Table of Contents

 

 

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 September 30, 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		¨  (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 November 16, 2009 the registrant had 1,236,744 shares of Class A common stock, no par value per share.

 

 

 

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Table of Contents

FORM 10-Q

TABLE OF CONTENTS

 

		PART I – FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements		3
		Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008		4
		Consolidated Statements of Operations for the three months and nine months ended September 30, 2009 and September 30, 2008 (unaudited)		5
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and September 30, 2008 (unaudited)		6
		Notes to Consolidated Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.		Controls and Procedures		21
		PART II – OTHER INFORMATION
Item 1.		Legal Proceedings		22
Item 1A.		Risk Factors		22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.		Defaults Upon Senior Securities		22
Item 4.		Submission of Matters to a Vote of Security Holders		22
Item 6.		Exhibits		22
Signatures				23

 

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Table of Contents

Financial Statements

and Notes to Financial Statements

Thanksgiving Coffee Company, Inc.

For the Nine Months Ended September 30, 2009 and 2008

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 September 30, 2009, and its results of operations for the three month and nine month periods ended September 30, 2009 and 2008 and its cash flows for the nine month periods ended September 30, 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

 

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Thanksgiving Coffee Company, Inc.

Balance Sheets

 

		September 30, 2009 (Unaudited)				December 31, 2008 (See Note 1)
Assets
Current assets
Cash		$	52,114			$	52,144
Accounts receivable, net of allowance			216,717				229,356
Inventories			300,695				339,323
Prepaid expenses			23,393				23,218
Total current assets			592,919				644,041
Property and equipment
Property and equipment			2,604,330				2,585,836
Accumulated depreciation			(2,285,214	)			(2,220,023	)
Total property and equipment			319,116				365,813
Other assets
Deposits and other assets			12,279				13,250
Other intangibles, net of amortization			7,113				10,329
Total other assets			19,392				23,579
Total assets		$	931,427			$	1,033,433
Liabilities and shareholders’ equity
Current liabilities
Accounts payable		$	291,966			$	331,287
Notes payable – bank			222,634				261,148
Notes payable – other			3,483				9,172
Note Payable – shareholders			37,019				43,019
Capital lease obligations			19,728				42,149
Accrued liabilities			59,772				36,303
Total current liabilities			634,602				723,078
Long term debt
Notes payable – bank			—				—
Notes payable – shareholder			—				12,000
Notes payable – other			1,277				3,936
Capital lease obligations			25,566				38,886
Total long term debt			26,843				54,822
Total liabilities			661,445				777,900
Commitments & Contingencies (Notes 1,5,7,8,9,10 & 11)
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			(616,434	)			(630,883	)
Total shareholders’ equity			269,982				255,533
Total liabilities and shareholders’ equity		$	931,427			$	1,033,433

See accompanying notes to financial statements

 

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Thanksgiving Coffee Company, Inc.

Statements of Operations

Unaudited

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2009				2008				2009				2008
Income
Net sales		$	1,156,415			$	1,171,993			$	3,372,188			$	3,325,934
Cost of sales			694,227				713,981				2,022,353				2,067,269
Gross profit			462,188				458,012				1,349,835				1,258,665
Operating expenses
Selling, general and administrative expenses			405,585				412,886				1,225,961				1,313,687
Depreciation and amortization			27,830				26,664				76,244				77,791
Total operating expenses			433,415				439,550				1,302,205				1,391,478
Operating profit/(loss)			28,773				18,462				47,630				(132,813	)
Other income (expense)
Miscellaneous income/(expense)			982				5,849				(5,232	)			1,621
Gain/(loss) on sale of fixed assets															5,975
Interest expense			(8,849	)			(10,792	)			(27,149	)			(31,927	)
Total other income (expense)			(7,867	)			(4,943	)			(32,381	)			(24,331	)
Profit/(loss) before income taxes			20,906				13,519				15,249				(157,144	)
Income tax expense			—				—				(800	)			(800	)
Net profit/(loss)		$	20,906			$	13,519			$	14,449			$	(157,944	)
Profit/(loss) per share (basic)		$	0.017			$	0.011			$	0.012			$	(0.128	)
Profit/(loss) per share (dilutive)		$	0.017			$	0.011			$	0.012			$	(0.128	)
Weighted average number of shares			1,236,744				1,236,744				1,236,744				1,236,744

See accompanying notes to financial statements

 

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Thanksgiving Coffee Company, Inc.

