operations amounted to $37,745 and $36,721 for the years
ended October 31, 2016 and 2015, respectively.
In
December 2016, the Company entered into a lease for office and
warehouse space in Burlington WA. This lease which is at a monthly
rental beginning December 1, 2016, expires on December 31,
2017.
The
aggregate minimum future lease payments as of October 31, 2016 for
each of the next five years and thereafter are as
follows:
October 31,
|
|
|
|
2017
|
$
300,123
|
2018
|
260,683
|
2019
|
262,413
|
2020
|
271,051
|
2021
|
279,051
|
Thereafter
|
610,416
|
|
|
|
$
1,983,737
|
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 9 -
COMMITMENTS AND CONTINGENCIES
(cont’d):
401
(K) RETIREMENT PLAN:
The Company has a 401(k) Retirement Plan, which
covers all the full time employees who have completed one year of
service and have reached their 21
st
birthday. The Company matches 100% of the
aggregate salary reduction contribution up to the first 3% of
compensation and 50% of aggregate contribution of the next 2% of
compensation. Contributions to the plan aggregated $67,083 and
$67,166 for the years ended October 31, 2016 and 2015,
respectiv
ely.
NOTE 10 -
ECONOMIC DEPENDENCY:
Approximately 29%
of the Company’s sales were derived from one customer during
the year ended October 31, 2016. This customer also accounted for
approximately $3,661,000 or 27% of the Company’s accounts
receivable balance at October 31, 2015. Approximately 54% of the
Company’s sales were derived from one customer during the
year ended October 31, 2015. This customer also accounted for
approximately $4,113,000 or 38% of the Company’s accounts
receivable balance at October 31, 2015. 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 and other allowances that management believes
will adequately provide for credit losses.
For the year ended October 31, 2016,
approximately 43% of the Company’s purchases were from four
vendors. These vendors accounted for approximately $609,000 of the
Company’s accounts payable at October 31, 2016. For the year
ended October 31, 2015, approximately 64% of the Company’s
purchases were from five vendors. These vendors accounted for
approximately $2,664,000 of the Company’s accounts payable at
October 31, 2015. 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
.
NOTE
11 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% partner in Generation Coffee Company,
LLC as an outside contractor (the “Partner”). Included
in contract labor expense, which is a component of cost of sales,
are expenses incurred from the Partner during the years ended
October 31, 2016 and 2015 of $459,345 and $422,039,
respectively.
An
employee of one of the top two vendors is a director of the
Company. Purchases from that vendor totaled approximately
$8,475,000 and $22,143,000 for the years ended October 31, 2016 and
2015, respectively. The corresponding accounts payable balance to
this vendor was approximately $237,000 and $586,000 at October 31,
2016 and 2015, 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 CEO. Within the plan guidelines, this employee is
deferring a portion of his current salary and bonus. The deferred
compensation payable represents the liability due to an officer of
the Company. The deferred compensation liability at October 31,
2016 and 2015 was $489,668 and $482,499, respectively. Deferred
compensation expenses included in officers’ salaries were $0
during the years ended October 31, 2016 and 2015,
respectively.
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 12 -
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 purchased 337,269 shares for $1,754,878 during the year
ended October 31, 2016 and 53,687 shares for $226,850 during the
year ended October 31, 2015.
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 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.
NOTE 13 -
FAIR VALUE
MEASUREMENTS
:
Fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date, not adjusted for transaction
costs. The guidance also establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels giving the highest priority to quoted
prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3) as
described below:
Level 1
Inputs – Unadjusted quoted prices in active markets for
identical assets or liabilities that are accessible by the
Company;
Level 2
Inputs – Quoted prices in markets that are not active or
financial instruments for which all significant inputs are
observable, either directly or indirectly; and
Level 3
Inputs – Unobservable inputs for the asset or liability
including significant assumptions of the Company and other market
participants.
The
Company determines fair values for its investment assets as
follows:
COFFEE HOLDING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2016 AND 2015
NOTE 13 -
FAIR VALUE MEASUREMENTS
(cont’d)
:
Investments at fair
value consist of commodity securities and deferred compensation
plan assets.
The
Company maintains a deferred compensation plan. The fair value of
the plan assets are classified within Level 1 as the assets are
valued using quoted prices in active markets. The assets are
included with Deposits and other assets in the accompanying balance
sheets. Additional information related to the Company’s
deferred compensation plan is disclosed in Note 10.
The
Company’s commodity securities are classified within Level 2
and include coffee futures and options contracts. To determine fair
value, the Company utilizes the market approach valuation technique
for the coffee futures and options contracts. The Company uses
Level 2 inputs that are based on market data of similar instruments
that are in observable markets. All commodities on the balance
sheet are recorded at fair value with changes in fair value
included in earnings.
The
following tables present the Company’s assets and liabilities
that are measured at fair value on a recurring basis and are
categorized using the fair value hierarchy.
|
|
Fair Value
Measurements as of October 31, 2016
|
|
|
|
|
|
Assets:
|
|
|
|
|
Money
market
|
489,826
|
489,826
|
–
|
–
|
Commodities-Futures
|
218,475
|
|
218,475
|
|
Total
Assets
|
$
708,301
|
$
489,826
|
218,475
|
–
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Commodities –
Options
|
(83,753
)
|
|
(83,753
)
|
|
Total
Liabilities
|
$
(83,753
)
|
–
|
$
(83,753
)
|
–
|
|
|
Fair Value
Measurements as of October 31, 2015
|
|
|
|
|
|
Assets:
|
|
|
|
|
Money
market
|
482,499
|
482,499
|
–
|
–
|
Total
Assets
|
$
482,499
|
$
482,499
|
–
|
–
|
Liabilities:
|
|
|
|
|
Commodities –
Options
|
(134,613
)
|
|
(134,613
)
|
|
Commodities –
Futures
|
(349,222
)
|
–
|
(349,222
)
|
–
|
Total
Liabilities
|
$
(483,835
)
|
–
|
$
(483,835
)
|
–
|
NOTE
14 - SUBSEQUENT EVENT:
The
Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required further
adjustment or disclosure in the condensed consolidated financial
statements.