Coffee Holding Co., Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended January 31, 2024; comparative period ended January 31, 2023. The company is a single-segment coffee wholesaler, roaster, packager and distributor, with green coffee, packaged coffee and coffee-roaster products. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $19.54 million | $18.33 million | Up $1.21 million (6.6%) |
| Gross profit / margin | $3.48 million / 18% | $2.32 million / 13% | Up $1.16 million; margin improved 5 percentage points |
| Operating expenses | $2.86 million | $3.12 million | Down $258,000 |
| Operating income (loss) | $617,000 | $(801,000) | Turned profitable |
| Net income (loss) | $351,000; $0.06 per share | $(532,000); $(0.09) per share | Turned profitable |
| Operating cash flow | $4.59 million | $2.80 million | Increased $1.79 million |
Packaged coffee revenue rose to $12.06 million from $10.67 million; green coffee revenue declined to $7.48 million from $7.66 million. Management attributed sales growth mainly to new private-label customers, partly offset by lower green coffee sales. Higher margins on roasted and packaged products were the principal stated driver of improved gross profit. Other income/expense shifted from $102,000 of income to $124,000 of expense, primarily reflecting the absence of $234,000 of prior-year other income.
Liquidity, debt and cash flow
- Cash was $2.41 million at January 31, versus $2.73 million at October 31, 2023. Working capital was $18.90 million, up $301,000 from October 31.
- The bank line of credit fell to $4.70 million from $9.62 million. The facility bears interest at SOFR plus 1.75%, subject to a 3.50% minimum, and matures June 30, 2024. Lease liabilities totaled $3.20 million.
- Operating activities provided $4.59 million; investing activities used no cash; financing activities used $4.92 million, mainly reflecting line-of-credit repayments. Cash decreased by $326,000 during the quarter.
- Inventory declined to $17.01 million from $18.99 million. The filing reports a $450,000 receivable from sale of investment at quarter-end, down from $3.15 million at October 31.
Material developments, outlook and risks
- Going concern and credit facility: The company was out of compliance with a loan covenant at October 31, 2023, triggering a default; it reports compliance as of January 31, 2024, but says the lender has not waived the prior default and reserved its rights. Uncertainty about a waiver and renewal of the facility raises substantial doubt about the company’s ability to continue as a going concern. Management expects to fund operations for at least twelve months with operating cash flow and the credit facility, but cautions there is no assurance of renewal.
- Proposed business combination: The merger agreement, amended January 4, 2024, would make Coffee Holding and Delta wholly owned subsidiaries of Pubco. Coffee Holding shareholders would receive approximately 4.79% of Pubco, described as approximately $31.5 million of shares; Delta holders would receive approximately 95.21%, or approximately $625 million, subject to adjustments. The stated implied diluted value is $5.50 per share. Closing is subject to conditions, including Coffee Holding shareholder approval, regulatory matters, an effective Pubco registration statement and Nasdaq listing approval. A shareholder meeting was scheduled for March 28, 2024; the agreement provides an April 1, 2024 outside date.
- Commodity exposure: Coffee prices and supply, customer retention, competition, supply-chain interruptions and hedging effectiveness are key risks. The company has scaled back futures and options activity and intends to use hedging in a limited capacity; these contracts can create earnings volatility. The quarter’s commodity-contract schedule reports a net gain of approximately $350,000.
- Controls: Management concluded disclosure controls were ineffective because of material weaknesses in internal control over financial reporting, including issues involving system access, accounting and reconciliations, vendor accruals and loan covenant calculations. Remediation efforts are underway, but management says the weaknesses are not remediated until controls are implemented and shown to operate effectively.
- No quantified operating guidance is provided. Management says customer-base expansion is expected to improve margins and profitability, but gives no assurance of that outcome. The company reports no material change to the risk factors in its latest annual report and no material pending litigation.
Investor verification priorities
- Confirm the lender’s position on the prior covenant default, any waiver, and renewal or refinancing before the June 30, 2024 maturity.
- Track the merger’s shareholder vote, remaining closing conditions, any amendments and whether the transaction closes by the stated outside date.
- Assess whether the gross-margin improvement persists, including the contribution from packaged coffee sales and commodity-contract gains.
- Review progress and testing of internal-control remediation, and reconcile the investment-sale receivable and related cash collections.