FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.		Financial Statements	4
	Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited).		4
	Condensed Statements of Operations for the nine months and three months ended September 30, 2019 and September 30, 2018 (unaudited)		6
	Condensed Statement of Changes in Accumulated Deficit for the nine months and the three months ended September 30, 2019 and September 30, 2018 (unaudited).		7
	Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 2018 (unaudited)		8
	Notes to Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19

PART II – OTHER INFORMATION

 

Item 1.	Legal Proceedings		20
Item 1A.	Risk Factors		20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.	Defaults Upon Senior Securities		20
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits		21
Signatures			22

 

 

PART 1. Financial Information

 

 

Item 1. Financial Statements

 

 

The condensed financial statements included herein have been prepared by Thanksgiving Coffee Company, Inc. (the Company, or we) 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, 2019 and December 31, 2018, and its results of operations for the three and nine month periods ended September 30, 2019 and September 30, 2018 and its cash flows for the nine month periods ended September 30, 2019 and September 30, 2018. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying condensed 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.

 

 

 

Thanksgiving Coffee Company, Inc.

Condensed Balance Sheets

Unaudited

 

 

See accompanying notes to condensed financial statements

 

 

Thanksgiving Coffee Company, Inc.

Condensed Balance Sheets

Unadudited

 

 

See accompanying notes to condensed financial statements

 

 

Thanksgiving Coffee Company, Inc.

Condensed Statements of Operations

Unaudited

 

 

See accompanying notes to condensed financial statements

 

 

Thanksgiving Coffee Company, Inc.

Condensed Statements of Accumulated Deficit

Unaudited

 

 

See accompanying notes to condensed financial statements

 

 

Thanksgiving Coffee Company, Inc.

Condensed Statements of Cash Flows

Unaudited

 

 

See accompanying notes to condensed financial statements

 

 

Thanksgiving Coffee Company, Inc.

 

Notes to Financial Statements (continued)

 

September 30, 2019 and December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

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 business, 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.

 

Risks that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or that may materially and adversely affect our actual results include, but are not limited to, those discussed in Part II, Item 1A. Risk Factors in the 2018 Report and the additional risk factor regarding COVID-19 discussed in Part II, Item 1A of this Report. Readers should carefully review the risk factors described in the 2018 Report, this Report and in other documents that the Company files from time to time with the SEC.

 

SUMMARY

 

Sales of the Company have eroded over the prior years 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. In the first quarter, second quarter and third quarter of this year the Company is experiencing an increase in sales because one of its distributors had a fire which curtailed what they could roast in house. In addition, the Company continues to try a number of strategies that may or may not prove effective in abating these declines. The Company has changed its method of distribution to rely less on direct distribution (with only three routes) and instead uses independent distributors or ships direct (via UPS or other common carrier). In addition, the Company is trying to focus increasing its on-line sales with a continued emphasis on its presence in social media, growing its email list and linking its search optimization. The effects of these changes on the Company’s sales will reduce 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 green beans than our competitors, because of quality, the organic nature of many of the varietals we carry and the fact that we use fair-traded coffees as well. Green bean costs have remained stable but any rise will place pressure on margins. If green bean costs continue as is or rise, whether as a consequence of inclement weather in a major producing area or any other event that affects green bean pricing, and if the Company cannot offset costs by raising prices, it would have a negative impact on the Company and its margins.

 

 

Results of Operations

 

Nine months ended September 30, 2019 versus September 30, 2018

 

		Increase (Decrease)				Percent Change
Net Sales		$	706,614				29.3	%
Cost of Sales			364,389				26.3	%
Gross Profit			342,225				33.3	%
Selling, G&A Expense			36,921				3.7	%
Depreciation and Amortization			(15,206	)			(22.8	%)
Other, net			(34,590	)			(568	%)
Net Income			276,326				687.0	%

 

Net sales for the nine months ended September 30, 2019 were $3,120,554 up 29.3%, or $706,614 when compared with net sales of $2,413,940 for the same period in fiscal 2018.

