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, 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 November 12, 2010 the registrant had 1,236,744 shares of Class A common stock, no par value per share, outstanding.

 

 

 

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FORM 10-Q

TABLE OF CONTENTS

 

		PART I – FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements		3
		Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		4
		Consolidated Statements of Operations for the three months and nine months ended September 30, 2010 and September 30, 2009 (unauditied)		6
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009 (unaudited)		7
		Notes to Consolidated Financial Statements		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		23
Item 4.		Controls and Procedures		23
		PART II – OTHER INFORMATION
Item 1.		Legal Proceedings		24
Item 1A.		Risk Factors		24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3.		Defaults Upon Senior Securities		24
Item 4.		Remove and Reserved		24
Item 6.		Exhibits		24
Signatures				26

 

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Financial Statements

and Notes to Financial Statements

Thanksgiving Coffee Company, Inc.

For the Nine Months Ended September 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 September 30, 2010 and December 31, 2009, and its results of operations for the three month and nine month periods ended September 30, 2010 and 2009 and its cash flows for the nine month periods ended September 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

 

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Thanksgiving Coffee Company, Inc.

Balance Sheets

 

		September 30, 2010 (Unaudited)				December 31, 2009 (See Note 1)
Assets
Current assets
Cash		$	285,430			$	54,743
Accounts receivable, net of allowance			249,963				245,315
Inventories			242,871				307,192
Prepaid expenses			22,615				28,267
Total current assets			800,879				635,517
Property and equipment
Property and equipment			2,280,433				2,653,539
Accumulated depreciation			(2,047,844	)			(2,310,811	)
Total property and equipment			232,589				342,728
Other assets
Deposits and other assets			32,352				12,569
Other intangibles, net of amortization			2,289				5,505
Total other assets			34,641				18,074
Total assets		$	1,068,109			$	996,319

See accompanying notes to financial statements

 

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Thanksgiving Coffee Company, Inc.

Balance Sheets

 

		September 30, 2010 (Unaudited)				December 31, 2009 (See Note 1)
Liabilities and shareholders’ equity
Current liabilities
Accounts payable		$	395,397			$	330,381
Notes payable - bank			52,286				50,568
Notes payable - other			1,277				3,611
Note Payable - shareholders			19,919				31,019
Capital lease obligations			15,598				19,988
Accrued liabilities			71,702				42,249
Total current liabilities			556,179				477,816
Long term debt
Notes payable - bank			146,212				175,266
Notes payable - other			—				325
Capital lease obligations			50,401				44,486
Total long term debt			196,613				220,077
Total liabilities			752,792				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			(571,099	)			(587,990	)
Total shareholders’ equity			315,317				298,426
Total liabilities and shareholders’ equity		$	1,068,109			$	996,319

See accompanying notes to financial statements

 

