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, 2016

 

¨

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 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 ¨
	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 Securities Exchange Act of 1934) Yes ¨ No x

 

As of February 9, 2017, 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, 2016

 

Part I	Financial Information
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of December 31, 2016 (UNAUDITED) and June 30, 2016	1
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015  (UNAUDITED)	3
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015  (UNAUDITED)	4
		Condensed Consolidated Statements of Cash Flows FOR THE SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015 (UNAUDITED)	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4.	Controls and Procedures	20
Part II	Other Information
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults Upon Senior Securities	21
	Item 4.	Mine Safety Disclosures	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	22
	Signatures		23

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				June 30,
		2016				2016
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents		$	299,932			$	19,259
Trade Receivables, Net of Allowance for Doubtful Accounts of $17,149 and $16,549, Respectively			306,723				179,622
Inventories:
Finished Goods			70,967				433,043
Goods in Process			5,941				6,540
Raw Materials			82,142				76,561
Packaging Materials			145,321				135,732
Prepaid Expenses			39,854				5,689
Income Tax Receivable			6,433				29,111
Deferred Income Taxes			6,943				7,533
Total Current Assets			964,256				893,090
PROPERTY AND EQUIPMENT
Land			35,000				35,000
Buildings			77,348				77,348
Machinery and Equipment			838,131				820,885
Trucks and Autos			213,116				213,116
Office Equipment			31,518				31,518
Leasehold Improvements			72,068				72,068
Total			1,267,181				1,249,935
Less Accumulated Depreciation			949,202				896,288
Total Property and Equipment, Net			317,979				353,647
Total Assets		$	1,282,235			$	1,246,737

 

The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

		December 31,				June 30,
		2016				2016
		(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	142,251			$	46,718
Current Maturities of Notes Payable			15,793				15,460
Accrued Expenses			19,772				25,163
Deferred Income			1,299				1,299
Total Current Liabilities			179,115				88,640
LONG-TERM LIABILITIES
Deferred Income			9,415				10,064
Notes Payable, Less Current Maturities			47,416				55,397
Deferred Income Taxes			72,510				90,446
Total Long-Term Liabilities			129,341				155,907
Total Liabilities			308,456				244,547
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital Stock Issued and Outstanding:
Prior Cumulative Preferred Stock, $5 Par Value:
Series A (Liquidation Preference $2,265,000 and $2,250,000, Respectively)			500,000				500,000
Series B (Liquidation Preference $2,220,000 and $2,205,000, Respectively)			500,000				500,000
Cumulative Preferred Stock, $20 Par Value:
Series A (Liquidation Preference $5,106,997 and $5,077,730, Respectively)			1,170,660				1,170,660
Series B (Liquidation Preference $832,285 and $827,516, 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			(5,492,217	)			(5,463,806	)
Total Stockholders' Equity			973,779				1,002,190
Total Liabilities and Stockholders' Equity		$	1,282,235			$	1,246,737

 

The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended
		December 31
		2016				2015
NET SALES		$	1,153,469			$	1,278,677
COST OF SALES			931,235				920,887
Gross Profit on Sales			222,234				357,790
OPERATING EXPENSES
Selling			132,229				156,957
General and Administrative			86,909				95,236
Gain on Sale of Equipment			-				(8,990	)
Total Operating Expenses			219,138				243,203
Income from Operations			3,096				114,587
OTHER INCOME (EXPENSE)
Miscellaneous Income			408				421
Interest Expense			(4,140	)			(2,741	)
Total Other Income (Expense)			(3,732	)			(2,320	)
Income (Loss) before Income Taxes			(636	)			112,267
PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT)			(153	)			39,581
NET INCOME (LOSS)		$	(483	)		$	72,686
EARNINGS (LOSS) PER SHARE
Basic		$	(0.03	)		$	0.04
Diluted		$	(0.03	)		$	0.02

 

The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Six Months Ended
		December 31
		2016				2015
NET SALES		$	2,015,657			$	2,341,780
COST OF SALES			1,603,126				1,764,270
Gross Profit on Sales			412,531				577,510
OPERATING EXPENSES
Selling			231,495				279,733
General and Administrative			222,655				210,287
Gain on Sale of Equipment			-				(21,364	)
Total Operating Expenses			454,150				468,656
Income (Loss) from Operations			(41,619	)			108,854
OTHER INCOME (EXPENSE)
Miscellaneous Income			784				799
Interest Expense			(4,957	)			(3,014	)
Total Other Income (Expense)			(4,173	)			(2,215	)
Income (Loss) before Income Taxes			(45,792	)			106,639
PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT)			(17,381	)			37,701
NET INCOME (LOSS)		$	(28,411	)		$	68,938
EARNINGS (LOSS) PER SHARE
Basic		$	(0.10	)		$	0.01
Diluted		$	(0.10	)		$	-

