UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2019March 31, 2020
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: 33-96070-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. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Regulation 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ 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-2 of the Act).
Yes ☐ No ☒
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, 2019March 31, 2020 the registrant had 1,236,744 shares of common stock, no par value per share, outstanding.
Class |
| Outstanding at |
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 | 4 |
Condensed Balance Sheets as of | |||
Condensed Statements of Operations for the | |||
| Condensed | |||
Condensed Statements of Cash Flows for the | |||
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 | 19 | |
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 | 20 |
Item 3. | Defaults Upon Senior Securities | 20 |
Item 4. | Submission of Matters to a Vote of Security Holders | |
Item 5. | Other Information | 21 |
Item 6. | Exhibits | 21 |
Signatures | 22 | |
PART 1. Financial Information
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by Thanksgiving Coffee Company, Inc. (the 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, 2019March 31, 2020 and December 31, 2018,2019, and its results of operations for the three and nine month periods ended September 30,March 31, 2020 and March 31, 2019 and September 30, 2018 and its cash flows for the ninethree month periods ended September 30, 2019March 31, 2020 and September 30, 2018.March 31, 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-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 | ||||
See accompanying notes to condensed financial statements
|
|
|
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 | ||||
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
See Note 1 | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 398,530 | $ | 410,974 | ||||
Accounts receivable, net of allowance | 180,255 | 218,454 | ||||||
Inventories | 255,992 | 236,258 | ||||||
Prepaid expenses | 52,244 | 49,534 | ||||||
Total current assets | 887,021 | 915,220 | ||||||
Property and equipment, net | 262,264 | 259,490 | ||||||
Right of use leased assets | 519,403 | 543,465 | ||||||
Deposits and other assets | 1,056 | 1,056 | ||||||
Total assets | $ | 1,669,744 | $ | 1,719,231 | ||||
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed |
|
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 | ||||||||||||
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
See Note 1 | ||||||||
Liabilities and shareholders' equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 285,743 | $ | 165,743 | ||||
Accrued liabilities | 40,899 | 44,996 | ||||||
Current portion of operating lease liabilities | 97,843 | 96,566 | ||||||
Current portion of long-term debt and equipment financing | 25,949 | 25,949 | ||||||
Total current liabilities | 450,434 | 333,254 | ||||||
Long term liabilities | ||||||||
Noncurrent long-term debt and equipment financing | 13,619 | 22,096 | ||||||
Noncurrent operating lease liabilities | 421,560 | 446,899 | ||||||
Total liabilities | 885,613 | 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) | (102,285 | ) | 30,566 | |||||
Total shareholders' equity | 784,131 | 916,982 | ||||||
Total liabilities and shareholders' equity | $ | 1,669,744 | $ | 1,719,231 | ||||
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of |
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 | ) | ||||
For the Three Months | ||||||||
Ended March 31, | ||||||||
2020 | 2019 | |||||||
Income | ||||||||
Net sales | $ | 774,526 | $ | 1,092,135 | ||||
Cost of sales | 448,422 | 594,372 | ||||||
Gross profit | 326,104 | 497,763 | ||||||
Operating expenses | ||||||||
Selling, general, and administrative expenses | 474,777 | 385,914 | ||||||
Operating profit (loss) | (148,673 | ) | 111,849 | |||||
Other Income (expense) | ||||||||
Interest expense | (1,100 | ) | (1,636 | ) | ||||
Other income, net | 17,722 | 13 | ||||||
Total other income (expense), net | 16,622 | (1,623 | ) | |||||
Income (loss) before income taxes | (132,051 | ) | 110,226 | |||||
Income tax expense | (800 | ) | (800 | ) | ||||
Net Income (loss) | $ | (132,851 | ) | $ | 109,426 | |||
Earnings (loss) per share (basic and diluted) | $ | (0.107 | ) | $ | 0.088 | |||
Weighted average number of shares | 1,236,744 | 1,236,744 | ||||||
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of |
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 | ||||
For the Three Months | ||||||||
Ended March 31, | ||||||||
