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, 20172020
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, 20172020 the registrant had 1,236,744 shares of Class A common stock, no par value per share, outstanding.
Class | Outstanding at September 30, 2020 | |
Common Equity, no par value | 1,236,744 shares |
Securities 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 | |||
| Condensed Balance Sheets as of September 30, | ||||
| Condensed Statements of Operations for the three months and nine months ended September 30, | ||||
| Condensed Statement of Retained Earnings (Accumulated Deficit) for the three months and nine months ended September 30, 2020 and September 30, 2019 (unaudited). | 8 | |||
| 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 | |||
| Item 1A. | Risk Factors | |||
| 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, 20172020 and December 31, 2016,2019, and its results of operations for the three month and nine month periods ended September 30, 20172020 and 20162019 and its cash flows for the nine month periods ended September 30, 20172020 and 2016.2019. 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, | |||||||
2020 | 2019 | |||||||
See Note 1 | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 662,472 | $ | 410,974 | ||||
Accounts receivable, net of allowance | 213,555 | 218,454 | ||||||
Inventories | 261,973 | 236,258 | ||||||
Prepaid expenses | 46,730 | 49,534 | ||||||
Total current assets | 1,184,730 | 915,220 | ||||||
Property and equipment, net | 236,132 | 259,490 | ||||||
Right of use leased assets | 471,117 | 543,465 | ||||||
Deposits and other assets | 4,545 | 1,056 | ||||||
Total assets | $ | 1,896,524 | $ | 1,719,231 | ||||
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, | |||||||
2020 | 2019 | |||||||
See Note 1 | ||||||||
Liabilities and shareholders' equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 229,784 | $ | 165,743 | ||||
Notes payable | 25,000 | - | ||||||
Accrued liabilities | 79,812 | 44,996 | ||||||
Current portion of operating lease liabilities | 99,098 | 96,566 | ||||||
Current portion of long term debt and equipment financing | 71,592 | 25,949 | ||||||
Total current liabilities | 505,286 | 333,254 | ||||||
Long term liabilities | ||||||||
Noncurrent long-term debt and equipment financing | 148,755 | 22,096 | ||||||
Noncurrent operating lease liabilities | 372,019 | 446,899 | ||||||
Total liabilities | 1,026,060 | 802,249 | ||||||
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 | ||||||
Retained earnings (accumulated deficit) | (15,952 | ) | 30,566 | |||||
Total shareholders' equity | 870,464 | 916,982 | ||||||
Total liabilities and shareholders' equity | $ | 1,896,524 | $ | 1,719,231 | ||||
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, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Income | ||||||||||||||||
Net sales | $ | 1,210,517 | $ | 866,775 | $ | 2,829,633 | $ | 3,120,554 | ||||||||
Cost of sales | 596,711 | 514,016 | 1,555,330 | 1,749,736 | ||||||||||||
Gross profit | 613,806 | 352,759 | 1,274,303 | 1,370,818 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general, and administrative expenses | 429,507 | 346,082 | 1,324,317 | 1,095,802 | ||||||||||||
Operating profit (loss) | 184,299 | 6,677 | (50,014 | ) | 275,016 | |||||||||||
Other Income (expense) | ||||||||||||||||
Interest expense | (468 | ) | (1,407 | ) | (2,328 | ) | (4,476 | ) | ||||||||
Other income (expenses), net | (516 | ) | (24,227 | ) | 17,383 | (24,028 | ) | |||||||||
Total other income (expense), net | (984 | ) | (25,634 | ) | 15,055 | (28,504 | ) | |||||||||
Income (loss) before income taxes | 183,315 | (18,957 | ) | (34,959 | ) | 246,512 | ||||||||||
Income tax expense | (10,759 | ) | (9,557 | ) | (11,559 | ) | (10,393 | ) | ||||||||
Net Income (loss) | $ | 172,556 | $ | (28,514 | ) | $ | (46,518 | ) | $ | 236,119 | ||||||
Earnings (loss) per share (basic and diluted) | $ | 0.140 | $ | (0.023 | ) | $ | (0.038 | ) | $ | 0.191 | ||||||
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 Retained Earnings (Accumulated Deficit) | |||||||||||||||
Unaudited |
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| Retained earnings (accumulated deficit), beginning of period | $ | (188,508 | ) | $ | 26,399 | $ | 30,566 | $ | (238,234 | ) | ||||||
Net income (loss) | 172,556 | (28,514 | ) | (46,518 | ) | 236,119 | ||||||||||
Accumulated deficit, end of period | $ | (15,952 | ) | $ | (2,115 | ) | $ | (15,952 | ) | $ | (2,115 | ) | ||||
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, | ||||||||
2020 | 2019 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | (46,518 | ) | $ | 236,119 | |||
