| 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 September 30, 2024 and December
31, 2023 and for the three and nine month periods ended September 30, 2024 and 2023. Basis of Presentation
and Consolidation The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”)
as promulgated in the United States of America. The consolidated financial statements include Reborn Coffee, Inc. and its wholly owned
subsidiary. All intercompany accounts, transactions, and profits have been eliminated upon consolidation. Minority Interest Reborn owns 60%
of Reborn Malaysia located in Kuala Lumpur with one retail coffee store under the brand name of Reborn Coffee. For the nine months ended
September 30, 2024, Reborn’s interest was not material as the store in Malaysia opened in November 2023 and operated in limited
capacity and revenue. Reverse Stock
Split On January 12, 2024,
the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Certificate of Incorporation
to effect a reverse stock split of its issued Common Stock in the ratio of 1-for-8 (the “Reverse Stock Split”). The Common
Stock began trading on the Nasdaq Capital Market on a Reverse Stock Split-adjusted basis at the market open on Monday, January 22, 2024. Segment Reporting FASB ASC Topic 280,
Segment Reporting, requires public companies to report financial and descriptive information about their reportable operating segments.
The Company’s management identifies operating segments based on how the Company’s management internally evaluate separate
financial information, business activities and management responsibility. At the current time, the Company has only 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 nine months ended September 30, 2024 and 2023. We shall generate revenues
from two geographic areas, consisting of North America and Asia. The following enterprise-wide disclosure is prepared on a basis consistent
with the preparation of the consolidated financial statements. The following table contains certain financial information by geographic
area:
For the Nine Months Ended September 30, 2024 2023
Net Sales:
North America $ 3,918,066 $ 4,155,503
Asia 231,826 -
Total net sales $ 4,149,892 $ 4,155,503
As of September 30, December 31,
Long-lived asset, net:
North America $ 823,250 $ 2,162,263
Asia 3,127,305 1,331,787
Total long-lived asset, net $ 3,950,555 $ 3,494,050 Use of Estimates The preparation of
consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts
reported in our consolidated financial statements and the accompanying notes. Such estimates include accounts receivables, accrued liabilities,
income taxes, long-lived assets, and deferred tax valuation allowances. These estimates generally involve complex issues and require management
to make judgments, involve analysis of historical and future trends that can require extended periods of time to resolve, and are subject
to change from period to period. In all cases, actual results could differ materially from estimates. Foreign Currency
Translations Reborn has controlling
interests in subsidiaries in foreign countries, South Korea and Malaysia. Fluctuations in foreign currency impact the amount of total
assets, liabilities, earnings and cash flows that the Company report for foreign subsidiaries upon the translation of these amounts into
U.S. Dollars for, and as of the end of, each reporting period. In particular, the strengthening of the U.S. Dollar generally will reduce
the reported amount of our foreign-denominated cash, cash equivalents, total revenues and total expense that we translate into U.S. Dollars
and report in the Company’s consolidated financial statements for, and as of the end of, each reporting period. However, a majority
of the Company’s consolidated revenue is denominated in U.S. Dollars, and therefore, the Company’s revenue is not directly
subject to foreign currency risk. In accordance with
FASB ASC 830, “Foreign Currency Matters”, when an operation has transactions denominated in a currency other than its functional
currency, they are measured in the functional currency. Changes in the expected functional currency cash flows caused by changes in exchange
rates are included in net income for the period. 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 92% of the Company’s total revenue.
● Wholesale
and Online Revenue Wholesale and online
revenues are recognized when the products are delivered, and title passes to the customers or to the wholesale distributors. When customers
pick up products at the Company’s warehouse, or distributed to the wholesale distributors, the title passes, and revenue is recognized.
Wholesale revenues make up approximately 8% of the Company’s total revenue.
● 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 September 30, 2024 and 2023. Other fees are earned as incurred and the Company did not have any other fee revenue for the
periods ended September 30, 2024 and 2023. Cost of Sales Product, food and drink
costs – stores and cost of sales – wholesale and online primarily include the costs of ingredients of food and beverage sold
and related supplies used in customer service. The wholesale and online sales also include costs of packaging and shipping. Shipping
and Handling Costs The Company incurred
freight out costs, which are primarily included in the Company’s cost of sales – wholesale and online. Freight in costs,
when attached to a specific purchase, are included as a component of the cost of the purchased goods and materials items and allocated
to accounts in accordance with the nature of the goods. When the freight in costs are not allocable to an individual purchase or
are more significant, they are recorded to a freight and shipping account within cost of sales. General and Administrative
Expense General and administrative
expense includes store-related expense as well as the Company’s corporate headquarters’ expenses. Advertising Expense Advertising costs are
expensed as incurred. Advertising expenses amounted to $110,050 and $49,531 for the nine months ended September 30, 2024 and 2023,
respectively, and are recorded under general and administrative expenses in the accompanying condensed consolidated statements of operations. Pre-opening Costs Pre-opening costs for
new stores, consist primarily of store and leasehold improvements, and are capitalized and depreciated over the shorter of the useful
life of the improvement or the lease term, including renewal periods that are reasonably assured. Accounts Receivable Accounts receivables
are stated net of allowance for doubtful accounts. The allowance for doubtful accounts is determined primarily on the basis of past collection
experience and general economic conditions. The Company determines terms and conditions for its customers based on volume transacted by
the customer, customer creditworthiness and past transaction history. At September 30, 2024 and December 31, 2023, allowance for doubtful
accounts were 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:
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 nine months ended September 30, 2024 and 2023. Long-lived Assets In accordance with
FASB ASC Topic 360, Property, Plant, and Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying
value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability
to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets;
significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends.
An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its
carrying amount. As of September 30, 2024 and December 31, 2023, the Company was not aware of any events or changes in circumstances that
would indicate that the long-lived assets are impaired. Fair Value of
Financial Instruments The Company records
its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques to measure
fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used
to measure fair value which are the following: Level 1 – Quoted
prices in active markets for identical assets or liabilities. Level 2 – Inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Level 3 – Inputs
include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The inputs are unobservable in the market and significant to the instrument’s valuation. As of September 30,
2024 and December 31, 2023, the Company believes that the carrying value of accounts receivable, accounts payable, accrued expenses, and
other current assets and liabilities approximate fair value due to the short maturity of theses financial instruments. The financial statements
do not include any financial instruments at fair value on a recurring or non-recurring basis. 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 months ended September 30, 2024 and 2023. Concentration
of Credit Risk Financial instruments
that potentially subject the Company to concentrations of credit risk are accounts receivable arising from its normal business activities.
The Company performs ongoing credit evaluations to its customers and establishes allowances when appropriate. Company purchases from
various vendors for its operations. For the three and nine months ended September 30, 2024 and 2023, no purchases from any vendors accounted
for a significant amount of the Company’s coffee bean purchases. Related Parties Related parties are
any entities or individuals that, through employment, ownership, or other means, possess the ability to direct or cause the direction
of management and policies of the Company. Recent Accounting
Pronouncement The Company has reviewed
all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements
may be expected to cause a material impact on our financial statements. |
