NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. NATURE OF OPERATIONS
Reborn Coffee, Inc. (“Reborn”) was incorporated
in the State of Florida in January 2018. In July 2022, Reborn was migrated from Florida to Delaware, and filed a certificate of incorporation
with the Secretary of State of the State of Delaware having the same capitalization structure as the Florida predecessor entity. Reborn
has the following wholly owned subsidiaries:
|
● |
Reborn Global Holdings, Inc. (“Reborn Holdings”), a California Corporation incorporated in November 2014. Reborn Holdings is engaged in the operation of wholesale distribution and retail coffee stores in California to sell a variety of coffee, tea, Reborn brand name water and other beverages along with bakery and dessert products. |
| ● | Reborn Coffee Franchise, LLC (the “Reborn Coffee Franchise”), a California limited liability corporation formed in December 2020, is a franchisor providing premier roaster specialty coffee to franchisees or customers. Reborn Coffee Franchise continues to develop the Reborn Coffee system for the establishment and operation of Reborn Coffee stores using one or more Reborn Coffee marks. The franchisee obtains a license to develop and operate a store under the strict compliance with terms of the agreement. The specific rights the franchisee is granted is to develop, own, and/or operate franchisee’s Reborn Coffee stores. The non-refundable initial franchise fee is $20,000. In addition, the franchisee is required to pay the company a royalty fee equal to 5% of the weekly gross sales of their respective store. |
Reborn Coffee, Inc., Reborn Global Holdings, Inc., and Reborn
Coffee Franchise, LLC will be collectively referred as the “Company”.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting
The unaudited condensed consolidated financial statements
include Reborn Coffee, Inc. and its wholly owned subsidiaries as of June 30, 2022 and December 31, 2021 and for the three and six month
periods ended June 30, 2022 and 2021.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United
States of America. The consolidated financial statements include Reborn Coffee, Inc. and its wholly owned subsidiaries. All intercompany
accounts, transactions, and profits have been eliminated upon consolidation.
Reverse Stock Split
In June 2022, the Company approved (a) the conversion of
all Class B Common Stock into Class A Common Stock, (b) a 1 for 100 reverse stock split, and (c) an amendment to Articles of Incorporation
to eliminate Class B and to change “Class A” to simply “common stock”. All share and earnings per share information
have been retroactively adjusted to reflect the stock split and the incremental par value of the newly issued shares was recorded with
the offset to additional paid-in capital.
Going Concern
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization
of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $9,979,164 at June
30, 2022, had a net loss of $1,502,260 for the six-month period ended June 30, 2022 and net cash used in operating activities of $1,199,979
for the six-month period ended June 30, 2022. These matters raise substantial doubt about the Company’s ability to continue as a
going concern.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
While the Company is attempting to expand operations and
increase revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management
intends to raise additional funds by way of public or private offerings. Management believes that the actions presently being taken to
further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While
management believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no
assurances to that effect or if available, on terms acceptable to the Company. The ability of the Company to continue as a going concern
is dependent upon the Company’s ability to further implement its business plan and generate additional profit. Compared to the revenue
for the six-month period ended June 30, 2021, however, net revenue for the six-month period ended June 30, 2022 has increased from $880,121
to $1,541,626, and the Company expects consistent increase in sales with the opening of more stores. In August 2022, the Company
consummated its initial public offering (the “IPO”) of 1,440,000 shares of its common stock at a public offering price of
$5.00 per share, generating gross proceeds of $7,200,000. The initial public offering is summarized in Note 12 to the unaudited condensed
consolidated financial statements.
The unaudited condensed consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States (“U.S. GAAP”) requires the Company to make estimates and
assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include
accounts receivables, accrued liabilities, income taxes, long-lived assets, and deferred tax valuation allowances. These estimates generally
involve complex issues and require management to make judgments, involve analysis of historical and future trends that can require extended
periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from
estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting
Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company’s net revenue primarily
consists of revenues from its retail stores and wholesale and online store. Accordingly, the Company recognizes revenue as follows:
Retail store revenues are recognized when payment is tendered
at the point of sale. Retail store revenues are reported net of sales, use or other transaction taxes that are collected from customers
and remitted to taxing authorities. Sales taxes that are payable are recorded as accrued as other current liabilities. Retail store revenue
makes up approximately 98% of the Company’s total revenue.