Statements of Cash Flows

Unaudited

 

		For the Nine Months September 30,
		2009				2008
Operating activities
Net Income/(loss)		$	14,449			$	(157,943	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization			83,865				85,832
Allowance for bad debts			508				(487	)
(Increase) decrease in:
Accounts receivable			12,131				2,018
Inventories			38,628				(16,828	)
Prepaid expenses			(175	)			6,808
Deposits and other assets			971				(236	)
Increase (decrease) in:
Accounts payable			(39,321	)			135,282
Accrued liabilities			23,469				(12,863	)
Net cash provided by operating activities			134,525				41,583
Investing activities
Purchases of property and equipment			(33,952	)			(91,527	)
Proceeds from sale of equipment/disposal			—				5,975
Net cash (used in) investing activities			(33,952	)			(85,552	)
Financing activities
Proceeds from notes payable and capital leases			—				43,860
Repayments of notes payable and capital leases			(100,603	)			(90,154	)
Net cash (used in) financing activities			(100,603	)			(46,294	)
Decrease in cash			(30	)			(90,263	)
Cash at beginning of period			52,144				104,035
Cash at end of period		$	52,114			$	13,772
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest		$	27,149			$	31,927
Income taxes		$	800			$	800

See accompanying notes to financial statements

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

September 30, 2009 and 2008

1. Basis of Presentation

The 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 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 nine months ended September 30, 2009 are not necessarily indicative of results to be expected for the full year.

Segment Reporting

The Company discloses the products and services it 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 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.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

2. Accounts Receivable

Accounts receivable consist of the following:

 

		9/30/2009				12/31/2008
Accounts receivable		$	221,904			$	235,532
Less: allowance for doubtful accounts			(5,187	)			(6,176	)
Net accounts receivable		$	216,717			$	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 nine months ended September 30, 2009 and 2008 was $(178) and $2,012 respectively.

3. Inventories

Inventories consist of the following:

 

		9/30/2009			12/31/2008
Coffee
Unroasted		$	83,930		$	110,244
Roasted			75,243			79,897
Tea			2,256			2,516
Packaging, supplies and other merchandise held for sale			139,266			146,666
Total inventories		$	300,695		$	339,323

4. Property and Equipment

Property and equipment consist of the following:

 

		9/30/2009				12/31/2008
Equipment		$	1,310,395			$	1,295,303
Furniture and fixtures			211,516				215,574
Leasehold improvements			460,729				459,861
Transportation equipment			184,368				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			2,604,330				2,585,836
Accumulated depreciation			(2,285,214	)			(2,220,023	)
Property and equipment, net		$	319,116			$	365,813

Depreciation expense for the nine months ended September 30, 2009 and 2008 was $80,649 and $81,410 respectively.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

5. Goodwill and Other Intangible Assets

As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assets as 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:

 

		9/30/2009				12/31/2008
Leasehold value		$	67,000			$	67,000
Trademarks			5,127				5,127
Total intangible assets			72,127				72,127
Accumulated amortization			(65,014	)			(61,798	)
Other intangibles, net of amortization		$	7,113			$	10,329

Amortization expense for the nine months ended September 30, 2009 and 2008 was $3,216 and $4,422 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.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

7. Long Term Debt

Notes Payable

 

		9/30/2009			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 September 30, 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.		$	222,134		$	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% (6.50% at September 30, 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 $500 has been used as of September 30, 2009.			500			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.			17,100			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.			—			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			4,760			7,063

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

Capital Lease Obligations

 

		9/30/2009		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.		—		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.		—		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		—		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.		4,110		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.		3,959		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 Jan. 10, 2010		2,047		6,180

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

7. Long Term Debt (continued)

Capital Lease Obligations

 

		9/30/2009				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.		$	17,134			$	19,764
Note payable to BSB Leasing payable in monthly installments of $285, including interest at 15.89%, collateralized by equipment, final payment due on June 2, 2012			10,461				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.			7,583				9,150
			309,707				410,310
Less current portion			(282,864	)			(355,488	)
Long term portion of notes payable		$	26,843			$	54,822

Interest paid for the nine months ended September 30, 2009 and 2008 was $27,149 and $31,927 respectively.