2020 | 2019 | |||||||
| Retained earnings (accumulated deficit), beginning of period | $ | 30,566 | $ | (238,234 | ) | |||
Net income (loss) | (132,851 | ) | 109,426 | |||||
Accumulated deficit, end of period | $ | (102,285 | ) | $ | (128,808 | ) | ||
See accompanying notes to condensed financial statements
Thanksgiving Coffee Company, Inc. |
Condensed Statements of Cash Flows |
Unaudited |
For the Three Months | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | (132,851 | ) | $ | 109,426 | |||
Adjustments to reconcile net income (loss) to cash flows from operating activities: | ||||||||
Depreciation and amortization | 22,125 | 18,262 | ||||||
Gain on disposal of property and equipment | (14,975 | ) | - | |||||
(Increase) decrease in: | ||||||||
Accounts receivable | 38,199 | (63,193 | ) | |||||
Inventories | (19,734 | ) | (23,677 | ) | ||||
Prepaid expenses | (2,710 | ) | (8,872 | ) | ||||
Deposits and other assets | - | (1,818 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable | 120,000 | 63,152 | ||||||
Accrued liabilities | (4,097 | ) | (33,839 | ) | ||||
Net cash provided by operating activities | 5,957 | 59,441 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (26,684 | ) | (723 | ) | ||||
Insurance recoveries | 16,509 | - | ||||||
Net cash used by investing activities | (10,175 | ) | (723 | ) | ||||
Financing activities | ||||||||
Repayments of long term debt | (8,226 | ) | (12,991 | ) | ||||
Increase (decrease) in cash | (12,444 | ) | 45,727 | |||||
Cash at beginning of period | 410,974 | 153,646 | ||||||
Cash at end of period | $ | 398,530 | $ | 199,373 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,100 | $ | 1,636 | ||||
Income taxes | $ | 800 | $ | 800 | ||||
NotesSee accompanying notes to Financial Statements (continued)condensed financial statements
September 30, 2019 and December 31, 2018
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. The Company has continued to follow the accounting policies disclosed in the financial statements included in its 20182019 Form 10-K filed with the Securities and Exchange Commission (SEC). The 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 management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited financial statements for the year ended December 31, 2018,2019, as filed with the SEC on Form 10-k (the “2018“2019 Report”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The results of operations for the ninethree months ended September 30, 2019March 31, 2020 are not necessarily indicative of results to be expected for the full year. The unaudited condensed balance sheet at September 30, 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.
Disclosure A/R Concentration of Risk
In the thirdfirst quarter of 2019, one customer2020, Customer A accounted for 31.55%7%, and Customer B accounted for 6% of the Company’s revenue. The account has purchased from the Company since 1992 and 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 accountthese accounts 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.
As of March 31, 2020, no customers individually accounted for more than 10% of the Company’s accounts receivable. As of March 31, 2019, one customer accounted for approximately 33% of the Company’s accounts receivable.
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, deferredDeferred 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, 2019 and December 31, 2018
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),Our leases consist of both operating and equipment financing. We categorize leases as amended, aseither operating leases or equipment financing at the commencement date 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.agreement.
In addition, The Company electedWe 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 hindsight practical expedienttime 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 determinerecord rent expense on a straight-line basis over 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.
AdoptionOur 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 new standard resultedspecific 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 operating 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 recordingsame manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of additional net lease assetsone of our leases and lease liabilities of $625,826 as of January 1, 2019.determine if a remeasurement is required.
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 ended March 31, 2020 and nine-months ended September 30, 2019 and 2018.
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 20182019.
