Coffee Holding Co., Inc. (NASDAQ: JVA) — FY2023 Form 10-K
Reporting period: Fiscal year ended October 31, 2023; filed February 9, 2024. This is an annual report, not a standalone fourth-quarter report.
Business context
Coffee Holding is a U.S. wholesale coffee roaster and dealer. Its business includes wholesale green coffee, private-label and branded roasted coffee, and tabletop roasting equipment. The company reports these activities as one segment.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $68.17 million | $65.71 million |
| Gross profit / margin | $10.96 million / 16% | $11.01 million / 17% |
| Operating expenses | $12.29 million | $16.35 million |
| Operating loss | $1.33 million | $5.34 million |
| Net loss attributable to Coffee Holding | $835,576; $0.15 per share | $3.74 million; $0.66 per share |
| Cash from (used in) operations | $652,083 | ($5.44 million) |
Sales rose 4%, with higher green-coffee sales partly offset by lower packaged-coffee sales. Gross margin declined as green coffee, freight, labor and packaging costs increased. Operating expenses fell mainly because Generations joint-venture expenses ended and FY2022 included impairment charges.
FY2023 other income included a $634,181 insurance recovery and a $650,000 gain on sale of an investment; the investment sale proceeds of $3.15 million were recorded as a receivable at year-end. Coffee futures and options generated a net gain of approximately $189,000, versus a loss of approximately $100,000 in FY2022. Interest expense increased to $563,351 from $225,043.
At October 31, 2023, cash was $2.73 million, working capital was $18.60 million, total liabilities were $18.48 million, and the line of credit balance was $9.62 million. The credit facility bears interest at SOFR plus 1.75%, with a 3.50% floor; the reported rate was 7.18%. The balance sheet classifies the line as current in FY2023. The company reported the balance had fallen to approximately $4.7 million by February 8, 2024.
Management reported FY2023 investing cash outflow of $857,760, primarily for equipment, and financing cash inflow of $423,781. The company does not currently pay cash dividends.
Material changes and unusual items
- Green-coffee revenue increased to $30.58 million from $27.21 million; packaged-coffee revenue decreased to $37.59 million from $38.50 million.
- The FY2022 comparison included $2.77 million of goodwill and intangible impairment charges, a $718,353 obsolete-inventory write-down and a $415,096 receivable write-off; FY2023 reported no impairment charge.
- The company abandoned its 49% Jordre Well CBD investment and recorded related investment losses and a loan-receivable write-off. It also sold its other investment for $3.15 million, recognizing a $650,000 gain.
- The company reported a $8.3 million overstatement of FY2020 net sales and cost of sales from intercompany eliminations, requiring restatement of those statements.
Outlook, risks and contingencies
- Going concern and debt: The auditor included a going-concern explanatory paragraph, citing the June 30, 2024 credit-facility maturity and covenant violations. The company was in default under at least one covenant at October 31, 2023, had not received a waiver, and stated that the lender reserved its rights, including calling the line. Management said it was seeking renewal and expected to fund operations through October 31, 2024 using operating cash flow and the facility; there is no assurance renewal or a waiver will be obtained.
- Merger: The proposed Delta combination remained subject to conditions, including JVA shareholder approval, an effective Pubco registration statement and Nasdaq listing approval. The January 2024 amendment is disclosed, but the filing does not establish that the transaction closed. The agreement described JVA holders as receiving one Pubco ordinary share per JVA share and approximately 4.79% of the combined share consideration; the stated outside date was April 1, 2024.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at October 31, 2023. Material weaknesses included year-end accruals and loan-covenant calculations, in addition to prior control deficiencies. Management described remediation steps but said weaknesses would not be considered remediated until implemented and operating effectively.
- Operating risks: Results are exposed to coffee-price and supply volatility, hedge performance, freight and labor costs, competition, customer retention and the ability to pass cost increases through to customers. Management said it had scaled back futures and options use and expected to continue hedging only in a limited capacity.
- Legal matters: The company disclosed a resolved coffee-labeling class action and an indemnity obligation for a customer in another labeling case; the latter settlement was described as immaterial. The filing says the company was not then a party to material legal proceedings.
Key facts investors should verify
- Whether Webster waived the covenant default and renewed or replaced the credit facility before its June 30, 2024 maturity, and the current debt balance and borrowing terms.
- Whether the $3.15 million investment-sale receivable was collected, and whether the FY2023 insurance recovery and other unusual income items are nonrecurring.
- Whether the Delta transaction closed, was further amended or terminated, and the final consideration and resulting ownership structure.
- Whether management’s control-remediation plan has been completed and whether subsequent filings report effective controls.
- Whether gross margins recover as coffee, packaging, freight and labor costs change, and whether new-customer sales continue to develop.