Coffee Holding Co., Inc. (NASDAQ: JVA) — FY2022 Form 10-K
Reporting period: Fiscal year ended October 31, 2022. This is an annual report, not a standalone fourth-quarter report. Comparisons below are with fiscal 2021.
Business context
Coffee Holding is a U.S. wholesale coffee roaster and dealer. Its business spans wholesale green coffee, private-label and branded packaged coffee, and tabletop roasting equipment. It reports as one operating segment. Fiscal 2022 sales were generated mainly in the United States, with limited international sales.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $65.71 million | $63.92 million |
| Gross profit / margin | $11.01 million / 16.8% | $16.02 million / 25.1% |
| Operating income (loss) | ($5.34 million) | $1.45 million |
| Net income (loss) attributable to Coffee Holding | ($3.74 million); ($0.66) per share | $1.26 million; $0.22 per share |
| Cash from (used in) operations | ($5.44 million) | $4.71 million |
| Cash from (used in) investing | ($1.06 million) | ($3.89 million) |
| Cash from (used in) financing | $5.32 million | ($0.001 million) |
Sales rose 3%, with growth from existing customers and new customers in the second half. Cost of sales increased to $54.69 million, or 83% of sales, from $47.90 million, or 75%. The company attributed margin pressure to higher green coffee, freight, labor and packaging costs, and losses at Generations/Steep & Brew. Hedge activity resulted in an approximately $97,000 net loss in FY2022, versus a $1.80 million net gain in FY2021.
At October 31, 2022, cash was $2.52 million, working capital was $25.26 million, and total assets were $42.69 million. Inventory was $19.25 million, up from $15.96 million a year earlier. The revolving line of credit balance rose to $8.31 million from $3.80 million; lease liabilities totaled $3.36 million. The credit facility is secured by company assets and bears interest at SOFR plus 1.75%, subject to a 3.50% floor, with maturity extended to June 30, 2024.
Material changes and unusual items
- Goodwill and intangible asset impairment charges totaled $2.77 million in FY2022, including a $2.49 million goodwill impairment. No goodwill impairment was recorded in FY2021.
- Generations restructuring included an obsolete-inventory write-down of $718,353 and an accounts-receivable write-off of $415,096. Approximately $550,000 of inventory was distributed to the non-controlling partner for $330,000 in cash.
- Management recorded an income tax benefit of $995,793, primarily deferred, compared with a $340,180 tax provision in FY2021.
- Cash decreased by $1.18 million during FY2022. Operating cash use reflected the net loss and increased inventory; financing inflows included additional line-of-credit borrowings. The company also paid a $399,000 dividend during the year.
- The company recorded a $2.50 million investment in a plant-based protein drink industry entity in FY2021; the investment remained at $2.50 million at October 31, 2022.
Outlook, risks and contingencies
- Management expected to fund operations, liabilities, capital expenditures and debt payments through October 31, 2023 using operating cash flow and the credit facility; additional borrowing capacity depends in part on eligible receivables and inventory. This outlook is subject to execution and liquidity risks.
- The company was not in compliance with net-profit and non-borrower affiliate covenants at year-end. Webster Bank granted a waiver on March 15, 2023 and modified the facility, including adding debt-to-tangible-net-worth and fixed-charge-coverage covenants. Future compliance is not assured.
- On September 29, 2022, the company agreed to a merger and share exchange with Delta. JVA shareholders would receive one Pubco ordinary share for each JVA share and approximately 4.79% of the combined Pubco equity; Delta shareholders would receive approximately 95.21%. The stated implied diluted value was $5.50 per share, subject to adjustments. Closing remained conditional on items including JVA shareholder approval, regulatory and listing conditions, and an effective Pubco registration statement; the outside date was June 29, 2023. The agreement also included a $50 million Delta earn-out tied to at least $70 million of Delta net income for FY2023.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, with material weaknesses identified in FY2020, FY2021 and FY2022 that had not been remediated as of the report. The company also restated FY2020 statements for approximately $8.3 million of overstated net sales and cost of sales caused by intercompany elimination errors.
- Key exposures include coffee commodity and hedge volatility, supply-chain and shipping disruptions, inflation and labor costs, competition, customer retention, and the company’s dependence on its two long-serving Gordon executives. The filing also notes continuing uncertainty around COVID-19 and geopolitical conditions.
- The company settled a class action concerning coffee-serving label claims after an appeal; a separate action against a significant customer was resolved for an amount described as immaterial, with the company having agreed to indemnify that customer.
Important facts for investors to verify
- Confirm the current status and final terms of the Delta business combination, including closing conditions, consideration adjustments, and any earn-out implications.
- Review the March 2023 lender waiver and amended covenants, and assess compliance, borrowing availability, interest costs and refinancing needs.
- Track whether the identified financial-reporting material weaknesses are remediated and whether subsequent filings require further corrections.
- Assess whether gross margins and operating cash flow recover after FY2022’s sharp margin compression, inventory build and restructuring charges.
- Review the valuation and recoverability of the remaining $2.50 million investment and the company’s exposure to green coffee prices and hedge losses.