Form S-1/A Reborn Coffee, Inc.

As filed with the Securities and Exchange Commission on August 9, 2022.

Registration No. 333-261937

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

AMENDMENT NO. 6
TO
FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

REBORN COFFEE, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware		5810		47-4752305
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(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)

 

Jay Kim

Chief Executive Officer

Reborn Coffee, Inc.

580 N. Berry Street,

Brea, CA 92821

(714) 784-6369

(Name, address, including zip code, and telephone number, including

area code, of agent for service)

 

Copies to:

 

Matthew Ogurick Darina Koleva K&L Gates LLP 599 Lexington Avenue New York, New York 10022 (212) 536-3901

Nimish Patel Blake Baron Mitchell Silberberg & Knupp LLP 2049 Century Park East, 18th Floor Los Angeles, CA 90067 (310) 312-3102

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

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 7(a)(2)(B) of the Securities Act. ☐

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant will file a further amendment which specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated August 9, 2022

 

PRELIMINARY PROSPECTUS

 

1,200,000

SHARES OF COMMON STOCK

AT $5.00 PER SHARE

We are offering shares of common stock, par value $0.0001 per share, at an assumed public offering price of $5.00 per share. The selling stockholders, identified herein as the Selling Stockholders, are offering up to 1,824,246 shares of our common stock. The 1,824,246 shares of common stock being offered by the Selling Stockholders are referred to herein as the Selling Stockholder Shares.

 

We will not receive any of the proceeds from the sale of common stock by the Selling Stockholders. The Selling Stockholder Shares will not be purchased by the underwriters or otherwise included in the underwritten offering of our common stock in this public offering. The Selling Stockholders may sell or otherwise dispose of their shares in a number of different ways and at varying prices, but will not sell any Selling Stockholder Shares until after the closing of this offering. See “Selling Stockholders—Plan of Distribution.” We will pay all expenses (other than discounts, concessions, commissions and similar selling expenses, if any) relating to the registration of the Selling Stockholder Shares with the Securities and Exchange Commission.

 

Currently, there is no public market for our common stock. We intend to apply to list our common stock on the Nasdaq Capital Market under the symbol “REBN.” The closing of this offering is contingent upon the successful listing of our common stock on the Nasdaq Capital Market.

 

Each share of our common stock is entitled to one vote per share. See “Description of Capital Stock” and “Organizational Structure.”

 

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17 to read about factors you should consider before buying our common stock.

 

		Per Share				Total
Public offering price		$				$
Underwriting discounts and commissions (1)		$				$
Proceeds, before expenses, to Reborn Coffee, Inc.		$				$

 

(1)

Does not include the following additional compensation payable to the underwriters: We have agreed to pay the representative of the underwriters, EF Hutton, division of Benchmark Investments, LLC, which we refer to as EF Hutton or the representative, a non-accountable expense allowance equal to one percent (1.0%) of the total proceeds raised and to reimburse the underwriters for certain expenses incurred relating to this offering. In addition, we have 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 this offering (including any shares of common stock sold upon exercise of the over-allotment option). The warrants are exercisable for a price per share equal to 125% of the public offering price. The warrants are exercisable at any time and from time to time, in whole or in part, during the four-and-a-half-year period commencing six (6) months from the date of commencement of sales of the offering. The registration statement of which this prospectus forms a part also registers the shares of common stock issuable upon the exercise of the representative’s warrants. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the representative’s warrants is $431,250, which is equal to 125% of $345,000 (5% of $6,900,000 based on an offering price of $5.00, and assuming full exercise of the over-allotment option). “Underwriting” contains additional information regarding underwriter compensation.

 

We have granted the underwriters the option for a period of 45 days to purchase up to 180,000 additional shares (equal to 15% of the shares of common stock sold in the offering) at the public offering price less the underwriting discounts and commissions, solely to cover over-allotments, if any.

 

The underwriters expect to deliver the share of common stock against payment on or about    , 2022.

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

EF HUTTON

division of Benchmark Investments, LLC

 

The date of this prospectus is      , 2022.

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

MARKET AND INDUSTRY DATA	iii
PROSPECTUS SUMMARY	1
OUR COMPANY	1
RISK FACTORS	17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	44
ORGANIZATIONAL STRUCTURE	46
USE OF PROCEEDS	47
DIVIDEND POLICY	48
CAPITALIZATION	49
DILUTION	50
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA	51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	54
BUSINESS	67
MANAGEMENT	73
EXECUTIVE COMPENSATION	78
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS	80
PRINCIPAL STOCKHOLDERS	81
SELLING STOCKHOLDERS	82
DESCRIPTION OF SECURITIES	86
SHARES ELIGIBLE FOR FUTURE SALE	90
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK	92
UNDERWRITING	98
LEGAL MATTERS	102
EXPERTS	102
WHERE YOU CAN FIND MORE INFORMATION	102
INDEX TO FINANCIAL STATEMENTS	F-1

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered or made available to you. We have not, the Selling Stockholders have not, and the underwriters have not, authorized anyone to provide you with additional or different information from that contained in this prospectus and any free writing prospectus we have authorized. We, the Selling Stockholders, and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. “Risk Factors” and “Special Note Regarding Forward-Looking Statements” contain additional information regarding these risks.

 

For investors outside the United States: We have not, the Selling Stockholders have not, and the underwriters have not, done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States. See “Underwriting.”

 

 

DEALER PROSPECTUS DELIVERY OBLIGATION

 

Through and including       , 2022 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

MARKET AND INDUSTRY DATA

 

This prospectus contains estimates and information concerning our industry, including market position and the size and growth rates of the markets in which we participate, that are based on industry publications and reports and other information from our internal sources. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

 

Certain information included in this prospectus concerning our industry and the markets we serve, including our market share, is also based on our good-faith estimates derived from management’s knowledge of the industry and other information currently available to us.

 

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

 

Reborn Coffee, our logo, and our other registered and common law trade names, trademarks and service marks are the property of the Company. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.

 

BASIS OF PRESENTATION

 

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

 

In this prospectus, “Reborn Coffee, Inc.,” “Reborn Coffee” “Reborn,” “we,” “us,” “our,” “our company” and the “Company” refer to Reborn Coffee, Inc., together with its wholly owned subsidiaries Reborn Global and Reborn Coffee Franchise unless expressly indicated or the context otherwise requires. This prospectus includes certain historical combined and consolidated financial and other data for Reborn Coffee. Reborn Coffee is a holding company whose material assets are its equity interest in Reborn Global (as defined herein), which wholly owns Reborn Coffee Franchise (as defined herein). Reborn Coffee will operate and control all the business and affairs of Reborn Global and Reborn Coffee Franchise, and through Reborn Global and Reborn Coffee Franchise, conduct our business.

 

The terms “dollar” or “$” refer to U.S. dollars, the lawful currency of the United States. The Company’s fiscal year end is December 31. Our financial statements are prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States (“GAAP”).

 

Unless indicated otherwise, the information included in this prospectus assumes the following:

 

	●	no exercise by the underwriters of their option to purchase additional shares (equal to 15% of the shares of common stock sold in the offering) from us solely to cover over-allotments;
	●	the consummation of our conversion of Class B shares to Class A shares and the amendment of our certificate of incorporation to eliminate the Class B share class and rename our Class A share class “common stock”; and
	●	our migration from Florida and reincorporation as a Delaware corporation.

 

 

 

RISK FACTORS

 

Investing in our common stock, which we refer to in this prospectus as our “securities,” involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations, and prospects. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects.

 

Risks Related to Our Business

 

Evolving consumer preferences and tastes may adversely affect our business.

