Reborn Coffee, Inc. - Quarter Report: 2023 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2023

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                            to                         

 

Commission File Number: 001-41479

 

REBORN COFFEE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware		47-4752305
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

580 N. Berry Street, Brea, CA 92821

(714) 784-6369

(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
Common Stock, $0.0001 par value per share		REBN		The Nasdaq Stock Market LLC (Nasdaq Capital Market)

 

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

 

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

 

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	☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

The registrant has 13,212,723 shares of common stock outstanding as of June 30, 2023.

 

 

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION		1
Item 1	Consolidated Financial Statements (unaudited)		1
	Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022		1
	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2023 and 2022		2
	Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the Three and Six Months Ended June 30, 2023 and 2022		3
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 31, 2023 and 2022		4
	Notes to Consolidated Financial Statements		5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3	Quantitative and Qualitative Disclosures About Market Risk		29
Item 4	Controls and Procedures		30
PART II	OTHER INFORMATION		31
Item 1	Legal Proceedings		31
Item 1A	Risk Factors		31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 6	Exhibits		32
Signature			33

 

 

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 elsewhere in this Quarterly Report on Form 10-Q. 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.

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements.

 

Unaudited Condensed Consolidated Balance Sheets

 

As of		June 30, 2023				December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents		$	337,492			$	3,019,035
Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively			2,285				780
Inventories, net			124,842				132,343
Prepaid expense and other current assets			1,284,323				477,850
Total current assets			1,748,942				3,630,008
Property and equipment, net			5,864,189				1,581,805
Operating lease right-of-use asset			4,209,267				3,010,564
Other assets			235,164				235,164
Total assets		$	12,057,562			$	8,457,541
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	293,911			$	87,809
Accrued expenses and current liabilities			389,513				233,053
Line of credit			974,027				-
Loans payable to financial institutions, current portion			194,844				44,664
Loan payable, emergency injury disaster loan (EIDL), current portion			30,060				30,060
Loan payable, payroll protection program (PPP), current portion			40,447				45,678
Operating lease liabilities, current portion			840,590				624,892
Total current liabilities			2,763,392				1,066,156
Loan payable, mortgage, net of current portion			2,850,000				-
Loans payable to financial institutions, net of current portion			74,918				6,234
Loan payable, emergency injury disaster loan (EIDL), net of current portion			469,940				469,940
Loan payable, payroll protection program (PPP), net of current portion			80,377				98,697
Operating lease liabilities, net of current portion			3,540,212				2,529,985
Total liabilities			9,778,839				4,171,012
Commitments and Contingencies
Stockholders’ equity
Common Stock, $0.0001 par value, 40,000,000 shares authorized; 13,212,723 and 13,162,723 shares issued and outstanding at June 30, 2023 and December 31, 2022			1,321				1,316
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding at June 30, 2023 and December 31, 2022							-
Additional paid-in capital			16,567,009				16,317,014
Accumulated deficit			(14,289,607	)			(12,031,801	)
Total stockholders’ equity			2,278,723				4,286,529
Total liabilities and stockholders’ equity		$	12,057,562			$	8,457,541

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Condensed Consolidated Statements of Operations

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2023				2022				2023				2022
Net revenues:
Stores		$	2,603,654			$	1,511,952			$	1,494,603			$	775,956
Wholesale and online			37,590				29,674				24,320				12,520
Total net revenues			2,641,244				1,541,626				1,518,923				788,476
Operating costs and expenses:
Product, food and drink costs—stores			882,302				563,906				518,483				278,952
Cost of sales—wholesale and online			16,464				12,997				10,652				5,484
General and administrative			3,893,849				2,468,447				2,189,198				1,432,432
Total operating costs and expenses			4,792,615				3,045,350				2,718,333				1,716,868
Loss from operations			(2,151,371	)			(1,503,724	)			(1,199,410	)			(928,392	)
Other income (expense):
Other income			-				16,440				-				1,440
Interest expense			(106,435	)			(14,976	)			(94,232	)			(10,196	)
Total other income (expense), net			(106,435	)			1,464				(94,232	)			(8,756	)
Loss before income taxes			(2,257,806	)			(1,502,260	)			(1,293,642	)			(937,148	)
Provision for income taxes			-				-				-				-
Net loss		$	(2,257,806	)		$	(1,502,260	)		$	(1,293,642	)		$	(937,148	)
Loss per share:
Basic and diluted		$	(0.17	)			(0.13	)			(0.10	)			(0.08	)
Weighted average number of common shares outstanding:
Basic and diluted			13,216,270				11,642,550				13,237,580				11,667,545

