NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
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’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.
The
Company during the quarter ended April 30, 2022 had begun a restructuring process with its Generations subsidiary. As part of this restructuring
approximately $550,000 of its inventory was distributed to the non-controlling interest partner for $330,000 in cash. As part of the restructuring process, the Company recorded a write-down of obsolete inventory of $718,353
and a write-off of accounts receivable of $415,096.
On
September 29, 2022, Coffee Holding Co., Inc, a Nevada corporation (the “Company”), entered into a Merger and Share Exchange
Agreement (the “Merger Agreement”), by and among the Company, Delta Corp Holdings Limited, a Cayman Islands exempted company
(“Pubco”), Delta Corp Holdings Limited, a company incorporated in England and Wales (“Delta”), CHC Merger Sub
Inc., a Nevada corporation and wholly owned subsidiary of Pubco (“Merger Sub”), and each of the holders of ordinary shares
of Delta as named therein (the “Sellers”). Upon the terms and subject to the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into the Company, with the Company surviving as a direct, wholly-owned subsidiary of Pubco (the “Merger”).
As a result of the Merger, each issued and outstanding share of the Company common stock, $0.001 par value per share (the “JVA
Common Stock”), will be cancelled and converted for the right of the holder thereof to receive one ordinary share, par value $0.0001
of Pubco (the “Pubco Ordinary Shares”).
Uncertainty
Due to Geopolitical Events
Due to Russia’s invasion of Ukraine,
which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty and
disruption in the global economy. Although Russia’s invasion of Ukraine did not have a material adverse impact on the Company’s
revenue or other financial results for the year ended October 31, 2022, at this time the Company is unable to fully assess the aggregate
impact will have on its business due to various uncertainties, which include, but are not limited to, the duration of the war, the war’s
effect on the economy, its impact to the businesses of the Company’s customers, and actions that may be taken by governmental authorities
related to the war.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
1 - BUSINESS ACTIVITIES (cont’d):
COVID-19
The
global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government
in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel
and transport restrictions, mandated closures and stay-at-home orders, and created significant disruption of the financial markets.
The
continuing impact on the Company’s business including the decrease in our sales, the length and impact of stay-at-home orders and/or
regional quarantines, labor shortages and employment trends, disruptions to supply chains, including its ability to obtain products from
global suppliers, higher operating costs, the form and impact of economic stimulus and general overall economic instability, has contributed
to and may continue to have a material adverse effect on the Company’s business, results of operations, financial condition and
cash flows. At this time the full impact could not be fully determined.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS
OF PRESENTATION:
The
consolidated financial statements include the accounts of the Company, Organic Products Trading Company, LLC (“OPTCO”), Sonofresco
LLC (“SONO”), Comfort Foods, Inc. (“CFI”) and Generations Coffee Company, LLC (“GCC”). All inter-company
balances and transactions have been eliminated in consolidation.
USE
OF ESTIMATES:
The
preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States
of America (GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant
estimates include, depreciable lives for long-lived assets, and valuation of goodwill and indefinitely lived intangible assets impairment
testing. These estimates may be adjusted as more current information becomes available, and any adjustment could have a significant impact
on recorded amounts.
CASH
AND CASH EQUIVALENTS:
Cash
and cash equivalents consists primarily of unrestricted cash on deposit and securities with an original maturity of 3 months or less
at financial institutions and brokerage firms.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
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:
SCHEDULE OF ACCOUNTS RECEIVABLE
| |
2022 | | |
2021 | |
Allowance for doubtful accounts | |
$ | 65,000 | | |
$ | 65,000 | |
Reserve for other allowances | |
| 35,000 | | |
| 35,000 | |
Reserve for sales discounts | |
| 44,000 | | |
| 44,000 | |
| |
| | | |
| | |
Totals | |
$ | 144,000 | | |
$ | 144,000 | |
INVENTORIES:
Inventories
are stated at the lower of cost (first in, first out basis) or net realizable value, including provisions for obsolescence commensurate
with known or estimated exposures. There are no reserves for obsolescence as of October 31, 2022 and 2021.
