ITEM
1 – FINANCIAL STATEMENTS.
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
JULY
31, 2018 AND OCTOBER 31, 2017
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
|
|
|
(
Unaudited)
|
|
|
|
|
|
-
ASSETS -
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,080,021
|
|
|
$
|
2,325,650
|
|
Accounts
receivable, net of allowances of $144,000 for 2018 and 2017
|
|
|
8,610,384
|
|
|
|
13,441,802
|
|
Inventories
|
|
|
15,210,573
|
|
|
|
16,310,572
|
|
Prepaid
green coffee
|
|
|
|
|
|
|
171,350
|
|
Prepaid
expenses and other current assets
|
|
|
707,332
|
|
|
|
593,825
|
|
Prepaid
and refundable income taxes
|
|
|
293,966
|
|
|
|
472,814
|
|
TOTAL
CURRENT ASSETS
|
|
|
29,902,276
|
|
|
|
33,316,013
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment, at cost, net of accumulated depreciation of $6,079,588 and $5,557,899 for 2018 and 2017, respectively
|
|
|
2,667,203
|
|
|
|
2,439,338
|
|
Customer
list and relationships, net of accumulated amortization of $95,125 and $72,250 for 2018 and 2017, respectively
|
|
|
344,875
|
|
|
|
367,750
|
|
Trademarks
|
|
|
820,000
|
|
|
|
820,000
|
|
Other
intangible assets
|
|
|
331,124
|
|
|
|
331,124
|
|
Non-compete
|
|
|
150,000
|
|
|
|
|
|
Goodwill
|
|
|
2,794,265
|
|
|
|
1,794,265
|
|
Equity
method investments
|
|
|
90,284
|
|
|
|
94,643
|
|
Deferred
income tax asset
|
|
|
569,250
|
|
|
|
339,748
|
|
Deposits
and other assets
|
|
|
527,303
|
|
|
|
497,529
|
|
TOTAL
ASSETS
|
|
$
|
38,196,580
|
|
|
$
|
40,000,410
|
|
|
|
|
|
|
|
|
|
|
-
LIABILITIES AND STOCKHOLDERS’ EQUITY -
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,732,107
|
|
|
$
|
4,430,626
|
|
Line
of credit
|
|
|
7,148,762
|
|
|
|
8,407,527
|
|
Due
to broker
|
|
|
528,038
|
|
|
|
210,862
|
|
Note
payable
|
|
|
150,000
|
|
|
|
|
|
Income
taxes payable
|
|
|
7,235
|
|
|
|
1,346
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
10,566,142
|
|
|
|
13,050,361
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities
|
|
|
862,932
|
|
|
|
629,680
|
|
Deferred
rent payable
|
|
|
241,702
|
|
|
|
240,379
|
|
Deferred
compensation payable
|
|
|
518,303
|
|
|
|
488,529
|
|
TOTAL
LIABILITIES
|
|
|
12,189,079
|
|
|
|
14,408,949
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Coffee
Holding Co., Inc. stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $.001 per share; 10,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, par value $.001 per share; 30,000,000 shares authorized, 6,494,680 shares issued; 5,620,767 and 5,805,935 shares outstanding
as of July 31, 2018 and October 31, 2017, respectively
|
|
|
6,494
|
|
|
|
6,494
|
|
Additional
paid-in capital
|
|
|
16,104,075
|
|
|
|
16,104,075
|
|
Retained
earnings
|
|
|
13,303,416
|
|
|
|
12,345,490
|
|
Less:
Treasury stock, 873,913 and 688,745 common shares, at cost as of July 31, 2018 and October 31, 2017, respectively
|
|
|
(4,398,877
|
)
|
|
|
(3,504,510
|
)
|
Total
Coffee Holding Co., Inc. Stockholders’ Equity
|
|
|
25,015,108
|
|
|
|
24,951,549
|
|
Noncontrolling
interest
|
|
|
992,393
|
|
|
|
639,912
|
|
TOTAL
EQUITY
|
|
|
26,007,501
|
|
|
|
25,591,461
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
38,196,580
|
|
|
$
|
40,000,410
|
|
See
notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED JULY 31, 2018 AND 2017
(Unaudited)
|
|
Nine
Months Ended July 31,
|
|
|
Three
Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
NET
SALES
|
|
$
|
67,717,019
|
|
|
$
|
55,398,538
|
|
|
$
|
23,439,903
|
|
|
$
|
17,979,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES (including $7.0 and $4.8 million of related party costs for the nine months ended July 31, 2018 and 2017, respectively.