|
● |
Wholesale and Online Revenue |
Wholesale and online revenues are recognized when the products
are delivered, and title passes to the customers or to the wholesale distributors. When customers pick up products at the Company’s
warehouse, or distributed to the wholesale distributors, the title passes, and revenue is recognized. Wholesale revenues make up approximately
2% of the Company’s total revenue.
|
● |
Royalties and Other Fees |
Franchise revenues consists of royalties and other franchise
fees. Royalties are based on a percentage of franchisee’s weekly gross sales revenue at 5%. The Company recognizes the royalties
as the underlying sales occur. The Company recorded revenue from royalties of $0 for the six-month periods ended June 30, 2022 and 2021.
Other fees are earned as incurred and the Company did not have any other fee revenue for the six-month periods ended June 30, 2022 and
2021.
Shipping and Handling Costs
The Company incurred freight out cost and is included in
the Company’s cost of sales - wholesale and online.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
General and Administrative Expense
General and administrative expense includes store-related
expense as well as the Company’s corporate headquarters’ expenses.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses
amounted to $20,513 and $50,160 for the six-month periods ended June 30, 2022 and 2021, respectively, and is recorded under general and
administrative expenses in the accompanying consolidated statements of operations.
Pre-opening Costs
Pre-opening costs for new stores, consist primarily of store
and leasehold improvements, and are capitalized and depreciated over the shorter of the useful life of the improvement or the lease term,
including renewal periods that are reasonably assured.
Accounts Receivable
Accounts receivables are stated net of allowance for doubtful
accounts. The allowance for doubtful accounts is determined primarily on the basis of past collection experience and general economic
conditions. The Company determines terms and conditions for its customers based on volume transacted by the customer, customer creditworthiness
and past transaction history. At June 30, 2022 and December 31, 2021, allowance for doubtful accounts was $0 and $0, respectively. The
Company does not have any off-balance sheet exposure related to its customers.
Inventories
Inventories consisted primarily of coffee beans, drink products,
and supplies which are recorded at cost or at net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Maintenance
and repairs are charged to expense as incurred. Depreciation and amortization are provided using both the straight-line and declining
balance methods over the following estimated useful lives:
Furniture and fixtures |
5-7 Years |
Store construction |
Lesser of the lease term or the estimated useful lives of the improvements, generally 6 years |
Leasehold improvement |
Lesser of the lease term or the estimated useful lives of the improvements, generally 6 years |
When assets are retired or disposed of, the cost and accumulated
depreciation thereon are removed, and any resulting gains or losses are included in the consolidated statements of operations. Leasehold
improvements are amortized using the straight-line method over the estimated life of the asset, not to exceed the length of the lease.
Repair and maintenance costs are expensed as incurred.
Operating Leases
The Company adopted FASB Accounting Standards Codification,
or ASC, Topic 842, Leases (“ASC 842”) which requires the recognition of the right-of-use assets and relating operating and
finance lease liabilities on the balance sheet. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified
as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating
lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset
is recorded in operating expenses and an implied interest component is recorded in interest expense.
Earnings Per Share
Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator
of the basic and diluted earnings (loss) per share (EPS) computations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basic earnings (loss) per share are computed by dividing
net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were
dilutive. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents,
because their inclusion would be anti-dilutive.
The Company did not have any dilutive shares for the three
and six month periods ended June 30, 2022 and 2021.
Segment Reporting
FASB ASC Topic 280, Segment Reporting, requires public companies
to report financial and descriptive information about their reportable operating segments. The Company’s management identifies operating
segments based on how the Company’s management internally evaluate separate financial information, business activities and management
responsibility. At the current time, the Company has only one reportable segment, consisting of both the wholesale and retail sales of
coffee, water, and other beverages. The Company’s franchisor subsidiary was not material as of and for the three and six month periods
ended June 30, 2022 and 2021.
Long-lived Assets
In accordance with FASB ASC Topic 360, Property, Plant, and
Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable
based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from
operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic
business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset are less than its carrying amount. As of June 30, 2022 and
December 31, 2021, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets
are impaired.