Adjustments to reconcile net income (loss) to cash flows from operating activities: | ||||||||
Depreciation and amortization | 56,867 | 51,633 | ||||||
Net gain on disposal of property and equipment | (5,759 | ) | - | |||||
(Increase) decrease in: | ||||||||
Accounts receivable | 4,899 | (26,529 | ) | |||||
Inventories | (25,715 | ) | (31,469 | ) | ||||
Prepaid expenses | 2,804 | 19,818 | ||||||
Other assets | (3,489 | ) | (2,908 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable | 64,041 | (28,458 | ) | |||||
Accrued liabilities | 34,816 | (3,481 | ) | |||||
Net cash provided by operating activities | 81,946 | 214,725 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (44,259 | ) | (724 | ) | ||||
Proceeds from insurance recovery | 16,509 | - | ||||||
Net cash used in investing activities | (27,750 | ) | (724 | ) | ||||
Financing activities | ||||||||
Proceeds from borrowings | 214,228 | - | ||||||
Repayments of long term debt | (16,926 | ) | (40,943 | ) | ||||
Net cash provided by (used in) financing activities | 197,302 | (40,943 | ) | |||||
Increase in cash | 251,498 | 173,058 | ||||||
Cash at beginning of period | 410,974 | 153,646 | ||||||
Cash at end of period | $ | 662,472 | $ | 326,704 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2,328 | $ | 4,476 | ||||
Income taxes | $ | 11,559 | $ | 837 | ||||
Thanksgiving Coffee Company, Inc.
NotesSee accompanying notes to Financial Statements
September 30, 2017 (unaudited) and December 31, 2016condensed financial statements
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 2019 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, 2019, 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 “2019 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, 20172020 are not necessarily indicative of results to be expected for the full year. The unaudited condensed balance sheet at December 31, 2019 was extracted from the audited annual financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements.
Concentration of Risk
For the ninethree months period endingended September 2017, one customer30, 2020, Customer A accounted for 11.24%46%, of the Company’s revenue. This customer has purchased fromFor the Company since 1992, and has several locations.nine months ended September 30, 2020, Customer A accounted for 29%, of the Company’s revenue. 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 TaxesAs of September 30, 2020, one customer accounted for approximately 41% of the Company’s accounts receivable. As of December 31, 2019, one customer accounted for approximately 21% of the Company’s accounts receivable.
The Company accounts for income taxes under the asset and liability method as prescribed by ASC 740,Accounting for Income Taxes. As such, deferred
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 AmericaUS GAAP 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.
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
Our leases consist of both operating and equipment financing. We categorize leases as either operating leases or equipment financing at the commencement date of the agreement.
We recognize a right-of-use (“ROU”) asset and lease liability for each operating and equipment financing with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term.
Our lease liability represents the present value of future lease payments over the lease term. We cannot determine the interest rate implicit in all of our leases. Therefore, we use market and term-specific incremental borrowing rates when the rate is not implicit in the agreement. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not borrow on a collateralized basis, we consider a combination of factors, including the risk profile and funding cost of the specific lease, the lease term and the effect of adjusting the rate to reflect consideration of collateral.
Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs, as applicable. We recognize operating lease costs on a straight-line basis over the lease term. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our corporate warehouse and distribution network and are recorded within selling, general, and administrative expenses.
The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For equipment financing, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each equipment financing liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
Earnings (Loss) per Share
The Company computes basic earnings (loss) per share ("EPS") by dividing net earnings (loss) 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, 2020 and 2019.
