Coffee Holding Co., Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 31, 2023; compared with the three months ended January 31, 2022. The interim financial statements are unaudited. Coffee Holding roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters.
Financial performance and position
- Revenue: $18.33 million, up 9.7% from $16.70 million. Management attributed growth mainly to existing private-label and branded customers, partly offset by lower green-coffee selling prices. Green coffee revenue was $7.66 million versus $6.95 million; packaged coffee was $10.67 million versus $9.75 million.
- Profitability: Gross profit fell to $2.32 million from $4.27 million; gross margin declined to 12.7% from 25.6%. Cost of sales rose to $16.01 million (87% of sales) from $12.43 million (74%). The filing cites higher packaging, freight and labor costs. Operating expenses decreased to $3.12 million from $3.72 million, but the company recorded an operating loss of $801,025 versus operating income of $550,730.
- Net result: Net loss attributable to Coffee Holding was $532,103, or $0.09 per diluted share, compared with net income of $280,863, or $0.05 per share. Other income included $234,041 related to an insurance claim; interest expense increased to $130,459 from $40,610.
- Cash flow: The cash-flow statement reports $2.80 million provided by operating activities, $202,018 used in investing activities, and $862,739 used in financing activities. Cash increased by $1.74 million to $4.25 million. The MD&A narrative instead reports operating cash flow of $1.93 million and financing cash flow provided of $13,409; these narrative figures conflict with the statements and should be reconciled.
- Liquidity and debt: Working capital was $24.57 million, down from $25.26 million at October 31, 2022. The revolving credit balance was $8.33 million, compared with $8.31 million at year-end. The facility bears interest at SOFR plus 1.75%, subject to a 3.50% floor, and matures June 30, 2024. Total lease liabilities were $3.33 million. The balance sheet also reports a small note payable.
- Balance sheet changes: Cash rose from $2.52 million at October 31, 2022, while inventories declined from $19.25 million to $16.70 million. Total assets were $40.85 million and total equity was $24.02 million at January 31, 2023.
Material changes and unusual items
- Despite higher sales, gross profit declined sharply and the company moved from operating and net income to losses. Management attributed the pressure principally to higher costs, including packaging, freight and labor.
- Commodity contracts produced a reported net gain of $234,896, including an unrealized gain of $772,021 offset by realized losses. The company says it has scaled back hedging and short-term futures and options trading, but intends to continue using them in a limited capacity. These contracts can increase earnings volatility.
- The company disclosed that it was out of compliance with net-profit and non-borrower-affiliate covenants as of October 31, 2022. The lender granted a waiver on March 15, 2023 and modified the agreement, including adding a fixed-charge-coverage covenant. The facility includes multiple operational and financial restrictions.
- Management expects to fund operations and obligations for at least the next 12 months using operating cash flow and its credit facility. No quantified revenue or earnings guidance is provided.
- A proposed merger agreement would make Coffee Holding a wholly owned subsidiary of Delta Corp Holdings Limited, with each Coffee Holding common share converted into one Pubco ordinary share, subject to the agreement’s conditions.
Risks, contingencies and controls
- Identified risks include coffee-price and supply volatility, hedge effectiveness, customer retention, competition, financing availability and covenant compliance, joint-venture performance, and broader economic conditions.
- Management concluded disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting. Weaknesses include system access and segregation-of-duties issues, contract and lease accounting controls, inventory and stock-compensation controls, and financial-statement presentation controls.
- The company reported that inadequate controls led to a restatement of fiscal 2020 financial statements, correcting an approximately $8.3 million overstatement of both net sales and cost of sales. Remediation efforts were underway and were not yet considered complete.
- A previously filed consumer class action against the company was settled after the appeal was dismissed. A separate labeling case against a significant customer was also settled; the company’s final settlement-related amount was described as immaterial.
Important facts for investors to verify
- Reconcile the cash-flow amounts in the MD&A narrative with the primary cash-flow statement.
- Review compliance with the amended credit-facility covenants, the new fixed-charge-coverage requirement, and borrowing availability through the June 2024 maturity.
- Assess whether gross-margin pressure from input, packaging, freight and labor costs persists, and how commodity hedging affects reported results.
- Track remediation of material weaknesses and the reliability of financial reporting following the fiscal 2020 restatement.
- Confirm the status and terms of the proposed merger and any subsequent developments concerning the customer-related litigation settlement.