Business context and reporting period
Coffee Holding Co., Inc. (NASDAQ: JVA) filed this Form 10-K for the fiscal year ended October 31, 2021. It roasts and sells private-label and branded coffee, wholesales green coffee, and sells tabletop roasting equipment. The filing provides full-year comparisons, not standalone fourth-quarter results.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $63.92 million | $74.34 million |
| Gross profit / margin | $16.02 million / 25% | $13.08 million / 18% |
| Operating income (loss) | $1.45 million | ($825,318) |
| Net income (loss) attributable to Coffee Holding | $1.26 million; $0.22 per share | ($94,301); ($0.02) per share |
| Cash provided by operations | $4.71 million | $4.39 million |
| Cash and cash equivalents at year-end | $3.70 million | $2.88 million |
| Working capital at year-end | $19.98 million | $24.04 million |
Sales fell 14%, while cost of sales declined to 75% of sales from 82%, lifting gross margin. The cash flow statement reports $867,677 of net income before non-controlling interest; the $1.26 million figure above is the amount attributable to Coffee Holding, reflecting a $387,677 loss attributable to non-controlling interests.
Investing activities used $3.89 million, including a $2.50 million investment in a plant-based protein drink business and $1.50 million of equipment and building purchases. Financing activities used approximately $1,000. The line-of-credit balance was $3.80 million; the facility was secured by company assets, bore interest at LIBOR plus 1.75% subject to a 3.50% floor, and was due to mature March 31, 2022. The company reported compliance with its covenants at year-end. Operating lease liabilities totaled $3.64 million.
Material changes versus the prior year
- Net sales decreased $10.41 million. Management attributed the decline to COVID-related closures or reduced activity among restaurant, food-service, and green-coffee customers, and supermarket sales normalizing after prior-year stockpiling.
- Packaged-coffee revenue fell to $37.80 million from $50.42 million; green-coffee revenue rose to $26.12 million from $23.91 million.
- Gross profit increased $2.94 million, driven by improved margins on roasted, branded, and green coffee sales, including use of lower-cost inventory built in earlier periods. Higher packaging costs, particularly steel for cans, partly offset the improvement.
- Selling and administrative expenses included a $1.08 million impairment of two trademarks. The company also recorded a $321,651 loss on disposal of machinery and equipment.
- Other expense was $237,298, compared with other income of $447,561 in FY2020, when the company recognized $634,400 of PPP loan forgiveness. The PPP loan was formally forgiven in FY2021.
Outlook, risks, contingencies, and unusual items
No quantified sales or earnings guidance is provided. Management said it expected to fund operations and obligations through October 31, 2022 using operating cash flow and the credit facility, and expected to renew the facility or seek alternative financing. Renewal on timely or acceptable terms was not assured.
- Commodity and supply exposure: Coffee prices are volatile; the quoted commodity price was $2.04 per pound at October 31, 2021 versus $1.04 a year earlier. The company has reduced its use of futures and options and intends to use them only on a limited basis. Price increases may not be passed through promptly, and hedging can create losses.
- COVID-19 and operating costs: Management cited continuing uncertainty around customer demand, labor, supply chains, transportation, packaging, and inflation.
- Internal controls: Management concluded internal control over financial reporting was ineffective due to material weaknesses involving financial-system access controls and controls for identifying and accounting for material contracts. Management stated the audited statements were fairly stated; the auditor did not attest to internal-control effectiveness. Remediation was underway.
- Impairment estimates: Goodwill was $2.49 million, with estimated reporting-unit fair value only about 4% above carrying value. Two trademarks were impaired by $1.08 million following revised revenue estimates.
- Legal matters: A coffee-labeling class action against the company was dismissed with prejudice in September 2021; the plaintiffs’ appeal was pending. The company also agreed to indemnify a customer in a separate labeling class action, whose outcome and potential exposure were not clear in the filing.
- Other investments and dilution: A 49% investment in CBD-beverage venture Jordre Well recorded a $149,947 loss in FY2021; a further 139,250 shares are issuable if the venture reaches $500,000 in revenue. The company also invested $2.50 million in a plant-based protein drink business.
- Related parties and ownership: Purchases from a coffee supplier whose employee is a company director were approximately $3.5 million; year-end payable to that supplier was approximately $1.01 million. The Gordon family owned approximately 15.3% of outstanding shares and could influence shareholder matters.
- Subsequent event: In January 2022, the board approved a special dividend of $0.073 per share, payable February 21, 2022.
Important facts for investors to verify
- Whether the Sterling credit facility was renewed or replaced after its March 31, 2022 maturity, and on what terms.
- Whether revenue and gross-margin trends improved after FY2021, especially in packaged coffee and food service.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Developments in the labeling lawsuit appeal and the indemnified customer lawsuit, including any potential costs.
- Valuation and performance of the plant-based investment and Jordre Well, and any shares issued under the Jordre Well agreement.
- Cash requirements from capital spending, leases, and working capital, alongside the company’s ability to manage coffee-price and hedging volatility.