 

The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended
		December 31
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)		$	(28,411	)		$	68,938
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization			52,913				60,968
Allowance for Bad Debts			600				600
Deferred Income Amortization			(649	)			(649	)
Deferred Income Taxes			(17,346	)			(1,843	)
Gain on Sale of Equipment			-				(21,364	)
Effects of Changes in Operating Assets and Liabilities:
Trade Receivables			(127,701	)			11,718
Inventories			347,505				224,404
Prepaid Expenses			(34,165	)			(32,550	)
Income Taxes Receivable			22,678				-
Accounts Payable			95,533				13,823
Accrued Expenses			(5,391	)			(3,063	)
Income Taxes Payable			-				(5,784	)
Net Cash Provided by Operating Activities			305,566				315,198
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment			(17,245	)			(21,622	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line-of-Credit			325,000				300,000
Principal Payments on Line-of-Credit			(325,000	)			(300,000	)
Principal Payments on Notes Payable			(7,648	)			(6,666	)
Net Cash Used by Financing Activities			(7,648	)			(6,666	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			280,673				286,910
Cash and Cash Equivalents - Beginning of Period			19,259				84,204
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	299,932			$	371,114

 

The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1

general

 

The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 2016 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, 2016 and for the three and six months ended December 31, 2015 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, 2016. The results of operations for the three and six months ended December 31, 2016 and cash flows for the six months ended December 31, 2016 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2017. 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, 2016, 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, 2016.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2

EARNINGS (Loss) PER SHARE

 

The earnings (loss) 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
		2016				2015				2016				2015
Net Income (Loss)		$	(483	)		$	72,686			$	(28,411	)		$	68,938
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 (Loss) - Common Stockholders		$	(32,501	)		$	40,668			$	(92,447	)		$	4,902
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 (Loss) per Share		$	(0.03	)		$	0.04			$	(0.10	)		$	0.01
Diluted Earnings (Loss) per Share		$	(0.03	)		$	0.02			$	(0.10	)		$	-

 

The contingently issuable shares, for the three months and six months ended December 31, 2016, were not included in diluted earnings per common share as they would have an antidilutive effect upon earnings per share.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

note 2

EARNINGS (LOSS) PER SHARE (continued)

 

Cumulative Preferred Stock dividends in arrears at December 31, 2016 and 2015 totaled $8,012,842 and $7,884,770, respectively. Total dividends in arrears, on a per share basis, consist of the following:

 

		Six Months Ended
		December 31
		2016				2015
6% Convertible
Series A		$	17			$	17
Series B			17				17
5% Convertible
Series A		$	67			$	66
Series B			67				66

 

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

 

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		2016				2016
Nodaway Valley Bank		$350,000 line-of-credit agreement expiring on January 4, 2018, 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.		$	-			$	-
Ford Credit		$705 monthly payments, interest of 5.8%; final payment due October 2021, secured by a vehicle.			35,537				38,674
Toyota Credit		$364 monthly payments, interest of 3.5%; final payment due December 2020, secured by a vehicle.			16,297				18,179
Ford Credit		$468 monthly payments, interest of 2.9%; final payment due January 2019, secured by a vehicle.			11,375				14,004
Total					63,209				70,857
Less Current Portion					15,793				15,460
Long-Term Portion				$	47,416			$	55,397

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

note 3

NOTES PAYABLE (continued)

 

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

 

December 31:		Amount
2017		$	15,793
2018			16,481
2019			11,973
2020			12,098
2021			6,864
Total		$	63,209

 

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, 2016. The Company has no material tax positions at December 31, 2016 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, 2016. The Company’s federal income tax returns for the fiscal years ended 2014, 2015 and 2016 are subject to examination by the Internal Revenue Service taxing authority.