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Condensed Consolidated Stockholders’ Equity (Deficit)

 

		Common Stock								Preferred Stock								Additional Paid-in				Subscription of Common				Accumulated				Total Shareholders’
		Shares				Amount				Shares				Amount				Capital				Stock				Deficit				Deficit
Balance as of December 31, 2021			11,634,523			$	1,163				-			$	-			$	9,674,036			$	-			$	(8,476,904	)		$	1,198,295
Net loss			-				-				-				-				-				-				(565,112	)			(565,112	)
Balance as of March 31, 2022			11,634,523			$	1,163				-			$	-			$	9,674,036			$	-			$	(9,042,016	)		$	633,183
Stock compensation			45,000				5				-				-				224,995				-				-				225,000
Net loss			-				-				-				-				-				-				(937,148	)			(937,148	)
Balance as of June 30, 2022			11,679,523			$	1,168				-			$	-			$	9,899,031			$	-			$	(9,979,164	)		$	(78,965	)

 

		Common Stock								Preferred Stock								Additional Paid-in				Subscription of Common				Accumulated				Total Shareholders’ Equity
		Shares				Amount				Shares				Amount				Capital				Stock				Deficit				(Deficit)
Balance as of December 31, 2022			13,162,723			$	1,316				-			$	-			$	16,317,014			$				$	(12,031,801	)		$	4,286,529
Net loss			-				-				-				-				-				-				(964,164	)			(964,164	)
Balance as of March 31, 2023			13,162,723			$	1,316				-			$	-			$	16,317,014			$	-			$	(12,995,965	)		$	3,322,365
Stock Compensation			50,000				5				-				-				249,995				-				-				250,000
Net loss			-				-				-				-				-				-				(1,293,642	)			(1,293,642	)
Balance as of June 30, 2023			13,212,723			$	1,321				-			$	-			$	16,567,009			$	-			$	(14,289,607	)		$	2,278,723

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Consolidated Statements of Cash Flows

 

For the Six Months Ended June 30,		2023				2022
Cash flows from operating activities:
Net loss		$	(2,257,806	)		$	(1,502,260	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation			250,000				225,000
Operating lease			27,222				22,086
Depreciation			135,398				97,922
Changes in operating assets and liabilities:
Accounts receivable			(1,505	)			(1,293	)
Inventories			7,501				(14,104	)
Prepaid expense and other current assets			(806,473	)			(28,275	)
Accounts payable			206,102				(45,590	)
Accrued expenses and current liabilities			156,460				46,535
Net cash used in operating activities			(2,283,101	)			(1,199,979	)
Cash flows from investing activities:
Purchases of property and equipment			(4,417,782	)			(168,397	)
Net cash used in investing activities			(4,417,782	)			(168,397	)
Cash flows from financing activities:
Proceeds from line of credit			974,027				594,529
Proceeds from loan payable to shareholders			-				150,000
Proceeds from loan payable to financial institutions			218,864				-
Proceeds from loan payable, mortgage			2,850,000				-
Repayment of loans			(23,551	)			(121,703	)
Repayment of equipment loan payable			-				(9,677	)
Net cash provided by financing activities			4,019,340				613,149
Net (decrease) increase in cash			(2,681,543	)			(755,227	)
Cash at beginning of period			3,019,035				905,051
Cash at end of period		$	337,492			$	149,824
Supplemental disclosures of non-cash financing activities:
Issuance of common shares for compensation		$	250,000			$	225,000
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Lease liabilities		$	546,389			$	435,635
Interest		$	106,435			$	367

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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 franchisees as of June 30, 2023.
	●	Reborn Realty, LLC (the “Reborn Realty”), a California limited liability corporation formed in March 2023, is an entity which acquired a real property located at 596 Apollo Street, Brea, California.

 

Reborn Coffee, Inc., Reborn Global Holdings, Inc., Reborn Coffee Franchise, LLC and Reborn Realty, LLC will be collectively referred to as the “Company”. 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reporting

 

The unaudited condensed consolidated financial statements include Reborn Coffee, Inc. and its wholly owned subsidiaries as of June 30, 2023 and December 31, 2022 and for the three and six month periods ended June 30, 2023 and 2022.

 

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 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 99% 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 1% of the Company’s total revenue.

 

●

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 recorded revenue from royalties of $0 for the periods ended June 30, 2023 and 2022. Other fees are earned as incurred and the Company did not have any other fee revenue for the years ended June 30, 2023 and 2022.

