Thanksgiving Coffee (TCCI) 10-Q 2010 Q2 Quarterly report

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 June 30, 2010

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 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	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	x

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 August 14, 2010 the registrant had 1,236,744 shares of Class A common stock, no par value per share, outstanding.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009	4
	Consolidated Statements of Operations for the three months and six months ended June 30, 2010 and June 30, 2009 (unauditied)	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30, 2009 (unaudited)	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II – OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Remove and Reserved	23
Item 6.	Exhibits	24
Signatures		25

2

Financial Statements

and Notes to Financial Statements

Thanksgiving Coffee Company, Inc.

For the Six Months Ended June 30, 2010 and 2009

PART 1. Financial Information

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 June 30, 2010 and December 31, 2009, and its results of operations for the three month and six month periods ended June 30, 2010 and 2009 and its cash flows for the six month periods ended June 30, 2010 and 2009. 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

	June 30, 2010 (Unaudited)			December 31, 2009 (See Note 1)
Assets
Current assets
Cash	$	24,042		$	54,743
Accounts receivable, net of allowance		231,208			245,315
Inventories		285,151			307,192
Prepaid expenses		15,193			28,267
Total current assets		555,594			635,517
Property and equipment
Property and equipment		2,530,965			2,653,539
Accumulated depreciation		(2,201,996	)		(2,310,811	)
Total property and equipment		328,969			342,728
Other assets
Deposits and other assets		8,450			12,569
Other intangibles, net of amortization		3,093			5,505
Total other assets		11,543			18,074
Total assets	$	896,106		$	996,319

See accompanying notes to financial statements

4

Thanksgiving Coffee Company, Inc.

Balance Sheets

	June 30, 2010 (Unaudited)			December 31, 2009 (See Note 1)
Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	343,678		$	330,381
Notes payable - bank		56,075			50,568
Notes payable - other		2,195			3,611
Note Payable - shareholders		19,919			31,019
Capital lease obligations		15,051			19,988
Accrued liabilities		31,980			42,249
Total current liabilities		468,898			477,816
Long term debt
Notes payable - bank		156,348			175,266
Notes payable - other		—			325
Capital lease obligations		55,404			44,486
Total long term debt		211,752			220,077
Total liabilities		680,650			697,893
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		(670,960	)		(587,990	)
Total shareholders’ equity		215,456			298,426
Total liabilities and shareholders’ equity	$	896,106		$	996,319

See accompanying notes to financial statements

5

Thanksgiving Coffee Company, Inc.

Statements of Operations

Unaudited

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
Income
Net sales	$	1,089,694		$	1,136,123		$	2,092,782		$	2,215,773
Cost of sales		652,921			678,101			1,301,227			1,328,126
Gross profit		436,773			458,022			791,555			887,647
Operating expenses
Selling, general and administrative expenses		416,802			393,020			807,395			820,376
Depreciation and amortization		22,651			22,832			46,322			48,414
Total operating expenses		439,453			415,852			853,717			868,790
Operating profit/ (loss)		(2,680	)		42,170			(62,162	)		18,857
Other income (expense)
Miscellaneous income/ (expense)		(2,412	)		(3,880	)		(4,628	)		(6,214	)
Interest expense		(7,614	)		(8,946	)		(15,380	)		(18,300	)
Total other income (expense)		(10,026	)		(12,826	)		(20,008	)		(24,514	)
Profit/ (loss) before income taxes		(12,706	)		29,344			(82,170	)		(5,657	)
Income tax expense		—			—			(800	)		(800	)
Net profit/ (loss)	$	(12,706	)	$	29,344		$	(82,970	)	$	(6,457	)
Profit/ (loss) per share (basic)	$	(0.010	)	$	0.024		$	(0.067	)	$	(0.005	)
Profit/ (loss) per share (dilutive)	$	(0.010	)	$	0.024		$	(0.067	)	$	(0.005	)
Weighted average number of shares		1,236,744			1,236,744			1,236,744			1,236,744