As of September 30, 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 December 31,
2009		$	257,547
2010			29,016
2011			14,297
2012			6,402
2013			2,445
		$	309,707

Based on current borrowing rates, the fair value of the notes payable and capital lease obligations approximate their carrying amounts.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

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 2027. 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 September 30, 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
September 30, 2009
Federal		$	73,102		2017		$	10,965		$	(10,965	)		$	(10,965	)		$	—
			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	)			—
			73,959		2027			11,094			(11,094	)			(11,094	)			—
		$	576,207				$	86,430		$	(86,430	)		$	(86,430	)		$	—
State		$	72,794		2016		$	6,435		$	(6,435	)		$	(6,435	)		$	—
			78,514		2018			6,941			(6,941	)			(6,941	)			—
		$	151,308				$	13,376		$	(13,376	)		$	(13,376	)		$	—

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		5.22
Temporary differences		15.73
Valuation allowance		(38.21	)
Tax provision (benefit) – effective rate		5.24

Income taxes paid for the nine months ended September 30, 2009 and the year ended December 31, 2008 were $800 and $800 respectively.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

9. Operating Leases

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

As of September 30, 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			1,974
2010			5,933
2011			5,391
2012			5,390
2013			5,154
Thereafter			1,487
		$	25,329

Total operating lease payments for the nine months ended September 30, 2009 and 2008 was $9,393 and $25,164 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, directors and officers). 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 nine months ended September 30, 2009 and 2008 was $77,400 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 nine months ended September 30, 2009 and 2008 was $41,301 and $37,980, respectively.

As of September 30, 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		$	39,090
2010			159,690
2011			147,120
2012			103,200
2013			103,200
Thereafter			146,200
		$	698,500

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

11. Related Party Transactions

As of September 30, 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) for $19,919. In addition, the Company has a note payable to Paul and Joan Katzeff with a principal balance of $17,100, as of September 30, 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 nine months ended September 30, 2009, is as follows:

 

Interest payments		$	3,855
Rent payments		$	77,400
Principal payments		$	8,000

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

 

		9/30/2009				9/30/2008
Net Sales
Specialty Coffee		$	2,947,000			$	2,900,135
Bakery			464,876				463,231
Total		$	3,411,876			$	3,363,366
Intersegment Sales
Specialty Coffee		$	39,688			$	37,432
Total Sales		$	3,372,188			$	3,325,934
Operating Income/(Loss)
Specialty Coffee		$	96,985			$	(74,081	)
Bakery			(49,355	)			(58,732	)
Total		$	47,630			$	(132,813	)
Depreciation and Amortization
Specialty Coffee		$	58,428			$	62,943
Bakery			17,816				14,848
Total		$	76,244			$	77,791

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

 

12. Information on Business Segments (continued)

 

		9/30/2009			9/30/2008
Interest Expense
Specialty Coffee		$	24,790		$	31,615
Bakery			2,359			312
Total		$	27,149		$	31,927
		9/30//2009			12/31/2008
Assets
Specialty Coffee		$	808,126		$	919,093
Bakery			123,301			114,340
Total		$	931,427		$	1,033,433
Fixed Assets
Specialty Coffee		$	246,578		$	278,647
Bakery			72,538			87,166
Total		$	319,116		$	365,813

 

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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 $500 is currently outstanding and a term debt facility of $222,134 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 or the term debt 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 September 30, 2009 versus September 30, 2008

 

Consolidated		Increase (Decrease)				Percent Change
Net Sales		$	(15,578	)		(1.3	)%
Cost of Sales			(19,754	)		(2.8	)%
Gross Margin %			.9	%		2.3	%
Selling, G&A Expense			(7,301	)		(1.8	)%
Depreciation And Amortization			1,166			4.4	%
Interest Expense			(1,943	)		(18.0	)%
Net Income (Loss)			7,387			54.6	%

 

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Consolidated net sales for the three months ended September 30, 2009 were $1,156,415, down 1.3%, or over $15,000 when compared with net sales of $1,171,993 for the same period in fiscal 2008.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $45,000 or 9% for the three months ended September 30, 2009, when compared with distribution sales for the same period in 2008. The decline was a result of lower sales at retailers in the Humboldt county region of the Company’s business and general decline in sales as no customers were lost.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $50,000, or 12% for the three months ended September 30, 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, continued sales growth from its new distributor in the central valley of California and a reopened 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 $20,000, or 13% for the three months ended September 30, 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 general slowdown in the Company’s online store volume.