BUILDING,
MACHINERY AND EQUIPMENT:
Building,
machinery and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets.
Purchases of buildings, machinery and equipment and additions and betterments which substantially extend the useful life of an asset
are capitalized at cost. Expenditures which do not materially prolong the normal useful life of an asset are charged to operations as
incurred. The Company also provides for amortization of leasehold improvements which are depreciated over the shorter of the useful life
of the improvement or the lease term.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
COMMODITIES
HELD BY BROKER:
The
commodities held at broker represent the market value of the Company’s trading account, which consists of option and future contracts
for coffee held with a brokerage firm. The Company uses options and futures contracts, which are not designated or qualifying as hedging
instruments, to partially hedge the effects of fluctuations in the price of green coffee beans. Options and futures contracts are level
1 investments recognized at fair value in the consolidated financial statements with current recognition of gains and losses on such
positions. The Company’s accounting for options and futures contracts may impact earnings volatility in any particular period.
We record all open contract positions on our consolidated balance sheets at fair value in the due from and due to broker line items and
typically do not offset these assets and liabilities.
The
Company classifies its options and future contracts as trading securities and accordingly, unrealized holding gains and losses are included
in the statement of operations as a component of cost of sales.
The
Company recorded realized and unrealized gains and losses on these contracts as follows:
SCHEDULE OF REALIZED AND UNREALIZED GAINS AND LOSSES ON CONTRACTS
| |
2022 | | |
2021 | |
| |
Year Ended October 31, | |
| |
2022 | | |
2021 | |
Gross realized gains | |
$ | 2,307,714 | | |
$ | 1,392,949 | |
Gross realized (losses) | |
| (1,683,401 | ) | |
| (63,516 | ) |
Unrealized (losses) gains | |
| (721,350 | ) | |
| 469,004 | |
Total | |
$ | (97,037 | ) | |
$ | 1,798,437 | |
CUSTOMER
LIST AND RELATIONSHIPS:
Customer
list and relationships consist of a specific customer lists and customer contracts obtained by the Company in the acquisition of OPTCO,
Comfort Foods and Sonofresco which are being amortized on the straight-line method over their estimated useful life of twenty years.
Amortization expense for the years ended October 31, 2022 and 2021 was $62,552, respectively.
GOODWILL
AND TRADEMARKS:
The Company has determined that its goodwill
and trademarks, which consist of product lines, trade names and packaging designs have indefinite useful lives. Goodwill and trademarks
are tested for impairment at least annually or when circumstances indicate that the carrying amount of goodwill or trademarks exceed fair
value. For purposes of evaluating goodwill for impairment, the Company has determined it operates a single reporting unit. The Company
performs its annual impairment test on October 31 of each year by first performing a qualitative assessment to determine if it is more
likely than not that the carrying amounts exceed the fair values. Depending on the outcome of our qualitative assessment, we may perform
a quantitative assessment to determine if the carrying amounts exceed the fair values on the
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
assessment
date. The Company quantitatively assessed the carrying amount of its goodwill in 2021 and 2022 due to its declining stock price. The
most significant assumptions used in these impairment tests include the royalty rates using the relief from royalty method of
testing trademarks, forecasted revenues and expenses, income tax rates and discounts and premiums built into our weighted average
cost of capital to estimate future cash flows using an income approach. Due to the sustained decline in the price of the Company
stock through the fourth quarter of 2022 and after the proposed Delta merger announcement, the Company determined that an impairment
charge was necessary and recorded an impairment charge of $2,569,785,
which consisted of $2,488,785
of goodwill and $81,000
of trademarks and tradenames. No impairment charge was recorded to the carrying amount of
goodwill as the reporting unit had a fair value in excess of its carrying amount of approximately 4%
as of October 31, 2021. For the year ended October 31, 2021, we recorded impairment charges on two of our trademarks as the carrying
amount of these trademarks exceeded the respective fair values on the test date which were determined using the relief from royalty
method. These impairments were due to a change in the estimated future revenues relating to these trademarks. The impairment charge amounted to
$1,080,000 for
the year ended October 31, 2021.