 

Reborn Coffee’s continued success depends on our ability to attract and retain customers. Our financial results could be adversely affected by a shift in consumer spending away from Reborn Coffee’s beverages, lack of customer acceptance of new products (including due to price increases necessary to cover the costs of new beverages or higher input costs), brand perception (such as the existence or expansion of our competitors), or customers reducing their demand for our current offerings as new beverages are introduced. In addition, most of our beverages contain caffeine, the health effects of which are the subject of public and regulatory scrutiny, including the suggestion of linkages to a variety of adverse health effects. There is increasing consumer awareness of health risks that are attributed to ingredients we use, particularly in the United States, including increased blood pressure and heart rate, anxiety and insomnia, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food and beverage products. A decrease in customer traffic as a result of these health concerns or negative publicity could significantly reduce the demand for Reborn Coffee’s specialty coffee and could harm our business.

 

Our financial condition and quarterly results of operations are subject to, and may be adversely affected by, a number of factors, many of which are also largely outside our control and as such our results may fluctuate significantly and may not fully reflect the underlying performance of our business.

 

Our quarterly results of operations and key metrics may vary significantly in the future as they have in the past, and period-to-period comparisons of our results of operations and key metrics may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly results of operations and key metrics may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuations in quarterly results may negatively impact the value of our securities. Factors that may cause fluctuations in our quarterly results of operations and key metrics include, without limitation, those listed elsewhere in this Risk Factors section and those listed below. Any one or more of the factors listed below or described elsewhere in this section could harm our business:

 

	●	increases in real estate or labor costs in certain markets;
	●	consumer preferences, including those described above;
	●	severe weather or other natural or man-made disasters affecting a large market or several closely located markets that may temporarily but significantly affect our business in such markets;
	●	especially in our large markets, labor discord or disruption, geopolitical events, social unrest, war, terrorism, political instability, acts of public violence, boycotts, hostilities and social unrest and other health pandemics that lead to avoidance of public places or cause people to stay at home; and
	●	adverse outcomes of litigation.

 

We have a history of operating losses and negative cash flow and we anticipate that we will need to raise additional funds to finance operations.

 

We have a history of operating losses and negative cash flow. We have incurred recurring net losses, including net losses from operations before income taxes of $565,000 for the three-month period ended March 31, 2022 and $3.4 million and $1.1 million in 2021 and 2020, respectively. We used $486,000 of cash for operating activities during the three-month period ended March 31, 2022 and used $1.9 million and $0.9 million of cash for operating activities during 2021 and 2020, respectively.

 

To support our existing and planned business model, we will need to raise additional capital to fund our future operations. 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. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

 

 

We have funded our operations primarily with proceeds from private offerings of our common stock and secured and unsecured debt instruments. Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, the terms of the private placement transactions that we completed in the past, and any restricted availability of credit, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.

 

Our marketing programs may not be successful, and our new menu items and advertising campaigns may not generate increased sales or profits.

 

We incur costs and expend other resources in our marketing efforts on new menu items and advertising campaigns to raise brand awareness and attract and retain customers. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenue. Additionally, some of our competitors have greater financial resources than we do, which enable them to spend significantly more on marketing and advertising and other initiatives than we can. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing funds decrease for any reason, or should our advertising, promotions and new menu items be less effective than our competitors, there could be an adverse effect on our results of operations and financial condition.

 

We may not be able to compete successfully with other specialty coffee locations, including the growing number of coffee delivery options. Intense competition could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.

 

We expect competition in our market to continue to be intense as we compete on a variety of fronts, including convenience, taste, price, quality, service and location. If our company-owned and any franchised locations that may open in the future (and as of the date of this prospectus, we have none) cannot compete successfully with other beverage and coffee locations, other specialty coffee locations, and the growing number of coffee delivery options in new and existing markets, we could lose customers and our revenue could decline. Our company-owned retail locations (and any franchise locations that may open in the future) compete with national, regional and local coffee chains for customers, locations and qualified management and other staff. Compared to us, some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brand recognition or are better established in the markets where our locations are located or are planned to be located. In some markets that we may grow into, there are already well-funded competitors in the coffee or beverage business that may challenge our ability to grow into those regions. Any of these competitive factors may harm our business.

 

Additionally, if our competitors begin to evolve their business strategies and adopt aspects of the Reborn Coffee business model, our customers may be drawn to those competitors for their beverage needs and our business could be harmed.

 

We have incurred operating losses and may not be profitable in the future. Our plans to maintain and increase liquidity may not be successful. The report of the Company’s independent registered public accounting firm includes a going concern uncertainty explanatory paragraph.

 

The Company's auditors have issued a going concern opinion that the Company may not be able to continue without generating sufficient cash to fund its operations. The accompanying audited consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. The Company had an accumulated deficit of $8,476,904 at December 31, 2021, and had a net loss of $3,440,401 for the year ended December 31, 2021 and net cash used in operating activities of $1,949,820 for the year ended December 31, 2021. The Company’s accumulated deficit, significant operating losses and cash used in operations raise substantial doubt about its ability to continue as a going concern. The Company’s auditor has also included a going concern paragraph in its audit report for the fiscal year ended December 31, 2021 which states that the auditor determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows, and that the Company’s accumulated deficit, significant operating losses and cash used in operations raise substantial doubt about its ability to continue as a going concern.

 

As of the date of this prospectus, 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 impacted our results of operations and cash flows. Additional equity financing is anticipated to take the form of one or more private placements to accredited investors under exemptions from the registration requirements of the Securities Act of 1933 or a subsequent public offering. 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. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These factors raise substantial doubt about our ability to continue as a going concern.

 

Our growth strategy depends in part on opening new locations in existing and new markets. We may be unsuccessful in opening new locations or establishing new markets, which could adversely affect our growth.

 

As of December 31, 2021, Reborn had 7 company-owned locations. One of the key means to achieving our growth strategy will be through opening new locations and operating those locations on a profitable basis. We opened 3 new company-owned retail locations in 2020 and 4 new company-owned retail locations in 2021. Our ability to open new locations is dependent upon a number of factors, many of which are beyond our control, including our ability to:

 

●

identify available and suitable sites;

 

 

	●	compete for such sites;
	●	reach acceptable agreements regarding the lease of locations;
	●	obtain or have available the financing required to acquire and operate a location, including construction and opening costs, which includes access to build-to-suit leases and ground lease construction or renovation arrangements;
	●	respond to unforeseen engineering or environmental problems with leased premises;

 

●

avoid the impact of inclement weather, natural disasters and other calamities;

 

	●	hire, train and retain the skilled management and other employees necessary to meet staffing needs;
	●	obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our costs or ability to open new locations; and
	●	control construction and equipment cost increases for new locations and secure the services of qualified contractors and subcontractors in an increasingly competitive environment.

 

There is no guarantee that a sufficient number of suitable sites for new locations will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new locations, or if location openings are significantly delayed, our revenue or earnings growth could be adversely affected and our business may be harmed.

 

As part of our longer term growth strategy, we expect to enter into geographic markets in which we have little or no prior operating experience. The challenges of entering new markets include: adapting to local regulations or restrictions that may limit our ability to open new locations, restrict the use of certain branding or increase the cost of development; difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our brand has been important in the success of our locations in our existing markets, and we will need to build this recognition in new markets. Locations we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating costs than existing locations, thereby affecting our overall profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new locations.

 

Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new locations in areas where we have existing locations. The operating results and comparable location sales could be adversely affected due to close proximity with our other locations and market saturation.

 

New locations, once opened, may not be profitable or may close, and the increases in average per location revenue and comparable sales that we have experienced in the past may not be indicative of future results.

