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. Reborn Coffee
Franchise does not have any franchisee as of September 30, 2022. |
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 September 30, 2022 and December 31, 2021 and for the three and nine
month periods ended September 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 subsidiary. 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 Common Stock and to change “Class A Common Stock” 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.
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.
On August 12, 2022, the Company’s stock began trading
on Nasdaq under the symbol “REBN”.
Deferred Offering Costs
Deferred offering costs were expenses directly related to
the IPO. These costs consisted of legal, accounting, printing, and filing fees. The deferred offering costs were offset against the IPO
proceeds in August 2022 and were recorded to additional paid-in capital upon completion of the IPO.
Use of Estimates
The preparation of consolidated financial statements in conformity
with 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.
Shipping and Handling Costs
The Company incurred freight out cost and is included in
the Company’s cost of sales—wholesale and online.
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 $27,110 and $72,619 for the nine-month periods ended September 30, 2022 and 2021, respectively, and are recorded under general
and administrative expenses in the accompanying condensed 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 September 30, 2022 and December 31, 2021, allowance for doubtful accounts were zero, 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 Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“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
FASB ASC Topic 260, Earnings Per Share, requires a reconciliation
of the numerator and denominator of the basic and diluted earnings (loss) per share computations.
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 had 72,000 and 0 potentially dilutive warrants outstanding
related to IPO for the three and nine month periods ended September 30, 2022 and 2021, respectively. See note 2.
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 nine month
periods ended September 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 September 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 September 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.
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 nine month
periods ended September 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 nine month periods ended September 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.
Recent Accounting Pronouncement
In June 2016, the FASB issued Accounting Standards Update
(“ASU”) 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 Securities and Exchange Commission (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:
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Furniture and equipment | |
$ | 852,817 | | |
$ | 779,650 | |
Leasehold improvement | |
| 639,602 | | |
| 639,602 | |
Store construction | |
| 312,183 | | |
| 52,161 | |
Store | |
| 300,000 | | |
| 300,000 | |
| |
| | | |
| | |
Total property and equipment | |
| 2,104,602 | | |
| 1,771,413 | |
Less accumulated depreciation | |
| (807,028 | ) | |
| (660,523 | ) |
| |
| | | |
| | |
Total property and equipment, net | |
$ | 1,297,574 | | |
$ | 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 $180,577 and a lease liability
of $170,853.
Depreciation expense on property and
equipment amounted to approximately $146,505 and $129,575 for the nine-month periods ended and $48,583 and $47,649 for the three-month
periods ended September 30, 2022 and 2021, respectively.
4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS
Loans payable to financial institutions consist of the following:
| |
September 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 | |
| |
| | | |
| | |
August 2022 - Loan agreement with principal amount of $100,000 and repayment rate of 20.5% for a total of $112,215. The loan payable matures on February 2, 2024. | |
| 88,982 | | |
| 32,382 | |
Total loan payable | |
$ | 88,982 | | |
$ | 121,703 | |
Less: current portion | |
| (74,810 | ) | |
| (98,475 | ) |
| |
| | | |
| | |
Total loan payable, net of current | |
$ | 14,172 | | |
$ | 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 September 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 September 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 September 30, 2022 and December 31, 2021, there was a balance outstanding of $0 and $32,382, respectively.
August 2022 - $88,982 loan payable
In August 2022, the Company entered into a loan agreement
with Square Capital in the principal amount of $100,000 with loan cost $12,215. The loan payable has a maturity date on February 2, 2024.
As of September 30, 2022 and December 31, 2021, there was a balance outstanding of $88,982 and $0, respectively.
5. LOAN PAYABLES, EMERGENCY INJURY DISASTER LOAN (EIDL)
| |
September 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 | |
| (10,861 | ) | |
| (7,957 | ) |
| |
| | | |
| | |
Total loan payable, emergency injury disaster loan (EIDL), less current portion | |
$ | 489,139 | | |
$ | 492,043 | |
The following table provides future minimum payments:
For the years ended December 31, | |
Amount | |
2022 (remaining three 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 U.S. Small Business Administration (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 September 30, 2022, the loan payable, EIDL 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 November 16, 2022 (thirty
months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from
the date of the SBA Loan Agreement.
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”).
June 28, 2021 – $350,000
On June 28, 2021, the Company executed the EIDL Loan from
the SBA under its EIDL assistance program in light of the impact of the COVID-19 pandemic on the TNB’s business. As of September
30, 2022, the loan payable, EIDL Loan noted above is not in default.
Pursuant to 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 Agreement)
in the amount of $2,505. The balance of principal and interest is payable thirty years from the original date of the SBA Loan Agreement.
6. LOAN PAYABLE, PAYROLL PROTECTION LOAN PROGRAM (PPP)
| |
September 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 | |
| (39,267 | ) | |
| (42,345 | ) |
| |
| | | |
| | |
Total loan payable, payroll protection program (PPP), less current portion | |
$ | 127,871 | | |
$ | 124,793 | |
The Paycheck Protection Program (“PPP”) Loan
(the “PPP Loan”) is administered by 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 Coronavirus Aid, Relief, and Economic Security Act (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.