Thanksgiving Coffee Company, Inc.
2. Accounts Receivable
Notes to Financial Statements
September 30, 2017 (unaudited) and December 31, 2016
Accounts receivable consist of the following:
| 9/30/2017 | 12/31/2016 | 9/30/2020 | 12/31/2019 | |||||||||||||
| Accounts receivable | $ | 211,518 | $ | 246,616 | $ | 217,230 | $ | 223,116 | ||||||||
| Less: allowance for doubtful accounts | (5,552 | ) | (6,878 | ) | (3,675 | ) | (4,662 | ) | ||||||||
| Net accounts receivable | $ | 205,966 | $ | 239,738 | $ | 213,555 | $ | 218,454 | ||||||||
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 three months ended September 30, 2020 and 2019 was $65 and $1,236, respectively. Bad debt expense for the nine months ended September 30, 20172020 and 20162019 was $(1,326)$795 and $(661),$8,795, respectively.
3.Inventories
Inventories consist of the following:
| 9/30/2017 | 12/31/2016 | 9/30/2020 | 12/31/2019 | |||||||||||||
| Coffee | ||||||||||||||||
| Unroasted | $ | 81,782 | $ | 168,003 | $ | 173,560 | $ | 142,095 | ||||||||
| Roasted | 61,501 | 55,066 | 37,717 | 35,141 | ||||||||||||
| Tea | 2,444 | 1,690 | 987 | 1,616 | ||||||||||||
| Packaging, supplies and other merchandise held for sale | 57,286 | 54,992 | ||||||||||||||
Packaging, supplies, and other merchandise held for sale | 49,709 | 57,406 | ||||||||||||||
| Total inventories | $ | 203,014 | $ | 279,751 | $ | 261,973 | $ | 236,258 | ||||||||
4. Properties and Equipment
Property and equipment, consist of the following:
| 9/30/2017 | 12/31/2016 | 9/30/2020 | 12/31/2019 | |||||||||||||
| Equipment | $ | 516,229 | $ | 506,939 | $ | 504,687 | $ | 488,189 | ||||||||
| Furniture and fixtures | 143,410 | 138,715 | 155,932 | 151,093 | ||||||||||||
| Leasehold improvements | 352,237 | 352,237 | 368,954 | 368,954 | ||||||||||||
| Transportation equipment | 150,686 | 146,133 | 44,687 | 50,217 | ||||||||||||
| Package design | 41,000 | 41,000 | ||||||||||||||
Pacakge design | 41,000 | 41,000 | ||||||||||||||
| Capitalized website development costs | 19,000 | 19,000 | 32,708 | 19,000 | ||||||||||||
| Property held under capital leases | 214,796 | 214,796 | ||||||||||||||
Property held under financings | 325,437 | 362,280 | ||||||||||||||
| Total property and equipment | $ | 1,437,358 | $ | 1,418,820 | 1,473,405 | 1,480,733 | ||||||||||
| Accumulated depreciation | (1,080,096 | ) | (992,441 | ) | (1,237,273 | ) | (1,221,243 | ) | ||||||||
| Property and equipment, net | $ | 357,262 | $ | 426,379 | $ | 236,132 | $ | 259,490 | ||||||||
Depreciation and amortization expense for the nine months ended September 30, 20172020 and 20162019 was $92,215$56,867 and $92,696,$51,633, respectively.
Included in cost of goods sold is $25,554 Depreciation and $28,064 of depreciationamortization expense respectively, for the ninethree months endingended September 30, 20172020 and September 30, 2016.
2019 was $17,412 and $16,409 respectively.
Thanksgiving Coffee Company, Inc.
5. Operating Leases, and Long-term Debt and Equipment Financing
Notes
ASC 842, “Leases (Topic 842)” requires leases with durations greater than twelve months to Financial Statementsbe recognized on the balance sheet.
We lease a warehouse, heavy machinery, and office equipment under finance and operating leases. As of September 30, 2017 (unaudited)2020, we had three operating leases and December 31, 2016four equipment financings and long-term debt with remaining terms ranging from less than one year to five 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.
| 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 Position as of September 30, 2020
The table below presents the lease-related assets and liabilities recorded on the balance sheet.
