Reborn Coffee, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in “Risk Factors” or in other sections of this Annual Report on Form 10-K. 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 Coffee 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 10 retail stores located in California, 1 store in Korea, and 1 store in Malaysia. Reborn Coffee continues to elevate the high-end coffee experience, and we received 1st place traditional still in “America’s Best Cold Brew” competition by Coffee Fest in 2017 in Portland and 2018 in Los Angeles. Current Operations We have a production and distribution center at our headquarters that we use to process and roast coffee for wholesale and retail distribution. We have the following twelve retail coffee locations as of December 31, 2024: ● La Floresta Shopping Village in Brea, California; ● La Crescenta, California; ● Corona Del Mar, California; ● Home Depot Center in Laguna Woods, California; ● Manhattan Village at Manhattan Beach, California. ● Huntington Beach, California; ● Galleria at Tyler in Riverside, California; ● Intersect in Irvine, California; ● Diamond Bar, California; and ● Anaheim, California ● Daejeon, Korea ● Kuala Lumpur, Malaysia 42 Components of Our Results of Operations Revenue We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers. Our net revenue primarily consists of revenues from our retail locations and wholesale and online stores. Accordingly, we recognize 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. Retails store revenue makes up approximately [98]% of our 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 the products at our warehouse, or the products are delivered to the wholesale distributors, the title of the products passes and revenue is recognized. Wholesale revenues make up between [4% to 6%] of our total revenue. Cost of Sales Cost of sales includes costs associated with generating revenue within our company-owned retail locations and through wholesale and online platform. General and Administrative Expense General and administrative expenses include store-related expenses as well as our corporate headquarters’ expenses. Reverse Stock Split On January 12, 2024, we filed the Certificate of Amendment to our Certificate of Incorporation to effect the Reverse Stock Split of our issued common stock in the ratio of 1-for-8. The common stock began trading on the Nasdaq Capital Market on a Reverse Stock Split-adjusted basis at the market open on Monday, January 22, 2024. Results of Operations The following tables present the summary of historical consolidated financial data for Reborn Coffee, Inc. and its subsidiaries for the periods and at the dates indicated. Historical results are not necessarily indicative of the results expected for any future period. You should read the summary of historical consolidated financial data below, together with our audited consolidated financial statements and related notes thereto. 43 For the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023. Years Ended December 31, Changes 2024 2023 Amount % Net revenues: Stores $ 5,573,247 $ 5,266,783 $ 306,464 5.8 % Wholesale and online 355,286 241,356 113,930 47.2 % Total net revenues 5,928,533 5,508,139 420,394 7.6 % Operating costs and expenses: Product, food and drink costs - stores 2,062,460 1,782,681 279,779 15.7 % Cost of sales—wholesale and online 142,114 105,714 36,400 34.4 % General and administrative 8,343,505 8,162,523 180,982 2.2 % Total operating costs and expenses 10,548,079 10,050,918 497,161 4.9 % Loss from operations (4,619,546 ) (4,542,779 ) (76,767 ) 1.7 % Other income (expense): Other income (expense) 55,140 (8,942 ) 64,082 -716.6 % Asset impairment loss (25,602 ) - (25,602 ) n/a Loss on the sale of building - (36,094 ) 36,094 -100.0 % Interest expense (215,140 ) (129,480 ) (85,660 ) 66.2 % Total other expense, net (185,602 ) (174,516 ) (11,086 ) 6.4 % Loss before income taxes (4,805,148 ) (4,717,295 ) (87,853 ) 1.9 % Provision for income taxes 800 7,828 (7,028 ) -89.8 % Net loss $ (4,805,948 ) $ (4,725,123 ) $ (80,825 ) 1.7 % Net Revenues – Revenues were approximately $5.9 million for the year ended December 31, 2024, compared to $5.5 million for the year ended December 31, 2023, representing an increase of approximately $0.4 million, or 7.6%. The increase in sales for the periods was primarily driven by the opening of new locations, and to the continued focus on marketing efforts to grow brand recognition. Product, Food and Drink Costs (stores) – Product, food and drink costs were approximately $2.1 million for the year ended December 31, 2024 compared to $1.8 million for the comparable period in 2023, representing an increase of approximately $0.3 million, or 15.7%. The increase in costs was partially driven by the opening of new locations and the overall increase in sales for the period. General and administrative expenses – General and administrative expenses were approximately $8.3 million for the year ended December 31, 2024 compared to $8.2 million for the comparable period in the prior year, representing an increase of approximately $0.1 million, or 1.2%. The increase was mainly caused by increased occupancy expenses and labor costs with opening of new locations. Other Income (Expense) – Other income or expense primarily includes interest expense. Interest expense was $0.2 million for the year ended December 31, 2024 compared to $0.1 million for the year ended December 31, 2023, an increase of $0.1 million. The increase was primarily due to increase in high interest rate for the monies borrowed during 2024. 