UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission File Number: 33-960-70LA
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to 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 ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated 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. (Check one):
| Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ | Smaller Reporting Company x | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ¨ No x
On May 14, 2009 the registrant had 1,236,744 shares of Class A common stock, no par value per share, and shares of Class B common stock, par value per share, outstanding.
FORM 10-Q
2
Financial Statements
and Notes to Financial Statements
Thanksgiving Coffee Company, Inc.
For the Three Months Ended March 31, 2009 and 2008
| Item 1. | Financial Statements |
The consolidated financial statements included herein have been prepared by Thanksgiving Coffee Company, Inc. (the Company) 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 March 31, 2009 and December 31, 2008, and its results of operations for the three month periods ended March 31, 2009 and 2008 and its cash flows for the three month periods ended March 31, 2009 and 2008. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying 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.
3
Thanksgiving Coffee Company, Inc.
Balance Sheets
| March 31, 2009 (Unaudited) | December 31, 2008 See Note 1 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 93,163 | $ | 52,144 | ||||
Accounts receivable, net of allowance | 204,688 | 229,356 | ||||||
Inventories | 317,944 | 339,323 | ||||||
Prepaid expenses | 15,110 | 23,218 | ||||||
Total current assets | 630,905 | 644,041 | ||||||
Property and equipment | ||||||||
Property and equipment | 2,576,522 | 2,585,836 | ||||||
Accumulated depreciation | (2,232,522 | ) | (2,220,023 | ) | ||||
Total property and equipment | 344,000 | 365,813 | ||||||
Other assets | ||||||||
Deposits and other assets | 10,197 | 13,250 | ||||||
Other intangibles, net of amortization | 9,123 | 10,329 | ||||||
Total other assets | 19,320 | 23,579 | ||||||
Total assets | $ | 994,225 | $ | 1,033,433 | ||||
See accompanying notes to financial statements
4
Balance Sheets
| March 31, 2009 (Unaudited) | December 31, 2008 See Note 1 | |||||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 311,452 | $ | 331,287 | ||||
Notes payable - bank | 251,895 | 261,148 | ||||||
Notes payable - other | 7,307 | 9,172 | ||||||
Note payable - shareholders | 39,919 | 43,019 | ||||||
Capital lease obligations | 36,348 | 42,149 | ||||||
Accrued liabilities | 85,995 | 36,303 | ||||||
Total current liabilities | 732,916 | 723,078 | ||||||
Long term debt | ||||||||
Notes payable - other | 3,081 | 3,936 | ||||||
Notes payable - Shareholders | 9,100 | 12,000 | ||||||
Capital lease obligations | 29,396 | 38,886 | ||||||
Total long term debt | 41,577 | 54,822 | ||||||
Total liabilities | 774,493 | 777,900 | ||||||
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 | (666,684 | ) | (630,883 | ) | ||||
Total shareholders’ equity | 219,732 | 255,533 | ||||||
Total liabilities and shareholders’ equity | $ | 994,225 | $ | 1,033,433 | ||||
See accompanying notes to financial statements
5
Unaudited
| For the Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Income | ||||||||
Net sales | $ | 1,079,650 | $ | 1,045,072 | ||||
Cost of sales | 650,025 | 629,920 | ||||||
Gross profit | 429,625 | 415,152 | ||||||
Operating expenses | ||||||||
Selling, general and administrative expenses | 427,356 | 449,112 | ||||||
Depreciation and amortization | 25,582 | 25,846 | ||||||
Total operating expenses | 452,938 | 474,958 | ||||||
Operating loss | (23,313 | ) | (59,806 | ) | ||||
Other income (expense) | ||||||||
Miscellaneous income (expense) | (2,334 | ) | (2,410 | ) | ||||
Gain (loss) on sale of equipment | — | — | ||||||
Interest expense | (9,354 | ) | (10,296 | ) | ||||
Total other income (expense) | (11,688 | ) | (12,706 | ) | ||||
Loss before income taxes | (35,001 | ) | (72,512 | ) | ||||
Income tax expense | (800 | ) | (800 | ) | ||||
Net loss | $ | (35,801 | ) | $ | (73,312 | ) | ||
Loss per share (basic) | $ | (0.029 | ) | $ | (0.059 | ) | ||
Loss per share (dilutive) | $ | (0.029 | ) | $ | (0.059 | ) | ||
Weighted average number of shares | 1,236,744 | 1,236,744 | ||||||
See accompanying notes to financial statements
6
Thanksgiving Coffee Company, Inc.
