NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
1 - BUSINESS ACTIVITIES:
Coffee
Holding Co., Inc. (the “Company”) conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing
and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee. The Company
also manufactures and sells coffee roasters. The Company’s core product, coffee, can be summarized and divided into three product
categories (“product lines”) as follows:
Wholesale
Green Coffee: unroasted raw beans imported from around the world and sold to large and small roasters and coffee shop operators;
Private
Label Coffee: coffee roasted, blended, packaged and sold under the specifications and names of others, including supermarkets
that want to have their own brand name on coffee to compete with national brands; and
Branded
Coffee: coffee roasted and blended to the Company’s own specifications and packaged and sold under the Company’s
eight proprietary and licensed brand names in different segments of the market.
The
Company’s private label and branded coffee sales are primarily to customers that are located throughout the United States with
limited sales in Canada and certain countries in Asia. Such customers include supermarkets, wholesalers, and individually-owned and multi-unit
retailers. The Company’s unprocessed green coffee, which includes over 90 specialty coffee offerings, is sold primarily to specialty
gourmet roasters and to coffee shop operators in the United States with limited sales in Australia, Canada, England and China.
The
Company’s wholesale green, private label, and branded coffee product categories generate revenues and cost of sales individually
but incur selling, general and administrative expenses in the aggregate. There are no individual product managers and discrete financial
information is not available for any of the product lines. The Company’s product portfolio is used in one business and it operates
and competes in one business activity and economic environment. In addition, the three product lines share customers, manufacturing resources,
sales channels, and marketing support. Thus, the Company considers the three product lines to be one single reporting segment.
On
September 29, 2022, 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 “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”).
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY:
The
Company’s fiscal year ends on October 31, of each calendar year. The accompanying interim condensed consolidated financial
statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for
the fiscal year ended October 31, 2022. In the opinion of the Company’s management, these interim condensed consolidated
financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from these estimates. The October 31, 2022 year-end condensed consolidated balance sheet data in this document
was derived from audited consolidated financial statements. These condensed consolidated financial statements and notes included in
this quarterly report on Form 10-Q does not include all disclosures required by U.S. generally accepted accounting principles
(“U.S. GAAP”) and should be read in conjunction with the Company’s audited consolidated financial statements as of
and for the year ended October 31, 2022 and notes thereto included in the Company’s fiscal 2022 Annual Report on Form
10-K, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2023 (the “2022 10-K”). The
results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not
necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The
condensed consolidated financial statements include the accounts of the Company, the Company’s subsidiaries, Organic Products Trading
Company, LLC (“OPTCO”), Sonofresco, LLC (“SONO”), Comfort Foods, Inc. (“CFI”) and Generations Coffee
Company, LLC (“GCC”), the entity formed as a result of the Company’s joint venture with Caruso’s Coffee, Inc.
The Company owns a 60% equity interest in GCC. All significant inter-company transactions and balances have been eliminated in consolidation.
Significant
Accounting Policies
The
significant accounting policies used in the preparation of these condensed consolidated financial statements are disclosed in our 2022
10-K, and there have been no changes to the Company’s significant accounting policies during the three months ended January 31,
2023.
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.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICY (cont’d):
The
following table presents revenues by product line in the three months ended January 31, 2023 and 2022
SCHEDULE OF REVENUE
| |
January 31, 2023 | | |
January 31, 2022 | |
Green | |
$ | 7,658,947 | | |
$ | 6,951,573 | |
Packaged | |
$ | 10,667,167 | | |
$ | 9,753,287 | |
Totals | |
$ | 18,326,114 | | |
$ | 16,704,860 | |
Revenues | |
$ | 18,326,114 | | |
$ | 16,704,860 | |
NOTE
3 - INVENTORIES:
Inventories
at January 31, 2023 and October 31, 2022 consisted of the following:
SCHEDULE OF INVENTORIES
| |
January 31, 2023 | | |
October 31, 2022 | |
Packed coffee | |
$ | 2,933,996 | | |
$ | 2,677,617 | |
Green coffee | |
| 11,954,062 | | |
| 14,847,708 | |
Roasters and parts | |
| 553,863 | | |
| 576,778 | |
Packaging supplies | |
| 1,254,860 | | |
| 1,150,111 | |
Totals | |
$ | 16,696,781 | | |
$ | 19,252,214 | |
Inventories | |
$ | 16,696,781 | | |
$ | 19,252,214 | |
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
4 - 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 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. 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 earnings and not reflected as a net amount as a separate component of stockholders’ equity.
