10-Q 1 tm1919526d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

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

 

For the transition period from to

 

Commission File Number 2-5916

 

Chase General Corporation

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

 

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

 

1307 South 59th, St. Joseph, Missouri 64507

(Address of principal executive offices, Zip Code)

 

(816) 279-1625

(Issuer’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 13, 2019, 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 THREE MONTHS ENDED SEPTEMBER 30, 2019

 

Part 1 Financial Information    
         
  Item 1. Condensed Consolidated Financial Statements    
         
  Condensed consolidated Balance Sheet as of September 30, 2019 (Unaudited) and June 30, 2019   1
       
  Condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018 (Unaudited)   3
       
  Condensed consolidated statements of cash flows for the three months ended September 30, 2019 and 2018 (Unaudited)   4
       
  Note to Condensed consolidated financial statements (Unaudited)   5
       
  Item 2. Management’s discussion and Analysis of Financial Condition and Results of Operations   13
         
  Item 3. Quantitative and qualitative disclosures about market risk   17
         
  Item 4. Controls and Procedures   17
         
Part II Other Information    
       
  Item 1. Legal Procedures   18
         
  Item 1A. Risk Factors   18
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   18
         
  Item 3. Defaults upon senior securities   18
         
  Item 4. Mine safety disclosures   18
         
  Item 5. Other information   18
         
  Item 6. exhibits   18
         
  Signatures   19

 

 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE sheets

 

   September 30,   June 30, 
   2019   2019 
   (Unaudited)      
ASSETS          
           
CURRENT ASSETS          
Cash and Cash Equivalents  $24,185   $18,800 
Trade Receivables, Net of Allowance for Doubtful Accounts of $13,149 and $12,849, Respectively   447,531    137,869 
Inventories:          
Finished Goods   270,421    200,085 
Goods in Process   11,357    12,999 
Raw Materials   52,310    45,456 
Packaging Materials   161,645    151,795 
Prepaid Expenses   37,902    7,653 
Total Current Assets   1,005,351    574,657 
           
LONG-TERM ASSETS          
Property and Equipment:          
Land   35,000    35,000 
Buildings   77,348    77,348 
Machinery and Equipment   851,791    851,791 
Trucks and Autos   158,632    158,632 
Office Equipment   33,025    33,025 
Leasehold Improvements   72,068    72,068 
Total   1,227,864    1,227,864 
Less Accumulated Depreciation   1,030,415    1,016,764 
Total Property and Equipment, Net   197,449    211,100 
           
Other Long-Term Assets          
Right of Use Assets   360,542    - 
Total Long-Term Assets   557,991    211,100 
           
Total Assets  $1,563,342   $785,757 

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 (1) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE sheets (CONTINUED)

 

   September 30,   June 30, 
   2019   2019 
   (Unaudited)      
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts Payable   265,990    78,549 
Current Maturities of Notes Payable and Line of Credit   299,319    97,133 
Current Maturities of Lease Liability   56,462    - 
Accrued Expenses   44,939    28,851 
Refund Liability Owed to Customers   20,909    10,403 
Deferred Income   1,299    1,299 
Total Current Liabilities   688,918    216,235 
           
LONG-TERM LIABILITIES          
           
Lease Liability, Less Current Maturities   304,080    - 
Notes Payable, Less Current Maturities   17,257    20,408 
Deferred Income   5,843    6,168 
Total Long-Term Liabilities   327,180    26,576 
           
Total Liabilities   1,016,098    242,811 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY          
Capital Stock Issued and Outstanding:          
Prior Cumulative Preferred Stock, $5 Par Value:          
Series A (Liquidation Preference $2,347,500 and $2,340,000, Respectively)   500,000    500,000 
Series B (Liquidation Preference $2,302,500 and $2,295,000, Respectively)   500,000    500,000 
Cumulative Preferred Stock, $20 Par Value:          
Series A (Liquidation Preference $5,267,963 and $5,253,329, Respectively)   1,170,660    1,170,660 
Series B (Liquidation Preference $858,518 and $856,133, Respectively)   190,780    190,780 
Common Stock, $1 Par Value   969,834    969,834 
Paid-In Capital in Excess of Par   3,134,722    3,134,722 
Accumulated Deficit   (5,918,752)   (5,923,050)
Total Stockholders' Equity   547,244    542,946 
           