Statements of Cash Flows
Unaudited
| For the Three Months Ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Operating activities | ||||||||
Net loss | $ | (35,801 | ) | $ | (73,312 | ) | ||
Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
Depreciation and amortization | 28,104 | 28,490 | ||||||
Allowance for bad debts | (192 | ) | 1,352 | |||||
(Increase) decrease in: | ||||||||
Accounts receivable | 24,858 | 14,524 | ||||||
Inventories | 21,379 | 17,240 | ||||||
Prepaid expenses | 8,109 | 12,838 | ||||||
Deposits and other assets | 3,053 | (236 | ) | |||||
Increase (decrease) in: | ||||||||
Accounts payable | (19,835 | ) | 7,371 | |||||
Accrued liabilities | 49,693 | (18,216 | ) | |||||
Net cash provided by (used in) operating activities | 79,368 | (9,949 | ) | |||||
Investing activities | ||||||||
Purchases of property and equipment | (5,085 | ) | (25,037 | ) | ||||
Proceeds from sale of equipment/disposal | — | — | ||||||
Net cash (used in) investing activities | (5,085 | ) | (25,037 | ) | ||||
Financing activities | ||||||||
Proceeds from notes payable and capital leases | — | — | ||||||
Repayments of notes payable and capital leases | (33,264 | ) | (27,543 | ) | ||||
Net cash (used in) financing activities | (33,264 | ) | (27,543 | ) | ||||
Decrease in cash | 41,019 | (62,529 | ) | |||||
Cash at beginning of period | 52,144 | 104,035 | ||||||
Cash at end of period | $ | 93,163 | $ | 41,506 | ||||
See accompanying notes to financial statements
7
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements
March 31, 2009 and December 31, 2008
| 1. | Basis of Presentation |
The unaudited condensed financial statements in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We have continued to follow the accounting policies disclosed in the financial statements included in our 2008 Form 10-K filed with the Securities and Exchange Commission (SEC). It is suggested that these statements be read in conjunction with the December 31, 2008 audited financial statements and the accompanying notes on Form 10-K, as filed with the SEC.
The interim financial information in this Form 10-Q reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our results of operations for the interim periods. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of results to be expected for the full year.
Segment Reporting
SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information”, changed the way public companies report information about segments of their business in their financial statements. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. See
Note 12
Income Taxes
The Company accounts for income taxes under the asset and liability method as prescribed by Statement of Financial Accounting Standards (FASB) No. 109,Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basses. 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.
8
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 2. | Accounts Receivable |
Accounts receivable consist of the following:
| 3/31/2009 | 12/31/2008 | |||||||
Accounts receivable | $ | 210,228 | $ | 235,532 | ||||
Less: allowance for doubtful accounts | (5,540 | ) | (6,176 | ) | ||||
Net accounts receivable | $ | 204,688 | $ | 229,356 | ||||
The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written off when it is determined that amounts are uncollectible. Bad debt expense (recovery) for the three months ended March 31, 2009 and 2008 was $81 and $1,214 respectively.