Classification on the Balance Sheet | September 30, 2020 | ||||
Assets | |||||
Operating lease assets | Operating lease right-of-use assets | $ | 471,117 | ||
Equipment financing assets | Property and equipment, net | 72,709 | |||
Total lease assets | $ | 543,826 | |||
Liabilities | |||||
Current | |||||
Operating | Current portions of operating leases | $ | 99,098 | ||
Equipment financing | Current portion of long-term debt and equipment financing | 14,824 | |||
Noncurrent | |||||
Operating | Noncurrent operating leases | 372,019 | |||
Equipment financing and long-term debt | Noncurrent long-term debt and equipment financing | 16,295 | |||
Total lease liabilities | $ | 502,236 | |||
Weighted-average remaining lease term | |||||
Operating leases (in years) | 3.50 | ||||
Equipment financing (in years) | 1.82 | ||||
Weighted-average discount rate | |||||
Operating leases | 2.45 | % | |||
Equipment financing | 8.64 | % | |||
Lease Costs
The table below presents certain information related to the lease costs for equipment financings and operating leases for the nine months ended September 30, 2017 and 2016 was $5,500 and $6,784, respectively.2020.
Nine Months Ended September 30, 2020 | ||||
Equipment financing and long-term debt costs: | $ | 23,614 | ||
Amortization of assets | $ | 21,286 | ||
Interest on equipment financing and long-term debt | 2,328 | |||
Operating lease cost | 82,476 | |||
Short-term lease cost | - | |||
Variable lease cost | - | |||
Total lease cost | $ | 106,090 | ||
Other Information
As ofThe table below presents supplemental cash flow information related to operating leases and equipment financing and long-term debt for the nine months ended September 30, 2017, maturities of notes payable and capital lease obligations2020.
Cash paid for amounts included in the measurement of lease liabilities: | Nine Months Ended September 30, 2020 | |||
Operating cash flows for operating leases | $ | 82,476 | ||
Operating cash flows for equipment financing and long-term debt | $ | 2,328 | ||
Financing cash flows for equipment financing and long-term debt | $ | 16,926 | ||
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 equipment financing and long-term debt liabilities and operating lease liabilities recorded on the balance sheet.
Operating Leases | Equipment Financing | |||||||
Period Ending December 31, | ||||||||
2020 | $ | 27,492 | $ | 6,209 | ||||
2021 | 109,968 | 15,393 | ||||||
2022 | 109,221 | 8,581 | ||||||
2023 | 105,484 | 2,838 | ||||||
2024 | 104,342 | 1,655 | ||||||
2025 | 43,000 | - | ||||||
Total minimum lease payments and equipment financings | 499,507 | 34,676 | ||||||
Less: amount of lease payments representing interest | (28,390 | ) | (3,557 | ) | ||||
Present value of future minimum lease payments and equipment financings | 471,117 | 31,119 | ||||||
Less: current obligations under leases and equipment financings | (99,098 | ) | (14,824 | ) | ||||
Long-term lease and equipment financing obligations | $ | 372,019 | $ | 16,295 | ||||
6. Disaggregated Revenue by routes, direct and mail order
Disaggregated information of revenue recognized is 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 | 2020 | 2019 | ||||||
Routes-wholesale | $ | 277,049 | $ | 316,621 | ||||
Direct-wholesale | 744,016 | 453,201 | ||||||
Mailorder-retail | 189,452 | 96,953 | ||||||
Total | $ | 1,210,517 | $ | 866,775 | ||||
| For the Nine months ended September 30 | ||||||||
Sales by department | 2020 | 2019 | ||||||
Routes-wholesale | $ | 808,208 | $ | 904,589 | ||||
Direct-wholesale | 1,434,696 | 1,910,988 | ||||||
Mailorder-retail | 586,729 | 304,977 | ||||||
Total | $ | 2,829,633 | $ | 3,120,554 | ||||
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 companyCompany 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 agreements2020, the Company has green contracts with three cooperatives in Nicaragua, Guatemala and Uganda. Ethical Trading and Investment Company of Nicaragua (ETICO) is the importer for eachthe transactions. Nicholas Hoskyns, a director of the next five yearsCompany, is the managing director of ETICO. At September 30, 2020 and in the aggregate were:
| Years Ending September 30, | ||||
| 2018 | $ | 9,626 | ||
| 2021 | 326 | |||
| $ | 9,953 | |||
Total operating lease payments forDecember 31, 2019, amounts owed to ETICO totaled $58,139 and $37,333, respectively. For the nine months ended September 30, 20172020 and 20162019, we have paid $401,811 and $424,367, respectively. All the amounts owed are current and were $6,094 and $5,526 respectively.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 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 Company is a guarantor on certain debt that the Company’s majority shareholders hold in connection with its corporate headquarters, warehouse and waterfront facilities. The ten-year lease term ends in May 31, 2025.
