UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 2-5916
Chase General Corporation
(Exact name of small business issuer as specified in its charter)
| MISSOURI | 36-2667734 |
| (State or other jurisdiction of | (IRS Employer Identification No.) |
| incorporation or organization) | |
1307 South 59th, St. Joseph, Missouri 64507
(Address of principal executive offices, Zip Code)
(816) 279-1625
(Issuer’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
| None | Not Applicable | Not Applicable |
Indicate by check mark if the registrant is a well-known issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 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 x No ¨
Indicate by check mark whether the registrant (1) has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| | |
| Nonaccelerated filer x | Smaller reporting company x |
| | |
| Emerging Growth Company ¨ | |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. Yes ¨ No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨ No x
As of November 13, 2020, there were 969,834 shares of common stock, $1.00 par value, outstanding.
Chase General Corporation and Subsidiary
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30, | | | June 30, | |
| | | 2020 | | | 2020 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | | | |
| | | | | | | | | |
| CURRENT ASSETS | | | | | | | | |
| Cash and Cash Equivalents | | $ | - | | | $ | 53,390 | |
| Trade Receivables, Net of Allowance for Doubtful Accounts of $13,749 and $13,171, Respectively | | | 649,530 | | | | 144,239 | |
| Inventories: | | | | | | | | |
| Finished Goods | | | 160,561 | | | | 85,632 | |
| Goods in Process | | | 11,335 | | | | 6,261 | |
| Raw Materials | | | 96,976 | | | | 65,555 | |
| Packaging Materials | | | 162,510 | | | | 156,038 | |
| Prepaid Expenses | | | 35,385 | | | | 7,653 | |
| Total Current Assets | | | 1,116,297 | | | | 518,768 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT | | | | | | | | |
| Land | | | 35,000 | | | | 35,000 | |
| Buildings | | | 77,348 | | | | 77,348 | |
| Machinery and Equipment | | | 851,791 | | | | 851,791 | |
| Trucks and Autos | | | 158,632 | | | | 158,632 | |
| Office Equipment | | | 33,025 | | | | 33,025 | |
| Leasehold Improvements | | | 72,068 | | | | 72,068 | |
| Total | | | 1,227,864 | | | | 1,227,864 | |
| Less: Accumulated Depreciation | | | 1,081,619 | | | | 1,071,370 | |
| Total Property and Equipment, Net | | | 146,245 | | | | 156,494 | |
| | | | | | | | | |
| Other Long-Term Assets: | | | | | | | | |
| Right of Use Assets | | | 304,080 | | | | 318,537 | |
| Total Long-Term Assets | | | 450,325 | | | | 475,031 | |
| | | | | | | | | |
| Total Assets | | $ | 1,566,622 | | | $ | 993,799 | |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
| | | September 30, | | | June 30, | |
| | | 2020 | | | 2020 | |
| | | (Unaudited) | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Outstanding Checks in Excess of Bank Balance | | $ | 43,921 | | | $ | - | |
| Accounts Payable | | | 233,831 | | | | 47,905 | |
| Current Maturities of Notes Payable | | | 298,515 | | | | 88,318 | |
| Current Maturities of Lease Liability | | | 60,201 | | | | 59,244 | |
| Accrued Expenses | | | 54,387 | | | | 22,207 | |
| Refund Liability Owed to Customers | | | 23,042 | | | | 10,176 | |
| Deferred Income | | | 1,299 | | | | 1,299 | |
| Total Current Liabilities | | | 715,196 | | | | 229,149 | |
| | | | | | | | | |
| LONG-TERM LIABILITIES | | | | | | | | |
| Notes Payable, Less Current Maturities | | | 100,243 | | | | 103,591 | |
| Lease Liabilities, Less Current Maturities | | | 243,879 | | | | 259,293 | |
| Deferred Income | | | 4,544 | | | | 4,869 | |
| Total Long-Term Liabilities | | | 348,666 | | | | 367,753 | |
| | | | | | | | | |
| Total Liabilities | | | 1,063,862 | | | | 596,902 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (NOTE 8) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
| Capital Stock Issued and Outstanding: | | | | | | | | |
| Prior Cumulative Preferred Stock, $5 Par Value: | | | | | | | | |
| Series A (Liquidation Preference $2,377,500 and $2,370,000, Respectively) | | | 500,000 | | | | 500,000 | |
