EQUATOR Beverage Co 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. MD&A is organized as follows: ● Significant Accounting Policies — Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. ● Results of Operations — Analysis of our financial results comparing the quarter ended September 30, 2023 to September 30, 2022. ● Liquidity and Capital Resources — Analysis of changes in our cash flows, and discussion of our financial condition and potential sources of liquidity. This report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this annual report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Significant Accounting Policies We have prepared our financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. We base these significant judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information presently available. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Actual results could materially differ from our estimates under different assumptions, judgments or conditions. All of our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to our financial statements, included elsewhere in this Annual Report. We have identified the following as our critical accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements: Use of Estimates — The financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments — Our short-term financial instruments, including cash, accounts receivable, accounts payable and other liabilities, consist primarily of instruments without extended maturities. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. 3 Table of Contents COMPANY OVERVIEW EQUATOR Beverage Company, headquartered in Jersey City, NJ, is a Delaware corporation that specializes in developing, producing, distributing, and marketing new beverage products. Our beverages have been certified Non-GMO Project Verified and USDA Organic, and we offer both nonalcoholic and ready-to-drink alcoholic options. In addition, we have a line of energy sparkling beverages formulated for female consumers. Our beverages can be found in North America, the Caribbean, and Bermuda. We are committed to sustainability and use 100% recyclable, eco-friendly packaging that has a minimal impact on the environment. Furthermore, our products are plant-based, renewable, and eco-friendly. Coconut water is nature's super hydration drink for skin and body. In each 11 oz serving, there are five essential electrolytes totaling 1043 mg more than other sports drinks. It is a fast rehydration recovery drink which performs faster than water. Coconut water has natural nutrients for skin and hair and vitamins B & C natural - not added. Coconut water is plant based and renewable; great for vegan, kosher, paleo keto and low carb diets. All this comes with a fresh crisp coconut taste. There are no preservatives in this coconut water and it is packaged in an eco-friendly container. Results of Operations Three Months Ended September 30, 2023 and 2022 Revenue For the three months ended September 30, 2023, the Company reported revenue of $675,947 an increase from revenue of $548,973 for the three months ended September 30, 2022. The $126,974 increase in revenue was due in part to a strong demand for a new product that launched in 2022. Cost of Revenue Cost of revenue includes finished goods purchase costs, production costs, raw material costs and freight in costs. Also included in cost of revenue are adjustments made to inventory carrying amounts, including markdowns to market. For the three months ended September 30, 2023, cost of revenue was $367,262 or 54% of revenue. For the three months ended September 30, 2022, cost of revenue was $380,864 or 69% of revenue. The 15% decrease in cost of revenue was primarily due to lower ocean transportation costs for the quarter ended September 30, 2023 compared to the same period last year. Operating Expenses For the three months ended September 30, 2023, selling, general and administrative expenses was $358,639 an increase of $160,517 from the three months ended September 30, 2022 of $198,122. This increase in operating expenses was primarily due to the increase in share price of the stock awards issued to officers and directors. Stock awards increased by $102,028 for the quarter ended September 30, 2023 compared to the same period last year. Compensation expense increased by $9,257 for the third quarter of 2023 compared to the same period in 2022. Amazon selling fees also increased by $46,443. Nine Months Ended September 30, 2023 and 2022 Revenue For the nine months ended September 30, 2023, the Company reported revenue of $1,780,059 an increase from revenue of $1,469,732 for the nine months ended September 30, 2022. The $310,327 increase in revenue was primarily due to new accounts that the Company picked up and also a higher quantity of cases sold to current customers during 2023 compared to the same period in 2022. Cost of Revenue Cost of revenue includes finished goods purchase costs, production costs, raw material costs and freight in costs. Also included in cost of revenue are adjustments made to inventory carrying amounts, including markdowns to market. For the nine months ended September 30, 2023, cost of revenue was $988,441 or 56% of revenue. For the nine months ended September 30, 2022, cost of revenue was $966,207 or 66% of revenue. The 10% decrease in cost of revenue was due to the lower ocean transportation costs for the first nine months of 2023 compared to the same period last year. Operating Expenses For the nine months ended September 30, 2023, selling, general and administrative expenses was $812,222, an increase of $144,304 from the nine months ended September 30, 2022 of $667,918. This increase in operating expenses was primarily due to an increase in Amazon selling expenses, compensation expenses and marketing expenses. During the first nine months of 2023, Amazon selling expenses increased by $70,721, compensation expenses increased by $36,278 and marketing expenses increased by $13,691compared to the first nine months of 2022. 4 Table of Contents Liquidity and Capital Resources Liquidity As of September 30, 2023, the Company had working capital of $235,836. Net cash provided by operating activities was $12,594 for the nine months ended September 30, 2023, compared to net cash used in operating activities for the nine months ended September 30, 2022 of $144,119. Net cash used in financing activities was $23,002 for the nine months ended September 30, 2023 compared to $107,260 for the nine months ended September 30, 2022. Net cash was provided by financing activities of a related party loan, offset by cash used in financing activities to repurchase EQUATOR Restricted Common Stock for the nine months ended September 30, 2023. Net cash was provided by financing activities of a related party loan and proceeds from the exercise of stock options, offset by cash used in financing activities to repurchase EQUATOR Restricted Common Stock for the nine months ended September 30, 2022. Working Capital Needs Our working capital requirements increase as revenue grows for our products. During the nine months ended September 30, 2023, the Company had net borrowings of $240,000. This was the direct result of supply chain delays in manufacturing and ocean transport times. In 2022, borrowings were $275,000. Should the Company require additional working capital during the next twelve months, it may seek to raise additional funds. Financing transactions may include the issuance of equity, debt securities and obtaining credit facilities. OFF BALANCE SHEET ARRANGEMENTS None ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not applicable