Business Context and Reporting Period
Company: Coffee Holding Co., Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2010
Business Overview: The Company is an integrated wholesale coffee roaster and dealer operating in the United States. It manufactures, roasts, packages, and distributes roasted and blended coffees for private label accounts and its own brands, and sells green coffee. Operations are primarily conducted at facilities in La Junta, Colorado, and Brecksville, Ohio (via a 60% owned joint venture, Generations Coffee Company, LLC). The Company closed its Brooklyn, New York manufacturing operations in May 2009 and sold the property in October 2009.
Key Financial Metrics
| Metric | Q1 2010 (Unaudited) | Q1 2009 (Unaudited) |
|---|---|---|
| Net Sales | $21,359,151 | $18,857,870 |
| Gross Profit | $2,637,764 | $2,115,095 |
| Gross Margin | 12.3% | 11.2% |
| Operating Income | $1,048,856 | $708,415 |
| Net Income (Attributable to Company) | $557,978 | $391,801 |
| Earnings Per Share (Basic & Diluted) | $0.10 | $0.07 |
| Cash and Cash Equivalents | $1,543,042 | $1,844,462 |
| Working Capital | $10,353,010 | $9,544,795 |
| Line of Credit Outstanding | $1,424,553 | $791,628 |
| Total Assets | $19,799,266 | $19,803,638 |
Cash Flow Summary (Three Months Ended Jan 31, 2010):
- Operating Activities: Net cash used of $376,822 (compared to $1,392,754 provided in 2009).
- Investing Activities: Net cash used of $80,994.
- Financing Activities: Net cash provided of $632,925.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 13.3% ($2.5 million) driven by increased sales of green coffee and private label coffee to major customers.
- Margin Expansion: Gross margin improved to 12.3% from 11.2%. Cost of sales as a percentage of net sales decreased to 87.7% from 88.8%, attributed to cost-cutting measures and a favorable green coffee inventory position.
- Operating Expenses: Increased by 13.0% ($182,228) due to higher contract labor ($170,000), Entenmann's setup expenses ($30,000), freight, and travel costs, partially offset by lower insurance and payroll costs.
- Commodity Gains: Net gains on options and futures contracts included in cost of sales decreased from $283,011 in 2009 to $134,689 in 2010.
- Debt Utilization: The outstanding balance on the $5 million line of credit increased by approximately $633,000 to $1.42 million.
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes the increase in profitability to strategic investments in sales and marketing, the consolidation of manufacturing operations to Colorado and Ohio, and the sale of the Brooklyn property which generated a pre-tax gain of approximately $2.1 million in the prior fiscal year. The Company expects to fund operations through October 31, 2010, via operating cash flows and its credit facility.
Risks and Contingencies:
- Customer Concentration: Approximately 43% of sales for the quarter ended January 31, 2010, were derived from a single customer, who also accounted for approximately $1.72 million of accounts receivable.
- Supplier Concentration: Approximately 35% and 6% of purchases were from two specific vendors.
- Commodity Price Volatility: The Company uses futures and options to hedge green coffee prices but remains exposed to loss if prices decline significantly or if hedges do not adequately offset risks.
- Interest Rate Risk: The Company has $1.42 million in variable-rate debt under its revolving line of credit.
Unusual Items: The filing notes the adoption of new accounting standards regarding noncontrolling interests and fair value measurements, though these did not have a material impact on the consolidated financial statements for the period.
Investor Verification Checklist
- Customer Dependency: Verify the stability of the relationship with the single customer representing 43% of sales and the collectability of the associated $1.72 million receivable.
- Cash Flow Reversal: Investigate the shift from positive operating cash flow in 2009 to negative operating cash flow in 2010, driven primarily by a decrease in accounts payable and receivables.
- Commodity Hedging Effectiveness: Review the impact of the decrease in net gains on commodity contracts ($148k reduction) on future cost of sales and margins.
- Debt Covenants: Confirm continued compliance with the Sterling National Bank credit facility covenants, specifically regarding minimum working capital and leverage ratios.
- Related Party Transactions: Review the $6.6 million in related party costs included in cost of sales, primarily purchases from a vendor where an employee is a Company director.