 

Shipping and Handling Costs

 

The Company incurred freight out cost and is included in the Company’s cost of sales—wholesale and online.

 

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.

 

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 $49,531 and $20,513 for the six-month periods ended June 30, 2023 and 2022, 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 June 30, 2023 and December 31, 2022, 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:

 

Building		39 Years
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 did not have any dilutive, or potentially dilutive, shares outstanding for the three and six month periods ended June 30, 2023 and 2022. 

 

 

Segment Reporting

 

FASB ASC Topic 280, Segment Reporting, requires public companies to report financial and descriptive information about their reportable operating segments. The Company’s management identifies operating segments based on how the Company’s management internally evaluate separate financial information, business activities and management responsibility. At the current time, the Company has only one reportable segment, consisting of both the wholesale and retail sales of coffee, water, and other beverages. The Company’s franchisor subsidiary was not material as of and for the three and six month periods ended June 30, 2023 and 2022.

 

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 whether the carrying value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount. As of June 30, 2023 and December 31, 2022, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

 

Fair Value of Financial Instruments

 

The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

As of June 30, 2023 and December 31, 2022, 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 six month periods ended June 30, 2023 and 2022.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable arising from its normal business activities. The Company performs ongoing credit evaluations to its customers and establishes allowances when appropriate.

 

Company purchases from various vendors for its operations. For the three and six month periods ended June 30, 2023 and 2022, 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.

 

Significant Recent Developments Regarding COVID-19

 

The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine. The Company is continually monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on operations, financial position, cash flows, inventory, supply chains, purchasing trends, customer payments, and the industry in general, in addition to the impact on its employees. We have experienced significant disruptions to our business due to the COVID-19 pandemic and related suggested and mandated social distancing and shelter-in-place orders.

 

 

Recent Accounting Pronouncement

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company evaluated and concluded that no material effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements.

 

Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		June 30, 2023				December 31, 2022
Building		$	2,645,000			$	-
Land			1,155,000				-
Furniture and equipment			1,298,763				1,203,737
Leasehold improvement			617,086				639,602
Store			663,651				300,000
Store construction			355,800				251,745
Vehicle			116,499				57,859
Computer equipment			18,926				-
Total property and equipment			6,870,725				2,452,943
Less accumulated depreciation			(1,006,536	)			(871,138	)
Total property and equipment, net		$	5,864,189			$	1,581,805

 

Depreciation expense on property and equipment amounted to approximately $135,398 and $97,922 for the six-month periods ended and $79,301 and $48,479 for the three-month periods ended June 30, 2023 and 2022, respectively.

 

4. LINE OF CREDIT FACILITIES

 

During the second quarter of 2023, the Company entered into a line of credit agreement with a financial institution that provides a maximum borrowing limit of $2,000,000 with interest at 5% per annum. This line of credit facility matures on December 31, 2023. Total borrowing balance under this facility as of June 30, 2023 was approximately $499,000.

 

On June 1, 2023, the Company entered into a debt agreement (the “Loan Note”) with DRE, Inc, a Illinois corporation (“DRE”). The Loan Note was guaranteed by Jay Kim, Chief Executive Officer of the Company and member of its Board of Directors.

 

 

The terms of the Loan Note require DRE, Inc. to provide the Company with a $1.0 million credit facility bearing a variable interest rate and a maturity date of May 31, 2025. The Company is responsible for making interest-only payments starting on July 15, 2023 and will continue to make such interest payments until the maturity date. The Loan Note further specifies that the interest rate payable to DRE is equal to one percentage point in excess of that rate shown in the Wall Street Journal as the prime rate. The interest rate on the Loan Note will therefore change with each change in the prime rate so published. If at any time the Wall Street Journal prime rate is no longer published, then DRE will establish a similar replacement rate in its sole discretion. The terms of the Loan Note also specify that the interest rate will never be less than 8% per year. The Company will be in default should they fail to repay any amount due within 30 days after demand by DRE, however, the Company may pay off the Loan Note at any time and without penalty. The Loan Note does not permit the Company the right to offset, deduct or counterclaim from the amount due, but it does include a usury savings clause whereby interest payments may not exceed the amount proscribed by usury laws and that any payments made exceeding the interest limit will be applied to lowering the principal.

 

Total borrowing balance under this credit facility as of June 30, 2023 was approximately $475,000.