| Series B (Liquidation Preference $2,332,500 and $2,325,000, Respectively) | | | 500,000 | | | | 500,000 | |
| Cumulative Preferred Stock, $20 Par Value: | | | | | | | | |
| Series A (Liquidation Preference $5,326,496 and $5,311,862, Respectively) | | | 1,170,660 | | | | 1,170,660 | |
| Series B (Liquidation Preference $868,057 and $865,672, Respectively) | | | 190,780 | | | | 190,780 | |
| Common Stock, $1 Par Value | | | 969,834 | | | | 969,834 | |
| Paid-In Capital in Excess of Par | | | 3,134,722 | | | | 3,134,722 | |
| Accumulated Deficit | | | (5,963,236 | ) | | | (6,069,099 | ) |
| Total Stockholders' Equity | | | 502,760 | | | | 396,897 | |
| | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 1,566,622 | | | $ | 993,799 | |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended | |
| | | September 30 | |
| | | 2020 | | | 2019 | |
| SALES | | $ | 865,247 | | | $ | 714,081 | |
| | | | | | | | | |
| COST OF SALES | | | 502,836 | | | | 488,630 | |
| Gross Profit on Sales | | | 362,411 | | | | 225,451 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Selling | | | 79,708 | | | | 77,955 | |
| General and Administrative | | | 180,042 | | | | 144,389 | |
| Total Operating Expenses | | | 259,750 | | | | 222,344 | |
| | | | | | | | | |
| Income from Operations | | | 102,661 | | | | 3,107 | |
| | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | |
| Miscellaneous Income | | | 4,400 | | | | 2,873 | |
| Interest Expense | | | (1,198 | ) | | | (1,682 | ) |
| Total Other Income (Expense) | | | 3,202 | | | | 1,191 | |
| | | | | | | | | |
| Income before Income Taxes | | | 105,863 | | | | 4,298 | |
| | | | | | | | | |
| INCOME TAX BENEFIT | | | - | | | | - | |
| | | | | | | | | |
| NET INCOME | | $ | 105,863 | | | $ | 4,298 | |
| | | | | | | | | |
| EARNINGS (LOSS) PER SHARE | | | | | | | | |
| Basic | | $ | 0.08 | | | $ | (0.03 | ) |
| | | | | | | | | |
| Diluted | | $ | 0.08 | | | $ | (0.03 | ) |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Three Months Ended | |
| | | September 30 | |
| | | | 2020 | | | | 2019 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| Net Income | | $ | 105,863 | | | $ | 4,298 | |
| Adjustments to Reconcile Net Income to Net Cash | | | | | | | | |
| Provided by Operating Activities: | | | | | | | | |
| Depreciation and Amortization | | | 10,249 | | | | 13,651 | |
| Allowance for Bad Debts | | | 300 | | | | 300 | |
| Deferred Income Amortization | | | (325 | ) | | | (325 | ) |
| Effects of Changes in Operating Assets and Liabilities: | | | | | | | | |
| Trade Receivables | | | (505,591 | ) | | | (309,962 | ) |
| Inventories | | | (117,896 | ) | | | (85,398 | ) |
| Prepaid Expenses | | | (27,732 | ) | | | (30,249 | ) |
| Accounts Payable | | | 185,926 | | | | 187,441 | |
| Refund Liability Owed to Customers | | | 12,866 | | | | 16,088 | |
| Accrued Expenses | | | 32,180 | | | | 10,506 | |
| Net Cash Used by Operating Activities | | | (304,160 | ) | | | (193,650 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Outstanding Checks in Excess of Bank Balance | | | 43,921 | | | | - | |
| Proceeds from Line-of-Credit | | | 210,000 | | | | 202,000 | |
| Principal Payments on Notes Payable | | | (3,151 | ) | | | (2,965 | ) |
| Net Cash Provided by Financing Activities | | | 250,770 | | | | 199,035 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (53,390 | ) | | | 5,385 | |
| | | | | | | | | |
| Cash and Cash Equivalents - Beginning of Period | | | 53,390 | | | | 18,800 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS - END OF PERIOD | | $ | - | | | $ | 24,185 | |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES |
General
The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as Chase, we, our, and us) at June 30, 2020 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three months ended September 30, 2020 and for the three months ended September 30, 2019 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended June 30, 2020. The results of operations for the three months ended September 30, 2020 and cash flows for the three months ended September 30, 2020 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2021. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations, and cash flows for the periods have been included.
