UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2017March 31, 2018

OR

☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _______ To _______

Commission File Number: 33-960-70LA33-96070-LA

THANKSGIVING COFFEE COMPANY, INC.

(Exact name of registrant as specified in its charter)

(707) 964-0118

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYes  ☒    No  ☐

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filefiled all reports required to be submitted and posted pursuant to Rule 405filed by Section 13 or 15(d) of Regulation S-Tthe Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to submitfile such reports), and post(2) has been subject to such files).xfiling requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whetherThere currently does not exist a public trading market for the registrantregistrant’s common stock. Over the years, there have been isolated and sporadic privately negotiated transactions in the Company’s shares.  See “Part II, Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”  The Company is a shell company (as defined in Rule 12b–2not aware of any privately negotiated transactions of the Exchange Act). Yes ☐   NoxCompany’s stock since 2008. The Company is unable to determine the current market value of the common equity held by non-affiliates as no reliable secondary trading price exists.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

On September 30, 2017March 31, 2018 the registrant had 1,236,744 shares of Class A common stock, no par value per share, outstanding.

FORM 10-Q

TABLE OF CONTENTS

Financial Statements

and Notes to Financial Statements

Thanksgiving Coffee Company, Inc.

For the Nine Months Ended September 30, 2017 and 2016

PART 1.I. Financial Information

Item 1. Financial Statements

The financial statements included herein have been prepared by Thanksgiving Coffee Company, Inc. (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations. In the opinion of management of the Company, the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2017March 31, 2018 and December 31, 2016,2017, and its results of operations for the three month and nine month periods ended September 30,March 31, 2018 and 2017 and 2016 and its cash flows for the ninethree month periods ended September 30, 2017March 31, 2018 and 2016.2017. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company’s annual report on Form 10-K10-K.

Thanksgiving Coffee Company, Inc.

Balance Sheets

See accompanying notes to financial statements

Thanksgiving Coffee Company, Inc.

Balance Sheets

See accompanying notes to financial statements

Thanksgiving Coffee Company, Inc.

Statements of Operations

Unaudited

See accompanying notes to financial statements

Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited

Cash paid for income taxes was $800, separately for each of the nine months ending September 30, 2017and September 30, 2016.

See accompanying notes to financial statements

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2017 (unaudited)March 31, 2018 and December 31, 20162017

Cash paid for income taxes was $800 for the three months ending March 31, 2017.

The unaudited condensed financial statements in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We haveThe Company has continued to follow the accounting policies disclosed in the financial statements included in our 2016its 2017 Form 10-K filed with the Securities and Exchange Commission (SEC). It is suggested that these statements be read in conjunction with the December 31, 20162017 audited financial statements and the accompanying notes on Form 10-K, as filed with the Securities and Exchange Commission.SEC.

The interim financial information in this Form 10-Q reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our results of operations for the interim periods. The results of operations for the ninethree months ended September 30, 2017March 31, 2018 are not necessarily indicative of results to be expected for the full year.

Concentration of Risk

ForIn the nine months period ending September 2017,first quarter of fiscal 2018, one customer accounted for 11.24%8.2% of the Company’s revenue. This customerThe account has purchased from the Company since 1992, and has several locations.2009. The account is a distributor of the Company’s product. A loss of this customer account or any other large account, or a significant reduction in sales to any of the Company’s principal customers, could have an adverse impact on the Company.

Income Taxes

The Company accounts for income taxes under the asset and liability method as prescribed by ASC 740,Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases.basses. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2017 (unaudited)March 31, 2018 and December 31, 20162017

Accounts receivable consist of the following:

The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written off when it is determined that amounts are uncollectible. Bad debt expense (recovery) for the ninethree months ended September 30,March 31, 2018 and 2017 was $(1,727) and 2016 was $(1,326) and $(661),($1,263) respectively.

Inventories consist of the following:

Property and equipment consist of the following:

Depreciation and amortization expense for the ninethree months ended September 30,March 31, 2018 and 2017 was $21,382 and 2016 was $92,215 and $92,696,$22,176 respectively.

Included in cost of goods sold is $25,554 and $28,064 of depreciation expense, respectively, for the nine months ending September 30, 2017 and September 30, 2016. 

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2017 (unaudited)March 31, 2018 and December 31, 20162017

Interest paid for the ninethree months ended September 30,March 31, 2018 and 2017 was $1,659 and 2016 was $5,500$1,966, respectively.