44 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 $4.8 million and $4.7 million for the years ended December 31, 2024 and 2023, respectively. We used $3.5 million and $3.2 million cash for operating activities during the years ended December 31, 2024 and 2023, respectively. These factors raise substantial doubt as to our ability to continue as a going concern, and our independent registered public accounting firm has included a going concern explanatory paragraph in our audit report for 2024. Our cash needs will depend on numerous factors, including our revenues, completion of our product development activities, customer and market acceptance of our product, and our ability to reduce and control costs. We expect to devote substantial capital resources to, among other things, fund operations and continue development plans. To support our existing and planned business model, we need to raise additional capital to fund our future operations. We have not experienced any difficulty in raising funds through loans, and have 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 impacted our results of operations and cash flows. Additional financing is anticipated to fund our operations in near future. However, other than the ELOC Agreement and the Arena Debenture Transaction, 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 we can continue as a going concern. Years Ended December 31, 2024 2023 Statement of Cash Flow Data: Net cash used in operating activities (3,452,229 ) (3,179,003 ) Net cash provided by (used in) investing activities (977,217 ) (2,413,257 ) Net cash provided by financing activities 4,423,360 2,737,526 Cash Flows Used in Operating Activities Net cash used in operating activities during the year ended December 31, 2024 was approximately $3.5 million, which resulted from net loss of $4.8 million, non-cash charges of $0.8 million for stock compensation, and $0.4 million for depreciation, and net cash inflows of $0.2 million from changes in operating assets and liabilities. Net cash used in operating activities during the year ended December 31, 2023 was approximately $3.2 million, which resulted from net loss of $4.7 million, non-cash charges of $0.3 million for stock compensation, $0.3 million for operating lease and $0.3 million for depreciation, and net cash inflows of $0.7 million from changes in operating assets and liabilities. Cash Flows Used in Investing Activities Net cash used in investing activities for the years ended December 31, 2024 and 2023 was $1.0 million and $2.4 million, respectively. These expenditures in each period are primarily related to purchases of property and equipment in connection with current and future location openings and maintaining our existing locations. Cash Flows Provided by Financing Activities Net cash provided by financing activities during the year ended December 31, 2024 was $4.4 million, which was primarily due to proceeds from issuances of common stock and off-set by repayments of loans payable. Net cash provided by financing activities during the year ended December 31, 2023 was $2.7 million, which was primarily from proceeds from the credit line and loans. 45 Credit Facilities Economic Injury Disaster Loan On May 16, 2020, we executed the EIDL Loan from the SBA under its EIDL assistance program in light of the impact of the COVID-19 pandemic on our business. As of December 31, 2024, the loan payable, EIDL Loan noted above is not in default. Pursuant to the SBA Loan Agreement, we borrowed an aggregate principal amount of the EIDL Loan of $500,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date of each advance. Installment payments, including principal and interest, are due monthly beginning May 16, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan. In connection therewith, we also received a $10,000 grant, which does not have to be repaid. During the year ended December 31, 2020, $10,000 was recorded in Economy injury disaster loan (EIDL) grant income in the Statements of Operations. The schedule of payments on this loan was later deferred to commence 24 months from the date of loan and we have paid the payments since May 2022. In connection therewith, we executed (i) a loan for the benefit of the SBA, which contains customary events of default and (ii) a Security Agreement, granting the SBA a security interest in all of our tangible and intangible personal property, which also contains customary events of default (the “SBA Security Agreement”). Paycheck Protection Program Loan In May 2020, we secured a loan under the PPP administered by the SBA in the amount of $115,000. In February 2021, we secured a second loan under this program in the amount of approximately $167,000. The interest rate of the loan is 1.00% per annum and accrues on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. Commencing seven months after the effective date of each PPP Loan, we are required to pay the Lender equal monthly payments of principal and interest as required to fully amortize any unforgiven principal balance of the loan by the two-year anniversary of the effective date of the loan. The PPP Loan contains customary events of default relating to, among other things, payment defaults, making materially false or misleading representations to the SBA or the Lender, or breaching the terms of the PPP Loan. The occurrence of an event of default may result in the repayment of all amounts outstanding under the PPP Loan, collection of all amounts we owe, or filing suit and obtaining judgment against us. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Recent modifications to the PPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original eight-week period, making it possible for us to apply for forgiveness of our PPP loan. The Company was granted forgiveness for the initial PPP Loan prior to December 31, 2021. 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. 46 Income Taxes We file income tax returns in the U.S. federal and California state jurisdictions. We also file income tax returns in South Korea and Malaysia related to our subsidiaries located in those countries. Income taxes in South Korea and Malaysia is not material. Upon the closing of this offering, we will be taxed at the prevailing U.S. corporate tax rates. We will be treated as a U.S. corporation and a regarded entity for U.S. federal, state and local income taxes. Accordingly, a provision will be recorded for the anticipated tax consequences of our reported results of operations for U.S. federal, state and foreign income taxes. Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with GAAP. Critical Accounting Estimates and Policies The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 2 to the financial statements included elsewhere in this Annual Report on Form 10-K. 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 7A. Quantitative and Qualitative Disclosures About Market Risk Under SEC rules and regulations, because we are considered to be a “smaller reporting company”, we are not required to provide the information required by this item in this report. Item 8. Financial Statements and Supplementary Data The Financial Statements and Supplementary Data required by this Item 8 are incorporated by reference to information beginning on Page F-1 of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.