UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period
ended
For the transition period from to
Commission File Number:
| (Exact name of Registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Nasdaq Stock Market LLC ( |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
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The registrant has
TABLE OF CONTENTS
i
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that are based on our management’s beliefs and assumptions and on information currently available to management, and which statements involve substantial risk and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and objectives for future operations are forward-looking statements. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions.
These risks and uncertainties include, among other things, risks related to our expectations regarding the impact of the coronavirus pandemic (the “COVID-19 pandemic”), including the easing of related regulations and measures as the pandemic and its related effects begin to abate or have abated, on our business, results of operations, financial condition, and future profitability and growth; our expectations regarding the impact of the evolving COVID-19 pandemic on the businesses of our customers, partners and suppliers, and the economy, as well as the macro- and micro-effects of the pandemic and differing levels of demand for our products as our customers’ priorities, resources, financial conditions and economic outlook change; global macro-economic conditions, including the effects of inflation, rising interest rates and market volatility on the global economy; our ability to estimate the size of our total addressable market, and the development of the market for our products, which is new and evolving; our ability to effectively sustain and manage our growth and future expenses, achieve and maintain future profitability, attract new customers and maintain and expand our existing customer base; our ability to scale and update our platform to respond to customers’ needs and rapid technological change; the effects of increased competition in our market and our ability to compete effectively; our ability to expand use cases within existing customers and vertical solutions; our ability to expand our operations and increase adoption of our platform internationally; our ability to strengthen and foster our relationships with developers; our ability to expand our direct sales force, customer success team and strategic partnerships around the world; the impact of any data breaches, cyberattacks or other malicious activity on our technology systems; our ability to identify targets for and execute potential acquisitions; our ability to successfully integrate the operations of businesses we may acquire, and to realize the anticipated benefits of such acquisitions; our ability to maintain, protect and enhance our brand; the sufficiency of our cash, cash equivalents and capital resources to satisfy our liquidity needs; limitations on us due to obligations we have under our credit facility or other indebtedness; our failure or the failure of our software to comply with applicable industry standards, laws and regulations; our ability to maintain, protect and enhance our intellectual property; our ability to successfully defend litigation against us; our ability to attract large organizations as users; our ability to maintain our corporate culture; our ability to offer high-quality customer support; our ability to hire, retain and motivate qualified personnel, including executive level management; our ability to successfully manage and integrate executive management transitions; our ability to estimate the size and potential growth of our target market; uncertainties regarding the impact of general economic and market conditions, including as a result of regional and global conflicts or related government sanctions; our ability to successfully implement and maintain new and existing information technology systems, including our ERP system; and our ability to maintain proper and effective internal controls.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and found in our Annual Report on Form 10-K/A filed for the year ended December 31, 2023. We undertake no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law.
ii
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Reborn Coffee, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventories, net | ||||||||
| Prepaid expense and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and current liabilities | ||||||||
| Loans payable to financial institutions, current | ||||||||
| Loans payable to others | ||||||||
| Loans payable to shareholders | ||||||||
| Loan payable, emergency injury disaster loan (EIDL), current | ||||||||
| Loan payable, payroll protection program (PPP), current | ||||||||
| Operating lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| Loans payable to financial institutions, net of current | - | |||||||
| Loan payable, emergency injury disaster loan (EIDL), net of current | ||||||||
| Loan payable, payroll protection program (PPP), net of current | ||||||||
| Operating lease liabilities, net of current | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Common Stock, $ | ||||||||
| Preferred Stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
Reborn Coffee, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net revenues: | ||||||||||||||||
| Stores | $ | $ | $ | $ | ||||||||||||
| Wholesale and online | ||||||||||||||||
| License income | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Product, food and drink costs - stores | ||||||||||||||||
| Cost of sales—wholesale and online | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Reborn Coffee, Inc. and Subsidiaries
Unaudited Condensed Consolidated Stockholders’ Equity (Deficit)
| Accumulated | Total | |||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-in | Accumulated | Other Comprehensive | Shareholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (loss) | (Deficit) | |||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation - issuance for services | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation - issuance for services | ||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid-in | Accumulated | Other Comprehensive | Shareholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (loss) | (Deficit) | |||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Common stock issued | - | $ | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | - | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued | - | $ | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued | - | $ | ||||||||||||||||||||||||||||||
