Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2020. The company is a single-segment wholesale coffee business, selling green coffee, private-label and branded roasted coffee, and coffee roasting equipment.
Financial performance
| Metric | Three months ended April 30, 2020 | Six months ended April 30, 2020 | Comparable 2019 period |
|---|---|---|---|
| Net sales | $20.10 million | $39.38 million | $20.72 million quarter; $44.35 million six months |
| Gross profit / margin | $4.51 million / 22.4% | $7.62 million / 19.4% | $3.54 million / 17.1% quarter; $8.11 million / 18.3% six months |
| Operating income (loss) | $893,549 | $333,250 | $(92,742) quarter; $597,292 six months |
| Net income (loss) attributable to Coffee Holding | $498,518; $0.09 per share | $(101,330); $(0.02) per share | $(238,468); $(0.04) per share quarter; $76,247; $0.01 per share six months |
| Operating cash flow | Not reported separately | $2.44 million provided | $598,440 used in the six-month period |
Second-quarter sales declined 3.0% year over year; six-month sales declined 11.2%. Six-month green-coffee revenue fell to $12.69 million from $17.18 million, while packaged-coffee revenue was $26.69 million versus $27.17 million. The filing attributes the improved gross margin to a greater share of branded and private-label roasted coffee and improved hedging results.
Financial position and liquidity
- At April 30, cash was $2.65 million, current assets were $31.00 million, current liabilities were $10.50 million, and working capital was $20.51 million.
- Total assets were $41.00 million and total liabilities were $13.64 million. Company stockholders’ equity was $25.65 million; total equity, including noncontrolling interest, was $27.36 million.
- The bank line of credit balance was $5.11 million, down from $7.17 million at October 31, 2019. A March 2020 amendment extended maturity to March 31, 2022 and set interest at LIBOR plus 1.75%, subject to a 3.50% floor. The company reported compliance with its covenants.
- Operating lease liabilities totaled $2.47 million. Cash rose by $244,900 over the six months; investing activities used $132,967 and financing activities used $2.06 million, principally reflecting line-of-credit repayments.
Material changes and management commentary
- Management said COVID-19 had not materially adversely affected the six-month financial statements and the company’s factories continued operating as an essential business. Café, restaurant, and food-service closures weakened that channel, while increased wholesale and retail demand partly offset the decline.
- Management cited lower green-coffee prices, customer purchasing patterns, and the pandemic as factors in lower sales. The shift of Steep & Brew’s largest customer from a vendor relationship to a brokerage relationship reduced reported sales by about $1.1 million.
- For the quarter, the company recorded a $484,131 net gain on commodity contracts, compared with a $1.55 million net loss in the prior-year quarter. For the six months, commodity contracts produced a $271,958 net loss, versus a $1.86 million net loss in 2019. The company said it was scaling back hedging and short-term trading and expected to use these practices in a limited capacity.
- COVID-19’s future effects remain uncertain, including potential labor, supply-chain, operating-cost, customer-demand, and broader economic impacts. The filing provides no formal earnings or revenue guidance.
- Six customers represented approximately 24% of six-month sales and about $3.56 million of receivables. Six vendors represented approximately 27% of six-month purchases. Purchases from a vendor whose employee is a company director were approximately $3.01 million for the six months.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were deemed ineffective at April 30, 2020 because of a material weakness in accounting for stock-based compensation awards. Management described remediation efforts as ongoing.
- Stock-based compensation was $488,940 for the six months; approximately $1.54 million of compensation expense remained unrecognized at April 30.
- Adoption of lease-accounting standard ASC 842 resulted in initial recognition of $2.51 million of operating lease right-of-use assets and $2.71 million of lease liabilities, with no opening equity impact.
- The company identified coffee-price volatility, hedging effectiveness, customer concentration, competition, financing and covenant compliance, and COVID-19 effects among its risks. It reported no material pending legal proceedings beyond routine litigation and no defaults on senior securities.
- The liquidity discussion says the company expected to fund operations and obligations “through June 14, 2020” using operating cash flow and its credit facility; the filing does not explain this date despite being signed June 15, 2020.
Most important facts for investors to verify
- Whether sales and margins recover as customer channels and coffee prices normalize, particularly given the continuing Steep & Brew customer relationship change.
- The scale and duration of COVID-19 effects on food-service customers, retail demand, labor, and the supply chain.
- Commodity-position results and the risks arising from the company’s reduced, but continuing, use of futures and options.
- Liquidity, borrowing availability, and compliance with the secured credit facility’s covenants and March 2022 maturity.
- Progress in remediating the stock-based compensation control weakness and the effect of remaining unrecognized compensation expense.
- The meaning and relevance of the filing’s stated liquidity-funding horizon of June 14, 2020.