See accompanying notes to financial statements

6

Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited

	For the Six Months June 30,
	2010			2009
Operating activities
Net loss	$	(82,970	)	$	(6,457	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization		52,116			53,460
Allowance for bad debts		(1,110	)		792
(Increase) decrease in:
Accounts receivable		15,217			(14,406	)
Inventories		22,041			33,396
Prepaid expenses		13,074			3,628
Deposits and other assets		4,119			3,053
Increase (decrease) in:
Accounts payable		13,297			(10,771	)
Accrued liabilities		(10,269	)		(7,153	)
Net cash provided by operating activities		25,515			55,542
Investing activities
Purchases of property and equipment		(35,945	)		(14,104	)
Proceeds from sale of equipment/disposal		—			—
Net cash (used in) investing activities		(35,945	)		(14,104	)
Financing activities
Proceeds from notes payable and capital leases		24,278			—
Repayments of notes payable and capital leases		(44,549	)		(64,620	)
Net cash (used in) financing activities		(20,271	)		(64,620	)
Decrease in cash		(30,701	)		(23,182	)
Cash at beginning of period		54,743			52,144
Cash at end of period	$	24,042		$	28,962

See accompanying notes to financial statements

7

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

June 30, 2010 and December 31, 2009

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 2009 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, 2009 audited financial statements and the accompanying notes on Form 10-K, as filed with the Securities and Exchange Commission.

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 six months ended June 30, 2010 are not necessarily indicative of results to be expected for the full year.

Concentration of Risk

In the second quarter of fiscal 2010, one customer accounted for 20% of the Company’s revenue. The account has purchased from the Company since 1992. The account has serving locations and is a distributor of the Company’s product. A loss of this account or any other large account, or a significant reduction in sales to any of the of the Company’s principal customers, could have an adverse impact on the Company.

Segment Reporting

ASC 280,“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 ASC 740,Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax 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)

June 30, 2010 and December 31, 2009

2. Accounts Receivable

Accounts receivable consist of the following:

	6/30/2010			12/31/2009
Accounts receivable	$	237,147		$	252,374
Less: allowance for doubtful accounts		(5,939	)		(7,059	)
Net accounts receivable	$	231,208		$	245,315

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 six months ended June 30, 2010 and 2009 was $(1,077) and $792 respectively.

3. Inventories

Inventories consist of the following:

	6/30/2010		12/31/2009
Coffee
Unroasted	$	104,428	$	107,325
Roasted		70,109		71,159
Tea		1,248		1,393
Packaging, supplies and other merchandise held for sale		109,366		127,315
Total inventories	$	285,151	$	307,192

4. Property and Equipment

Property and equipment consist of the following:

	6/30/2010			12/31/2009
Equipment	$	1,292,240		$	1,334,579
Furniture and fixtures		185,159			210,016
Leasehold improvements		456,031			460,729
Transportation equipment		189,669			184,368
Marketing equipment		153,986			166,162
Capitalized website development costs		—			14,076
Property held under capital leases		253,880			283,609
Total property and equipment		2,530,965			2,653,539
Accumulated depreciation		(2,201,996	)		(2,310,811	)
Property and equipment, net	$	328,969		$	342,728

Depreciation expense for the six months ended June 30, 2010 and 2009 was $49,013 and $53,460 respectively.

9

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

5. Goodwill and Other Intangible Assets

Intangible assets subject to amortization consist of the following:

	6/30/2010			12/31/2009
Leasehold value	$	67,000		$	67,000
Trademarks		5,127			5,127
Total intangible assets		72,127			72,127
Accumulated amortization		(69,034	)		(66,622	)
Other intangibles, net of amortization	$	3,093		$	5,505

Amortization expense for the six months ended June 30, 2010 and 2009 was $3,103 and $2,412 respectively.

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)

June 30, 2010 and December 31, 2009

7. Long Term Debt

Notes Payable

	6/30/2010		12/31/2009
Note payable to Savings Bank of Mendocino, payable in monthly installments of $4,309 plus interest at 7.25% renewed December 1, 2009, final payment is due on December 1, 2014. 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.	$	194,923	$	213,334
Line of credit to Savings Bank of Mendocino, payable in monthly installments of interest only at 2% over prime rate renewed March16, 2010 with a minimum rate of 6.5% (6.50% at June 30, 2010). 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 intangibles and contract rights along with a personal guarantee from the Company’s majority shareholders. The line is for a maximum of $25,000 and $17,500 has been used as of June 30, 2010.		17,500		12,500
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 June 15, 2010.		—		11,100
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 Chrysler Financing, payable in monthly installments of $329, including interest at 15.492%, collateralized by a vehicle, final payment due on January 24, 2011		2,195		3,936