Sales of the Company’s bakery were flat for the three months ended September 30, 2009 when compared to bakery sales for the same period in 2008.

Consolidated cost of sales for the three months ended September 30, 2009 were $694,227, down 2.8%, or nearly $20,000 when compared with the cost of sales of $713,981 for the same period in 2008. This decrease was a result of lower wages and benefit costs of $17,000 and lower utility costs of $3,000 and lower food costs at the bakery of $7,000 offset by an increase in green beans of nearly $7,000.

Consolidated gross margin percentage (gross profit as a percentage of net sales) for the three months ended September 30, 2009 was 40%, up .9 % when compared with gross margin of 39.1% for the same period in 2008. The increase in gross margin percent was a result of lower costs for the quarter.

Consolidated selling, general and administrative expenses were $405,585 for the three months ended September 30, 2009, a decrease of 1.8%, or over $7,000 when compared with the selling, general and administrative expenses of $412,886 for the same period in 2008. The decrease was a result of a decrease in payments to certain grower co-ops because of a change in their programs and a reduction in commission expense because of lower sales to some distributors.

Consolidated depreciation and amortization expenses for the three months ended September 30, 2009 were $27,830, a 4.4% increase, or over $1,000, when compared to depreciation expense of $26,664 for the same period in 2008. The increase was a result of capital expenditures placed into service during the third quarter of 2009.

Consolidated interest expense for the three months ended September 30, 2009 was $8,849, an 18.1% decrease or nearly $2,000 compared with interest expense of $10,792 for the same period in 2008. Total debt is $309,707 at September 30, 2009 versus $410,310 at December 31, 2008.

As a result of the foregoing factors, the Company had a consolidated net profit of $20,906 for the three months ended September 30, 2009, an increase of nearly $7,400, or 54.6% when compared to a net profit of $13,519 for the same period in 2008. Because of the current economic climate, the lack of sustainable sales growth and high green bean costs, their can be no assurances that the Company will be profitable in the future.

 

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Nine Months ended September 30, 2009 versus September 30, 2008:

 

Consolidated		Increase/(Decrease)				Percent Change
Sales		$	46,254			1.4	%
Cost of Sales			(44,916	)		(2.2	)%
Gross Margin			2.2	%		5.8	%
Selling G & A Expense			(87,726	)		(6.7	)%
Depreciation and Amortization			(1,547	)		(2.0	)%
Interest Expense			(4,778	)		(15.0	)%
Net Income/(Loss)			172,393			—

Consolidated net sales for the nine months ended September 30, 2009 were $3,372,188, an increase of over $46,000 or 1.4%, when compared to sales of $3,325,934 for the same period in 2008.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $69,000 or 5%, for the nine months ended September 30, 2009 when compared to the same period in 2008. Sales in this segment are lower because of a drop in the Humboldt county region of the Company’s business and a grocery chain that eliminates the Company’s products when they remodel existing stores. Sales volume in this segment was effected by the economic downturn as only a small number of customers were lost because of closing their businesses during this period.

National Revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $150,000 or 11%, for the nine months ended September 30, 2009 when compared to sales for the same period in 2008. Increases with the distributor in southern California, a new distributor in the central valley of California and the reopening of a museum in the bay area have all added to this segment of the Company’s business.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were down $35,000 or 10%, for the nine months ended September 30, 2009 when compared to sales for the same period in 2008. The decline was attributable to the reduction of the Cornucopia program through elimination of some partners. The remainder was a slowdown in the Company’s online store volume.

Sales of the Company’s bakery were flat for the nine months ended September 30, 2009 when compared to the same period in 2008.

Consolidated cost of sales for the nine months ended September 30, 2009 were $2,022,353 a decrease of nearly $45,000 or 2.2%, when compared with the cost of sales of $2,067,269 for the same period in 2008. The decrease was attributed to lower costs of production and roasting labor of $60,000, lower utility costs of $15,000 and lower production costs of $15,000. These declines were offset by higher green bean costs of $45,000.

Consolidated gross margin (gross profit as a percentage of net sales) for the nine months ended September 30, 2009 was 40%, up 2.2% when compared with gross margin of 37.8% for the same period in 2008. The increase in gross margin is attributed to higher sales and lower production costs.