| 3. | Inventories |
Inventories consist of the following:
| 3/31/2009 | 12/31/2008 | |||||
Coffee | ||||||
Unroasted | $ | 95,853 | $ | 110,244 | ||
Roasted | 78,565 | 79,897 | ||||
Tea | 2,041 | 2,516 | ||||
Packaging, supplies and other merchandise held for sale | 141,485 | 146,666 | ||||
Total inventories | $ | 317,944 | $ | 339,323 | ||
| 4. | Property and Equipment |
Property and equipment consist of the following:
| 3/31/2009 | 12/31/2008 | |||||||
Equipment | $ | 1,291,828 | $ | 1,295,303 | ||||
Furniture and fixtures | 210,607 | 215,574 | ||||||
Leasehold improvements | 458,989 | 459,861 | ||||||
Transportation equipment | 177,776 | 177,776 | ||||||
Marketing equipment | 166,162 | 166,162 | ||||||
Capitalized website development costs | 14,076 | 14,076 | ||||||
Property held under capital leases | 257,084 | 257,084 | ||||||
Total property and equipment | 2,576,522 | 2,585,836 | ||||||
Accumulated depreciation | (2,232,522 | ) | (2,220,023 | ) | ||||
Property and equipment, net | $ | 344,000 | $ | 365,813 | ||||
Depreciation expense for the three months ended March 31, 2009 and 2008 was $26,898 and $27,284 respectively.
9
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 5. | Goodwill and Other Intangible Assets |
As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142,Goodwill and Other Tangible Assetsas of January 1, 2002, the Company no longer amortizes goodwill. At December 31, 2008 the Company performed a test of impairment on goodwill that resulted in a write down of all remaining goodwill at that time.
Intangible assets subject to amortization consist of the following:
| 3/31/2009 | 12/31/2008 | |||||||
Leasehold value | $ | 67,000 | $ | 67,000 | ||||
Trademarks | 5,127 | 5,127 | ||||||
Total intangible assets | 72,127 | 72,127 | ||||||
Accumulated amortization | (63,004 | ) | (61,798 | ) | ||||
Other intangibles, net of amortization | $ | 9,123 | $ | 10,329 | ||||
Amortization expense for the three months ended March 31, 2009 and 2008 was $1,206 for both years.
| 6. | Deposits and Other Assets |
Included in Deposits and Other Assets are artwork that was developed for the labels for the tea program and long-term deposits.
10
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 7. | Long Term Debt |
Notes Payable | 3/31/2009 | 12/31/2008 | ||||
Note payable to Savings Bank of Mendocino, payable in monthly installments of $4,307 plus interest at 2% over prime rate beginning January 1, 2005 (6.50% at March 31, 2009), final payment is due on December 1, 2009. The note payable is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights along with a personal guarantee from the Company’s majority shareholders. | $ | 238,895 | $ | 247,148 | ||
Line of credit to Savings Bank of Mendocino, payable in monthly installments of interest only at 2% over prime rate beginning February 13, 2009 with a minimum rate of 6.50% (6.500% at March 31, 2009). The note payable for the line of credit is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangible and contract rights along with a personal guarantee from the Company’s majority shareholders. The line is for a maximum of $25,000 and $13,000 has been used as of March 31, 2009. | 13,000 | 14,000 | ||||
Note payable to majority shareholders, Paul and Joan Katzeff, uncollateralized, payable in monthly installments of $2,000 plus interest at 12%paid monthly, due on July 15, 2010 . | 29,100 | 35,100 | ||||
Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of interest only at 12%, with balance due on demand after June 30, 1996. | 19,919 | 19,919 | ||||
Note payable to Mercedes-Benz, payable in monthly installments of $691, including interest at 6.99%, collateralized by a vehicle, final payment due on September 24, 2009. | 4,065 | 6,046 | ||||
Note payable to Chrysler Financing, payable in monthly installments of $329, including interest at 15.492%, collateralized by a vehicle, final payment due on January 24, 2011 | 6,323 | 7,063 | ||||
11
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