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

March 31, 2018 and $6,784, respectively.December 31, 2017

As of September 30, 2017,March 31, 2018, maturities of notes payable and capital lease obligations for each of the next fourfive years and in the aggregate were as follows:

Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company’s deferred tax assets consist of the benefit from net operating loss (NOL) carryforwards and temporary differences. The net operating loss carryforward expirescarryforwards expire in various years through 2036.2034. The Company’s deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of the net operation loss carryforwards. Net operating loss carryforwards may be further limited by a change in the company ownership and other provisions of the tax laws.

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2017 (unaudited) and December 31, 2016

The Company leases some office equipment under non cancelablenon-cancelable operating leases.leases with terms ranging from three to five years.

As of September 30, 2017,March 31, 2018, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:

Total operating lease payments for the ninethree months ended September 30,March 31, 2018 and 2017 was $2,340 and 2016 were $6,094$2,187 respectively.

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

March 31, 2018 and $5,526 respectively.December 31, 2017

The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Company’s majority shareholders)shareholders, directors and officers). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The ten-year lease term ends May 31, 2025.

As of September 30,March 31, 2017, minimum future rental payments under non cancelablenon-cancelable facilities operating leases for each of the next five years and in the aggregate are as follows:

9. Related Party Transactions

As of September 30, 2017,March 31, 2018, the Company has green coffee contracts with three cooperatives in Nicaragua.Nicaragua, Ethical Trading and Investment Company of Nicaragua (ETICO) is the importer for the transactions. Nicholastransaction. Nicolas Hoskyns, a director of the company, is the managing director of ETICO. As of September 30, 2017,At March 31, 2018, amounts owed to ETICO totaled $40,083.$28,647. All the amounts owed are current and were paid in accordance with our standard vendor payment policies. The loss of the ETICO relationship could have an adverse effect on the Company’s business in the short term. Management believes other options are available that could be utilized in the event the ETICO relationship was terminated.

The total rent payments made to the majority shareholders in connection with these related transactions for the nine months ended September 30, 2017 and September 30, 2016 were $77,400 and $77,400, respectively.

ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. In some cases, forward-looking statements may be identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These statements relate to, among other things, possible expansions into new and existing markets and trends in the operations of Thanksgiving Coffee Company, Inc. (“the Company”). Any forward-looking statements should be considered in light of various risks and uncertainties that could cause results to differ materially from expectations, estimates or forecasts expressed. These various risks and uncertainties include, but are not limited to: changes in general economic conditions, changes in business conditions in the coffee industry, fluctuations in consumer demand for coffee products and in the availability and costs of green beans, continuing competition within the Company’s businesses, variances from budgeted sales mix and growth rate, consumer acceptance of the Company’s products, inability to secure adequate capital to fund its operating expenses and working capital requirements, inability to hire, train and retain qualified personnel, concentration of production and sales in Northern California, the loss of one or more major customers, inability to successfully implement the Company’s sales goals, natural disasters, civil unrest in countries which produce coffee and tea, weather and other risks identified herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this Quarterly Report on Form 10-Q. The Company’s forward-looking statements should also be considered in light of its reviewed financial statements, related notes and the other financial information appearing elsewhere in this report and in its other filings with the Securities and Exchange Commission. As a result of these risks and uncertainties, the Company’s actual results may differ materially and adversely from those expressed in any forward-looking statements. The Company assumes no obligation to update any forward-looking statements.

SUMMARY

Sales of the Company have eroded over the last five years primarily due to declines in the direct distribution sales method of the Company’s business (i.e., delivery by company truck). Increased competition, customer attrition and customers roasting green beans for their own use have all had a negative impact on the Company’s sales. The Company has triedcontinues to try a number of strategies that havemay or may not provenprove effective in abating these declines. The Company has changed its method of distribution to rely less on direct distribution (with only twothree routes) and instead uses independent distributors or shipping direct (via UPS or other common carrier). In addition, the companyCompany is trying to focus on increasing our on-line sales with the maina continued focus of promotingon our award as “Roaster of the Year for 2017”, from Roast magazine.presence in social media, growing our email list and linking our search optimization. The effecteffects of these changes on the Company’s sales has been limited but has reducedwill reduce our distribution expenses. Because of the limited impact of these changes, as well as the changesincrease in cost of sales and other factors noted herein, there can be no assurances that the Company will be profitable in any future period, and, as a consequence, the Company is considering various strategic alternatives.