Total Liabilities and Stockholders' Equity  $1,563,342   $785,757 

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 (2) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended 
   September 30 
   2019   2018 
SALES  $714,081   $741,520 
           
COST OF SALES   488,630    526,321 
Gross Profit on Sales   225,451    215,199 
           
OPERATING EXPENSES          
Selling   77,955    72,903 
General and Administrative   144,389    138,484 
Total Operating Expenses   222,344    211,387 
           
Income from Operations   3,107    3,812 
           
OTHER INCOME (EXPENSE)          
Miscellaneous Income   2,873    363 
Interest Expense   (1,682)   (2,883)
Total Other Income (Expense)   1,191    (2,520)
           
Net Income before Income Taxes   4,298    1,292 
           
INCOME TAX EXPENSE (BENEFIT)   -    - 
           
NET INCOME  $4,298   $1,292 
           
NET LOSS PER SHARE OF COMMON STOCK          
Basic  $(0.03)  $(0.03)
           
Diluted  $(0.03)  $(0.03)

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 (3) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF cash flows

(UNAUDITED)

 

   Three Months Ended 
   September 30 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income  $4,298   $1,292 
Adjustments to Reconcile Net Income to Net Cash          
Used by Operating Activities:          
Depreciation and Amortization   13,651    14,245 
Allowance for Bad Debts   300    300 
Deferred Income Amortization   (325)   (324)
Effects of Changes in Operating Assets and Liabilities:          
Trade Receivables   (309,962)   (418,933)
Inventories   (85,398)   (57,940)
Prepaid Expenses   (30,249)   (23,788)
Accounts Payable   187,441    117,835 
Accrued Expenses   16,088    27,101 
Refund Liability Owed to Customers   10,506    18,274 
Net Cash Used by Operating Activities   (193,650)   (321,938)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from Line-of-Credit   202,000    310,000 
Principal Payments on Notes Payable   (2,965)   (2,754)
Bank Overdraft   -    12,846 
Net Cash Provided by Financing Activities   199,035    320,092 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   5,385    (1,846)
           
Cash and Cash Equivalents - Beginning of Period   18,800    2,129 
           
CASH AND CASH EQUIVALENTS - END OF PERIOD  $24,185   $283 

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 (4) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED)

 

NOTE 1SIGNIFICANT ACCOUNTING POLICIES

 

General

 

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

 

No events have occurred subsequent to September 30, 2019, through the date of filing this form, that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the three month period ended September 30, 2019.

 

Revenue Recognition

 

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

 

 (5) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED)

 

NOTE 1SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition (Continued)

 

Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilling product orders. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The amount of consideration the Company expects to receive and revenue the Company recognizes includes estimates of variable consideration, including costs for trade promotional programs, customer incentives, and allowances and discounts associated with aged or potentially unsaleable products. These estimates are based upon our analysis of the programs offered, historical trends, and expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past. The Company reviews and updates these estimates regularly and the impact of any adjustments are recognized in the period the adjustments are identified. The adjustments recognized in the first quarter of the year ending June 30, 2020 resulting from updated estimates of revenue for prior year product sales were not significant.

 

The majority of the Company’s products are confectionery and confectionery-based and, therefore, exhibit similar economic characteristics, such that they are based on similar ingredients and are marketed and sold through the same channels to the same customers. The Company operates two divisions, Chase Candy Products and Seasonal Candy Products. Chase Candy Products involve production and sale of a candy bar marketed under the trade name “Cherry Mash”. The Seasonal Candy Products involve production and sale of coconut, peanut, chocolate, and fudge confectioneries. Both divisions share a common labor force and utilize the same basic equipment and raw materials. Management considers these two divisions as one reportable segment. The various divisions of revenue are as follows for the three months ended September 30:

 

   2019   2018 
Sales - Chase Candy  $355,825   $294,447 
Sales - Seasonal Candy   358,256    447,073 
Sales  $714,081   $741,520 

 

 (6) 

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED) 

 

NOTE 1SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Adopted Pronouncements

 

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

 

Recently Issued Pronouncements

 

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

 

NOTE 2Earnings (LOSS) PER SHARE

 

The loss per share were computed on the weighted average of outstanding common shares during the period.