SCHEDULE OF CONSOLIDATED STATEMENT OF INCOME
Trademarks and tradenames | |
Total | |
Balance at November 1, 2020 | |
$ | 1,488,000 | |
Impairment | |
| (1,080,000 | ) |
Impairment | |
$ | (1,080,000 | ) |
Balance at October 31, 2021 | |
| 408,000 | |
Impairment charge | |
| (81,000 | ) |
Balance at October 31, 2022 | |
$ | 327,000 | |
IMPAIRMENT
OF LONG-LIVED ASSETS:
The
Company assesses the impairment of long-lived assets used in operations, primarily buildings, machinery and equipment as well as
intangible assets subject to amortization, when events and circumstances indicate that the carrying value amounts of these assets
might not be recoverable. For purposes of evaluating the recoverability of buildings, machinery and equipment and amortizable
intangible assets, the undiscounted cash flows estimated to be generated by those assets are compared to the carrying amounts of
those assets. If and when the carrying amounts of the assets exceed the undiscounted cashflows, then the related assets will be
written down to fair value, if less. During the year ended October 31, 2022 and 2021, the Company recorded $199,767
and 0,
respectively of impairment charges of its amortizable intangible assets. No
impairment charges were recorded against buildings, machinery and equipment.
ADVERTISING:
The
Company expenses the cost of advertising and promotion as incurred. Advertising costs charged to operations totaled $42,001 and $67,643
for the years ended October 31, 2022 and 2021, respectively.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
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.
(LOSS)
EARNINGS PER SHARE:
Basic
(loss) earnings per common share was computed by dividing net (loss) income by the sum of the weighted-average number of common shares
outstanding. Diluted (loss) earnings per common share is computed by dividing the net (loss) 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 Company
has issued 1,000,000 options that are outstanding which have not been included in the calculation of diluted (loss) earnings per share
because they are anti-dilutive.
The
weighted average common shares outstanding used in the computation of basic and diluted (loss) earnings per share were 5,708,599
and 5,575,453 for the years ended October 31, 2022 and 2021, respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS:
The
carrying amounts of cash, accounts receivable, notes due to/(from) broker and accounts payable approximate fair value
because of the short-term nature of these instruments. The carrying amount of the bank line of credit approximates fair value because
the debt is based on current rates at which the Company could borrow funds with similar remaining maturities. Fair value estimates are
made at a specific point in time, based on relevant market information about the financial instruments when available. These estimates
are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The
Company measures fair value as required by Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements
and Disclosures” (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding
the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
A) |
Level 1 – unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. |
|
B) |
Level 2 – inputs other than quoted prices included
within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable
market data. |
|
C) |
Level 3 – unobservable inputs for the asset or
liability only used when there is little, if any, market activity for the asset or liability at the measurement date. |
The
hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining
fair value.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
REVENUE
RECOGNITION:
The
Company recognizes revenue in accordance with the five-step model as prescribed by the Financial Accounting Standards Board (“FASB”)
Accounting Codification (“ASC”) Topic 606 (“ASC 606”) 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 ASC 606, 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.
The
following table presents revenues by product line for the years ended October 31, 2022 and 2021.
SCHEDULE OF REVENUE
| |
2022 | | |
2021 | |
Green | |
$ | 27,210,883 | | |
$ | 26,118,492 | |
Packaged | |
| 38,495,996 | | |
| 37,803,910 | |
| |
| | | |
| | |
Totals | |
$ | 65,706,879 | | |
$ | 63,922,402 | |
Revenues | |
$ | 65,706,879 | | |
$ | 63,922,402 | |
Revenue
for these product lines is recognized upon shipment to the customer.