Including $2.6 and $2.6 million for the three months ended July 31, 2018 and 2017, respectively.)
|
|
|
56,263,183
|
|
|
|
46,469,896
|
|
|
|
19,648,710
|
|
|
|
14,903,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
11,453,836
|
|
|
|
8,928,642
|
|
|
|
3,791,193
|
|
|
|
3,075,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative
|
|
|
8,905,830
|
|
|
|
7,517,062
|
|
|
|
3,352,268
|
|
|
|
2,716,393
|
|
Officers’
salaries
|
|
|
510,750
|
|
|
|
527,090
|
|
|
|
170,250
|
|
|
|
179,250
|
|
TOTAL
|
|
|
9,416,580
|
|
|
|
8,044,152
|
|
|
|
3,522,518
|
|
|
|
2,895,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
2,037,256
|
|
|
|
884,490
|
|
|
|
268,675
|
|
|
|
179,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
11,170
|
|
|
|
29,381
|
|
|
|
3,433
|
|
|
|
5,993
|
|
(Loss)
gain from equity method investment
|
|
|
(4,359
|
)
|
|
|
(71
|
)
|
|
|
199
|
|
|
|
(322
|
)
|
Interest
expense
|
|
|
(286,555
|
)
|
|
|
(192,317
|
)
|
|
|
(99,906
|
)
|
|
|
(68,079
|
)
|
TOTAL
|
|
|
(279,744
|
)
|
|
|
(163,007
|
)
|
|
|
(96,274
|
)
|
|
|
(62,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES AND NON-CONTROLLING INTEREST IN SUBSIDIARY
|
|
|
1,757,512
|
|
|
|
721,483
|
|
|
|
172,401
|
|
|
|
117,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
447,105
|
|
|
|
153,453
|
|
|
|
35,721
|
|
|
|
23,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE NON-CONTROLLING INTEREST IN SUBSIDIARY
|
|
|
1,310,407
|
|
|
|
568,030
|
|
|
|
136,680
|
|
|
|
93,512
|
|
Less:
Net (income) attributable to the non-controlling interest
|
|
|
(352,481
|
)
|
|
|
(157,711
|
)
|
|
|
(120,990
|
)
|
|
|
(60,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO COFFEE HOLDING CO., INC.
|
|
$
|
957,926
|
|
|
$
|
410,319
|
|
|
$
|
15,690
|
|
|
$
|
32,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
$
|
.17
|
|
|
$
|
.07
|
|
|
$
|
.00
|
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,720,360
|
|
|
|
5,861,777
|
|
|
|
5,673,914
|
|
|
|
5,859,918
|
|
See
notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2018 AND 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,310,407
|
|
|
$
|
568,030
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
544,564
|
|
|
|
573,447
|
|
Unrealized
loss (gain) on commodities
|
|
|
317,176
|
|
|
|
(643,834
|
)
|
Loss
on equity method investments
|
|
|
4,359
|
|
|
|
70
|
|
Deferred
rent
|
|
|
1,323
|
|
|
|
6,872
|
|
Deferred
income taxes
|
|
|
3,750
|
|
|
|
178,460
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,917,860
|
|
|
|
3,684,724
|
|
Inventories
|
|
|
2,240,892
|
|
|
|
(270,523
|
)
|
Prepaid
expenses and other current assets
|
|
|
(50,625
|
)
|
|
|
(53,740
|
)
|
Prepaid
green coffee
|
|
|
171,350
|
|
|
|
155,323
|
|
Prepaid
and refundable income taxes
|
|
|
178,848
|
|
|
|
(315,962
|
)
|
Accounts
payable and accrued expenses
|
|
|
(1,698,518
|
)
|
|
|
(1,434,462
|
)
|
Deposits
and other assets
|
|
|
|
|
|
|
59,640
|
|
Income
taxes payable
|
|
|
5,889
|
|
|
|
(1,050
|
)
|
Net
cash provided by operating activities
|
|
|
7,947,275
|
|
|
|
2,506,995
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of business net of cash acquired
|
|
|
-
|
|
|
|
(2,893,275
|
)
|
Cash
paid for business acquisition
|
|
|
(2,740,217
|
)
|
|
|
-
|
|
Purchases
of machinery and equipment
|
|
|
(299,554
|
)
|
|
|
(586,098
|
)
|
Net
cash used in investing activities
|
|
|
(3,039,771
|
)
|
|
|
(3,479,373
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Advances
under bank line of credit
|
|
|
3,800,300
|
|
|
|
4,512,950
|
|
Purchase
of treasury stock
|
|
|
(894,368
|
)
|
|
|
(15,829
|
)
|
Principal
payments under bank line of credit
|
|
|
(5,059,065
|
)
|
|
|
(4,065,000
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(2,153,133
|
)
|
|
|
432,121
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE DECREASE IN CASH
|
|
|
2,754,371
|
|
|
|
(540,257
|
)
|
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
2,325,650
|
|
|
|
3,227,981
|
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
5,080,021
|
|
|
$
|
2,687,724
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
285,603
|
|
|
$
|
189,933
|
|
Income
taxes paid
|
|
$
|
245,838
|
|
|
$
|
281,538
|
|
See
notes to Condensed Consolidated Financial Statements
COFFEE
HOLDING CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED JULY 31, 2018 AND 2017
(Unaudited)
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
On
April 24, 2018 Generations Coffee Company acquired the assets of Steep & Brew, Inc.:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
86,442
|
|
Inventory
|
|
|
1,140,893
|
|
Equipment
|
|
|
450,000
|
|
Prepaid
expenses
|
|
|
62,882
|
|
Non-compete
|
|
|
150,000
|
|
Goodwill
|
|
|
1,000,000
|
|
|
|
|
|
|
Less:
Note payable
|
|
|
150,000
|
|
|
|
|
|
|
Net
cash paid
|
|
$
|
2,740,217
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
On
February 23, 2017 Coffee Holding Co., Inc. acquired the stock of Comfort Foods, Inc.:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
584,918
|
|
Inventory
|
|
|
1,116,906
|
|
Equipment
|
|
|
229,597
|
|
Prepaid
expenses
|
|
|
32,681
|
|
Customer
lists
|
|
|
170,000
|
|
Goodwill
|
|
|
1,359,502
|
|
Other
asset
|
|
|
26,551
|
|
|
|
|
|
|
Less:
liabilities
|
|
|
626,880
|
|
|
|
|
|
|
Net
cash paid
|
|
$
|
2,893,275
|
|
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2018
(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 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, 2017, 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, 2018 for the fiscal year ended October 31, 2017 (“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, 2018, and results of operations for the three and nine months
ended July 31, 2018 and the cash flows for the nine months ended July 31, 2018 as applicable, have been made.