Revenue Recognition
The majority of our revenue is derived by fulfilling customer orders for the purchase of our products, including 1) a candy bar marketed under the trade name “Cherry Mash” and 2) coconut, peanut, chocolate, and fudge confectioneries. The Company recognizes revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon shipment to the customer. Shipping and handling costs incurred to ship product to the customer are recorded within cost of sales. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis. Generally, individual orders from customers are accounted for as a single performance obligation.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Revenue Recognition (Continued)
Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilling product orders. Sales, value added, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The amount of consideration the Company expects to receive and revenue the Company recognizes includes estimates of variable consideration, including costs for trade promotional programs, customer incentives, and allowances and discounts associated with aged or potentially unsaleable products. These estimates are based upon our analysis of the programs offered, historical trends, and expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past. The Company reviews and updates these estimates regularly and the impact of any adjustments are recognized in the period the adjustments are identified. The adjustments recognized in the first quarter of the year ending June 30, 2021 resulting from updated estimates of revenue for prior year product sales were not significant. The company has elected a practical expedient to recognize incremental costs incurred to obtain contracts, which primarily represent sales commissions where the amortization period would be less than one year, as a selling expense when incurred in the financial statements.
The majority of the Company’s products are confectionery and confectionery-based and, therefore, exhibit similar economic characteristics, such that they are based on similar ingredients and are marketed and sold through the same channels to the same customers. The Company operates two divisions, Chase Candy Products and Seasonal Candy Products. Chase Candy Products involve production and sale of a candy bar marketed under the trade name “Cherry Mash”. The Seasonal Candy Products involve production and sale of coconut, peanut, chocolate, and fudge confectioneries. Both divisions share a common labor force and utilize the same basic equipment and raw materials. Management considers these two divisions as one reportable segment. The various divisions of revenue are as follows:
For the three months ended September 30,
| | | 2020 | | | 2019 | |
| Sales - Chase Candy | | $ | 380,205 | | | $ | 355,825 | |
| Sales - Seasonal Candy | | | 485,042 | | | | 358,256 | |
| Sales | | $ | 865,247 | | | $ | 714,081 | |
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 1 | SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recently Issued Pronouncements
There have been no newly issued or newly applicable accounting pronouncements that have, or are expected to have, a significant impact on the Company’s consolidated financial statements.
| NOTE 2 | EARNINGS (LOSS) PER SHARE |
The loss per share was computed on the weighted average of outstanding common shares during the period. Diluted earnings per share are calculated by including contingently issuable shares with the weighted average shares outstanding.
