Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2019 and December 31, 2018

Net sales for the nine months endingended September 30, 20172019 were $2,625,044 down 1.3%$3,120,554 up 29.3%, (or down by $35,691),or $706,614 when compared towith net sales of $2,660,735$2,413,940 for the same period in fiscal 2016. 2018.

Distribution revenues (e.g., revenues generated by the Company’s own truck distribution) were down by ($56,253),86,686 or (5.25%(8.73%) for the nine months endingended September 30, 2017,2019, when compared with distribution sales for the same period in 2016. Sales on the coast2018. The decline appears to be a result of Mendocino continue to rise.slower volume for existing customers and no customers have been lost.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $26,312$775,756 or 2.09%68.31% for the nine months endingended September 30, 20172019 when compared to national sales for the same period in 2016.2018. The increase reflects the increased sales from a distributor who suffered a major fire and was not able to fulfill all their orders for the cafes they own. Thanksgiving is roasting more of their coffees and not a selected variety as in the past. This is a short-term fix and they will be fully operational in 2020.

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%decreased $39,286 or (11.40%) for the nine months endingended September 30, 20172019 when compared to mail order sales for the same period in 2016.2018. The decrease is attributable to the increase in competition with other on line competitors.

Cost of sales for the nine months ending Juneended September 30, 2017 was $1,501,060 down by 6.09%; ($97,410)2019 were $1,749,736, up 26.3%, or $364,389 when compared towith the cost of sales of $1,598,470$1,385,347 for the same period in 2016. This decrease was a result of lower costs of green beans. Cost per pound of green beans2018. The increase reflects the increase in the second quarter was $2.70overall sales in 2017 versus $2.83 for the same period in 2016, creating a $77,424 cost savings.nine months of 2019.

Gross margin percentage (gross profit as a percentage of net sales) for the nine months endingended September 30, 2017,2019 was 42.82%, up almost 3%43.92% percentage points when compared with the gross margin of 39.9%42.61% for the same period in 2016. The increase in gross margin was a result of lower green bean costs and better efficiencies in our overall inventory.2018.

Selling, general and administrative expenses were $1,077,586$1,044,169 for the nine months endingended September 30, 2017, a decrease2019, an increase of 3.21% ($35,745)3.7% when compared towith the selling, and general and administrative expenses of $1,113,331$1,007,248 for the same period in 2016.2018. The decreaseincrease was a result of workers’ compensation ratesincrease in freight, graphics and audit fees.advertising.

Depreciation and amortization expenses for the nine months endingended September 30, 2017,2019 were $92,215,$51,633, a (22.8%) decrease, of 0.5% (or $454)or nearly ($15,206) when compared to depreciation and amortization expense of $92,669$66,839 for the same period in 2016. 2018. The decrease reflects the disposal of old equipment.

As a result of the foregoing factors, the Company had a net lossincome of ($52,772)$236,118 for the nine months endingended September 30, 2017,2019, compared to a loss of $117,717$40,208 for the same period in 2016.2018.

To summarize the Company’s third quarter overall sales are up over the prior year. The growth was in national revenue, which required us to ship out the coffees and in turn increased our selling, general and administrative expenses. It should bewas one customer whose sales attributed to the increase. It is noted the cost of sales increased as well because of the volume of green roasted to fulfill orders. Customers shared part of the cost in freight but not all and that is reflected in the Statementincrease in freight cost in the selling, general, and administrative expenses of Operations, for the three month ending June 30, 2017, that a one-time bonus of $30K was awardedprofit and loss reports.

Direct routes and mail order revenues decreased due to the company employees. This bonus was awarded fromincrease of competition in the final payment from salemarket place. The Company is in the process of upgrading the website, links, and increasing our social media presence, but in turn means more expenses out -going for marketing. In addition, the Company is working on introducing a new product to the market place and a re-introduction of a product. Overall our expenses have risen in advertising, freight and the on line mail order aspect of the bakeryCompany but have decreased in 2012,other areas, such as insurance 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.depreciation.

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, 20172019, the Company had working capital of $413,300$533,862 versus working capital of $387,199$371,667 as of December 31, 2016.2018. The increase in working capital is due primarily to profitable results experienced in the decrease in accounts payable.quarter ended September 30, 2019.

Net cash provided by operating activities was $43,796$214,725 for the nine months endingended September 30, 2017,2019 compared to $12,033 fornet cash used by activities of $22,095 during the nine months ending September 30, 2016.same period in 2018. The increase of $31,773 or 265%in cash was principally the result of a decreasedue to an increase in inventory.roasting for one distributor.

Net cashCash used in investing activities was ($18,538)724) for the nine months endingended September 30, 2017,2019 compared to ($93,058)26,364) 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.

2018. Net cash used in financing activities for the nine months endingended September 30, 20172019 was ($6,933)40,943) 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($16,874) during the same period in 2018. The cash used by financing activities was a result of paying existing debts.debt.

As ofAt September 30, 2017,2019, the Company had total borrowings of $101,338. This compares to total borrowings of $130,297 as of December 31, 2016.$61,344.

For long-term debt, see Note 5 of the Notes to Financial Statements. For operating leases, see Note 7 of the Notes to Financial Statements. For real estate leases, see Note 8 of the Notes to Financial Statements.At September 30, 2019, our contractual obligations are as follows:

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 iswere 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.Statements included in the Company’s 10-K, as filed with the SEC. In addition, see note “7- Related Party Transaction” in regards to ETICO green bean purchases for 2019.

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 2019 the Company has been keeping a tighter control on its inventory supply, resulting in fewer inventory supplies on hand. In the third quarter of 2019, similar controls continue.

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 preceding 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 two 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

Under the supervision and with the participation of our management, including our Chief Executive Officer and President, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and President concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2018.

Management has identified the following material weakness in our internal control over financial reporting:

Notwithstanding the existence of these material weaknesses in our internal controls, we believe that our financial statements fairly present, in all material respects, our balance sheets at September 30, 2019 and our statements of operations, stockholders’ deficit and cash flows for the quarter ended September 30, 2019 in conformity with GAAP.

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, 2017.2019. 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 second quarter of 2017 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.

We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.

Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world. The effects of this outbreak on our business have included and could continue to include disruptions or restrictions on our employees’ ability to travel in affected regions, as well as temporary closures of our roasting facility and temporary closures of the facilities of our suppliers, customers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our customers, third-party suppliers and contractors, and results of operations. In addition, a significant outbreak of contagious disease in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could reduce the demand for our products and likely impact our results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

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

-None-None –

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

-None-- None –

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

ITEM 4. REMOVE AND RESERVED- None -

-None-

ITEM 5. OTHER INFORMATION

-None- Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 

Financial Statement Schedules

Not Applicable

Exhibits

Exhibits