2. |
|
Accounts receivable consist of the following:
9/30/2019 | 12/31/2018 | 3/31/2020 | 12/31/2019 | |||||||||||||
Accounts receivable | $ | 249,953 | $ | 226,104 | $ | 185,650 | $ | 223,116 | ||||||||
Less: allowance for doubtful accounts | (4,635 | ) | (7,315 | ) | (5,395 | ) | (4,662 | ) | ||||||||
Net accounts receivable | $ | 245,318 | $ | 218,789 | $ | 180,255 | $ | 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 nine months ended September 30, 2019 and 2018 was $8,795 and $(32), respectively. Bad debt expense (recovery) for the three months ended September 30,March 31, 2020 and 2019 was $733 and 2018 was $1,236 and $(348),$924, 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 consist of the following:
9/30/2019 | 12/31/2018 | 3/31/2020 | 12/31/2019 | |||||||||||||
Coffee | ||||||||||||||||
Unroasted | $ | 172,795 | $ | 161,355 | $ | 160,808 | $ | 142,095 | ||||||||
Roasted | 49,122 | 34,420 | 48,202 | 35,141 | ||||||||||||
Tea | 1,597 | 1,723 | 1,694 | 1,616 | ||||||||||||
Packaging, supplies and other merchandise held for sale | 45,663 | 40,210 | 45,288 | 57,406 | ||||||||||||
Total inventories | $ | 269,177 | $ | 237,708 | $ | 255,992 | $ | 236,258 | ||||||||
4. Properties and Equipment
Property and equipment, consist of the following:
9/30/2019 | 12/31/2018 | 3/31/2020 | 12/31/2019 | |||||||||||||
Equipment | $ | 485,413 | $ | 490,430 | $ | 497,496 | $ | 488,189 | ||||||||
Furniture and fixtures | 149,527 | 148,693 | 154,513 | 151,093 | ||||||||||||
Leasehold improvements | 368,954 | 366,698 | 368,954 | 368,954 | ||||||||||||
Transportation equipment | 50,217 | 178,497 | 46,898 | 50,217 | ||||||||||||
Pacakge design | 41,000 | 41,000 | 41,000 | 41,000 | ||||||||||||
Capitalized website development costs | 19,000 | 19,000 | 32,708 | 19,000 | ||||||||||||
Property held under finance leases | 362,280 | 225,864 | 325,437 | 362,280 | ||||||||||||
Total property and equipment | 1,476,391 | 1,470,182 | 1,467,006 | 1,480,733 | ||||||||||||
Accumulated depreciation | (1,200,928 | ) | (1,161,533 | ) | (1,204,742 | ) | (1,221,243 | ) | ||||||||
Property and equipment, net | $ | 275,463 | $ | 308,649 | $ | 262,264 | $ | 259,490 | ||||||||
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, 2019 and 2018 was $51,633 and $66,839, respectively.
Depreciation and amortization expense for the three months ended September 30,March 31, 2020 and 2019 was $22,125 and 2018 was $16,409 and $19,572$18,262 respectively.
5. FinanceOperating Leases, and Operating LeasesLong-term Debt and Equipment Financing
ASU No. 2016-02,ASC 842, “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, 2019,March 31, 2020, we had three operating and six finance leasesfive equipment financings 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. SomeNone of our leases include renewal options that are factored into our determination of lease payments when appropriate.options. 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, 2019March 31, 2020
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 | % | |||
Classification on the Balance Sheet | March 31, 2020 | ||||
Assets | |||||
Operating lease assets | Operating lease right-of-use assets | $ | 519,403 | ||
Equipment financing assets | Property and equipment, net | 85,877 | |||
Total lease assets | $ | 605,280 | |||
Liabilities | |||||
Current | |||||
Operating | Current maturities of operating leases | $ | 97,843 | ||
Equipment financing | Current portion of long-term debt and equipment financing | 25,949 | |||
Noncurrent | |||||
Operating | Noncurrent operating leases | 421,560 | |||
Equipment financing | Noncurrent long-term debt and equipment financing | 13,619 | |||
Total lease liabilities | $ | 558,971 | |||
Weighted-average remaining lease term | |||||
Operating leases | 4.00 years | ||||
Equipment financing | 1.86 years | ||||
Weighted-average discount rate | |||||
Operating leases | 2.45 | % | |||
Equipment financing | 7.30 | % | |||
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 2018
Lease Costs
The table below presents certain information related to the lease costs for financeequipment financing and long-term debt and operating leases for the ninethree months ended September 30, 2019.March 31, 2020.
Quarter Ended September 30, 2019 | Quarter Ended March 31, 2020 | |||||||
Finance lease cost: | $ | 28,704 | ||||||
Equipment financing and long-term debt cost: | $ | 9,083 | ||||||
Amortization of assets | $ | 24,229 | $ | 8,119 | ||||
Interest on lease liabilities | 4,475 | 964 | ||||||
Operating lease cost: | 81,905 | 23,811 | ||||||
Short-term lease cost | - | - | ||||||
Variable lease cost | - | - | ||||||
Total lease cost | $ | 110,609 | $ | 32,894 | ||||
Other Information
The table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2019.March 31, 2020.