 

5. LOANS PAYABLE TO FINANCIAL INSTITUTIONS

 

Loans payable to financial institutions consist of the following:

 

		June 30, 2023				December 31, 2022
August 2022 - Loan agreement with principal amount of $100,000 and repayment rate of 20.5% for a total of $124,430. The loan was paid off in full as of June 30, 2023			-				50,898
May 2023 – Loan agreement with principal amount of $86,400 and repayment rate of 20% for a total of $98,712. The loan payable matures on November 19, 2024			84,188				-
May 2023 – Loan agreement with principal amount of $86,900 and repayment rate of 20% for a total of $98,936. The loan payable matures on November 19, 2024			85,297				-
April 2023 – Loan agreement with principal amount of $121,500 and repayment rate of 20% for a total of $137,963. The loan payable matures on October 6, 2024			100,277				-
Less: current portion			(194,844	)			(44,664	)
Total loan payable, net of current		$	74,918			$	6,234

 

 

6. LOAN PAYABLES, EMERGENCY INJURY DISASTER LOAN (EIDL)

 

		June 30, 2023				December 31, 2022
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			(30,060	)			(30,060	)
Total loan payable, emergency injury disaster loan (EIDL), less current portion		$	469,940			$	469,940

 

The following table provides future minimum payments:

 

For the years ended December 31,		Amount
2023 (remaining six months)			15,030
2024			30,060
2025			30,060
2026			30,060
2027			30,060
Thereafter			364,730
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 June 30, 2023, the loan payable, EIDL noted above is not in default.

 

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 June 30, 2023, the loan payable, EIDL Loan noted above is not in default.

 

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”).

 

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, interest only, 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.

 

7. LOAN PAYABLE, PAYROLL PROTECTION LOAN PROGRAM (PPP)

 

		June 30, 2023				December 31, 2022
Loan payable, payroll protection program (PPP)		$	120,824			$	144,375
Less - current portion			(40,447	)			(45,678	)
Total loan payable, payroll protection program (PPP), less current portion		$	80,377			$	98,697

 

 

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.

  

8. LOAN PAYABLE, MORTGAGE

 

In April 2023, the Company entered into a mortgage loan agreement with GF Capital for a principal amount of $2,850,000 to acquire a warehouse and roasting facility located in Brea, California. The loan bears interest at a prime rate plus 3% per annum and has a term of 2 years. The loan requires monthly interest only payments with a balloon principal payment at maturity. The loan contains customary events of default, and in the event of a default, the entire balance may be accelerated.  

 

The Company paid a monthly interest payment of approximately $27,000 during the second quarter of 2023.

 

 

9. INCOME TAX

 

Total income tax (benefit) expense consists of the following:

 

For the Six-Month Periods Ended June 30,		2023				2022
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 six months ended June 30, 2023 and 2022 is as follows:

 

Description		June 30, 2023				June 30, 2022
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		June 30, 2023				December 31, 2022
Deferred tax assets:
Net operating loss		$	2,988,713			$	2,515,031
Other temporary differences			-				-
Total deferred tax assets			2,988,713				2,515,031
Less - valuation allowance			(2,988,713	)			(2,515,031	)
Total deferred tax assets, net of valuation allowance		$	-			$	-

 

As of December 31, 2022, the Company had available net operating loss carryovers of approximately $2,515,000. 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 2018 and later and subject to California authorities for tax year ended 2017 and later. The Company currently is not under examination by any tax authority. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2023 and December 31, 2022, the Company has no accrued interest or penalties related to uncertain tax positions.

 

As of June 30, 2023, the Company had cumulative net operating loss carryforwards for federal tax purposes of approximately $2,988,713. In addition, the Company had state tax net operating loss carryforwards of approximately $2,988,713. The carryforwards may be applied against future taxable income and expires at various dates subject to certain limitations.

 

 

10. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company entered into the following operating facility leases:

 

