UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20172019
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)
California | 94-2823626 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
19100 South Harbor Drive, Fort Bragg, California | 95437 | |
(Address of principal executive offices) | (Zip Code) |
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to RuleRegulation 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).xYes ☐ No ☒
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
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 whether the registrant is a shell company (as defined in Rule 12b–212b-2 of the Exchange Act).
Yes ☐ Nox ☒
There currently does not exist a public trading market for the registrant’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, and Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” The Company is not aware of any privately negotiated transactions of the Company’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, 20172019 the registrant had 1,236,744 shares of Class A common stock, no par value per share, outstanding.
Class | Outstanding at September 30, 2019 | |
Common Equity, no par value | 1,236,744 shares |
FORM 10-Q
TABLE OF CONTENTSSecurities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | tcci | none |
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION |
Item 1. | Financial Statements | ||
4 | |||
Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited). | 4 | ||
Condensed Statements of Operations for the nine months and three months ended September 30, 2019 and September 30, 2018 (unaudited) | 6 | ||
Condensed Statement of Changes in Accumulated Deficit for the nine months and the three months ended September 30, 2019 and September 30, 2018 (unaudited). | 7 | ||
Condensed Statements of Cash Flows for the nine months ended September 30, | |||
Notes to Condensed Financial Statements | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||
Item 4. | Controls and Procedures | ||
PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 20 | ||
Item 1A. | Risk Factors | 20 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||
Item 3. | Defaults Upon Senior Securities | |||
Item 4. | Submission of Matters to a Vote of Security Holders | |||
Item 5. | ||||
Item 6. | Exhibits | |||
Signatures |
Financial Statements
and Notes to Financial Statements
Thanksgiving Coffee Company, Inc.
For the Nine Months Ended September 30, 2017 and 2016
PART 1. Financial Information
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by Thanksgiving Coffee Company, Inc. (the Company)Company, or we) 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, 20172019 and December 31, 2016,2018, and its results of operations for the three month and nine month periods ended September 30, 20172019 and 2016September 30, 2018 and its cash flows for the nine month periods ended September 30, 20172019 and 2016.September 30, 2018. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying condensed 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. |
Condensed Balance Sheets |
Unaudited |
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
See Note 1 | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 326,704 | $ | 153,646 | ||||
Accounts receivable, net of allowance | 245,318 | 218,789 | ||||||
Inventories | 269,177 | 237,708 | ||||||
Prepaid expenses | 70,613 | 90,431 | ||||||
Total current assets | 911,812 | 700,574 | ||||||
Property and equipment, net | 275,463 | 308,649 | ||||||
Right of use leased assets | 567,564 | - | ||||||
Total property, equipment, and other | 843,027 | 308,649 | ||||||
Other assets | ||||||||
Deposits and other assets | 7,076 | 4,168 | ||||||
Total assets | $ | 1,761,915 | $ | 1,013,391 |
Thanksgiving Coffee Company, Inc.
Balance Sheets
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | (See Note 1) | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 168,261 | $ | 149,936 | ||||
Accounts receivable, net of allowance | 205,966 | 239,738 | ||||||
Inventories | 203,014 | 279,751 | ||||||
Prepaid expenses | 75,965 | 109,974 | ||||||
Total current assets | 653,206 | 779,399 | ||||||
Property and equipment | ||||||||
Property and equipment | 1,437,358 | 1,418,820 | ||||||
Accumulated depreciation | (1,080,096 | ) | (992,441 | ) | ||||
Total property and equipment | 357,262 | 426,379 | ||||||
Other assets | ||||||||
Deposits and other assets | 3,112 | 12,242 | ||||||
Note receivables | 0 | 29,728 | ||||||
Total other assets | 3,112 | 41,970 | ||||||
Total assets | $ | 1,013,580 | $ | 1,247,748 |
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Balance Sheets |
Unadudited |
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
See Note 1 | ||||||||
Liabilities and shareholders' equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 189,370 | $ | 217,828 | ||||
Accrued liabilities | 59,336 | 62,817 | ||||||
Current portion of operating lease liabilities | 96,604 | - | ||||||
Current portion of long term debt | 32,640 | 48,262 | ||||||
Total current liabilities | 377,950 | 328,907 | ||||||
Long term liabilities | ||||||||
Long-term debt | 28,704 | 36,302 | ||||||
Noncurrent operating lease liabilities | 470,960 | - | ||||||
Total long term debt | 499,664 | 36,302 | ||||||
Total liabilities | 877,614 | 365,209 | ||||||
Shareholders' equity | ||||||||
Common stock, no par value, 1,960,000 shares authorized, 1,236,744 shares issued and outstanding | 861,816 | 861,816 | ||||||
Additional paid in capital | 24,600 | 24,600 | ||||||
Accumulated deficit | (2,115 | ) | (238,234 | ) | ||||
Total shareholders' equity | 884,301 | 648,182 | ||||||
Total liabilities and shareholders' equity | $ | 1,761,915 | $ | 1,013,391 |
Thanksgiving Coffee Company, Inc.
