UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2019

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to         

 

Commission File Number 2-5916

 

        Chase General Corporation        

(Exact name of small business issuer as specified in its charter)

 

MISSOURI	36-2667734
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

 

1307 South 59th, St. Joseph, Missouri 64507

(Address of principal executive offices, Zip Code)

 

(816) 279-1625

(Issuer’s telephone number, including area code)

 

Indicate by check mark if the registrant is a well-known issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant (1) has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨
Nonaccelerated filer x	Smaller reporting company x
Emerging Growth Company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨ No x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨ No x

 

As of February 11, 2020, there were 969,834 shares of common stock, $1.00 par value, outstanding.

 

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2019

 

Part I	Financial Information
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of December 31, 2019 (UNAUDITED) and June 30, 2019	1
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018  (UNAUDITED)	3
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2019 AND 2018  (UNAUDITED)	4
		Condensed consolidated statements of cash flows for the SIX months ended dECEMBER 31, 2019 and 2018 (Unaudited)	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	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.	Mine Safety Disclosures	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
	Signatures		23

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				June 30,
		2019				2019
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents		$	287,207			$	18,800
Trade Receivables, Net of Allowance for Doubtful Accounts of $13,449 and $12,849, Respectively			164,126				137,869
Inventories:
Finished Goods			25,910				200,085
Goods in Process			7,455				12,999
Raw Materials			72,407				45,456
Packaging Materials			103,307				151,795
Prepaid Expenses			44,219				7,653
Total Current Assets			704,631				574,657
PROPERTY AND EQUIPMENT
Land			35,000				35,000
Buildings			77,348				77,348
Machinery and Equipment			851,791				851,791
Trucks and Autos			158,632				158,632
Office Equipment			33,025				33,025
Leasehold Improvements			72,068				72,068
Total			1,227,864				1,227,864
Less Accumulated Depreciation			1,044,067				1,016,764
Total Property and Equipment, Net			183,797				211,100
Other Long-Term Assets
Right of Use Assets			346,764				-
Total Long-Term Assets			530,561				211,100
Total Assets		$	1,235,192			$	785,757

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

		December 31,				June 30,
		2019				2019
		(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	66,133			$	78,549
Current Maturities of Notes Payable			12,507				97,133
Current Maturities of Lease Liability			57,374				-
Accrued Expenses			11,415				28,851
Refund Liability Owed to Customers			20,604				10,403
Deferred Income			1,299				1,299
Total Current Liabilities			169,332				216,235
LONG-TERM LIABILITIES
Lease Liability, Less Current Maturities			289,390				-
Notes Payable, Less Current Maturities			14,059				20,408
Deferred Income			5,518				6,168
Total Long-Term Liabilities			308,967				26,576
Total Liabilities			478,299				242,811
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital Stock Issued and Outstanding:
Prior Cumulative Preferred Stock, $5 Par Value:
Series A (Liquidation Preference $2,355,000 and $2,340,000, Respectively)			500,000				500,000
Series B (Liquidation Preference $2,310,000 and $2,295,000, Respectively)			500,000				500,000
Cumulative Preferred Stock, $20 Par Value:
Series A (Liquidation Preference $5,282,596 and $5,253,329, Respectively)			1,170,660				1,170,660
Series B (Liquidation Preference $860,902 and $856,133, Respectively)			190,780				190,780
Common Stock, $1 Par Value			969,834				969,834
Paid-In Capital in Excess of Par			3,134,722				3,134,722
Accumulated Deficit			(5,709,103	)			(5,923,050	)
Total Stockholders' Equity			756,893				542,946
Total Liabilities and Stockholders' Equity		$	1,235,192			$	785,757

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended
		December 31
		2019				2018
SALES		$	1,231,459			$	1,130,629
COST OF SALES			806,670				752,454
Gross Profit on Sales			424,789				378,175
OPERATING EXPENSES
Selling			100,223				95,514
General and Administrative			111,835				97,329
Total Operating Expenses			212,058				192,843
Income from Operations			212,731				185,332
OTHER INCOME (EXPENSE)
Miscellaneous Income			433				3,462
Interest Expense			(3,515	)			(3,056	)
Total Other Income (Expense)			(3,082	)			406
Income before Income Taxes			209,649				185,738
PROVISION FOR INCOME TAXES			-				3,400
NET INCOME		$	209,649			$	182,338
EARNINGS PER SHARE
Basic		$	0.18			$	0.14
Diluted		$	0.09			$	0.07