| Foreign currency translation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Reborn Coffee, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock compensation | ||||||||
| Operating lease | ||||||||
| Depreciation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | ( | ) | ( | ) | ||||
| Decrease (increase) in inventories | ( | ) | ( | ) | ||||
| Decrease (increase) in other assets, net | ( | ) | ( | ) | ||||
| Increase (decrease) in accounts payable | ( | ) | ||||||
| Increase (decrease) in accrued liabilities, net | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Repayment of borrowings from shareholder | ( | ) | ||||||
| Proceeds from loan payable to others | ||||||||
| Proceeds from line of credit | ||||||||
| Repayment of loan payable, PPP | ( | ) | ( | ) | ||||
| Proceeds from loan payable, mortgage | ||||||||
| Repayment of loan payable, mortgage | ( | ) | ||||||
| Proceeds from loan payable to financial institutions | ||||||||
| Repayments of loan payable to financial institutions | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||
| Cash at beginning of year | ||||||||
| Cash at end of year | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Issuance of common shares for compensation | ||||||||
| Converting credit line to equity | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the years for: | ||||||||
| Lease liabilities and assets | ||||||||
| Interest | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
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 subsidiaries:
| ● | Reborn Global Holdings, Inc. (“Reborn Holdings”), a California Corporation incorporated in November 2014 and wholly-owned by Reborn Coffee, Inc. 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 and wholly-owned by Reborn Coffee, Inc, 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, 2024. |
| ● | Reborn Realty, LLC (the “Reborn Realty”), a California limited liability corporation formed in March 2023 and wholly-owned by Reborn Coffee, Inc, is an entity which acquired a real property located at 596 Apollo Street, Brea, California. |
| ● | Reborn Coffee Korea, Inc. (the “Reborn Korea”) – a Korea corporation located in Daejon, South Korea formed in October 2023 and wholly-owned by Reborn Coffee, Inc, with one retail coffee store under the brand name of Reborn Coffee. |
| ● | Reborn Malaysia, Inc. (the “Reborn Malaysia”) – a Malaysian corporation located in Kuala Lumpur, Malaysia formed in October 2023, is majority owned by Reborn Coffee, Inc. ( |
Reborn Coffee, Inc., Reborn Global Holdings, Inc., Reborn Coffee Franchise, LLC, Reborn Realty, LLC, Reborn Korea and Reborn Malaysia will be collectively referred as the “Company”.
Going Concern Matters
The accompanying consolidated
financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”),
which contemplates the Company’s continuation as a going concern. The Company incurred a net comprehensive loss of $
Management intends to raise additional operating funds through equity and/or debt offerings. However, there can be no assurance management will be successful in its endeavors.
There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings, and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings, and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company, it may be required to curtail or cease its operations.
Due to uncertainties related to these matters, there exists substantial doubt about the ability of the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
5
Unaudited Interim Financial Statements
The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023 included in the Company’s Form 10-K/A. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.
The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
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, 2024 and December 31, 2023 and for the three and nine month periods ended September 30, 2024 and 2023.
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.
Minority Interest
Reborn owns
Reverse Stock Split
On January 12, 2024, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Certificate of Incorporation to effect a reverse stock split of its issued Common Stock in the ratio of 1-for-8 (the “Reverse Stock Split”). The Common Stock began trading on the Nasdaq Capital Market on a Reverse Stock Split-adjusted basis at the market open on Monday, January 22, 2024.
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
6
We shall generate revenues
from two geographic areas, consisting of North America and Asia. The following enterprise-wide disclosure is prepared on a basis consistent
with the preparation of the consolidated financial statements.
| For the Nine Months Ended September 30, | 2024 | 2023 | ||||||
| Net Sales: | ||||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| Total net sales | $ | $ | ||||||
| As of | September 30, 2024 | December 31, 2023 | ||||||
| Long-lived asset, net: | ||||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| Total long-lived asset, net | $ | $ | ||||||
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.
Foreign Currency Translations
Reborn has controlling interests in subsidiaries in foreign countries, South Korea and Malaysia. Fluctuations in foreign currency impact the amount of total assets, liabilities, earnings and cash flows that the Company report for foreign subsidiaries upon the translation of these amounts into U.S. Dollars for, and as of the end of, each reporting period. In particular, the strengthening of the U.S. Dollar generally will reduce the reported amount of our foreign-denominated cash, cash equivalents, total revenues and total expense that we translate into U.S. Dollars and report in the Company’s consolidated financial statements for, and as of the end of, each reporting period. However, a majority of the Company’s consolidated revenue is denominated in U.S. Dollars, and therefore, the Company’s revenue is not directly subject to foreign currency risk.
