NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(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 AND SIGNIFICANT ACCOUNTING POLICY:
The
following (a) condensed consolidated balance sheet as of October 31, 2018, 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 29, 2019 for the fiscal year ended October 31, 2018 (“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 April 30, 2019, and results of operations for the three and six months
ended April 30, 2019 and the cash flows for the six months ended April 30, 2019 as applicable, have been made.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY(cont’d):
The
results of operations for the three and six months ended April 30, 2019 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.
Significant
Accounting Policy
Revenue
Recognition
The
Company’s significant accounting policy for revenue was updated as a result of the adoption of ASU 2014-09. The Company
has adopted the new standard on November 1, 2018 and has used the modified retrospective method. The majority of the Company’s
business is ship and bill. Based on our analysis, the Company did not identify a cumulative effect adjustment to retained earnings
at November 1, 2018. The Company recognizes revenue in accordance with the five-step model as prescribed by ASU 2014-09 in which
the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised
goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange
for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the
scope of ASU 2014-09, the Company performs the following five 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. See Note 11
for revenue disaggregated by product line.
Share-Based
Payment
The
Company accounts for share-based payments using the fair value method. For employees and directors, the fair value of the award
is measured, as discussed below, on the grant date. The Company has granted stock options at an exercise price equal to the closing
price of the Company’s common stock as reported by Nasdaq. Upon exercise of an option, the Company issues new shares of
common stock out of its authorized shares.
The
weighted-average fair value of options has been estimated on the grant date using the Black-Scholes pricing model. The fair value
of each instrument is estimated on the grant date utilizing certain assumptions for a risk-free interest rate, volatility and
expected remaining lives of the awards. The risk-free interest rate used is the United States Treasury rate for the day of the
grant having a term equal to the life of the equity instrument. Beginning with the current year quarter, the fair value of stock-based
payment awards issued was estimated using a volatility derived from comparable companies share price. The assumptions used in
calculating the fair value of share-based payment awards represents management’s best estimates, but these estimates involve
inherent uncertainties and the application of management judgement. As a result, if factors change and the Company uses different
assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the
Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In
estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested
options, and the number of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture
rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY (cont’d):
The Black Scholes assumptions are as follows:
|
|
April
30, 2019
|
|
Expected Life
|
|
|
10
years
|
|
Risk free interest rate
|
|
|
2.42% ˗ 2.57
|
%
|
Expected volatility
|
|
|
43.0% ˗ 64.2
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Forfeiture rate
|
|
|
0
|
%
|
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY:
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.
The FASB issued ASU
2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The
amendment simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess
tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’
maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are
expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for
the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted in any interim or annual period. There was no material impact to the condensed consolidated financial statements upon
adoption.
COFFEE HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
APRIL 30, 2019
(UNAUDITED)
NOTE 3 - RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS AFFECTING THE COMPANY (cont’d):
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 I and Part II of this Update do not require any transition guidance because those amendments do not have an
accounting effect.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
4 – BUSINESS ACQUISITION:
Steep
& Brew, Inc. Acquisition
Pursuant
to the terms of an Asset Purchase Agreement dated April 24, 2018 (the “Generations Agreement”), by and among Generations
Coffee Company, LLC (“GCC”), the entity formed as a result of the Company’s joint venture with Caruso’s
Coffee, Inc., Steep & Brew, Inc. (“the Seller”) a Wisconsin corporation and the stockholder of the Seller. GCC
purchased substantially all the assets, including equipment, inventory, customer list and relationships (the “Assets”)
of the Seller. This was accounted for as a business combination.
Pro
Forma Results of Operations (unaudited)
The
following pro forma results of operations for the three and six months ended April 30, 2018 have been prepared as though the business
acquisition had occurred as of November 1, 2017. There is no proforma information included here for the three and six months ended
April 30, 2019 because the Steep & Brew, Inc. numbers are included in the actual April 30, 2019 results. This pro forma financial
information is not indicative of the results of operations that the Company would have attained had the acquisition 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:
|
|
Three
Months Ended
April
30, 2018
|
|
|
Six
Months Ended
April
30, 2018
|
|
Pro forma sales
|
|
$
|
24,542,639
|
|
|
$
|
49,680,884
|
|
Pro forma net income
|
|
|
378,773
|
|
|
|
837,063
|
|
Pro forma basic and diluted earnings
per share
|
|
|
.07
|
|
|
|
.15
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
5 - 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:
|
|
April
30, 2019
|
|
|
October
31, 2018
|
|
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
6 - INVENTORIES:
Inventories
at April 30, 2019 and October 31, 2018 consisted of the following:
|
|
April
30, 2019
|
|
|
October
31, 2018
|
|
Packed coffee
|
|
$
|
4,563,283
|
|
|
$
|
3,286,450
|
|
Green coffee
|
|
|
8,859,188
|
|
|
|
9,858,495
|
|
Roasters and parts
|
|
|
280,375
|
|
|
|
270,188
|
|
Packaging supplies
|
|
|
2,711,629
|
|
|
|
1,855,973
|
|
Totals
|
|
$
|
16,414,475
|
|
|
$
|
15,271,106
|
|
NOTE
7 - 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.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
7 - COMMODITIES HELD BY BROKER (cont’d):
The
Company has open position contracts held by the broker, which are summarized as follows:
|
|
April
30, 2019
|
|
|
October
31, 2018
|
|
Option Contracts
|
|
$
|
(398,588
|
)
|
|
$
|
(39,926
|
)
|
Future Contracts
|
|
|
(227,846
|
)
|
|
|
17,880
|
|
Total Commodities
|
|
$
|
(626,434
|
)
|
|
$
|
(22,046
|
)
|
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
April 30, 2019, the Company held 112 futures contracts (generally with terms of three to four months) for the purchase of 4,200,000
pounds of green coffee at a weighted average price of $0.9280 per pound. The fair market value of coffee applicable to such contracts
was $0.9315 per pound at that date.