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2018
(UNaudited)
NOTE
2 - BASIS OF PRESENTATION (cont’d):
The
results of operations for the three and nine months ended July 31, 2018 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.
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY:
The
FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 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.
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. The Company will adopt the new standard
on November 1, 2018 and currently plans to use the modified rtrospective method. The majority of the Company’s business
is ship and bill and, on that primary revenue stream, the Company does not expect significant differences. However, the Company’s
analysis is preliminary and subject to change. The Company has not completed its assessment of multiple arrangements and certain
discount and trade promotion programs.
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2018
(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 II of this Update do not require any transition guidance because those amendments do not have an accounting
effect.
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 Company adopted ASU 2015-17 during
the quarter ended January 31, 2018, which did not have a material impact on its consolidated financial statements.
COFFEE
HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2018
(Unaudited)
NOTE
3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AFFECTING THE COMPANY (cont’d):
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 adopted ASU 2015-11, which did not have a material impact on its consolidated
financial statements.
NOTE
4 – BUSINESS 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. GCC purchased the Assets for a purchase price consisting of $2,740,217
in cash and a Seller held promissory note for $150,000. The Seller held promissory note calls for two principal payments of $75,000
each. The first payment of principal only is due October 24, 2018 and the final payment is due April 24, 2019.
As
part of the transaction, all of the employees of the Seller will be leased to GCC for a transitional period ending July 31, 2018
(or earlier date as may be agreed in writing between GCC and the Seller). In addition, on April 24, 2018, GCC entered into a three
month 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 Wisconsin.
After completion of the first three month term, the Advisory Agreement will automatically expire, 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 $7,000
per month, as well as reimbursement by GCC of the Executive of up to $815 per month for health insurance benefits for the Executive
paid by the seller.
The
Company has not yet completed its full analysis of the fair value of tangible assets acquired and liabilities assumed and the
allocation of any excess acquisition cost over the fair value of the net tangible net assets acquired to any separately identifiable
intangible assets. Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end
of the reporting period in which the combination occurs, but during the allowed measurement period (which is not to exceed one
year from the acquisition date), the Company retrospectively adjusts the provisional amounts recognized at the acquisition date
by means of adjusting the amount recognized for goodwill.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(Unaudited)
NOTE
4 – BUSINESS ACQUISITION (cont’d):
The
following table summarizes the provisional amouts of assets purchased:
Assets
acquired:
|
|
|
|
|
Accounts
receivable
|
|
$
|
86,442
|
|
Inventory
|
|
|
1,140,893
|
|
Equipment
|
|
|
450,000
|
|
Prepaid
expenses
|
|
|
62,882
|
|
Non-compete
|
|
|
150,000
|
|
Goodwill
|
|
|
1,000,000
|
|
Assets
acquired:
|
|
$
|
2,890,217
|
|
Purchase
of assets funded by:
|
|
|
|
|
Cash
paid
|
|
$
|
2,740,217
|
|
Note
payable to seller
|
|
|
150,000
|
|
|
|
$
|
2,890,217
|
|
Pro
Forma Results of Operations (unaudited)
The
following pro forma results of operations for the nine months ended July 31, 2018 and 2017 and the three months ended July
31, 2017, have been prepared as though the business acquisition 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 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:
|
|
Nine Months Ended
July 31,
|
|
|
Three Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma sales
|
|
$
|
77,962,356
|
|
|
$
|
64,418,901
|
|
|
$
|
21,121,957
|
|
Pro forma net income (loss)
|
|
$
|
839,087
|
|
|
$
|
423,340
|
|
|
$
|
5,581
|
|
Pro forma basic and diluted earnings per share
|
|
$
|
.15
|
|
|
$
|
.07
|
|
|
$
|
.00
|
|
The
operations have been included in the Company’s consolidated statement of operations since the date of the acquisition on
April 24, 2018. The total revenue included for the nine months is $2,984,984, and the net
income included for the nine months is $157,443.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(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 $6,868 and $29,377 for the nine months ended July 31, 2018
and 2017, respectively. The prepaid coffee balance was $0 at July 31, 2018 and $171,350 at October 31, 2017.