In accordance with FASB ASC 830, “Foreign Currency Matters”, when an operation has transactions denominated in a currency other than its functional currency, they are measured in the functional currency. Changes in the expected functional currency cash flows caused by changes in exchange rates are included in net income for the period.
7
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 Revenue |
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
| ● | 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
| ● | Royalties and Other Fees |
Franchise revenues
consist of royalty fees and other franchise fees. Royalty fees are based on a percentage of a franchisee’s weekly gross sales revenue
at
Cost of Sales
Product, food and drink costs – stores and cost of sales – wholesale and online primarily include the costs of ingredients of food and beverage sold and related supplies used in customer service. The wholesale and online sales also include costs of packaging and shipping.
Shipping and Handling Costs
The Company incurred freight out costs, which are primarily included in the Company’s cost of sales – wholesale and online. Freight in costs, when attached to a specific purchase, are included as a component of the cost of the purchased goods and materials items and allocated to accounts in accordance with the nature of the goods. When the freight in costs are not allocable to an individual purchase or are more significant, they are recorded to a freight and shipping account within cost of sales.
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 $
8
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, 2024 and December 31, 2023, allowance for doubtful
accounts were
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.
| Furniture and fixtures | |
| Store construction | Lesser of the lease term or the estimated useful lives of the improvements, generally |
| Leasehold improvement | Lesser of the lease term or the estimated useful lives of the improvements, generally |
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 did not have any dilutive, or potentially dilutive, shares outstanding for the nine months ended September 30, 2024 and 2023.
9
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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, 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.
10
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
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 months ended September 30, 2024 and 2023, no purchases from any vendors accounted for a significant amount of the Company’s coffee bean 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.
Recent Accounting Pronouncement
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.
11
3. PROPERTY AND EQUIPMENT
| September 30, 2024 | December 31, 2023 | |||||||
| Furniture and equipment | $ | $ | ||||||
| Leasehold improvement | ||||||||
| Store | ||||||||
| Store construction | ||||||||
| Vehicle | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense
on property and equipment amounted to approximately $
4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS
| As of | September 30, 2024 | December 31, 2023 | ||||||
| Loan agreements with principal amount of $ | ||||||||
| Loan agreement with principal amount of $ | ||||||||
| Total loan payable | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Total loan payable, net of current | $ | $ | ||||||
5. LOAN PAYABLE TO OTHER
| As of | September 30, 2024 | December 31, 2023 | ||||||
| Loan agreement with principal amount of $ | $ | $ | ||||||
| Loan agreement with principal amount | ||||||||
| Loan agreement with principal amount of $ | ||||||||
| Total loan payable | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Total loan payable, net of current | $ | $ | ||||||
12
December
2023 – $
On December 27, 2023,
the Company entered into a short-term borrowing agreement with a private party for a principal amount of $
December
2023 – $
The Company, from time-to-time,
borrows from a lender, Prime Capital, as a short-term loan with interest at
September
2024 – $
On September 23, 2023,
the Company entered into a short-term borrowing agreement with a private party for a principal amount of $
6. LOAN PAYABLE, EMERGENCY INJURY DISASTER LOAN (EIDL)
| As of | September 30, 2024 | December 31, 2023 | ||||||
| May 16, 2020 ($ | $ | $ | ||||||
| June 28, 2021 ($ | ||||||||
| Total long-term loan payable, emergency injury disaster loan (EIDL) | ||||||||
| Less - current portion | ( | ) | ( | ) | ||||
| Total loan payable, emergency injury disaster loan (EIDL), less current portion | $ | $ | ||||||
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| For the years ended December 31, | Amount | |||
| 2024 (remaining three months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
May 16, 2020
– $
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 Company’s business. As of September 30, 2024, 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 $
The SBA Agreement contains customary events of default. In connection therewith, the Company executed 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 – $
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 Company’s business. As of September 30, 2024, the loan payable, Emergency Injury Disaster Loan noted above is not in default.