 

Our results have been, and in the future may continue to be, significantly impacted by the timing of new location openings, which is subject to a number of factors, many of which are outside of our control, including landlord delays, associated pre-opening costs and operating inefficiencies, as well as changes in our geographic concentration due to the opening of new locations. We have typically incurred the most significant portion of pre-opening expenses associated with a given location within the three months preceding the opening of the location. Our experience has been that labor and operating costs associated with a newly opened location for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of sales. Our new locations commonly take three to five months to reach planned operating levels due to inefficiencies typically associated with new locations, including the training of new personnel, new market learning curves, inability to hire sufficient qualified staff, and other factors. We may incur additional costs in new markets, particularly for transportation and distribution, which may impact sales and the profitability of those locations. Accordingly, the volume and timing of new location openings may have a material adverse impact on our profitability.

 

Although we target specified operating and financial metrics, new locations may never meet these targets or may take longer than anticipated to do so. Any new location we open may never become profitable or achieve operating results similar to those of our existing locations, which could adversely affect our business, financial condition or results of operations.

 

 

Some of Reborn Coffee’s retail locations open with an initial start-up period of higher than normal sales volumes and related costs, which subsequently decrease to stabilized levels. In new markets, the length of time before average sales for new locations stabilize is less predictable and can be longer as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. Our ability to operate new locations profitably and increase average location revenue and comparable location sales will depend on many factors, some of which are beyond our control, including:

 

	●	consumer awareness and understanding of the Reborn brand;
	●	general economic conditions, which can affect location traffic, local labor costs and prices we pay for the beverage and other supplies we use;
	●	consumption patterns and beverage preferences that differ from region to region;
	●	changes in consumer preferences and discretionary spending;
	●	difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;
	●	increases in prices for commodities, including coffee, and milk;
	●	inefficiency in our labor costs as the staff gains experience;
	●	competition, either from our competitors in the beverage industry or our own locations;
	●	temporary and permanent site characteristics of new locations;
	●	changes in government regulation; and
	●	other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

 

If our new locations do not perform as planned or close, our business and future prospects could be harmed. In addition, an inability to achieve our expected average location revenue could harm our business.

 

Additionally, opening new locations in existing markets may negatively impact sales. The consumer target area of our locations varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new location in or near markets in which we already have locations could adversely impact sales at these existing locations while growing overall sales in a region. Existing locations could also make it more difficult to build our consumer base for a new location in the same market. Sales transfer between our locations may become significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, harm our business.

 

As we expand, we may not be able to maintain our current average location and our business may be harmed. Although we have specific target operating and financial metrics, new locations may not meet these targets or may take longer than anticipated to do so. Any new Reborn Coffee location we open may not be profitable or achieve operating results similar to those of our existing locations, which could adversely affect our business, financial condition or results of operations.

  

Our failure to manage our growth effectively could harm our business and operating results.

 

We have experienced increased demand for our products. The growth and expansion of our business and products may place a significant strain on our management, operational and financial resources. As we expand our business, it is important that we continue to maintain a high level of customer service and satisfaction which may place a significant strain on our management, sales and marketing, administrative, financial, and other resources. We may not be able to respond in a timely basis to all the changing demands that our planned expansion will impose on management and on our existing infrastructure, or be able to hire or retain the necessary management and baristas, which could harm our business. Further, if we are not able to continue to provide high quality customer service as a result of these demands, our reputation, as well as our business, including a decline in financial performance, could be harmed. If we experience a decline in financial performance, we may decrease the number of or discontinue new Reborn Coffee location openings, or we may decide to close locations that we are unable to operate in a profitable manner.

 

 

We are required to manage multiple relationships with various strategic partners, customers, and other third parties. In the event of further growth of our operations or in the number of our third-party relationships, our existing management systems, financial and management controls and information systems may not be adequate to support our planned expansion and we may face challenges of integrating, developing, training, and motivating a rapidly growing employee base in our various locations and maintaining our company culture across multiple company-owned retail locations. Our ability to manage our growth effectively will require us to continue to enhance our systems, procedures and controls and to locate, hire, train and retain management and staff, particularly in new markets which may require significant capital expenditures.

 

Damage to our brand or reputation and negative publicity could negatively impact our business, financial condition and results of operations.

 

Our reputation and the quality of our Reborn Coffee brand are critical to our business and success in existing markets and will be critical to our success as we enter new markets. We believe that we have built our reputation on the high quality of our coffee and service, our commitment to our customers and our strong employee culture, and we must protect and grow the value of our brand in order for us to continue to be successful. Any incident that erodes consumer loyalty for our brand could significantly reduce its value and damage our business.

 

We may, from time to time, be faced with negative publicity, regardless of its accuracy, relating to beverage quality; the safety, sanitation and welfare of our locations; customer complaints or litigation alleging illness or injury; health inspection scores; integrity of our or our suppliers’ food processing, employment practices and other policies, practices and procedures; or employee relationships and welfare or other matters. Negative publicity may adversely affect us, regardless of whether the allegations are substantiated or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one location may extend far beyond the location involved, to affect some or all of our other locations. A similar risk exists with respect to beverage businesses unrelated to us if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims could harm our business.

 

Additionally, there has been a marked increase in the use of social media platforms and similar devices, including blogs, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning us may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction.

 

Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may harm our business.

  

 

Our inability to identify, recruit and retain qualified individuals for our locations could slow our growth and adversely impact our ability to operate.

 

Our success also depends substantially on the contributions and abilities of our staff on whom we rely to give customers a superior experience and elevate our brand. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified operators, all of whom come from within our system, and staff to meet the needs of our existing locations and to staff new locations. We aim to hire warm, friendly, motivated, caring, self-aware and intellectually curious individuals, who are excited and committed to championship performance, remarkable and enriching hospitality, embodying our culture and actively growing themselves and our brand. A sufficient number of qualified individuals to fill these positions and qualifications may be in short supply in some communities. Competition in these communities for qualified staff is high and will likely require us to pay higher wages and provide greater benefits, especially if there is continued improvement in regional or national economic conditions. We place a heavy emphasis on the qualification and training of our personnel and spend a significant amount of time and money on training our employees. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, all of which could adversely affect our business. Any such inability could also delay the planned openings of new locations and could adversely impact our existing locations. Any such inability to retain or recruit qualified employees, increased costs of attracting qualified employees or delays in location openings could harm our business.

 

Our expansion into new domestic markets may present increased risks, which could affect our profitability.

 

We plan to open additional company-owned Reborn Coffee retail locations in domestic markets where we have little or no operating experience. The target consumer base of our locations varies by location, depending on a number of factors, including population density, other local coffee and convenience beverage distributors, area demographics and geography. Locations we open in new markets may take longer to reach expected sales and profit levels on a consistent basis. New markets may have competitive or regulatory conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our values. Until we attain a critical mass in a market, the locations we do open will have reduced operating leverage. As a result, these new locations may be less successful or may achieve target operating profit margins at a slower rate than existing locations did, if ever. If we do not successfully execute our plans to enter new markets, our business could be harmed.

 

We are subject to the risks associated with leasing space subject to long-term non-cancelable lease and, in the event we chose to purchase real property in the future, owning real estate.

 

Our leases generally have initial multiple-year terms with renewal options. Location leases provide for a specified annual rent, typically at a fixed rate with annual increases and other escalators. Generally, our leases are “net” leases, which require us to pay all the cost of insurance, taxes, maintenance and utilities. We generally cannot terminate these leases without incurring substantial costs. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future location is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close locations in desirable locations.

 

Also, should we choose to purchase real property for various locations in the future, we would be subject to all the risks generally associated with owning real estate, including changes in the investment climate for real estate, demographic trends and supply or demand for the use of the locations, which may result from competition from similar restaurants in the area as well as strict, joint and several liability for environmental contamination at or from the property, regardless of fault.