Cash paid for amounts included in the measurement of lease liabilities: | Quarter Ended September 30, 2019 | Quarter Ended March 31, 2020 | ||||||
Operating cash flows for operating leases | $ | 81,905 | $ | 23,811 | ||||
Operating cash flows for finance leases | $ | 4,475 | ||||||
Operating cash flows for equipment financing and long-term debt | $ | 964 | ||||||
Financing cash flows for finance leases | $ | 24,229 | ||||||
Financing cash flows for equipment financing and long-term debt | $ | 8,226 | ||||||
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
September 30, 2019 and December 31, 2018
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance leaseequipment financing and long-term debt liabilities and operating lease liabilities recorded on the balance sheet.
Operating Leases | Finance Leases | Operating Leases | Equipment Financing and Long-term Debt | |||||||||||||
Period Ending December 31, | ||||||||||||||||
2019 | $ | 27,492 | $ | 13,024 | ||||||||||||
2020 | 109,969 | 29,529 | $ | 82,476 | $ | 15,519 | ||||||||||
2021 | 109,969 | 15,393 | 114,448 | 15,393 | ||||||||||||
2022 | 109,221 | 5,472 | 109,221 | 8,581 | ||||||||||||
2023 | 105,544 | 2,838 | 105,484 | 2,838 | ||||||||||||
2024 | 104,458 | 1,655 | 104,342 | 1,655 | ||||||||||||
Thereafter | 43,000 | - | ||||||||||||||
2025 | 43,000 | - | ||||||||||||||
Total minimum lease payments | 609,653 | 67,911 | 558,971 | 43,986 | ||||||||||||
Less: amount of lease payments representing interest | (42,089 | ) | (6,399 | ) | (39,568 | ) | (4,418 | ) | ||||||||
Present value of future minimum lease payments | 567,564 | 61,344 | 519,403 | 39,568 | ||||||||||||
Less: current obligations under leases | (96,604 | ) | (32,640 | ) | (97,843 | ) | (25,949 | ) | ||||||||
Long-term lease obligations | $ | 470,960 | $ | 28,704 | $ | 421,560 | $ | 13,619 | ||||||||
6. Disaggregated Revenue by routes, direct and mail order
Disaggregated information of revenue recognized as follows:
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
| For the Three months ended March 31 | ||||||||
Sales by department | 2020 | 2019 | ||||||
Routes-wholesale | $ | 298,255 | $ | 282,926 | ||||
Direct-wholesale | 307,871 | 702,400 | ||||||
Mailorder-retail | 168,400 | 106,809 | ||||||
Total | $ | 774,526 | $ | 1,092,135 | ||||
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 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 companyCompany ownership and other provisions of the tax laws.
8. Related Party Transactions
As of September 30, 2019,March 31, 2020, 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 the transactions. Nicholas Hoskyns, a director of the Company, is the managing director of ETICO. At September 30,March 31, 2020 and December 31, 2019, amounts owed to ETICO totaled $48,567.$37,230 and $37,333, respectively. For the first ninethree months ended September 30,March 31, 2020 and 2019, and 2018 we have paid $424,367$82,104 and $421,402,$148,105, 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 Company holdsleases 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 (see Note 5). The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The Company is a five-yearguarantor 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 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 shareholder, which is due to expire on May 1, 2025.terms of repayment have not been agreed upon as of the date of these financial statements but will be determined upon the improvement of economic conditions.
9. Insurance Recovery
In early 2020, one of our trucks, which was insured, was subject to extensive damage in a traffic accident. The truck was declared unsalvageable by the insurance company. As such, we received cash of $16,509 and recorded a gain of $14,975.
10. 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 Events11. COVID-19 Uncertainty
During the first quarter of 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 eight 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.
12. Subsequent Events
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 willmay 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 610 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 yet applied for loan forgiveness as of the issuance of these financial statements.forgiveness.
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 20182019 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 20182019 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 prior years 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. In the first quarter second quarter and third quarter of this year, the Company is experiencing an increasea decrease in sales because one of its distributors had a fire which curtailed what they could roasthas begun roasting their own beans in house. In addition, the Company continues to try a number of strategies that may or may not prove effective in abating these declines. The Company has changed its method of distribution to rely less on direct distribution (with only three routes) and instead uses independent distributors or ships direct (via UPS or other common carrier). In addition, the Company is trying to focus increasing its on-line sales with a continued emphasis on its presence in social media, growing its email list and linking its search optimization. The effects of these changes on the Company’s sales will reduce distribution expenses. Because of the limited impact of these changes, as well as the increasedecrease 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 green beans than our competitors, because of quality, the organic nature of many of the varietals we carry and the fact that we use fair-traded coffees as well. Green bean costs have remained stable but any rise will place pressure on margins. If green bean costs continue as is or rise, whether as a consequence of inclement weather in a major producing area or any other event that affects green bean pricing, and if the Company cannot offset costs by raising prices, it would have a negative impact on the Company and its margins.
