Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - CHASE GENERAL CORP | tv484972_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - CHASE GENERAL CORP | tv484972_ex31-1.htm |
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, 2017
| ¨ | 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 ¨ |
| Nonaccelerated filer ¨ (Do not check if a smaller reporting company) | 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, 2018, 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, 2017
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, | June 30, | |||||||
| 2017 | 2017 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and Cash Equivalents | $ | 328,331 | $ | 46,182 | ||||
| Trade Receivables, Net of Allowance for Doubtful Accounts of $14,333 and $13,733, Respectively | 187,166 | 127,207 | ||||||
| Inventories: | ||||||||
| Finished Goods | 30,331 | 270,352 | ||||||
| Goods in Process | 12,915 | 13,393 | ||||||
| Raw Materials | 83,352 | 60,655 | ||||||
| Packaging Materials | 140,890 | 135,638 | ||||||
| Prepaid Expenses | 40,120 | 24,689 | ||||||
| Income Tax Receivable | 52,531 | 11,160 | ||||||
| Total Current Assets | 875,636 | 689,276 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Land | 35,000 | 35,000 | ||||||
| Buildings | 77,348 | 77,348 | ||||||
| Machinery and Equipment | 836,066 | 838,131 | ||||||
| Trucks and Autos | 213,116 | 213,116 | ||||||
| Office Equipment | 30,748 | 31,518 | ||||||
| Leasehold Improvements | 72,068 | 72,068 | ||||||
| Total | 1,264,346 | 1,267,181 | ||||||
| Less Accumulated Depreciation | 1,033,225 | 1,002,043 | ||||||
| Total Property and Equipment, Net | 231,121 | 265,138 | ||||||
| Deferred Income Taxes | - | 27,163 | ||||||
| Total Long-Term Assets | 231,121 | 292,301 | ||||||
| Total Assets | $ | 1,106,757 | $ | 981,577 | ||||
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
| (1) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
| December 31, | June 30, | |||||||
| 2017 | 2017 | |||||||
| (Unaudited) | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts Payable | $ | 157,217 | $ | 63,628 | ||||
| Current Maturities of Notes Payable | 16,481 | 16,133 | ||||||
| Accrued Expenses | 14,656 | 29,239 | ||||||
| Income Taxes Payable | 6,739 | - | ||||||
| Deferred Income | 1,299 | 1,299 | ||||||
| Total Current Liabilities | 196,392 | 110,299 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Deferred Income | 8,116 | 8,765 | ||||||
| Notes Payable, Less Current Maturities | 30,935 | 39,264 | ||||||
| Deferred Income Taxes | 32,520 | - | ||||||
| Total Long-Term Liabilities | 71,571 | 48,029 | ||||||
| Total Liabilities | 267,963 | 158,328 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Capital Stock Issued and Outstanding: | ||||||||
| Prior Cumulative Preferred Stock, $5 Par Value: | ||||||||
| Series A (Liquidation Preference $2,295,000 and $2,280,000, Respectively) | 500,000 | 500,000 | ||||||
| Series B (Liquidation Preference $2,250,000 and $2,235,000, Respectively) | 500,000 | 500,000 | ||||||
| Cumulative Preferred Stock, $20 Par Value: | ||||||||
| Series A (Liquidation Preference $5,165,530 and $5,136,263, Respectively) | 1,170,660 | 1,170,660 | ||||||
| Series B (Liquidation Preference $841,824 and $837,055, 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 | (5,627,202 | ) | (5,642,747 | ) | ||||
| Total Stockholders' Equity | 838,794 | 823,249 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 1,106,757 | $ | 981,577 | ||||
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
| (2) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| NET SALES | $ | 1,110,235 | $ | 1,153,469 | ||||
| COST OF SALES | 786,390 | 931,235 | ||||||
| Gross Profit on Sales | 323,845 | 222,234 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling | 118,216 | 132,229 | ||||||
| General and Administrative | 122,627 | 86,909 | ||||||
| Total Operating Expenses | 240,843 | 219,138 | ||||||
| Income from Operations | 83,002 | 3,096 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Miscellaneous Income | 392 | 408 | ||||||
| Interest Expense | (2,318 | ) | (4,140 | ) | ||||
| Total Other Income (Expense) | (1,926 | ) | (3,732 | ) | ||||
| Income (Loss) before Income Taxes | 81,076 | (636 | ) | |||||
| PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT) | 8,682 | (153 | ) | |||||
| NET INCOME (LOSS) | $ | 72,394 | $ | (483 | ) | |||
| EARNINGS (LOSS) PER SHARE | ||||||||
| Basic | $ | 0.04 | $ | (0.03 | ) | |||
| Diluted | $ | 0.02 | $ | (0.03 | ) | |||
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
| (3) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Six Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| NET SALES | $ | 1,980,665 | $ | 2,015,657 | ||||
| COST OF SALES | 1,447,482 | 1,603,126 | ||||||
| Gross Profit on Sales | 533,183 | 412,531 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling | 230,548 | 231,495 | ||||||
| General and Administrative | 269,663 | 222,655 | ||||||
| Total Operating Expenses | 500,211 | 454,150 | ||||||
| Income (Loss) from Operations | 32,972 | (41,619 | ) | |||||
| OTHER INCOME (EXPENSE) | ||||||||
| Miscellaneous Income | 762 | 784 | ||||||
| Interest Expense | (4,298 | ) | (4,957 | ) | ||||
| Total Other Income (Expense) | (3,536 | ) | (4,173 | ) | ||||
| Income (Loss) before Income Taxes | 29,436 | (45,792 | ) | |||||
| PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT) | 13,891 | (17,381 | ) | |||||
| NET INCOME (LOSS) | $ | 15,545 | $ | (28,411 | ) | |||
| LOSS PER SHARE | ||||||||
| Basic | $ | (0.05 | ) | $ | (0.10 | ) | ||
| Diluted | $ | (0.05 | ) | $ | (0.10 | ) | ||
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
| (4) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income (Loss) | $ | 15,545 | $ | (28,411 | ) | |||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: | ||||||||
| Depreciation and Amortization | 34,017 | 52,913 | ||||||
| Allowance for Bad Debts | 600 | 600 | ||||||
| Deferred Income Amortization | (649 | ) | (649 | ) | ||||
| Deferred Income Taxes | 59,683 | (17,346 | ) | |||||
| Effects of Changes in Operating Assets and Liabilities: | ||||||||
| Trade Receivables | (60,559 | ) | (127,701 | ) | ||||
| Inventories | 212,550 | 347,505 | ||||||
| Prepaid Expenses | (15,431 | ) | (34,165 | ) | ||||
| Income Taxes Receivable | (41,371 | ) | 22,678 | |||||
| Accounts Payable | 93,589 | 95,533 | ||||||
| Accrued Expenses | (14,583 | ) | (5,391 | ) | ||||
| Income Taxes Payable | 6,739 | - | ||||||
| Net Cash Provided by Operating Activities | 290,130 | 305,566 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of Property and Equipment | - | (17,245 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from Line-of-Credit | 330,000 | 325,000 | ||||||
| Principal Payments on Line-of-Credit | (330,000 | ) | (325,000 | ) | ||||
| Principal Payments on Notes Payable | (7,981 | ) | (7,648 | ) | ||||
| Net Cash Used by Financing Activities | (7,981 | ) | (7,648 | ) | ||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 282,149 | 280,673 | ||||||
| Cash and Cash Equivalents - Beginning of Period | 46,182 | 19,259 | ||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 328,331 | $ | 299,932 | ||||
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
| (5) |
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, 2017 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, 2017 and for the three and six months ended December 31, 2016 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, 2017. The results of operations for the three and six months ended December 31, 2017 and cash flows for the six months ended December 31, 2017 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2018. 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, 2017, 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, 2017.
| (6) |
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 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net Income (Loss) | $ | 72,394 | $ | (483 | ) | $ | 15,545 | $ | (28,411 | ) | ||||||
| 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 | $ | 40,376 | $ | (32,501 | ) | $ | (48,491 | ) | $ | (92,447 | ) | |||||
| 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 | $ | 0.04 | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.10 | ) | |||||
| Diluted Earnings (Loss) per Share | $ | 0.02 | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.10 | ) | |||||
The contingently issuable shares, for the three months ended December 31, 2016, the six months ended December 31, 2017 and the 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.