 

Our locations are geographically concentrated in California, and we could be negatively affected by conditions specific to that state.

 

As of December 31, 2021, all of our company-owned retail locations were located in California. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in California have, and may continue, to harm our business. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these adverse conditions compared to other chain beverage locations with a national footprint.

 

 

Our operations may be subject to the effects of a rising rate of inflation which may adversely impact our financial condition and results of operations.

 

Inflation in the United States began to rise significantly in the second half of the calendar year 2021. This is primarily believed to be the result of the economic impacts from the COVID-19 pandemic, including the global supply chain disruptions, strong economic recovery and associated widespread demand for goods, government stimulus packages and the impacts of the many government programs which has resulted in increases to the money supply as well to fund some of these programs and the associated spending to fund them which has created large government deficits in almost every jurisdiction. Global supply chain disruptions have resulted in shortages in materials and services. Such shortages have resulted in inflationary cost increases for labor, materials, and services, and could continue to cause costs to increase as well as scarcity of certain products. In addition, inflation is often accompanied by higher interest rates. The impact of COVID-19 may increase uncertainty in the global financial markets, as well as the possibility of high inflation and extended economic downturn, which could reduce our ability to incur debt or access capital and impact our results of operations and financial condition even after these conditions improve.

 

We are experiencing inflationary pressures in certain areas of our business, including with respect to the cost of raw green coffee beans, the cost of shipping and supplies, and increases in labor costs, however, we cannot predict any future trends in the rate of inflation or associated increases in our operating costs and how that may impact our business. Historically and as of the date hereof, inflation has not had a material effect on our results of operations since we have been able to offset such increased costs by increasing the price of our whole roasted beans by 15% in January 2022, through increased sales and growth in opening 2 new company-owned retail locations, better lease terms on such new company-owned retail locations, more efficient purchasing practices (e.g., volume purchase discounts), productivity improvements and greater economies of scale. Severe increases in inflation, however, could affect the global and U.S. economies and could have a materially adverse impact on our business, financial condition or results of operations. Furthermore, future volatile, negative, or uncertain economic conditions and recessionary periods or periods of significant inflation may adversely impact consumer spending at our restaurants, which would materially adversely affect our business, financial condition and results of operations. Such effects can be especially pronounced during periods of economic contraction or slow economic growth. To the extent that we are unable to offset such cost inflation through increased menu prices or increased efficiencies in our operations and cost savings, there could be a negative impact on the our business, sales and margin performance, net income, cash flows and the trading price of our common shares.

 

Material interruptions of our supply chain of coffee or other ingredients, coffee machines and other restaurant equipment or packaging could affect our ability to produce or deliver our products and could negatively impact our business and profitability.

 

As of the date of this prospectus, supply chain interruptions have not been material. However, any material interruption in our supply chain, such as material interruption of the supply of coffee, dairy, coffee machines and other restaurant equipment or packaging for our proprietary products due to the casualty loss of any of our roasting plant, interruptions in service by our third-party logistic service providers or common carriers that ship goods within our distribution channels, trade restrictions, such as increased tariffs or quotas, embargoes or customs restrictions, pandemics, social or labor unrest, natural disasters or political disputes and military conflicts that cause a material disruption in our supply chain could have a negative material impact on our business and our profitability.

 

Additionally, most of our beverage and other products are sourced from a wide variety of domestic and international business partners and we rely on these suppliers to provide high quality products and to comply with applicable laws. For certain products, we may rely very few suppliers. The loss of these vendors or failures by our suppliers to meet our standards, provide products in a timely and efficient manner, or comply with applicable laws is beyond our control and could have a material adverse effect on the Company.

 

Increases in the cost of high-quality coffee beans or other commodities or decreases in the availability of high-quality coffee beans or other commodities could have an adverse impact on our business and financial results.

 

The availability and prices of coffee beans and other commodities are subject to significant volatility. We purchase, roast and sell high-quality whole coffee beans and related coffee products.

 

The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, such as weather (including the potential effects of climate change), natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels, political and economic conditions and the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality coffee beans could have a material adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green coffee beans due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have a material adverse impact on our profitability.

 

We also purchase significant amounts of dairy products, particularly milk, and non-dairy “milks” to support the needs of our locations. Additionally, and although less significant to our operations than coffee, other commodities, including but not limited to tea, syrups, and packaging material, such as plastics and corrugate, are important to our operations. Increases in the cost of such commodities may increase the cost of our packing materials, or lack of availability, whether due to supply shortages, delays or interruptions in processing, or otherwise, especially in international markets, could harm our business.

 

 

If we fail to offer high-quality customer experience, our business and reputation will suffer.

 

Numerous factors may impact a customer’s experience which may in turn impact the likelihood of such customer returning. Those factors include service, convenience, taste, price, quality, location of our locations and brand image. In addition to providing high quality coffee, we empower our employees to provide an enhanced customer experience. Our staff put customer needs first and we give them the flexibility required to build genuine, meaningful connections that keep our customers returning for more. As we grow, it may be difficult for us to identify, recruit, train and manage enough people with enough skill and talent to provide this enhanced customer experience.

 

If we fail to maintain adequate operational and financial resources, particularly if we continue to grow rapidly, we may be unable to execute our business plan or maintain high levels of service and customer satisfaction.

 

Our continuous growth and expansion may place significant demands on our management and our operational and financial resources and in connection therewith, our organizational structure is becoming more complex as we scale our operational, financial, and management controls, as well as our reporting systems and procedures. As we continue to grow, we may face challenges of integrating, developing, training, and motivating a rapidly growing employee base in our various locations and maintaining our company culture across multiple offices and locations. Certain members of our management may have not previously worked together for an extended period of time, and some do not have prior experience managing a public company, which may affect how they manage our growth. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our beverages and services may suffer, which could negatively affect our brand and reputation and harm our ability to attract users, employees, and organizations.

 

To manage growth in our operations and personnel, we will need to continue to grow and improve our operational, financial, and management controls and our reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our management, customer experience, research and development, sales and marketing, administrative, financial, and other resources.

 

In addition, as we expand our business, it is important that we continue to maintain a high level of customer service and satisfaction. As our customer base continues to grow, we will need to expand our customer service and other personnel, which will require more complex management and systems. If we are not able to continue to provide high levels of customer service, our reputation, as well as our business could be harmed.

 

We are increasingly dependent on information technology and our ability to process data in order to operate and sell our goods and services, and if we (or our vendors) are unable to protect against software and hardware vulnerabilities, service interruptions, data corruption, cyber-based attacks, ransomware or security breaches, or if we fail to comply with our commitments and assurances regarding the privacy and security of such data, our operations could be disrupted, our ability to provide our goods and services could be interrupted, our reputation may be harmed and we may be exposed to liability and loss of customers and business.

 

We rely on information technology networks and systems and data processing (some of which are managed by third-party service providers such as Square, ADP, and Xero) to market, sell and deliver our products and services, to fulfill orders, to collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of and share (“Process” or “Processing”) personal information, confidential or proprietary information, financial information and other information, to manage a variety of business processes and activities, for financial reporting purposes, to operate our business, to process orders, for legal and marketing purposes and to comply with regulatory, legal and tax requirements (“Business Functions”). These information technology networks and systems, and the Processing they perform, may be vulnerable to data security and privacy threats (cyber and otherwise). Moreover, the risk of unauthorized circumvention of our security measures or those of our third parties on whom we rely has been heightened by advances in computer and software capabilities and the increasing sophistication of hackers who employ complex techniques, including, without limitation, “phishing” or social engineering incidents, ransomware, extortion, account takeover attacks, denial or degradation of service attacks and malware. Further, breaches experienced by other companies may also be leveraged against us. For example, credential stuffing attacks are becoming increasingly common and sophisticated actors can mask their attacks, making them increasingly difficult to identify and prevent. We have technology security initiatives, such as cyber liability insurance, and disaster recovery plans in place to mitigate our risk to these vulnerabilities, but these measures may not be adequately designed or implemented to ensure that our operations are not disrupted or that data security breaches do not occur. If our information technology networks and systems or data processing suffers damage, security breaches, vulnerabilities, disruption or shutdown, and we do not effectively resolve the issues in a timely manner, they could cause a material adverse impact to, our Business Functions and our business, reputation and financial condition.