Results of Operations
NineThree months ended September 30, 2019March 31, 2020 versus September 30, 2018March 31, 2019
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 | % | |||||
Increase (Decrease) | Percent Change | |||||||
Net Sales | $ | (317,609 | ) | (29.1 | %) | |||
Cost of Sales | (145,950 | ) | (24.6 | %) | ||||
Gross Profit | (171,659 | ) | (34.5 | %) | ||||
Selling, General, and Administrative Expense | 88,863 | 23.0 | % | |||||
Other Income, net | 18,245 | 1124.2 | % | |||||
Net Loss | (242,277 | ) | (221.4 | %) | ||||
Net sales for the ninethree months ended September 30, 2019March 31, 2020 were $3,120,554 up 29.3%,$774,526 a (29.1%) decrease, or $706,614$317,609 when compared with net sales of $2,413,940$1,092,135 for the same period in fiscal 2018.2019.
Distribution revenues (e.g., revenues generated by the Company’s own truck distribution) were down 86,686up 15,329 or (8.73%)5.4% for the ninethree months ended September 30, 2019,March 31, 2020, when compared with distribution sales for the same period in 2018.2019. The decline appears to beincrease is a result of slowerincreased volume for existing customers and no customers have been lost.new customers.
National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $775,756down $394,529 or 68.31%(56.2%) for the ninethree months ended September 30, 2019March 31, 2020 when compared to national sales for the same period in 2018.2019. The increasedecrease reflects the increased salesdecrease in volume from a distributor who suffered a major fire and was not able to fulfill allhas begun roasting their orders for the cafes they own.own coffee. Thanksgiving is now roasting more of their coffees and not a selected variety, aswhereas in the past. Thispast Thanksgiving was roasting all of their coffee. The distributor is a short-term fix and they will benow fully operational in 2020.operational.
Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased $39,286increased $61,591 or (11.40%)57.7% for the ninethree months ended September 30, 2019March 31, 2020 when compared to mail order sales for the same period in 2018.2019. The decreaseincrease is attributable to the increase in competition with other on line competitors.our online marketing and social media presence.
Cost of sales for the ninethree months ended September 30, 2019March 31, 2020 were $1,749,736, up 26.3%,$448,422, a (24.6%) decrease, or $364,389$145,950 when compared with the cost of sales of $1,385,347$594,372 for the same period in 2018.2019. The increasedecrease reflects the increasedecrease in sales for the overall sales in the nine months of 2019.previously mentioned distributor who is now roasting their coffee inhouse.
Gross margin percentage (gross profit as a percentage of net sales) for the ninethree months ended September 30, 2019March 31, 2020 was 43.92%42.1% percentage points when compared with the gross margin of 42.61%45.6% for the same period in 2018.2019. This was largely due to an increase in the cost per unit in first quarter of 2020 compared to first quarter of 2019.
Selling, general, and administrative expenses were $1,044,169$474,777 for the ninethree months ended September 30, 2019,March 31, 2020, an increase of 3.7%23% when compared with the selling, and general, and administrative expenses of $1,007,248$385,914 for the same period in 2018.2019. The increase was a result of an increase in freight, graphics and advertising.
Depreciation and amortization expenses for the nine months ended September 30, 2019 were $51,633, a (22.8%) decrease, or nearly ($15,206) when compared to depreciation expense of $66,839 for the same period in 2018. The decrease reflects the disposal of old equipment.professional fees.
As a result of the foregoing factors, the Company had a net loss of $132,851 for the three months ended March 31, 2020, compared to net income of $236,118 for the nine months ended September 30, 2019, compared to a loss of $40,208$109,426 for the same period in 2018.2019.
To summarize the Company’s thirdfirst quarter overall sales are updown over the prior year.period. The growthdecline was in national revenue, which required usdue to ship out the coffees and in turn increased our selling, general and administrative expenses. It was one customer whose decrease in sales attributed to the increase.decrease. It is noted the cost of sales increaseddecreased as well because of the decrease in volume of green beans roasted to fulfill orders. Customers shared part of the cost in freight but not all and that is reflected in the increase in freight cost in the selling, general, and administrative expenses of the profit and loss reports.