| | | Three Months Ended | |
| | | September 30 | |
| | | 2020 | | | 2019 | |
| Net Income | | $ | 105,863 | | | $ | 4,298 | |
| | | | | | | | | |
| Preferred Dividend Requirements: | | | | | | | | |
| 6% Prior Cumulative Preferred, $5 Par Value | | | 15,000 | | | | 15,000 | |
| 5% Convertible Cumulative Preferred, $20 Par Value | | | 17,018 | | | | 17,018 | |
| Total Dividend Requirements | | | 32,018 | | | | 32,018 | |
| | | | | | | | | |
| Net Income (Loss) - Common Stockholders | | $ | 73,845 | | | $ | (27,720 | ) |
| | | | | | | | | |
| Weighted Average Shares - Basic | | | 969,834 | | | | 969,834 | |
| Dilutive Effect of Contingently Issuable Shares | | | 1,033,334 | | | | 1,033,334 | |
| Weighted Average Shares – Diluted | | | 2,003,168 | | | | 2,003,168 | |
| | | | | | | | | |
| Basic Earnings (Loss) per Share | | $ | 0.08 | | | $ | (0.03 | ) |
| | | | | | | | | |
| Diluted Earnings (Loss) per Share | | $ | 0.08 | | | $ | (0.03 | ) |
The contingently issuable shares, for the three months ended September 30, 2020 and 2019, were not included in diluted earnings per common share as they would have an antidilutive effect upon earnings per share.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| note 2 | Earnings (LOSS) PER SHARE (continued) |
Cumulative Preferred Stock dividends in arrears at September 30, 2020 and 2019 totaled $8,493,112 and $8,365,040, respectively. Total dividends in arrears, on a per share basis, consist of the following:
| | | Three Months Ended | |
| | | September 30 | |
| | | 2020 | | | 2019 | |
| 6% Convertible: | | | | | | | | |
| Series A | | $ | 19 | | | $ | 18 | |
| Series B | | | 18 | | | | 18 | |
| 5% Convertible: | | | | | | | | |
| Series A | | $ | 71 | | | $ | 70 | |
| Series B | | | 71 | | | | 70 | |
The 6% convertible prior cumulative preferred stock may, upon thirty days prior notice, be redeemed by the Corporation at $5.25 a share plus unpaid accrued dividends to date of redemption. In the event of voluntary liquidation, holders of this stock are entitled to receive $5.25 per share plus accrued dividends. It may be exchanged for common stock at the option of the shareholders in the ratio of 4 common shares for one share of Series A and 3.75 common shares for one share of Series B.
The Company has the privilege of redemption of 5% convertible cumulative preferred stock at $21.00 a share plus unpaid accrued dividends. In the event of voluntary or involuntary liquidation, holders of this stock are entitled to receive $20.00 a share plus unpaid accrued dividends. It may be exchanged for common stock at the option of the shareholders, in the ratio of 3.795 common shares for one of preferred.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 3 | NOTES PAYABLE and line of credit |
The Company’s long-term debt consists of:
| | | | | September 30, | | | June 30, | |
| Payee | | Terms | | 2020 | | | 2020 | |
| Nodaway Valley Bank | | $350,000 line-of-credit agreement expiring on January 4, 2021, with a variable interest rate at prime but not less than 5%. The line-of-credit is collateralized by substantially all assets of the Company. Management anticipates renewal of the line-of-credit agreement at similar terms upon expiration. | | $ | 210,000 | | | $ | - | |
| | | | | | | | | | | |
| Ford Credit | | $705 monthly payments, interest of 5.8%; final payment due October 2021, secured by a vehicle. | | | 8,858 | | | | 10,824 | |
| | | | | | | | | | | |
| Toyota Credit | | $444 monthly payments, interest of 6.49%; final payment due May 2022, secured by a vehicle. | | | 8,400 | | | | 9,585 | |
| | | | | | | | | | | |
| Nodaway Valley Bank | | Small Business Administration Paycheck Protection Program (PPP) Promissory Note, interest of 1%, beginning November 10, 2020 monthly payments of $9,652 including interest are due; final payment due April 10, 2022, under the terms of the PPP program, this loan has the potential to be partially or fully forgiven after certain conditions and requirements are satisfied. | | | 171,500 | | | | 171,500 | |
| | | | | | | | | | | |
| | | Total | | | 398,758 | | | | 191,909 | |
| | | Less Current Portion | | | 298,515 | | | | 88,318 | |
| | | Long-Term Portion | | $ | 100,243 | | | $ | 103,591 | |
Future minimum payments for the twelve months ending September 30 are:
| September 30, | | Amount | |
| 2021 | | $ | 298,515 | |
| 2022 | | | 100,243 | |
| Total | | $ | 398,758 | |
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company follows the provisions for uncertain tax positions as addressed in Financial Accounting Standards Board Accounting Standards Codification 740-10. The Company recorded no income tax provision for the three months ended September 30, 2020 due to the net operating loss carryforward as of June 30, 2020 that is available to offset taxable income in the current period. A valuation allowance has been placed on the remaining net operating loss carryforward. The Company recognized no liability for unrecognized tax benefits at September 30, 2020. The Company has no material tax positions at September 30, 2020, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The Company had no accruals for interest or penalties at September 30, 2020. The Company’s federal income tax returns for the fiscal years ended 2018, 2019, and 2020 are subject to examination by the Internal Revenue Service taxing authority.
