Coffee Holding Co., Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended July 31, 2021; fiscal year ends October 31. The company roasts, packages and distributes coffee, sells green coffee, and manufactures coffee roasters. It reports one operating segment. Results are unaudited.
Key financial metrics
| Metric | Three months ended July 31, 2021 | Nine months ended July 31, 2021 |
|---|---|---|
| Net sales | $13.63 million | $46.24 million |
| Gross profit / margin | $2.93 million / 21.5% | $11.17 million / 24.2% |
| Operating income (loss) | $(313,465) | $1.31 million |
| Net income (loss) attributable to Coffee Holding | $(127,051), or $(0.02) per share | $907,305, or $0.16 per share |
| Operating cash flow | Not separately presented | $4.43 million |
At July 31, cash was $4.51 million, current assets $28.00 million, current liabilities $7.43 million, and working capital $20.57 million. The company reported total liabilities of $9.93 million and consolidated stockholders’ equity of $29.15 million, including $1.15 million of non-controlling interest. The bank line of credit was $2.50 million, all classified as current; operating lease liabilities totaled $1.72 million. The credit facility matures March 31, 2022, is secured by company assets, and had covenants with which the company reported compliance.
For the nine months, investing activities used $1.49 million, primarily reflecting capital purchases, and financing activities used $1.30 million. Cash increased by $1.64 million from October 31, 2020. In June, the company bought its previously leased Colorado facility for $900,321.
Changes versus prior comparable periods
- Third-quarter sales fell 21.3% from $17.34 million; nine-month sales fell 18.5% from $56.73 million. Management cited lower shipments and supermarket/wholesale demand, as well as lower sales at Generations/Steep N Brew.
- Third-quarter gross margin declined to 21.5% from 22.1%, while nine-month gross margin improved to 24.2% from 20.2%. The quarter was pressured by higher green coffee and packaging costs, including steel, while customer pricing had not yet fully adjusted. Management attributed the nine-month margin improvement partly to sales of lower-cost inventory.
- The company recorded a third-quarter net loss attributable to it, versus net income of $391,324 a year earlier. Management cited approximately $152,000 of losses at Generations and $189,768 of non-cash stock-based compensation.
- Nine-month attributable net income increased to $907,305 from $289,994. Operating cash flow increased to $4.43 million from $2.92 million.
- Compared with October 31, 2020, cash rose from $2.88 million and the line-of-credit balance declined from $3.80 million. Current working capital nevertheless decreased by $3.47 million, including because $2.50 million of the borrowing was classified as current.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. Management stated that current cash and projected revenue, expenses, capital expenditures and cash flows should provide sufficient resources for at least the next 12 months.
- Management described COVID-19-related demand shifts: café, restaurant and food-service customers were affected, while demand shifted toward wholesale and retail channels. It warned that the pandemic, labor availability, supply-chain disruption and higher costs could continue to adversely affect results; the full impact was uncertain.
- Green coffee price volatility, hedging effectiveness, customer retention, competition, freight and packaging costs, and reliance on vendors and major customers are identified risks. The company said it had scaled back commodity hedging and intended to continue using it only in a limited capacity. Derivative gains and losses affect cost of sales.
- Six customers generated approximately 23% of nine-month sales; six vendors accounted for approximately 34% of nine-month purchases. One vendor is connected to a company director.
- The company disclosed class-action litigation concerning coffee-product labeling, including one suit naming the company and a separate suit involving a customer for which the company agreed to indemnify defense costs and potential liability. Outcomes could not be predicted; the company disputes the allegations.
- Disclosure controls were assessed as ineffective due to material weaknesses in accounting for stock-based compensation and inventory at a subsidiary. Remediation efforts were underway and not yet considered complete.
- After the balance-sheet date, the company invested $2.5 million in an entity holding investments in the plant-based protein drink manufacturing industry.
- Commercial sales began in July 2021 for CBD-infused extensions of two coffee brands through the company’s relationship with The Jordre Well.
Important facts for investors to verify
- Whether the March 2022 credit-facility maturity was extended, refinanced or repaid, and the impact of the current classification of the $2.50 million balance.
- Subsequent developments in the labeling lawsuits and the company’s indemnification exposure.
- Progress and effectiveness of remediation for the disclosed internal-control material weaknesses, particularly inventory and stock-based compensation controls.
- Whether sales recover and margins withstand green coffee, packaging and freight cost changes, given the decline in third-quarter sales and gross margin.
- The terms, valuation and strategic rationale for the $2.5 million post-period investment, and any additional cash commitments.