Balance Sheets
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | (See Note 1) | |||||||
Liabilities and shareholders' equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 156,080 | $ | 286,852 | ||||
Accrued Liabilities | 45,822 | 67,344 | ||||||
Current portion of long term debt | 38,004 | 38,004 | ||||||
Total current liabilities | 239,906 | 392,200 | ||||||
Long term debt | ||||||||
Long-term debt | 101,337 | 130,297 | ||||||
Less current portion of long term debt | (38,004 | ) | (38,004 | ) | ||||
Total long term debt | 63,333 | 92,293 | ||||||
Total liabilities | 303,239 | 484,493 | ||||||
Shareholders' equity | ||||||||
Common stock, no par value, 1,960,000 shares authorized, 1,236,744 shares issued and outstanding | 861,816 | 861,816 | ||||||
Additional paid in capital | 24,600 | 24,600 | ||||||
Accumulated deficit | (176,075 | ) | (123,161 | ) | ||||
Total shareholders' equity | 710,341 | 763,255 | ||||||
Total liabilities and shareholders' equity | $ | 1,013,580 | $ | 1,247,748 |
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of Operations |
Unaudited |
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Income | ||||||||||||||||
Net sales | $ | 866,775 | $ | 800,149 | $ | 3,120,554 | $ | 2,413,940 | ||||||||
Cost of sales | 514,016 | 447,840 | 1,749,736 | 1,385,347 | ||||||||||||
Gross profit | 352,759 | 352,309 | 1,370,818 | 1,028,593 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general, and administrative expenses | 329,120 | 323,384 | 1,044,169 | 1,007,248 | ||||||||||||
Depreciation and amortization | 16,962 | 19,571 | 51,633 | 66,839 | ||||||||||||
Total operating expenses | 346,082 | 342,955 | 1,095,802 | 1,074,087 | ||||||||||||
Operating profit (loss) | 6,677 | 9,354 | 275,016 | (45,494 | ) | |||||||||||
Other Income | ||||||||||||||||
Interest expense | (1,407 | ) | (2,040 | ) | (4,476 | ) | (5,444 | ) | ||||||||
Other expense, net | (24,227 | ) | 11,463 | (24,028 | ) | 11,530 | ||||||||||
Total other income (expense), net | (25,634 | ) | 9,423 | (28,504 | ) | 6,086 | ||||||||||
Income/(loss) before income taxes | (18,957 | ) | 18,777 | 246,512 | (39,408 | ) | ||||||||||
Income tax expense | (9,557 | ) | 0 | (10,393 | ) | (800 | ) | |||||||||
Net Income/ (loss) | $ | (28,514 | ) | $ | 18,777 | $ | 236,119 | $ | (40,208 | ) | ||||||
Earnings/ (loss) per share (basic and dilutive) | $ | (0.023 | ) | $ | 0.015 | $ | 0.191 | $ | (0.033 | ) | ||||||
Weighted average number of shares | 1,236,744 | 1,236,744 | 1,236,744 | 1,236,744 |
Thanksgiving Coffee Company, Inc.
