Coffee Holding Co., Inc. — Q2 FY2015 Form 10-Q
Business context and period: The company roasts, packages, markets and distributes coffee and sells green coffee. It reports one segment. This unaudited filing covers the quarter and six months ended April 30, 2015; balance-sheet comparisons are with October 31, 2014.
Financial performance
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales, 2015 | $30.26 million; up 19% year over year | $68.67 million; up 30.2% year over year |
| Gross profit (loss), 2015 | $(1.08) million; gross margin approximately (3.6%) | $0.84 million; gross margin approximately 1.2% |
| Operating income (loss), 2015 | $(3.15) million | $(3.05) million |
| Net income (loss) attributable to Coffee Holding, 2015 | $(2.05) million; $(0.33) per share | $(1.98) million; $(0.32) per share |
| Prior-year net income attributable to Coffee Holding | $1.26 million; $0.20 basic EPS | $2.63 million; $0.41 basic EPS |
Cash flow and liquidity: Six-month operating cash flow was negative $3.02 million, versus positive $3.83 million in 2014. Investing activities used $0.34 million, primarily for equipment purchases; financing activities provided $3.19 million, mainly through increased borrowing. Cash declined $0.17 million to $3.61 million. Working capital was $21.33 million, down $2.15 million from October 31, 2014; current assets were $32.57 million and current liabilities $11.25 million.
Debt: Reported line-of-credit borrowings totaled $5.77 million at April 30, 2015, compared with $2.50 million at October 31, 2014. The amount comprises $4.53 million outstanding under the company facility and $1.24 million under OPTCO’s separate facility. In March 2015, the company facility was increased to $9 million and extended to February 2017; OPTCO obtained a separate $3 million revolving facility, also through February 2017. Both are secured by company assets, and the company guarantees OPTCO’s facility. The company reported compliance with financial covenants.
Material changes and unusual items
- Despite higher sales, gross margin fell sharply and the company moved from prior-year profits to losses. Management attributed the deterioration principally to losses from coffee futures and options, including liquidation of unprofitable positions while scaling back hedging and short-term trading. Commodity-contract losses were approximately $3.36 million for the quarter and $5.05 million for the six months; the comparable prior-year periods recorded gains.
- Six-month accounts receivable fell $2.26 million and inventory fell $2.54 million, while accounts payable and accrued expenses fell $3.22 million. These working-capital movements, together with the loss and a $1.39 million increase in prepaid/refundable taxes, contributed to operating cash use.
- The six-month income-tax benefit was $1.19 million, compared with a $1.66 million tax provision in 2014. Management notes that deferred tax assets may require a valuation allowance if the company does not generate taxable income.
Outlook, risks and other disclosures
No quantified revenue or earnings guidance is provided. Management says it is reducing its use of hedging and short-term commodity trading because of market volatility, while continuing limited hedging and longer-term futures purchases. It cautions that hedges may not offset coffee-price movements and can increase losses; coffee supply and pricing, competition, customer retention, joint ventures, financing and restrictive loan covenants are among the stated risks.
Customer concentration is substantial: one customer generated approximately 61% of six-month sales and represented about $6.75 million of receivables at April 30, 2015; the same customer generated 55% of quarterly sales. Four vendors accounted for approximately 64% of six-month purchases. Related-party vendor purchases were approximately $14.9 million for the six months. The filing reports no material change in risk factors, no material pending legal proceedings beyond routine matters, and no subsequent events requiring disclosure.
Key facts for investors to verify
- How much of the reported gross-margin decline reflects the commodity-contract losses, and whether margins recover after the hedging strategy change.
- The customer’s continuing share of sales and receivables, and the potential effect of a reduction in that customer’s business or delayed payment.
- Borrowing availability, collateral and covenant headroom under both credit facilities, given the increase in outstanding borrowings.
- The recoverability of deferred tax assets if operating losses continue; the filing’s tax-asset disclosures should be reviewed alongside the full financial-statement notes.
- Whether management’s plans to expand brands, markets and joint ventures produce sustainable growth and profitability.