Coffee Holding Co., Inc. — Q2 FY2022 Form 10-Q
Business and period: The company roasts, packages, markets and distributes coffee, sells unroasted green coffee, and manufactures coffee roasters. Its three coffee product lines are reported as one segment. This unaudited filing covers the three and six months ended April 30, 2022; comparisons are to the same 2021 periods.
Financial performance
| Metric | Three months ended Apr. 30, 2022 | Three months ended Apr. 30, 2021 | Six months ended Apr. 30, 2022 | Six months ended Apr. 30, 2021 |
|---|---|---|---|---|
| Net sales | $16.50 million | $14.47 million | $33.20 million | $32.60 million |
| Gross profit (margin) | $1.99 million (12.1%) | $3.77 million (26.1%) | $6.26 million (18.9%) | $8.25 million (25.3%) |
| Operating income (loss) | $(1.37) million | $454,144 | $(822,739) | $1.62 million |
| Net income (loss) attributable to Coffee Holding | $(368,096), or $(0.06) per share | $357,044, or $0.06 per share | $(87,233), or $(0.02) per share | $1.03 million, or $0.18 per share |
For the six-month period, green coffee revenue was $14.15 million versus $12.05 million, while packaged coffee revenue was $19.05 million versus $20.55 million.
- Cash flow: Six-month operating activities used $1.50 million, compared with $5.05 million provided in 2021. Investing activities used $871,919, primarily for machinery and equipment; financing activities provided $1.70 million, mainly reflecting increased line-of-credit borrowings. Cash declined $671,138 to $3.03 million.
- Liquidity: Working capital was $18.54 million at April 30, down $1.44 million from October 31, 2021. Current assets were $27.40 million and current liabilities were $8.86 million.
- Debt and leases: The line of credit was $5.90 million, up from $3.80 million at fiscal year-end. Note payable totaled approximately $14,661; lease liabilities totaled $3.49 million. The credit facility was secured by company assets, and the company reported compliance with its covenants.
- Balance sheet: Total assets were $40.89 million and total equity was $28.42 million at April 30, 2022, compared with $43.31 million and $29.37 million, respectively, at October 31, 2021.
Material changes and unusual items
- Quarterly sales rose 14.0%, but six-month sales increased only 1.8%. Management attributed sales growth to legacy customers, partly offset by lower sales from Generations/Steep N Brew.
- Higher green coffee and packaging costs, and continued Generations/Steep N Brew losses, drove cost of sales to 87.9% of quarterly sales versus 74.0% a year earlier. The six-month cost-of-sales ratio rose to 81.1% from 74.7%.
- During the quarter the company began restructuring its Generations subsidiary. It recorded a $718,353 obsolete-inventory write-down and a $415,096 accounts-receivable write-off. 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.
- Six-month selling and administrative expenses increased $463,173, including higher freight costs and the $415,096 bad-debt expense. Six-month interest expense increased to $90,293 from $43,507.
- Six-month cash flow from operations was also affected by payments of accounts payable and income taxes. The company paid a $399,000 dividend during the period.
Outlook, risks and contingencies
- Management said it expects to fund operations, liabilities, capital expenditures and debt payments for at least the next twelve months through operating cash flow and the credit facility; additional eligible receivables and inventory could support further borrowing. No specific earnings or revenue guidance was provided.
- The lender extended the line-of-credit maturity to June 29, 2022; the company said a two-year extension had been approved and documentation was being prepared. The filing does not state that the extension documents had been completed.
- Management cited coffee-price volatility, hedge effectiveness, supply-chain disruptions, labor shortages, freight and other operating costs, competition, customer retention, financing and COVID-19-related uncertainty as risks. The company said it had scaled back commodity hedging and intended to use it in a limited capacity. Six-month commodity-contract gains were $178,135; such trading can add earnings volatility.
- Disclosure controls were deemed ineffective due to material weaknesses involving system access and segregation of duties in financial reporting, and identification and accounting for material contracts. Remediation efforts were underway and had not yet been deemed complete.
- The company’s own coffee-labeling class action was settled after dismissal and appeal; a separate action against a significant customer, for which the company agreed to indemnify the customer, was finalized after the reporting period. The company said the settlement amount was immaterial.
Important facts for investors to verify
- Whether the credit-facility extension was finalized, and the facility’s subsequent maturity, availability and covenant terms.
- Whether the Generations restructuring improves operating performance and whether further inventory, receivables or other charges arise.
- Whether coffee and packaging cost increases can be passed through to customers without further gross-margin deterioration.
- Progress in remediating the material weaknesses and whether controls are operating effectively.
- Subsequent operating cash flow, borrowing levels and liquidity relative to the company’s stated twelve-month funding expectation.