Capital Lease Obligations | 3/31/2009 | 12/31/2008 | ||
Note payable to G.E. Capital, payable in monthly installments of $1,355, including interest at 16.78%, collateralized by equipment, final payment due on March 1, 2009. | — | 3,952 | ||
Note payable to Avaya Financial Services, payable in monthly installments of $824, including interest at 5.855%, collateralized by equipment, final payment due on August 1, 2009. | 4,062 | 6,451 | ||
Note payable to Axis Capital, payable in monthly installments of $709, including interest at 15.473%, collateralized by store fixtures, final payment due September 14, 2009. | 3,413 | 5,358 | ||
Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $462, including interest at 14.237%, collateralized by equipment, final payment due on May 22,2009 | 908 | 2,229 | ||
Note payable to Marlin Leasing payable in monthly installments of $544, including interest at 17.172%, collateralized by equipment, final payment due on March 1, 2010. | 6,920 | 8,244 | ||
Note payable to Marlin Leasing payable in monthly installments of $428, including interest at 18.00%, collateralized by equipment, final payment due on October 1, 2010. | 6,078 | 7,072 | ||
Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $533, including interest at 22.24%, collateralized by equipment, final payment due on January 10, 2010. | 4,870 | 6,180 |
12
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 7. | Long Term Debt (continued) |
Capital Lease Obligations | 3/31/2009 | 12/31/2008 | ||||||
Note payable to Bank of the West payable in monthly installments of $489, including interest at 12.69% collateralized by equipment, final payment due on May 1, 2013 | $ | 18,915 | $ | 19,764 | ||||
Note payable to BSB Leasing payable in monthly installments of $285, including interest at 15.89%, colateralized by equipment, final payment due on June 2, 2012 | 11,937 | 12,634 | ||||||
Note payable to BSB Leasing payable in monthly installments of $390, including interest at 14.30%, collateralized by equipment, final payment due June 2, 2012 | 8,641 | 9,150 | ||||||
| $ | 377,046 | $ | 410,310 | |||||
Less current portion | (335,469 | ) | (355,488 | ) | ||||
Long term portion of notes payable | $ | 41,577 | $ | 54,822 | ||||
Interest paid for the three months ended March 31, 2009 and 2008 was $9,354 and $10,296, respectively.
As of March 31, 2009, maturities of notes payable and capital lease obligations for each of the next five years and in the aggregate were as follows:
Years Ending June 30, | |||
2009 | $ | 325,135 | |
2010 | 28,647 | ||
2011 | 11,818 | ||
2012 | 9,077 | ||
2013 | 2,369 | ||
Thereafter | — | ||
| $ | 377,046 | ||
Based on current borrowing rates, the fair value of the notes payable and capital lease obligations approximate their carrying amounts.
| 8. | Income Taxes |
Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company’s deferred tax assets consist of the benefit from net operating loss (NOL) carryforwards and temporary differences. The net operating loss carryforwards expire in various years through 2028. 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 company ownership and other provisions of the tax laws.
13
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
The Company’s deferred tax assets, valuation allowance, and change in valuation allowance as of March 31, 2009 are as follows:
Period Ending | Estimated NOL Carryforward less Temporary Differences | NOL Expires | Benefit From NOL | Valuation Allowance | Change in Valuation Allowance | Net Tax Benefit | |||||||||||||
March 31, 2009 | |||||||||||||||||||
Federal | $ | 103,695 | 2017 | $ | 15,554 | $ | (15,554 | ) | $ | (15,554 | ) | $ | — | ||||||
| 128,576 | 2018 | 19,286 | (19,286 | ) | (19,286 | ) | — | ||||||||||||
| 96,867 | 2023 | 14,530 | (14,530 | ) | (14,530 | ) | — | ||||||||||||
| 49,714 | 2024 | 7,457 | (7,457 | ) | (7,457 | ) | — | ||||||||||||
| 18,755 | 2025 | 2,813 | (2,813 | ) | (2,813 | ) | — | ||||||||||||
| 135,234 | 2026 | 20,285 | (20,285 | ) | (20,285 | ) | — | ||||||||||||