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Six Months Ended
		December 31
		2019				2018
SALES		$	1,945,540			$	1,872,149
COST OF SALES			1,295,300				1,278,775
Gross Profit on Sales			650,240				593,374
OPERATING EXPENSES
Selling			178,178				168,417
General and Administrative			256,224				235,813
Total Operating Expenses			434,402				404,230
Income from Operations			215,838				189,144
OTHER INCOME (EXPENSE)
Miscellaneous Income			3,306				3,825
Interest Expense			(5,197	)			(5,941	)
Total Other Expense			(1,891	)			(2,116	)
Income before Income Taxes			213,947				187,028
PROVISION FOR INCOME TAXES			-				3,400
NET INCOME		$	213,947			$	183,628
EARNINGS PER SHARE
Basic		$	0.15			$	0.11
Diluted		$	0.07			$	0.05

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended
		December 31
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income		$	213,947			$	183,628
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization			27,303				28,429
Allowance for Bad Debts			600				600
Deferred Income Amortization			(650	)			(649	)
Deferred Income Taxes			-				3,400
Effects of Changes in Operating Assets and Liabilities:
Trade Receivables			(26,857	)			(52,487	)
Inventories			201,256				192,551
Prepaid Expenses			(36,566	)			(32,298	)
Accounts Payable			(12,416	)			(84,492	)
Accrued Expenses			(17,436	)			(23,763	)
Refund Liability Owed to Customers			10,201				37,624
Net Cash Provided by Operating Activities			359,382				252,543
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line-of-Credit			227,000				340,000
Principal Payments on Line-of-Credit			(312,000	)			(340,000	)
Principal Payments on Notes Payable			(5,975	)			(5,542	)
Net Cash Used by Financing Activities			(90,975	)			(5,542	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			268,407				247,001
Cash and Cash Equivalents - Beginning of Period			18,800				2,129
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	287,207			$	249,130

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

NOTE 1       SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 2019 has been taken from audited consolidated financial statements at that date and condensed. The condensed consolidated financial statements as of and for the three and six months ended December 31, 2019 and for the three and six months ended December 31, 2018 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended June 30, 2019. The results of operations for the three and six months ended December 31, 2019 and cash flows for the six months ended December 31, 2019 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2020. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

 

No events have occurred subsequent to December 31, 2019, through the date of filing this form, that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the six month period ended December 31, 2019.

 

Revenue Recognition

 

The majority of our revenue is derived by fulfilling customer orders for the purchase of our products, including 1) a candy bar marketed under the trade name “Cherry Mash” and 2) coconut, peanut, chocolate, and fudge confectioneries. The Company recognizes revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon shipment to the customer. Shipping and handling costs incurred to ship product to the customer are recorded within cost of sales. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis. Generally, individual orders from customers are accounted for as a single performance obligation.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition (Continued)

 

Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilling product orders. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The amount of consideration the Company expects to receive and revenue the Company recognizes includes estimates of variable consideration, including costs for trade promotional programs, customer incentives, and allowances and discounts associated with aged or potentially unsaleable products. These estimates are based upon our analysis of the programs offered, historical trends, and expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past. The Company reviews and updates these estimates regularly and the impact of any adjustments are recognized in the period the adjustments are identified. The adjustments recognized in second quarter of the year ending June 30, 2020 resulting from updated estimates of revenue for prior year product sales were not significant. The company has elected a practical expedient to recognize incremental costs incurred to obtain contracts, which primarily represent sales commissions where the amortization period would be less than one year, as a selling expense when incurred in the financial statements.