 

   Three Months Ended 
   September 30 
   2019   2018 
Net Income  $4,298   $1,292 
           
Preferred Dividend Requirements:          
6% Prior Cumulative Preferred, $5 Par Value   15,000    15,000 
5% Convertible Cumulative Preferred, $20 Par Value   17,018    17,018 
Total Dividend Requirements   32,018    32,018 
           
Net Loss - Common Stockholders  $(27,720)  $(30,726)

 

Diluted earnings per share are calculated by including contingently issuable shares with the weighted average shares outstanding.

 

(7)

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED) 

 

NOTE 2EARNINGS (LOSS) PER SHARE (CONTINUED)

 

 

   Three Months Ended 
   September 30 
   2019   2018 
Weighted Average Shares - Basic   969,834    969,834 
Dilutive Effect of Contingently Issuable Shares   1,033,334    1,033,334 
Weighted Average Shares – Diluted   2,003,168    2,003,168 
           
Basic Loss per Share  $(0.03)  $(0.03)
           
Diluted Loss per Share  $(0.03)  $(0.03)

 

The contingently issuable shares were not included in diluted earnings per common share as they would have an antidilutive effect upon earnings per share.

 

Cumulative Preferred Stock dividends in arrears at September 30, 2019 and 2018 totaled $8,365,040 and $8,236,968, respectively. Total dividends in arrears, on a per share basis, consist of the following:

 

   Three Months Ended 
   September 30 
   2019   2018 
6% Convertible        
Series A  $18   $18 
Series B   18    17 
5% Convertible          
Series A  $70   $69 
Series B   70    69 

 

The 6% convertible prior cumulative preferred stock may, upon 30 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 four 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.

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED) 

 

NOTE 3NOTES PAYABLE and line of credit

 

The Company’s long-term debt consists of:

 

        September 30,     June 30,  
Payee   Terms   2019     2019  
Nodaway Valley Bank   $350,000 line-of-credit agreement expiring on January 4, 2020, 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. Management anticipates renewal of the line-of-credit agreement at similar terms upon expiration.   $ 287,000     $ 85,000  
                     
 Ford Credit   $705 monthly payments, interest of 5.8%; final payment due October 2021, secured by a vehicle.     16,552       18,407  
                     
Toyota Credit   $444 monthly payments, interest of 6.49%; final payment due May 2022, secured by a vehicle.     13,024       14,134  
                     
Total         316,576       117,541  
Less: Current Portion         299,319       97,133  
Long-Term Portion       $ 17,257     $ 20,408  

 

Future minimum payments for the twelve months ending September 30 are:

 

Twelve Months Ending September 30,  Amount 
2020  $299,319 
2021   13,090 
2022   4,167 
Total  $316,576 

 

(9)

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED) 

 

NOTE 4INCOME 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 September 30, 2019. The Company has no material tax positions at September 30, 2019 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The Company’s federal income tax returns for the fiscal years ended 2017, 2018, and 2019 are subject to examination by the Internal Revenue Service (IRS) taxing authority.

 

NOTE 5SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

   Three Months Ended 
   September 30 
   2019   2018 
Cash Paid for:          
Interest  $1,682   $2,883 

 

 

NOTE 6DISCLOSURES 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 September 30, 2019, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.

 

NOTE 7LEASES

 

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

 

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

 

(10)

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

notes to CONDENSED CONSOLIDATED financial STATEMENTS

(UNAUDITED) 

 

NOTE 7LEASES (CONTINUED)

 

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

 

The Company’s lease agreement does not contain any residual value guarantees. Additionally, any other short-term leases are immaterial. The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize right-of-use assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term. Operating lease expenses and cash paid for operating lease liabilities were $19,500 for the three months ended September 30, 2019, of which, $17,891 is included in cost of sales and $1,609 is included in general and administrative expenses.