Fair Value of Financial Instruments
The Company records its financial assets and liabilities
at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable
outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 – Quoted prices in active markets for identical
assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 – Inputs include management’s best estimate
of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market
and significant to the instrument’s valuation.
As of June 30, 2022 and December 31, 2021, the Company believes
that the carrying value of accounts receivable, accounts payable, accrued expenses, and other current assets and liabilities approximate
fair value due to the short maturity of theses financial instruments. The financial statements do not include any financial instruments
at fair value on a recurring or non-recurring basis.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consisted of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences
between the basis of assets and liabilities for financial statement and income tax purposes.
The Company follows FASB ASC Topic 740, Income Taxes, which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. ASC 740-10-25 provides
criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from
such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The Company did not recognize additional liabilities for uncertain tax positions pursuant to ASC 740-10-25 for the three and six month
periods ended June 30, 2022 and 2021.
Concentration of Credit Risk
Financial instruments that potentially subject the Company
to concentrations of credit risk are accounts receivable arising from its normal business activities. The Company performs ongoing credit
evaluations to its customers and establishes allowances when appropriate.
Company purchases from various vendors for its operations.
For the three and six month periods ended June 30, 2022 and 2021, no purchases from any vendors accounted for a significant amount of
the Company’s bean coffee purchases.
Related Parties
Related parties are any entities or individuals that, through
employment, ownership, or other means, possess the ability to direct or cause the direction of management and policies of the Company.
Significant Recent Developments Regarding COVID-19
The novel coronavirus, known as the global pandemic COVID-19,
was first identified in December 2019. During March 2020, a global pandemic was declared by the World Health Organization related to the
rapidly spreading outbreak of a novel strain of coronavirus designated COVID-19. The pandemic has significantly impacted economic conditions
in the United States. The outbreak of the virus impacted our company-owned retail locations in Southern California.
The Company first began to experience impacts from COVID-19
around the middle of March 2020 as federal, state and local governments began to react to the public health crisis by encouraging or requiring
social distancing, instituting stay-at-home orders, and requiring, in varying degrees, restaurant dine-in limitations, capacity limitations
or other restrictions that largely limited restaurants to take-out, drive-thru and delivery sales. Although we have experienced some recovery
from the initial impact of COVID-19, the long-term impact of COVID-19 on the economy and on our business remains uncertain, the duration
and scope of which cannot currently be predicted.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncement
In June 2016, the FASB issued Accounting Standards Update
No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology
for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.
In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller
reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. The Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential
effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements, particularly its recognition of allowances
for accounts receivable.
Other recently issued accounting updates are not expected
to have a material impact on the Company’s consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Furniture and equipment | |
$ | 849,809 | | |
$ | 779,649 | |
Leasehold improvement | |
| 639,602 | | |
| 639,602 | |
Store construction | |
| 150,399 | | |
| 52,161 | |
Store | |
| 300,000 | | |
| 300,000 | |
| |
| | | |
| | |
Total property and equipment | |
| 1,939,810 | | |
| 1,771,412 | |
Less accumulated depreciation | |
| (758,445 | ) | |
| (660,522 | ) |
| |
| | | |
| | |
Total property and equipment, net | |
$ | 1,181,365 | | |
$ | 1,110,890 | |
In February 2021, the Company repurchased its retail location
in Corona Del Mar. The purchase price was $300,000, comprised of $150,000 in cash and 232,558 shares of the Company’s common stock.
The Company recorded the assumption of the ongoing lease for the store, which included a right of use asset of $183,442 and a lease liability
of $193,463.
Depreciation expense on property
and equipment amounted to approximately $97,922 and $81,926 for the six-month periods ended and $48,479 and $45,797 for the three-month
periods ended June 30, 2022 and 2021, respectively.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS
Loans payable to financial institutions consist of the following:
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
July 2021 - Loan agreement with principal amount of $90,000 and repayment rate of 19% for a total of $101,700. The loan payable matures on January 31, 2023. | |
$ | - | | |
$ | 52,819 | |
| |
| | | |
| | |
August 2021 - Loan agreement with principal amount of $72,500 and repayment rate of 18.5% for a total of $81,925. The loan payable matures on February 10, 2023. | |
| - | | |
| 36,502 | |
| |
| | | |
| | |
August 2021 - Loan agreement with principal amount of $67,500 and repayment rate of 18.5% for a total of $76,275. The loan payable matures on February 11, 2023. | |
| - | | |
| 32,382 | |
| |
| | | |
| | |
Total loan payable | |
$ | - | | |
$ | 121,703 | |
Less: current portion | |
| - | | |
| (98,475 | ) |
| |
| | | |
| | |
Total loan payable, net of current | |
$ | - | | |
$ | 23,228 | |
July 2021 - $ 101,700 loan payable
In July 2021, the Company entered into a loan agreement with
Square Capital in the principal amount of $90,000 with loan cost $11,700. The loan payable has a maturity date on January 31, 2023. As
of June 30, 2022 and December 31, 2021, there was a balance outstanding of $0 and $52,819, respectively.