Pursuant to that certain
Amended Loan Authorization and Agreement (the “Amended SBA Loan Agreement”), the Company borrowed an aggregate principal amount
of the EIDL Loan of $
14
7. LOAN PAYABLE, PAYROLL PROTECTION LOAN PROGRAM (PPP)
| As of | September 30, 2024 | December 31, 2023 | ||||||
| Loan payable from Payroll protection program (PPP) | $ | $ | ||||||
| Less - current portion | ( | ) | ( | ) | ||||
| Total loan payable, payroll protection program (PPP), less current portion | $ | $ | ||||||
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
8. INCOME TAX
| For the Nine Months Ended September 30, | 2024 | 2023 | ||||||
| Current provision (benefit): | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total current provision (benefit) | ||||||||
| Deferred provision (benefit): | ||||||||
| Federal | ||||||||
| State | ||||||||
| Total deferred provision (benefit) | ||||||||
| Total tax provision (benefit) | $ | $ |
15
| Description | September 30, 2024 | September 30, 2023 | ||||||
| Statutory federal rate | % | % | ||||||
| State income taxes net of federal income tax benefit and others | % | % | ||||||
| Permanent differences for tax purposes and others | % | % | ||||||
| Change in valuation allowance | - | % | - | % | ||||
| Effective tax rate | % | % | ||||||
The income tax benefit
differs from the amount computed by applying the U.S. federal statutory tax rate of
| Deferred tax assets | September 30, 2024 | December 31, 2023 | ||||||
| Deferred tax assets: | ||||||||
| Net operating loss | $ | $ | ||||||
| Other temporary differences | ||||||||
| Total deferred tax assets | ||||||||
| Less - valuation allowance | ( | ) | ( | ) | ||||
| Total deferred tax assets, net of valuation allowance | $ | $ | ||||||
As of December 31,
2023, the Company had available net operating loss carryovers of approximately $
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 and later and subject to California authorities for tax year ended 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, 2024 and December 31, 2023, the Company has no accrued interest or penalties related to uncertain tax positions.
As of September 30,
2024, the Company had cumulative net operating loss carryforwards for federal tax purposes of approximately $
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9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into the following operating facility leases:
| Brea (Corporate office 1) - On September 1, 2018, the Company entered into an operating facility lease for its corporate office located in Brea, California with a term of | |
| Brea (Corporate office 2) - On June 28, 2023, the Company entered into an operating facility lease for its corporate office located in Brea, California with term of | |
| 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 a term of | |
| La Crescenta - On May 2017, the Company entered into an operating facility lease for its store located in La Crescenta, California with | |
| Corona Del Mar - On January 18, 2023, the Company renewed its retail store in Corona Del Mar, California. As part of that lease renewal, the Company renewed the original operating lease with
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 a term of
Manhattan Village - On March 1, 2022, the Company entered into an operating facility lease for its store located at Manhattan Beach, California with
Huntington Beach - On October 7, 2022, the Company entered into an operating facility lease for its store located at Huntington Beach, California with a
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 a term of
Intersect in Irvine - On October 1, 2022 the Company entered into a percentage base lease agreement for the store located in Irvine, California with
Diamond Bar - On March 20, 2023, the Company entered into an operating facility lease for its store located at Diamond Bar, California which matures on March 31, 2027. The monthly lease payment under the lease agreement is approximately $
Anaheim - On March 3, 2023, the Company entered into an operating facility lease for its store located at Anaheim, California with |
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Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected to account for these lease and non-lease components as a single lease component.
| For the nine months ended September 30, | 2024 | 2023 | ||||||
| Operating lease expense | $ | $ | ||||||
| Total lease expense | $ | $ | ||||||
| For the nine months ended September 30, | 2024 | 2023 | ||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term—operating leases | ||||
| Weighted-average discount rate—operating leases | % | |||
| Operating | ||||
| Year ending: | Lease | |||
| 2024 (remaining three months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | $ | |||
| Reconciliation of lease liabilities: | ||||
| Weighted-average remaing lease terms | ||||
| Weighted-average discount rate | % | |||
| Present values | $ | |||
| Lease liabilities—current | ||||
| Lease liabilities—long-term | ||||
| Lease liabilities—total | $ | |||
| Difference between undiscounted and discounted cash flows | $ | |||
18
Contingencies
The Company is subject to various legal proceedings from time to time as part of its business. As of September 30, 2024, 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, or results of operations.
10. STOCKHOLDERS’ EQUITY
Common Stock
The Company has authorization
to issue and have outstanding at any one time
Preferred Stock
The Company has authorization
to issue and have outstanding at any one time
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 shareholders 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
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 dividends declared for the nine months ended September 30, 2024 and 2023.
