Coffee Holding Co., Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended January 31, 2022; balance sheet compared with October 31, 2021. The company roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters. Its product lines are reported as one segment.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 / prior date |
|---|---|---|
| Net sales | $16.70 million | $18.13 million |
| Gross profit / margin | $4.27 million / 25.6% | $4.48 million / 24.7% |
| Operating income | $550,730 | $1.17 million |
| Net income attributable to Coffee Holding / diluted EPS | $280,863 / $0.05 | $677,312 / $0.12 |
| Cash from operations | $(1.23) million | $2.77 million |
| Cash and cash equivalents | $4.02 million | $3.70 million at October 31, 2021 |
| Working capital | $20.22 million | $19.98 million at October 31, 2021 |
| Line of credit | $5.40 million | $3.80 million at October 31, 2021 |
Gross margin improved despite lower sales, but higher operating expenses and other expense contributed to lower operating income and net income. Current assets were $30.68 million and current liabilities $10.46 million. Total liabilities were $14.02 million, including $3.55 million of lease liabilities; the filing also reports a $15,985 note payable. The line of credit is secured by company assets.
Investing activities used $44,729, mainly for equipment purchases. Financing activities provided $1.60 million, primarily from $1.60 million of additional line-of-credit borrowings. Operating cash use was primarily attributed to paying down accounts payable and accrued expenses. A $399,000 dividend was recorded as payable.
Changes versus the prior comparable quarter
- Sales fell $1.43 million, or 7.9%. Management attributed approximately $1.32 million of the decline to lost customers at Generations/Steep N Brew.
- Green coffee revenue increased to $6.95 million from $6.60 million; packaged coffee revenue declined to $9.75 million from $11.53 million.
- Cost of sales decreased to 74.4% of revenue from 75.3%, which management attributed to a favorable green coffee inventory position, partly offset by higher packaging costs and a change in open hedging positions.
- Operating expenses rose $407,592, mainly from professional fees, freight and labor. Equity-method investment losses and interest expense also increased.
- Operating cash flow shifted from $2.77 million provided to $1.23 million used. Cash nevertheless increased, supported by increased credit-line borrowings.
Outlook, risks and notable items
- Management expects to fund operations and liabilities for at least the next 12 months using operating cash flow and its credit facility; additional borrowing may be available if eligible receivables and inventory increase. No specific sales or earnings guidance was provided.
- The credit facility was due to mature March 31, 2022. On March 17, 2022, after quarter-end, the company extended maturity to June 29, 2022; other terms remained unchanged. The company said it was covenant-compliant at January 31, 2022.
- Management cited COVID-19-related customer closures, changing demand, supply-chain disruption, labor availability and higher operating costs as uncertainties. It said café, restaurant and food-service sales were affected, while large wholesale and retail sales benefited from a shift in consumption.
- Coffee-price volatility and hedging are material risks. The company uses futures and options on a limited basis and reported a $123,545 total loss on contracts for the quarter, including realized and unrealized effects. Such positions may add earnings volatility.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses involving financial-system access controls and identification/accounting for material contracts, including a lease amendment. Management described remediation steps, but the weaknesses were not yet considered remediated.
- A previously dismissed consumer class action was settled after an appeal was filed, and the appeal was dismissed. In a separate case against a significant customer, which the company agreed to indemnify, the parties reached an agreement in principle on February 28, 2022, with final settlement terms still being negotiated.
- Related-party items included approximately $1.16 million of purchases from a vendor whose employee is a company director, and $58,434 of contractor expense paid to the 40% partner in the company’s joint venture subsidiary.
Investor verification points
- Review the drivers and durability of the Generations/Steep N Brew customer losses and the shift between green and packaged coffee sales.
- Track gross-margin performance, packaging and freight costs, and realized and unrealized commodity-hedging results.
- Assess operating cash conversion, inventory levels and reliance on increased credit-line borrowings.
- Verify the status and terms of the credit facility after its June 29, 2022 maturity extension, including covenant compliance and refinancing arrangements.
- Monitor remediation and testing of the disclosed material weaknesses in internal controls.
- Check final settlement terms and any resulting costs or indemnification exposure from the consumer litigation.