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, 2018
|
|
|
October
31, 2017
|
|
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, 2018 and October 31, 2017 consisted of the following:
|
|
July
31, 2018
|
|
|
October
31, 2017
|
|
Packed
coffee
|
|
$
|
3,403,238
|
|
|
$
|
2,242,714
|
|
Green
coffee
|
|
|
9,747,978
|
|
|
|
12,317,394
|
|
Roasters
and parts
|
|
|
251,129
|
|
|
|
286,515
|
|
Packaging
supplies
|
|
|
1,808,228
|
|
|
|
1,463,949
|
|
Totals
|
|
$
|
15,210,573
|
|
|
$
|
16,310,572
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(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, 2018
|
|
|
October
31, 2017
|
|
|
|
|
|
|
|
|
Option
Contracts
|
|
$
|
56,768
|
|
|
$
|
166,945
|
|
Future
Contracts
|
|
|
(584,805
|
)
|
|
|
(377,807
|
)
|
Total
Commodities
|
|
$
|
(528,038
|
)
|
|
$
|
(210,862
|
)
|
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, 2018, the Company held 131 futures contracts (generally with terms of three to four months) for the purchase of 4,912,500
pounds of green coffee at a weighted average price of $1.159 per pound. The fair market value of coffee applicable to such contracts
was $1.099 per pound at that date. At July 31, 2018, the Company did not have any options.
At
October 31, 2017, the Company held 145 futures contracts (generally with terms of three to four months) for the purchase of 5,437,500
pounds of green coffee at a weighted average price of $1.31 per pound. The fair market value of coffee applicable to such contracts
was $1.25 per pound at that date. At October 31, 2017, the Company did not have any options.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(Unaudited)
NOTE
8 - COMMODITIES HELD BY BROKER (cont’d):
The
Company recorded realized and unrealized gains and losses respectively, on these contracts as follows:
|
|
Three
Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Gross
realized gains
|
|
$
|
369,233
|
|
|
$
|
323,196
|
|
Gross
realized losses
|
|
|
(414,476
|
)
|
|
|
(1,129,690
|
)
|
Unrealized
gain (loss)
|
|
|
(1,170,086
|
)
|
|
|
1,379,165
|
|
Total
|
|
$
|
(1,215,329
|
)
|
|
$
|
572,671
|
|
|
|
Nine
Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Gross
realized gains
|
|
$
|
635,029
|
|
|
$
|
1,050,844
|
|
Gross
realized losses
|
|
|
(1,373,107
|
)
|
|
|
(1,630,591
|
)
|
Unrealized
gain (loss)
|
|
|
(317,177
|
)
|
|
|
643,834
|
|
Total
|
|
$
|
(1,055,255
|
)
|
|
$
|
64,087
|
|
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(Unaudited)
NOTE
9 - 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.
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
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
JULY
31, 2018
(Unaudited)
NOTE
9 - 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 July 31, 2018 and October 31, 2017, the outstanding balance under the bank line of credit was $7,148,762 and $8,407,527, 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.
As
of July 31, 2018 and October 31, 2017, 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, 2018 and
October 31, 2017, 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, Massachusetts, Michigan,
New Jersey, New York, New York City, Oregon, Rhode Island, South Carolina, 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 2014.
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 2011. 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 2012.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect the Company’s
fiscal year ending October 31, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate. The Tax Act
reduces the federal corporate tax rate to 21% in the fiscal year ending October 31, 2018. Section 15 of the Internal Revenue Code
stipulates that our fiscal year ending October 31, 2018, will have a blended corporate tax rate of approximately 23%, which is
based on the applicable tax rates before and after the Tax Act and the number of days in the year. The reduction of the corporate
tax rate to 21% has caused the Company to reduce its deferred tax assets and liabilities. The effect of this discrete event had
an immaterial effect on the condensed consolidated financial statements for the nine and three months ended July 31, 2018.
The
changes included in the Tax 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
JULY
31, 2018
(Unaudited)
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 5,720,360 and
5,673,914 for the nine and three months ended July 31, 2018, respectively and 5,861,777 and 5,859,918 for the nine and three months
July 31, 2017, respectively.
NOTE
12 - ECONOMIC DEPENDENCY:
Approximately
27% of the Company’s sales were derived from five customers during the nine months ended July 31, 2018. Approximately 25%
of the Company’s sales were derived from four customers during the nine months ended July 31, 2017. 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, 2018, approximately 26% of the Company’s purchases were from six vendors. These vendors accounted
for approximately $278,000 of the Company’s accounts payable at July 31, 2018. 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. 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
20% of the Company’s sales were derived from five customers during the three months ended July 31, 2018. Approximately 24%
of the Company’s sales were derived from four customers during the three months ended July 31, 2017.