 

The majority of the Company’s products are confectionery and confectionery-based and, therefore, exhibit similar economic characteristics, such that they are based on similar ingredients and are marketed and sold through the same channels to the same customers. The Company operates two divisions, Chase Candy Products and Seasonal Candy Products. Chase Candy Products involve production and sale of a candy bar marketed under the trade name “Cherry Mash”. The Seasonal Candy Products involve production and sale of coconut, peanut, chocolate, and fudge confectioneries. Both divisions share a common labor force and utilize the same basic equipment and raw materials. Management considers these two divisions as one reportable segment. The various divisions of revenue are as follows:

 

For the three months ended December 31, 2019

 

		2019				2018
Sales - Chase Candy		$	499,762			$	474,199
Sales - Seasonal Candy			731,697				656,430
Sales		$	1,231,459			$	1,130,629

 

  For the six months ended December 31, 2019

 

		2019				2018
Sales - Chase Candy		$	857,945			$	768,486
Sales - Seasonal Candy			1,087,595				1,103,663
Sales		$	1,945,540			$	1,872,149

 

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Adopted Pronouncements

 

The Company adopted the guidance of ASU No. 2016-02, Leases, (ASC 842) as of July 1, 2019 using the modified retrospective transition approach with the cumulative effect recognized at the date of initial application. The comparative information in the prior year has not been adjusted and continues to be reported under ASC 840, Leases, which was the accounting standard in effect for that period. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all, and disclose key leasing information. The Company elected a package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification, and exclude from balance sheet reporting those leases with initial terms of 12 months or less. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Adoption of the new standard on July 1, 2019 resulted in the recording of operating lease ROU assets and lease liabilities in the amount of $376,105. The standard did not materially affect the Company’s consolidated net income or cash flows. See Note 7—Leases for the required disclosures of the nature, amount, timing, and uncertainty of cash flows arising from leases.

 

Recently Issued Pronouncements

 

There have been no newly issued or newly applicable accounting pronouncements that have, or are expected to have, a significant impact on the Company’s consolidated financial statements

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2

EARNINGS PER SHARE

 

The earnings per share were computed on the weighted average of outstanding common shares during the period. Diluted earnings per share are calculated by including contingently issuable shares with the weighted average shares outstanding.

 

		Three Months Ended								Six Months Ended
		December 31								December 31
		2019				2018				2019				2018
Net Income		$	209,649			$	182,338			$	213,947			$	183,628
Preferred Dividend Requirements:
6% Prior Cumulative Preferred,
$5 Par Value			15,000				15,000				30,000				30,000
5% Convertible Cumulative
Preferred, $20 Par Value			17,018				17,018				34,036				34,036
Total Dividend Requirements			32,018				32,018				64,036				64,036
Net Income - Common
Stockholders		$	177,631			$	150,320			$	149,911			$	119,592
Weighted Average Shares - Basic			969,834				969,834				969,834				969,834
Dilutive Effect of Contingently
Issuable Shares			1,033,334				1,033,334				1,033,334				1,033,334
Weighted Average Shares – Diluted			2,003,168				2,003,168				2,003,168				2,003,168
Basic Earnings per Share		$	0.18			$	0.14			$	0.15			$	0.11
Diluted Earnings per Share		$	0.09			$	0.07			$	0.07			$	0.05

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

note 2        EARNINGS PER SHARE (continued)

 

Cumulative Preferred Stock dividends in arrears at December 31, 2019 and 2018 totaled $8,397,058 and $8,268,986, respectively. Total dividends in arrears, on a per share basis, consist of the following:

 

		Six Months Ended
		December 31
		2019				2018
6% Convertible
Series A		$	18			$	18
Series B			18				18
5% Convertible
Series A		$	70			$	69
Series B			70				69

 

The 6% convertible prior cumulative preferred stock may, upon thirty days prior notice, be redeemed by the Corporation at $5.25 a share plus unpaid accrued dividends to date of redemption. In the event of voluntary liquidation, holders of this stock are entitled to receive $5.25 per share plus accrued dividends. It may be exchanged for common stock at the option of the shareholders in the ratio of 4 common shares for one share of Series A and 3.75 common shares for one share of Series B.

