Coffee Holding Co., Inc. — Q3 2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2023; interim financial statements are unaudited. The company wholesales green coffee, roasts and sells packaged coffee, and sells coffee-roasting equipment. Its green, private-label, and branded coffee activities are reported as one segment.
Financial performance
- Third-quarter sales: $15.76 million, down 7.3% from $17.01 million. Management attributed the decline to lower Generations/Steep N Brew sales and lower green-coffee selling prices, partly offset by sales growth among legacy customers.
- Third-quarter gross profit and margin: $2.45 million and 15.5%, versus $3.15 million and 18.5% a year earlier. Cost of sales was 84.5% of revenue, up from 81.5%. Operating loss was $403,247, compared with operating income of $239,482; net loss was $111,881, or $0.02 per share, versus net income of $132,381, or $0.02 per share.
- Nine-month sales: $49.41 million, down 1.6% from $50.22 million. Gross profit was $7.60 million, with a 15.4% margin, versus $9.41 million and 18.7% in 2022. Operating loss was $1.59 million versus $570,257; net loss was $1.00 million, or $0.18 per share, versus net income of $45,148, or $0.01 per share.
- Revenue mix, nine months: Green coffee contributed $21.08 million and packaged coffee $28.33 million. Both were below the comparable 2022 amounts.
- Unusual income item: Other income included $634,181 related to an insurance claim for the nine months, including $400,140 in the third quarter. This helped offset higher interest expense; nine-month interest expense rose to $393,590 from $143,393.
Cash flow, balance sheet, and liquidity
- Cash and working capital: Cash was $2.42 million at July 31, versus $2.52 million at October 31, 2022. Working capital was $15.50 million, down from $25.26 million; the company attributed much of the decrease to its $9.02 million line of credit being classified as current.
- Cash flows, nine months: Operating activities provided $799,162, compared with $2.82 million used in 2022, primarily reflecting the inventory position. Investing activities used $721,696, mainly for equipment purchases. Financing activities used $174,789. Cash decreased by $97,323.
- Debt and leases: The line of credit balance was $9.02 million, up from $8.31 million at October 31, 2022. The facility bears interest at SOFR plus 1.75%, subject to a 3.50% floor; the filing describes a June 30, 2024 maturity. Lease liabilities totaled $3.30 million. Total liabilities were $15.77 million.
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern, citing the need to renew or replace its credit facility and the lack of assurance it can do so on acceptable terms. Management expects to renew the facility or seek alternative financing and says operations are expected to be funded through at least the next 12 months, but neither outcome is assured.
Changes, outlook, and risks
- Sales declined modestly over nine months, but weaker gross margins and higher interest expense contributed to a shift from prior-year net income to a loss.
- Management prepared a fiscal 2024 business forecast but said the company has not yet achieved higher revenues at improved margins and provided no numerical guidance.
- The company uses coffee futures and options on a limited basis to manage bean-price exposure and has been scaling back hedging and short-term trading. These contracts are not designated as accounting hedges, so gains and losses affect current earnings; the filing reports a $109,535 net loss on investments for the nine months.
- Risks include coffee-price and supply volatility, hedge effectiveness, customer retention, competition, financing and covenant compliance, and supply-chain disruption. The company received a lender waiver in March 2023 for specified covenant noncompliance at October 31, 2022; the facility also includes a fixed-charge-coverage covenant and other restrictions.
- Management said disclosure controls were not effective because of material weaknesses, including deficiencies involving stock-based compensation and inventory, system access and segregation of duties, contract and lease accounting, records custody, and intercompany eliminations. The company is undertaking remediation; the weaknesses were not yet considered remediated.
- The filing describes a September 2022 merger and share-exchange agreement under which Coffee Holding would become a wholly owned subsidiary of Pubco and shareholders would receive Pubco shares. This filing does not clearly provide an updated transaction status.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced, its current maturity and terms, and the company’s compliance with all covenants.
- Whether the substantial-doubt going-concern assessment has changed and whether actual results support the fiscal 2024 forecast.
- The recurring versus one-time nature of the insurance-claim income and the drivers of gross-margin pressure and higher interest expense.
- Progress in remediating material weaknesses and the current status of the merger agreement.