August 2021 - $81,925 loan payable
In August 2021, the Company entered into a loan agreement
with Square Capital in the principal amount of $72,500 with loan cost $9,425. The loan payable has a maturity date on February 10, 2023.
As of June 30, 2022 and December 31, 2021, there was a balance outstanding of $0 and $36,502, respectively.
August 2021 - $76,275 loan payable
In August 2021, the Company entered into a loan agreement
with Square Capital in the principal amount of $67,500 with loan cost $8,775. The loan payable has a maturity date on February 11, 2023.
As of June 30, 2022 and December 31, 2021, there was a balance outstanding of $0 and $32,382, respectively.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
5. LOAN PAYABLES, EMERGENCY INJURY DISASTER LOAN (EIDL)
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
May 16, 2020 ($150,000) - Loan agreement with principal amount of $150,000 with an interest rate of 3.75% and maturity date on May 16, 2050 | |
$ | 150,000 | | |
$ | 150,000 | |
June 28, 2021 ($350,000) – Loan agreement with principal amount of $350,000 with an interest rate of 3.75% and maturity date on May 18, 2050 | |
| 350,000 | | |
| 350,000 | |
| |
| | | |
| | |
Total long-term loan payable, emergency injury disaster loan (EIDL) | |
| 500,000 | | |
| 500,000 | |
Less - current portion | |
| (10,760 | ) | |
| (7,957 | ) |
| |
| | | |
| | |
Total loan payable, emergency injury disaster loan (EIDL), less current portion | |
$ | 489,240 | | |
$ | 492,043 | |
The following table provides future minimum payments:
For the years ended December 31, | |
Amount | |
2022 (remaining six months) | |
| 5,330 | |
2023 | |
| 10,964 | |
2024 | |
| 11,382 | |
2025 | |
| 11,816 | |
2026 | |
| 12,267 | |
Thereafter | |
| 448,241 | |
| |
| | |
Total | |
$ | 500,000 | |
May 16, 2020 – $150,000
On May 16, 2020, the Company executed the standard loan documents
required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance
program in light of the impact of the COVID-19 pandemic on the TNB’s business. As of June 30, 2022, the loan payable, Emergency
Injury Disaster Loan noted above is not in default.
Pursuant to that certain Loan Authorization and Agreement
(the “SBA Loan Agreement”), the Company borrowed an aggregate principal amount of the EIDL Loan of $150,000, with proceeds
to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds actually advanced
from the date of each advance. Installment payments, including principal and interest, are due monthly beginning May 16, 2021 (twelve
months from the date of the SBA Loan) in the amount of $731. The balance of principal and interest is payable thirty years from the date
of the SBA Loan.
In connection therewith, the Company executed (i) a loan
for the benefit of the SBA (the “SBA Loan”), which contains customary events of default and (ii) a Security Agreement, granting
the SBA a security interest in all tangible and intangible personal property of the Company, which also contains customary events of default
(the “SBA Security Agreement”).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
5. LOAN PAYABLES, EMERGENCY INJURY DISASTER LOAN (EIDL) (continued)
June 28, 2021 – $350,000
On June 28, 2021, the Company executed the standard loan
documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”)
assistance program in light of the impact of the COVID-19 pandemic on the TNB’s business. As of June 30, 2022, the loan payable,
Emergency Injury Disaster Loan noted above is not in default.