7. EQUIPMENT LOAN PAYABLE
Equipment loan payable consist of the following:
| |
September 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 | |
$ | 1,515 | | |
$ | 15,989 | |
| |
| | | |
| | |
Total long-term equipment loan payable | |
| 1,515 | | |
| 15,989 | |
Less – current portion | |
| (1,515 | ) | |
| (15,989 | ) |
| |
| | | |
| | |
Total long-term debt, net of current portion | |
$ | - | | |
$ | - | |
For the year ended December 31, | |
Amount | |
2022 (remaining three months) | |
$ | 1,515 | |
Total long-term equipment loan payable | |
$ | 1,515 | |
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 September 30, 2022
and December 31, 2021, there was a balance outstanding of $1,515 and $15,989, respectively.
8. INCOME TAX
Total income tax (benefit) expense consists of the following:
For the Nine-Month Periods Ended September 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 for the nine months ended September 30, 2022 and 2021 is as follows:
Description | |
September 30, 2022 | | |
September 30, 2021 | |
| |
| | |
| |
Statutory federal rate | |
| 21.00 | % | |
| 21.00 | % |
State income taxes net of federal income tax benefit and others | |
| 6.98 | % | |
| 6.98 | % |
Permanent differences for tax purposes and others | |
| 0.00 | % | |
| 0.00 | % |
Change in valuation allowance | |
| -27.98 | % | |
| -27.98 | % |
Effective tax rate | |
| 0 | % | |
| 0 | % |
The income tax benefit differs from the amount computed
by applying the U.S. federal statutory tax rate of 21% due to California state income taxes of 8.84% and changes 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 | |
September 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 September 30, 2022
and December 31, 2021, the Company has no accrued interest or penalties related to uncertain tax positions.
As of September 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.
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 right-of-use assets and operating lease liabilities of $2,764,258 and $2,915,149,
respectively, as of September 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 $297,385 to ROU assets and $325,028 to operational lease liabilities for the nine-month
period ended September 30, 2022.
In accordance with ASC 842, the components of lease expense
were as follows:
For the nine-month period ended September 30, | |
2022 | | |
2021 | |
Operating lease expense | |
$ | 691,341 | | |
$ | 477,950 | |
Total lease expense | |
$ | 691,341 | | |
$ | 477,950 | |
In accordance with ASC 842, other information related to leases
was as follows:
For the nine-month period ended September 30, | |
2022 | | |
2021 | |
Operating cash flows from operating leases | |
$ | 669,265 | | |
$ | 383,440 | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 669,265 | | |
$ | 383,440 | |
| |
| | | |
| | |
Weighted-average remaining lease term—operating leases | |
| | | |
| 3.8 Years | |
Weighted-average discount rate—operating leases | |
| | | |
| 8.9 | % |
In accordance with ASC 842, maturities of operating lease
liabilities as of September 30, 2022 were as follows:
| |
Operating | |
For the years ended December 31, | |
Lease | |
2022 (remaining three months) | |
$ | 234,129 | |
2023 | |
| 864,887 | |
2024 | |
| 785,267 | |
2025 | |
| 642,387 | |
2026 | |
| 574,150 | |
Thereafter | |
| 456,435 | |
Total undiscounted cash flows | |
$ | 3,557,255 | |
| |
| | |
Reconciliation of lease liabilities: | |
| | |
Weighted-average remaining lease terms | |
| 3.8 Years | |
Weighted-average discount rate | |
| 8.9 | % |
Present values | |
$ | 2,915,149 | |
| |
| | |
Lease liabilities—current | |
| 654,145 | |
Lease liabilities—long-term | |
| 2,261,004 | |
Lease liabilities—total | |
$ | 2,915,149 | |
| |
| | |
Difference between undiscounted and discounted cash flows | |
$ | 642,106 | |
Contingencies
The Company is subject to various legal
proceedings from time to time as part of its business. As of September 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.
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.
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 September 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,
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 public offering,
eliminating the one-year period following an the public offering 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 and the shareholders do not have such antidilution protection
rights since the Company’s IPO date.
Dividend policy
Dividends are paid at the discretion
of the Board of Directors. There were no dividends declared for the nine-month periods ended September 30, 2022 and 2021.
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:
| |
Nine-Month Period | | |
Three-Month Period | |
| |
Ended September 30, | | |
Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net Loss | |
$ | (2,422,320 | ) | |
$ | (2,576,136 | ) | |
$ | (920,060 | ) | |
$ | (1,940,973 | ) |
Weighted Average Shares of Common Stock Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 11,844,900 | | |
| 10,437,239 | | |
| 11,679,523 | | |
| 10,842,264 | |
Diluted | |
| 11,844,900 | | |
| 10,437,239 | | |
| 11,679,523 | | |
| 10,842,264 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings Per Share - Basic | |
| | | |
| | | |
| | | |
| | |
Net Loss Per Share | |
| (0.20 | ) | |
| (0.25 | ) | |
| (0.08 | ) | |
| (0.18 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings Per Share - Diluted | |
| | | |
| | | |
| | | |
| | |
Net Loss Per Share | |
| (0.20 | ) | |
| (0.25 | ) | |
| (0.08 | ) | |
| (0.18 | ) |
12. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred
after September 30, 2022 up through the filing date of this Form 10-Q with SEC. During this period, the Company did not have any material
recognizable subsequent events required to be disclosed as of and for the nine-month period ended September 30, 2022, except for the following.