At
October 31, 2018, 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 $1.11 per pound. The fair market value of coffee applicable to such contracts
was $1.13 per pound at that date. At October 31, 2018, the Company held 65 options covering an aggregate of 2,437,500 pounds of
green coffee beans from $1.125 to $1.15 per pound. The fair market value of these options, which was obtained from observable
market data of similar instruments was $52,594.
The
Company recorded realized and unrealized gains and losses respectively, on these contracts as follows:
|
|
Three
Months Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Gross realized gains
|
|
$
|
171,955
|
|
|
$
|
134,849
|
|
Gross realized losses
|
|
|
(1,661,913
|
)
|
|
|
(545,296
|
)
|
Unrealized
(loss) gain
|
|
|
(61,239
|
)
|
|
|
737,041
|
|
Total
|
|
$
|
(1,551,197
|
)
|
|
$
|
326,594
|
|
|
|
Six
Months Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Gross realized gains
|
|
$
|
714,551
|
|
|
$
|
265,795
|
|
Gross realized losses
|
|
|
(1,971,526
|
)
|
|
|
(958,631
|
)
|
Unrealized
(loss) gain
|
|
|
(604,388
|
)
|
|
|
852,909
|
|
Total
|
|
$
|
(1,861,363
|
)
|
|
$
|
160,073
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
8 - LINE OF CREDIT:
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”) and Amended and Restated
Loan Facility (the “A&R Loan Facility”) with Sterling National Bank (“Sterling”), which consolidated
(i) the financing agreement between the Company and Sterling, dated February 17, 2009, as modified, (the “Company Financing
Agreement”) and (ii) the financing agreement between Company, as guarantor, OPTCO and Sterling, dated March 10, 2015 (the
“OPTCO Financing Agreement”), amongst other things.
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 over advance
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 CFI (collectively
referred to herein as the “Guarantors”), entered into a Guaranty Agreement (the “Guaranty Agreement”)
in connection with the A&R 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.
On
March 23, 2018, the Company reached an agreement for a new loan modification agreement and credit facility with Sterling. The
terms of the new agreement among other things: (i) provides for a new maturity date of March 31, 2020; (ii) increases the maximum
principal amount to $14,000,000; and (iii) decreases the interest rate per annum to LIBOR plus 2 percent, 4.48% at April 30, 2019.
Each
of the A&R Loan Facility and A&R Loan Agreement contains covenants, subject to certain exceptions, that place annual restrictions
on the Borrowers’ operations, including covenants relating to debt restrictions, capital expenditures, indebtedness, minimum
deposit restrictions, tangible net worth, net profit, leverage, employee loan restrictions, dividend and repurchase restrictions
(common stock and preferred stock), and restrictions on intercompany transactions. The Company was in compliance with all covenants
as of April 30, 2019 and October 31, 2018.
The
A&R 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.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
8 - LINE OF CREDIT (cont’d):
Each
of the A&R 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 April 30, 2019 and October 31, 2018, the outstanding balance under the bank line of credit was $5,767,540 and $6,260,014, respectively.
The Company has announced a dividend plan. We intend to pay a dividend of 30% of our net profits for the fiscal year ending October
31, 2019 to shareholders of record as of October 31, 2019. We expect such dividend to be paid in our second fiscal quarter of
2020. The Company has received a waiver from Sterling National bank allowing this plan.
NOTE
9 - 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.
As
of April 30, 2019 and October 31, 2018, 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 April 30, 2019 and
October 31, 2018, 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, Connecticut, Idaho, Kansas, Louisiana, Montana, Massachusetts,
Michigan, New Jersey, New York, New York City, Oregon, Rhode Island, South Carolina, Tennessee, Virginia, 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 2015. 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 2012. 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 2013.
The
changes included in the Tax Cuts and Jobs Act (the “Act”) are broad and complex. The final impacts of the Tax Act
may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act,
any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income
taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to
calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period
of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate
finalizing and recording any resulting adjustments within one year after enactment date of the Tax Act.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
10 - 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 5,569,349 for
the six and three months ended April 30, 2019 and 5,743,967 and 5,721,635 for the six and three months ended April 30, 2018, respectively.
The Company has granted 689,000 options which have not been included in the calculation of diluted earnings per share due to
their anti-dilutive nature.