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Statements of Operations

Unaudited

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2010				2009				2010				2009
Income
Net sales		$	990,273			$	1,156,415			$	3,083,055			$	3,372,188
Cost of sales			600,222				694,227				1,901,449				2,022,353
Gross profit			390,051				462,188				1,181,606				1,349,835
Operating expenses
Selling, general and administrative expenses			366,765				405,585				1,174,160				1,225,961
Depreciation and amortization			21,736				27,830				68,058				76,244
Total operating expenses			388,501				433,415				1,242,218				1,302,205
Operating profit/ (loss)			1,550				28,773				(60,612	)			47,630
Other income (expense)
Miscellaneous income/ (expense), net			107,080				982				102,452				(5,232	)
Interest expense			(8,769	)			(8,849	)			(24,149	)			(27,149	)
Total other income (expense)			98,311				(7,867	)			78,303				(32,381	)
Profit/ (loss) before income taxes			99,861				20,906				17,691				15,249
Income tax expense			—				—				(800	)			(800	)
Net profit/ (loss)		$	99,861			$	20,906			$	16,891			$	14,449
Profit/ (loss) per share (basic)		$	0.081			$	0.017			$	0.014			$	0.012
Profit/ (loss) per share (dilutive)		$	0.081			$	0.017			$	0.014			$	0.012
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,
		2010				2009
Operating activities
Net Income		$	16,891			$	14,449
Adjustments to reconcile net profit to cash flows from operating activities:
Depreciation and amortization			77,649				83,865
Allowance for bad debts			(252	)			508
(Gain) on disposal of assets			(480,000	)			—
Proceeds from insurance recovery for losses			555,000				—
(Increase) decrease in:
Accounts receivable			(4,396	)			12,131
Inventories			64,321				38,628
Prepaid expenses			5,652				(175	)
Deposits and other assets			(19,783	)			971
Increase (decrease) in:
Accounts payable			65,016				(39,321	)
Accrued liabilities			29,453				23,469
Net cash provided by operating activities			309,551				134,525
Investing activities
Purchases of property and equipment			(39,294	)			(33,952	)
Proceeds from sale of equipment/disposal			—				—
Net cash (used in) investing activities			(39,294	)			(33,952	)
Financing activities
Proceeds from notes payable and capital leases			—				—
Repayments of notes payable and capital leases			(39,570	)			(100,603	)
Net cash (used in) financing activities			(39,570	)			(100,603	)
Increase (decrease) in cash			230,687				(30	)
Cash at beginning of period			54,743				52,144
Cash at end of period		$	285,430			$	52,114

See accompanying notes to financial statements

 

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		For the nine months ended
		2010				2009
Supplemental Cash Flow Information:
Cash paid for interest:		$	24,149			$	27,149
Cash paid for income taxes:		$	800			$	800
Non-cash transaction
Capital lease transaction		$	23,712			$	—

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements

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

Concentration of Risk

In the third quarter of fiscal 2010, one customer accounted for 19.5% 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.

Fire Damage

The Company has experienced a major fire at its plant and office facility on July 5, 2010. The fire was deemed to be arson. The offices, packaging, tasting room and shipping facility were destroyed. The roasting and warehouse facility, where the Company stored most of its green beans, were not damaged. The Company had building, personal property, business interruption, loss of rent, code upgrades and additional expense insurance. Through September 30, 2010, the Company has received advances of $555,000 from the insurance company. The Company is still in the process of finalizing the total loss from the aspects of the fire and has yet to negotiate on a final settlement.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

2. Accounts Receivable

Accounts receivable consist of the following:

 

		9/30/2010				12/31/2009
Accounts receivable		$	256,770			$	252,374
Less: allowance for doubtful accounts			(6,807	)			(7,059	)
Net accounts receivable		$	249,963			$	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 nine months ended September 30, 2010 and 2009 was $(209) and $178 respectively.

3. Inventories

Inventories consist of the following:

 

		9/30/2010				12/31/2009
Coffee
Unroasted		$	126,202			$	107,325
Roasted			32,696				71,159
Tea			81				1,393
Packaging, supplies and other merchandise held for sale			83,892				127,315
Total inventories		$	242,871			$	307,192

4. Property and Equipment

Property and equipment consist of the following:

 

		9/30/2010				12/31/2009
Equipment		$	1,116,707			$	1,334,579
Furniture and fixtures			185,160				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			178,880				283,609
Total property and equipment			2,280,433				2,653,539
Accumulated depreciation			(2,047,844	)			(2,310,811	)
Property and equipment, net		$	232,589			$	342,728

Depreciation expense for the nine months ended September 30, 2010 and 2009 was $73,741 and $80,649 respectively.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

5. Goodwill and Other Intangible Assets

Intangible assets subject to amortization consist of the following:

 

		9/30/2010				12/31/2009
Leasehold value		$	67,000			$	67,000
Trademarks			5,127				5,127
Total intangible assets			72,127				72,127
Accumulated amortization			(69,838	)			(66,622	)
Other intangibles, net of amortization		$	2,289			$	5,505

