UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2020

OR

For the Transition Period From _______ To _______

Commission File Number: 33-96070-LA

THANKSGIVING COFFEE COMPANY, INC.

(Exact name of registrant as specified in its charter)

(707) 964-0118

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Regulation 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    ☐   No    ☒

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   Yes ☐  No  ☒

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

If an emerging growth company, 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

Yes ☐  No  ☒

There currently does not exist a public trading market for the registrant’s common stock. Over the years, there have been isolated and sporadic privately negotiated transactions in the Company’s shares.  See “Part II, Item 5, and Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”  The Company is not aware of any privately negotiated transactions of the Company’s stock since 2008. The Company is unable to determine the current market value of the common equity held by non-affiliates, as no reliable secondary trading price exists.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

On September 30, 2020 the registrant had 1,236,744 shares of common stock, no par value per share, outstanding.

Securities registered pursuant to Section 12(b) of the Act:

FORM 10-Q

TABLE OF CONTENTS

1. Basis of Presentation

The unaudited condensed financial statements in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies disclosed in the financial statements included in its 2019 Form 10-K filed with the Securities and Exchange Commission (SEC). The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC for interim financial information. The unaudited interim condensed consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Financial Statements (including the Significant Accounting Policies and Recent Accounting Pronouncements) included in the Company’s audited financial statements for the year ended December 31, 2019, as filed with the SEC on Form 10-K (the “2019 Report”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the full year. The unaudited condensed balance sheet at December 31, 2019 was extracted from the audited annual financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements.

Concentration of Risk

For the three months ended September 30, 2020, Customer A accounted for 46%, of the Company’s revenue. For the nine months ended September 30, 2020, Customer A accounted for 29%, of the Company’s revenue. A loss of this account or any other large account, or a significant reduction in sales to any of the Company’s principal customers, could have an adverse impact on the Company.

As of September 30, 2020, one customer accounted for approximately 41% of the Company’s accounts receivable. As of December 31, 2019, one customer accounted for approximately 21% of the Company’s accounts receivable.

Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue in accordance with the five-step model as prescribed by Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” in which the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for the goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize the revenue when (or as) the entity satisfies a performance obligation.

The Company recognizes revenue once its performance obligation to the customer is completed and control of the product or service is transferred to the customer. Revenue reflects the total amount the Company receives, or expects to receive, from the customer and includes shipping costs that are billed and included in the consideration. The Company's contractual obligations to customers generally have a single point of obligation and are short term in nature. For sales through distributors, the Company recognizes revenue when the product is shipped, and title passes to the distributor. The Company's standard terms are 'FOB' shipping point, with no customer acceptance provisions. The cost of price promotions and rebates are treated as reductions of revenue. No products are sold on consignment. Credit sales are recorded as trade accounts receivable and no collateral is required. The Company has price incentive programs with its distributors to encourage product placement. The cost of price promotions and rebates are treated as reductions of revenue and revenues are presented net of sales allowances. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met. Freight charges are recognized as revenue at the time of delivery.

The Company sells coffee directly to customers through its direct delivery, retail web site and wholesale mail order customers. Additionally, the Company sells other coffee related merchandise through its website. Web site sales are paid for and recognized as revenue at the point of sale. Retail orders are billed to the customer's credit card, at the time of shipment, and revenue is then recognized. The Company periodically sells special bulk orders of products that are in excess of production requirements. These sales are recognized when ownership transfers to the buyer, which occurs at the point of shipment.

Leases

Our leases consist of both operating and equipment financing. We categorize leases as either operating leases or equipment financing at the commencement date of the agreement.

We recognize a right-of-use (“ROU”) asset and lease liability for each operating and equipment financing with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term.

Our lease liability represents the present value of future lease payments over the lease term. We cannot determine the interest rate implicit in all of our leases. Therefore, we use market and term-specific incremental borrowing rates when the rate is not implicit in the agreement. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not borrow on a collateralized basis, we consider a combination of factors, including the risk profile and funding cost of the specific lease, the lease term and the effect of adjusting the rate to reflect consideration of collateral.

Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs, as applicable. We recognize operating lease costs on a straight-line basis over the lease term. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our corporate warehouse and distribution network and are recorded within selling, general, and administrative expenses.

The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For equipment financing, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each equipment financing liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.

Earnings (Loss) per Share

The Company computes basic earnings (loss) per share ("EPS") by dividing net earnings (loss) for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible stock. We have no dilutive instruments for the three months and nine months ended September 30, 2020 and 2019.

2. Accounts Receivable

Accounts receivable consist of the following:

The Company utilizes a percentage method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables based on factors pertaining to the credit risk of specific customers, historical trends and other information. Delinquent accounts are written off when it is determined that amounts are uncollectible. Bad debt expense for the three months ended September 30, 2020 and 2019 was $65 and $1,236, respectively. Bad debt expense for the nine months ended September 30, 2020 and 2019 was $795 and $8,795, respectively.

3. Inventories

Inventories consist of the following:

4. Properties and Equipment

Property and equipment, consist of the following:

Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019 was $56,867 and $51,633, respectively. Depreciation and amortization expense for the three months ended September 30, 2020 and 2019 was $17,412 and $16,409 respectively.