In September 2020, the Company deferred rent payments for its corporate headquarters totaling $17,200 for the months of July and August 2020. As the rental lease was entered into with the majority shareholders, terms of September 30, 2017, minimum future rental payments under non cancelable facilities operating leases for eachrepayment have not been agreed upon as of the next five yearsdate of these condensed financial statements but will be determined upon the improvement of economic conditions.
9. Business Segment
The Company operates in one reportable segment. All revenues are derived, and all long-lived assets are held in the aggregate are as follows:U.S.
| Years ending September 30, | ||||
| 2018 | $ | 103,200 | ||
| 2019 | 103,200 | |||
| 2020 | 103,200 | |||
| 2021 | 103,200 | |||
| 2022 | 103,200 | |||
| Thereafter | 275,200 | |||
| $ | 791,200 | |||
9.10. COVID-19 Uncertainty and Related Party TransactionsActivity
AsDuring the first quarter of September 30, 2017,2020, government offices throughout the United States and around the world issued shelter in place orders due to the global 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 twenty-four weeks of payroll and other identified costs which may be eligible for partial or full forgiveness.
The future impact of the global emergence of COVID-19 on our business is currently unknown. We are closely monitoring the impact of the COVID-19 global outbreak and its resulting impact on our roasting operations and supply chain, with our top priority being the health and safety of our employees, customers, partners, and communities. While we believe our supply chain is in a healthy position, there remains uncertainty related to the public health situation globally. The magnitude of any potential impact is unknown, as it is unclear how long it will take for the overall supply chain to return to normal. We are working closely with our partners and suppliers to manage this process.
In April 2020, the Company has green coffee contracts with three cooperativessuccessfully 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 Nicaragua. Ethical Trading and Investment Company of Nicaragua (ETICO) isplace orders. Per the importer for the transactions. Nicholas Hoskyns, a directorterms of the company, isloan, the managing director of ETICO. As of September 30, 2017, amounts owedfull amount may be forgiven as long as loan proceeds are used to ETICO totaled $40,083. All the amounts owed are currentcover payroll costs and were paid in accordance with our standard vendor payment policies. The lossother specified non-payroll costs (provided any non-payroll costs do not exceed 40% of the ETICO relationship could have an adverse effect onforgiven amount) over a 24-week period after the Company’s business in the short term. Management believes other optionsloan is made; and employee and compensation levels are available that could be utilized inmaintained. In the event the ETICO relationship was terminated. Company is required to repay the loan, all payments are deferred for 10 months with accrued interest over this period. Amounts outstanding under the loan bear a fixed interest rate of 1.00% per annum with a maturity date of 2 years from commencement date. The Company has not yet applied for loan forgiveness. If the loan is not forgiven, future debt maturities would be $113,537 and $75,691 for the years ending December 31, 2021 and 2022, respectively.
The total rent payments made toSBA loan is being accounted for under ASC 470, “Debt”, whereby interest expense is being accrued at the majority shareholderscontractual rate and future debt maturities are based on the assumption that none of the principal balance will be forgiven. Forgiveness, if any, will be recognized as a gain on extinguishment when the lender legally releases the Company based on the criteria set forth in connection with these related transactions for the nine months ended September 30, 2017debt agreement and September 30, 2016 were $77,400 and $77,400, respectively.the CARES Act.