For
the three months ended July 31, 2018, approximately 22% of the Company’s purchases were from six vendors. For the three
months ended July 31, 2017, approximately 27% of the Company’s purchases were from four vendors.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(Unaudited)
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, 2018 of $112,458 and $343,683, respectively,
for the processing of finished goods.
An
employee of one of the top six vendors is a director of the Company. Purchases from that vendor totaled approximately $6,989,000
and $2,555,000 for the nine and three months ended July 31, 2018, respectively and $4,788,000 and $2,587,000 for the nine and
three months ended July 31, 2017, respectively. The corresponding accounts payable balance to this vendor was approximately $221,000
and $72,000 at July 31, 2018 and 2017, 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, 2018 and October 31, 2017 were $518,303
and $488,529, respectively.
NOTE
14 - STOCKHOLDERS’ EQUITY:
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 185,168 shares for $894,368 during the nine months ended July 31, 2018. The
Company purchased 57,367 shares for $247,382 during the year ended October 31, 2017.
Share
Repurchase Program.
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 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 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 and 337,269 shares respectively for $15,829
and $1,754,878, respectively during the year ended October 31, 2017 and 2016. 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 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 timing and amount of any
shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY
31, 2018
(Unaudited)
NOTE
14 - STOCKHOLDERS’ EQUITY (cont’d):
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 185,168 and 53,983 shares for $894,368 and $239,091 during the nine months ended July 31, 2018
and for the year ended October 31, 2017, respectively.
NOTE
15 - 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS
OF OPERATIONS
Cautionary
Note on Forward-Looking Statements
Some
of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results
of Operation” and elsewhere in this quarterly report include forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements upon information
available to management as of the date of this Form 10-Q and management’s expectations and projections about future events,
including, among other things:
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our
dependency on a single commodity could affect our revenues and profitability;
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our
success in expanding our market presence in new geographic regions;
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the
effectiveness of our hedging policy may impact our profitability;
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the
success of our joint ventures and acquisitions;
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our
success in implementing our business strategy or introducing new products;
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our
ability to attract and retain customers;
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our
ability to obtain additional financing;
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the
effects of competition from other coffee manufacturers and other beverage alternatives;
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the
impact to the operations of our Colorado facility;
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general
economic conditions and conditions which affect the market for coffee;
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the
macro global economic environment;
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our
ability to maintain and develop our brand recognition;
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the
impact of rapid or persistent fluctuations in the price of coffee beans;
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fluctuations
in the supply of coffee beans;
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the
volatility of our common stock; and
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other
risks which we identify in future filings with the Securities and Exchange Commission (the “SEC”).
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In
some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,”
“predict,” “potential,” “continue,” “expect,” “anticipate,” “future,”
“intend,” “plan,” “believe,” “estimate” and similar expressions (or the negative
of such expressions). Any or all of our forward looking statements in this quarterly report and in any other public statements
we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed. In addition, we undertake no responsibility to update
any forward-looking statement to reflect events or circumstances, that occur after the date of this quarterly report.
Overview
We
are an integrated wholesale coffee roaster and dealer in the United States and one of the few coffee companies that offers a broad
array of coffee products across the entire spectrum of consumer tastes, preferences and price points. As a result, we believe
that we are well-positioned to increase our profitability and endure potential coffee price volatility throughout varying cycles
of the coffee market and economic conditions.
Our
operations have primarily focused on the following areas of the coffee industry:
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the
sale of wholesale specialty green coffee;
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the
roasting, blending, packaging and sale of private label coffee;
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the
roasting, blending, packaging and sale of our eight proprietary brands of coffee; and
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sales
of our tabletop coffee roasting equipment.
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Our
operating results are affected by a number of factors including:
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the
level of marketing and pricing competition from existing or new competitors in the coffee industry;
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our
ability to retain existing customers and attract new customers;
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our
hedging policy;
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fluctuations
in purchase prices and supply of green coffee and in the selling prices of our products; and
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our
ability to manage inventory and fulfillment operations and maintain gross margins.
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Our
net sales are driven primarily by the success of our sales and marketing efforts and our ability to retain existing customers
and attract new customers. For this reason, we have made, and will continue to evaluate, strategic decisions to invest in measures
that are expected to increase net sales. These transactions include our acquisition of Premier Roasters, LLC, including equipment
and a roasting facility in La Junta, Colorado, the addition of a west coast sales manager to increase sales of our private label
and branded coffees to new customers, our joint venture with Caruso’s Coffee, Inc. of Brecksville, Ohio, the transaction
with OPTCO and our licensing arrangement with DTS8 Coffee Company, Ltd. On June 23, 2016, we formed our wholly-owned subsidiary,
Sonofresco, LLC (“SONO”), a Delaware limited liability company. On June 29, 2016, we purchased through SONO, substantially
all the assets, including equipment, inventory, customer list and relationships of Coffee Kinetics, LLC, a Washington limited
liability company. On February 24, 2017, we acquired 100% of the capital stock of Comfort Foods, Inc. (“CFI”), a Massachusetts
based medium sized coffee roaster, manufacturing both branded and private label coffee for retail and foodservice customers. In
April 2018, Generations Coffee Company, the entity formed as a result of our joint venture with Caruso’s Coffee, Inc., purchased
substantially all the assets of Steep & Brew, Inc. We believe these efforts will allow us to expand our business.