19
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).
| Nine Months | ||||||||
| Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Shares of Common Stock Outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Earnings Per Share - Basic | ||||||||
| Net Loss Per Share | ( | ) | ( | ) | ||||
| Earnings Per Share - Diluted | ||||||||
| Net Loss Per Share | ( | ) | ( | ) | ||||
| Three Months | ||||||||
| Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Shares of Common Stock Outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Earnings Per Share - Basic | ||||||||
| Net Loss Per Share | ( | ) | ( | ) | ||||
| Earnings Per Share - Diluted | ||||||||
| Net Loss Per Share | ( | ) | ( | ) | ||||
12. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after September 30, 2024 up through the date the consolidated financial statements were available to be issued. Based upon the evaluation, except as disclosed below or within the footnotes, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements as of and for the period ended September 30, 2024.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ending December 31, 2023. As discussed in the section titled “Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” in our Annual Report on Form 10-K/A for the year ending December 31, 2023.
Business
Reborn is focused on serving high quality, specialty-roasted coffee at retail locations, kiosks and cafes. We are an innovative company that strives for constant improvement in the coffee experience through exploration of new technology and premier service, guided by traditional brewing techniques. We believe Reborn differentiates itself from other coffee roasters through its innovative techniques, including sourcing, washing, roasting, and brewing our coffee beans with a balance of precision and craft.
Founded in 2015 by Jay Kim, our Chief Executive Officer, Mr. Kim and his team launched Reborn with the vision of using the finest pure ingredients and pristine water. We currently serve customers through our retail store locations in California: Brea, La Crescenta, Corona Del Mar, Laguna Woods, Manhattan Beach, Huntington Beach, Riverside, San Francisco, Irvine, Diamond Bar and Anaheim.
Reborn continues to elevate the high-end coffee experience and we received first place traditional still in “America’s Best Cold Brew” competition by Coffee Fest in 2017 in Portland and 2018 in Los Angeles.
The Experience, Reborn
We believe that we are the leading pioneers of the emerging “Fourth Wave” movement and that our business is redefining specialty coffee as an experience that demands much more than premium quality. We consider ourselves leaders of the “fourth wave” coffee movement because we are constantly developing our bean processing methods, researching design concepts, and reinventing new ways of drinking coffee. For instance, the current transition from the K-Cup trend to the pour over drip concept allowed us to reinvent the way people consume coffee, by merging convenience and quality. We took the pour over drip concept and made it available and affordable to the public through our Reborn Coffee Pour Over packs. Our Pour Over Packs allow our consumers to consume our specialty coffee outdoors and on-the-go.
Our success in innovating within the “Fourth Wave” coffee movement is measured by our success in B2B sales with our introduction of Reborn Coffee Pour Over Packs to hotels. With the introduction of our Pour Over Packs to major hotels (including one hotel company with 7 locations), our B2B sales increased as these companies recognized the convenience and functionality our Pour Over Packs serve to their customers.
Our continuous Research and Development is essential to developing new parameters in the production of new blends. Our first place position in “America’s Best Cold Brew” competition by Coffee Fest in 2017 in Portland and 2018 in Los Angeles is a testament to the way we believe we lead the “Fourth Wave” movement by example.
Centered around its core values of service, trust, and well-being, Reborn Coffee delivers an appreciation of coffee as both a science and an art. Developing innovative processes such as washing green coffee beans with magnetized water, we challenge traditional preparation methods by focusing on the relationship between water chemistry, health, and flavor profile. Reborn Coffee proactively distinguishes exceptional quality from good quality by starting at the foundation and paying attention to the details. Our mission places an equal emphasis on humanizing the coffee experience, delivering a fresh take on “farm-to-table” by sourcing internationally. In this way, Reborn Coffee creates opportunities to develop transparency by paying homage to origin stories and sparking new conversations by building cross-cultural communities united by a passion for the finest coffee.
21
Through a broad product offering, Reborn Coffee provides customers with a wide variety of beverages and coffee options. As a result, we believe we can capture share of any experience where customers seek to consume great beverages whether in our inviting store atmospheres which are designed for comfort, or on the go through our Pour Over Packs, or at home with our whole bean ground coffee bags. We believe that the retail coffee market in the US is large and growing. According to IBIS, in 2021, the retail market for coffee in the United States is expected to be $46.2 billion. This is expected to grow due to a shift in consumer preferences to premium coffee, including specialized blends, espresso-based beverages, and cold brew options. Reborn aims to capture a growing portion of the market as we expand and increase consumer awareness of our brand.