		Brea - On September 1, 2018, the Company entered into an operating facility lease for its corporate office located in Brea, California with a term of 72 months and an option to extend. The lease started on September 2018 and expires in August 2024.
		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 60 months and an option to extend. The lease started in July 2016 and expiration date was extended to 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.
		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 60 months term with an option to extend. The lease expires in January 2028. The monthly lease payment under the renewed lease agreement is approximately $5,001.   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 60 months and an option to extend. The lease started in June 2021 and expires in May 2026.   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 started in March 2022 and expires in February 2027.   Cabazon - On May 2017, the Company entered into an operating facility lease for its store located in Cabazon, California with 120 months term with option to extend. The lease started in November 2022 and expires in October 2032. The Company entered into a non-cancellable lease agreement for a coffee shop approximately 1,734 square feet located in Cabazon, California commencing in November 2022 and expiring in November 2032. The monthly lease payment under the lease agreement is approximately $6,521.   Huntington Beach - On October 7, 2022, the Company entered into an operating facility lease for its store located at Huntington Beach, California with a 124 months term with option to extend. The lease started in November 2021 and expires in February 2032.   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 started 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 a term of 84 months and an option to extend. The lease started in April 2021 and expires in March 2028.   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 a term of 84 months with an option to extend. The lease started in June 2021 and expires in April 2028.
		Intersect in Irvine - On October 1, 2022 the Company entered into a percentage based lease agreement for the store located in Irvine, California with 9 months term with option to extend. The lease started in October 2022 and expires on December 31, 2023 with an execution of extension. The rate to be used is 10% and it’s based on monthly gross sales.   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 $5,900.   Anaheim - On March 3, 2023, the Company entered into an operating facility lease for its store located at Anaheim, California with 120 months term with option to extend. The lease started in March 2023 and expires in February 2033.

 

 

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.

 

In accordance with ASC 842, the components of lease expense were as follows:

 

For the six-month period ended June 30,		2023				2022
Operating lease expense		$	579,270			$	452,155
Total lease expense		$	579,270			$	452,155

 

In accordance with ASC 842, other information related to leases was as follows:

 

For the six-month period ended June 30,		2023				2022
Operating cash flows from operating leases		$	569,113			$	435,635
Cash paid for amounts included in the measurement of lease liabilities		$	569,113			$	435,635
Weighted-average remaining lease term—operating leases							5.3 Years
Weighted-average discount rate—operating leases							10.6	%

 

In accordance with ASC 842, maturities of operating lease liabilities as of June 30, 2023 were as follows:

 

		Operating
For the years ended December 31,		Lease
2023 (remaining six months)		$	641,107
2024			1,205,165
2025			1,071,360
2026			1,010,848
2027			662,396
Thereafter			1,562,305
Total undiscounted cash flows		$	6,153,181
Reconciliation of lease liabilities:
Weighted-average remaining lease terms			5.7 Years
Weighted-average discount rate			8.60	%
Present values		$	4,380,802
Lease liabilities—current			840,590
Lease liabilities—long-term			3,540,212
Lease liabilities—total		$	4,380,802
Difference between undiscounted and discounted cash flows		$	1,772,379

 

Contingencies

 

The Company is subject to various legal proceedings from time to time as part of its business. As of June 30, 2023, 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.

 

 

11. SHAREHOLDERS’ EQUITY

 

Common Stock

 

The Company has authorization to issue and have outstanding at any one time 40,000,000 shares 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 shares of preferred stock with a par value of $0.0001 per share, in one or more classes or series within a class as may be determined by our board of directors, who establish, from time to time, the number of shares to be included in each class or series, fix the designation, powers, preferences and rights of the shares of each such class or series and any qualifications, limitations or restrictions thereof. Any preferred stock so issued is senior to other existing classes of common stock with respect to the payment of dividends or amounts upon liquidation or dissolution. As of June 30, 2023 and December 31, 2022, no shares of our preferred stock had been designated any rights and we had no shares of preferred stock issued and outstanding.

 

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 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 six-month periods ended June 30, 2023 and 2022.

 

 

12. EARNINGS PER SHARE

 

The Company calculates earnings per share in accordance with FASB ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially dilutive common shares consist of stock options outstanding (using the treasury method).

 

The following table sets forth the computation of basic and diluted net income per common share:

 

		Six-Month Period
		Ended June 30,
		2023				2022
Net Loss		$	(2,257,806	)		$	(1,502,260	)
Weighted Average Shares of Common Stock Outstanding
Basic			13,216,270				11,642,550
Diluted			13,216,270				11,642,550
Earnings Per Share - Basic
Net Loss Per Share			(0.17	)			(0.13	)
Earnings Per Share - Diluted
Net Loss Per Share			(0.17	)			(0.13	)

 

		Three-Month Period
		Ended June 30,
		2023				2022
Net Loss		$	(1,293,642	)		$	(937,148	)
Weighted Average Shares of Common Stock Outstanding
Basic			13,237,580				11,667,545
Diluted			13,237,580				11,667,545
Earnings Per Share - Basic
Net Loss Per Share			(0.10	)			(0.08	)
Earnings Per Share - Diluted
Net Loss Per Share			(0.10	)			(0.08	)

 

13. SUBSEQUENT EVENTS

 

The Company evaluated all events or transactions that occurred after June 30, 2023 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 three-month period ended June 30, 2023.

 

 

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 for the year ending December 31, 2022. 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 for the year ending December 31, 2022.