Consolidated selling, general and administrative expenses were $1,225,961 for the nine months ended September 30, 2009, a decrease of nearly $88,000 or 6.7%, when compared to selling, general and administrative expenses of $1,313,687 for the same period in 2008. The decreases were attributed to a $16,000 decrease in leasing costs as leases expired, a $17,000 decline in rebates and commissions paid to co-op growing partners and brokers and distributors, a $15,000 reduction in officers life insurance premiums, a $11,000 reduction in audit fees as the deadline for using an independent accounting firm to audit internal controls for smaller companies was extended, a $10,000 reduction in auto repair and fuel expense, a $5,000 reduction in online catalog expense and a $14,000 reduction in operating supplies.

Consolidated depreciation and amortization expenses for the nine months ended September 30, 2009 were $76,244 a decline of over $1,500 or 2%, when compared to depreciation and amortization expenses of $77,791 for the same period in 2008. The decrease is a result of few expenditures being placed in service during the first six months of 2009 and a number of older assets being fully depreciated offset by a number of new assets placed into service in the third quarter of 2009.

Consolidated interest expense for the nine months ended September 30, 2009 was $27,149 a decrease of nearly $4,800 or 15%, when compared to interest expense of $31,927 for the same period in 2008. Total debt has been reduced by $100,603 since December 31, 2008.

As a result of the forgoing items, the Company had a consolidated net profit of $14,449 at September 30, 2009 compared to a loss of $157,944 for the same period in 2008. Because of previous periods sales declines, increases in the cost of green beans and the current economic climate, there can be no assurances that the Company will be profitable in any future periods

 

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LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2009, the Company had working capital deficit of ($41,683) versus working capital deficit of ($79,037) as of December 31, 2008. The decrease in working capital deficit is due primarily to over a $37,000 reduction in current liabilities over current assets. The working capital is negative because the Company has reclassified a note from the Savings Bank of Mendocino of $222,134 from a long term debt to a current liability 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 $134,525 for the nine months ended September 30, 2009 compared to net cash provided by operating activities for the nine months ended September 30, 2008 of $41,583. The increase in net cash provided by operating activities in the nine months of 2009 was primarily a result of the Company earning a profit of $14,449 in 2009 versus a loss of nearly $158,000 offset by a decrease in accounts payable.

Cash used in investing activities was $33,952 for the nine months ended September 30, 2009 compared to $85,552 used in investing activities for the same period in 2008. Capital additions for the first nine months of 2009 were $15,000 for customer retail store fixtures $5,000 for brewers and grinders, $4,000 for production equipment, $6,000 for replacements to Company vehicles and $4,000 for a new POS cash register and quad core computer for the office.

Net cash used in financing activities for the nine months ended September 30, 2009 was $100,603 compared to net cash used in financing activities of $46,294 during the same period in 2008. The cash used by financing activities in 2009 was a result of paying existing debt while in 2008 over $90,000 of debt was paid which was offset by nearly $44,000 of new debt.

Because of the increase in net cash provided by operating activities offset by the capital acquisitions and repayment of debt, cash at September 30, 2009 was nearly equal to the cash at January 1, 2009 and was over $38,000 higher than cash of $13,772 at September 30, 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 6.5% at September 30, 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 September 30, 2009 the balance on the note is $222,134 (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 6.5% at September 30, 2009 with an outstanding balance on the line of $500. The credit line is dated February 13, 2009 and is renewed annually. 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 $17,100 at September 30, 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 has a 12% interest rate and is 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 September 30, 2009, the Company had total borrowings of $309,707 including $222,634 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		$	309,707		$	257,547		$	43,313		$	8,847		$
Operating Leases			25,329			7,907			10,781			6,641			—
Real Estate Leases			698,500			198,780			250,320			206,400			43,000
Total Cash Obligations		$	1,033,536		$	464,234		$	304,414		$	221,888		$	43,000

 

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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 any 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 September 30, 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 third 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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Part II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

– None –

 

ITEM 1A.

RISK FACTORS

The Company has concerns regarding the current economic situation. The United States and the global economy is experiencing severe instability in the commercial and investment banking systems which 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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

THANKSGIVING COFFEE COMPANY, INC.

 

Name		Title		Date
/s/    PAUL KATZEFF		Chief Executive Officer		November 16, 2009
Paul Katzeff
/s/    JOAN KATZEFF		President		November 16, 2009
Joan Katzeff
/s/    SAM KRAYNEK		Chief Financial Officer		November 16, 2009
Sam Kraynek

 

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