Pursuant to that certain Amended Loan Authorization and Agreement
(the “SBA Loan Agreement”), the Company borrowed an aggregate principal amount of the EIDL Loan of $500,000, with proceeds
to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds actually advanced
from the date of each advance. Installment payments, including principal and interest, are due monthly beginning October 16, 2022
(thirty months from the original date of the SBA Loan) in the amount of $2,505. The balance of principal and interest is payable thirty
years from the original date of the SBA Loan.
6. LOAN PAYABLE, PAYROLL PROTECTION LOAN PROGRAM (PPP)
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Loan payable, payroll protection program (PPP) – February 10, 2021 | |
$ | 167,138 | | |
$ | 167,138 | |
| |
| | | |
| | |
Total long-term loan payable, payroll protection program (PPP) | |
| 167,138 | | |
| 167,138 | |
Less - current portion | |
| (39,169 | ) | |
| (42,345 | ) |
| |
| | | |
| | |
Total loan payable, payroll protection program (PPP), less current portion | |
$ | 127,969 | | |
$ | 124,793 | |
The Paycheck Protection Program Loan (the “PPP Loan”)
is administered by the U.S. Small Business Administration (the “SBA”). The interest rate of the loan is 1.00% per annum and
accrues on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. Commencing seven
months after the effective date of the PPP Loan, the Company is required to pay the Lender equal monthly payments of principal and interest
as required to fully amortize any unforgiven principal balance of the loan by the two-year anniversary of the effective date of the PPP
Loan (the “Maturity Date”). The PPP Loan contains customary events of default relating to, among other things, payment defaults,
making materially false or misleading representations to the SBA or the Lender, or breaching the terms of the PPP Loan. The occurrence
of an event of default may result in the repayment of all amounts outstanding under the PPP Loan, collection of all amounts owing from
the Company, or filing suit and obtaining judgment against the Company. Under the terms of the CARES Act, PPP loan recipients can apply
for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to
limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.
Recent modifications to the PPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original
eight-week period, making it possible for the Company to apply for forgiveness of its PPP loan.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
7. EQUIPMENT LOAN PAYABLE
Equipment loan payable consist of the following:
| |
June 30,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
October 2017 - Loan agreement with principal amount of $82,011 with an interest rate of 6.40% and maturity date on October 1, 2022 | |
$ | 6,312 | | |
$ | 15,989 | |
| |
| | | |
| | |
Total long-term equipment loan payable | |
| 6,312 | | |
| 15,989 | |
Less – current portion | |
| (6,312 | ) | |
| (15,989 | ) |
| |
| | | |
| | |
Total long-term debt, net of current portion | |
$ | - | | |
$ | - | |
For the year ended December 31, | |
Amount | |
2022 (remaining six months) | |
$ | 6,312 | |
Total long-term equipment loan payable | |
$ | 6,312 | |
October 2017 - $82,011 equipment loan payable
In October 2017, the Company entered into equipment finance
loan agreement with US Bank Equipment Finance in the amount of $82,011 with an interest rate of 6.40% and maturity date on October 1,
2022, payable in 60 payments. All principal, together with interest cost is due and payable on October 1, 2022. As of June 30, 2022 and
December 31, 2021, there was a balance outstanding of $6,312 and $15,989, respectively.
8. INCOME TAX
Total income tax (benefit) expense consists of the following:
For the Six-Month Periods Ended June 30, |
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
Current provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
|
$ |
- |
|
State |
|
|
- |
|
|
|
- |
|
Total current provision (benefit) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
- |
|
|
|
- |
|
State |
|
|
- |
|
|
|
- |
|
Total deferred provision (benefit) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total tax provision (benefit) |
|
$ |
- |
|
|
$ |
- |
|
A reconciliation of the Company’s effective tax rate
to the statutory federal rate is as follows:
Description | |
Rate | |
| |
| |
Statutory federal rate | |
| 21.00 | % |
State income taxes net of federal income tax benefit and others | |
| 8.84 | % |
Permanent differences for tax purposes and others | |
| 0.00 | % |
Change in valuation allowance | |
| -29.84 | % |
| |
| | |
Effective tax rate | |
| 0 | % |
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
8. INCOME TAX (continued)
The income tax benefit differs from the amount computed
by applying the U.S. federal statutory tax rate of 21% and California state income taxes of 8.84% due to the change in the valuation allowance.