 

NOTE 5

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Six Months Ended
		December 31
		2016				2015
Cash Paid for:
Interest		$	4,957			$	3,014
Income Taxes		$	2,030			$	45,368
Noncash Transactions:
Financing of New Vehicles		$	-			$	62,681

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The guidance will initially be applied retrospectively using one of two methods. The standard will be effective for the entity for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted beginning for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of the amended revenue recognition guidance on its consolidated financial statements.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," ("ASU 2015-11"). An entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

 

In February 2016, the FASB issued amended guidance for the treatment of leases. The guidance requires lessees to recognize a right-of-use asset and a corresponding lease liability for all operating and finance leases with lease terms greater than one year. The guidance also requires both qualitative and quantitative disclosures regarding the nature of the entity’s leasing activities. The guidance will initially be applied using a modified retrospective approach. The amendments in the guidance are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the amended lease guidance on the its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)". ASU 2014-15 provides guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material effect on the financial position, results of operations or cash flows.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In November 2015, the FASB issued ASC Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes” as part of its simplification initiatives. This update requires deferred tax liabilities and assets to be classified as non-current on the consolidated condensed balance sheet for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. An entity can elect to adopt prospectively or retrospectively to all periods presented. We do not expect the adoption of ASU 2015-17 to have a material effect on our financial position, results of operations or cash flows.

 

There have been no other 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

 

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, 2016 Compared to Three Months Ended December 31, 2015, and Six Months Ended December 31, 2016 Compared to Six Months Ended December 31, 2015

 

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 net sales and revenues for the periods presented:

 

		Three Months Ended								Six Months Ended
		December 31								December 31
		2016				2015				2016				2015
Net Sales			100	%			100	%			100	%			100	%
Cost of Sales			81				72				80				75
Gross Profit on Sales			19				28				20				25
Operating Expenses			19				19				23				20
Income (Loss) from Operations			-				9				(3	)			5
Other Income (Expense), Net			-				(1	)			-				-
Income (Loss) before Income Taxes			-				8				(3	)			5
Provision (Benefit) for Income Taxes			-				3				(1	)			2
Net Income (Loss)			-	%			5	%			(2	)%			3	%

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

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

AND RESULTS OF OPERATIONS

 

NET SALES

 

Net sales decreased $125,208 or 10% for the three months ended December 31, 2016 to $1,153,469 compared to $1,278,677 for the three months ended December 31, 2015. Gross sales for Chase Candy increased $64,909 to $497,792 for the three months ended December 31, 2016, compared to $432,883 for the three months ended December 31, 2015. Gross sales for Seasonal Candy decreased $199,378 to $665,658 for the three months ended December 31, 2016, compared to $865,036 for the three months ended December 31, 2015. Gross sales for other sales for the Company increased $3,291 to $7,143 for the three months ended December 31, 2016, compared to $3,852 for the three months ended December 31, 2015. Sales returns and allowances for the Company decreased $5,970 to $17,124 for the three months ended December 31, 2016, compared to $23,094 for the three months ended December 31, 2015.

 

The 15% increase in gross sales of Chase Candy of $64,909 for the three months ended December 31, 2016 over the same period ended December 31, 2015, is primarily due to the net effect of the following: 1) increased sales of the L212 Mini Mash division by approximately $31,000 versus the same period a year ago primarily due to increased orders from existing customers; 2) increased sales of L276 Cherry Mash Distributor Pack division by approximately $19,000 versus the same period a year ago primarily due to increased orders from existing customers; 3) increased sales of L200 Cherry Mash Merchandisers division by approximately $9,000 versus the same period a year ago due to increased orders from existing customers; and 4) increased sales of L278 Mini Mash division by approximately $7,000 versus the same period a year ago due to increased orders from existing customers.

 

The 23% decrease in gross sales of Seasonal Candy of $199,378 for the three months ended December 31, 2016 over the same period ended December 31, 2015, is primarily due to the net effect of the following: 1) a decrease in the generic seasonal division netting approximately $180,000 versus the same period a year ago, primarily due to existing customers decreasing orders; and 2) decreased orders in the bulk seasonal division netting approximately $44,000, due to decreased sales from existing customers; offset by 3) increased volume from various customers in the clamshell seasonal division netting approximately $24,000 versus the same period a year ago, primarily due to existing customers increasing orders.