Statements of Operations
Unaudited
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Income | ||||||||||||||||
Net sales | $ | 856,952 | $ | 903,403 | $ | 2,625,044 | $ | 2,660,735 | ||||||||
Cost of sales | 481,066 | 543,324 | 1,501,060 | 1,570,470 | ||||||||||||
Gross profit | 375,886 | 360,079 | 1,123,984 | 1,062,265 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative expenses | 370,867 | 398,542 | 1,077,586 | 1,113,331 | ||||||||||||
Depreciation and amortization | 22,203 | 22,495 | 66,661 | 64,605 | ||||||||||||
Total operating expenses | 393,070 | 421,037 | 1,144,247 | 1,177,936 | ||||||||||||
Operating loss | (17,184 | ) | (60,958 | ) | (20,263 | ) | (115,671 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Miscellaneous income/ (expense) | (1,107 | ) | 143 | (31,710 | ) | (1,246 | ) | |||||||||
Total other income (expense) | (1,107 | ) | 143 | (31,710 | ) | (1,246 | ) | |||||||||
Loss before income taxes | (18,291 | ) | (60,815 | ) | (51,973 | ) | (116,917 | ) | ||||||||
Income tax expense | 0 | 0 | (800 | ) | (800 | ) | ||||||||||
Net Loss | $ | (18,291 | ) | $ | (60,815 | ) | $ | (52,773 | ) | $ | (117,717 | ) | ||||
Loss per share (basic and dilutive) | $ | (0.015 | ) | $ | (0.049 | ) | $ | (0.043 | ) | $ | (0.095 | ) | ||||
Weighted average number of shares | 1,236,744 | 1,236,744 | 1,236,744 | 1,236,744 |
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of Accumulated Deficit |
Unaudited |
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Retained earnings/Accumulated deficit, beginning of the period | $ | 26,399 | $ | (260,975 | ) | $ | (238,234 | ) | $ | (201,990 | ) | |||||
Net income/ (loss) | (28,514 | ) | 18,777 | 236,119 | (40,208 | ) | ||||||||||
Accumulated deficit, end of period | $ | (2,115 | ) | $ | (242,198 | ) | $ | (2,115 | ) | $ | (242,198 | ) |
Thanksgiving Coffee Company, Inc.
Statements of Cash Flows
Unaudited
For the nine Months | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities | ||||||||
Net loss | $ | (52,773 | ) | $ | (117,717 | ) | ||
Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
Depreciation and amortization | 92,215 | 92,696 | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable | 33,772 | (30,424 | ) | |||||
Inventories | 76,737 | 39,663 | ||||||
Prepaid expenses | 34,009 | 47,170 | ||||||
Deposits and other assets | 9,130 | - | ||||||
Increase (decrease) in: | ||||||||
Accounts payable | (130,772 | ) | 1,687 | |||||
Accrued liabilities | (21,522 | ) | (21,052 | ) | ||||
Net cash provided by operating activities | 43,796 | 12,023 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (18,538 | ) | (93,058 | ) | ||||
Net cash (used in) investing activities | (18,538 | ) | (93,058 | ) | ||||
Financing activities | ||||||||
Decreases in notes receivable | 29,728 | - | ||||||
(Repayments) increases of notes payable and capital leases | (36,661 | ) | 79,528 | |||||
Net cash (used in) provided by financing activities | (6,933 | ) | 79,528 | |||||
Decrease in cash | 18,325 | (1,507 | ) | |||||
Cash at beginning of period | 149,936 | 213,193 | ||||||
Cash at end of period | $ | 168,261 | $ | 211,686 |
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 condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of Cash Flows |
Unaudited |
For the Nine Months | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | 236,119 | $ | (40,208 | ) | |||
Adjustments to reconcile net income (loss) to cash flows from operating activities: | ||||||||
Depreciation and amortization | 51,633 | 66,839 | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (26,529 | ) | 14,870 | |||||
Inventories | (31,469 | ) | 57,163 | |||||
Prepaid expenses | 19,818 | (8,063 | ) | |||||
Deposits and other assets | (2,908 | ) | (1,056 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable | (28,458 | ) | (45,697 | ) | ||||
Accrued liabilities | (3,481 | ) | (21,753 | ) | ||||
Net cash provided by operating activities | 214,725 | 22,095 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (724 | ) | (26,364 | ) | ||||
Financing activities | ||||||||
Repayments of long term debt | (40,943 | ) | (16,874 | ) | ||||
Increase (decrease) in cash | 173,058 | (21,143 | ) | |||||
Cash at beginning of period | 153,646 | 160,392 | ||||||
Cash at end of period | $ | 326,704 | $ | 139,249 | ||||
Interest | $ | 4,476 | $ | 5,444 | ||||
Income taxes | $ | 837 | $ | 800 |
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2017 (unaudited)2019 and December 31, 20162018
1. Basis of Presentation
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 2018 Form 10-K filed with the Securities and Exchange Commission (SEC). It is suggestedThe accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that these statementsmanagement believes necessary to fairly state results of interim operations, should be read in conjunction with the December 31, 2016Notes to Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited financial statements andfor the accompanying notes on Form 10-K,year ended December 31, 2018, as filed with the Securities and Exchange Commission.