The
Company recorded realized and unrealized gains and losses respectively, on these contracts as follows:
SCHEDULE OF REALIZED AND UNREALIZED GAINS AND LOSSES ON CONTRACTS
| |
2023 | | |
2022 | |
| |
Three Months Ended January 31, | |
| |
2023 | | |
2022 | |
Gross realized gains | |
$ | 128,925 | | |
$ | 322,140 | |
Gross realized losses | |
| (666,050 | ) | |
| (378,919 | ) |
Unrealized gain (loss) | |
| 772,021 | | |
| (66,766 | ) |
Total | |
$ | 234,896 | | |
$ | (123,545 | ) |
Gain (Loss) on Investments | |
$ | 234,896 | | |
$ | (123,545 | ) |
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
5 - 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 (later acquired by Webster Bank N.A.) (“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 remained 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 remained the same.
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 to, 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
$8,328,782 and $8,314,000 as of January 31, 2023 and October 31, 2022, respectively.
NOTE
6 - 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 January 31, 2023 and October 31, 2022, 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 January 31, 2023 and October
31, 2022, the Company had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax
examinations in progress.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
6 - INCOME TAXES (cont’d):
The
Company files a U.S. federal income tax return and California, Colorado, Connecticut, Idaho, Kansas, Michigan, New Jersey, New York,
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.
NOTE
7 - 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 5,708,599 for the three
months ended January 31, 2023 and 2022. The Company had granted 1,000,000 options in the second quarter of 2019, which have not been
included in the calculation of diluted earnings per share due to their anti-dilutive nature.
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 one of the Company’s supermarket customers, generally allege that such client sold private label coffee products manufactured
by the Company and one of its partners, which falsely described the number of cups of coffee that could be made from the amount of product
purchased. These parties 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 settled the matter
during mediation in late January 2022 and the Appeal was dismissed.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (cont’d):
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 on or about
February 2, 2021, concerning the labeling on private label coffee productions the Company sold to the customer. The plaintiff, David Cohen,
purporting to represent a class of individuals who purchased coffee products from the Company’s customer, generally alleged 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 the Company 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 parties
have 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.
NOTE
9 - LEASES:
The
following summarizes the Company’s operating leases:
SCHEDULE
OF OPERATING LEASES
| |
2023 | | |
2022 | |
Right-of-use operating lease assets | |
$ | 2,832,907 | | |
$ | 2,871,773 | |
| |
| | | |
| | |
Current lease liability | |
| 186,879 | | |
| 220,734 | |
Non-current lease liability | |
| 3,142,959 | | |
| 3,136,006 | |
Total lease liability | |
$ | 3,329,838 | | |
$ | 3,356,740 | |
The
amortization of the right-of-use asset for the three months ended January 31, 2023 and 2022 was $79,663 and $102,681, respectively.
Maturities
of lease liabilities by year for our operating leases are as follows:
SCHEDULE
OF MINIMUM FUTURE LEASE PAYMENTS
| |
| | |
2023 | |
$ | 558,758 | |
2024 | |
| 481,670 | |
2025 | |
| 354,528 | |
2026 | |
| 360,108 | |
2027 | |
| 367,788 | |
Thereafter | |
| 2,333,300 | |
Total lease payments | |
$ | 4,456,152 | |
Less: imputed interest | |
| (1,126,314 | ) |
Present value of operating lease liabilities | |
$ | 3,329,838 | |
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
December 2022, the Company extended its lease at its subsidiary Sonofresco in Washington through December 2023. As a result, on the date
of the modification the Company increased its right-of-use asset and lease liability by $40,979 as of January 31, 2023.
COFFEE
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY
31, 2023
(UNAUDITED)
NOTE
10 - RELATED PARTY TRANSACTIONS:
The
Company has engaged its 40% former partner in GCC as an outside contractor (the “Partner”). Included in contract labor expense
are expenses incurred from the Partner during the three months ended January 31, 2023 and 2022 of $56,851 and $58,434, respectively,
for the processing of finished goods.
In
January 2005, the Company established the “Coffee Holding Co., Inc. Non-Qualified Deferred Compensation Plan.” Currently,
there is only one participant in the plan: the Company’s Chief Executive Officer. Within the plan guidelines, this employee is
deferring a portion of his current salary and bonus. The assets are held in a separate trust. The deferred compensation payable represents
the liability due to the Chief Executive Officer of the Company. The assets were $176,074 and $243,238 at January 31, 2023 and October
31, 2022, respectively, and are included in the Deposits and other assets in the accompanying balance sheets. The deferred compensation
liability at January 31, 2023 and October 31, 2022 were $176,074 and $243,238, respectively.
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 three months ended January 31, 2023 and the year
ended October 31, 2022. |
|
|
|
|
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 three months ended January 31, 2023
or for the year ended October 31, 2022. |
|
|
|
|
|
The
Company recorded $0 and $189,768 of stock-based compensation for the three months ended January 31, 2023 and 2022. |