In April 2020, the Company executed a $25,000 non-interest bearing loan with a maturity date of April 16, 2021 with Savings Bank of Mendocino County. The Company repaid the loan in full in December 2020.
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”, “Thanksgiving”, “We”, “Our”). 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 reviewedinterim 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 I, Item 1A. Risk Factors in the 2019 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 2019 Report, this Quarterly Report on Form 10-Q 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 and second quarter of this year, the Company has triedexperienced a decrease in sales because one of its distributors had begun roasting their own beans in house. However, in the third quarter this distributor was unable to roast their own beans and returned to purchasing roasted beans from Thanksgiving. This led to an increase in direct distribution revenue for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019. 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 companyThe Company is also trying to focus on increasing ourincreasingly toward its 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 changesdecrease in cost of salesGross Profit 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
Nine monthsmonths ended September 30, 20172020 versus September 30, 20162019
Increase (Decrease) | Percent Change | |||||||
Net Sales | $ | (290,921 | ) | (9.3% | ) | |||
Cost of Sales | (194,406 | ) | (11.1% | ) | ||||
Gross Profit | (96,515 | ) | (7.0% | ) | ||||
Selling, General, and Administrative Expenses | 228,515 | 20.9 | % | |||||
Other, net | 43,559 | (152.8% | ) | |||||
Net Loss | (282,637 | ) | (119.7% | ) | ||||
| 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 | % | ||||
Net sales for the nine months endingended September 30, 20172020 were $2,625,044$2,829,633 down 1.3%9.3%, (or down by $35,691),or $290,921 when compared towith net sales of $2,660,735$3,120,554 for the same period in fiscal 2016. 2019.
Distribution revenues (e.g., revenues generated by the Company’s own truck distribution) were down by ($56,253),$96,381 or (5.25%)11% for the nine months endingended September 30, 2017,2020, when compared with distribution sales for the same period in 2016. Sales on the coast2019. 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 $26,312down $476,292 or 2.09%25% for the nine months endingended September 30, 20172020 when compared to national sales for the same period in 2016.2019. The decrease reflects the decrease in volume from a distributor who has begun roasting their own coffee. Thanksgiving is now roasting a selected variety, whereas in the past Thanksgiving was roasting all of their coffee. During the third quarter, Thanksgiving saw an increased demand from the distributor compared to the first and second quarter.
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 $281,752 or 92% for the nine months endingended September 30, 20172020 when compared to mail order sales for the same period in 2016.2019. The increase is attributable to the increase in our online marketing and social media presence.
Cost of sales for the nine months ending Juneended September 30, 20172020 was $1,501,060$1,555,330 down by 6.09%; ($97,410)11.1%, or $194,406 when compared towith the cost of sales of $1,598,470$1,749,736 for the same period in 2016. This2019. The decrease was a result of lower costs of green beans. Cost per pound of green beansreflects the decrease 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 2020.
Gross margin percentage (gross profit as a percentage of net sales) for the nine months endingended September 30, 2017,2020 was 42.82%, up almost 3%45% when compared with the gross margin of 39.9%44% for the same period in 2016. The2019, an increase of 1 percentage point. This is due to a decrease in gross margin was a result of lower green bean costs and better efficienciesDistribution (e.g., revenues generated by the Company’s own truck distribution) cost per unit sold this year compared to the prior period, specifically due to the decrease in our overall inventory.Routes-wholesale costs.
Selling, general, and administrative expenses were $1,077,586$1,324,317 for the nine months endingended September 30, 2017, a decrease2020, an increase of 3.21% ($35,745)20.9% when compared towith the selling, general, and administrative expenses of $1,113,331$1,095,802 for the same period in 2016.2019. The decreaseincrease was a result of workers’ compensation rates and auditan increase in professional 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.
As a result of the foregoing factors, the Company had a net loss of ($52,772)$46,518 for the nine months endingended September 30, 2017,2020, compared to a lossnet income of $117,717$236,119 for the same period in 2016. It should be noted that2019.