 

Business

 

Reborn Coffee 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 Coffee 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, Huntington Beach, Corona Del Mar, Arcadia, Laguna Woods, Riverside, San Francisco, Cabazon, Manhattan Beach, two locations in Irvine, Diamond Bar and Anaheim with one location in development.

 

Reborn Coffee 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

 

As leading pioneers of the emerging “Fourth Wave” movement, Reborn Coffee 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.

 

Reborn Coffee’s 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.

 

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 fourteen 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.

 

●

Cabazon, California;

 

●

Huntington Beach, California;

 

●

Santa Anita Westfield Mall in Arcadia, California;

 

●

Galleria at Tyler in Riverside, California;

 

●

Stonestown Galleria in San Francisco, California;

 

●

Intersect in Irvine, California;

 

	●	Dupont Drive in Irvine, California;
	●	Diamond Bar, California; and

 

●

Anaheim, California

 

 

Components of Our Results of Operations

 

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 99% 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 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 1% of the Company’s total revenue.

 

	●	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 recorded revenue from royalty of $0 for the six-month periods ended June 30, 2023 and 2022. Other fees are earned as incurred and the Company did not have any other fee revenue for the six-months periods ended June 30, 2023 and 2022.

 

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 June 30, 2023, 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 expenses are expensed as incurred. Advertising expenses amounted to $49,531 and $20,513 for the six-month periods ended June 30, 2023 and 2022, respectively, and are recorded under general and administrative expenses in the accompanying unaudited 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.

 

 

Results of Operations

 

Three and six months ended June 30, 2023 compared to three and six months ended June 30, 2022

 

The following table presents selected comparative results of operations from our unaudited financial statements for the three and six months ended June 30, 2023 compared to three and six months ended June 30, 2022. 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.

  

		Six Months Ended June 30,								Increase / (Decrease)
		2023				2022				Dollars				Percentage
Net revenues:
Stores		$	2,603,654			$	1,511,952			$	1.091.702				72.2	%
Wholesale and online			37,590				29,674				7,916				26.7	%
Total net revenues			2,641,244				1,541,626				1,099,618				71.3	%
Operating costs and expenses:
Product, food and drink costs—stores			882,302				563,906				318,396				56.5	%
Cost of sales—wholesale and online			16,464				12,997				3,467				26.7	%
General and administrative			3,893,849				2,468,447				1,425,402				57.7	%
Loss from operations			(2,151,371	)			(1,503,724	)			(647,647	)			43.1	%
Other income			-				16,440				(16,440	)			-100.0	%
Interest expense			(106,435	)			(14,976	)			(91,459	)			610.7	%
Loss before income taxes			(2,257,806	)			(1,502,260	)			(755,546	)			50.3	%
Provision for income taxes			-				-				-				0.0	%
Net loss		$	(2,257,806	)		$	(1,502,260	)		$	(755,546	)			50.3	%

 

		Three Months Ended June 30,								Increase / (Decrease)
		2023				2022				Dollars				Percentage
Net revenues:
Stores		$	1,494,603			$	775,956			$	718,647				92.6	%
Wholesale and online			24,320				12,520				11,800				94.2	%
Total net revenues			1,518,923				788,476				730,447				92.6	%
Operating costs and expenses:
Product, food and drink costs—stores			518,483				278,952				239,531				85.9	%
Cost of sales—wholesale and online			10,652				5,484				5,168				94.2	%
General and administrative			2,189,198				1,432,432				756,766				52.8	%
Loss from operations			(1,199,410	)			(928,392	)			(271,108	)			29.2	%
Other income			-				1,440				(1,440	)			-100.0	%
Interest expense			(94,232	)			(10,196	)			(84,036	)			824.2	%
Loss before income taxes			(1,293,642	)			(937,148	)			(356,494	)			38.0	%
Provision for income taxes			-				-				-				0.0	%
Net loss		$	(1,293,642	)		$	(937,148	)		$	(356,494	)			-38.0	%

 

Revenues

 

Revenues were approximately $2.6 million for the six-month period ended June 30, 2023, compared to $1.5 million for the comparable period in 2022, representing an increase of $1.1 million, or 71.3%. Revenues were approximately $1.5 million for the three-month period ended June 30, 2023, compared to $788,000 for the comparable period in 2022, representing an increase of $730,000, or 92.6%. The increase in sales for the periods was primarily driven by the opening of new stores, and to the continued focus on marketing efforts to grow brand recognition.

