Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2020. Balance-sheet comparisons are to October 31, 2019. The company is a wholesale coffee roaster and dealer, selling green coffee, private-label and branded coffee, and coffee roasting equipment.
Financial performance and position
| Metric | Three months ended July 31, 2020 | Nine months ended July 31, 2020 |
|---|---|---|
| Net sales | $17.34 million; down 19.7% year over year | $56.73 million; down 14.0% |
| Gross profit and margin | $3.83 million; 22.1% (19.1% in 2019) | $11.44 million; 20.2% (18.6% in 2019) |
| Operating income | $574,292 | $907,541 |
| Net income attributable to Coffee Holding | $391,324; $0.07 per share | $289,994; $0.05 per share |
For the nine-month period, cash provided by operating activities was $2.92 million, versus $911,740 used in the prior-year period. Investing activities used $392,023, primarily for equipment purchases; financing activities used $2.74 million, mainly reflecting line-of-credit repayments. Cash declined $209,778 to $2.19 million.
At July 31, current assets were $28.96 million and current liabilities $4.01 million; reported working capital was $24.96 million. Total assets were $38.88 million, total liabilities $10.97 million, and total equity $27.91 million. The bank line of credit was $3.80 million, classified as long-term; the company also recorded a $634,400 PPP loan and $2.35 million of operating lease liabilities. The credit facility is secured by company assets, matures March 31, 2022, and bears interest at LIBOR plus 1.75%, subject to a 3.50% floor. The company reported compliance with its covenants.
Changes versus comparable periods
- Sales fell as green-coffee customers serving restaurants and food service reduced or suspended operations during COVID-19 disruptions. Supermarket sales also returned to more typical levels after prior-quarter stockpiling. Green coffee revenue declined to $18.45 million for nine months from $25.57 million; packaged coffee revenue declined to $38.27 million from $40.37 million.
- Despite lower sales, gross margin improved, which management attributed to a higher share of branded and private-label roasted coffee and, for the nine-month period, improved hedging results.
- Operating expenses declined year over year, mainly due to cost-control measures. Nine-month stock-based compensation rose by $449,841 to $678,709, while freight costs also increased.
- Nine-month net income attributable to the company increased from $187,741 to $289,994. Quarterly net income attributable to the company increased from $111,494 to $391,324.
- Working capital increased from $20.23 million at October 31, 2019. Management cited the extension of the credit facility maturity, lower accounts payable and accrued expenses, and other working-capital movements.
Outlook, commentary, and risks
- Management said factories continued operating as an essential business and reported minimal supply-chain or distribution disruption to date. It also said COVID-19 had materially adversely affected the nine-month results and could continue to harm sales, costs, operations, and cash flows; the ultimate impact was uncertain.
- The $634,400 PPP loan may be forgiven if eligibility and program conditions are met. Any unforgiven amount is repayable at 1% over two years. The filing provides no assurance of forgiveness.
- The company uses coffee futures and options on a limited basis to manage green-coffee price and supply exposure. These instruments are not designated as accounting hedges, and gains or losses are recognized in earnings; results may be volatile. Management said it had scaled back hedging and short-term trading.
- Six customers represented approximately 23% of nine-month sales and about $1.91 million of receivables at July 31. Six vendors represented approximately 26% of nine-month purchases. A director is an employee of a key vendor; purchases from that vendor were approximately $4.47 million for the nine months.
- Management expected to fund operations and obligations through September 14, 2020 using operating cash flow and the credit facility. No longer-term quantitative guidance was provided.
- Disclosure controls were deemed ineffective due to a material weakness in accounting for stock-based compensation awards. Management described remediation steps, but the weakness was not yet considered remediated.
- The filing reported no material pending legal proceedings beyond routine litigation and no defaults upon senior securities.
Important facts for investors to verify
- Whether COVID-19-related customer demand, especially in food service, and any supply or labor disruptions changed after the quarter.
- PPP loan forgiveness status and any repayment obligations.
- Current availability, borrowing-base capacity, covenant compliance, and terms of the secured credit facility.
- Progress in remediating the stock-based compensation control weakness and the accuracy of related expense estimates.
- Customer and vendor concentration, related-party purchasing, and the effect of coffee-price hedging gains or losses on margins.