Direct routes and mail order revenues decreasedincreased due to the increase of competition in the market place.online marketing and social media presence. The Company is in the process of upgradingcompleted upgrades to the website, links, and increasing our social media presence, butoutlets, in turn means more expenses out -going for marketing.January of 2020. In addition, the Company is working on introducingintroduced a new product to the market placemarketplace and a re-introduction of a product.re-introduced another product in early 2020. Overall, our expenses have risendecreased in advertising, freight and the on lineonline mail order aspect of the Company but have decreasedincreased in other areas, such as insurance and depreciation.professional fees.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2019,March 31, 2020, the Company had working capital of $533,862$436,587 versus working capital of $371,667$581,966 as of December 31, 2018.2019. The increasedecrease in working capital is due primarily to profitable results experiencedthe increase in the quarter ended September 30, 2019.accounts payable as of March 31, 2020.
Net cash provided by operating activities was $214,725$5,957 for the ninethree months ended September 30, 2019March 31, 2020 compared to net cash usedprovided by activities of $22,095$59,441 during the same period in 2018.2019. The increasedecrease in cash was due to an increasea decrease in roasting for one distributor.
CashNet cash used in investing activities was ($724)10,175) for the ninethree months ended September 30, 2019March 31, 2020 compared to ($26,364)723) used in the same period in 2018. 2019. Investing activities comprised of purchases of property and equipment for $26,684 and receiving $16,509 from insurance recoveries.
Net cash used in financing activities for the ninethree months ended September 30, 2019March 31, 2020 was ($40,943)8,226) compared to net cash used in financing activities of ($16,874)12,991) during the same period in 2018.2019. The cash used by financing activities was a result of paying existing debt.debt in both periods.
At September 30, 2019,March 31, 2020, the Company had total borrowings of $61,344.$39,568.
CONTRACTUAL OBLIGATIONS
At September 30, 2019,March 31, 2020, our contractual obligations are as follows:
Payments Due By Period | Payments Due By Period (including interest) | |||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||
Finance Leases | $ | 67,911 | 13,024 | 50,394 | 4,493 | $ | - | |||||||||||||||||||||||||||||||||
Equipment Financings | $43,986 | 15,519 | 26,812 | 1,655 | $- | |||||||||||||||||||||||||||||||||||
Operating Leases | 24,853 | 1,692 | 19,559 | 3,602 | - | 25,771 | 5,076 | 19,553 | 1,142 | - | ||||||||||||||||||||||||||||||
Real Estate Leases | 584,800 | 25,800 | 309,600 | 206,400 | 43,000 | 533,200 | 77,400 | 309,600 | 146,200 | - | ||||||||||||||||||||||||||||||
Total Cash Obligations | $ | 677,564 | $ | 40,516 | $ | 379,553 | $ | 214,495 | $ | 43,000 | $602,957 | $97,995 | $355,965 | $148,997 | $- | |||||||||||||||||||||||||
The Company is dependent on successfully executing its business plan to achieve profitable operations, obtaining 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 were 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 “11“8 — Related Party Transactions” in the Notes to the Financial Statements included in the Company’s 10-K, as filed with the SEC. In addition, see note “7-“8- Related Party Transaction” in regards to ETICO green bean purchases for 2019.2020.
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 20192020, the Company has been keeping a tighter control onincreasing its inventory supply, resulting in fewerincreased 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:
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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 and with the participation of the Company’s management, including the Chief Executive Officer and President, of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019.March 31, 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 were no changes in our internal control over financial reporting that occurred during the quarter to which this report related that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-None-None
ITEM 1A. RISK Factors
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 –
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- None –
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- None -
ITEM 5. OTHER INFORMATION
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, |
*** | Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2003. |
| **** | Incorporated by reference to the exhibits to the Company's Form 10-Q for the quarter ended September 30, 2019. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this Quarterly Report to be signed on it’s behalf by the undersigned, thereunto duly authorized.
THANKSGIVING COFFEE COMPANY, INC.
| Name | Title | Date |
| /s/ Paul Katzeff | Chief Executive Officer | |
| Paul Katzeff | ||
| /s/ Joan Katzeff | President | |
| Joan Katzeff |