Coffee Holding Co., Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021. The company is an integrated wholesale coffee roaster and dealer, selling green, private-label and branded coffee, as well as roasting equipment. Its operations are reported as one segment. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change / context |
|---|---|---|---|
| Net sales | $18.13 million | $19.29 million | Down 6.0% |
| Gross profit / margin | $4.48 million / 24.7% | $3.11 million / 16.2% | Margin increased 8.5 percentage points |
| Operating income (loss) | $1.17 million | $(0.56) million | Returned to operating profitability |
| Net income (loss) attributable to Coffee Holding | $677,312; $0.12 per share | $(599,848); $(0.11) per share | Returned to profitability |
| Cash provided by operating activities | $2.77 million | $1.72 million | Inventory use and net income contributed to the increase |
| Cash and working capital | $2.73 million cash; $22.54 million working capital | — | Working capital was down $1.50 million from October 31, 2020 |
Gross margin improved primarily due to higher margins on roasted and branded products, including sales of lower-cost green coffee inventory built in prior quarters. Operating expenses fell 9.8% to $3.31 million, reflecting cost controls, partly offset by higher freight costs. The filing reports $756,282 of consolidated net income before the $78,970 attributable to noncontrolling interest; attributable net income was $677,312.
At January 31, 2021, total assets were $36.92 million, total liabilities $8.23 million and total equity $28.69 million. The company had $952,732 outstanding on its line of credit, down from $3.80 million at October 31, 2020; it also reported $21,121 of note payable and approximately $2.14 million of operating lease liabilities. The credit facility bears interest at LIBOR plus 1.75%, subject to a 3.50% floor, matures March 31, 2022 and is secured by company assets. The company reported compliance with its covenants.
Investing activities used $66,151, principally for equipment purchases. Financing activities used $2.85 million, principally for line-of-credit repayments. Cash declined $146,339 during the quarter. The filing reports no material off-balance-sheet arrangements.
Changes versus the prior-year quarter
- Sales fell $1.15 million as COVID-19-related restaurant, café and food-service closures reduced demand from green-coffee customers. Management said increased purchases by wholesalers and retailers partly reflected a shift in coffee consumption toward those channels.
- Reported product-line figures show green coffee sales of $6.60 million versus $6.79 million and packaged coffee sales of $11.53 million versus $12.50 million. The product-line table labels both columns “January 31, 2020”; the filing text does not clearly label the first column, though its totals correspond to Q1 FY2021.
- Cost of sales declined to 75.3% of sales from 83.8%. Commodity contracts generated a reported net gain of $676,986, including a $415,075 unrealized gain, versus a net loss of $756,089 in the prior-year quarter. These non-designated trading positions can add earnings volatility.
- Interest expense declined to $26,669 from $55,734. The company also reduced its line-of-credit balance substantially during the quarter.
Outlook, risks and notable items
- No quantified revenue or earnings guidance was provided. Management expected to fund operations, liabilities, capital expenditures and debt payments through March 16, 2022 with operating cash flow and the credit facility; the facility’s stated maturity is March 31, 2022.
- Management described COVID-19 as materially affecting the quarter and expected near-term disruption and changes in consumer behavior to continue. It noted that facilities largely continued operating as an essential business and that supply-chain disruption had been limited to date, but warned that future effects remain uncertain.
- Coffee price volatility, supply availability, effectiveness of hedging, customer retention, competition, labor and supply-chain disruption, and the ability to comply with lending covenants are identified risks. The company said it had scaled back hedging and short-term futures and options trading and intended to continue using these practices in a limited capacity.
- Six customers represented approximately 26% of quarterly sales and $2.40 million of receivables. Five vendors represented approximately 29% of purchases; one vendor accounted for 10% of purchases. Related-party purchases from a vendor associated with a company director were approximately $734,000.
- The company disclosed a putative class action over coffee-product labeling in which it is a defendant; it had not been served and said the claims were without merit. In a separate similar action against a significant customer, the company agreed to indemnify the customer for defense costs and potential liability. Outcomes and potential exposure were not determinable.
- Disclosure controls were deemed ineffective due to material weaknesses involving stock-based compensation accounting and inventory controls at a subsidiary. Management described remediation efforts, including accounting staffing and system changes, more frequent inventory audits and enhanced review procedures; the weaknesses were not yet considered remediated.
- The company disclosed a 49% investment in The Jordre Well, a CBD beverage company, to develop CBD-infused product extensions and new products. No financial contribution or quantified outlook was provided.
Important facts for investors to verify
- Whether the substantial gross-margin improvement and commodity-contract gains are sustainable, and how coffee-price and hedging exposure may affect future results.
- How sales and margins develop as café, restaurant and food-service demand and COVID-related conditions change.
- Liquidity and borrowing capacity under the secured credit facility, covenant compliance, and funding needs as the facility approaches its March 2022 maturity.
- Progress in remediating the material weaknesses and whether inventory and stock-compensation controls are operating effectively.
- Developments, indemnification exposure and potential costs associated with the coffee-labeling lawsuits.
- The product-line table’s mislabeled comparative-period heading and the company’s reported $756,282 consolidated net income versus $677,312 attributable net income.