The Company pays substantially more for its green beans than the market price, because of the higher quality, the organic nature of many of its lines and the fact that it uses fair-traded coffees. Green bean costs have continued toremained stable but any rise and have placedwill place pressure on margins. If green bean costs do not declinecontinue as is or continue to rise, whether as a consequence of inclement weather in a major producing area or any other event that affects green bean pricing, and if the Company cannot offset costs by raising prices, it would have a negative impact on the Company and its margins.

Results of Operations

NineThree months ended September 30,March 31, 2018 versus March 31, 2017 versus September 30, 2016

Net sales for the ninethree months ending September 30, 2017ended March 31, 2018 were $2,625,044$795,036, down 1.3%3.0%, (or down by $35,691),or under $24,250 when compared towith net sales of $2,660,735$819,286 for the same period in fiscal 2016. 2017

Distribution revenues (e.g., revenues generated by the Company’s own truck distribution) were down by ($56,253),$7,488 or (5.25%(2.34%) for the ninethree months ending September 30, 2017,ended March 31, 2018, when compared with distribution sales for the same period in 2016. Sales on the coast2017. The decline appears to be a result of Mendocino continue to rise.slower volume for existing customers as no customers have been lost.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $26,312down $14,029 or 2.09%(3.42%) for the ninethree months ending September 30, 2017ended March 31, 2018 when compared to national sales for the same period in 2016.2017.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were down $9,051; 2.67%increased $1,006, or.99% for the ninethree months ending September 30, 2017ended March 31, 2018 when compared to mail order sales for the same period in 2016.2017. The increase in the mail order division was attributable to the Company’s increased social media presence on the Company’s online store volume.

Cost of sales for the ninethree months ending June 30, 2017 was $1,501,060 down by 6.09%; ($97,410)ended March 31, 2018 were $483,078, up 6.2%, or up $28,153 when compared towith the cost of sales of $1,598,470$454,925 for the same period in 2016. This decrease was a result of lower costs of green beans. Cost per pound of green beans2017. The increase reflects the increase in the second quarter was $2.70green bean costs used in 2017 versus $2.83 for the same period in 2016, creating a $77,424 cost savings.first three months of 2018.

Gross margin percentage (gross profit as a percentage of net sales) for the ninethree months ending September 30, 2017,ended March 31, 2018 was, 42.82%, up almost 3%down 12.84% percentage points when compared with the increase of gross margin of 39.9%9.49% for the same period in 2016. The increase2017. Higher costs in gross margin was a result of lower green bean costs and better efficienciesother supplies in our overall inventory.the three months ended 2018 resulted in a decrease in gross margins.

Selling,Consolidated selling, general and administrative expenses were $1,077,586$365,490 for the ninethree months ending September 30, 2017, a decreaseended March 31, 2018, an increase of 3.21% ($35,745).8% when compared towith the selling, general and administrative expenses of $1,113,331$362,658 for the same period in 2017. The increase was a result of being fully invoiced for the audit fee for the 2017 10K.

Depreciation and amortization expenses for the three months ended March 31, 2018 were $21,382, a 3.59% decrease, or nearly $794 when compared to depreciation expense of $22,176 for the same period in 2016. The decrease was a resultreflects the disposal of workers’ compensation rates and audit fees.

Depreciation and amortization expenses for the nine months ending September 30, 2017, were $92,215, a decrease of 0.5% (or $454) when compared to depreciation and amortization expense of $92,669 for the same period in 2016. old equipment.

As a result of the foregoing factors, the Company had a net loss of ($52,772)$74,944 for the ninethree months ending September 30, 2017,ended March 31, 2018, compared to a loss of $117,717$21,273 for the same period in 2016. It should be noted that in the Statement of Operations, for the three month ending June 30, 2017, that a one-time bonus of $30K was awarded to the company employees. This bonus was awarded from the final payment from sale of the bakery in 2012, and the sale at the time was recorded as revenue. The bonus payment was a non-recurring event and the Company would have otherwise experienced less of a loss.2017.

Due to the increasing costs of insurance and other goods, there can be no assurances that the Company will be profitable in future periods.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2017March 31, 2018, the Company had working capital of $413,300$311,132 versus working capital of $387,199$384,440 as of December 31, 2016.2017. The increasedecrease in working capital is due primarily to the decrease in cash, accounts payable.

Net cash provided by operating activities was $43,796 for the nine months ending September 30, 2017, compared to $12,033 for the nine months ending September 30, 2016. The increase of $31,773 or 265% was principally the result of a decrease in inventory.receivable, inventory and prepaid expenses.