SHIPPING
AND HANDLING FEES AND COSTS:
Revenue
earned from shipping and handling fees is reflected in net sales. Costs associated with shipping product to customers aggregating approximately
$2,964,000 and $3,165,000 for the years ended October 31, 2022 and 2021, respectively, is included in selling and administrative expenses.
STOCK-
BASED COMPENSATION:
Stock-based
awards are accounted for as required by ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”). Under ASC
718 stock-based awards are valued at fair value on the date of grant, and that fair value is recognized over requisite service period.
The Company accounts for forfeitures when they occur.
CONCENTRATION
OF RISK:
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions
and brokerage firms.
Accounts
at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. At October 31, 2022 and 2021,
the Company had approximately $625,000 and $2,224,000 in excess of FDIC insured limits, respectively.
The
accounts at the brokerage firm contain cash and securities. Balances are insured up to $500,000, with a limit of $100,000 for cash, by
the Securities Investor Protection Corporation (SIPC). At October 31, 2022 and 2021, the Company had approximately $1,560,000 and $523,000
in excess of SIPC insured limits, respectively.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
EQUITY
METHOD OF ACCOUNTING:
Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an
evaluation of several factors including, among others, representation on the Investee company’s board of directors and
ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method
of accounting, an Investee company’s accounts are not reflected within the Company’s consolidated Balance Sheets and
consolidated Statements of Operations; however, the Company’s share of the earnings or losses of the Investee company is
reflected in the caption “Loss from equity method investments” in the consolidated Statements of Operations. The
Company’s carrying value in an equity method Investee company is reflected in the caption “Equity method
investments” in the Company’s consolidated Balance Sheets.
The
Company’s equity method investments consist of the following:
(1)
20% interest in Healthwise Gourmet Coffees, LLC, a distributor of low acidity coffees. The initial investment in this company amounted
to $100,000. The loss recognized amounted to $15,178 and $9,213 for the years ended October 31, 2022 and 2021, respectively. The carrying
amount of this investment as presented on the consolidated balance sheet at October 31, 2022 and 2021 was $56,601 and $71,779, respectively.
(2)
On October 15, 2020 the Company acquired a 49% interest in Jordre Well LLC, a company that will produce CBD infused products. The investment
was made in 139,250 shares of the Company’s common stock. The price of the stock on October 15, 2020 was $3.45 for an initial investment
of $480,413. An additional 139,250 shares of the Company’s common stock will be transferred if Jordre Well LLC generates $500,000
in revenue from the sale of its newly created brands. The loss recognized amounted to $32,622 and $149,947 for the year ended October
31, 2022 and 2021, respectively. The net value of this investment as presented on the consolidated balance sheet at October 31, 2022
and 2021 was $297,843 and $330,466.
INVESTMENTS
- OTHER:
Investment
– other represent investments made by the Company that do not qualify as equity method investments as the Company cannot exercise
significant influence over the target. The Company accounts for these investments in accordance with ASC Topic 321 “Investments
– Equity Securities” (“ASC 321”). In August 2021, the Company made an investment of $2,500,000 in an entity that
hold investments in the plant-based protein drink manufacturing industry. The Company has determined they do not have significant influence
over the investee. Pursuant to ASC 321, the Company has elected an alternate measurement to account for this investment at cost less
any impairment with adjustments to fair value if there are observable price changes. As of October 31, 2022 and 2021, no such price changes
and investments-other was $2,500,000 on the accompanying consolidated balance sheet.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d):
LEASES:
Leases
are accounted for under ASC 842. The Company determines if an arrangement is or contains a lease at inception. The Company’s operating
lease arrangement are comprised of real estate and facility leases. Right of use assets represent the Company’s right to use the
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from
the lease. Right of use assets and lease liabilities are recognized at the commencement date based on the present value of the lease
payments over the lease term. As the Company’s leases do not provide an implicit rate and the implicit rate is not readily determinable,
the Company estimates its incremental borrowing rate based on the information available at the measurement date in determining the present
value of the lease payments. The present value of the lease payments was determined to be 5.00% for new leases and lease amendments that
occurred during fiscal year 2022 and 2021. Right of use assets also exclude lease incentives.
