Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2023. The interim financial statements are unaudited. The company roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters; it reports as one segment.
Financial performance and position
| Metric | Three months ended April 30, 2023 | Six months ended April 30, 2023 |
|---|---|---|
| Net sales | $15.32 million; down 7.1% year over year | $33.65 million; up 1.3% |
| Gross profit / margin | $2.83 million / 18.5%, versus $1.99 million / 12.1% | $5.15 million / 15.3%, versus $6.26 million / 18.9% |
| Operating loss | $0.38 million, versus $1.37 million | $1.19 million, versus $0.82 million |
| Net loss attributable to Coffee Holding | $0.36 million, or $0.06 per share, versus $0.37 million | $0.89 million, or $0.16 per share, versus $0.09 million |
| Cash from operating activities | $1.23 million for the six months, versus cash used of $1.50 million |
Quarterly revenue declined mainly because of lower sales from Generations/Steep N Brew, partly offset by increased sales to legacy customers. For the half year, higher sales were more than offset at the gross-profit level by higher costs, including packaging. Selling and administrative expense fell, partly because the Generations joint venture did not generate expenses in the 2023 period. Six-month other income included a $234,041 insurance claim; interest expense rose by $159,273.
At April 30, 2023, cash was $1.47 million, working capital was $23.05 million, and total assets were $37.33 million. The revolving line of credit balance was $7.52 million, down from $8.31 million at October 31, 2022; its stated rate is SOFR plus 1.75%, subject to a 3.50% floor, and it matures June 30, 2024. Operating lease liabilities totaled $3.37 million. Six-month investing cash use was $0.61 million, primarily for machinery and equipment; financing cash use was $1.67 million.
Changes, outlook and risks
- Six-month gross margin fell to 15.3% from 18.9%, while the company’s net loss widened. The quarter’s gross margin improved year over year despite lower sales.
- Inventory declined to $15.82 million from $19.25 million at fiscal year-end, contributing to operating cash generation. Cash declined by $1.05 million over the six months.
- The lender waived covenant noncompliance relating to net profit and non-borrower affiliates as of October 31, 2022, and modified the facility in March 2023, including adding a fixed-charge-coverage covenant. The credit agreement contains multiple operating and financial restrictions.
- Management expects to fund operations and obligations for at least 12 months after issuance of the statements using operating cash flows and the credit facility; additional borrowing capacity depends in part on eligible receivables and inventory. No numerical earnings or revenue guidance is provided.
- The company uses coffee futures and options on a limited basis to partially manage coffee-price exposure. These instruments are not designated accounting hedges, and fair-value gains and losses can add earnings volatility. Management cites commodity prices and supply, customer retention, competition, financing and covenant compliance, and broader economic conditions as risks.
- Management concluded disclosure controls were ineffective because of material weaknesses, including weaknesses involving stock-based compensation and inventory controls, system access and segregation of duties, contract accounting, record custody, and consolidation/presentation controls. The company reported an approximately $8.3 million overstatement of fiscal 2020 net sales and cost of sales and a restatement. Remediation was underway; management said the weaknesses were not yet remediated.
- A previously disclosed merger agreement would convert each outstanding Coffee Holding share into one Pubco ordinary share upon completion, subject to its terms and conditions. This filing excerpt does not provide a current completion status.
Important facts for investors to verify
- The statements report six-month net loss of $891,943, while MD&A states $891,433. Verify the correct figure against the filed financial statements and any subsequent correction.
- Review the current status of the merger agreement and the company’s ability to meet the amended credit-facility covenants, including the new fixed-charge-coverage covenant.
- Track remediation and independent auditor disclosures concerning the material weaknesses and fiscal 2020 restatement.
- Assess whether inventory reductions, lower cash, commodity hedging results, and the decline in six-month gross margin persist or reverse.
- Consider that the filing describes settlement of the company’s coffee-labeling class action and an immaterial settlement of a separate customer action for which the company agreed to indemnify the customer.