Our
net sales are affected by the price of green coffee. We purchase our green coffee from dealers located primarily within the United
States. The dealers supply us with coffee beans from many countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and
Uganda. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond
our control. For example, in Brazil, which produces approximately 40% of the world’s green coffee, the coffee crops are
historically susceptible to frost in June and July and drought in September, October and November. However, because we purchase
coffee from a number of countries and are able to freely substitute one country’s coffee for another in our products, price
fluctuations in one country generally have not had a material impact on the price we pay for coffee. Accordingly, price fluctuations
in one country generally have not had a material effect on our results of operations, liquidity and capital resources. Historically,
because we generally have been able to pass green coffee price increases through to customers, increased prices of green coffee
generally result in increased net sales.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control.
Historically, we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts
primarily for the purpose of partially hedging the effects of changing green coffee prices. In addition, we acquired, and expect
to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of guaranteeing
an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected in
our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts
increase our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect
of changing prices. We believe that, in normal economic times, our hedging policies remain a vital element to our business model
not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to
grow our sales while trying to minimize margin compression during a time of historically high coffee prices. However, no strategy
can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly
in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties
to any of our futures contracts. Although we have had net gains on options and futures contracts in the past, we have incurred
significant losses on options and futures contracts in the past. In these cases, our cost of sales has increased, resulting in
a decrease in our profitability or increase in our losses. Such losses have and could in the future materially increase our cost
of sales and materially decrease our profitability and adversely affect our stock price. See “Item 3, Quantitative and Qualitative
Disclosures About Market Risk. If our hedging policy is not effective, we may not be able to control our coffee costs, we may
be forced to pay greater than market value for green coffee and our profitability may be reduced.” Failure to properly design
and implement an effective hedging strategy may materially adversely affect our business and operating results. If the hedges
that we enter do not adequately offset the risks of coffee bean price volatility or our hedges result in losses, our cost of sales
may increase, resulting in a decrease in profitability or increased losses. As previously announced, as a result of the volatile
nature of the commodities markets, we have and are continuing to scale back our use of hedging and short-term trading of coffee
futures and options contracts, and intend to continue to use these practices in a limited capacity going forward.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures 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 the amounts
reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts, inventories, assets held for sale, income taxes, commodities held and loss contingencies. Management
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.
Actual results could differ from these estimates under different assumptions or conditions.
We
believe the following critical accounting policies, among others, may be impacted significantly by judgment, assumptions and estimates
used in the preparation of the financial statements:
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We
recognize revenue in accordance with the relevant authoritative guidance. Revenue is recognized at the point title and risk
of ownership transfers to its customers which is upon the shippers taking possession of the goods because i) title passes
in accordance with the terms of the purchase orders and with our agreements with our customers, ii) any risk of loss is covered
by the 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.
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Our
allowance for doubtful accounts is maintained to provide for losses arising from customers’ inability to make required
payments. If there is deterioration of our customers’ credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the historical assumptions used, additional allowances may be required.
For example, every additional one percent of our accounts receivable that becomes uncollectible, would decrease our operating
income by approximately $86,000 for the quarter ended July 31, 2018. 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 us from our customers.
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Inventories
are stated at lower of cost (determined on a first-in, first-out basis) or market. Based on our assumptions about future demand
and market conditions, inventories are subject to be written-down to market value. If our assumptions about future demand
change and/or actual market conditions are less favorable than those projected, additional write-downs of inventories may
be required. Each additional one percent of potential inventory write-down would have decreased operating income by approximately
$152,000 for the quarter ended July 31, 2018.
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The
commodities held at broker represent the market value of our trading account, which consists of option and futures contracts
for coffee held with a brokerage firm. We use 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. We classify options and futures contracts as trading securities and accordingly, unrealized holding gains and losses
are included in earnings. We record realized and unrealized gains and losses in our cost of sales in the statement of operations/income.
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We
account for income taxes in accordance with the relevant authoritative guidance. Deferred tax assets and liabilities are 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 rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that
the asset will be realized.
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Our
goodwill consists of the cost in excess of the fair market value of the acquired net assets of OPTCO, SONO, CFI and GCC which
has been integrated into a structure that does not provide the basis for separate reporting units. Consequently, we are a
single reporting unit for goodwill impairment testing purposes. We also have intangible assets consisting of our customer
list and relationships and trademarks acquired from OPTCO and SONO. At July 31, 2018 our balance sheet reflected goodwill
and intangible assets as set forth below:
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July
31, 2018
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Customer
list and relationships, net
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$
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344,875
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Trademarks
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820,000
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Non
compete
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150,000
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Other
intangible assets
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331,124
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Goodwill
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2,794,265
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$
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4,440,264
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Goodwill
and the trademarks which are deemed to have indefinite lives are subject to annual impairment tests. Goodwill impairment tests
require the comparison of the fair value and carrying value of reporting units. We assess the potential impairment of goodwill
and intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge
will be recorded. The value assigned to the customer list and relationships is being amortized over a twenty year period.
