Business Context and Reporting Period
Coffee Holding Co., Inc. (NASDAQ: JVA) filed its Form 10-K for the fiscal year ended October 31, 2019. It is an integrated U.S. coffee roaster and dealer, with wholesale green coffee, private-label and branded coffee, and tabletop roasting equipment. Its financial statements report one operating segment.
Key Financial Metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $86.47 million | $90.66 million |
| Gross profit / margin | $15.76 million / 18.2% | $15.61 million / 17.2% |
| Operating income | $0.54 million | $2.40 million |
| Net income (loss) attributable to Coffee Holding | $(94,598); $(0.02) per diluted share | $1.06 million; $0.19 per diluted share |
| Cash from operating activities | $(2.15) million | $8.69 million |
| Cash and cash equivalents, year-end | $2.40 million | $4.61 million |
| Working capital, year-end | $20.23 million | $19.57 million |
| Line-of-credit borrowings, year-end | $7.17 million | $6.26 million |
| Total assets / liabilities, year-end | $39.69 million / $12.96 million | $38.83 million / $12.84 million |
Packaged-coffee revenue was $53.62 million, up from $51.12 million; green-coffee revenue was $32.85 million, down from $39.54 million. Cost of sales was $70.71 million, or 81.8% of sales, versus $75.04 million, or 82.8%. Operating expenses increased to $15.22 million from $13.21 million. Interest expense was $254,592, compared with $370,705. The company reported $264,006 of net income before non-controlling interest; the non-controlling interest’s $358,604 share resulted in a loss attributable to Coffee Holding.
Material Changes Versus the Prior Year
- Sales fell 4.6%, which management attributed to lower coffee selling prices amid a depressed green-coffee market.
- Gross profit increased modestly and gross margin improved by 1 percentage point, primarily due to lower coffee prices.
- Operating income declined substantially as operating expenses rose about $2.01 million. Management cited a full year of Steep & Brew operations versus about half a year in FY2018, accounting for $1.84 million of the increase, as well as higher freight costs.
- Operating cash flow moved from $8.69 million provided to $2.15 million used. Inventory rose $3.57 million to $18.84 million, while cash fell $2.21 million.
- Green coffee futures and options produced a net loss of $1.21 million recorded in cost of sales, compared with a net loss of $819,335 in FY2018.
Outlook, Risks, and Unusual Items
The filing provides no quantified earnings or revenue guidance. Management expected to fund operations and obligations through October 31, 2020 with operating cash flow and its credit facility. It reported discussions with lenders about renewing or extending the facility, with no agreement yet reached at the filing date, and said it could defer discretionary spending or extend trade-payment timing if needed. Management described working capital and inventory purchased at favorable prices as liquidity sources.
- Credit facility: The facility was secured by company assets, carried interest at LIBOR plus 2% (3.78% at October 31, 2019), and had a $14 million maximum. The filing gives its maturity as March 31, 2020 in one section, but incorrectly states March 31, 2010 elsewhere; the date should be verified. The company reported compliance with covenants at year-end.
- Commodity and hedging exposure: Coffee prices and supply are volatile; price increases may not be passed to customers promptly. Management said it was scaling back futures and options use but expected to continue hedging on a limited basis. Derivative positions can increase earnings volatility.
- Customer and supplier concentration: Six customers generated about 19% of FY2019 sales and represented 33% of year-end receivables. Five suppliers represented about 26% of coffee purchases; a related-party supplier accounted for approximately $8.3 million, or 12%, of total product purchases. An employee of that supplier is a director.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing a material weakness in accounting for stock-based compensation awards. Remediation was underway but not yet complete. The auditor gave an unmodified opinion on the financial statements; it did not opine on internal-control effectiveness.
- Other items: The company granted 1,000,000 stock options at $5.43 per share and recorded $476,899 in stock-based compensation. No cash dividend was paid because the company had no FY2019 net profit. The filing reported no material pending litigation or material off-balance-sheet arrangements.
Most Important Facts to Verify
- Confirm renewal, extension, or replacement of the credit facility and its actual maturity date, given the filing’s conflicting date reference.
- Reconcile the MD&A cash-flow figures with the audited statements: the MD&A cites approximately $2.30 million of operating cash used and $743,410 of investing cash used, while the cash-flow statement reports $2.15 million and $897,683, respectively.
- Monitor liquidity and working-capital quality, particularly the higher inventory balance, reduced cash, and management’s reliance on inventory and lender financing.
- Track progress remediating the stock-based-compensation material weakness and assess the impact of the options granted.
- Assess continued gross-margin pressure from coffee prices, hedge results, freight expense, and customer and supplier concentration.