  

 

Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks, which may remain undetected until after they occur. Despite our efforts to protect our information technology networks and systems, Processing and information, we may not be able to anticipate or to implement effective preventive and remedial measures against all data security and privacy threats. Our security measures may not be adequate to prevent or detect service interruption, system failure data loss or theft, or other material adverse consequences. No security solution, strategy or measures can address all possible security threats. Our applications, systems, networks, software and physical facilities could have material vulnerabilities, be breached or personal or confidential information could be otherwise compromised due to employee error or malfeasance, if, for example, third parties attempt to fraudulently induce our personnel or our customers to disclose information or user names and/or passwords, or otherwise compromise the security of our networks, systems and/or physical facilities. We cannot be certain that we will be able to address any such vulnerabilities, in whole or part, and there may be delays in developing and deploying patches and other remedial measures to adequately address vulnerabilities, and taking such remedial steps could adversely impact or disrupt our operations. We expect similar issues to arise in the future as our products and services are more widely adopted, and as we continue to expand the features and functionality of existing products and services and introduce new products and services.

 

An actual or perceived breach of our security systems or those of our third-party service providers may require notification under applicable data privacy regulations or for customer relations or publicity purposes, which could result in reputational harm, costly litigation (including class action litigation), material contract breaches, liability, settlement costs, loss of sales, regulatory scrutiny, actions or investigations, a loss of confidence in our business, systems and Processing, a diversion of management’s time and attention, and significant fines, penalties, assessments, fees and expenses.

 

The costs to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these problems may not be successful. These costs include, but are not limited to, retaining the services of cybersecurity providers; compliance costs arising out of existing and future cybersecurity, data protection and privacy laws and regulations; and costs related to maintaining redundant networks, data backups and other damage-mitigation measures. We could be required to fundamentally change our business activities and practices in response to a security breach or related regulatory actions or litigation, which could have an adverse effect on our business. Additionally, most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities, and others of security breaches involving certain types of data. Such mandatory disclosures are costly, could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach.

 

We may not have adequate insurance coverage for handling security incidents or breaches, including fines, judgments, settlements, penalties, costs, attorney fees and other impacts that arise out of incidents or breaches. If the impacts of a security incident or breach, or the successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), it could harm our business. In addition, we cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or that our insurers will not deny coverage as to all or part of any future claim or loss. Moreover, our privacy risks are likely to increase as we continue to expand, grow our customer base, and process, store, and transmit increasingly large amounts of personal and/or sensitive data.

 

Pandemics or disease outbreaks such as the COVID-19, especially governmental mandates and restrictions attributable thereto, have had, and may continue to have, an effect on our business and results of operations.

 

Pandemics or disease outbreaks such as the COVID-19, especially governmental mandates and restrictions attributable thereto, have impacted and may continue to impact customer traffic at our Reborn locations and may make it more difficult to staff our locations and, in more severe cases, may cause a temporary inability to obtain supplies and increase commodity costs. COVID-19 was officially declared a global pandemic by the World Health Organization in March 2020, and the virus, including the continued spread of highly transmissible variants of the virus, and governmental mandates and restrictions attributable thereto have impacted all global economies, and in the United States has resulted in varying levels of restrictions and shutdowns implemented by national, state, and local authorities.

  

 

Such viruses may be transmitted through human contact and airborne delivery, and the risk of contracting viruses could continue to cause employees or customers to avoid gathering in public places, which has had, and could further have, adverse effects on our customer traffic or the ability to adequately staff locations. We have been adversely affected when government authorities have imposed and continue to impose restrictions on public gatherings, human interactions, operations of restaurants or mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products. Additional regulation or requirements with respect to the compensation of our employees could also have an adverse effect on our business. Even if such measures are not implemented and a virus or other disease does not spread significantly within a specific area, the perceived risk of infection or health risk in such area may adversely affect our business, liquidity, financial condition and results of operations. Additionally, different jurisdictions have seen varying levels of outbreaks or resurgences in outbreaks, and corresponding differences in government responses, which may make it difficult for us to plan or forecast an appropriate response.

 

Our operations have been and we expect will be disrupted when employees were suspected of having COVID-19 or other illnesses since this required us to quarantine some or all such employees and close and disinfect our impacted locations. If a significant percentage of our workforce are unable to work, including because of illness or travel or government restrictions, like quarantine requirements, in connection with pandemics or disease outbreaks, our operations may be negatively impacted, potentially materially adversely affecting our business, liquidity, financial condition or results of operations.

 

We experienced repressed customer flow through periods when malls and shopping centers were restricted or closed entirely due to governmental lockdown mandates and restrictions. Our current retail locations are within popular shopping areas with anticipated regular customer traffic. Such closures or limitations and restrictions were at times mandated the government, and at other times due to natural customer uncertainties regarding the status of COVID-19. Such restrictions and uncertainties not only impacted anticipated revenues from current locations, but added additional risk to us related to the opening of new locations. COVID-19 has challenged our performance at our kiosk locations. Shopping mall restrictions and mandates during the pandemic made it difficult for our kiosks to operate at maximum performance, as indoor restrictions of shopping malls affected the way we had to operate business. For instance, we had to offer only to-go/pickup operations to operate while meeting regulations.

 

The COVID-19 pandemic and governmental lockdown mandates and other restrictive measures have also had an adverse impact on global economic conditions, which have had an adverse effect on our business and financial condition. Our sales and operating results may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including prolonged periods of high unemployment, inflation, deflation, prolonged weak consumer demand, a decrease in consumer discretionary spending, political instability or other changes. The significance of the operational and financial impact to us will depend on how long and widespread the disruptions caused by the COVID-19 pandemic, and the corresponding response to contain the virus and treat those affected by it, prove to be.

 

We do not yet know the full extent of potential delays or impacts on our business, operations or the global economy as a whole. While there have recently been vaccines developed and administered, and the spread of COVID- 19 may eventually be contained or mitigated, we cannot predict the timing of the vaccine roll-out globally or the efficacy or safety of such vaccines, and we do not yet know how customers will operate in a post COVID-19 environment. In addition, new strains and variants of the virus have caused a resurgence and an increase in reported infection rates, which may impact the general economic recovery. There is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business fully recover. The ultimate impact of the COVID-19 pandemic or a similar health epidemic on our business, operations or the global economy as a whole remains highly uncertain.

 

While we have developed and continue to develop plans to help mitigate the potential negative impact of the COVID-19 pandemic, these efforts may not be effective, and any protracted economic downturn will likely limit the effectiveness of our efforts. Accordingly, it is not possible for us to predict the duration and extent to which this will affect our business at this time.

 

Risks Related to Our Brand

 

Our success depends substantially on the value of our brand and failure to preserve its value could have a negative impact on our financial results.

 

Our success depends in large part upon our ability to maintain and enhance our corporate reputation and the value and perception of our brand. Brand value is based in part on consumer perceptions on a variety of subjective qualities. To be successful in the future, particularly outside of the Southern California region of the United States where the Reborn brand may be less well-known, we believe we must preserve, grow and leverage the value of our brand across interactions.