 

The Company has the privilege of redemption of 5% convertible cumulative preferred stock at $21.00 a share plus unpaid accrued dividends. In the event of voluntary or involuntary liquidation, holders of this stock are entitled to receive $20.00 a share plus unpaid accrued dividends. It may be exchanged for common stock at the option of the shareholders, in the ratio of 3.795 common shares for one of preferred.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3

NOTES PAYABLE

 

The Company’s long-term debt consists of:

 

				December 31,				June 30,
Payee		Terms		2019				2019
Nodaway Valley Bank		$350,000 line-of-credit agreement expiring on January 4, 2021, with a variable interest rate at prime but not less than 5%.  The line-of-credit is collateralized by substantially all assets of the Company.		$	-			$	85,000
Ford Credit		$705 monthly payments, interest of 5.8%; final payment due October 2021, secured by a vehicle.			14,670				18,407
Toyota Credit		$444 monthly payments, interest of 6.49%; final payment due May 2022, secured by a vehicle.			11,896				14,134
Total					26,566				117,541
Less Current Portion					12,507				97,133
Long-Term Portion				$	14,059			$	20,408

 

Future minimum payments for the twelve months ending December 31 are:

 

December 31:		Amount
2020		$	12,507
2021			11,877
2022			2,182
Total		$	26,566

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4

INCOME TAXES

 

The Company follows the provisions for uncertain tax positions as addressed in Financial Accounting Standards Board Accounting Standards Codification 740-10. The Company recognized no liability for unrecognized tax benefits at December 31, 2019. The Company has no material tax positions at December 31, 2019 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The Company had no accruals for interest or penalties at December 31, 2019. The Company’s federal income tax returns for the fiscal years ended 2017, 2018 and 2019 are subject to examination by the Internal Revenue Service taxing authority.

 

NOTE 5

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Six Months Ended
		December 31
		2019				2018
Cash Paid for:
Interest		$	5,197			$	5,941

 

NOTE 6

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments consist principally of cash and cash equivalents, trade receivables and payables, and notes payable. There are no significant differences between the carrying value and fair value of any of these consolidated financial instruments. As of December 31, 2019, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7

Leases

 

The Company adopted ASC 842 on July 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three months ended December 31, 2018 or as of June 30, 2019.

 

The Company leases its office and manufacturing facility, located at 1307 South 59^th, St. Joseph, Missouri under an operating lease from an entity that is partially owned by the son of the Chief Executive Officer of the Company. The lease term is from February 1, 2005 through March 31, 2025 with an option to extend for an additional term of five years. The Company does not believe that exercise of the renewal option is reasonably assured, and has not included the additional five years in the lease term. The lease currently requires payments of $6,500 per month.

 

Operating lease right-of-use assets and lease liabilities were recognized upon adoption of the lease standard based on the present value of minimum lease payments over the remaining lease term. The Company’s operating lease has a remaining term of 5.5 years and the present value of the lease payments is calculated using the lessor’s implicit rate of 6.43%. Operating lease expense is recognized on a straight-line basis over the lease term.

 

The Company’s lease agreement does not contain any residual value guarantees. Additionally, any other short-term leases are immaterial. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize right-of-use assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term. Operating lease expenses and cash paid for operating lease liabilities were $39,000 for the six months ended December 31, 2019, of which, $35,782 is included in cost of sales and $3,218 is included in general and administrative expenses.

 

Minimum annual payments required under existing operating lease liabilities that have initial or remaining noncancelable terms in excess of one year as of December 31, 2019 are as follows:

 

Twelve months ending December 31, 2020		$	78,000
2021			78,000
2022			78,000
2023			78,000
2024			78,000
Thereafter			19,500
Total lease payments			409,500
Less imputed interest			62,736
Total lease payments		$	346,764

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

OVERVIEW

 

Chase General Corporation (Chase) is a holding company for its wholly-owned subsidiary, Dye Candy Company. This subsidiary is the main operating company that is engaged in the manufacture of confectionery products which are sold primarily to wholesale houses, grocery accounts, vendors, and repackers. The subsidiary (Company) operates two divisions, Chase Candy division and Seasonal Candy division, which share a common labor force and utilize the same basic equipment and raw materials. Therefore, segment reporting for the two divisions is not maintained by Management.

 

The Company’s business, like that of many other confectionary product manufacturers, is seasonal. Historically, the Company has realized more of its revenue and earnings in the fiscal second quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.

 

RESULTS OF OPERATIONS - Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018, and Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018

 

The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.