Plan of Operation
We have a production and distribution center at our headquarters that we use to process and roast coffee for wholesale and retail distribution.
Currently, we have the following twelve retail coffee locations:
| ● | La Floresta Shopping Village in Brea, California; | |
| ● | La Crescenta, California; | |
| ● | Corona Del Mar, California; | |
| ● | Home Depot Center in Laguna Woods, California; | |
| ● | Manhattan Village at Manhattan Beach, California. | |
| ● | Huntington Beach, California; | |
| ● | Galleria at Tyler in Riverside, California; | |
| ● | Intersect in Irvine, California; | |
| ● | Diamond Bar, California; | |
| ● | Anaheim, California; | |
| ● | Daejeon, Korea; and | |
| ● | Kuala Lumpur, Malaysia. |
Critical Accounting Policies and Significant Judgments and Estimates
Revenue
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company’s net revenue primarily consists of revenues from its retail locations and wholesale and online store. Accordingly, the Company recognizes revenue as follows:
| ● | Retail Store Revenue |
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 92% 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 8% of the Company’s total revenue.
22
| ● | Royalties and Other Fees |
Franchise revenues consist of royalty fees and other franchise fees. Royalty fees are based on a percentage of a franchisee’s weekly gross sales revenue at 5%. The Company recognizes the fee as the underlying sales occur. The Company did not have any revenue from royalties or other fees for the nine months ended September 30, 2024 and 2023.
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, 2024 and December 31, 2023, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
Cost of Sales
Cost of sales includes costs associated with generating revenue within our company-owned retail locations, and franchising operations (of which, as of September 30, 2024, we had none).
Shipping and Handling Costs
The Company incurred freight out cost and is included in the Company’s cost of sale.
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 $110,050 and $49,531 for the nine months ended September 30, 2024 and 2023, 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, which are not material, consist primarily of payroll and recruiting expense, training, marketing, rent, travel, and supplies, and are expensed as incurred depreciated over the shorter of the useful life of the improvement or the lease term, including renewal periods that are reasonably assured.
23
Results of Operations
Three and nine months ended September 30, 2024 compared to three and nine months ended September 30, 2024
The following table presents selected comparative results of operations from our unaudited financial statements for the three and nine months ended September 30, 2024 compared to three and nine months ended September 30, 2023. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding.
| Nine Months Ended September 30, | Changes | |||||||||||||||
| 2024 | 2023 | Amount | % | |||||||||||||
| Net revenues: | ||||||||||||||||
| Stores | $ | 3,784,728 | $ | 4,091,512 | $ | (306,784 | ) | -7.5 | % | |||||||
| Wholesale and online | 365,164 | 63,991 | 301,173 | 470.6 | % | |||||||||||
| Total net revenues | 4,149,892 | 4,155,503 | (5,611 | ) | -0.1 | % | ||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Product, food and drink costs - stores | 1,071,764 | 1,324,465 | (252,701 | ) | -19.1 | % | ||||||||||
| Cost of sales—wholesale and online | 159,942 | 28,028 | 131,914 | 470.6 | % | |||||||||||
| General and administrative | 5,844,057 | 5,687,095 | 156,962 | 2.8 | % | |||||||||||
| Total operating costs and expenses | 7,075,763 | 7,039,588 | 36,175 | 0.5 | % | |||||||||||
| Loss from operations | (2,925,871 | ) | (2,884,085 | ) | (41,786 | ) | 1.4 | % | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense) | 49,594 | 10,172 | 39,422 | 387.6 | % | |||||||||||
| Interest expense | (149,827 | ) | (124,967 | ) | (24,860 | ) | 19.9 | % | ||||||||
| Total other expense, net | (100,233 | ) | (114,795 | ) | 14,562 | -12.7 | % | |||||||||
| Loss before income taxes | (3,026,104 | ) | (2,998,880 | ) | (27,224 | ) | 0.9 | % | ||||||||
| Provision for income taxes | 800 | 7,828 | (7,028 | ) | -89.8 | % | ||||||||||
| Net loss | $ | (3,026,904 | ) | $ | (3,006,708 | ) | $ | (20,196 | ) | 0.7 | % | |||||
| Three Months Ended September 30, | Changes | |||||||||||||||
| 2024 | 2023 | Amount | % | |||||||||||||
| Net revenues: | $ | 1,118,522 | $ | 1,487,858 | $ | (369,336 | ) | -24.8 | % | |||||||
| Stores | 140,407 | 26,401 | 114,006 | 431.8 | % | |||||||||||
| Wholesale and online | 1,258,929 | 1,514,259 | (255,330 | ) | -16.9 | % | ||||||||||