Amortization expense for the nine months ended September 30, 2010 and 2009 was $3,907 and $3,216 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)

September 30, 2010 and December 31, 2009

 

7. Long Term Debt

 

Notes Payable		9/30/2010				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.		$	185,497			$	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 September 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 $13,000 has been used as of September 30, 2010.			13,000				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			1,277				3,936

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

Capital Lease Obligations
		9/30/2010				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.			22,614				25,599
Note payable to Bank of the West payable in monthly installments of $489, including interest at 12.69%, colateralized by equipment, final payment due on May 1, 2013			13,217				16,201
Note payable to BSB Leasing payable in monthly installments of $285, including interest at 15.89%, colateralized by equipment, final pament due June 2, 2012			7,151				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 paable in monthly installments of $390, including interest at 14.30% collateralized by equipment, final payment due on June 2, 2012			5197				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

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

7. Long Term Debt (continued)

 

Capital Lease Obligations		9/30/2010				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.		$	17,821			$	—
			285,693				325,263
Less current portion			(89,080	)			(105,180	)
Long term portion of notes payable		$	196,613			$	220,077

Interest paid for the nine months ended September 30, 2010 and 2009 was $24,149 and $27,149, respectively.

As of September 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 September 30,
2011		$	89,080
2012			76,748
2013			59,251
2014			54,851
Thereafter			5,763
			—
		$	285,693

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.

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

8. Income Taxes (continued)

The Company’s deferred tax assets, valuation allowance, and change in valuation allowance as of September 30, 2010 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, 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	)			—
			83,917				2030				12,588				(12,588	)			(12,588	)			—
		$	559,493							$	83,923			$	(83,923	)		$	(83,923	)		$	—
																							—
State		$	5,881				2018			$	520			$	(520	)		$	(520	)		$	—
			67,858				2029				5,999				(5,999	)			(5,999	)			—
			86,509				2030				7,647				(7,647	)			(7,647	)			—
		$	160,248							$	14,166			$	(14,166	)		$	(14,166	)		$	—

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			1.10
Temporary differences			(0.98	)
Valuation allowance			23.32
Tax provision - effective rate			0.94

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

9. Operating Leases

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

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

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

9. Operating Leases (continued)

 

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

Total operating lease payments for the nine months ended September 30, 2010 and 2009 was $8,182 and $9,393, 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 $5,000.

As of September 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 September 30,
2011		$	160,200
2012			103,200
2013			103,200
2014			103,200
2015			43,000
		$	512,800

11. Related Party Transactions

As of September 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

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

11. Related Party Transaction (continued)

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 nine months ended September 30, 2010, is as follows:

 

Interest payments		$	2,464
Rent payments		$	77,400
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

 

		9/30/2010				9/30/2009
Net Sales
Specialty Coffee		$	2,721,121			$	2,947,000
Bakery			396,006				464,876
Total		$	3,117,127			$	3,411,876
Intersegment Sales
Specialty Coffee		$	34,072			$	39,688
Total Sales		$	3,083,055			$	3,372,188
Operating Income/(Loss)
Specialty Coffee		$	10,015			$	96,985
Bakery			(70,627	)			(49,355	)
Total		$	(60,612	)		$	47,630
Depreciation and Amortization
Specialty Coffee		$	50,395			$	58,428
Bakery			17,663				17,816
Total		$	68,058			$	76,244
Interest Expense
Specialty Coffee		$	22,424			$	24,790

 

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Thanksgiving Coffee Company, Inc.

