Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2021. The unaudited filing covers the company’s wholesale green, private-label and branded coffee operations, and coffee-roasting equipment business.
Financial performance
| Metric | Three months ended Apr. 30, 2021 | Year-over-year | Six months ended Apr. 30, 2021 | Year-over-year |
|---|---|---|---|---|
| Net sales | $14.47 million | Down 28.0% | $32.60 million | Down 17.2% |
| Gross profit / margin | $3.77 million / 26.0% | Margin up from 22.4% | $8.25 million / 25.3% | Margin up from 19.4% |
| Operating income | $454,144 | Down from $893,549 | $1.62 million | Up from $333,250 |
| Net income attributable to Coffee Holding | $357,044; $0.06 per share | Down from $498,518; $0.09 per share | $1.03 million; $0.18 per share | Improved from a $101,330 loss; $(0.02) per share |
| Operating cash flow | Not separately provided | — | $5.05 million | Up from $2.44 million |
Liquidity and debt: At April 30, cash was $3.53 million, working capital was $21.45 million (down $2.59 million from October 31, 2020), and total assets were $36.84 million. The line of credit balance fell to $2,500 from $3.80 million; note payable was about $19,900 in total. Operating lease liabilities totaled $2.08 million. The company reported compliance with credit-facility covenants. The facility is secured by company assets, bears interest at LIBOR plus 1.75% subject to a 3.50% floor, and matures March 31, 2022.
Material changes and operating drivers
- Sales fell in both comparative periods, particularly packaged coffee. Management cited reduced customer demand as cafés, restaurants and food-service customers remained affected by COVID-19, and supermarkets stopped building inventories at the elevated pace seen in April 2020.
- The company discontinued Aldi as a customer because of unacceptably low net margins, costing approximately $750,000 in revenue. New private-label accounts and higher Café Caribe sales partly offset the decline.
- Gross margins improved, which management attributed partly to selling lower-cost green coffee inventory and stronger margins on roasted and branded products. Higher packaging costs, especially steel cans, and freight costs (truckload deliveries to major wholesale customers were approximately 20% more expensive year over year) were offsets.
- Cost reductions lowered operating expenses. Six-month results also benefited from lower interest expense and commodity-contract gains: the company reported $1.06 million of realized and unrealized net gains on coffee futures and options for the six months. These instruments are not designated as accounting hedges, so their gains and losses affect earnings and can increase volatility.
- Six-month operating cash flow increased to $5.05 million, supported in part by inventory reductions and net income. Investing used $597,444, mainly for machinery and equipment; financing used $3.80 million, primarily for credit-line repayments. Cash increased by $653,017.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management said it expects to fund operations, liabilities, capital expenditures and debt payments through June 14, 2022 using operating cash flow and the credit facility; borrowing availability may increase with eligible receivables and inventory.
- COVID-19 effects remain uncertain. Management described the company as an essential business with factories operating and limited supply-chain disruption to date, but warned of possible labor shortages, supply interruptions, higher costs, changed consumer behavior and continued adverse effects on results.
- Other stated risks include coffee-price and supply volatility, reliance on effective hedging, customer retention, competition, financing and covenant requirements, joint ventures, and execution of growth and brand strategies. Management said it was scaling back commodity hedging and trading to limited use.
- The company faces a putative class action over private-label coffee yield labeling and has agreed to indemnify a significant customer in a similar lawsuit. It believes the claims are without merit but cannot predict outcomes or potential costs.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses involving stock-based compensation accounting and inventory at a subsidiary. Remediation efforts include accounting-process changes, staffing and system upgrades, and more frequent inventory audits; management said the weaknesses are not yet remediated.
- Six customers accounted for approximately 24% of six-month sales; six vendors accounted for approximately 28% of purchases. The filing identifies no material subsequent events through issuance.
Important facts for investors to verify
- Whether declining packaged-coffee demand, the Aldi departure and lower Colorado-facility production persist, and how customer mix affects revenue and margins.
- Whether improved gross margins and operating cash flow are sustainable after inventory drawdowns and commodity-contract gains.
- Available borrowing capacity, facility maturity and refinancing plans, especially in light of management’s stated liquidity outlook through June 2022.
- Developments, possible costs and indemnification exposure in the coffee-labeling lawsuits.
- Progress in remediating the material weaknesses and whether the controls are operating effectively.