 

 

Product, food and drink costs

 

Product, food and drink costs were approximately $882,000 for the six-month period ended June 30, 2023 compared to $564,000 for the comparable period in 2022, representing an increase of approximately $318,000, or 56.5%, and were approximately $518,000 for the three-month period ended June 30, 2023 compared to $279,000 for the comparable period in the prior year, representing an increase of $240,000 or 85.9%. The increase in costs for the periods was partially driven by the opening of new locations and the overall increase in sales for the period.

 

As a percentage of revenues, product, food and drink costs decreased to 33.4% in the six-month period ended June 30, 2023 compared to 36.6% in the comparable period in 2022 and decreased to 34.1% in the three-month period ended June 30, 2023 compared to 35.4% in the comparable period in 2022. The decrease in costs as a percentage of sales was primarily driven by our cost reduction efforts. We monitor product costs to analyze whether they are considered to be representative of general economic conditions, such as inflation, or to be related to commodity specific changes.

 

General and administrative expenses

 

General and administrative expenses were approximately $3.9 million for the six-month period ended June 30, 2023 compared to $2.5 million for the comparable period in the prior year, representing an increase of approximately $1.4 million, or 57.7%, and were approximately $2.2 million for the three-month period ended June 30, 2023 compared to $1.4 million for the comparable period in 2022, representing an increase of approximately $757,000, or 52.8%.

 

This increase in general and administrative expenses was primarily due to the hiring of additional administrative employees, increases in professional services and corporate-level costs to support growth plans, the opening of new restaurants, as well as costs associated with outside administrative, legal and professional fees and other general corporate expenses associated with being a public company.

 

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 $2.2 million and $1.5 million for the six-month periods ended June 30, 2023 and 2022, respectively. We used $2.3 million and $1.2 million of cash for operating activities for the six-month periods ended June 30, 2023 and 2022, 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.

 

 

In August 2022, the Company consummated 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 were approximately $6.2 million after deducting underwriting discounts and commissions and other offering expenses of approximately $998,000.

 

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.

 

		Six Months Ended June 30,
		2023				2022
Statement of Cash Flow Data:
Net cash used in operating activities			(2,283,101	)			(1,199,979	)
Net cash used in investing activities			(4,417,782	)			(168,397	)
Net cash provided by financing activities			4,019,340				613,149

 

Cash Flows used in Operating Activities

 

Net cash used in operating activities during the six-month period ended June 30, 2023 was approximately $2.3 million, which resulted from net loss of $2.3 million, non-cash charges of $250,000 for stock compensation, $27,000 for operating lease and $135,000 for depreciation and net cash outflows of $438,000 from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of increases in prepaid expense and other current assets, partially offset by increase in accounts payable and accrued liabilities.

 

Cash Flows used in Investing Activities

 

Net cash used in investing activities during the six-month periods ended June 30, 2023 and 2022 was $4.4 million and $168,000, respectively. Net cash used in investing activities for the second quarter of 2023 was primarily related to the purchase of a warehouse and roasting facility located in Brea, California at a purchase price of $3.8 million.

  

Cash Flows provided by Financing Activities

 

Net cash provided by financing activities during the six-month period ended June, 2023 and 2022 was $4.0 million and $613,000, respectively. Net cash flows provided by financing activities for the second quarter of 2023 was primarily proceeds from mortgage loan by $2.85 million and proceeds from line of credit by $974,000.

 

As of June 30, 2023, the Company had total assets of approximately $12.1 million. Our cash balance as of June 30, 2023 was approximately $337,000.

  

Credit Facilities

 

Loans with Square Capital

 

During the second quarter of 2023, the Company entered into three loan agreements with Square Capital in the aggregate principal amount of $294,800 with loan costs of $40,811. These loans have a maturity of 18 months. As of June 30, 2023, there was a balance outstanding of $269,762.

 

 

Economic Injury Disaster Loan

 

On May 16, 2020, 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 Company’s business. As of June 30, 2023, 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 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. In connection therewith, the Company 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 the 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 the Company had paid the payments since May 2022.

 

In connection therewith, the Company 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 tangible and intangible personal property of the Company, which also contains customary events of default (the “SBA Security Agreement”).

 

Paycheck Protection Program Loan

 

In May 2020, the Company secured a loan under the PPP administered by the SBA in the amount of $115,000. In February 2021, the Company 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, 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 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 owed from the Company, or filing suit and obtaining judgment against the Company. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Recent modifications to the PPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original eight-week period, making it possible for the Company to apply for forgiveness of its PPP loan. The Company was granted forgiveness for the initial PPP Loan prior to December 31, 2021 and expects to be granted forgiveness on the remainder subsequently.