Deferred income taxes reflect the temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets | |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Deferred tax assets: | |
| | |
| |
Net operating loss | |
$ | 2,961,949 | | |
$ | 2,513,674 | |
Other temporary differences | |
| - | | |
| - | |
| |
| | | |
| | |
Total deferred tax assets | |
| 2,961,949 | | |
| 2,513,674 | |
Less - valuation allowance | |
| (2,961,949 | ) | |
| (2,513,674 | ) |
| |
| | | |
| | |
Total deferred tax assets, net of valuation allowance | |
$ | - | | |
$ | - | |
As of December 31, 2021, the Company had available net operating
loss carryovers of approximately $8,423,841. Per the Tax Cuts and Jobs Act (TCJA) implemented in 2018, the two-year carryback provision
was removed and now allows for an indefinite carryforward period. The carryforwards are limited to 80% of each subsequent year’s net income.
As a result, net operating loss may be applied against future taxable income and expires at various dates subject to certain limitations.
The Company has a deferred tax asset arising substantially from the benefits of such net operating loss deduction and has recorded a valuation
allowance for the full amount of this deferred tax asset since it is more likely than not that some or all of the deferred tax asset may
not be realized.
The Company files income tax returns in the U.S. federal
jurisdiction and California and is subject to income tax examinations by federal tax authorities for tax year ended 2017 and later and
subject to California authorities for tax year ended 2016 and later. The Company currently is not under examination by any tax authority.
The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2022 and
December 31, 2021, the Company has no accrued interest or penalties related to uncertain tax positions.
As of June 30, 2022, the Company had cumulative net operating
loss carryforwards for federal tax purposes of approximately $9,926,101. In addition, the Company had state tax net operating loss carryforwards
of approximately $9,926,101. The carryforwards may be applied against future taxable income and expires at various dates subject to certain
limitations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
9.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company entered into the following operating facility leases
|
●
|
La Floresta
- On July 25, 2016, the Company entered into an operating facility lease for its store located at La Floresta Shopping Village
in Brea, California with 60 months term with option to extend. The lease started on July 2016 and expires on November 2024. |
| ● | La Crescenta - On May 2017, the Company entered into an operating facility lease for its store located in La Crescenta, California with 120 months term with option to extend. The lease started on May 2017 and expires in May 2027. The Company entered into non-cancellable lease agreement for a coffee shop approximately 1,607 square feet located in La Crescenta, California commencing in May 2017 and expiring in April 2027. The monthly lease payment under the lease agreement approximately $6,026. |
| ● | Brea
- On September 1, 2018, the Company entered into an operating facility lease for its corporate
office located in Brea, California with 72 months term with option to extend. The lease starts
on September 2018 and expires on August 2024. |
|
●
|
Glendale –
On October 27, 2020, The Company entered a 7-year operating facility lease for its store located at the Glendale Galleria in Glendale,
California. The lease starts on November 2020 and expires in October 2027. |
|
|
|
|
● |
San
Francisco - On December 22, 2020, the Company entered into an operating facility lease for its store located at Stonestown
Galleria in San Francisco, California with 84 months term with option to extend. The lease starts in June 2021 and expires in April
2028. |
|
● |
Santa
Anita - On December 22, 2020,
the Company entered into an operating facility lease for its store located at Arcadia, California
with 36 months term with option to extend. The lease starts in February 2021 and expires in
January 2024.
|
|
● |
Riverside
- On February 4, 2021, the Company entered into an operating facility lease for its store located at Galleria at Tyler in
Riverside, California with 84 months term with option to extend. The lease starts in April 2021 and expires in March 2028. |
|
●
|
Corona Del
Mar - On February 5, 2021, the Company repurchased its retail store in Corona Del Mar, California. As part of that repurchase,
the Company assumed the original operating lease on the facility, with 66 months term with an option to extend. The lease expires
in December 2022. |
|
● |
Laguna Woods
- On February 12, 2021, the Company entered into an operating facility
lease for its store located at Home Depot Center in Laguna Woods, California with 60 months term with option to extend. The lease
starts in June 2021 and expires in May 2026. |
| ● | Huntington
Beach - On November 1 2021, the Company entered into an operating facility lease for
its store located at Huntington Beach, California with 124 months term with option to extend.