| (7) |
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, 2017 and 2016 totaled $8,140,914 and $8,012,842, respectively. Total dividends in arrears, on a per share basis, consist of the following:
| Six Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| 6% Convertible | ||||||||
| Series A | $ | 18 | $ | 17 | ||||
| Series B | 17 | 17 | ||||||
| 5% Convertible | ||||||||
| Series A | $ | 68 | $ | 67 | ||||
| Series B | 68 | 67 | ||||||
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.
| (8) |
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 | 2017 | 2017 | |||||||
| Nodaway Valley Bank | $350,000 line-of-credit agreement expiring on January 4, 2019, 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. | 28,983 | 32,308 | |||||||
| Toyota Credit | $364 monthly payments, interest of 3.5%; final payment due December 2020, secured by a vehicle. | 12,434 | 14,383 | |||||||
| Ford Credit | $468 monthly payments, interest of 2.9%; final payment due January 2019, secured by a vehicle. | 5,999 | 8,706 | |||||||
| Total | 47,416 | 55,397 | ||||||||
| Less Current Portion | 16,481 | 16,133 | ||||||||
| Long-Term Portion | $ | 30,935 | $ | 39,264 | ||||||
| (9) |
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 | |||
| 2018 | 16,481 | |||
| 2019 | 11,974 | |||
| 2020 | 12,098 | |||
| 2021 | 6,863 | |||
| Total | $ | 47,416 | ||
| 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, 2017. The Company has no material tax positions at December 31, 2017 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, 2017. 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.
On December 22, 2017, the President signed into law The Tax Cuts and Jobs Act (the “Act”), which enacts significant changes to U.S. income tax and related laws. Among other things, the Act reduces the top U.S. corporate income tax rate from 35.0% to 21.0% effective January 1, 2018, and makes changes to certain other business-related exclusions, deductions and credits. Because a change in tax law is accounted for in the period of enactment, the effect of the Act was recorded in the Company’s fiscal second quarter ending December 31, 2017 which caused a net provision adjustment to deferred income taxes of approximately $19,000.
| (10) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 5 | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| Six Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| Cash Paid for: | ||||||||
| Interest | $ | 4,298 | $ | 4,957 | ||||
| Income Taxes | $ | - | $ | 2,030 | ||||
| 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 plans to adopt the new standard on July 1, 2018 on a modified retrospective basis. The Company is finalizing reviews and working on implementing the process, policy and disclosure changes that will go into effect on July 1, 2018.
The Company has performed a review of the requirements of the new guidance and has identified which of its revenue streams will be within the scope of ASC 606. The Company is working through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to the customer contracts and comparing the results to our current accounting. As part of this, we are assessing changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting. Effective July 1, 2018, the Company will be revising its revenue recognition accounting policy and expanding revenue disclosures to reflect the requirements of ASC 606, which include disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgements and assets recognized from the costs to obtain or fulfill a contract. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its consolidated financial statements.
| (11) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 6 | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) |
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
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.
Recently Adopted Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet, instead of separating deferred taxes into current and noncurrent amounts. During the period ended September 30, 2017, the Company elected to retrospectively adopt ASU 2015-17, resulting in a reclassification reducing both deferred tax assets and deferred tax liabilities by $63,306 on the balance sheet at June 30, 2017. There was no impact on results of operations as a result of the adoption of ASU 2015-17.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," (ASU 2015-11). The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance was effective on July 1, 2017. The adoption of this amendment did not have a material impact on these financial statements.
| (12) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| NOTE 7 | 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, 2017, 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.
| (13) |
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, 2017 Compared to Three Months Ended December 31, 2016, and Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016
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 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net Sales | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| Cost of Sales | 71 | 81 | 73 | 80 | ||||||||||||
| Gross Profit on Sales | 29 | 19 | 27 | 20 | ||||||||||||
| Operating Expenses | 22 | 19 | 25 | 23 | ||||||||||||
| Income (Loss) from Operations | 7 | - | 2 | (3 | ) | |||||||||||
| Other Income (Expense), Net | - | - | - | - | ||||||||||||
| Income (Loss) before Income Taxes | 7 | - | 2 | (3 | ) | |||||||||||
| Provision (Benefit) for Income Taxes | 1 | - | 1 | (1 | ) | |||||||||||
| Net Income (Loss) | 6 | % | - | % | 1 | % | (2 | )% | ||||||||
| (14) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET SALES
Net sales decreased $43,234 or 4% for the three months ended December 31, 2017 to $1,110,235 compared to $1,153,469 for the three months ended December 31, 2016. Gross sales for Chase Candy decreased $32,741 to $465,051 for the three months ended December 31, 2017, compared to $497,792 for the three months ended December 31, 2016. Gross sales for Seasonal Candy increased $14,485 to $680,143 for the three months ended December 31, 2017, compared to $665,658 for the three months ended December 31, 2016. Gross sales for other sales for the Company increased $877 to $8,020 for the three months ended December 31, 2017, compared to $7,143 for the three months ended December 31, 2016. Sales returns and allowances for the Company increased $25,855 to $42,979 for the three months ended December 31, 2017, compared to $17,124 for the three months ended December 31, 2016.