 

Minimum annual payments required under existing operating lease liabilities that have initial or remaining noncancelable terms in excess of one year as of September 30, 2019 are as follows:

 

Twelve months ending September 30,    
2020  $78,000 
2021   78,000 
2022   78,000 
2023   78,000 
2024   78,000 
Thereafter   39,000 
Total lease payments   429,000 
Less imputed interest   68,458 
Total lease payments  $360,542 

 

(11)

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

 

OVERVIEW

 

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

 

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

 

RESULTS OF OPERATIONS - Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

 

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

 

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

 

   Three Months Ended 
   September 30 
   2019   2018 
Sales   100%   100%
Cost of Sales   68    71 
Gross Profit on Sales   32    29 
Operating Expenses   31    29 
Income from Operations   1    - 
Other Income (Expense), Net   -    - 
Net Income before Income Taxes   1    - 
Income Tax Expense (Benefit)   -    - 
Net Income   1%   -%

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

 

SALES

 

Sales decreased $27,439 or 4% for the three months ended September 30, 2019 to $714,081 compared to $741,520 for the three months ended September 30, 2018. Sales for Seasonal Candy decreased $88,817 to $358,256 for the three months ended September 30, 2019, compared to $447,073 for 2018. Sales for Chase Candy increased $61,378 to $355,825 for the three months ended September 30, 2019, compared to $294,447 for 2018.

 

The 20% decrease in sales of Seasonal Candy of $88,817 for the three months ended September 30, 2019 over the same period ended September 30, 2018, is primarily due to the net effect of the following: 1) decreased orders from various customers in the clamshell seasonal division netting approximately $41,500 versus the same period a year ago primarily due to existing customers changing the timing of their shipments; 2) decreased orders in the bulk seasonal division netting approximately $33,500 due to decreased sales to existing customers; and 3) decreased orders from customers in the generic seasonal division netting approximately $14,500 versus the same period a year ago primarily due to existing customer decreasing orders offset by 4) various other fluctuations netting approximately $500.

 

The 21% increase in sales of Chase Candy of $61,378 for the three months ended September 30, 2019 over the same period ended September 30, 2018, is primarily due to the net effect of the following: 1) increased sales of L100, L200, SK436, and SK2100 Cherry Mash Merchandisers division by approximately $34,000 versus the same period a year ago due to increased orders from existing customers; 2) increased sales of L278/L212 Mini Mash division by approximately $28,000 versus the same period a year ago primarily due to increased orders from existing customers; 3) increased sales of the L276 Cherry Mash Distributor Pack division by approximately $5,000 versus the same period a year ago primarily due to increased orders from existing customers offset by 4) decreased sales of L279 and L299 Bulk Mini Mash division by approximately $3,000 versus the same period a year ago due to decreased orders from existing customers; and 5) various other fluctuations netting approximately $2,500.

 

COST OF SALES

 

The cost of sales decreased $37,691 to $488,630, or 68% of related sales for the three months ended September 30, 2019 compared to $526,321, or 71% of related sales for the three months ended September 30, 2018.

 

The 7% decrease in cost of sales of $37,691 is primarily due to the net impact of a 4% decrease in sales of $27,439 and a 5% decrease in the raw material cost of peanuts. This was offset by a 2% increase in the raw material cost of corn syrup and a 2% increase in the raw material cost of sugar. 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.

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

 

SELLING EXPENSES

 

Selling expenses for the three months ended September 30, 2019 increased $5,052 to $77,955, which is 11% of sales, compared to $72,903 or 10% of sales for the three months ended September 30, 2018.

