Coffee Holding Co., Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 31, 2022; interim financial statements are unaudited. The company roasts, packages and distributes coffee, sells green coffee, and manufactures coffee roasters. It reports one operating segment.
Key financial results
| Metric | Three months ended July 31, 2022 | Nine months ended July 31, 2022 |
|---|---|---|
| Net sales | $17.01 million, up 24.8% year over year | $50.22 million, up 8.6% |
| Gross profit / margin | $3.15 million / 18.5%, versus 21.5% | $9.41 million / 18.7%, versus 24.2% |
| Operating income (loss) | $239,482, versus a $313,465 loss | $(570,257), versus $1.31 million income |
| Net income (loss) attributable to Coffee Holding | $132,381, or $0.02 per share; prior period loss of $127,051 | $45,148, or $0.01 per share; prior period income of $907,305 |
| Operating cash flow | Not provided separately for the quarter | $(2.82) million, versus $4.43 million provided |
For the nine-month period, the consolidated net loss before non-controlling interest was $564,083. The company reported $609,231 of net loss attributable to the non-controlling interest, resulting in positive net income attributable to Coffee Holding of $45,148.
Financial position and liquidity
- At July 31, 2022, cash was $1.43 million, down from $3.70 million at October 31, 2021. Working capital was $24.54 million, compared with $19.98 million at fiscal year-end.
- Inventory rose to $19.24 million from $15.96 million, while accounts receivable declined to $7.54 million from $9.30 million.
- Line-of-credit borrowings were $6.11 million, up from $3.80 million. The facility was amended in June 2022, extending maturity to June 30, 2024; its rate is SOFR plus 1.75%, subject to a 3.50% floor. The facility is secured by company assets. The company reported covenant compliance.
- Total liabilities were $15.16 million and total equity was $28.59 million. Lease liabilities totaled $3.42 million.
- Nine-month investing cash use was $1.36 million, mainly machinery and equipment purchases. Financing provided $1.91 million, principally reflecting net line-of-credit advances; the company also paid a $399,000 dividend.
Material changes and unusual items
- Quarterly sales growth reflected increased sales to legacy customers and incremental sales to several significant new customers. Nine-month sales growth was partly offset by lower Generations/Steep N Brew sales.
- Gross margin declined in both the quarter and nine-month period as green coffee and packaging costs increased. Nine-month results also included losses associated with Generations/Steep N Brew.
- During the Generations restructuring, approximately $550,000 of inventory was sold to the joint-venture partner for $330,000 cash, with the balance treated as a distribution to the non-controlling interest. The company recorded a $718,353 obsolete-inventory write-down and a $415,096 accounts-receivable write-off.
- Interest expense increased amid higher credit-line advances. Commodity contracts produced a $663,018 net gain for the nine months, compared with a $1.08 million gain in the prior-year period; these contracts are not designated as accounting hedges and can add earnings volatility.
Outlook, risks and other matters
- No numerical revenue or earnings guidance was provided. Management expects to fund operations, liabilities, capital expenditures and debt payments for at least the next 12 months using operating cash flow and the credit facility.
- Risks highlighted include coffee-price and supply volatility, the effectiveness of hedging, customer retention, competition, supply-chain and labor disruptions, COVID-19-related uncertainty, joint-venture performance, and credit-facility covenants. Management said it was scaling back futures and options activity and intended to use it in limited capacity.
- Management concluded disclosure controls and procedures were not effective due to previously identified material weaknesses involving financial-system access controls and identification and accounting for material contracts, including a lease amendment. Remediation efforts were underway and were not yet considered complete.
- A previously filed coffee-labeling class action against the company was settled after dismissal and appeal. A separate action involving a customer was resolved, with final settlement details completed after quarter-end; the company said the amount was immaterial.
Important facts for investors to verify
- Whether gross margins recover as higher coffee and packaging costs are passed through, and how commodity hedging affects reported cost of sales.
- Whether inventory levels convert to sales and cash, and whether further Generations-related charges or restructuring effects arise.
- Cash generation, borrowing needs and compliance with the amended credit facility’s covenants and maturity terms.
- Progress in remediating the reported material weaknesses in internal control over financial reporting.