11

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

Capital Lease Obligations

	6/30/2010	12/31/2009
Note payable to US Bancorp Manifest Funding Services payable in monthly installments of $621, including interest at 14.32%, collateralized by equipment, final payment due on September 8, 2014.	23,644	25,599
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	14,243	16,201
Note payable to BSB Leasing payable in monthly installments of $285, including interest at 15.89%, collateralized by equipment, final payment due June 2, 2012	8,026	9680
Note payable to Marlin Leasing payable in monthly installments of $544, including interest at 17.17%, collateralized by equipment, final payment due on March 1, 2010.	—	2,619
Note payable to Marlin Leasing payable in monthly installments of $428, including interest at 18.00%, collateralized by equipment, final payment due on June 1, 2010.	—	2,830
Note payable to BSB Leasing payable in monthly installments of $390, including interest at 14.30% collateralized by equipment, final payment due on June 2, 2012	5829	7,021
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	—	524

12

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

7. Long Term Debt (continued)

Capital Lease Obligations

	6/30/2010			12/31/2009
Note payable to Bank of the West payable in monthly installments of $427, including interest at 11.83%, collateralized by equipment, final payment due on April 1, 2015.	$18,713			$ —
		304,992			325,263
Less current portion		(93,240	)		(105,180	)
Long term portion of notes payable	$	211,752		$	220,077

Interest paid for the six months ended June 30, 2010 and 2009 was $15,380 and $18,300, respectively.

As of June 30, 2010, 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,
2011	$	93,240
2012		92,650
2013		64,251
2014		54,851
Thereafter		—
	$	304,992

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 2030. 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.

The Company’s deferred tax assets, valuation allowance, and change in valuation allowance as of June 30, 2010 are as follows:

13

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

8. Income Taxes (Continued)

Period Ending	Estimated NOL Carryforward Less Temporary Differences		NOL Expires	Benefit From NOL		Valuation Allowance			Change in Valuation Allowance			Net Tax Benefit
June 30, 2010
Federal	$	11,416	2017	$	1,712	$	(1,712	)	$	(1,712	)	$	—
		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	)		—
		125,700	2026		18,855		(18,855	)		(18,855	)		—
		63,303	2028		9,495		(9,495	)		(9,495	)		—
		85,957	2029		12,894		(12,894	)		(12,894	)		—
	$	561,533		$	84,229	$	(84,229	)	$	(84,229	)	$	—
													—
State	$	5,881	2018	$	520	$	(520	)	$	(520	)	$	—
		67,858	2029		5,999		(5,999	)		(5,999	)		—
		87,419	2030		7,728		(7,728	)		(7,728	)		—
	$	161,158		$	14,247	$	(14,247	)	$	(14,247	)	$	—

Income taxes at the expected statutory rate are reconciled to the Company’s actual income taxes as follows:

	2010
Tax (benefit) at federal statutory rate	(15.00	)%
State tax (benefit) net of federal benefit	(7.50	)
Non-taxable differences	0.92
Temporary differences	(2.09	)
Valuation allowance	24.64
Tax provision - effective rate	0.97

Income taxes paid for the six months ended June 30, 2010 and the year ended December 31, 2009 were $800 and $800 respectively.

14

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

9. Operating Leases

The Company leases some office equipment under noncancelable operating leases with terms ranging from three to five years.

As of June 30, 2010, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate were:

Years Ending June 30,
2011		10,909
2012		6,652
2013		6,652
2014		836
	$	25,049

Total operating lease payments for the six months ended June 30, 2010 and 2009 was $5,454 and $5,943, 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.

The Company also leases a bakery establishment in Mendocino, California under operating leases expiring September 30, 2011. The lease provides for monthly rental payments of approximately $4,600.

As of June 30, 2010, 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 June 30,
2011	$	161,070
2012		117,840
2013		103,200
2014		103,200
2015		103,200
	$	588,510

15

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

11. Related Party Transactions

As of June 30, 2010, the Company has an interest only note payable totaling $19,919, due on demand, to Paul and Joan Katzeff, (the Company’s majority shareholders, directors and officers). In addition, the Company had a note payable to Paul and Joan Katzeff that was paid as of June 30, 2010. The outstanding loan is uncollateralized and requires monthly payments of interest only at 12% per annum and is due on demand after June 30, 1996. 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 six months ended June 30, 2010, is as follows:

Interest payments	$	1,587
Rent payments	$	35,400
Principal payments	$	11,100

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

	6/30/2010			6/30/2009
Net Sales
Specialty Coffee	$	1,879,217		$	1,960,674
Bakery		239,478			278,028
Total	$	2,118,695		$	2,238,702
Intersegment Sales
Specialty Coffee	$	25,913		$	22,929
Total Sales	$	2,092,782		$	2,215,773
Operating Income/(Loss)
Specialty Coffee	$	6,715		$	65,459
Bakery		(68,876	)		(46,602	)
Total	$	(62,161	)	$	18,857
Depreciation and
Amortization
Specialty Coffee	$	34,242		$	38,467
Bakery		12,080			9,947

16

Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

June 30, 2010 and December 31, 2009

12. Information on Business Segments (continued)

Depreciation and Amortization (continued)
	06/30/2010		06/30/2009
Total	$	46,322	$	48,414
Interest Expense
Specialty Coffee	$	14,174	$	16,676
Bakery		1,206		1,624
Total	$	15,380	$	18,300
	6/30//2010		12/31/2009
Assets
Specialty Coffee	$	810,890	$	890,709
Bakery		85,216		105,610
Total	$	896,106	$	996,319
Fixed Assets
Specialty Coffee	$	268,160	$	274,988
Bakery		60,809		67,740
Total	$	328,969	$	342,728

13. Subsequent Event

The Company experienced a major fire at its plant and office facility on July 5, 2010. There were no reported injuries. The fire was deemed to be arson by the Mendocino county sheriff’s office. As a result of the fire, the Company’s offices, packaging, tasting room and shipping facility were destroyed. However, the Company’s roasting and warehouse facility, where the Company stored most of its green beans, were not damaged. The Company is assessing the extent of the damage caused by the fire and the expected effect of the fire on the Company’s business, operations and financial performance. The amount of loss to the Company is unknown at this time. The Company has resumed its administrative, packaging, tasting and shipping activities at temporary locations and it is uncertain whether and to what extent the Company will rebuild its facility and restore operations to their prior condition. The Company expects that a portion of the loss resulting from the fire will be covered by it current building, personal property, business interruption and additional expense insurance, however, the full amount that the Company will be able to recover under this insurance policy is still being determined. Up to the first $1,000 of the loss will be borne by the Company as a deductible per the terms of the policy.

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”) and the effects of the recent fire at the Company’s plant and office facility may have on the Company’s business, operations and financial performance. 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, the ability to recover proceeds on insurance claims related to the fire at the Company’s plant and office facility, the Company’s ability to rebuild its facility and restore operations after the recent fire, 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 $17,500 is currently outstanding and a term debt facility of $194,943 with the Savings Bank of Mendocino. The term debt is a five-year note due December 1, 2014 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.”

The Company experienced a major fire at its plant and office facility on July 5, 2010. There were no reported injuries. The fire was deemed to be arson by the Mendocino County Sheriff’s office. As a result of the fire, the Company’s offices, packaging, tasting room and shipping facility were destroyed. However, the Company’s roasting and warehouse facility, where the Company stored most of its green beans, were not damaged. The Company is assessing the extent of the damage caused by the fire and the expected effect of the fire on the Company’s business, operations and financial performance. The amount of loss to the Company and the impact on net sales and capital expenditures are unknown at this time. The Company expects that a portion of the loss resulting from the fire will be covered by its current building, personal property, business interruption and additional expense insurance, however, the full amount that the Company will be able to recover under this insurance policy is still being determined. Up to the first $1,000 of the loss will be borne by the Company as a deductible per the terms of the policy. See Note 13 to the Financial Statements.

18

Results of Operations

Three months ended June 30, 2010 versus June 30, 2009

Consolidated	Increase (Decrease)			Percent Change
Net Sales	$	(46,429	)	(4.1	)%
Cost of Sales		(25,180	)	(3.7	)%
Gross Margin %		( .2	)%	( .5	)%
Selling, G&A Expense		23,782		6.1	%
Depreciation And Amortization		(181	)	( .8	)%
Interest Expense		(1,332	)	(14.9	)%
Net Income (Loss)		(42,050	)	—	%

Consolidated net sales for the three months ended June 30, 2010 were $1,089,694, down 4.1%, or over $46,000 when compared with net sales of $1,136,123 for the same period in fiscal 2009.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $40,000 or 10% for the three months ended June 30, 2010, when compared with distribution sales for the same period in 2009. The decline was a result of decreases in the Company’s grocery store distribution and some declines in its serving accounts. No major accounts were lost during this period.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $27,000, or 5% for the three months ended June 30, 2010 when compared to national sales for the same period in 2009. The increase is attributed to higher sales for the Company’s distributors in southern and the central valley of California.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased $10,000, or 10% for the three months ended June 30, 2010 when compared to mail order sales for the same period in 2009. The decrease was attributable to a general slowdown in the Company’s online store volume

Sales of the Company’s bakery were down $23,000 for the three months ended June 30, 2010 when compared to bakery sales for the same period in 2009. Lower customer counts and lower sales dollars per transaction contributed to the decline.