Notes to Financial Statements (continued)

September 30, 2010 and December 31, 2009

 

12. Information on Business Segments (continued)

 

Interest Expense (continued)		9/30/2010				9/30/2009
Bakery			1,725				2,359
Total		$	24,149			$	27,149
		9/30/2010				12/31/2009
Assets
Specialty Coffee		$	982,287			$	890,709
Bakery			85,822				105,610
Total		$	1,068,109			$	996,319
Fixed Assets
Specialty Coffee		$	176,559			$	274,988
Bakery			56,030				67,740
Total		$	232,589			$	342,728

 

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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 $13,000 is currently outstanding and a term debt facility of $185,498 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 sustained a major fire to its packaging, offices, tasting room and shipping facility on July 5, 2010. Because of the fire, sales for the month of July, 2010 were approximately 60% of projected monthly volume. In August and September of 2010, sales were approximately 90% of projected volume. The Company is currently packaging its product by hand and also using other roasters to package its retail 12 ounce packages of regular and its flavored coffees. Although there have been no loses of major customers, there can be no assurances that the Company will be able to sustain even its current level of sales.

 

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Results of Operations

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

 

Consolidated		Increase (Decrease)				Percent Change
Net Sales		$	(166,142	)			(14.4	)%
Cost of Sales			(94,005	)			(13.5	)%
Gross Margin %			(.6	)%			(1.5	)%
Selling, G&A Expense			(38,820	)			(9.6	)%
Depreciation And Amortization			(6,094	)			(21.9	)%
Interest Expense			(80	)			(.9	)%
Net Income (Loss)			78,955				—	%

Consolidated net sales for the three months ended September 30, 2010 were $990,273, down 14.4%, or over $166,000 when compared with net sales of $1,156,415 for the same period in fiscal 2009.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $60,000 or 12% for the three months ended September 30, 2010, when compared with distribution sales for the same period in 2009. The decline was a result of the Company being closed for the first two weeks in July 2010 because of the fire. During the balance of the month, the Company was producing bulk coffee but did not begin sales of its packaged coffee until August, 2010. As a result, its supermarket business dropped during this quarter. The Company is packaging some of its 12 ounce packs at its facility and utilizing other roasters facilities to package the remaining amounts.

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were down $40,000, or 10% for the three months ended September 30, 2010 when compared to national sales for the same period in 2009. The decrease is attributed to the Company not operating the first two weeks of July as noted above.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased $30,000, or 25% for the three months ended September 30, 2010 when compared to mail order sales for the same period in 2009. The decrease was attributable to the lack of operations in the first two weeks of July and hand packing of the 12 ounce packages.

Sales of the Company’s bakery were down $35,000 for the three months ended September 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. The fire did not affect the bakery operations.

Consolidated cost of sales for the three months ended September 30, 2010 were $600,222 down 13.5%, or over $94,000 when compared with the cost of sales of $694,227 for the same period in 2009. This decrease was a result of lower volume because of the fire and lower wages for the bakery operations.

Consolidated gross margin percentage (gross profit as a percentage of net sales) for the three months ended September 30, 2010 was 39.4%, down .6 % when compared with gross margin of 40% for the same period in 2009.

Consolidated selling, general and administrative expenses were $366,765 for the three months ended September 30, 2010, a decrease of 9.6% or nearly $39,000 when compared with the selling, general and administrative expenses of $405,585 for the same period in 2009. The decreases were a result of lower wages of $27,000, a drop in travel expenses of $8,000 and lower commissions of $5,000 because of lower sales for the quarter.

Consolidated depreciation and amortization expenses for the three months ended September 30, 2010 were $21,736, a nearly 22% decrease, or over $6,000, when compared to depreciation expense of $27,830 for the same period in 2009.

Consolidated interest expense for the three months ended September 30, 2010 was $8,769, a .9% decrease compared with interest expense of $8,849 for the same period in 2009. Total debt is $285,693 at September 30, 2010 versus $325,263 at December 31, 2009.

Consolidated miscellaneous income for the three months ended September 30, 2010 was $107,080 a $106,000 increase from miscellaneous income of $982 last year. The increase in other income is the result of advances from the insurance company over the expenses incurred by the Company through September 30, 2010.