5. Operating Leases, and Long-term Debt and Equipment Financing

ASC 842, “Leases (Topic 842)” requires leases with durations greater than twelve months to be recognized on the balance sheet.

We lease a warehouse, heavy machinery, and office equipment under finance and operating leases. As of September 30, 2020, we had three operating leases and four equipment financings and long-term debt with remaining terms ranging from less than one year to five years. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Some of our leases include renewal options that are factored into our determination of lease payments when appropriate. We did not separate lease and non-lease components of contracts for any asset class.

None of our leases require us to provide a residual value guarantee. When available, we use the rate implicit in the lease to discount lease payments to present value; however, some of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

Lease Position as of September 30, 2020

The table below presents the lease-related assets and liabilities recorded on the balance sheet.

Lease Costs

The table below presents certain information related to the lease costs for equipment financings and operating leases for the nine months ended September 30, 2020.

Other Information

The table below presents supplemental cash flow information related to operating leases and equipment financing and long-term debt for the nine months ended September 30, 2020.

Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the equipment financing and long-term debt liabilities and operating lease liabilities recorded on the balance sheet.

6. Disaggregated Revenue by routes, direct and mail order

Disaggregated information of revenue recognized is as follows:

7. Income Taxes

Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company’s deferred tax assets consist of the benefit from net operating loss (NOL) carryforwards and temporary differences. The Company’s deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of the net operation loss carryforwards. Net operating loss carryforwards may be further limited by a change in Company ownership and other provisions of the tax laws.

8. Related Party Transactions

As of September 30, 2020, the Company has green contracts with three cooperatives in Nicaragua, Guatemala and Uganda. Ethical Trading and Investment Company of Nicaragua (ETICO) is the importer for the transactions. Nicholas Hoskyns, a director of the Company, is the managing director of ETICO. At September 30, 2020 and December 31, 2019, amounts owed to ETICO totaled $58,139 and $37,333, respectively. For the nine months ended September 30, 2020 and 2019, we have paid $401,811 and $424,367, respectively. All the amounts owed are current and were paid in accordance with our standard vendor payment policies. The loss of the ETICO relationship could have an adverse effect on the Company’s business in the short term. Management believes other options are available that could be utilized in the event the ETICO relationship was terminated.

The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Company’s majority shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The Company is a guarantor on certain debt that the Company’s majority shareholders hold in connection with its corporate headquarters, warehouse and waterfront facilities. The ten-year lease term ends in May 2025.

In September 2020, the Company deferred rent payments for its corporate headquarters totaling $17,200 for the months of July and August 2020. As the rental lease was entered into with the majority shareholders, terms of repayment have not been agreed upon as of the date of these condensed financial statements but will be determined upon the improvement of economic conditions.

9. Business Segment

The Company operates in one reportable segment. All revenues are derived, and all long-lived assets are held in the U.S.

10. COVID-19 Uncertainty and Related Activity

During the first quarter of 2020, government offices throughout the United States and around the world issued shelter in place orders due to the global outbreak of the COVID-19 virus. On March 27, 2020, the President of the United States signed into law the Families First Coronavirus Response Act and two phases of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act which are intended to provide emergency assistance to individuals and business affected by COVID-19. The CARES Act includes a small business stimulus program, Paycheck Protection Program (“PPP”), which is intended to provide loans to qualified businesses to guarantee twenty-four weeks of payroll and other identified costs which may be eligible for partial or full forgiveness.

The future impact of the global emergence of COVID-19 on our business is currently unknown. We are closely monitoring the impact of the COVID-19 global outbreak and its resulting impact on our roasting operations and supply chain, with our top priority being the health and safety of our employees, customers, partners, and communities. While we believe our supply chain is in a healthy position, there remains uncertainty related to the public health situation globally. The magnitude of any potential impact is unknown, as it is unclear how long it will take for the overall supply chain to return to normal. We are working closely with our partners and suppliers to manage this process.

In April 2020, the Company successfully secured a $189,228 Small Business Association (“SBA”) loan under the Payroll Protection Program to secure payroll expenses for otherwise furloughed employees impacted by government imposed shelter in place orders. Per the terms of the loan, the full amount may be forgiven as long as loan proceeds are used to cover payroll costs and other specified non-payroll costs (provided any non-payroll costs do not exceed 40% of the forgiven amount) over a 24-week period after the loan is made; and employee and compensation levels are maintained. In the event the Company is required to repay the loan, all payments are deferred for 10 months with accrued interest over this period. Amounts outstanding under the loan bear a fixed interest rate of 1.00% per annum with a maturity date of 2 years from commencement date. The Company has not yet applied for loan forgiveness. If the loan is not forgiven, future debt maturities would be $113,537 and $75,691 for the years ending December 31, 2021 and 2022, respectively.

The SBA loan is being accounted for under ASC 470, “Debt”, whereby interest expense is being accrued at the contractual rate and future debt maturities are based on the assumption that none of the principal balance will be forgiven. Forgiveness, if any, will be recognized as a gain on extinguishment when the lender legally releases the Company based on the criteria set forth in the debt agreement and the CARES Act.

In April 2020, the Company executed a $25,000 non-interest bearing loan with a maturity date of April 16, 2021 with Savings Bank of Mendocino County. The Company repaid the loan in full in December 2020.