| NOTE 5 | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| | | Three Months Ended | |
| | | September 30 | |
| | | 2020 | | | 2019 | |
| Cash Paid for: | | | | | | | | |
| Interest | | $ | 1,198 | | | $ | 1,682 | |
| NOTE 6 | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS |
The Company’s financial instruments consist principally of cash and cash equivalents, trade receivables and payables, and notes payable. There are no significant differences between the carrying value and fair value of any of these consolidated financial instruments. As of September 30, 2020, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 7 | COMMITMENT, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS |
The Company leases its office and manufacturing facility, located at 1307 South 59th, St. Joseph, Missouri under an operating lease from an entity that is partially owned by the son of the Chief Executive Officer of the Company. The lease term is from February 1, 2005 through March 31, 2025 with an option to extend for an additional term of five years. The Company does not believe that exercise of the renewal option is reasonably assured, and has not included the additional five years in the lease term. The lease currently requires payments of $6,500 per month.
Operating lease right-of-use assets and lease liabilities were recognized upon adoption of the lease standard based on the present value of minimum lease payments over the remaining lease term. The Company’s operating lease has a remaining term of 5.5 years and the present value of the lease payments is calculated using the lessor’s implicit rate of 6.43%. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company’s lease agreement does not contain any residual value guarantees. Additionally, any other short-term leases are immaterial. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize right-of-use assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term. Operating lease expenses and cash paid for operating lease liabilities were $19,500 for the three months ended September 30, 2020, of which, $17,891 is included in cost of sales and $1,609 is included in general and administrative expenses.
Minimum annual payments required under existing operating lease liabilities that have initial or remaining noncancelable terms in excess of one year as of September 30, 2020 are as follows:
| Twelve Months Ending September 30, | | Amount | |
| 2021 | | $ | 78,000 | |
| 2022 | | | 78,000 | |
| 2023 | | | 78,000 | |
| 2024 | | | 78,000 | |
| 2025 | | | 39,000 | |
| Total Lease Payments | | | 351,000 | |
| Less: Imputed Interest | | | 46,920 | |
| Total Lease Liabilities | | $ | 304,080 | |
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The COVID-19 pandemic is having significant effects on global markets, supply chains, businesses, and communities. The Company put preparedness plans in place at the manufacturing facility. They have adjusted the number of people allowed at their facilities, enforced social distancing, maintained proper sanitation protocol and have asked that any high risk or employees feeling ill to not come in. The office and sales staff continues to work, while adhering to social distancing guidelines, implementing flexible hours, reducing person-to-person interaction and increasing safety measures.
The Company believes they have sufficient liquidity to satisfy current cash needs, however, they continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that the business can continue to operate during these uncertain times.
The potential impact to the Company’s consolidated financial statements could occur as early as the second quarter of fiscal year ending June 30, 2021 and include, but not limited to: impairment of long lived assets; including property and equipment and operating lease right-of-use assets related to the Company’s fair value and collectability of receivables and other financial assets.
No other events have occurred subsequent to September 30, 2020, through the date of filing this form, that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the three month period ended September 30, 2020.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Chase General Corporation (Chase) is a holding company for its wholly-owned subsidiary, Dye Candy Company. This subsidiary is the main operating company that is engaged in the manufacture of confectionery products which are sold primarily to wholesale houses, grocery accounts, vendors, and repackers. The subsidiary (Company) operates two divisions, Chase Candy division and Seasonal Candy division, which share a common labor force and utilize the same basic equipment and raw materials. Therefore, segment reporting for the two divisions is not maintained by Management.
The Company’s business, like that of many other confectionary product manufacturers, is seasonal. Historically, the Company has realized more of its revenue and earnings in the fiscal second quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.
RESULTS OF OPERATIONS - Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.