 

Line of Credit Facilities

 

During the second quarter of 2023, the Company entered into a line of credit agreement with a financial institution that provides a maximum borrowing limit of $2,000,000 with interest at 5% per annum. This line of credit facility matures on December 31, 2023. Total borrowing balance under this facility as of June 30, 2023 was approximately $499,000.

 

On June 1, 2023, the Company entered into a debt agreement (the “Loan Note”) with DRE, Inc, a Illinois corporation (“DRE”). The Loan Note was guaranteed by Jay Kim, Chief Executive Officer of the Company and member of its Board of Directors.

 

 

The terms of the Loan Note require DRE, Inc. to provide the Company with a $1.0 million credit facility bearing a variable interest rate and a maturity date of May 31, 2025. The Company is responsible for making interest-only payments starting on July 15, 2023 and will continue to make such interest payments until the maturity date. The Loan Note further specifies that the interest rate payable to DRE is equal to one percentage point in excess of that rate shown in the Wall Street Journal as the prime rate. The interest rate on the Loan Note will therefore change with each change in the prime rate so published. If at any time the Wall Street Journal prime rate is no longer published, then DRE will establish a similar replacement rate in its sole discretion. The terms of the Loan Note also specify that the interest rate will never be less than 8% per year. The Company will be in default should they fail to repay any amount due within 30 days after demand by DRE, however, the Company may pay off the Loan Note at any time and without penalty. The Loan Note does not permit the Company the right to offset, deduct or counterclaim from the amount due, but it does include a usury savings clause whereby interest payments may not exceed the amount proscribed by usury laws and that any payments made exceeding the interest limit will be applied to lowering the principal.

 

Total borrowing balance under this credit facility as of June 30, 2023 was approximately $475,000.

 

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.

 

 

JOBS Act Accounting Election

 

We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various public company reporting requirements for up to five years or until we are no longer an emerging growth company, whichever is earlier. The JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use this extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

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.

 

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 June 30, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2023, 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. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s 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 June 30, 2023, 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 June 30, 2023, 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 June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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 June 30, 2023, 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

 

On September 12th, 2022, the Company entered into an investor relations consulting agreement with MZHCI, LLC. 

 

On July 13, 2023, the Board accepted Director Dennis Egidi’s formal resignation from its audit and compensation committees, effective immediately. Mr. Egidi resigned due to no longer meeting the SEC and Nasdaq independent director requirements. On July 13, 2023, the Board appointed Andy Nasim as a director of the Company, effective immediately, to fill the vacancy created by Hannah Goh’s resignation, with a term expiring at our annual meeting of stockholders in 2023 or until his successor is duly elected and qualified or until his earlier death, resignation, retirement, disqualification, removal from office or other cause. Mr. Nasim will serve as a member of the audit committee of the Board and as chair of its compensation committee. The Board’s audit committee membership now consists of Farooq Arjomand (Chair), Andy Nasim and Jay Kim. The Board’s compensation committee membership now consists of Andy Nasim (Chair), Farooq Arjomand and Jay Kim. The Company has no standing nominating committee.

 

There is no arrangement or understanding between Mr. Nasim and any other person pursuant to which he was selected as a director. Mr. Nasim does not have any direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.

 

 

Item 6. Exhibits.

 

The following exhibits are included herein or incorporated herein by reference:

 

3.1		Certificate of Incorporation (Delaware), dated July 27, 2022 (incorporated by reference to Exhibit 3.1 to Amendment No. 5 to our Registration Statement on Form S-1 filed on August 2, 2022)
3.2		Bylaws of Registrant (Delaware) (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to our Registration Statement on Form S-1 filed on August 2, 2022)
4.1		Specimen Common Stock Certificate (Delaware) (incorporated by reference to Exhibit 4.1 to Amendment No. 5 to our Registration Statement on Form S-1 filed on August 2, 2022)
4.2		Form of Representative’s Warrant  (incorporated by reference to Exhibit 4.5 to Amendment No. 2 to our Registration Statement on Form S-1 filed on April 18, 2022)
10.1		The Loan Note and Guaranty
31.1*		Certification of Jay Kim pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Stephan Kim pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Jay Kim pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of Stephan Kim pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*	Filed herewith.

 

**	Furnished herewith.

 

 

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		August 14, 2023
Jay Kim		(Principal Executive Officer)
/s/ Stephan Kim		Chief Financial Officer		August 14, 2023
Stephan Kim		(Principal Financial and Accounting Officer)

 

 

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