As a result of the foregoing factors, the Company had a consolidated net profit of $99,861 for the three months ended September 30, 2010, compared to a profit of $20,906 for the same period in 2009. Because of the sales declines higher green bean expenses and the unresolved claim with the insurance carrier, there can be no assurances that the Company will be profitable in future periods.

 

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Nine Months ended September 30, 2010 versus September 30, 2009:

 

Consolidated		Increase/(Decrease)				Percent Change
Sales		$	(289,133	)			(7.6	)%
Cost of Sales			(120,904	)			(6.0	)%
Gross Margin			(1.7	)%			(4.2	)%
Selling G & A Expense			(51,801	)			(4.2	)%
Depreciation and Amortization			(8,186	)			(10.7	)%
Interest Expense			(3,000	)			(11.0	)%
Net Income/(Loss)			2,442				16.9	%

Consolidated net sales for the nine months ended September 30, 2010 were $3,083,055 a decrease of over $289,000 or 7.6%, when compared to sales of $3,372,188 for the same period in 2009.

Distribution revenues (e.g., revenues generated on the Company’s own truck distribution) were down $130,000 or 10%, for the nine months ended September 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 and the fire that resulted in reduced sales for July, August and September. No major accounts have been lost during this period.

National Revenues (e.g., revenues not derived by mail order and direct truck distribution) were down $29,000 or 2%, for the nine months ended September 30, 2010 when compared to sales for the same period in 2009. The decrease was a result of the fire that limited our production capability especially in July.

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) were down $60,000 or 20%, for the nine months ended September 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 and the fire in July which has limited the Company’s ability to produce its 12 ounce packages.

Sales of the Company’s bakery were down $70,000 or 15%, for the nine months ended September 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 nine months ended September 30, 2010 were $1,901,449 a decrease of nearly $121,000 or 6% when compared with the cost of sales of $2,022,353 for the same period in 2009. The decrease was attributed to lower wages at both the coffee company and bakery operations and the lower sales volume primarily as a result of the fire in July.

Consolidated gross margin (gross profit as a percentage of net sales) for the nine months ended September 30, 2010 was 38.3%, down 1.7% when compared with gross margin of 40% 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 coupled with lower volume.

Consolidated selling, general and administrative expenses were $1,174,160 for the nine months ended September 30, 2010, a decrease of nearly $51,801 or 4.2%, when compared to selling, general and administrative expenses of $1,225,961 for the same period in 2009. The decrease was a result of lower wages of $40,000, lower travel expenses of $5,000 and lower commissions of $8,000 because of the drop in volume.

Consolidated depreciation and amortization expenses for the nine months ended September 30, 2010 were $68,058 a decline of over $8,000 or 10.7%, when compared to depreciation and amortization expenses of $76,244 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 nine months ended September 30, 2010 was $24,149 a decrease of $3,000 or 11%, when compared to interest expense of $27,149 for the same period in 2009. Total debt has been reduced by nearly $40,000 since December 31, 2009.

Consolidated miscellaneous income for the nine months ended September 30, 2010 were $102,452 or $107,684 higher when compared to miscellaneous expenses of $5,232 for the same period in 2009. Increases in miscellaneous income this year was a result of insurance company advances over the losses the Company has incurred through September 30, 2010.

 

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As a result of the forgoing items, the Company had a consolidated net profit for the nine months ended September 30, 2010 of $16,891 compared to a profit of $14,449 for the same period in 2009. Because of the sales decline, increases in green beans and the unresolved claim with the insurance carrier, there can be no assurances that the Company will be profitable in any future periods.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2010, the Company had working capital of $244,700 versus working capital of $157,701 as of December 31, 2009. The increase in working capital is due primarily to the increase in cash which are advances from the insurance company from various fire coverages that were offset by lower inventory and higher payables.

Net cash provided by operating activities was $309,551 for the nine months ended September 30, 2010 compared to net cash provided by operating activities for the nine months ended September 30, 2009 of $134,525. The increase in net cash provided by operating activities in the nine months of 2010 was principally the result of income from the advances from the insurance company relating to the Company’s fire coverage.