The interim financial information in thisSEC on Form 10-Q reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our results10-k (the “2018 Report”). Results of operations for the interim periods.periods are not necessarily indicative of annual results of operations. The results of operations for the nine months ended September 30, 20172019 are not necessarily indicative of results to be expected for the full year. The unaudited condensed balance sheet at September 30, 2019 was extracted from the audited annual financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements.
Disclosure A/R Concentration of Risk
ForIn the nine months period ending September 2017,third quarter of 2019, one customer accounted for 11.24%31.55% of the Company’s revenue. This customerThe account has purchased from the Company since 1992 and has several locations.is a distributor of the Company’s product. This distributor had a setback in opening their new main café/roaster and Thanksgiving continues to roast all their coffees until they are operational again. 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. 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.
Revenue Recognition
The Company recognizes revenue in accordance with the five-step model as prescribed by Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers,” in which the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for the goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize the revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenue once its performance obligation to the customer is completed and control of the product or service is transferred to the customer. Revenue reflects the total amount the Company receives, or expects to receive, from the customer and includes shipping costs that are billed and included in the consideration. The Company's contractual obligations to customers generally have a single point of obligation and are short term in nature. For sales through distributors, the Company recognizes revenue when the product is shipped, and title passes to the distributor. The Company's standard terms are 'FOB' shipping point, with no customer acceptance provisions. The cost of price promotions and rebates are treated as reductions of revenue. No products are sold on consignment. Credit sales are recorded as trade accounts receivable and no collateral is required. The Company has price incentive programs with its distributors to encourage product placement. The cost of price promotions and rebates are treated as reductions of revenue and revenues are presented net of sales allowances. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met. Freight charges are recognized as revenue at the time of delivery.
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2017 (unaudited)2019 and December 31, 20162018
The Company sells coffee directly to customers through its direct delivery, retail web site and wholesale mail order customers. Additionally, the Company sells other coffee related merchandise through its website. Web site sales are paid for and recognized as revenue at the point of sale. Retail orders are billed to the customer's credit card, at the time of shipment, and revenue is then recognized. The Company periodically sells special bulk orders of products that are in excess of production requirements. These sales are recognized when ownership transfers to the buyer, which occurs at the point of shipment.
Leases
The Company adopted Accounting Standard Update (ASU) No. 2016-02—Leases (Topic 842), as amended, as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.
In addition, The Company elected the hindsight practical expedient to determine the lease term for existing leases. In our application of hindsight, we evaluated the performance of the leased warehouse and office equipment, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $625,826 as of January 1, 2019.
Earnings per share
The Company computes basic earnings per share ("EPS") by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible stock. We have no dilutive instruments for the three months and nine-months ended September 30, 2019 and 2018.
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 2018
2. Accounts Receivable
Accounts receivable consist of the following:
9/30/2017 | 12/31/2016 | 9/30/2019 | 12/31/2018 | |||||||||||||
Accounts receivable | $ | 211,518 | $ | 246,616 | $ | 249,953 | $ | 226,104 | ||||||||
Less: allowance for doubtful accounts | (5,552 | ) | (6,878 | ) | (4,635 | ) | (7,315 | ) | ||||||||
Net accounts receivable | $ | 205,966 | $ | 239,738 | $ | 245,318 | $ | 218,789 |
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 nine months ended September 30, 20172019 and 20162018 was $(1,326)$8,795 and $(661)$(32), respectively. Bad debt expense (recovery) for the three months ended September 30, 2019 and 2018 was $1,236 and $(348), respectively.