NOTE
3 - INVENTORIES:
Inventories
at October 31, 2022 and 2021 consisted of the following:
SCHEDULE OF INVENTORIES
| |
2022 | | |
2021 | |
Packed coffee | |
$ | 2,677,617 | | |
$ | 2,705,356 | |
Green coffee | |
| 14,847,708 | | |
| 10,890,091 | |
Roaster parts | |
| 576,778 | | |
| 422,858 | |
Packaging supplies | |
| 1,150,111 | | |
| 1,943,561 | |
Totals | |
$ | 19,252,214 | | |
$ | 15,961,866 | |
Inventories | |
$ | 19,252,214 | | |
$ | 15,961,866 | |
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
4 – BUILDING, MACHINERY AND EQUIPMENT:
Building
machinery and equipment at October 31, 2022 and 2021 consisted of the following:
SCHEDULE OF MACHINERY AND EQUIPMENT
| |
Estimated Useful Life | |
2022 | | |
2021 | |
Improvements | |
15-30 years | |
$ | 233,766 | | |
$ | 233,766 | |
Building | |
31 years | |
| 900,321 | | |
| 900,321 | |
Machinery and equipment | |
7 years | |
| 7,730,098 | | |
| 8,441,382 | |
Furniture and fixtures | |
7 years | |
| 1,184,387 | | |
| 1,082,022 | |
| |
| |
| 10,048,572 | | |
| 10,657,491 | |
| |
| |
| | | |
| | |
Less, accumulated depreciation | |
| |
| 6,848,782 | | |
| 7,994,863 | |
| |
| |
$ | 3,199,790 | | |
$ | 2,662,628 | |
Depreciation
expense totaled $522,043 and $600,357 for the years ended October 31, 2022 and 2021, respectively. In October 2021 the Company sold $651,175
of machinery and equipment with a carrying value of $434,817 at disposal for $113,166 of proceeds and recognized a loss on disposal of
$321,651 recorded as a component of operating expenses for the year ended October 31, 2021.
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts
payable and accrued expenses at October 31, 2022 and 2021 consisted of the following:
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
2022 | | |
2021 | |
Accounts payable | |
$ | 2,637,051 | | |
$ | 4,144,700 | |
Purchase accruals | |
| 784,531 | | |
| 875,201 | |
Other accruals | |
| 393,282 | | |
| 27,739 | |
Totals | |
$ | 3,814,864 | | |
$ | 5,047,640 | |
NOTE
6 - 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.
On
March 17, 2022, the Company reached an agreement for a new loan modification agreement and credit facility which extended the maturity
date to June 29, 2022. The facility was then approved for a two-year extension.
All other terms of the A&R Loan Agreement and A&R Loan Facility remain the same.
On
June 28, 2022, the Company reached an agreement for a new loan modification agreement and credit facility with Webster Bank. The terms
of the new agreement, among other things: (i) provided for a new maturity date of June 30, 2024, and (ii) changed the interest rate per
annum to SOFR plus 1.75% (with such interest rate not to be lower than 3.50%). All other terms of the A&R Loan Agreement and A&R
Loan Facility remain the same.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
6 - LINE OF CREDIT (cont’d):
The
Company is subject to certain covenants with respect to its line of credit agreement. The Company was not in compliance with the
net profit and non-borrower affiliate covenants as of October 31, 2022. The Company requested a waiver from the lender and the waiver
was granted and received on March 15, 2023. The lender also extended the due date of the October 31, 2022 financial statements until
April 15, 2023. The loan agreement was also modified on March 15, 2023. The terms of the modification, among other things: (i) provides
for a requirement for subordination agreements if necessary, and (ii) changes the terms of transactions with affiliates from a dollar
limitation to allowable in the ordinary course of business, (iii) establishes a new covenant for a fixed charge coverage ratio.