The lease starts in November 2021 and expires in February 2032. |
| ● | Manhattan
Village - On March 1 2022, the Company entered into an operating facility lease for its
store located at Manhattan Beach, California with 60 months term with option to extend. The
lease starts in March 2022 and expires in February 2027. |
The
Company adopted ASC 842 as of January 2018 (date of formation). The Company has operating leases for the Company’s corporate office
and stores and accounts for these leases in accordance with ASC 842, which resulted in the recognition of ROU assets and operating lease
liabilities of $2,937,437 and $3,082,771, respectively, as of June 30, 2022. Certain of the leases for the Company’s retail
store facilities provide for variable payments for property taxes, insurance and common area maintenance payments related to rental payments
based on future sales volumes at the leased location, which are not measurable at the inception of the lease, or rental payments that
are adjusted periodically for inflation.
For the new lease and adjustments,
the Company recorded an additional non-cash increase of $470,564 to ROU assets and $492,650 to operational lease liabilities for
the six-month period ended June 30, 2022.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (continued)
In accordance with ASC 842, the components of lease expense
were as follows:
Six-month period ended June 30, | |
2022 | | |
2021 | |
Operating lease expense | |
$ | 452,155 | | |
$ | 279,888 | |
Total lease expense | |
$ | 452,155 | | |
$ | 279,888 | |
In accordance with ASC 842, other information related to leases
was as follows:
Six-month period ended June 30, | |
2022 | | |
2021 | |
Operating cash flows from operating leases | |
$ | 435,635 | | |
$ | 224,988 | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 435,635 | | |
$ | 224,988 | |
| |
| | | |
| | |
Weighted-average remaining lease term—operating leases | |
| | | |
| 4.1 Years | |
Weighted-average discount rate—operating leases | |
| | | |
| 8.9 | % |
In accordance with ASC 842, maturities of operating lease
liabilities as of June 30, 2022 were as follows:
| |
Operating | |
For the years ended December 31, | |
Lease | |
2022 (remaining six months) | |
$ | 467,758 | |
2023 | |
| 864,887 | |
2024 | |
| 785,267 | |
2025 | |
| 642,387 | |
2026 | |
| 574,150 | |
Thereafter | |
| 456,435 | |
Total undiscounted cash flows | |
$ | 3,790,884 | |
| |
| | |
Reconciliation of lease liabilities: | |
| | |
Weighted-average remaining lease terms | |
| 4.1 Years | |
Weighted-average discount rate | |
| 8.9 | % |
Present values | |
$ | 3,082,771 | |
| |
| | |
Lease liabilities—current | |
| 655,603 | |
Lease liabilities—long-term | |
| 2,427,168 | |
Lease liabilities—total | |
$ | 3,082,771 | |
| |
| | |
Difference between undiscounted and discounted cash flows | |
$ | 708,113 | |
Contingencies
The Company is subject to various legal proceedings from
time to time as part of its business. As of June 30, 2022, the Company was not currently party to any legal proceedings or threatened
legal proceedings, the adverse outcome of which, individually or in the aggregate, it believes would have a material adverse effect on
its business, financial condition, and results of operations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
10. SHAREHOLDERS’ EQUITY
Common Stock
The Company has authorization to issue and have outstanding
at any one time 40,000,000 share of common stock with a par value of $0.0001 per share. The shareholders of common stock shall be entitled
to one vote per share and dividends declared by the Company’s Board of Directors.
In June 2022, the Company approved (a) the conversion of
all Class B Common Stock into Class A Common Stock, (b) a 1 for 100 reverse split, and (c) an amendment to Articles of Incorporation to
eliminate Class B and to change “Class A” to simply “common stock”. All share and earnings per share information
have been retroactively adjusted to reflect the stock split and the incremental par value of the newly issued shares was recorded with
the offset to additional paid-in capital.
Preferred Stock
The Company has authorization to issue and have outstanding
at any one time 1,000,000 share of preferred stock with a par value of $0.0001 per share, in one or more classes or series within a class
as may be determined by our board of directors, who establish, from time to time, the number of shares to be included in each class or
series, fix the designation, powers, preferences and rights of the shares of each such class or series and any qualifications, limitations
or restrictions thereof. Any preferred stock so issued is senior to other existing classes of common stock with respect to the payment
of dividends or amounts upon liquidation or dissolution. As of June 30, 2022 and December 31, 2021, no shares of our preferred stock had
been designated any rights and we had no shares of preferred stock issued and outstanding.