 

The following table sets forth certain items as a percentage of sales and revenues for the periods presented:

 

		Three Months Ended								Six Months Ended
		December 31								December 31
		2019				2018				2019				2018
Sales			100	%			100	%			100	%			100	%
Cost of Sales			66				67				67				68
Gross Profit on Sales			34				33				33				32
Operating Expenses			17				17				22				22
Income from Operations			17				16				11				10
Other Income (Expense), Net			-				-				-				-
Income before Income Taxes			17				16				11				10
Provision for Income Taxes			-				-				-				-
Net Income			17	%			16	%			11	%			10	%

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

SALES

 

Sales increased $100,830 or 9% for the three months ended December 31, 2019 to $1,231,459 compared to $1,130,629 for the three months ended December 31, 2018. Sales for Chase Candy increased $25,563 to $499,762 for the three months ended December 31, 2019, compared to $474,199 for the three months ended December 31, 2018. Sales for Seasonal Candy increased $75,267 to $731,697 for the three months ended December 31, 2019, compared to $656,430 for the three months ended December 31, 2018.

 

The 5% increase in sales of Chase Candy of $25,563 for the three months ended December 31, 2019 over the same period ended December 31, 2018, is primarily due to the net effect of the following: 1) increased sales of the L100/L200/SK2100 Cherry Mash Merchandisers division by approximately $29,000 versus the same period a year ago primarily due to increased orders from existing customers; 2) increased sales of tue L279/L299 Bulk Mini Mash division by approximately $6,500 versus the same period a year ago due to increased orders from existing customers; 3) increased sales of the L212/L278 Mini Mash division by approximately $4,000 versus the same period a year ago primarily due to increased orders from existing customers; offset by 4) decreased sales of the L276 Cherry Mash Distributors Pack division by approximately $12,000 versus the same period a year ago due to decreased orders from existing customers and 5) other various decreases netting to $2,000.

 

The 11% increase in sales of Seasonal Candy of $75,267 for the three months ended December 31, 2019 over the same period ended December 31, 2018, is primarily due to the net effect of the following: 1) an increase orders in the general seasonal division netting approximately $60,000 versus the same period a year ago, primarily due to existing customers increasing orders; 2) increased orders in the bulk seasonal division netting approximately $9,000, due to increased sales from existing customers; and 3) other various increases netting to $6,000.

 

Sales increased $73,391 or 4% for the six months ended December 31, 2019 to $1,945,540 compared to $1,872,149 for the six months ended December 31, 2018. Sales for Chase Candy increased $89,459 to $857,945 for the six months ended December 31, 2019, compared to $768,486 for the six months ended December 31, 2018. Sales for Seasonal Candy decreased $16,068 to $1,087,595 for the six months ended December 31, 2019, compared to $1,103,663 for the six months ended December 31, 2018.

 

The 12% increase in sales of Chase Candy of $89,459 for the six months ended December 31, 2019 over the same period ended December 31, 2018, is primarily due to the following: 1) increased sales of the L100/L200/SK2100 Cherry Mash Merchandisers division by approximately $63,000 versus the same period a year ago primarily due to increased orders from existing customers; 2) increased sales of the L212/L278 Mini Mash division by approximately $32,000 versus the same period a year ago due to increased orders from existing customers; 3) increased sales of the L279/L299 Bulk Mini Mash division by approximately $3,500 versus the same period a year ago primarily due to increased orders from existing customers; offset by 4) decreased sales of the L276 Cherry Mash Distributors Pack division by approximately $7,000 versus the same period a year ago due to decreased orders from existing customers and 5) other various decreases netting to $2,000.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

SALES (CONTINUED)

 

The 1% decrease in sales of Seasonal Candy of $16,068 for the six months ended December 31, 2019 over the same period ended December 31, 2018, is primarily due to the net effect of the following: 1) decreased sales in the bulk seasonal division netting approximately $24,000 versus the same period a year ago, primarily due to existing customers decreasing orders; 2) decreased sales in the clamshell seasonal division netting approximately $14,000 versus the same period a year ago, primarily due to existing customers decreasing orders; offset by 3) increased sales in the general seasonal division netting approximately $18,000 versus the same period a year ago, primarily due to existing customers decreasing orders; and 4) various other increases netting to $4,000.