 

Distribution revenues (e.g., revenues generated by the Company’s own truck distribution) were down 86,686 or (8.73%) for the nine months ended September 30, 2019, when compared with distribution sales for the same period in 2018. The decline appears to be a result of slower volume for existing customers and no customers have been lost.

 

National revenues (e.g., revenues not derived by mail order and direct truck distribution) were up $775,756 or 68.31% for the nine months ended September 30, 2019 when compared to national sales for the same period in 2018. The increase reflects the increased sales from a distributor who suffered a major fire and was not able to fulfill all their orders for the cafes they own. Thanksgiving is roasting more of their coffees and not a selected variety as in the past. This is a short-term fix and they will be fully operational in 2020.

 

Mail order revenues (e.g., revenues generated from product sold directly to the consumer either through print media or the Internet) decreased $39,286 or (11.40%) for the nine months ended September 30, 2019 when compared to mail order sales for the same period in 2018. The decrease is attributable to the increase in competition with other on line competitors.

 

Cost of sales for the nine months ended September 30, 2019 were $1,749,736, up 26.3%, or $364,389 when compared with the cost of sales of $1,385,347 for the same period in 2018. The increase reflects the increase in the overall sales in the nine months of 2019.

 

Gross margin percentage (gross profit as a percentage of net sales) for the nine months ended September 30, 2019 was 43.92% percentage points when compared with the gross margin of 42.61% for the same period in 2018.

 

Selling, general and administrative expenses were $1,044,169 for the nine months ended September 30, 2019, an increase of 3.7% when compared with the selling, and general and administrative expenses of $1,007,248 for the same period in 2018. The increase was a result of increase in freight, graphics and advertising.

 

Depreciation and amortization expenses for the nine months ended September 30, 2019 were $51,633, a (22.8%) decrease, or nearly ($15,206) when compared to depreciation expense of $66,839 for the same period in 2018. The decrease reflects the disposal of old equipment.

  

As a result of the foregoing factors, the Company had a net income of $236,118 for the nine months ended September 30, 2019, compared to a loss of $40,208 for the same period in 2018.

 

To summarize the Company’s third quarter overall sales are up over the prior year. The growth was in national revenue, which required us to ship out the coffees and in turn increased our selling, general and administrative expenses. It was one customer whose sales attributed to the increase. It is noted the cost of sales increased as well because of the volume of green roasted to fulfill orders. Customers shared part of the cost in freight but not all and that is reflected in the increase in freight cost in the selling, general, and administrative expenses of the profit and loss reports.

 

Direct routes and mail order revenues decreased due to the increase of competition in the market place. The Company is in the process of upgrading the website, links, and increasing our social media presence, but in turn means more expenses out -going for marketing. In addition, the Company is working on introducing a new product to the market place and a re-introduction of a product. Overall our expenses have risen in advertising, freight and the on line mail order aspect of the Company but have decreased in other areas, such as insurance and depreciation.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2019, the Company had working capital of $533,862 versus working capital of $371,667 as of December 31, 2018. The increase in working capital is due primarily to profitable results experienced in the quarter ended September 30, 2019.

 

Net cash provided by operating activities was $214,725 for the nine months ended September 30, 2019 compared to net cash used by activities of $22,095 during the same period in 2018. The increase in cash was due to an increase in roasting for one distributor.

 

Cash used in investing activities was ($724) for the nine months ended September 30, 2019 compared to ($26,364) used in the same period in 2018. Net cash used in financing activities for the nine months ended September 30, 2019 was ($40,943) compared to net cash used in financing activities of ($16,874) during the same period in 2018. The cash used by financing activities was a result of paying existing debt.

 

At September 30, 2019, the Company had total borrowings of $61,344.