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 outstanding balance on the Company’s lines of credit were
$8,314,000 and $3,800,850 as of October 31, 2022 and October 31, 2021, respectively.
NOTE
7 - INCOME TAXES:
The
Company’s provision/(benefit) for income taxes in 2022 and 2021 consisted of the following:
SCHEDULE
OF PROVISION FOR INCOME TAX
| |
2022 | | |
2021 | |
| |
| | |
| |
Current | |
| | | |
| | |
Federal | |
$ | - | | |
$ | 427,210 | |
State and local | |
| - | | |
| 90,771 | |
Total | |
| - | | |
| 517,981 | |
Deferred | |
| | | |
| | |
Federal | |
| (933,489 | ) | |
| (50,451 | ) |
State and local | |
| (62,304 | ) | |
| (127,350 | ) |
Total | |
| (995,793 | ) | |
| (177,801 | ) |
Income tax (benefit) | |
$ | (995,793 | ) | |
$ | 340,180 | |
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
7 - INCOME TAXES (cont’d):
A
reconciliation of the difference between the expected income tax rate using the statutory U.S. federal tax rate and the Company’s
effective tax rate is as follows:
SCHEDULE
OF EFFECTIVE INCOME TAX RATE
| |
2022 | | |
2021 | |
(Benefit) from provision for tax at the federal statutory rate | |
$ | (1,175,507 | ) | |
$ | 253,650 | |
Goodwill impairment | |
| 265,796 | | |
| | |
Other permanent differences | |
| 135,025 | | |
| 19,736 | |
State and local tax, net of federal | |
| (221,107 | ) | |
| 66,794 | |
| |
| | | |
| | |
(Benefit from) provision for income taxes | |
$ | (995,793 | ) | |
$ | 340,180 | |
| |
| | | |
| | |
Effective income tax rate | |
| 18 | % | |
| 28 | % |
The
tax effects of the temporary differences that give rise to the deferred tax assets and liabilities as of October 31, 2022 and 2021 are
as follows:
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Accounts receivable | |
$ | 34,547 | | |
$ | 34,203 | |
Unrealized loss | |
| 173,058 | | |
| - | |
Deferred rent | |
| 15,643 | | |
| 20,652 | |
Deferred compensation | |
| 58,355 | | |
| 74,075 | |
Net operating loss | |
| 547,570 | | |
| 57,576 | |
Stock-based compensation | |
| 602,237 | | |
| 499,841 | |
Inventory | |
| 107,298 | | |
| 77,579 | |
| |
| | | |
| | |
Total deferred tax asset | |
| 1,538,708 | | |
| 763,926 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Intangible assets acquired | |
| 70,021 | | |
| 346,892 | |
Unrealized gain | |
| - | | |
| 111,068 | |
Buildings, machinery and equipment | |
| 395,500 | | |
| 228,572 | |
| |
| | | |
| | |
Total deferred tax liabilities | |
| 465,521 | | |
| 686,532 | |
Net deferred tax asset | |
$ | 1,073,187 | | |
$ | 77,394 | |
A
valuation allowance was not provided at October 31, 2022 or 2021. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
7 - INCOME TAXES (cont’d):
Based
upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets
are expected to be deductible, management believes it is more likely than not the Company will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
As
of October 31, 2022 and 2021, the Company did not have any unrecognized tax benefits or open tax positions. The Company’s practice
is to recognize interest and/or penalties related to income tax matters in income tax expense. As of October 31, 2022 and 2021, 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, Michigan, New Jersey, New York, New York City, Virginia, Texas, Rhode Island,
South Carolina, and Oregon state tax returns. The Company’s federal income tax return is no longer subject to examination by the
federal taxing authority for years before fiscal 2019. The Company’s California, Colorado and New Jersey and Texas income tax returns
are no longer subject to examination by their respective taxing authorities for the years before fiscal 2019. The Company’s Oregon,
New York, Kansas, South Carolina, Rhode Island, Connecticut and Michigan income tax returns are no longer subject to examination by their
respective taxing authorities for the years before fiscal 2019.