| Total net revenues | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Product, food and drink costs - stores | 441,349 | 442,163 | (814 | ) | -0.2 | % | ||||||||||
| Cost of sales—wholesale and online | 5,921 | 11,564 | (5,643 | ) | -48.8 | % | ||||||||||
| General and administrative | 1,536,357 | 1,793,246 | (256,889 | ) | -14.3 | % | ||||||||||
| Total operating costs and expenses | 1,983,627 | 2,246,973 | (263,346 | ) | -11.7 | % | ||||||||||
| Loss from operations | (724,698 | ) | (732,714 | ) | 8,016 | -1.1 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense) | 13,265 | 10,172 | 3,093 | 30.4 | % | |||||||||||
| Interest expense | (7,515 | ) | (18,532 | ) | 11,017 | -59.4 | % | |||||||||
| Total other expense, net | 5,750 | (8,360 | ) | 14,110 | -168.8 | % | ||||||||||
| Loss before income taxes | (718,948 | ) | (741,074 | ) | 22,126 | -3.0 | % | |||||||||
| Provision for income taxes | 800 | 7,828 | (7,028 | ) | -89.8 | % | ||||||||||
| Net loss | $ | (719,748 | ) | $ | (748,902 | ) | $ | 29,154 | -3.9 | % | ||||||
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Revenues
Revenues were approximately $4.14 million for the nine months ended September 30, 2024, compared to $4.15 million for the comparable period in 2023, representing a decrease of approximately $5,611, or 0.1%. Revenues were approximately $1.3 million for the three months ended September 30, 2024, compared to $1.5 million for the comparable period in 2023, representing a decrease of approximately $255,000, or 16.9%.
Product, food and drink costs
Product, food and drink costs were approximately $1.1 million for the nine months ended September 30, 2024 compared to $1.3 million for the comparable period in 2023, representing a decrease of approximately $253,000 or 19.1%, and were approximately $441,000 for the three months ended September 30, 2024 compared to $442,000 for the comparable period in the prior year.
General and administrative expenses
General and administrative expenses were approximately $5.8 million for the nine months ended September 30, 2024 compared to $5.7 million for the comparable period in the prior year, representing an increase of approximately $157,000, or 2.8%, and were approximately $1.5 million for the three months ended September 30, 2024 compared to $1.8 million for the comparable period in 2023, representing a decrease of approximately $257,000, or 14.3%.
Liquidity and Capital Resources
We have a history of operating losses and negative cash flow in operating activities. We have incurred recurring net losses, including net losses from operations before income taxes of $3.0 million and $3.0 million for the nine months ended September 30, 2024 and 2023, respectively. We used $3.3 million and $3.0 million of cash for operating activities for the nine months ended September 30, 2024 and 2023, respectively.
Our cash needs will depend on numerous factors, including our revenues, completion of our product development activities, customer and market acceptance of our product, and our ability to reduce and control costs. We expect to devote substantial capital resources to, among other things, fund operations and continue development plans.
To support our existing and planned business model, the Company needs to raise additional capital to fund our future operations. The Company has not experienced any difficulty in raising funds through loans, and has not experienced any liquidity problems in settling payables in the normal course of business and repaying loans when they fall due. Successful renewal of our loans, however, is subject to numerous risks and uncertainties. In addition, the increasingly competitive industry conditions under which we operate may negatively impact our results of operations and cash flows. Additional debt financing is anticipated to fund the Company’s operations in the near future. However, there are no current agreements or understandings with regard to the form, time or amount of such financing and there is no assurance that any of this financing can be obtained or that the Company can continue as a going concern.
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| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Statement of Cash Flow Data: | ||||||||
| Net cash used in operating activities | 3,319,670 | 2,990,792 | ||||||
| Net cash used in investing activities | 641,059 | 746,416 | ||||||
| Net cash provided by financing activities | 3,902,291 | 1,082,134 | ||||||
Cash Flows used in Operating Activities
Net cash used in operating activities during the nine months ended September 30, 2024 was approximately $3.3 million, which resulted from net loss of $3.0 million and from the changes in operating assets and liabilities.