As of September 30, 2019 we wrote off receivables from company A in the amount of $1,192 and company B in the amount of $4,642.
3. Inventories
Inventories consist of the following:
9/30/2017 | 12/31/2016 | |||||||
Coffee | ||||||||
Unroasted | $ | 81,782 | $ | 168,003 | ||||
Roasted | 61,501 | 55,066 | ||||||
Tea | 2,444 | 1,690 | ||||||
Packaging, supplies and other merchandise held for sale | 57,286 | 54,992 | ||||||
Total inventories | $ | 203,014 | $ | 279,751 |
9/30/2019 | 12/31/2018 | |||||||
Coffee | ||||||||
Unroasted | $ | 172,795 | $ | 161,355 | ||||
Roasted | 49,122 | 34,420 | ||||||
Tea | 1,597 | 1,723 | ||||||
Packaging, supplies and other merchandise held for sale | 45,663 | 40,210 | ||||||
Total inventories | $ | 269,177 | $ | 237,708 |
4. Properties and Equipment
Property and equipment, consist of the following:
9/30/2017 | 12/31/2016 | 9/30/2019 | 12/31/2018 | |||||||||||||
Equipment | $ | 516,229 | $ | 506,939 | $ | 485,413 | $ | 490,430 | ||||||||
Furniture and fixtures | 143,410 | 138,715 | 149,527 | 148,693 | ||||||||||||
Leasehold improvements | 352,237 | 352,237 | 368,954 | 366,698 | ||||||||||||
Transportation equipment | 150,686 | 146,133 | 50,217 | 178,497 | ||||||||||||
Package design | 41,000 | 41,000 | ||||||||||||||
Pacakge design | 41,000 | 41,000 | ||||||||||||||
Capitalized website development costs | 19,000 | 19,000 | 19,000 | 19,000 | ||||||||||||
Property held under capital leases | 214,796 | 214,796 | ||||||||||||||
Property held under finance leases | 362,280 | 225,864 | ||||||||||||||
Total property and equipment | $ | 1,437,358 | $ | 1,418,820 | 1,476,391 | 1,470,182 | ||||||||||
Accumulated depreciation | (1,080,096 | ) | (992,441 | ) | (1,200,928 | ) | (1,161,533 | ) | ||||||||
Property and equipment, net | $ | 357,262 | $ | 426,379 | $ | 275,463 | $ | 308,649 |
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 2018
Property and Equipment and Right of Use Assets
Depreciation and amortization expense for the nine months ended September 30, 20172019 and 20162018 was $92,215$51,633 and $92,696,$66,839, respectively.
Included in cost of goods sold is $25,554Depreciation and $28,064 of depreciationamortization expense respectively, for the ninethree months endingended September 30, 20172019 and 2018 was $16,409 and $19,572 respectively.
5. Finance and Operating Leases
ASU No. 2016-02, “Leases (Topic 842)” requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the modified retrospective approach with an effective date as of the beginning of our fiscal year, January 1, 2019. Prior year financial statements were not recast under the new standard, and, therefore, those amounts are not presented below.
We lease a warehouse, heavy machinery, and office equipment under finance and operating leases. As of September 30, 2016. 2019, we had three operating and six finance leases with remaining terms ranging from less than one year to six years. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Some of our leases include renewal options that are factored into our determination of lease payments when appropriate. We did not separate lease and non-lease components of contracts for any asset class.
None of our leases require us to provide a residual value guarantee. When available, we use the rate implicit in the lease to discount lease payments to present value; however, some of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Lease Position as of September 30, 2019
The table below presents the lease-related assets and liabilities recorded on the balance sheet.