The 7% decrease in gross sales of Chase Candy of $32,741 for the three months ended December 31, 2017 over the same period ended December 31, 2016, is primarily due to the net effect of the following: 1) decreased sales of the L276 Cherry Mash Merchandisers division by approximately $21,000 versus the same period a year ago primarily due to decreased orders from existing customers; 2) decreased sales of L100/L200 Cherry Mash Merchandisers division by approximately $8,000 versus the same period a year ago due to decreased orders from existing customers; 3) decreased sales of L278 Mini Mash division by approximately $3,000 versus the same period a year ago primarily due to decreased orders from existing customers; and 4) decreased sales of L279 Bulk Mini Mash division by approximately $1,000 versus the same period a year ago due to decreased orders from existing customers.
The 2% increase in gross sales of Seasonal Candy of $14,485 for the three months ended December 31, 2017 over the same period ended December 31, 2016, is primarily due to the net effect of the following: 1) an increase orders in the generic seasonal division netting approximately $119,000 versus the same period a year ago, primarily due to existing customers increasing orders; offset by 2) decreased orders in the clamshell seasonal division netting approximately $64,000, due to decreased sales from existing customers; and 3) decreased orders from various customers in the bulk seasonal division netting approximately $41,000 versus the same period a year ago, primarily due to existing customers decreasing orders.
Management anticipates sales returns and allowances for the three months ended December 31, 2017 to be higher than the prior period due to expected returns from one customer.
| (15) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET SALES (CONTINUED)
Net sales decreased $34,992 or 2% for the six months ended December 31, 2017 to $1,980,665 compared to $2,015,657 for the six months ended December 31, 2016. Gross sales for Chase Candy decreased $105,605 to $814,072 for the six months ended December 31, 2017, compared to $919,677 for the six months ended December 31, 2016. Gross sales for Seasonal Candy increased $105,651 to $1,218,281 for the six months ended December 31, 2017, compared to $1,112,720 for the six months ended December 31, 2016. Gross sales for other sales for the Company increased $1,371 to $8,553 for the six months ended December 31, 2017, compared to $7,182 for the six months ended December 31, 2016. Sales returns and allowances for the Company increased $36,319 to $60,241 for the six months ended December 31, 2017, compared to $23,922 for the six months ended December 31, 2016.
The 11% decrease in gross sales of Chase Candy of $105,605 for the six months ended December 31, 2017 over the same period ended December 31, 2016, is primarily due to the following: 1) decreased sales of the L276 Cherry Mash Distributor Pack division by approximately $90,000 versus the same period a year ago primarily due to existing customers decreasing orders; 2) decreased sales of the L212 Mini Mash division by approximately $10,000 versus the same period a year ago primarily due to existing customers decreasing orders; 3) decreased sales of the L200 Cherry Mash Merchandisers division by approximately $13,000 versus the same period a year ago primarily due to existing customers decreasing orders; offset by 4) increased sales of the L279/L299 Bulk Mini Mash division by approximately $7,000 versus the same period a year ago primarily due to existing customers increasing orders.
The 9% increase in gross sales of Seasonal Candy of $105,651 for the six months ended December 31, 2017 over the same period ended December 31, 2016, is primarily due to the net effect of the following: 1) increased sales in the generic seasonal division netting approximately $135,000 versus the same period a year ago, primarily due to existing customers increasing orders; offset by 2) decreased sales in the clamshell seasonal division netting approximately $30,000 versus the same period a year ago, primarily due to existing customers decreasing orders.