 

The increase of $5,052 in selling expenses for the three months ended September 30, 2019 is primarily due to higher sales salaries and shipping charges offset by lower sales commissions. Sales salaries increased $4,561 to $27,686 for this period from $23,125 for the three months ended September 30, 2018 primarily due to increased base compensation for the Company’s sales person. Shipping expense increased $2,020 to $1,686 for this period from $(334) for the three months ended September 30, 2018 primarily due to actual shipping costs being less than estimated in the prior period. Commission expense decreased $1,229 to $33,385 for this period from $34,614 for the three months ended September 30, 2018 primarily due to a decrease in sales.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses for the three months ended September 30, 2019 increased $5,905 to $144,389 and increased to 20% of sales, compared to $138,484 or 19% of sales for the three months ended September 30, 2018.

 

The increased costs are primarily because of an increase in professional fees and indirect costs offset by a decrease in insurance expense. Professional fees increased $5,314 to $69,019 for this period from $63,705 for the three months ended September 30, 2019 primarily due to the Company’s audit firm increasing their fees by $5,000 for the current period. During the current period, the Company began allocating indirect costs to general and administrative expense that were previously allocated to cost of sales. This allocation is for the administrative portion of the office and totaled $3,681 for the period ending September 30, 2019. Insurance expense decreased $2,853 to $29,195 for this period from $32,048 for the three months ended September 30, 2019 primarily due to a decrease in the number of employees on the plan.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) increased by $3,711 for the three months ended September 30, 2019 to $1,191 compared to $(2,520) for the three months ended September 30, 2018 primarily due to an increase in miscellaneous income of $2,510 for an additional nonrefundable payment from a customer not associated with any goods sold and a decrease in interest expense of $1,201.

 

INCOME TAX EXPENSE (BENEFIT)

 

The Company recorded a tax expense for the three months ended September 30, 2019 of $0 as compared to tax expense of $0 for the three months ended September 30, 2018. There is no income tax expense recorded for the three months ended September 30, 2019 primarily due to the net operating loss carryforward at June 30, 2019 that is available to offset taxable income in the current period with a corresponding valuation allowance placed on the carryforward.

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

 

NET INCOME

 

The Company reported a net income for the three months ended September 30, 2019 of $4,298, compared to net income of $1,292 for the three months ended September 30, 2018. This increase of $3,006 is explained above

 

PREFERRED DIVIDENDS

 

Preferred dividends were $32,018 for the three months ended September 30, 2019 and 2018, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

 

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

 

Net loss applicable to common stockholders for the three months ended September 30, 2019 was $27,720 which is an increase of $3,006 as compared to the net loss for the three months ended September 30, 2018 of $30,726.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

   Three Months Ended 
   September 30 
   2019   2018 
Net Cash Used in Operating Activities  $(193,650)  $(321,938)
Net Cash Provided by Financing Activities   199,035    320,092 

 

Management has made no material commitments for capital expenditures during the remainder of fiscal 2020. The $193,650 of cash used in operating activities is fully detailed in the condensed consolidated statement of cash flows on page four. The $199,035 of cash provided by financing activities is primarily due to the receipt of $202,000 drawn from a line-of-credit, net of principal payments on equipment and vehicle loans. The proceeds from the line-of-credit during the period ended September 30, 2019 were used to finance the buildup of inventories which is reflected in the cash used in operating activities. At September 30, 2019, the Company had $63,000 remaining on the line-of-credit, which could be utilized to help fund any working capital requirements. Management expects that projected cash flows will enable the Company to pay the full balance on the line-of-credit prior to December 31, 2019.

 

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 generally be offset by sales price increases, which are not expected to have a significant effect upon demand.

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

Forward-Looking Information

 

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

 

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Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

 

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a smaller reporting company.

 

ITEM 4.CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control over Financial Reporting

 

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

 

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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 September 30, 2019 is $8,365,040.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.OTHER INFORMATION

 

None

 

ITEM 6.EXHIBITS

 

 Exhibit 31.1 Certification of Chief Executive Officer and Financial Officer Pursuant to Rules 13A-14(A) and 15D-14(A) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
 Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial 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 September 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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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)
   
   
November 14, 2019 /s/ Barry M. Yantis
Date Barry M. Yantis
  Chairman of the Board, Chief Executive Officer and
  Chief Financial Officer, President, and Treasurer

 

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