  

 

Business incidents, whether isolated or recurring and whether originating from us or our business partners, that erode consumer trust can significantly reduce brand value, potentially trigger boycotts of our locations or result in civil or criminal liability and can have a negative impact on our financial results. Such incidents include actual or perceived breaches of privacy, contaminated products, staff infected with communicable diseases, such as COVID-19, or other potential incidents discussed in this Risk Factors section. The impact of such incidents may be exacerbated if they receive considerable publicity, including rapidly through social or digital media (including for malicious reasons) or result in litigation. Consumer demand for our products and our brand equity could diminish significantly if we, our employees, or business partners fail to preserve the quality of our products, act or are perceived to act in an unethical, illegal, racially-biased, unequal or socially irresponsible manner, including with respect to the sourcing, content or sale of our products, service and treatment of customers at Reborn locations, or the use of customer data for general or direct marketing or other purposes. Additionally, if we fail to comply with laws and regulations, publicly take controversial positions or actions or fail to deliver a consistently positive consumer experience in each of our markets, including by failing to invest in the right balance of wages and benefits to attract and retain employees that represent the brand well or foster an inclusive and diverse environment, our brand value may be diminished.

 

Moreover, our success depends in large part upon our ability to maintain our corporate reputation. For example, the reputation of our Reborn brand could be damaged by claims or perceptions about the quality or safety of our ingredients or beverages or the quality or reputation of our suppliers or distributors or by claims or perceptions that we, or our business partners have acted or are acting in an unethical, illegal, racially-biased or socially irresponsible manner or are not fostering an inclusive and diverse environment, regardless of whether such claims or perceptions are substantiated. Our corporate reputation could also suffer from negative publicity or consumer sentiment regarding Reborn action or inaction or brand imagery, a real or perceived failure of corporate governance, or misconduct by any officer or any employee or representative of us. Any such incidents (even if resulting from actions of a competitor) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our Reborn brand and/or our products and reduce consumer demand for our products, which would likely result in lower revenue and profits.

 

There has been an increased public focus, including from the United States federal and state governments, on environmental sustainability matters, including with respect to climate change, greenhouse gases, water resources, packaging and waste, animal health and welfare, deforestation and land use. We endeavor to conduct our business in a manner which reflects our priority of sustainable stewardship, including with respect to environmental sustainability matters, and we are working to manage the risks and costs to us, and our supply chain associated with these types of environmental sustainability matters. In addition, as the result of such heightened public focus on environmental sustainability matters, we may face increased pressure to provide expanded disclosure, make or expand commitments, set targets, or establish additional goals and take actions to meet such goals, in connection with such environmental sustainability matters. These matters and our efforts to address them could expose us to market, operational, reputational and execution costs or risks.

 

We may not be able to adequately protect our intellectual property, including trademarks, trade names, and service marks, which, in turn, could harm the value of our brand and adversely affect our business.

 

Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks, proprietary products and other intellectual property, including our name and logos and the unique character and atmosphere of our Reborn locations. We rely on U.S. trademark, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and confidentiality and other contractual provisions to protect our intellectual property. Nevertheless, our competitors may develop similar menu items and concepts, and adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and other intellectual property.

 

The success of our business depends on our continued ability to use our existing trademarks, trade names, and service marks to increase brand awareness and further develop our brand as we expand into new markets. We have registered and applied to register trademarks and service marks in the United States and abroad. We may not be able to adequately protect our trademarks and service marks, and our competitors and others may successfully challenge the validity and/or enforceability of our trademarks and service marks and other intellectual property. There can also be no assurance that pending or future U.S. trademark applications will be approved in a timely manner or at all, or that such registrations will effectively protect our brand names and trademarks.

  

 

Additionally, the steps we have taken to protect our intellectual property in the United States may not be adequate. If our efforts to maintain and protect our intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes on our intellectual property, the value of our brand may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance. Even with our own prospective franchise partners, whose activities are monitored and regulated through our eventual franchise agreements, we face risk that they may refer to or make statements about our Reborn brand that do not make proper use of our trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our brand or place our brand in a context that may tarnish our reputation. This may result in dilution of, or harm to, our intellectual property or the value of our brand.

 

We may also from time to time be required to institute litigation to enforce our trademarks, service marks and other intellectual property. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we can successfully enforce our rights.

 

Third parties may oppose our trademark and service mark applications, or otherwise challenge our use of the trademarks and service marks. In the event that these or other intellectual property rights are successfully challenged, we could be forced to rebrand our products, which would result in loss of brand recognition and would require us to devote resources to advertising and marketing new brands. Third parties may also assert that we infringe, misappropriate or otherwise violate their intellectual property and may sue us for intellectual property infringement. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention of our management and other personnel may be diverted in pursuing these proceedings. If a court finds that we infringe a third party’s intellectual property, we may be required to pay damages and/or be subject to an injunction. With respect to any third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we may not be able to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.

 

Food safety and quality concerns may negatively impact our brand, business and profitability, our internal operational controls and standards may not always be met and our employees may not always act professionally, responsibly and in our and our customers’ best interests. Any possible instances or reports, whether true or not, of food and/or beverage-borne illness could reduce our sales.

 

Incidents or reports, whether true or not, of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness failures or improper employee conduct at our locations could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation as well as our business, revenue and profits. Similar incidents or reports occurring at coffee and convenience locations unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

 

We cannot guarantee to customers that our internal controls and training will be fully effective in preventing all food-borne illnesses. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-owned retail locations could negatively affect sales at all our locations if highly publicized. This risk exists even if it were later determined that the illness was wrongly attributed to one of our locations. Additionally, even if food-borne illnesses were not identified at our locations, our sales could be adversely affected if instances of food-borne illnesses at other coffee and beverage chains were highly publicized.

 

If we are unable to protect our customers’ credit and debit card data or confidential information in connection with process the same or confidential employee information, we could be exposed to data loss, litigation, liability and reputational damage.

 

Our business requires the collection, transmission and retention of large volumes of customer and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. The integrity and protection of that customer and employee data is critical to us. Further, our customers and employees have a high expectation that we and our service providers will adequately protect their personal information.

  

 

We currently accept payments using credit cards and debit cards and, as such, are subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard (“PCI-DSS”), which is a security standard applicable to companies like ours that collect, store or transmit certain data regarding credit and debit cards, holders and transactions. We are also subject to rules governing electronic funds transfers. Such rules could change or be reinterpreted to make it difficult or impossible for us to comply. If we (or a third party processing payment card transactions on our behalf) suffer a security breach affecting payment card information, we may have to pay onerous and significant fines, penalties and assessments arising out of the major card brands’ rules and regulations, contractual indemnifications or liability contained in merchant agreements and similar contracts, and we may lose our ability to accept payment cards for payment for our goods and services, which could materially impact our operations and financial performance.

 

The information, security and privacy requirements imposed by governmental regulation are increasingly demanding. Our systems may not be able to satisfy these changing requirements and customer and employee expectations or may require significant additional investments or time in order to do so. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our and our service providers’ information systems and records. A breach in the security of our information technology systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or access to, customers’ or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our operations, damage our reputation and expose us to claims from customers and employees, any of which could harm our business.

 

Risks Related to People and Culture

 

Changes in the availability of and the cost of labor could harm our business.