Cash Flows used in Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2024 and 2023 was $641,059 and $746,416, respectively. Net cash used in investing activities for the third quarter of 2024 was primarily related to the purchase of equipment.
Cash Flows provided by Financing Activities
Net cash provided by financing activities during the nine months ended September 30, 2024 and 2023 was $3.9 million and $1.1 million, respectively. Net cash flows provided by financing activities for the third quarter of 2024 was primarily proceeds from the issuance of common stock.
As of September 30, 2024, the Company had total assets of approximately $10.6 million. Our cash balance as of September 30, 2024 was approximately $106,000.
Credit Facilities
Economic Injury Disaster Loan
On May 16, 2020, we executed the EIDL Loan from the SBA under its EIDL assistance program in light of the impact of the COVID-19 pandemic on our business. As of September 30, 2024, the loan payable, EIDL Loan noted above is not in default.
Pursuant to the SBA Loan Agreement, we 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 May 16, 2021 (twelve 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, we also received a $10,000 grant, which does not have to be repaid. During the year ended December 31, 2020, $10,000 was recorded in Economy injury disaster loan (EIDL) grant income in the Statements of Operations. The schedule of payments on this loan was later deferred to commence 24 months from the date of loan and we has paid all payments owed since May 2022.
In connection therewith, we executed (i) a loan for the benefit of the SBA, which contains customary events of default and (ii) a Security Agreement, granting the SBA a security interest in all of our tangible and intangible personal property, which also contains customary events of default (the “SBA Security Agreement”).
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Paycheck Protection Program Loan
In May 2020, we secured a loan under the PPP administered by the SBA in the amount of $115,000. In February 2021, we secured a second loan under this program in the amount of approximately $167,000. 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 each PPP Loan, we are 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 loan. 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, or filing suit and obtaining judgment against us. 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. We were granted forgiveness for the initial PPP Loan prior to December 31, 2021 and expects to be granted forgiveness on the remainder subsequently.
Leases
Operating Leases
We currently lease all company-owned retail locations. Operating leases typically contain escalating rentals over the lease term, as well as optional renewal periods. Rent expense for operating leases is recorded on a straight-line basis over the lease term and begins when Reborn has the right to use the property. The difference between rent expense and cash payment is recorded as deferred rent on the accompanying consolidated balance sheets. Pre-opening rent is included in selling, general and administrative expenses on the accompanying consolidated statements of income. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions to rent expense over the term of the lease.
Income Taxes
Reborn files income tax returns in the U.S. federal and California state jurisdictions.
We are taxed at the prevailing corporate tax rates for U.S. federal, state and local income taxes. Accordingly, a provision is recorded for the anticipated tax consequences of our reported results of operations for U.S. federal, state and foreign income taxes.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with GAAP.
Critical Accounting Estimates and Policies
The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 2 to the financial statements included elsewhere in this Quarterly Report on Form 10-Q
Recent Accounting Pronouncements
We have determined that all other issued, but not yet effective accounting pronouncements are inapplicable or insignificant to us and once adopted are not expected to have a material impact on our financial position.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(1)(i) and are not required to provide information under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2024. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, our disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission (“SEC”) rules and forms and (b) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.
Management has identified control deficiencies regarding inadequate accounting resources, the lack of segregation of duties and the need for a stronger internal control environment. Our management believes that these material weaknesses are due to the small size of our accounting staff. The small size of our accounting outsourced staff may prevent adequate controls in the future due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our financial statements may not be prevented or detected on a timely basis. In light of this material weakness, we performed additional analyses and procedures in order to conclude that our financial statements for the quarter ended September 30, 2024, included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the quarter ended September 30, 2024, are fairly stated, in all material respects, in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
In the future, the Company may be subject to various legal proceedings from time to time as part of its business. We are currently not involved in litigation that we believe will have a materially adverse effect on our financial condition or results of operations. As of September 30, 2024, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self- regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision is expected to have a material adverse effect.
Item 1A. Risk Factors.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended September 30,
2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
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Item 6. Exhibits.
The following exhibits are included herein or incorporated herein by reference:
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Signature | Title | Date | ||
| /s/ Jay Kim | Chief Executive Officer | November 19, 2024 | ||
| Jay Kim | (Principal Executive Officer) | |||
| /s/ Stephan Kim | Chief Financial Officer | |||
| Stephan Kim | (Principal Financial and Accounting Officer) | November 19, 2024 |
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