As
of October 31, 2022, and 2021, the Company had cumulative net operating loss carryforwards of approximately $2,281,518 and $274,173 respectively,
which begin to expire in 2038. In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating
loss carryforwards is subject to an annual limitation of $60,469. These net operating loss carryforwards may be further limited in the
event of a change in ownership.
NOTE
8 - COMMITMENTS AND CONTINGENCIES:
CLASS
ACTION COMPLAINT
The
Company was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Northern District
of Illinois (the “Court”) on or about December 21, 2020. The plaintiffs, Eileen Brodsky and Rhonda Diamond, purported to
represent a class of individuals who purchased coffee products at Aldi, Inc. (“Aldi”), a supermarket chain, generally allege
that Aldi sold private label coffee products manufactured by the Company and by Pan American Coffee Co., LLC (“Pan American”), which
falsely described the number of cups of coffee that could be made from the amount of product purchased. Aldi and Pan American were also
named as defendants in the action. The complaint asserted a variety of claims under New York and California consumer protection laws,
and sought unspecified monetary damages, including disgorgement and restitution, as well as other forms of relief including class certification,
declaratory and injunctive relief, attorneys’ fees, and interest. On September 28, 2021, the Court entered an order granting the
Company’s motion to dismiss with prejudice (the “Dismissal Order”). In the Dismissal Order, the Court stated that no
reasonable coffee drinker would be deceived by the Company’s packaging. The plaintiffs filed an appeal with the 7th
Circuit Court of Appeals (the “Appeal”). After the Appeal was filed, the Company and the plaintiffs’ settled the matter
during mediation in late January 2022 and the Appeal was dismissed.
A
significant customer of the Company was named as a defendant in a putative class action lawsuit filed in the United States District Court
for the District of Massachusetts (the “Massachusetts District Court”) on or about February 2, 2021, concerning the labeling
on private label coffee productions the Company sold to the customer.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
8 - COMMITMENTS AND CONTINGENCIES (cont’d):
The
plaintiff, David Cohen, purporting to represent a class of individuals who purchased coffee products from our customer, generally
allege that the customer sold private label coffee products manufactured by the Company which falsely described the number of cups
of coffee that could be made from the amount of product purchased. The Company is not named as a defendant in the action, but has
agreed to indemnify the customer for the costs and expenses incurred in defending the lawsuit and for any liability the customer may
suffer as a result. The complaint asserts a variety of claims under Massachusetts consumer protection laws, and seeks unspecified
monetary damages as well as other forms of relief including class certification, declaratory and injunctive relief, attorneys’
fees, and interest. The Company believes the allegations in the complaint are wholly without merit and that the claims asserted are
legally deficient, and intends to vigorously support the customer in defending the action. On February 28, 2022, the Company and the
plaintiff, in his individual capacity and not on behalf of a presumptive class, resolved the matter in principle and have reported
the agreement in principle to the Massachusetts District Court. After the end of the period, the parties finalized the details of a
settlement agreement. The final settlement amount was immaterial to the Company’s operations and results of
operations.
The
Company has a 401(k) Retirement Plan, which covers all the full time employees who have completed one year of service and have reached
their 21st birthday. The Company matches 100% of the aggregate salary reduction contribution up to the first 3% of compensation
and 50% of aggregate contribution of the next 2% of compensation.
Contributions to the plan aggregated $75,004
and $72,558
for the years ended October 31, 2022 and 2021,
respectively.
NOTE
9 - LEASES:
The
following summarizes the Company’s operating leases:
SCHEDULE
OF OPERATING LEASES
| |
2022 | | |
2021 | |
Right-of-use operating lease assets | |
$ | 2,871,773 | | |
$ | 3,545,786 | |
| |
| | | |
| | |
Current lease liability | |
| 220,734 | | |
| 340,400 | |
Non-current lease liability | |
| 3,136,006 | | |
| 3,299,784 | |
Total lease liability | |
$ | 3,356,740 | | |
$ | 3,640,184 | |
The
amortization of the right-of-use asset for the years ended October 31, 2022 and 2021 was $674,013 and $350,871, respectively.