Because
we are a single reporting unit, the closing price of our common stock on the Nasdaq Capital Market as of the acquisition date
was used as a basis to measure the fair value of goodwill. Goodwill and the intangible assets will be tested annually at the end
of each fiscal year to determine whether they have been impaired. Upon completion of each annual review, there can be no assurance
that a material charge will not be recorded. Impairment testing is required more often than annually if an event or circumstance
indicates that an impairment or decline in value may have occurred.
Three
Months Ended July 31, 2018 Compared to the Three Months Ended July 31, 2017
Net
Sales.
Net sales totaled $23,439,903 for the three months ended July 31, 2018, an increase of $5,460,835, or 30.4%, from
$17,979,068 for the three months ended July 31, 2017. This increase includes approximately $2,827,000 of net sales from the operations
of Steep & Brew, which was acquired in April 2018 by Generations Coffee Company, the entity formed as a result of our joint
venture with Caruso’s Coffee, Inc. Therefore, organic sales growth was $2,633,835 or 14.6%. The increase in our net sales
reflects our continued increased sales of branded and private label coffee and wholesale green beans to both new and existing
customers.
Cost
of Sales.
Cost of sales for the three months ended July 31, 2018 was $19,648,710, or 83.8% of net sales, as compared to
$14,903,594, or 82.9% of net sales, for the three months July 31, 2017. Cost of sales consists primarily of the cost of green
coffee and packaging materials and realized and unrealized gains or losses on hedging activity. The increase in cost of sales
was due to our increased sales and sales generated by the Steep & Brew acquisition which results were not included in the
quarter ended July 31, 2017.
Gross
Profit.
Gross profit for the three months ended July 31 2018 was $3,791,193, an increase of $715,719 from $3,075,474 for
the three months ended July 31, 2017. Gross profit as a percentage of net sales decreased to 16.2% for the three months ended
July 31, 2018 from 17.1% for the three months ended July 31, 2017. The decrease in gross profits resulted from the increase in
freight and shipping costs, our integration of Steep & Brew and and changes in the coffee prices, which resulted in our recognition
of approximately $1,170,000 of unrealized hedging losses during the quarter ended July 31, 2018.
Operating
Expenses.
Total operating expenses increased by $626,875 to $3,522,518 for the three months ended July 31, 2018 from $2,895,643
for the three months ended July 31, 2017. Operating expenses for the three months ended July 31, 2018 included approximately $723,000
of selling and administrative expenses resulting from the Steep & Brew acquisition, which occurred in April 2018. Therefore,
our selling and administrative expenses from our legacy businesses decreased by approximately $96,000 for the quarter ended July
31, 2018. The Steep & Brew new expenditures was the result of our continued dedication to our growth and expansion strategy.
Other
Income (Expense).
Other expense for the three months ended July 31, 2018 was $96,274, an increase of $33,866 from $62,408
for the three months ended July 31, 2017. The increase in other expense was attributable to an increase in interest expense of
$31,827 and a reduction in our interest income of $2,560, partially offset by an increase in our equity method investment of $521.
Income
Taxes
.
Our provision for income taxes for the three months ended July 31, 2018 totaled $35,721 compared to $23,721 for
the three months ended July 31, 2017. The change was attributable to the difference in the gain from our subsidiary for the quarter
ended July 31, 2018 as compared to the gain in the quarter ended July 31, 2017.
Net
Income
.
We had net income of $15,690 or $0.00 per share basic and diluted, for the three months ended July 31, 2018 compared
to net income of $32,800, or $0.01 per share basic and diluted for the three months ended July 31, 2017. The decrease in net income
was due primarily to the reasons described above.
Nine
Months Ended July 31, 2018 Compared to the Nine Months Ended July 31, 2017
Net
Sales.
Net sales totaled $67,717,019 for the nine months ended July 31, 2018, an increase of $12,318,481,
or 22.2%, from $55,398,538 for the nine months ended July 31, 2017. This increase includes approximately $2,985,000 of net sales
from the operations of Steep & Brew, which was acquired in April 2018 by Generations Coffee Company, the entity formed as
a result of our joint venture with Caruso’s Coffee, Inc. Therefore, organic sales growth was $9,333,480 or 16.8%. The increase
in our net sales reflects our continued increased sales of branded and private label coffee and wholesale green beans to both
new and existing customers.
Cost
of Sales.