NOTE
11 - ECONOMIC DEPENDENCY:
Approximately
21% of the Company’s sales were derived from five customers during the six months ended April 30, 2019. These customers
also accounted for approximately $2,030,000 of the Company’s accounts receivable balance at April 30, 2019. Approximately
20% of the Company’s sales were derived from five customers during the six months ended April 30, 2018. These customers
also accounted for approximately $8,012,000 of the Company’s accounts receivable balance at April 30, 2018. 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 six months ended April 30, 2019, approximately 28% of the Company’s purchases were from five vendors. These vendors
accounted for approximately $322,000 of the Company’s accounts payable at April 30, 2019. For the six months ended April
30, 2018, approximately 19% of the Company’s purchases were from six vendors. These vendors accounted for approximately
$218,000 of the Company’s accounts payable at April 30, 2018. 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
21% of the Company’s sales were derived from five customers during the three months ended April 30, 2019. Approximately
18% of the Company’s sales were derived from five customers during the three months ended April 30, 2018.
For
the three months ended April 30, 2019, approximately 25% of the Company’s purchases were from five vendors. For the three
months ended April 30, 2018, approximately 18% of the Company’s purchases were from six vendors.
The
following table presents revenues by product line in the six and three months ended April 30, 2019 and 2018
|
|
Six
Months Ended
April
30, 2019
|
|
|
Three
Months Ended
April
30, 2019
|
|
|
Six
Months Ended
April
30, 2018
|
|
|
Three
Months Ended
April
30, 2018
|
|
Green
|
|
$
|
17,178,743
|
|
|
$
|
8,021,039
|
|
|
$
|
21,776,323
|
|
|
$
|
10,929,696
|
|
Packaged
|
|
$
|
27,171,556
|
|
|
$
|
12,695,452
|
|
|
$
|
22,500,793
|
|
|
$
|
11,264,202
|
|
Totals
|
|
$
|
44,350,299
|
|
|
$
|
20,716,491
|
|
|
$
|
44,277,116
|
|
|
$
|
22,193,898
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
12 - 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 six months ended April 30, 2019 of $106,754 and $207,374, respectively,
and $119,557 and $231,225 for the three and six months ended April 30, 2018, respectively, for the processing of finished goods.
An
employee of one of the top five vendors is a director of the Company. Purchases from that vendor totaled approximately $2,299,000
and $4,095,000 for the three and six months ended April 30, 2019, respectively, and $3,036,000 and $4,434,000 for the three and
six months ended April 30, 2018, respectively. The corresponding accounts payable balance to this vendor was approximately $63,000
and $218,000 at April 30, 2019 and 2018, 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: 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 April 30, 2019 and October 31, 2018 were $474,997 and $532,726,
respectively.
NOTE
13 - 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 six and three months ended April 30,
2019. The Company purchased 236,586 shares for $1,129,050 during the year ended October 31, 2018.
|
|
|
|
|
b.
|
Share
Repurchase Program.
On September 10, 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
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 2017 Share Repurchase Program may be discontinued or
suspended at any time. Pursuant to the terms of the 2017 Share Repurchase Program, the Company purchased 236,586 shares for
$1,129,050 during the year ended October 31, 2018. As of October 31, 2018, the 2017 Share Repurchase Program has been discontinued.
|
|
|
|
|
|
Stock Options.
The
Company has an incentive stock plan, the 2013 Equity Compensation Plan (the “2013
Plan”), and on April 19, 2019, has granted stock options to employees, officers
and non-employee directors from the 2013 Plan. Options granted under the 2013 Plan may
be Incentive Stock Options or Nonqualified Stock Options, as determined by the Administrator
at the time of grant. As of April 30, 2019, the Board of Directors approved 1,000,000
options. There were 689,000 options granted from this pool of awards and the remaining
311,000 remaining shares have not yet been granted.
|
|
|
|
|
|
During
the quarter ended April 30, 2019, the Company granted stock option awards to five board members to purchase an aggregate 59,000
shares of the Company’s common stock at $5.43 per share.
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30, 2019
(UNAUDITED)
NOTE
13 - STOCKHOLDERS’ EQUITY (cont’d):
The
stock options have an expected term of six years and will vest over a twelve month service period.
The
stock options have an aggregate grant date fair value of approximately $233,320. The Company also granted stock option awards
to certain officers to purchase an aggregate of 630,000 shares of the Company’s common stock at an exercise price of $5.43
per share. The stock options have an expected term of six years and will vest over a three year service period. These stock options
have an aggregate grant date fair value of approximately $1,524,600.
The
following table represents stock option activity for the six months ended April 30, 2019:
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
(Years)
|
|
|
Value
|
|
Balance
October 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
689,000
|
|
|
|
|
|
|
$
|
5.43
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
April 30, 2019
|
|
|
689,000
|
|
|
|
-
|
|
|
$
|
5.43
|
|
|
|
-
|
|
|
|
10
|
|
|
|
1,757,920
|
|
The
Company recorded $25,000 of stock-based compensation in the three months ended April 30, 2019.
The outstanding stock compensation expense as of April 30, 2019 was approximately $1,732,650.
NOTE
14 - SUBSEQUENT EVENTS:
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.