Cash used in investing activities was $39,294 for the nine months ended September 30, 2010 compared to $33,952 used in the same period in 2009. Capital additions for the first nine 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 $13,000 for brewing equipment.

Net cash used in financing activities for the nine months ended September 30, 2010 was $39,570 compared to net cash used in financing activities of $100,603 during the same period in 2009. The drop in cash used in financing activities was a result of the payoff of a number of leases and loans during the last twelve months.

Because of the cash advances from the insurance company and a reduction in cash used in financing activities, cash at September 30, 2010 increased by $230,687 from the cash balance at January 1, 2009 and $233,316 from cash at September 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 September 30, 2010, the balance on the note is $185,498. (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 September 30, 2010 with an outstanding balance on the line of $13,000. The credit line is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract rights. The line of credit is personally guaranteed by the Company’s majority shareholders. (See Note 7 of Notes to Financial Statements)

The Company has an interest-only note for $19,919 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 September 30, 2010, the Company had total borrowings of $285,693 including $198,498 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.

 

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		Payments Due By Period
Contractual Obligations		Total				Less than One year				1-3 years				4-5 years				After 5 years
Long Term Debt		$	285,693			$	89,080			$	135,999			$	60,614			$	—
Operating Leases			25,049				10,909				13,304				836				—
Real Estate Leases			512,800				160,200				206,400				146,200				—
Total Cash Obligations		$	823,542			$	260,189			$	355,703			$	207,650			$	—

The Company is dependent on successfully executing its business plan to achieve profitable operations, obtaining additional sources of borrowings (including normal trade credit) and securing favorable financing arrangements (including lease financing) to finance its working capital needs. There can be no assurance that the Company will be successful in this regard. If the Company is not able to meet its credit obligations the stability of the Company’s business would be in question.

RELATED PARTY TRANSACTIONS

From time to time, the Company enters into various transactions with its majority shareholders, Paul and Joan Katzeff. See note “11 — Related Party Transactions” in the Notes to the Financial Statements.

SEASONALITY AND OTHER FACTORS AFFECTING PERFORMANCE

The Company’s business is seasonal in nature. The seasonal availability of green bean coffee in the first two quarters of the year and increased sales in the last quarter historically creates a high use of cash and a build up in inventories in the first two quarters, with a corresponding decrease in inventory and increase in cash in the last quarter. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Furthermore, past seasonal patterns are not necessarily indicative of future results.

INDEMNIFICATION MATTERS

The Company’s Bylaws provide that the Company may indemnify its directors, officers, employees and other agents to the fullest extent permitted by California law. The Company believes that indemnification under its Bylaws also permits the Company to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether California law would permit indemnification. The Company maintains such liability insurance for its directors and certain officers and employees.

At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification would be required or permitted. The Company is not aware of any pending or threatened litigation or proceeding that might result in a claim for such indemnification.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s stock is generally illiquid and there have been few trades in recent years. There have been three trades in the Company’s Common Stock since 1999. In June 2004, 750 shares were traded at $4.50 per share. In December 2005, 400 shares were traded at $2.00 per share.

ITEM 4. CONTROLS AND PROCEDURES

 

(a)

We maintain a system of controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange act of 1934, as amended, is accumulated and communicated to our management including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2010, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, management has evaluated the effectiveness of the design and operation our disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.

 

(b)

Changes in Internal Controls. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

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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.

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 –

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).

 

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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).

 

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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 it behalf by the undersigned, thereunto duly authorized.

THANKSGIVING COFFEE COMPANY, INC.

 

Name		Title		Date
/s/ Sam Kraynek		Chief Executive Officer		November 15, 2010
Sam Kraynek
/s/ Ben Corey-Moran		President		November 15, 2010
Ben Corey-Moran
/s/ Sam Kraynek		Chief Financial Officer		November 15, 2010
Sam Kraynek

 

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