Classification on the Balance Sheet | September 30, 2019 | ||||
Assets | |||||
Operating lease assets | Operating lease right-of-use assets | $ | 567,564 | ||
Finance lease assets | Property and equipment, net | 61,344 | |||
Total lease assets | $ | 628,908 | |||
Liabilities | |||||
Current | |||||
Operating | Current maturities of operating leases | $ | 96,604 | ||
Finance | Current maturities of finance leases | 32,640 | |||
Noncurrent | |||||
Operating | Noncurrent operating leases | 470,960 | |||
Finance | Long-term finance leases | 28,704 | |||
Total lease liabilities | $ | 628,908 | |||
Weighted-average remaining lease term | |||||
Operating leases (years) | 4.50 | ||||
Finance leases (years) | 1.93 | ||||
Weighted-average discount rate | |||||
Operating leases | 2.45 | % | |||
Finance leases | 7.62 | % |
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2017 (unaudited)2019 and December 31, 20162018
Capital Lease Obligations | 9/30/2017 | 12/31/2016 | ||||||
Bank of the West payable in monthly installments of $787.03, including interest at 9.234% collateralized by equipment, final payment due on January 1, 2021. | $ | 26,430 | $ | 31,486 | ||||
Bank of the West payable in monthly installments of $1,465, including interest at 9.227%, collateralized by equipment, final payment due on January 1, 2020. | 36,778 | 47,020 | ||||||
Hansel Ford, payable in monthly installments of $385.18, including interest at .90%, collateralized by equipment, final payment due on March 14, 2019. | 6,883 | 10,290 | ||||||
Hansel Ford, payable in monthly installments of $385.18, including interest at .90%, collateralized by equipment, final payment due on March 14, 2019. | 6,883 | 10,290 | ||||||
Hansel Ford, payable in monthly installments of $806.38, including interest at 1.939%, collateralized by equipment, final payment due on April 10, 2020. | 24,363 | 31,211 | ||||||
$ | 101,337 | $ | 130,297 | |||||
Less current portion | (38,004 | ) | (38,004 | ) | ||||
Long term portion of notes payable | $ | 63,333 | $ | 92,293 |
Interest paidLease Costs
The table below presents certain information related to the lease costs for finance and operating leases for the nine months ended September 30, 2017 and 2016 was $5,500 and $6,784, respectively.2019.
Quarter Ended September 30, 2019 | ||||
Finance lease cost: | $ | 28,704 | ||
Amortization of assets | $ | 24,229 | ||
Interest on lease liabilities | 4,475 | |||
Operating lease cost: | 81,905 | |||
Short-term lease cost | - | |||
Variable lease cost | - | |||
Total lease cost | $ | 110,609 |
Other Information
As ofThe table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2017, maturities of notes payable2019.
Cash paid for amounts included in the measurement of lease liabilities: | Quarter Ended September 30, 2019 | |||
Operating cash flows for operating leases | $ | 81,905 | ||
Operating cash flows for finance leases | $ | 4,475 | ||
Financing cash flows for finance leases | $ | 24,229 |
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and capital lease obligationsDecember 31, 2018
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the next fourfirst five years and intotal of the aggregate wereremaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet.
Operating Leases | Finance Leases | |||||||
Period Ending December 31, | ||||||||
2019 | $ | 27,492 | $ | 13,024 | ||||
2020 | 109,969 | 29,529 | ||||||
2021 | 109,969 | 15,393 | ||||||
2022 | 109,221 | 5,472 | ||||||
2023 | 105,544 | 2,838 | ||||||
2024 | 104,458 | 1,655 | ||||||
Thereafter | 43,000 | - | ||||||
Total minimum lease payments | 609,653 | 67,911 | ||||||
Less: amount of lease payments representing interest | (42,089 | ) | (6,399 | ) | ||||
Present value of future minimum lease payments | 567,564 | 61,344 | ||||||
Less: current obligations under leases | (96,604 | ) | (32,640 | ) | ||||
Long-term lease obligations | $ | 470,960 | $ | 28,704 |
6. Disaggregated Revenue by routes, direct and mail order
Disaggregated information of revenue recognized as follows:
Years Ending September 30, | ||||
2018 | $ | 38,004 | ||
2019 | 40,554 | |||
2020 | 22,779 | |||
$ | 101,337 |
For the Three months ended September 30 | ||||||||
Sales by department | 2019 | 2018 | ||||||
Routes-wholesale | $ | 316,621 | $ | 342,083 | ||||
Direct-wholesale | 453,201 | 357,758 | ||||||
Mailorder-retail | 96,953 | 100,308 | ||||||
Total | $ | 866,775 | $ | 800,149 |
For the Nine months ended September 30 | ||||||||
Sales by department | 2019 | 2018 | ||||||
Routes-wholesale | $ | 904,589 | $ | 991,440 | ||||
Direct-wholesale | 1,910,988 | 1,097,862 | ||||||
Mailorder-retail | 304,977 | 324,638 | ||||||
Total | $ | 3,120,554 | $ | 2,413,940 |
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 2018
7. Income Taxes
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 expires in various years through 2036. 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 cancelable operating leases.8. Related Party Transactions
As of September 30, 2017, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:
Years Ending September 30, | ||||
2018 | $ | 9,626 | ||
2021 | 326 | |||
$ | 9,953 |
Total operating lease payments for the nine months ended September 30, 2017 and 2016 were $6,094 and $5,526 respectively.
