| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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, 2022 and December 31, 2021 and for the three and six month
periods ended June 30, 2022 and 2021. Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United
States of America. The consolidated financial statements include Reborn Coffee, Inc. and its wholly owned subsidiaries. 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 and to change “Class A” 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. Going Concern The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization
of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $9,979,164 at June
30, 2022, had a net loss of $1,502,260 for the six-month period ended June 30, 2022 and net cash used in operating activities of $1,199,979
for the six-month period ended June 30, 2022. These matters raise substantial doubt about the Company’s ability to continue as a
going concern. While the Company is attempting to expand operations and
increase revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management
intends to raise additional funds by way of public or private offerings. Management believes that the actions presently being taken to
further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While
management believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no
assurances to that effect or if available, on terms acceptable to the Company. The ability of the Company to continue as a going concern
is dependent upon the Company’s ability to further implement its business plan and generate additional profit. Compared to the revenue
for the six-month period ended June 30, 2021, however, net revenue for the six-month period ended June 30, 2022 has increased from $880,121
to $1,541,626, and the Company expects consistent increase in sales with the opening of more stores. 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. The initial public offering is summarized in Note 12 to the unaudited condensed
consolidated financial statements. The unaudited condensed consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Use of Estimates The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States (“U.S. 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
● 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 98% of the Company’s total revenue.
● Wholesale and Online Revenue Wholesale and online revenues are recognized when the products
are delivered, and title passes to the customers or to the wholesale distributors. When customers pick up products at the Company’s
warehouse, or distributed to the wholesale distributors, the title passes, and revenue is recognized. Wholesale revenues make up approximately
2% of the Company’s total revenue.
● Royalties and Other Fees Franchise revenues consists of royalties and other franchise
fees. Royalties are based on a percentage of franchisee’s weekly gross sales revenue at 5%. The Company recognizes the royalties
as the underlying sales occur. The Company recorded revenue from royalties of $0 for the six-month periods ended June 30, 2022 and 2021.
Other fees are earned as incurred and the Company did not have any other fee revenue for the six-month periods ended June 30, 2022 and
2021. Shipping and Handling Costs The Company incurred freight out cost and is included in
the Company’s cost of sales - wholesale and online. General and Administrative Expense General and administrative expense includes store-related
expense as well as the Company’s corporate headquarters’ expenses. Advertising Expense Advertising costs are expensed as incurred. Advertising expenses
amounted to $20,513 and $50,160 for the six-month periods ended June 30, 2022 and 2021, respectively, and is recorded under general and
administrative expenses in the accompanying 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, 2022 and December 31, 2021, allowance for doubtful accounts was $0 and $0, respectively. The
Company does not have any off-balance sheet exposure related to its customers. Inventories Inventories consisted primarily of coffee beans, drink products,
and supplies which are recorded at cost or at net realizable value. Property and Equipment Property and equipment are recorded at cost. Maintenance
and repairs are charged to expense as incurred. Depreciation and amortization are provided using both the straight-line and declining
balance methods over the following estimated useful lives:
Furniture and fixtures 5-7 Years
Store construction Lesser of the lease term or the estimated useful lives of the improvements, generally 6 years
Leasehold improvement Lesser of the lease term or the estimated useful lives of the improvements, generally 6 years When assets are retired or disposed of, the cost and accumulated
depreciation thereon are removed, and any resulting gains or losses are included in the consolidated statements of operations. Leasehold
improvements are amortized using the straight-line method over the estimated life of the asset, not to exceed the length of the lease.
Repair and maintenance costs are expensed as incurred. Operating Leases The Company adopted FASB Accounting Standards Codification,
or 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 Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator
of the basic and diluted earnings (loss) per share (EPS) 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 shares for the three
and six month periods ended June 30, 2022 and 2021. 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, 2022 and 2021. Long-lived Assets In accordance with FASB ASC Topic 360, Property, Plant, and
Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable
based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from
operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic
business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset are less than its carrying amount. As of June 30, 2022 and
December 31, 2021, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets
are impaired. Fair Value of Financial Instruments The Company records its financial assets and liabilities
at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable
outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: Level 1 – Quoted prices in active markets for identical
assets or liabilities. Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 3 – Inputs include management’s best estimate
of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market
and significant to the instrument’s valuation. As of June 30, 2022 and December 31, 2021, the Company believes
that the carrying value of accounts receivable, accounts payable, accrued expenses, and other current assets and liabilities approximate
fair value due to the short maturity of theses financial instruments. The financial statements do not include any financial instruments
at fair value on a recurring or non-recurring basis. Income Taxes Income taxes are provided for the tax effects of transactions
reported in the financial statements and consisted of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences
between the basis of assets and liabilities for financial statement and income tax purposes. The Company follows FASB ASC Topic 740, Income Taxes, which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. ASC 740-10-25 provides
criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from
such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The Company did not recognize additional liabilities for uncertain tax positions pursuant to ASC 740-10-25 for the three and six month
periods ended June 30, 2022 and 2021. Concentration of Credit Risk Financial instruments that potentially subject the Company
to concentrations of credit risk are accounts receivable arising from its normal business activities. The Company performs ongoing credit
evaluations to its customers and establishes allowances when appropriate. Company purchases from various vendors for its operations.
For the three and six month periods ended June 30, 2022 and 2021, no purchases from any vendors accounted for a significant amount of
the Company’s bean coffee purchases. Related Parties Related parties are any entities or individuals that, through
employment, ownership, or other means, possess the ability to direct or cause the direction of management and policies of the Company. Significant Recent Developments Regarding COVID-19 The novel coronavirus, known as the global pandemic COVID-19,
was first identified in December 2019. During March 2020, a global pandemic was declared by the World Health Organization related to the
rapidly spreading outbreak of a novel strain of coronavirus designated COVID-19. The pandemic has significantly impacted economic conditions
in the United States. The outbreak of the virus impacted our company-owned retail locations in Southern California. The Company first began to experience impacts from COVID-19
around the middle of March 2020 as federal, state and local governments began to react to the public health crisis by encouraging or requiring
social distancing, instituting stay-at-home orders, and requiring, in varying degrees, restaurant dine-in limitations, capacity limitations
or other restrictions that largely limited restaurants to take-out, drive-thru and delivery sales. Although we have experienced some recovery
from the initial impact of COVID-19, the long-term impact of COVID-19 on the economy and on our business remains uncertain, the duration
and scope of which cannot currently be predicted. Recent Accounting Pronouncement In June 2016, the FASB issued Accounting Standards Update
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 is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential
effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements, particularly its recognition of allowances
for accounts receivable. Other recently issued accounting updates are not expected
to have a material impact on the Company’s consolidated financial statements. |