The following table sets forth certain items as a percentage of sales and revenues for the periods presented:
| | | Three Months Ended | |
| | | September 30, | |
| | | 2020 | | | 2019 | |
| Sales | | | 100 | % | | | 100 | % |
| Cost of Sales | | | 58 | | | | 68 | |
| Gross Profit on Sales | | | 42 | | | | 32 | |
| Operating Expenses | | | 30 | | | | 31 | |
| Income from Operations | | | 12 | | | | 1 | |
| Other Income (Expense), Net | | | - | | | | - | |
| Net Income before Income Taxes | | | 12 | | | | 1 | |
| Income Tax Expense (Benefit) | | | - | | | | - | |
| Net Income | | | 12 | % | | | 1 | % |
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
SALES
Sales increased $151,166 or 21% for the three months ended September 30, 2020 to $865,247 compared to $714,081 for the three months ended September 30, 2019. Sales for Chase Candy increased $24,380 to $380,205 for the three months ended September 30, 2020, compared to $355,825 for the three months ended September 30, 2019. Sales for Seasonal Candy increased $126,786 to $485,042 for the three months ended September 30, 2020, compared to $358,256 for the three months ended September 30, 2019.
The 7% increase in sales of Chase Candy of $24,380 for the three months ended September 30, 2020 over the same period ended September 30, 2019, is primarily due to the net effect of the following: 1) increased sales of the L212/L278 Mini Mash division by approximately $7,700 versus the same period a year ago, primarily due to increased orders from existing customers, 2) various other fluctuations netting to a increase of approximately $4,800, 3) increased website sales by approximately $3,400 primarily due to existing customers increasing orders; 4) increased sales of the L276 Cherry Mash Distributor Pack by approximately $41,800 versus the same period a year ago, primarily due to existing customers increasing orders, offset by 5) decreased sales of the L100/L200/SK2100 Merchandisers division by approximately $33,600 versus the same period a year ago, primarily due to customers decreasing orders.
The 35% increase in sales of Seasonal Candy of $126,786 for the three months ended September 30, 2020 over the same period ended September 30, 2019, is primarily due to the effect of the following: 1) increased sales in the bulk seasonal division by approximately $38,100 versus the same period a year ago, primarily due to increased sales to existing customers along with a price increase of 5% effective this quarter ended, 2) increased sales in the clamshell division by approximately $57,400 versus the same period a year ago, primarily due to increased sales to existing customers along with a price increase of 6.6% effective this quarter ended, 3) increased sales in the generic segment of approximately $31,200 primarily due to increased sales to existing customers.
COST OF SALES
The cost of sales increased $14,206 to $502,836 or 58% of related revenues for the three months ended September 30, 2020, compared to $488,630 or 68% of related revenues for the three months ended September 30, 2019.
The 3% increase in cost of sales of $14,206 is primarily due to the impact of 1) a 21% increase in sales of $151,166, a portion of which is related to price increases noted above that did not have a direct impact on cost of sales, 2) a 56% increase in the price of peanuts during the period, 3) an 8% increase in the price of sugar during the period.
SELLING EXPENSES
Selling expenses for the three months ended September 30, 2020 increased $1,753 to $79,708, which is 9% of sales, compared to $77,955, or 11% of sales for the three months ended September 30, 2019.
The increase of $1,753 in selling expenses for the three months ended September 30, 2020 is primarily due to higher commissions with decreases in depreciation expense and customer shows. Commissions increased $7,428 to approximately $40,800 for this period from approximately $33,400 for the three months ended September 30, 2020, primarily due to an increase in sales. Depreciation expense decreased approximately $3,100 for this period. Customer show expense decreased $2,500 for this period from $2,600 for the three months ended September 30, 2020, primarily due to effects of COVID 19 and not going on site for customer shows.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September 30, 2020 increased $35,653 to $180,042 and 21% of sales, compared to $144,389 or 20% of sales for the three months ended September 30, 2019.
The increase of $35,653 in general and administrative expenses for the three months ended September 30, 2020 is primarily due to higher professional fees and insurance expense offset by minimal decreases in office related expenses. Professional fees increased approximately $31,400 to $100,384 for this period from $69,019 for the three months ended September 30, 2019 primarily due increased audit and consulting fees. Insurance expense increased approximately $5,900 to $35,136 for the period from $29,195 for the three months ended September 30, 2019 due to the increase in insurance premiums. A decrease in office related expenses of approximately $2,900 for this period offset the increases discussed above.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $2,011 for the three months ended September 30, 2020 to $3,202, compared to $1,191 for the three months ended September 30, 2019. A portion of the change can be attributed to a decrease in interest expense for the period.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded no income tax provision for the three months ended September 30, 2020 due to the net operating loss carryforward as of June 30, 2020 that is available to offset taxable income in the current period with a corresponding valuation allowance placed on the remaining net operating loss carryforward.
