Coffee Holding Co., Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020. The filing is an annual report, not a standalone fourth-quarter report. Coffee Holding is an integrated U.S. coffee roaster and dealer, selling wholesale green coffee, private-label and branded coffee, and tabletop roasting equipment.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $74.34 million | $86.47 million |
| Gross profit / margin | $13.08 million / 17.6% | $15.76 million / 18.2% |
| Operating income (loss) | ($0.83 million) | $0.54 million |
| Net income (loss) attributable to Coffee Holding | ($94,301); ($0.02) per share | ($94,598); ($0.02) per share |
| Operating cash flow | $4.39 million | ($2.15 million) |
| Cash at year-end | $2.88 million | $2.40 million |
| Working capital | $24.04 million | $20.23 million |
| Line of credit outstanding | $3.80 million | $7.17 million |
| Total assets / total liabilities | $38.48 million / $10.74 million | $39.69 million / $12.96 million |
Net sales fell 14%. Green coffee revenue declined to $23.91 million from $32.85 million; packaged coffee revenue declined to $50.42 million from $53.62 million. Gross margin contracted by 0.6 percentage points, and the company shifted from operating profit to an operating loss. The reported net loss attributable to Coffee Holding was nearly unchanged, with $634,400 of PPP grant income contributing to other income.
Operating cash flow improved substantially, primarily reflecting lower inventory and accounts receivable. Inventory decreased by $1.74 million and receivables by $2.01 million. Investing activities used $0.54 million; financing activities used $3.38 million, mainly as the company paid down its credit line. The credit facility is secured by company assets, matures March 31, 2022, and bears interest at LIBOR plus 1.75%, subject to a 3.50% floor. The company reported compliance with facility covenants at year-end.
Business developments, outlook, and risks
- COVID-19: Management attributed lower sales to restaurant and food-service closures and reduced activity among green-coffee customers; supermarket stockpiling early in the year did not recur. Management said the pandemic’s continuing impact on sales, supply chains, labor, costs, liquidity, and results remained uncertain and could be material.
- Costs and margins: Gross profit was pressured by lower sales and inventory adjustments related to reduced sales, lost customers, and outdated inventory. Management reduced selling and administrative costs and said CEO and vice president pay reductions begun in the fourth quarter would continue in FY2021.
- Funding outlook: Management expected to fund operations, liabilities, capital expenditures, and debt payments through October 31, 2021 using operating cash flow and the credit facility. No quantified revenue or earnings guidance was provided.
- PPP loan: The company received $634,400 in July 2020 and recognized the full amount as other income, accounting for it as a government grant based on its expectation of forgiveness. The filing says qualified expenses equaled the loan and unrecognized grant income was zero; elsewhere it cautions that forgiveness eligibility is not assured.
- Commodity exposure: Coffee prices, supply, and hedging results can materially affect costs and margins. The company reported a net $326,122 loss on coffee futures and options in FY2020, and said it was scaling back hedging and short-term trading while retaining limited use.
- Strategic investment: In October 2020, the company acquired a 49% interest in CBD beverage company The Jordre Well, issuing 139,250 shares and agreeing to issue another 139,250 shares if the venture generates $500,000 in revenue. Commercialization plans depend partly on the legislative environment and product formulations.
- Contingencies: The company was named in a putative class action alleging inaccurate coffee-serving labels; it had not been served and could not predict the outcome. It also agreed to indemnify a significant customer in a separate labeling-related class action. Potential damages were unspecified.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses in stock-based compensation accounting and inventory accounting at a subsidiary. Remediation efforts were underway; the auditor did not provide an internal-control attestation.
- Other exposures: Six customers represented about 23% of FY2020 sales and 28% of year-end receivables. A coffee supplier affiliated with a director accounted for approximately $5.3 million, or 8%, of product purchases. The company also reported 1,000,000 outstanding stock options at a $5.43 exercise price.
Most important facts for investors to verify
- Whether sales and gross margins recover as food-service activity and customer demand normalize, and how customer concentration evolves.
- Whether operating cash generation can be sustained after the FY2020 inventory and receivables reductions.
- The final PPP forgiveness outcome and the accounting treatment of the $634,400 already recognized as grant income.
- Progress in remediating the material weaknesses, particularly the accuracy of stock-compensation and subsidiary inventory records.
- Developments, potential costs, and any required disclosures related to the labeling lawsuits and customer indemnification.
- Credit-facility availability, covenant compliance, and refinancing or repayment plans before the March 2022 maturity.
- Future costs and results from coffee-price hedging, including the open commodity positions and the decision to reduce hedging activity.