 

COST OF SALES

 

The cost of sales increased $58,384 to $806,670 or 66% of related revenues for the three months ended December 31, 2019, compared to $752,454 or 67% of related revenues for the three months ended December 31, 2018. The 8% increase in cost of sales of $58,384 is primarily due to the net effect of 1) a 9% increase sales of $100,830; 2) a 3.6% increase in the price of corn syrup; 3) a 1.5% increase in the price of sugar; offset by 4) a 5.1% decrease in the price of peanuts; and 5) an 2.4% decrease in the price of chocolate.

 

The cost of sales increased $20,693 to $1,295,300 or 67% of related revenues for the six months ended December 31, 2019, compared to $1,278,775 or 68% of related revenues for the six months ended December 31, 2018. The 2% increase in cost of sales of $20,693 is primarily due to the net effect of 1) a 4% increase in sales of $73,391; 2) a 2.9% increase in the price of corn syrup; 3) a 1.8% increase in the price of sugar; offset by 4) a 5.2% decrease in the price of peanuts; and 5) an 1.5% decrease in the price of chocolate.

 

Due to volatility in the regions where these raw materials are grown, management anticipates the prices of these raw materials to continue to fluctuate primarily based on supply and demand.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

SELLING EXPENSES

 

Selling expenses for the three months ended December 31, 2019 increased $4,709 to $100,223, which is 8% of sales, compared to $95,514, or 8% of sales for the three months ended December 31, 2018. The increase of $4,709 in selling expenses for the three months ended December 31, 2019 is primarily due to higher sales salaries and higher commissions offset by lower shipping charges. Sales salaries increased $4,561 to $ 27,686 for this period from $23,125 for the three months ended December 31, 2018 primarily due to increased base compensation for the Company’s sales person. Commission expense increased $2,443 to $43,528 for this period from $41,085 for the three months ended December 31, 2018 primarily due to an increase in sales. Shipping expenses decreased $2,822 to $15,685 for this period from $18,507 for the three months ended December 31, 2018 primarily due to a decrease in shipment of online ordered items.

 

Selling expenses for the six months ended December 31, 2019 increased $9,761 to $178,178, which is 9% of sales, compared to $168,417 or 9% of sales for the six months ended December 31, 2018. The increase of $9,761 in selling expenses for the six months ended December 31, 2019 is primarily due to the higher sales salaries and higher commissions offset by lower vehicle expense. Sales salaries increased $9,122 to $55,372 for this period from $46,250 for the six months ended December 31, 2018 primarily due to increased base compensation for the Company’s sales person. Commissions increased $1,214 to $76,913 for this period from $75,699 for the six months ended December 31, 2018 primarily due to an increase in sales. Vehicle expense decreased $806 to $3,342 for this period from $4,148 for the six months ended December 31, 2018 primarily due to newer vehicles currently in service.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses for the three months ended December 31, 2019 increased $14,506 to $111,835 and 9% of sales, compared to $97,329 or 9% of sales for the three months ended December 31, 2018. The increase of $14,506 in general and administrative expenses for the three months ended December 31, 2019 is primarily due to higher professional fees, indirect costs and postage expense. Professional fees increased $8,871 to $29,723 for this period from $20,852 for the three months ending December 31, 2018 primarily due to the Company’s audit firm increasing their fees and attorney fees increased. During the current year, the Company began allocating indirect costs to general and administrative expenses that were previously allocated to cost of sales. This allocation is for the administrative portion of the office and totaled $3,444 for the three months ended December 31, 2019. Postage expense increased $1,789 to $2,154 for this period from $365 for the three months ending December 31, 2018 primarily due to the purchase of additional postage supplies.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)

 

General and administrative expenses for the six months ended December 31, 2019 increased $20,411 to $256,224 or 13% of sales, compared to $235,813 or 13% of sales for the six months ended December 31, 2018. The increase of $20,411 in general and administrative expenses for the six months ended December 31, 2019 is primarily due to higher professional fees and indirect costs. Professional fees increased $14,185 to $98,742 for this period from $84,557 for the three months ending December 31, 2018 primarily due to the Company’s audit firm increasing their fees and attorney fees increased. During the current year, the Company began allocating indirect costs to general and administrative expenses that were previously allocated to cost of sales. This allocation is for the administrative portion of the office and totaled $7,125 for the six months ended December 31, 2019.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) decreased by $3,486 for the three months ended December 31, 2019 to $(3,082), compared to $406 for the three months ended December 31, 2018 primarily due to $2,859 of miscellaneous income received from supplier during the three months ended December 31, 2018.