NET INCOME
The Company reported a net income for the three months ended September 30, 2020 of $105,863, compared to a net income of $4,298 for the three months ended September 30, 2019. This increase of $101,565 is explained above.
PREFERRED DIVIDENDS
Preferred dividends were $32,018 for the three months ended September 30, 2020 and September 30, 2019, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
Net income applicable to common stockholders for the three months ended September 30, 2020 was $73,845 which is an increase of $101,565 as compared to the net loss applicable to common stockholders for the three months ended September 30, 2019 of ($27,720).
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the summary of cash flow for the fiscal period indicated.
| | | Three Months Ended | |
| | | September 30, | |
| | | 2020 | | | 2019 | |
| Net Cash Used by Operating Activities | | $ | (304,160 | ) | | $ | (193,650 | ) |
| Net Cash Provided by Financing Activities | | $ | 250,770 | | | $ | 199,035 | |
Management has made no material commitments for capital expenditures during the remainder of fiscal 2021. The $304,160 of cash used in operating activities for the three months ended September 30, 2020 is fully detailed in the condensed consolidated statement of cash flows on page four. The $250,770 of cash provided by financing activities for the three months ended September 30, 2020 are primarily due to the receipt of $210,000 drawn from a line-of-credit, an increase in outstanding checks in excess of bank balance of $43,921, net of $3,151 of principal payments on equipment and vehicle loans. The proceeds from the line-of-credit during the period ended September 30, 2020 were used to finance the buildup of inventories which is reflected in the cash used in operating activities. At September 30, 2020, the Company had $140,000 remaining on the line-of-credit, which could be utilized to help fund any working capital requirements.
The COVID-19 pandemic is having significant effects on global markets, supply chains, businesses, and communities. Specific to the Company, COVID-19 may impact various parts of its fiscal year ending June 30, 2021 operations and financial results, including the production and sales of goods. Management believes the Company is taking appropriate actions to mitigate the negative impact. However, the full impact of COVID-19 is unknown and cannot be reasonably estimated as these events are still developing.
Management believes that the projected cash flow from operations, including the impact of the COVID-19 pandemic, combined with its availability on the line-of-credit, will be sufficient to meet its funding requirements for the foreseeable future.
Management believes that inflation will have only a minimal effect on future operations since such effects will be offset by sales price increases, which are not expected to have a significant effect upon demand.
Chase General Corporation and Subsidiary
pART i. FINANCIAL INFORMATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CRITICAL ACCOUNTING POLICIES
Forward-Looking Information
This report, as well as our other reports filed with the Securities and Exchange Commission (SEC), contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict,” and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, and management’s plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks, and uncertainties that could cause actual results to be different from what appear here. These risk factors include: the ability to adequately pass through customers unanticipated future increases in raw material costs, decreased demand for products, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.
Chase General Corporation and Subsidiary
PART I. FINANCIAL INFORMATION
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET rISK |
Not applicable to a smaller reporting company.
| ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and management has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the board of directors, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There were no significant changes in Chase’s internal control over financial reporting or in other factors that management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of evaluation.
Chase General Corporation and Subsidiary
PART II. OTHER INFORMATION
None.
Not applicable to a smaller reporting company.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
| b. | The total cumulative preferred stock dividends contingency at September 30, 2020 is $8,493,112 |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
| | Exhibit 31.1 | Certification of Chief Executive Officer and Treasurer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
| | | |
| | Exhibit 32.1 | Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Exhibit 101 | The following financial statements for the quarter ended September 30, 2020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020, (ii) Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2020 and 2019, (iii) Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Chase General Corporation and Subsidiary |
| | (Registrant) |
| | |
| | |
| November 13, 2020 | /s/ Barry M. Yantis |
| Date | Barry M. Yantis |
| | Chairman of the Board, Chief Executive Officer and |
| | Chief Financial Officer, President, and Treasurer |