| 113,645 | 2027 | 17,047 | (17,047 | ) | (17,047 | ) | — | ||||||||||||
| 19,250 | 2028 | 2,888 | (2,888 | ) | (2,888 | ) | — | ||||||||||||
| $ | 665,736 | $ | 99,860 | $ | (99,860 | ) | $ | (99,860 | ) | $ | — | ||||||||
State | $ | 99,944 | 2016 | $ | 8,835 | $ | (8,835 | ) | $ | (8,835 | ) | $ | — | ||||||
| 79,918 | 2017 | 7,065 | (7,065 | ) | (7,065 | ) | — | ||||||||||||
| 23,657 | 2018 | 2,091 | (2,091 | ) | (2,091 | ) | — | ||||||||||||
| $ | 203,519 | $ | 17,991 | $ | (17,991 | ) | $ | (17,991 | ) | $ | — | ||||||||
Income taxes at the expected statutory rate are reconciled to the Company’s actual income taxes as follows:
| 2009 | |||
Tax (benefit) at federal statutory rate | (15.00 | )% | |
State tax (benefit) net of federal benefit | (7.50 | ) | |
Non-taxable differences | 0.65 | ||
Temporary differences | 8.19 | ||
Valuation allowance | 15.95 | ||
Tax provision (benefit) - effective rate | 2.29 | ||
Income taxes paid for the three months ended March 31, 2009 and the year ended December 31, 2008 were $800 and $800 respectively.
14
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 9. | Operating Leases |
The Company leases its delivery fleet, other vehicles and some office equipment under noncancelable operating leases with terms ranging from three to five years.
As of March 31, 2009, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:
Years Ending December 31, | |||
2009 | 9,709 | ||
2010 | 5,932 | ||
2011 | 5,391 | ||
2012 | 5,391 | ||
2013 | 5,391 | ||
Thereafter | 1,487 | ||
| $ | 33,301 | ||
Total operating lease payments for the three months ended March 31, 2009 and 2008 was $1,657 and $8,548 respectively.
| 10. | Long Term Leases |
The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Company’s majority shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The ten-year lease term ends May 31, 2015. Rental expense under the lease for the three months ended March 31, 2009 and 2008 was $25,800 in both years.
The Company also leases a bakery establishment in Mendocino, California under an operating lease expiring September 30, 2011. Rental expense under this operating lease for the three months ended March 31, 2009 and 2008 was $13,290 and $12,660, respectively.
As of March 31, 2009, minimum future rental payments under noncancelable facilities operating leases for each of the next five years and in the aggregate are as follows:
Years ending December 31, | |||
2009 | $ | 117,930 | |
2010 | 159,690 | ||
2011 | 147,120 | ||
2012 | 103,200 | ||
2013 | 103,200 | ||
Thereafter | 206,400 | ||
| $ | 837,540 | ||
15
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December 31, 2008
| 11. | Related Party Transactions |
As of March 31, 2009, the Company has an interest only note payable, due on demand, to Paul and Joan Katzeff, (the Company’s majority shareholders, directors and officers). In addition, the Company has a note payable to Paul and Joan Katxeff with a principal balance of $29,100, as of March 31, 2009. The loan is uncollateralized, is due July 15, 2010, requires monthly payments of $2,000 and bears interest at 12% per annum. The Company also leases properties from its majority shareholders.
The summary of payments made to Paul and Joan Katzeff in connection with these related party transactions for the three months ended March 31, 2009, is as follows:
Interest payments | $ | 1,435 | |
Rent payments | $ | 21,500 | |
Principal payments | $ | 6,000 |
The Company’s majority shareholders’ also guarantee certain notes payable of the Company (See Note 7).
| 12. | Information on Business Segments |
As noted in Note 1 in the Notes to the Financial Statements, the Company operates in two different business segments: the specialty coffee business and the retail bakery business. The specialty coffee business, although primarily based in California, sells to grocery stores, serving locations and other retail outlets throughout the United States and some international business. The bakery sells exclusively on the north coast of California in Mendocino and Fort Bragg.