 

Net sales decreased $326,123 or 14% for the six months ended December 31, 2016 to $2,015,657 compared to $2,341,780 for the six months ended December 31, 2015. Gross sales for Chase Candy decreased $5,191 to $919,677 for the six months ended December 31, 2016, compared to $924,868 for the six months ended December 31, 2015. Gross sales for Seasonal Candy decreased $332,344 to $1,112,720 for the six months ended December 31, 2016, compared to $1,445,064 for the six months ended December 31, 2015. Gross sales for other sales for the Company increased $2,604 to $7,182 for the six months ended December 31, 2016, compared to $4,578 for the six months ended December 31, 2015. Sales returns and allowances for the Company decreased $8,808 to $23,922 for the six months ended December 31, 2016, compared to $32,730 for the six months ended December 31, 2015.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

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

AND RESULTS OF OPERATIONS

 

NET SALES (CONTINUED)

 

The 1% decrease in gross sales of Chase Candy of $5,191 for the six months ended December 31, 2016 over the same period ended December 31, 2015, is primarily due to the following: 1) decreased sales of the L278 Mini Mash division by approximately $15,000 versus the same period a year ago primarily due to existing customers decreasing orders; offset by 2) increased sales of the L276 Cherry Mash Distributor Pack division by approximately $11,000 versus the same period a year ago primarily due to existing customers increasing orders.

 

The 23% decrease in gross sales of Seasonal Candy of $332,344 for the six months ended December 31, 2016 over the same period ended December 31, 2015, is primarily due to the net effect of the following: 1) decreased orders from three customers in the generic seasonal division netting approximately $328,000 versus the same period a year ago, primarily due to customers decreasing orders; 2) decreased orders in the bulk seasonal division netting approximately $30,000 due to decreased sales from existing customers; offset by 3) increased volume from various customers in the clamshell seasonal division netting approximately $25,000 versus the same period a year ago, primarily due to customers increasing orders.

 

COST OF SALES

 

The cost of sales increased $10,348 to $931,235 or 81% of related revenues for the three months ended December 31, 2016, compared to $920,887 or 72% of related revenues for the three months ended December 31, 2015. The 1% increase in cost of sales of $10,348 is primarily due to a 15% increase in the price of peanuts offset by a 4% decrease in the price of sugar and the 10% decrease in net sales of $125,208.

 

The cost of sales decreased $161,144 to $1,603,126 or 80% of related revenues for the six months ended December 31, 2016, compared to $1,764,270 or 75% of related revenues for the six months ended December 31, 2015. The 9% decrease in cost of sales of $161,144 is primarily due to a 14% decrease in net sales of $326,123, offset by a 10% increase in the price of corn syrup and an 8% increase in the price of peanuts.

 

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

 

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, 2016 decreased $24,728 to $132,229, which is 11% of sales, compared to $156,957, or 12% of sales for the three months ended December 31, 2015. The decrease of $24,728 in selling expenses for the three months ended December 31, 2016 is primarily due to lower promotions expense and lower commission expense. Promotions expense, which are paid to customers for various marketing reasons, decreased $13,291 to $27,023 for this period from $40,314 for the three months ended December 31, 2015. Commission expense, which are based on sales, decreased $9,122 to $39,695 for this period from $48,817 for the three months ended December 31, 2015.

 

Selling expenses for the six months ended December 31, 2016 decreased $48,238 to $231,495, which is 11% of sales, compared to $279,733 or 12% of sales for the six months ended December 31, 2015. The decrease of $48,238 in selling expenses for the six months ended December 31, 2016 is primarily due to lower promotions expense, lower commission expense, and lower depreciation expense for the period. Promotions expense decreased $21,273 to $44,098 for this period from $65,371 for the six months ended December 31, 2015. Commission expense decreased $17,392 to $73,010 for this period from $90,402 for the six months ended December 31, 2015 primarily due to the decrease in sales. Depreciation expense decreased $6,667 to $21,312 for this period from $27,979 primarily due to the decrease in purchases of property and equipment during this period opposed to the six months ended December 31, 2015.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses for the three months ended December 31, 2016 decreased $8,327 to $86,909 and 8% of sales, compared to $95,236 or 7% of sales for the three months ended December 31, 2015. The decrease of $8,327 in general and administrative expenses for the three months ended December 31, 2016 is primarily due to lower professional fees offset by higher insurance expense and higher payroll expense. Professional fees decreased $16,696 to $14,970 for this period from $31,666 for the three months ending December 31, 2015 due to lower audit fees versus the same period a year ago. Insurance expense increased $4,241 to $28,466 for this period from $24,225 for the three months ending December 31, 2015 due to employees changing their enrollment in insurance plans. Payroll expense increased $2,631 to $7,888 for this period from $5,257 for the three months ending December 31, 2015 due to reclassifying payroll expenses that were previously charged to cost of sales to general and administrative payroll expenses as roles in the company changed from the previous period.