Quarter Ended September 30, 2020
To summarize the Company’s third quarter overall sales are up over the prior period. The increase was in the Statement of Operations, for the three month ending June 30, 2017, that a one-time bonus of $30K was awardednational revenue, due to one customer whose increase in sales attributed to the company employees. This bonus was awarded fromincrease, as well as Mail order revenue. It is noted the final payment from salecost of sales increased as well because of the bakeryincrease in 2012,volume of green beans roasted to fulfill orders.
Mail order revenues increased due to the increase of online marketing and social media presence. The Company completed upgrades to the website, links, and social media outlets, in January of 2020. In addition, the Company introduced a new product to the marketplace and re-introduced another product in early 2020. Overall, our expenses have decreased in advertising, freight, and the sale at the time was recorded as revenue. The bonus payment was a non-recurring event andonline mail order aspect of the Company wouldbut have otherwise experienced less of a loss.increased in other areas, such as professional fees.
DueDirect routes decreased due to the increasing costschanged method of insurance and other goods, there can be no assurances that the Company will be profitable in future periods.distribution as well as COVID-19 causing a decreased demand from distributors.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 20172020, the Company had working capital of $413,300$679,444 versus working capital of $387,199$581,966 as of December 31, 2016.2019. The increase in working capital is due primarily to the decreaseincrease in accounts payable.cash due to the increased third quarter sales, and Paycheck Protection Program borrowings.
Net cash provided by operating activities was $43,796$81,946 for the nine months endingended September 30, 2017,2020 compared to $12,033 fornet cash provided by activities of $214,725 during the nine months ending September 30, 2016.same period in 2019. The increase of $31,773 or 265% was principally the result of a decrease in inventory.operating cash was due to the net loss, partially offset by an increase in accounts payable.
Net cash used in investing activities was ($18,538)27,750) for the nine months endingended September 30, 2017,2020 compared to ($93,058)724) used in the same period in 2016. Capital additions2019. This increased use of $12,986 this year were a resultcash was due to purchases of adding two new Safeway storesproperty and another commercial grinder to our packaging facility.equipment. Investing activities comprised of purchases of property and equipment for $44,259 and receiving $16,509 from insurance recoveries.
Net cash used inprovided by financing activities for the nine months endingended September 30, 20172020 was ($6,933)$197,302 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($40,943) during the same period in 2019. The cash provided by financing activities was a result of paying existing debts.proceeds from the Paycheck Protection Program promissory note of $189,228 and a commercial loan of $25,000, partially offset by payment of equipment financings of $16,926.
As ofAt September 30, 2017,2020, the Company had total borrowings of $101,338. This compares to total borrowings of $130,297 as of December 31, 2016.$245,347.
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.
| Payments Due By Period | ||||||||||||||||||||
Contractual Obligations |
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 | ||||||||||
| Operating Leases | 9,952 | 9,626 | 326 | 0 | 0 | |||||||||||||||
| Real Estate Leases | 791,200 | 103,200 | 309,600 | 206,400 | 172,000 | |||||||||||||||
| Total Cash Obligations | $ | 902,489 | $ | 150,830 | $ | 373,259 | $ | 206,400 | $ | 172,000 | ||||||||||
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 “8- Related Party Transaction” in regards to ETICO green bean purchases for 2020 in the Notes to the condensed Financial Statements included in this 10-Q.
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 upbuildup in inventories in the first two quarters, with a corresponding decrease in inventory and increase in cash in the last quarter. In 2020, the Company has been increasing its inventory supply, resulting in increased inventory supplies on hand.
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 JuneSeptember 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, 2017.2020. 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 beenwere no changes in the Company’s Disclosure controlsour internal control over financial reporting that occurred during the second quarter of 2017to which this report related that have materially affected, or are reasonably likely to materially affect, the Company’sour internal controlscontrol over financial reporting.
Part II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-None-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. REMOVE AND RESERVEDSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-None-None
ITEM 5. OTHER INFORMATION
-None- Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6. EXHIBITSFinancial Statement Schedules
Not applicable
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, 2019. |
*** | Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2003. |
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 | |||
| /s/ Paul Katzeff | Chief Executive Officer | |||
| Paul Katzeff | ||||
| /s/ Joan Katzeff | President | |||
| Joan Katzeff | ||||
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