 

Our business could be harmed by increases in labor costs, including those increases triggered by regulatory actions regarding wages, scheduling and benefits, increased health care and workers’ compensation insurance costs, which, in a retail business such as ours, are our most significant costs. In particular, our baristas are paid wage rates at or based on the applicable federal or state minimum wage, and increases in the applicable minimum wage will increase labor costs. From time to time, legislative proposals are made to increase the minimum wage at the federal or state level. As federal, state or other applicable minimum wage rates increase, we may be required to increase not only the wage rates of minimum wage baristas or other employees, but also the wages paid to other hourly employees. We may not choose to increase prices in order to pass future increased labor costs on to customers, in which case our margins would be negatively affected. If we do not increase prices to cover increased labor costs, the higher prices could result in lower revenue, which may also reduce margins.

 

Furthermore, the successful operation of our business depends upon our ability to attract, motivate and retain a sufficient number of qualified employees. From time to time, there may be a shortage of qualified employees in certain of the communities in which we operate or expand to. Shortages may make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualified employees, which could delay the planned openings of new company-owned retail locations and adversely impact the operations and profitability of existing locations. Furthermore, competition for qualified employees, particularly in markets where such shortages exist, could require us to pay higher wages, which could result in higher labor costs. Accordingly, if we are unable to recruit and retain sufficiently qualified individuals, our business could be harmed.

 

Additionally, the growth of our business can make it increasingly difficult to locate and hire sufficient numbers of key employees, to maintain an effective system of internal controls for a dispersed chain and to train employees to deliver consistently high-quality hand-crafted beverages and customer experiences, which could materially harm our business and results of operations. Furthermore, due to the COVID-19 pandemic, we could experience a shortage of labor for location positions as concern over exposure to COVID-19 and other factors could decrease the pool of available qualified talent for key functions. In addition, our wages and benefits programs, combined with the challenging conditions due to the COVID-19 pandemic, may be insufficient to attract and retain the best talent.

  

 

We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract and retain other highly skilled employees could harm our business.

 

Our success depends largely upon the continued services of our executive officers and other key employees. We rely on our leadership team in the areas of marketing, sales, customer experience, and selling, general and administrative. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The loss of one or more of our executive officers or key employees could harm our business. Changes in our executive management team may also cause disruptions in, and harm to, our business.

 

Reborn continues to be led by our Founder, Jay Kim, who plays an important role in driving our culture, determining the strategy, and executing against that strategy across the company. If Mr. Kim’s services became unavailable to Reborn for any reason, it may be difficult or challenging for us to find an adequate replacement, which could cause us to be less successful in maintaining our culture and developing and effectively executing on our company strategies.

 

Our culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the high employee engagement fostered by our culture, which could harm our business.

 

At Reborn Coffee, we believe our people-first culture is a critical component of our success and customer loyalty. We have invested substantial time and resources in developing pathways for our employees to create their own compelling future, which we believe has fostered the positive, people-first culture that defines our organization and is enjoyed by our customers. We have built out our leadership team with an expectation of protecting this culture, an emphasis on shared values and a commitment to diversity and inclusion. As we continue to develop the infrastructure to support our growth, we will need to maintain our culture among a larger number of employees dispersed in various geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel, and loss of customer loyalty.

 

Unionization activities may disrupt our operations and affect our profitability.

 

Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business, financial condition or results of operations. In addition, a labor dispute involving some or all of our employees may harm our reputation, disrupt our operations and reduce our revenue, and resolution of disputes may increase our costs.

 

Risks Related to Regulation and Litigation

 

Changes in statutory, regulatory, accounting, and other legal requirements, including changes in accounting principles generally accepted in the United States, could potentially impact our operating and financial results.

 

We are subject to numerous statutory, regulatory and legal requirements. Our operating results could be negatively impacted by developments in these areas due to the costs of compliance in addition to possible government penalties and litigation in the event of deemed noncompliance. Changes in the regulatory environment in the area of food safety, privacy and information security, wage and hour laws, among others, could potentially impact our operations and financial results.

 

GAAP is subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

  

 

Moreover, while we believe that we maintain insurance customary for businesses of our size and type, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could harm our business.

 

Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our operating results and adversely affect our financial condition.

 

We are subject to taxes by the U.S. federal, state, and local tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. We record tax expense based on our estimates of future payments, which may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

	●	changes in the valuation of our deferred tax assets and liabilities;
	●	expected timing and amount of the release of any tax valuation allowance;
	●	changes in tax laws, regulations or interpretations thereof; or
	●	future earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated earnings in jurisdictions where we have higher statutory tax rates.

 

In addition, our effective tax rate in a given financial statement period may be materially impacted by a variety of factors including but not limited to changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate, fluctuations in the valuation allowance or by changes to existing accounting rules or regulations. Further, tax legislation may be enacted in the future which could negatively impact our current or future tax structure and effective tax rates. We may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, and local taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

 

We are subject to many federal, state and local laws with which compliance is both costly and complex.

 

The beverage industry is subject to extensive federal, state and local laws and regulations, including the recently enacted comprehensive health care reform legislation discussed above, those relating to building and zoning requirements and those relating to the preparation and sale of food and beverages or consumption. Such laws and regulations are subject to change from time to time. The failure to comply with these laws and regulations could adversely affect our operating results. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits and approvals could adversely affect our existing locations and delay or result in our decision to cancel the opening of new locations, which would adversely affect our business.

 

The development and operation of a location depends, to a significant extent, on the selection of suitable sites, which are subject to unique permitting, zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards.

 

We are subject to the Fair Labor Standards Act and various other federal, state and local laws that regulate the wages and hours of employees. These laws commonly apply a strict liability standard so that even inadvertent noncompliance can lead to claims, government enforcement actions and litigation. These laws vary from state to state and are subject to frequent amendments and judicial interpretations that can require rapid adjustments to operations. Insurance coverage for violations of these laws is costly and sometimes is not available. Changes to these laws can adversely affect our business by increasing labor and compliance costs. The failure to comply with these laws could adversely affect our business as a result of costly litigation or government enforcement actions.

  

 

We are also subject to a variety of other employee relations laws including FMLA and state leave laws, employment discrimination laws, predictive scheduling laws, occupational health and safety laws and regulations and the NLRA, to name a few. Together, these many laws and regulations present a thicket of compliance obligations and liability risks. As we grow, we will need to continue to increase our compliance efforts in these areas, which may affect our results from operations. Changes to these laws and regulations may increase these costs beyond our expectations or predictions, which would adversely affect our business operations and financial results. Violations of these laws could lead to costly litigation or governmental investigation or proceedings.

 

We are subject to the Americans with Disabilities Act (the “ADA”), which, among other things, requires our locations to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employment and public accommodations on the basis of disability. Under the ADA, we could be required to expend funds to modify our locations to provide service to, or make reasonable accommodations for the employment of, disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency.

 

In addition, our anticipated future franchise activities (of which, as of the date of this prospectus, we have none) will be subject to laws enacted by a number of states and rules and regulations promulgated by the Federal Trade Commission (the “FTC”). Failure to comply with new or existing franchise laws, rules and regulations in any jurisdiction or to obtain required government approvals could negatively affect our licensing sales and our relationships with our licensees.

 

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our locations if we failed to comply with applicable standards. Compliance with all these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

 

We (and our vendors) are subject to stringent and changing laws, regulations, industry standards, related to data processing, protection, privacy and security. The actual or perceived failure by us, our customers or vendors to comply with such laws, regulations, industry standards, may harm our business, financial condition, results of operations and prospects.

 

We process personal information, confidential information and other information necessary to provide our products and service and ensure that they are delivered effectively, to operate our business, for legal and marketing purposes, and for other business-related purposes.