COFFEE
HOLDING CO., INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER
31, 2022 AND 2021
NOTE
9 – LEASES (cont’d):
Maturities
of lease liabilities by year for our operating leases are as follows:
SCHEDULE
OF MATURITY LEASE LIABILITY
| |
| | |
2023 | |
$ | 623,696 | |
2024 | |
| 474,670 | |
2025 | |
| 354,528 | |
2026 | |
| 360,108 | |
2027 | |
| 367,788 | |
Thereafter | |
| 2,333,300 | |
Total lease payments | |
$ | 4,514,090 | |
Less: imputed interest | |
| (1,157,350 | ) |
Present value of operating lease liabilities | |
$ | 3,356,740 | |
The
aggregate cash payments under these leasing agreements was $426,271 and $442,118 for the years ended October 31, 2022 and 2021, respectively.
In
June 2021, the Company purchased a facility in Colorado for $900,321 that it was previously leasing. On the date of purchase, the Company
wrote off the carrying value of the right-of-use asset and lease liability associated with this facility of $242,888.
In
September 2021, the Company extended its headquarters lease in Staten Island, New York through September 2036. As a result, on the date
of the modification the Company increased its right-of-use asset and lease liability by $2,025,316.
NOTE
10 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% partner in Generation Coffee Company, LLC as an outside contractor (the “Partner”). Included
in contract labor expense, which is a component of cost of sales, are expenses incurred from the Partner during the years ended October
31, 2022 and 2021 of $285,696 and $349,760, respectively.
An
employee of one of the top two vendors is a director of the Company. Purchases from that vendor totaled approximately $3,500,000 for
the year ended October 31, 2021. This director retired from this vendor. The corresponding accounts payable balance to this vendor was
approximately $1,014,000 at October 31, 2021.
In
January 2005, the Company established the “Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan.” Currently,
there is only one participant in the plan: Andrew Gordon, the CEO. The deferred compensation payable represents the liability due to
this employee of the Company upon his retirement. The deferred compensation liability at October 31, 2022 and 2021 was $243,238 and $311,872,
respectively. Deferred compensation expenses included in officers’ salaries were $0 during the years ended October 31, 2022 and
2021, respectively as no amounts were contributed to this plan during the years ended October 31, 2022 and 2021.
NOTE
11 - 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 years ended October 31, 2022 and 2021. |
|
|
|
|
b. |
Stock Options. The
Company has an incentive stock plan, the 2013 Equity Compensation Plan (the “2013 Plan”), and on April 19, 2019, has
granted 1,000,000 stock options to employees, officers and non-employee directors from the 2013 Plan each with an exercise price
of $5.43. 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. No options were granted, forfeited or expired during the years ended October 31, 2022 and 2021.
As of October 31, 2022 and October 31, 2021, 1,000,000 and 666,383 options were exercisable, respectively. |
The
Company recorded $405,821 and $759,073 of stock-based compensation during the years ended October 31, 2022 and 2021, respectively. Stock
compensation was fully recognized during the year ended October 31, 2022.
NOTE
12 – SUBSEQUENT EVENTS:
The
Company is subject to certain covenants with respect to its line of credit agreement. The Company was not in compliance with the net
profit and non-borrower affiliate covenants as of October 31, 2022. The Company requested a waiver from the lender and the waiver
was granted and received on March 15, 2023. The lender also extended the due date of the October 31, 2022 financial statements
until April 15, 2023. The loan agreement was also modified on March 15, 2023. The terms of the modification, among other things: (i)
provides for a requirement for subordination agreements if necessary, (ii) changes the terms of transactions with affiliates from a
dollar limitation to allowable in the ordinary course of business and (iii) establishes a new covenant for a fixed charge coverage
ratio.