Consolidated cost of sales for the three months ended June 30, 2010 were $652,921, down 3.7%, or over $25,000 when compared with the cost of sales of $678,101 for the same period in 2009. This decrease was a result of lower volume and wages for both the coffee and bakery operations.

Consolidated gross margin percentage (gross profit as a percentage of net sales) for the three months ended June 30, 2010 was 40.1%, down .2 % when compared with gross margin of 40.3% for the same period in 2009.

Consolidated selling, general and administrative expenses were $416,802 for the three months ended June 30, 2010, an increase of 6.1% or nearly $24,000 when compared with the selling, general and administrative expenses of $393,020 for the same period in 2009. The increase was a result of higher costs for medical, dental, worker’s compensation and property and casualty insurance.

Consolidated depreciation and amortization expenses for the three months ended June 30, 2010 were $22,651, a .8% decrease, or $181, when compared to depreciation expense of $22,832 for the same period in 2009.

Consolidated interest expense for the three months ended June 30, 2010 was $7,614, a 14.9% decrease compared with interest expense of $8,946 for the same period in 2009. Total debt is $304,992 at June 30, 2010 versus $325,263 at December 31, 2009.

As a result of the foregoing factors, the Company had a consolidated net loss of $12,706 for the three months ended June 30, 2010, compared to a profit of $29,344 for the same period in 2009. Because of the sales declines and higher operating expenses, there can be no assurances that the Company will be profitable in future periods.

19

Six Months ended June 30, 2010 versus June 30, 2009:

Consolidated	Increase/(Decrease)			Percent Change
Sales	$	(122,991	)	(5.6	)%
Cost of Sales		(26,899	)	(2.0	)%
Gross Margin		(2.3	)%	(5.7	)%
Selling G & A Expense		(12,981	)	(1.6	)%
Depreciation and Amortization		(2,092	)	(4.3	)%
Interest Expense		(2,920	)	(16.0	)%
Net Income/(Loss)		(76,513	)	—

Consolidated net sales for the six months ended June 30, 2010 were $2,092,782 a decrease of nearly $123,000 or 5.6%, when compared to sales of $2,215,773 for the same period in 2009.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $75,000 or 9%, for the six months ended June 30, 2010 when compared to the same period in 2009. Sales have dropped during the current period because of lower volumes at grocery stores and serving accounts. No major accounts have been lost during this period.

National Revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $20,000 or than 2%, for the six months ended June 30, 2010 when compared to sales for the same period in 2009. Increases were generated by the distributors in southern and the central valley of California.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were down $30,000 or 15%, for the six months ended June 30, 2010 when compared to sales for the same period in 2009. The drop was a result of a slowdown in the Company’s online store volume.

Sales of the Company’s bakery were down $38,000 or 14%, for the six months ended June 30, 2010 when compared to the same period in 2009 because of a decline in customer counts and lower sales dollars per transaction.

Consolidated cost of sales for the six months ended June 30, 2010 were $1,301,227 a decrease of nearly $27,000 or 2% when compared with the cost of sales of $1,328,126 for the same period in 2009. The decrease was attributed to lower wages at both the coffee company and bakery operations.

Consolidated gross margin (gross profit as a percentage of net sales) for the six months ended June 30, 2010 was 37.8%, down 2.3% when compared with gross margin of 40.1% for the same period in 2009. The drop in gross margin is attributed to the higher bean costs at the coffee company and higher raw ingredient costs at the bakery.

Consolidated selling, general and administrative expenses were $807,395 for the six months ended June 30, 2010, a decrease of nearly $13,000 or 1.6%, when compared to selling, general and administrative expenses of $820,376 for the same period in 2009. The decrease was a result of lower wages.

Consolidated depreciation and amortization expenses for the six months ended June 30, 2010 were $46,322 a decline of $2,092 or 4.3%, when compared to depreciation and amortization expenses of $48,414 for the same period in 2009. The decrease is a result of assets that were fully depreciated for the period.

Consolidated interest expense for the six months ended June 30, 2010 was $15,380 a decrease of nearly $3,000 or 16%, when compared to interest expense of $18,300 for the same period in 2009. Total debt has been reduced by $20,271 since December 31, 2009.