Management anticipates sales returns and allowances for the six months ended December 31, 2017 to be higher than the prior period due to expected returns from one customer.
| (16) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COST OF SALES
The cost of sales decreased $144,845 to $786,390 or 71% of related revenues for the three months ended December 31, 2017, compared to $931,235 or 81% of related revenues for the three months ended December 31, 2016. The 16% decrease in cost of sales of $144,845 is primarily due to the net effect of 1) a 4% decrease in net sales of $43,234; 2) a 2% decrease in the price of peanuts; 3) direct labor decreasing $8,334 to $114,047 for this period from $122,381 for the three months ended December 31, 2016 primarily due to less temporary and overtime labor; 4) equipment depreciation decreasing $9,499 to $5,133 for this period from $14,632 for the three months ended December 31, 2016 primarily due to assets becoming fully depreciated in the prior period; 5) maintenance labor decreasing $8,095 to $9,389 for this period from $17,484 for the three months ended December 31, 2016 primarily due to not hiring a dedicated maintenance worker during the current period; offset by 6) an 8% increase in the price of corn syrup; and 7) a 2% increase in the price of chocolate.
The cost of sales decreased $155,644 to $1,447,482 or 73% of related revenues for the six months ended December 31, 2017, compared to $1,603,126 or 80% of related revenues for the six months ended December 31, 2016. The 10% decrease in cost of sales of $155,644 is primarily due to the net effect of 1) a 2% decrease in net sales of $34,992; 2) a 2% decrease in the price of peanuts; 3) direct labor decreasing $39,714 to $213,974 for this period from $253,688 for the six months ended December 31, 2016 primarily due to less temporary and overtime labor; 4) equipment depreciation decreasing $18,896 to $10,441 for this period from $29,337 for the six months ended December 31, 2016 primarily due to assets becoming fully depreciated in the prior period; 5) maintenance labor decreasing $18,155 to $16,915 for this period from $35,070 for the six months ended December 31, 2016 primarily due to not hiring a dedicated maintenance worker during the current period; offset by 6) an 8% increase in the price of corn syrup; and 7) a 2% increase 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.
| (17) |
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, 2017 decreased $14,013 to $118,216, which is 11% of sales, compared to $132,229, or 11% of sales for the three months ended December 31, 2016. The decrease of $14,013 in selling expenses for the three months ended December 31, 2017 is primarily due to lower bill backs expense, lower promotions expense offset by higher commissions. Bill backs expense, which are paid to customers for various marketing reasons, decreased $14,032 to $12,991 for this period from $27,023 for the three months ended December 31, 2016 primarily due to a change in the structure of the bill back agreement. Promotions expense decreased $1,273 to $790 for this period from $2,063 for the three months ended December 31, 2016 primarily due to fewer promotional items ordered in the current period as compared to the previous period. Commissions increased $1,154 to $40,849 for this period from $39,695 for the three months ended December 31, 2016 primarily due to an increase in sales of items with higher commissions.
Selling expenses for the six months ended December 31, 2017 decreased $947 to $230,548, which is 11% of sales, compared to $231,495 or 11% of sales for the six months ended December 31, 2016. The decrease of $947 in selling expenses for the six months ended December 31, 2017 is primarily due to lower advertising expense offset by higher shipping expense for the period. Advertising expense decreased $2,561 to $1,244 for this period from $3,805 for the six months ended December 31, 2016 primarily due to a reduction in advertisement in the current period. Shipping expense increased $1,500 to $17,528 for this period from $16,028 for the six months ended December 31, 2016 primarily due to increased shipment of online ordered items.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended December 31, 2017 increased $35,718 to $122,627 and 11% of sales, compared to $86,909 or 8% of sales for the three months ended December 31, 2016. The increase of $35,718 in general and administrative expenses for the three months ended December 31, 2017 is primarily due to higher website expense, professional fees, and insurance expense offset by lower miscellaneous expense. Website expense increased $29,057 to $31,942 for this period from $2,885 for the three months ending December 31, 2016 due to redesigning the website for the 100th anniversary of the Cherry Mash. Professional fees increased $5,637 to $20,607 for this period from $14,970 for the three months ending December 31, 2016 due to higher audit fees versus the same period a year ago. Insurance expense increased $2,372 to $30,838 for this period from $28,466 for the three months ending December 31, 2016 due to an increase in health insurance premiums partially paid by the company. Miscellaneous expense decreased $883 to $1,319 for this period from $2,202 for the three months ending December 31, 2016 due to non-recurring expenses happening in the previous period.
