Business Context and Reporting Period
Coffee Holding Co., Inc. (the "Company") is an integrated wholesale coffee roaster and dealer operating primarily in the United States. The Company manufactures, roasts, packages, and distributes roasted and blended coffees for private label accounts and its own brands, while also selling green coffee. This Form 10-Q covers the quarterly period ended July 31, 2010, and includes comparative data for the nine months ended July 31, 2010 and 2009.
Key operational developments during the period include the acquisition of substantially all assets of Organic Products Trading Company, Inc. ("OPTCO") on May 17, 2010, to expand organic and fair trade coffee offerings. The Company also closed its Brooklyn, New York manufacturing operations in May 2009, consolidating processing capacity in La Junta, Colorado, and Brecksville, Ohio.
Key Financial Metrics
| Metric | Nine Months Ended July 31, 2010 | Nine Months Ended July 31, 2009 | Three Months Ended July 31, 2010 | Three Months Ended July 31, 2009 |
|---|---|---|---|---|
| Net Sales | $60,309,228 | $54,020,045 | $19,032,770 | $17,289,305 |
| Gross Profit | $7,653,813 | $7,233,083 | $2,458,415 | $2,913,686 |
| Gross Margin % | 12.7% | 13.4% | 12.9% | 16.9% |
| Net Income (Attributable to Company) | $1,782,517 | $1,592,211 | $424,091 | $799,760 |
| Earnings Per Share (Basic/Diluted) | $0.33 | $0.29 | $0.08 | $0.15 |
| Cash and Cash Equivalents (End of Period) | $216,246 | $2,015,616 | $216,246 | $2,015,616 |
| Line of Credit Outstanding | $2,059,920 | $791,628 | $2,059,920 | $791,628 |
| Working Capital | $11,055,407 | $9,544,795 | $11,055,407 | $9,544,795 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.6% for the nine months ended July 31, 2010, driven by increased sales of specialty green coffee and the inclusion of OPTCO operations post-acquisition.
- Margin Compression: Gross profit margins declined from 13.4% to 12.7% (nine months) and 16.9% to 12.9% (three months). Management attributes this to higher green coffee prices that could not be immediately passed to customers and a decrease in net gains on commodity options and futures contracts.
- Profitability: While nine-month net income increased by 12%, quarterly net income for the three months ended July 31, 2010, decreased by 47% compared to the prior year quarter due to the margin pressures noted above.
- Liquidity: Cash and cash equivalents decreased significantly from $1.37 million to $0.22 million. This was primarily due to the $2.26 million cash payment for the OPTCO acquisition and increased inventory and prepaid green coffee balances.
- Debt: The outstanding balance on the Company's line of credit increased from $0.79 million to $2.06 million. The credit facility was increased from $5 million to $7 million in July 2010.
Guidance, Outlook, and Risks
Management Commentary: Management expects to fund operations through October 31, 2010, using cash from operating activities and the credit facility. The acquisition of OPTCO is viewed as highly complementary, merging customer bases to enhance the Company's position as a purveyor of specialty green coffee.
Risks and Contingencies:
- Commodity Price Volatility: The Company remains exposed to fluctuations in green coffee prices. While hedging strategies are employed, significant price declines or supply disruptions could impact profitability.
- Customer Concentration: Approximately 47% of sales for the nine months ended July 31, 2010, were derived from a single customer. This customer also accounted for approximately $1.3 million of accounts receivable.
- Vendor Concentration: Approximately 54% of purchases were from three vendors during the nine-month period.
- Goodwill and Intangibles: The acquisition of OPTCO resulted in $440,000 of goodwill and $330,000 of intangible assets. These are subject to annual impairment testing.
- Related Party Transactions: Significant related party costs were incurred ($15.3 million for nine months 2010) involving a 40% partner in a joint venture and a vendor where an employee serves as a director.
Investor Verification Checklist
- Customer Concentration Risk: Verify the stability of the relationship with the single customer representing 47% of sales and the collectability of the associated $1.3 million receivable.
- Commodity Hedging Effectiveness: Assess the impact of recent green coffee price increases on future margins and the Company's ability to pass costs to customers.
- Liquidity Position: Monitor the cash balance of $216,246 against the $2.06 million line of credit utilization and upcoming dividend obligations.
- OPTCO Integration: Evaluate the performance of the newly acquired OPTCO subsidiary against the earn-out targets (pre-tax net profit of $300,000) which trigger additional cash and stock payments.
- Related Party Costs: Review the terms and necessity of the $15.3 million in related party costs included in cost of sales.