Selected financial data by business segment
| 3/31/2009 | 3/31/2008 | |||||||
Net Sales | ||||||||
Specialty Coffee | $ | 964,655 | $ | 931,337 | ||||
Bakery | 125,808 | 120,967 | ||||||
Total | $ | 1,090,463 | $ | 1,052,304 | ||||
Intersegment Sales | ||||||||
Specialty Coffee | $ | 10,813 | $ | 7,232 | ||||
Total Sales | $ | 1,079,650 | $ | 1,045,072 | ||||
Operating Income/(Loss) | ||||||||
Specialty Coffee | $ | 11,656 | $ | (29,699 | ) | |||
Bakery | (34,969 | ) | (30,107 | ) | ||||
Total | $ | (23,313 | ) | $ | (59,806 | ) | ||
Depreciation and Amortization | ||||||||
Specialty Coffee | $ | 19,346 | $ | 21,536 | ||||
Bakery | 6,236 | 4,310 | ||||||
Total | $ | 25,582 | $ | 25,846 | ||||
16
Thanksgiving Coffee Company, Inc.
Notes to Financial Statements (continued)
March 31, 2009 and December
| 12. | Information on Business Segments (continued) |
| 3/31/2009 | 03/31/2008 | |||||
Interest Expense | ||||||
Specialty Coffee | $ | 8,513 | $ | 10,286 | ||
Bakery | 841 | 10 | ||||
Total | $ | 9,354 | $ | 10,296 | ||
| 3/31/2009 | 12/31/2008 | |||||
Assets | ||||||
Specialty Coffee | $ | 880,374 | $ | 919,093 | ||
Bakery | 113,851 | 114,340 | ||||
Total | $ | 994,225 | $ | 1,033,433 | ||
Fixed Assets | ||||||
Specialty Coffee | $ | 261,864 | $ | 278,647 | ||
Bakery | 82,136 | 87,166 | ||||
Total | $ | 344,000 | $ | 365,813 | ||
17
| 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 businesses, 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.
SUMMARY
Sales of the Company have eroded over the last five years primarily due to declines in the direct distribution sales method of the Company’s business (i.e., delivery by company truck). Increased competition, customer attrition and customers roasting green beans for their own use have all had a negative impact on the Company’s sales. The Company has tried a number of strategies that have not proven effective in abating these declines. The Company has changed its method of distribution to rely less on direct distribution (with only two routes) and instead uses independent distributors or shipping direct (via UPS or other common carrier). The effect of these changes on the Company’s sales has been limited but has reduced distribution expenses. Because of the limited impact of these changes, as well as the increase in cost of sales and other factors noted herein, there can be no assurances that the Company will be profitable in any future period, and, as a consequence, the Company is considering various strategic alternatives.
The Company pays substantially more for its green beans than the market price, because of quality, organic nature of many of its lines and the fact that it uses fair-traded coffees. Green bean costs have continued to rise and have placed pressure on margins. If green bean costs do not decline or continue to rise, whether as a consequence of inclement weather in a major producing area or any other event that affects green bean pricing, and the Company cannot offset costs by raising prices, it would have a negative impact on the Company and its margins.
The Company has a revolving line of credit for $25,000 of which $13,000 is currently outstanding and a term debt facility of $238,895 with the Savings Bank of Mendocino. The term debt is a five-year note due December 1, 2009 and the line of credit is renewed annually. If the credit line should not be renewed, the stability of the Company’s business would be in question. “See Liquidity and Capital Resources.”
Results of Operations
Three months ended March 31, 2009 versus March 31, 2008
Consolidated | Increase (Decrease) | Percent Change | |||||
Net Sales | $ | 34,578 | 3.3 | % | |||
Cost of Sales | 20,105 | 3.2 | % | ||||
Gross Margin % | .1 | % | — | % | |||
Selling, G&A Expense | (21,756 | ) | (4.8 | )% | |||
Depreciation And Amortization | (264 | ) | (1.0 | )% | |||
Interest Expense | (942 | ) | (9.2 | )% | |||
Net Income (Loss) | 37,511 | — | % | ||||
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Consolidated net sales for the three months ended March 31, 2009 were $1,079,650, up 3.3%, or over $34,000 when compared with net sales of $1,045,072 for the same period in fiscal 2008.
Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $15,000 or 2.5% for the three months ended March 31, 2009, when compared with distribution sales for the same period in 2008. The decline appears to be a result of slower volume at existing customers as no customers have been lost. It is also a result of lower sales to a grocery chain in California that eliminates the Company’s products when they remodel existing stores.
National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $50,000, or 14% for the three months ended March 31, 2009 when compared to national sales for the same period in 2008. The increase is attributed to higher sales for the Company’s distributor in southern California, a new distributor in the central valley of California and the addition of a new museum in the bay area.
Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased $2,500, or 5% for the three months ended March 31, 2009 when compared to mail order sales for the same period in 2008. The decrease was attributable to a decline in the Cornucopia program through the elimination of some partners and a slowdown in the Company’s online store volume.
Sales of the Company’s bakery were up $5,000 for the three months ended March 31, 2009 when compared to bakery sales for the same period in 2008.
Consolidated cost of sales for the three months ended March 31, 2009 were $650,025, up 3.2%, or over $20,000 when compared with the cost of sales of $629,920 for the same period in 2008. This increase was a result of an increase in green bean costs of nearly $23,000.
Consolidated gross margin percentage (gross profit as a percentage of net sales) for the three months ended March 31, 2009 was 39.79%, up .07 percentage points when compared with gross margin of 39.72% for the same period in 2008.
Consolidated selling, general and administrative expenses were $427,356 for the three months ended March 31, 2009, a decrease of 4.8% or over $21,000 when compared with the selling, general and administrative expenses of $449,112 for the same period in 2008. The decrease was a result of lower wages of $5,000 and a reduction of travel expense of $17,000 because there was no promotional tour of interfaith groups in the United States as there was last year for the Mirembe Kowamera program.
Consolidated depreciation and amortization expenses for the three months ended March 31, 2009 were $25,582, a 1% decrease, or $264, when compared to depreciation expense of $25,846 for the same period in 2008.
Consolidated interest expense for the three months ended March 31, 2009 was $9,354, a 9.2% decrease or nearly $1,000 compared with interest expense of $10,296 for the same period in 2008. Total debt is $377,046 at March 31, 2009 versus $410,310 at December 31, 2008.
As a result of the foregoing factors, the Company had a consolidated net loss of $35,801 for the three months ended March 31, 2009, compared to a loss of $73,312 for the same period in 2008. Because of the increases in the cost of green beans, there can be no assurances that the Company will be profitable in future periods.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, the Company had working capital deficit of ($102,011) versus working capital deficit of ($79,037) as of December 31, 2008. The decrease in working capital is due primarily to the increase in accrued liabilities of nearly $50,000 offset somewhat by a decrease in accounts payable of nearly $20,000. The working capital is a negative amount because the Company has reclassified a note from the Savings Bank of Mendocino of $238,895 to a current liability from long term debt because the loan is due in less than twelve months and requires a balloon payment in December of 2009. The Company plans to renew the loan at that time. However, there can be no assurances the Company will be successful in renewing the note.
Net cash provided by operating activities was $79,368 for the three months ended March 31, 2009 compared to net cash used by operating activities of $9,949 during the same period in 2008. The increase in net cash provided by operating activities in the three months of 2009 was the result of a reduced loss of over $37,000, a larger decline in inventory, receivables and prepaid expenses of over $13,000 and an increase in accrued liabilities of nearly $50,000.
Cash used in investing activities was $5,085 for the three months ended March 31, 2009 compared to $25,037 used in the same period in 2008. Capital additions for the first three months of 2009 were for brewers and grinders.
Net cash used in financing activities for the three months ended March 31, 2009 was $33,264 compared to net cash used in financing activities of $27,543 during the same period in 2008. The cash used by financing was a result of paying existing debt.