 

Other income (expense) increased by $225 for the six months ended December 31, 2019 to $(1,891), compared to $(2,116) for the six months ended December 31, 2018.

 

PROVISION (BENEFIT) FOR INCOME TAXES

 

The Company recorded income tax expense for the three months ended December 31, 2019 of $0 as compared to income tax expense of $3,400 for the three months ended December 31, 2018. The Company recorded income tax expense for the six months ended December 31, 2019 of $0 as compared to income tax expense of $3,400 for the six months ended December 31, 2018.

 

NET INCOME

 

The Company reported net income for the three months ended December 31, 2019 of $209,649, compared to net income of $182,338 for the three months ended December 31, 2018. This increase of $27,311 is explained above. The Company reported net income for the six months ended December 31, 2019 of $213,947, compared to net income of $183,628 for the six months ended December 31, 2018. This increase of $30,319 is explained above.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

PREFERRED DIVIDENDS

 

Preferred dividends were $32,018 for the three months ended December 31, 2019 and 2018, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

 

Preferred dividends were $64,036 for the six months ended December 31, 2019 and 2018, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

 

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS

 

Net income applicable to common stockholders for the three months ended December 31, 2019 was $177,631 which is an increase of $27,311 as compared to the net income applicable to common stockholders for the three months ended December 31, 2018 of $150,320.

 

Net income applicable to common stockholders for the six months ended December 31, 2019 was $149,911 which is an increase of $30,319 as compared to the net loss applicable to common stockholders for the six months ended December 31, 2018 of $119,592.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The table below presents the summary of cash flow for the fiscal period indicated.

 

		Six Months Ended
		December 31
		2019				2018
Net Cash Provided by Operating Activities		$	359,382			$	252,543
Net Cash Used by Financing Activities		$	(90,975	)		$	(5,542	)

 

Management has no material commitments for capital expenditures during the remainder of fiscal 2020. The $359,382 of cash provided by operating activities is fully detailed in the condensed consolidated statement of cash flows on page five. The $90,975 of cash used in financing activities is the principal payments on the line of credit and equipment and vehicle loans. At December 31, 2019, the Company had $350,000 remaining on the line-of-credit, which could be utilized to help fund any working capital requirements.

 

Management believes that the projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements for the foreseeable future.

 

Management believes that inflation will have only a minimal effect on future operations since such effects will be offset by sales price increases, which are not expected to have a significant effect upon demand.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

Forward-Looking Information

 

This report, as well as our other reports filed with the Securities and Exchange Commission (SEC), contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict” and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, and management’s plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to be different from what appear here. These risk factors include: the ability to adequately pass through customers unanticipated future increases in raw material costs, decreased demand for products, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a smaller reporting company.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures

 

Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and management has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the board of directors, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no significant changes in Chase’s internal control over financial reporting or in other factors that management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of evaluation.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.

RISK FACTORS

 

Not applicable to a smaller reporting company.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

a.

None

 

b.

The total cumulative preferred stock dividends contingency at December 31, 2019 is $8,397,058.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

None

 

ITEM 6.

EXHIBITS

 

a.

Exhibits.

 

		Exhibit 31.1	Certification of Chief Executive Officer and Treasurer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
		Exhibit 32.1	Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		Exhibit 101	The following financial statements for the quarter ended December 31, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019, (ii) Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2019 and 2018, (iii) Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

 

SIGNATURES

 

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

 

		Chase General Corporation and Subsidiary
		(Registrant)
February 12, 2020		/s/ Barry M. Yantis
Date		Barry M. Yantis
		Chairman of the Board, Chief Executive Officer and
		Chief Financial Officer, President and Treasurer