Cost of sales for the nine months ended July 31, 2018 was $56,263,183, or 83.1% of net sales, as compared
to $46,469,896, or 83.9% of net sales, for the nine months ended July 31, 2017. Cost of sales consists primarily of the cost of
green coffee and packaging materials and realized and unrealized gains or losses on hedging activity. The increase in cost of
sales was due to our increased sales and sales generated by the Steep & Brew acquisition which results were not included in
the nine months ended July 31, 2017.
Gross
Profit.
Gross profit for the nine months ended July 31 2018 was $11,453,836, an increase of $2,525,194 from
$8,928,642 for the nine months ended July 31, 2017. Gross profit as a percentage of net sales increased to 16.9% for the nine
months ended July 31, 2018 from 16.1% for the nine months ended July 31, 2017. The increase in gross profits resulted from increased
and improved margins on our wholesale and roasted business, partially offset by the change in the coffee market and the increase
in freight and shipping costs.
Operating
Expenses.
Total operating expenses increased by $1,372,428 to $9,416,580 for the nine months ended July 31, 2018 from
$8,044,152 for the nine months ended July 31, 2017. Operating expenses for the nine months ended July 31, 2018 included approximately
$779,000 of selling and administrative expenses resulting from the Steep & Brew acquisition, which occurred in April and approximately
$449,000 of additional expenses from out legacy business from our subsidiary “CFI” which acquired in February 2017.
Therefore, our selling and administrative expenses increased by approximately $144,000 for the nine months ended July 31, 2018.
The Steep & Brew new expenditures was the result of our continued reinvestment in our growth and expansion strategy.
Other
Income (Expense).
Other expense for the nine months ended July 31, 2018 was $279,742, an increase of $116,735 from $163,007
from the nine months ended July 31, 2017. The increase in other expense was attributable to an increase in interest expense of
$94,237, a decrease in our equity method investment of $4,288 and a decrease in interest income of $18,210.
Income
Taxes
.
Our provision for income taxes for the nine months ended July 31, 2018 totaled $447,105 compared to a provision
of $153,453 for the nine months ended July 31, 2017. The change was attributable to our higher gross profit partially offset by
our higher operating expenses and the increased gain from our subsidiary for the nine months ended July 31, 2018 as compared to
the gain in the nine months ended July 31, 2017.
Net
Income
.
We had net income of $957,926 or $0.17 per share basic and diluted, for the nine months ended July 31, 2018 compared
to net income of $410,319, or $0.07 per share basic and diluted for the nine months ended July 31, 2017. The increase in net income
was due primarily to the reasons described above.
Liquidity
and Capital Resources
As
of July 31, 2018, we had working capital of $19,336,134, which represented a $929,518 decrease from our working capital of $20,265,652
as of October 31, 2017, and total stockholders’ equity of $25,015,108, which increased by $63,559 from our total stockholders’
equity of $24,951,549 as of October 31, 2017. Our working capital decreased primarily due to decreases of $4,831,418 in accounts
receivable, $1,099,999 in inventories, $171,350 in prepaid green coffee, $178,848 in prepaid and refundable income taxes, increases
of $317,176 in due from broker, $150,000 in note payable and $5,889 income taxes payable partially offset by increases of $2,754,371
in cash, $113,507 in prepaid expenses and other current assets, decreases of $1,698,519 in accounts payable and accrued expenses
and $1,258,765 in our line of credit. As of July 3, 2018, the outstanding balance on our line of credit was $7,148,762 compared
to $8,407,527 as of October 31, 2017. Total stockholders’ equity increased due to our net income and was partially offset
by our purchase of treasury stock. $894,367.
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.
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
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.
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 July 31, 2018 and October 31, 2017, the outstanding balance under the bank line of credit was $7,148,762 and $8,407,527, respectively.
For
the nine months ended July 31, 2018, our operating activities provided net cash of $7,947,275 as compared to the nine months ended
July 31, 2017 when operating activities provided net cash of $2,506,995. The increased cash flow from operations for the nine
months ended July 31, 2018 was primarily due to our accounts receivable, inventories and unrealized gains partially offset by
our accounts payable and deferred income taxes.
For
the nine months ended July 31, 2018, our investing activities used net cash of $3,039,771 as compared to the nine months ended
July 31, 2017 when net cash used by investing activities was $3,479,373. The decrease in our uses of cash in investing activities
was due to the purchase of Steep & Brew during the nine months ended July 31, 2017, partially offset by a decrease in our
outlays for equipment.
For
the nine months ended July 31, 2018, our financing activities used net cash of $2,153,133 as compared to the nine months ended
July 31, 2017 when net cash provided by financing activities was $432,121. The change in cash flow from financing activities for
the nine months ended July 31, 2018 was due to our increased net principal payments on our line of credit of $994,065 and our
increased treasury stock purchases of $878,538, partially offset by our decreased advances on our line of credit of $712,650.
We
expect to fund our operations, including paying our liabilities, funding capital expenditures and making required payments on
our indebtedness, through July 31, 2019 with cash provided by operating activities and the use of our credit facility. In addition,
an increase in eligible accounts receivable and inventory would permit us to make additional borrowings under our line of credit.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.