Subscription of Common Stock Receivables
The Company issued 1,569,768 shares of common stock to several
individuals in March 2020 and in December 2020 for total proceeds of $1,350,000, of which $553,500 was received in January, February,
and June 2021.
Issuance of Common Stock in Settlement of Antidilution
Provisions
In May 2018, the Company had entered into a share exchange
agreement wherein Capax, Inc., the predecessor entity of Reborn Coffee, Inc. (“Capax”) effectively merged with Reborn Global
Holdings, Inc. to form the Company. In this share exchange agreement, the preexisting shareholder of Capax were provided covenants that
for a period of one year following the date upon which the Company is approved for quotation or trading on a public exchange (“IPO”),
the percentage of ownership of the prior shareholders of Capax would not be less than the 5% of the total number of shares of voting common
stock outstanding of the Company that they owned following the share exchange. In the event the ownership of the pre-merger shareholders
of Capax fell below 5%, the Company was obligated to issue that number of shares of common stock to those shareholders which would increase
the ownership of all of the Pre-Merger Shareholders to five percent (5%) of the total outstanding voting common shares of the Company.
During the year ended December 31, 2021, the Company issued 325,495 shares of common stock under these provisions.
On January 25, 2022, the Company modified this agreement
with the preexisting shareholders to effectively end the antidilution protection at the time of a successful IPO, eliminating the one-year
period following an IPO as provided under the original agreement. The shareholders would be entitled to additional protection through
the IPO date should the Company issue any additional shares between December 31, 2021 and the IPO date. The Company has not issued any
additional shares subsequent to December 31, 2021.
Dividend policy
Dividends are paid at the discretion of the Board of Directors.
There were no dividends declared for the six-month periods ended June 30, 2022 and 2021.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
11. EARNINGS PER SHARE
The Company calculates earnings per share in accordance
with FASB ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per
share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially dilutive common shares
consist of stock options outstanding (using the treasury method).
The following table sets forth the computation of basic
and diluted net income per common share:
| |
Six-Month Period | | |
Three-Month Period | |
| |
Ended June 30, | | |
Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net Loss | |
$ | (1,502,260 | ) | |
$ | (635,163 | ) | |
$ | (937,148 | ) | |
$ | (307,684 | ) |
Weighted Average Shares of Common Stock Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 11,642,550 | | |
| 10,282,669 | | |
| 11,667,545 | | |
| 10,380,944 | |
Diluted | |
| 11,642,550 | | |
| 10,282,669 | | |
| 11,667,545 | | |
| 10,380,944 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings Per Share - Basic | |
| | | |
| | | |
| | | |
| | |
Net Loss Per Share | |
| (0.13 | ) | |
| (0.06 | ) | |
| (0.08 | ) | |
| (0.03 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings Per Share - Diluted | |
| | | |
| | | |
| | | |
| | |
Net Loss Per Share | |
| (0.13 | ) | |
| (0.06 | ) | |
| (0.08 | ) | |
| (0.03 | ) |
12. SUBSEQUENT EVENTS
The Company evaluated all events or
transactions that occurred after June 30, 2022 up through the date the unaudited condensed consolidated financial statements were available
to be issued. During this period, the Company did not have any material recognizable subsequent events required to be disclosed as of
and for the six-month period ended June 30, 2022, except for the following:
Initial Public Offering
In August 2022, the Company consummated its initial public offering
(the “IPO”) of 1,440,000 shares of its common stock at a public offering price of $5.00 per share, generating gross proceeds
of $7,200,000. Net proceeds from the IPO was approximately $6.2 million after deducting underwriting discounts and commissions and other
offering expenses of approximately $998,000.
The Company had granted the underwriters a 45-day option to
purchase up to 216,000 additional shares (equal to 15% of the shares of common stock sold in the offering) to cover over-allotments.
In addition, the Company had agreed to issue to the representative of the several underwriters warrants to purchase the number of shares
of common stock in the aggregate equal to five percent (5%) of the shares of common stock to be issued and sold in the IPO. The warrants
are exercisable for a price per share equal to 125% of the public offering price. No over-allotment option or representative’s warrants
have been exercised.