 

General and administrative expenses for the six months ended December 31, 2016 increased $12,368 to $222,655 or 11% of sales, compared to $210,287 or 9% of sales for the six months ended December 31, 2015. The increase of $12,368 in general and administrative expenses for the six months ended December 31, 2016 is primarily due to higher insurance expense and higher payroll tax expense. Insurance expense increased $9,331 to $55,913 for this period from $46,582 for the six months ending December 31, 2015 due to employees changing their enrollment in insurance plans. Payroll tax expense increased $3,702 to $15,296 for this period from $11,594 for the six months ending December 31, 2015 due to reclassifying payroll expenses that were previously charged to cost of sales to general and administrative payroll expenses as roles in the company changed from the previous period.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

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

AND RESULTS OF OPERATIONS

 

OTHER INCOME (EXPENSE)

 

Other income (expense) decreased by $1,412 for the three months ended December 31, 2016 to $(3,732), compared to $(2,320) for the three months ended December 31, 2015 primarily due to an increase of $1,399 in interest expense.

 

Other income (expense) decreased by $1,958 for the six months ended December 31, 2016 to $(4,173), compared to $(2,215) for the six months ended December 31, 2015 primarily due to an increase of $1,943 in interest expense.

 

PROVISION (BENEFIT) FOR INCOME TAXES

 

The Company recorded income tax benefit for the three months ended December 31, 2016 of $(153) as compared to income tax expense of $39,581 for the three months ended December 31, 2015. The Company recorded income tax benefit for the six months ended December 31, 2016 of $(17,381) as compared to income tax expense of $37,701 for the six months ended December 31, 2015. The net income tax expense (benefit) recorded for the three and six months ended December 31, 2016 is primarily due to recognizing income taxes in relation to the profitability of operations.

 

NET INCOME (LOSS)

 

The Company reported net loss for the three months ended December 31, 2016 of $(483), compared to net income of $72,686 for the three months ended December 31, 2015. This decrease of $73,169 is explained above. The Company reported net loss for the six months ended December 31, 2016 of $(28,411), compared to net income of $68,938 for the six months ended December 31, 2015. This decrease of $97,349 is explained above.

 

PREFERRED DIVIDENDS

 

Preferred dividends were $32,018 for the three months ended December 31, 2016 and 2015, 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, 2016 and 2015, 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.

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

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

AND RESULTS OF OPERATIONS

 

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

 

Net loss applicable to common stockholders for the three months ended December 31, 2016 was $(32,501) which is a decrease of $73,169 as compared to the net income applicable to common stockholders for the three months ended December 31, 2015 of $40,668.

 

Net loss applicable to common stockholders for the six months ended December 31, 2016 was $(92,447) which is a decrease of $97,349 as compared to the net income applicable to common stockholders for the six months ended December 31, 2015 of $4,902.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

		Six Months Ended
		December 31
		2016				2015
Net Cash Provided by Operating Activities		$	305,566			$	315,198
Net Cash Used in Investing Activities		$	(17,245	)		$	(21,622	)
Net Cash Used by Financing Activities		$	(7,648	)		$	(6,666	)

 

Management has no material commitments for capital expenditures during the remainder of fiscal 2017. The $305,566 of cash provided by operating activities is fully detailed in the condensed consolidated statement of cash flows on page five. The $17,245 of cash used in investing activities is the purchase of equipment used during the manufacturing process. The $7,648 of cash used in financing activities is the principal payments on equipment and vehicle loans. At December 31, 2016, 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

 

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

 

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 in management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of the 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, 2016 is $8,012,842.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

None

 

 

CHASE GENERAL CORPORATION AND SUBSIDIARY

 

PART II. OTHER INFORMATION (CONTINUED)

 

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, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2016, (ii) Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2016 and 2015, (iii) Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2016 and 2015, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2016 and 2015, 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 10, 2017		/s/ Barry M. Yantis
Date		Barry M. Yantis
		Chairman of the Board, Chief Executive Officer and
		Chief Financial Officer, President and Treasurer