Because of the cash provided by operating activities, capital acquisitions and repayment of debt, cash at March 31, 2009 increased over $41,000 from the cash balance at January 1, 2009 and was over $51,000 higher than cash at March 31, 2008.
In November 2004, the Company secured a term note with the Savings Bank of Mendocino. This note is amortized over ten years and is payable in five years with a balloon payment on December 1, 2009 at 2% over prime rate. The rate was 6.50% at March 31, 2009. The note is collateralized by the Company’s accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. This note is personally guaranteed by the Company’s majority shareholders. As of March 31, 2009, the balance on the note is $238,895 (See Note 7 of Notes to the Financial Statements).
The Company also has a $25,000 line of credit with the Savings Bank of Mendocino. The credit line is interest only payments renewable annually at 2% over the prime rate with a minimum rate of 6.5 %. The rate was 6.50% at March 31, 2009 with an outstanding balance on the line of $13,000. The credit line is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. The line of credit is personally guaranteed by the Company’s majority shareholders. (See Note 7 of Notes to Financial Statements)
The Company has an interest-only note for $19,919 and a principal and interest note for $29,100 at March 31, 2009, payable to the majority shareholders, directors and officers, Joan and Paul Katzeff. The interest-only note is at 12%, with balance due on demand after June 30, 1996 and is uncollateralized. The principal and interest note is at 12% payable in monthly installments of $2,000 plus interest with the balance due on July 15, 2010 and is uncollateralized. (See Note 7 and Note 11 of Notes to Financial Statements)
At March 31, 2009, the Company had total borrowings of $377,046 including $251,895 owing to the Savings Bank of Mendocino. This compares to total borrowings of $410,310 as of December 31, 2008, including $261,148 outstanding to the Savings Bank of Mendocino.
For long-term debt, see Note 7 and Note 11 of the Notes to Financial Statements. For operating leases, see Note 9 of the Notes to Financial Statements. For real estate leases, see Note 10 and Note 11 of the Notes to Financial Statements.
| Payments Due By Period | |||||||||||||||
Contractual Obligations | Total | Less than One year | 1-3 years | 4-5 years | After 5 years | ||||||||||
Long Term Debt | $ | 377,046 | $ | 325,135 | $ | 40,465 | $ | 11,446 | $ | — | |||||
Operating Leases | 33,301 | 9,709 | 11,323 | 10,782 | 1,487 | ||||||||||
Real Estate Leases | 837,540 | 117,930 | 306,810 | 206,400 | 206,400 | ||||||||||
Total Cash Obligations | $ | 1,247,887 | $ | 452,774 | $ | 358,598 | $ | 228,628 | $ | 207,887 | |||||
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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 is 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 — Related Party Transactions” in the Notes to the Financial Statements.
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 creates 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. 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 proceeding 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 three 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 |
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, the President and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2009. Based on that evaluation, the Company’s management, including the Chief Executive Officer, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s Disclosure controls over financial reporting during the first quarter of 2009 that have materially affected or are reasonably likely to affect the Company’s internal controls over financial reporting.
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| ITEM 1. | LEGAL PROCEEDINGS |
-None-
| ITEM 1A. | RISK Factors |
We have 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 is 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.
| 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 |
- None –
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
| a. | Exhibits |
| 31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). | |
| 31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (President) | |
| 31.3 | Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (President). | |
| 32.3 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). | |
| b. | No reports filed on Form 8-K |
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Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this Quarterly Report to be signed on it behalf by the undersigned, thereunto duly authorized.
THANKSGIVING COFFEE COMPANY, INC.
Name | Title | Date | ||
/s Paul Katzeff Paul Katzeff | Chief Executive Officer | May 15, 2009 | ||
/s/ Joan Katzeff Joan Katzeff | President | May 15, 2009 | ||
/s/ Sam Kraynek Sam Kraynek | Chief Financial Officer | May 15, 2009 | ||
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