The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Company’s majority shareholders). 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, 2017, minimum future rental payments under non cancelable facilities operating leases for each of the next five years and in the aggregate are as follows:
Years ending September 30, | ||||
2018 | $ | 103,200 | ||
2019 | 103,200 | |||
2020 | 103,200 | |||
2021 | 103,200 | |||
2022 | 103,200 | |||
Thereafter | 275,200 | |||
$ | 791,200 |
9. Related Party Transactions
As of September 30, 2017,2019, the Company has green coffee contracts with three cooperatives in Nicaragua.Nicaragua, Guatemala and Uganda. Ethical Trading and Investment Company of Nicaragua (ETICO) is the importer for the transactions. Nicholas Hoskyns, a director of the company,Company, is the managing director of ETICO. As ofAt September 30, 2017,2019, amounts owed to ETICO totaled $40,083.$48,567. For the first nine months ended September 30, 2019 and 2018 we have paid $424,367 and $421,402, respectively. 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 madeCompany holds a five-year rental lease with the majority shareholder, which is due to expire on May 1, 2025.
9. Business Segment
The Company operates in one reportable segment. All revenues are derived and all long-lived assets are held in the U.S.
10. Subsequent Events
During the first quarter of 2020, government offices throughout the United States and around the world issued shelter in place orders due to the majority shareholders in connection with these related transactionsglobal outbreak of the COVID-19 virus. On March 27, 2020, the President of the United States signed into law the Families First Coronavirus Response Act and two phases of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act which are intended to provide emergency assistance to individuals and business affected by COVID-19. The CARES Act includes a small business stimulus program, Paycheck Protection Program (“PPP”), which is intended to provide loans to qualified businesses to guarantee eight weeks of payroll and other identified costs which may be eligible for the nine months ended September 30, 2017 and September 30, 2016 were $77,400 and $77,400, respectively.partial or full forgiveness.
In April 2020, the Company successfully secured a $189,228 Small Business Association (“SBA”) loan under the Payroll Protection Program to secure payroll expenses for otherwise furloughed employees impacted by government imposed shelter in place orders. Per the terms of the loan, the full amount will be forgiven as long as loan proceeds are used to cover payroll costs and other specified non-payroll costs (provided any non-payroll costs do not exceed 40% of the forgiven amount) over a 24-week period after the loan is made; and employee and compensation levels are maintained. The Company intends to comply with the above terms in order to qualify for full or partial loan forgiveness. In the event the Company is required to repay the loan, all payments are deferred for 6 months with accrued interest over this period. Amounts outstanding under the loan will bear a fixed interest rate of 1.00% per annum with a maturity date of 2 years from commencement date. The Company has not applied for loan forgiveness as of the issuance of these financial statements.
In April 2020, the Company executed a $25,000 non-interest bearing emergency COVID-19 Commercial loan with a maturity date of April 16, 2021 with Savings Bank of Mendocino County.
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 business, 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.