As a result of the forgoing items, the Company had a consolidated net loss for the six months ended June 30, 2010 of $82,970 compared to a loss of $6,457 for the same period in 2009. Because of the sales decline, there can be no assurances that the Company will be profitable in any future periods.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2010, the Company had working capital of $86,696 versus working capital of $157,701 as of December 31, 2009. The decrease in working capital is due primarily to the decrease in current assets of nearly $80,000.

20

Net cash provided by operating activities was $25,515 for the six months ended June 30, 2010 compared to net cash provided by operating activities for the six months ended June 30, 2009 of $55,542. The decrease in net cash provided by operating activities in the six months of 2010 was principally the result of the increase in the loss of over $76,000.

Cash used in investing activities was $35,945 for the six months ended June 30, 2010 compared to $14,104 used in the same period in 2009. Capital additions for the first six months of 2010 were $7,000 for a new online store, $5,000 for a T-1 communication line, $14,000 for new local area network computer servers and $9,000 for brewing equipment.

Net cash used in financing activities for the six months ended June 30, 2010 was $20,271 compared to net cash used in financing activities of $64,620 during the same period in 2009. The decrease in cash used by financing activities was a result of adding one new lease and drawing down $5,000 of the credit line during the period.

Because of the operating loss, capital acquisitions and repayment of debt, cash at June 30, 2010 declined by over $30,000 from the cash balance at January 1, 2009 and nearly $5,000 from cash at June 30, 2009.

In December 2009, the Company extended a term note with the Savings Bank of Mendocino. This note is for five years and is due on December 1, 2014 with an interest rate of 7.25%. 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 June 30, 2010, the balance on the note is $194,923. (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% and was renewed in March of 2010. The rate was 6.5% at June 30, 2010 with an outstanding balance on the line of $17,500. 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 payable to the majority shareholders, directors and officers, Joan and Paul Katzeff. The interest-only note bears interest at 12%, with balance due on demand after June 30, 1996 and is uncollateralized. (See Note 7 and Note 11 of Notes to Financial Statements)

At June 30, 2010, the Company had total borrowings of $304,992 including $212,423 owing to the Savings Bank of Mendocino. This compares to total borrowings of $325,263 as of December 31, 2009, including $225,834 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	$	304,992	$	93,240	$	156,901	$	54,851	$	—
Operating Leases		25,049		10,909		13,304		836		—
Real Estate Leases		588,510		161,070		221,040		206,400		—
Total Cash Obligations	$	918,551	$	265,219	$	391,245	$	262,087	$	—

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

21

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 June 30, 2010. 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 second quarter of 2010 that have materially affected or are reasonably likely to affect the Company’s internal controls over financial reporting.

22

Part II – OTHER INFORMATION

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 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 recently experienced a major fire at our plant and office facility as described in more detail in Note 13 to the Financial Statements. We are assessing the extent of the damage caused by the fire and the expected effect of the fire on our business, operational and financial performance. The amount of loss is unknown at this time. We have resumed our administrative, packaging, tasting and shipping activities at temporary locations and it is uncertain whether and to what extent the Company will rebuild its facility and restore operations to their prior condition. Our operations have bee affected in the near term and we may lose existing customers or have more difficulty attracting new customers as a result, which could in turn affect our revenues and other financial results. We have building, personal property, business interruption and additional expense insurance, however, the full amount that we will be able to recover under this insurance policy is still being determined. Our current insurance is subject to deductibles and coverage limitations, and may not continue to be available to us on acceptable terms. If our existing insurance policy does not adequately cover our losses due to the fire or if we are unable to continue our current insurance policy or obtain new insurance at acceptable cost or on acceptable terms with adequate coverage, we may be exposed to significant liabilities, which may harm our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

- None -

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

- None -

ITEM 4. REMOVE AND RESERVED

- None -

ITEM 5. OTHER INFORMATION

- None -

23

ITEM 6. EXHIBITS

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).
	12.1 8-K filed June 3, 2010.

24

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 behalf by the undersigned, thereunto duly authorized.

THANKSGIVING COFFEE COMPANY, INC.

Name	Title	Date
/s/ Sam Kraynek   Sam Kraynek	Chief Executive Officer	August 16, 2010
/s/ Ben Corey-Moran   Ben Corey-Moran	President	August 16, 2010
/s/ Sam Kraynek   Sam Kraynek	Chief Financial Officer	August 16, 2010

25