Net cash used in operating activities was ($57,746) for the three months ended March 31, 2018 compared to net cash used in operating activities of ($42,230) during the same period in 2017. The decrease in net cash provided by operating activities in the three months of 2018 was the result of decreases in inventory in the amount of ($37,982) and increases in prepaid expenses in the amount of $24,138 and decreases in accounts payable.

Cash used in investing activities was ($18,538)7,563) for the ninethree months ending September 30, 2017,ended March 31, 2018 compared to ($93,058)2,710) used in the same period in 2016. Capital additions of $12,986 this year were a result of adding two new Safeway stores and, another commercial grinder to our packaging facility.

2017.

Net cash used in financing activities for the ninethree months ending September 30, 2017ended March 31, 2018 was ($6,933)11,383) compared to net cash provided by financing activities of $79,528 during the same period in 2016. The decrease in cash used in financing activities of $86,461($10,194) during the same period in 2017. The cash used by financing activities was a result of paying existing debts.debt.

As of September 30,At March 31, 2017, the Company had total borrowings of $101,338. This compares to total borrowings of $130,297 as of December 31, 2016.$102,846.

For long-term debt, see Note 57 of the Notes to Financial Statements. For operating leases, see Note 79 of the Notes to Financial Statements. For real estate leases, see Note 810 and Note 11 of the Notes to Financial Statements.

The Company is dependent on successfully executing its business plan to achieve profitable operations, obtainobtaining additional sources of borrowings (including normal trade credit) and securing favorable financing arrangements (including lease financing) to finance its working capital needs. There can be no assurance that the Company will be successful in this regard. If the Company is not able to meet its credit obligations the stability of the Company’s business would be in question.

RELATED PARTY TRANSACTIONS

From time to time, the Company enters into various transactions with its majority shareholders, Paul and Joan Katzeff. See Note “9 —“note “11 — Related Party Transactions” in the Notes to the Financial Statements.

SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE

The Company’s business is seasonal in nature. The seasonal availability of green bean coffee in the first two quarters of the year and increased sales in the last quarter historically create a high use of cash and a build up in inventories in the first two quarters, with a corresponding decrease in inventory and increase in cash in the last quarter. In 2017 the Company has been keeping a tighter control on its inventory supply, resulting in less inventory on hand in the first quarter of 2018.

Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Furthermore, past seasonal patterns are not necessarily indicative of future results.

INDEMNIFICATION MATTERS

The Company’s Bylaws provide that the Company may indemnify its directors, officers, employees and other agents to the fullest extent permitted by California law. The Company believes that indemnification under its Bylaws also permits the Company to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether California law would permit indemnification. The Company maintains such liability insurance for its directors and certain officers and employees.

At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification would be required or permitted. The Company is not aware of any pending or threatened litigation or precedingproceeding that might result in a claim for such indemnification.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s stock is generally illiquid and there have been few trades in recent years. There have been twothree trades in the Company’s Common Stock since 1999. In June 2004, 750 shares were traded at $4.50 per share. In December 2005, 400 shares were traded at $2.00 per share.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer and the President, of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017.March 31, 2018. Based on that evaluation, the Company’s management, including the Chief Executive Officer, and the President concluded that the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s Disclosure controls over financial reporting during the secondfirst quarter of 20172018 that have materially affected or are reasonably likely to affect the Company’s internal controls over financial reporting.

Part II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

-None-

ITEM 1A. RISK FACTORSFactors

The Company has concerns regarding the current economic situation. The United States and the global economy is experiencing severe instability in the commercial and investment banking systems which are likely to continue to have far-reaching effects on the economic activity in the country for an indeterminable period. The long-term impact on the United States economy and the Company’s operating activities and ability to raise capital cannot be predicted at this time, but may be substantial.

Our coffee roasting facility is subject to state and local air-quality and emissions regulations. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations our ability to produce any of our roasted products would be severely limited. We believe that we are in compliance in all material respects with all such laws and regulations and we have obtained all material licenses that are required for the operation of our business. We are not aware of any environmental regulations that have or that we believe will have a material adverse effect on our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

-None-- None -

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

-None-- None -

ITEM 4. REMOVE AND RESERVEDSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

-None-- None -

ITEM 5. OTHER INFORMATION

-None-- None -

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Financial Statement Schedules

Not Applicable

Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this Quarterly Report to be signed on itit’s behalf by the undersigned, thereunto duly authorized.

THANKSGIVING COFFEE COMPANY, INC.

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