Risks that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect our actual results include, but are not limited to, those discussed in Part II, Item 1A. Risk Factors in the 2018 Report and the additional risk factor regarding COVID-19 discussed in Part II, Item 1A of this Report. Readers should carefully review the risk factors described in the 2018 Report, this Report and in other documents that the Company files from time to time with the SEC.
SUMMARY
Sales of the Company have eroded over the last fiveprior 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. TheIn the first quarter, second quarter and third quarter of this year the Company has triedis experiencing an increase in sales because one of its distributors had a fire which curtailed what they could roast in house. In addition, the Company continues 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 shippingships direct (via UPS or other common carrier). In addition, the companyCompany is trying to focus on increasing ourits on-line sales with the main focus of promoting our award as “Roaster of the Year for 2017”, from Roast magazine.a continued emphasis on its presence in social media, growing its email list and linking its search optimization. The effecteffects of these changes on the Company’s sales has been limited but has reducedwill reduce 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 our competitors, because of the higher quality, the organic nature of many of its linesthe varietals we carry and the fact that it useswe use fair-traded coffees.coffees as well. 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
Ninemonths ended September 30 2017, 2019 versus September 30 2016, 2018
Income and Expense | Increase (Decrease) | Percent Change | ||||||
Net Sales | $ | (35,691 | ) | -1.3 | % | |||
Cost of Sales | (97,410 | ) | -6.09 | % | ||||
Gross Margin % | - | 2.9 | % | |||||
Selling, G&A Expense | (35,745 | ) | -3.21 | % | ||||
Depreciation And Amortization | 2,056 | 3.18 | % | |||||
Net Profit (Loss) | (64,944 | ) | -55.17 | % |
Increase (Decrease) | Percent Change | |||||||
Net Sales | $ | 706,614 | 29.3 | % | ||||
Cost of Sales | 364,389 | 26.3 | % | |||||
Gross Profit | 342,225 | 33.3 | % | |||||
Selling, G&A Expense | 36,921 | 3.7 | % | |||||
Depreciation and Amortization | (15,206 | ) | (22.8 | %) | ||||
Other, net | (34,590 | ) | (568 | %) | ||||
Net Income | 276,326 | 687.0 | % |
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:
Payments Due By Period | Payments Due By Period | |||||||||||||||||||||||||||||||||||||||
Contractual Obligations |
Total | Less than One year |
1-3 years |
4-5 years |
After 5 years |
Total | Less than One year |
1-3 years |
4-5 years |
After 5 years | ||||||||||||||||||||||||||||||
Long Term Debt | $ | 101,337 | $ | 38,004 | $ | 63,333 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||
Finance Leases | $ | 67,911 | 13,024 | 50,394 | 4,493 | $ | - | |||||||||||||||||||||||||||||||||
Operating Leases | 9,952 | 9,626 | 326 | 0 | 0 | 24,853 | 1,692 | 19,559 | 3,602 | - | ||||||||||||||||||||||||||||||
Real Estate Leases | 791,200 | 103,200 | 309,600 | 206,400 | 172,000 | 584,800 | 25,800 | 309,600 | 206,400 | 43,000 | ||||||||||||||||||||||||||||||
Total Cash Obligations | $ | 902,489 | $ | 150,830 | $ | 373,259 | $ | 206,400 | $ | 172,000 | $ | 677,564 | $ | 40,516 | $ | 379,553 | $ | 214,495 | $ | 43,000 |
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:
● | Application of New Accounting Standards – we did not have appropriate controls in place to ensure proper and timely implementation of new accounting standards, specifically with respect to the adoption of ASC 842 – Leases. |
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
3.1 | |
3.2 |
10.4 | ||
10.10 | License Agreement between the Company and the American Birding Association, Inc. and amendment.** | |
10.13 | ||
14.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document.* | |
101.SCH | XBRL Taxonomy Extension Schema Document.* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.* | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.* |
* | Filed herewith. |
** | Incorporated by reference to the exhibits to the Company’s Form 10-K for the year ended December 31, 2018. |
*** | Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2003. |
SIGNATURES
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.
Title | Date | |||
Chief Executive Officer | ||||
Paul Katzeff | ||||
/s/ Joan Katzeff | President | |||
Joan Katzeff |
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