 

At September 30, 2019, our contractual obligations are as follows:

 

		Payments Due By Period
Contractual Obligations		Total				Less than One year				1-3 years				4-5 years				After 5 years
Finance Leases		$	67,911				13,024				50,394				4,493			$	-
Operating Leases			24,853				1,692				19,559				3,602				-
Real Estate Leases			584,800				25,800				309,600				206,400				43,000
Total Cash Obligations		$	677,564			$	40,516			$	379,553			$	214,495			$	43,000

 

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 were 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 included in the Company’s 10-K, as filed with the SEC. In addition, see note “7- Related Party Transaction” in regards to ETICO green bean purchases for 2019.

 

 

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 create 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. In 2019 the Company has been keeping a tighter control on its inventory supply, resulting in fewer inventory supplies on hand. In the third quarter of 2019, similar controls continue.

 

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 preceding 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 two 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

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and President, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and President concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2018.

 

Management has identified the following material weakness in our internal control over financial reporting:

 

●

Application of New Accounting Standards – we did not have appropriate controls in place to ensure proper and timely implementation of new accounting standards, specifically with respect to the adoption of ASC 842 – Leases.

 

Notwithstanding the existence of these material weaknesses in our internal controls, we believe that our financial statements fairly present, in all material respects, our balance sheets at September 30, 2019 and our statements of operations, stockholders’ deficit and cash flows for the quarter ended September 30, 2019 in conformity with GAAP.

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and President, of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer, and the President concluded that the Company’s disclosure controls and procedures were effective.

 

 

Part II – OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

-None-

 

 

ITEM 1A. RISK Factors

 

The Company has concerns regarding the current economic situation. The United States and the global economy is experiencing severe instability in the commercial and investment banking systems which are likely to continue to have far-reaching effects on the economic activity in the country for an indeterminable period. The long-term impact on the United States economy and the Company’s operating activities and ability to raise capital cannot be predicted at this time, but may be substantial.

 

Our coffee roasting facility is subject to state and local air-quality and emissions regulations. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations our ability to produce any of our roasted products would be severely limited. We believe that we are in compliance in all material respects with all such laws and regulations and we have obtained all material licenses that are required for the operation of our business. We are not aware of any environmental regulations that have or that we believe will have a material adverse effect on our operations.

 

We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.

 

Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world. The effects of this outbreak on our business have included and could continue to include disruptions or restrictions on our employees’ ability to travel in affected regions, as well as temporary closures of our roasting facility and temporary closures of the facilities of our suppliers, customers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our customers, third-party suppliers and contractors, and results of operations. In addition, a significant outbreak of contagious disease in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could reduce the demand for our products and likely impact our results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.

 

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

 

 

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

 

None –

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

- None –

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

 

- None -

 

 

ITEM 5. OTHER INFORMATION

 

 Not applicable

 

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 

 

Financial Statement Schedules

 

Not Applicable

 

Exhibits

 

Exhibits

 

3.1	Restated Articles of Incorporation of the Company.*
3.2	Bylaws of the Company and amendments.*
10.4	Sample Coffee Purchase Agreement.**
10.10	License Agreement between the Company and the American Birding Association, Inc. and amendment.**
10.13	Lease agreement for the Company’s headquarters and manufacturing and storage facility dated November 1, 2005 and amendment.**
14.1	Code of Ethics***
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
31.2	Certification of President Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*

 

*	Filed herewith.

**	Incorporated by reference to the exhibits to the Company’s Form 10-K for the year ended December 31, 2018.

***	Incorporated by reference to the exhibits to the Company’s Form 10-KSB for the year ended December 31, 2003.

 

 

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’s behalf by the undersigned, thereunto duly authorized.

 

THANKSGIVING COFFEE COMPANY, INC.

 

 

Name	Title	Date
/s/ Paul Katzeff	Chief Executive Officer	August 19, 2020
Paul Katzeff
/s/ Joan Katzeff	President	August 19, 2020
Joan Katzeff