| (18) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
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, 2017 increased $47,008 to $269,663 or 14% of sales, compared to $222,655 or 11% of sales for the six months ended December 31, 2016. The increase of $47,008 in general and administrative expenses for the six months ended December 31, 2017 is primarily due to higher website expense and insurance expense. Website expense increased $41,320 to $46,278 for this period from $4,958 for the three months ending December 31, 2016 due to redesigning the website for the 100th anniversary of the Cherry Mash. Insurance expense increased $6,409 to $62,322 for this period from $55,913 for the six months ending December 31, 2016 due to an increase in health insurance premiums partially paid by the Company.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $1,806 for the three months ended December 31, 2017 to $(1,926), compared to $(3,732) for the three months ended December 31, 2016 primarily due to an increase of $1,822 in interest expense.
Other income (expense) increased by $637 for the six months ended December 31, 2017 to $(3,536), compared to $(4,173) for the six months ended December 31, 2016 primarily due to an increase of $659 in interest expense.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded income tax expense for the three months ended December 31, 2017 of $8,835 as compared to income tax benefit of $(153) for the three months ended December 31, 2016. The Company recorded income tax expense for the six months ended December 31, 2017 of $13,891 as compared to income tax benefit of $(17,381) for the six months ended December 31, 2016. The net income tax expense (benefit) recorded for the three and six months ended December 31, 2017 is primarily due to recognizing income taxes in relation to the profitability of operations and a $19,000 net provision adjustment to deferred income taxes due to the U.S. corporate income tax rate reducing from 35.0% to 21.0%.
NET INCOME (LOSS)
The Company reported net income for the three months ended December 31, 2017 of $72,394, compared to net loss of $(483) for the three months ended December 31, 2016. This increase of $72,877 is explained above. The Company reported net income for the six months ended December 31, 2017 of $15,545, compared to net loss of $(28,411) for the six months ended December 31, 2016. This decrease of $43,956 is explained above.
| (19) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
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, 2017 and 2016, 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, 2017 and 2016, 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 (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
Net income applicable to common stockholders for the three months ended December 31, 2017 was $40,376 which is an increase of $72,877 as compared to the net loss applicable to common stockholders for the three months ended December 31, 2016 of $(32,501).
Net loss applicable to common stockholders for the six months ended December 31, 2017 was $45,891 which is an increase of $43,956 as compared to the net income applicable to common stockholders for the six months ended December 31, 2016 of $(92,447).
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the summary of cash flow for the fiscal period indicated.
| Six Months Ended | ||||||||
| December 31 | ||||||||
| 2017 | 2016 | |||||||
| Net Cash Provided by Operating Activities | $ | 290,130 | $ | 305,566 | ||||
| Net Cash Provided by (Used in) Investing Activities | $ | - | $ | (17,245 | ) | |||
| Net Cash Used by Financing Activities | $ | (7,981 | ) | $ | (7,648 | ) | ||
Management has no material commitments for capital expenditures during the remainder of fiscal 2018. The $290,130 of cash provided by operating activities is fully detailed in the condensed consolidated statement of cash flows on page five. The $7,981 of cash used in financing activities is the principal payments on equipment and vehicle loans. At December 31, 2017, 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.
| (20) |
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.
| (21) |
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 |
During the first quarter of year ending June 30, 2018, we identified and disclosed a material weakness in our internal control over financial reporting as it relates to our controls over the use of the retail inventory method in estimating ending inventory. The material weakness resulted in a material adjustment to our ending inventory balance which was reflected in our financial statements for the period ending September 30, 2017. As a result, management has implemented controls to properly record and review the ending inventory balance under the retail inventory method.
Except as noted above, 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.
| (22) |
CHASE GENERAL CORPORATION AND SUBSIDIARY
| 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, 2017 is $8,140,914. |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None
| (23) |
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, 2017, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017, (ii) Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2017 and 2016, (iii) Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2017 and 2016, (iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
| (24) |
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, 2018 | /s/ Barry M. Yantis |
| Date | Barry M. Yantis |
| Chairman of the Board, Chief Executive Officer and | |
| Chief Financial Officer, President and Treasurer |
| (25) |