 

Data privacy and regulation of privacy, information security and Processing has become a significant issue in the United States. The legal and regulatory framework for privacy and security issues is rapidly evolving and is expected to increase our compliance costs and exposure to liability. There are numerous federal, state, local laws, orders, codes, regulations and regulatory guidance regarding privacy, information security and Processing (“Data Protection Laws”), the number and scope of which is changing, subject to differing applications and interpretations, and which may be inconsistent among jurisdictions, or in conflict with other rules, laws or Data Protection Obligations (defined below). We expect that there will continue to be new Data Protection Laws and Data Protection Obligations, and we cannot yet determine the impact such future Data Protection Laws may have on our business. Any significant change to Data Protection Laws and Data Protection Obligations, including without limitation, regarding the manner in which the express or implied consent of customers for Processing is obtained, could increase our costs and require us to modify our operations, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process customer data and operate our business.

  

 

Data Protection Laws are, and are likely to remain, uncertain for the foreseeable future, and our actual or perceived failure to address or comply with these laws could: increase our compliance and operational costs; limit our ability to market our products or services and attract new and retain current customers; limit or eliminate our ability to Process; expose us to regulatory scrutiny, actions, investigations, fines and penalties; result in reputational harm; lead to a loss of customers; reduce the use of our products or services; result in litigation and liability, including class action litigation; cause to incur significant costs, expenses and fees (including attorney fees); cause a material adverse impact to business operations or financial results, and; otherwise result in other material harm to our business (“Adverse Data Protection Impact”).

 

We are or may also be subject to the terms of our external and internal privacy and security policies, codes, representations, certifications, industry standards, publications and frameworks (“Privacy Policies”) and contractual obligations to third parties related to privacy, information security and Processing, including contractual obligations to indemnify and hold harmless third parties from the costs or consequences of non-compliance with Data Protection Laws or other obligations (“Data Protection Obligations”).

 

We strive to comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations to the extent possible, but we may at times fail to do so, or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees, partners or vendors do not comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations. We may be subject to, and suffer an Adverse Data Protection Impact if we fail (or are perceived to have failed) to comply with applicable Data Protection Laws, Privacy Policies and Data Protection Obligations, if our Privacy Policies are, in whole or part, found to be inaccurate, incomplete, deceptive, unfair or misrepresentative of our actual practices. In addition, any such failure or perceived failure could result in public statements against us by consumer advocacy groups, the media or others, which may cause us material reputational harm. Our actual or perceived failure to comply with Data Protection Laws, Privacy Policies and Data Protection Obligations could also subject us to litigation, claims, proceedings, actions or investigations by governmental entities, authorities or regulators, which could result in an Adverse Data Protection Impact, including required changes to our business practices, the diversion of resources and the attention of management from our business, regulatory oversights and audits, discontinuance of necessary Processing or other remedies that adversely affect our business.

 

In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the California Consumer Privacy Act (the “CCPA”), and other state and federal laws relating to privacy and data security. The CCPA, which among other things, establishes a privacy framework for covered businesses, including an expansive definition of personal data and data privacy rights. The CCPA provides individual privacy rights for California residents and places increased privacy and security obligations on covered businesses processing personal data. The CCPA requires covered businesses to provide new disclosures to California residents and provide such individuals with ways to opt-out of certain sales of personal data. The CCPA also provides a private right of action and statutory damages for violations, including for data breaches. To the extent applicable to our business and operations, the CCPA may impact our business activities by increasing our compliance costs and potential liability with respect to personal information that we or third parties with whom we contract to provide services maintain about California residents. It is anticipated that the CCPA will be expanded on January 1, 2023, when the California Privacy Rights Act of 2020 (the “CPRA”) becomes operative. The CPRA will, among other things, give California residents the ability to limit use of certain sensitive personal data, further restrict the use of cross-contextual advertising, establish restrictions on the retention of personal data, expand the types of data breaches subject to the CCPA’s private right of action, provide for increased penalties for CPRA violations concerning California residents under the age of 16, and establish a new California Privacy Protection Agency to implement and enforce the law. These Data Protection Laws (such as the CCPA and CPRA) exemplify the vulnerability of our business to the evolving regulatory environment related to personal data.

 

Moreover, across the United States, laws and regulations governing data privacy and security continue to develop and evolve. For example, Virginia enacted the Consumer Data Protection Act (“CDPA”) that may impose obligations similar to or more stringent than those we may face under other Data Protection Laws. Compliance with the CPRA, the CCPA, the CDPA and any newly enacted privacy and data security laws or regulations may be challenging and cost- and time-intensive, and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation. The Data Protection Laws, Privacy Policies and Data Protection Obligations to which we are subject may significantly affect our business activities and many of these obligations may contain ambiguous provisions creating uncertainty. Compliance with the requirements imposed by such Data Protection Laws and Data Protection Obligations may require us to revise our business practices, allocate more resources to privacy and security, and implement new technologies. Such efforts may result in significant costs to our business. Noncompliance could result in Adverse Data Protection Impact, including proceedings against us by governmental and regulatory entities, collaborators, individuals or others.

  

 

We rely on a variety of marketing techniques and practices, including email and social media marketing, online targeted advertising, and cookie-based Processing, to sell our products and services and to attract new customers, and we, and our vendors, are subject to various current and future Data Protection Laws and Data Protection Obligations that govern marketing and advertising practices. Governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices, web browsers and application locations have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, require additional consents or limit the ability to track user activity, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. Laws and regulations regarding the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms, which, in turn, could have an adverse effect on our business, financial condition, results of operations and prospects.

 

We are subject to extensive government regulations that could result in claims leading to increased costs and restrict our ability to conduct franchise operations.

 

We are subject to extensive government regulation at the federal, state and local government levels, including by the FTC. These include, but are not limited to, regulations relating to the preparation and sale of beverages, zoning and building codes, franchising, land use and employee, health, sanitation and safety matters. We are required to obtain and maintain a wide variety of governmental licenses, permits and approvals. Local authorities may suspend or deny renewal of our governmental licenses if they determine that our operations do not meet the standards for initial grant or renewal. Difficulty or failure in obtaining them in the future could result in delaying or canceling the opening of new locations and thus could harm our business. Any such failure could also subject us to liability from future franchise partners (of which, as of the date of this prospectus, we have none).

 

Additionally, Congress has a legislation proposal in process that could shift more liability for franchise partner employment practices onto franchisors. The federal PROAct would codify the Browning-Ferris decision that redefined joint employment to include a broader category of conduct by the franchisor, thereby increasing the possibility of Reborn being held liable for the employment practices of franchisees (of which, as of the date of this prospectus, we have none).

 

Beverage and restaurant companies have been the target of class action lawsuits and other proceedings that are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

 

Our business is subject to the risk of litigation by employees, customers, competitors, landlords or neighboring businesses, suppliers, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, beverage and restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of assistant managers and failure to pay for all hours worked. While we have not been a party to any of these types of lawsuits in the past, there can be no assurance that we will not be named in any such lawsuit in the future or that we would not be required to pay substantial expenses and/or damages.

  

 

Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our locations, including actions seeking damages resulting from food-borne illness or accidents in our locations. We also could be subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims.

 

Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could harm our business.

 

New information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our business, financial condition and results of operations.

 

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.

 

We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in drinking and consumption habits.

 

Risks Related to Our Organizational Structure, this Offering and Ownership of Our Securities

 

Reborn Coffee, Inc. is a holding company.

 

Reborn Coffee, Inc. is a holding company, and has no independent means of generating revenue or cash flow, and its ability to pay taxes, operating expenses and dividends in the future, if any, will be dependent upon the financial results and cash flows of Reborn Global and Reborn Franchise. There is no limitation or restriction on the distribution of funds to Reborn Coffee, Inc. from its subsidiaries, which are closely operated by the same management as the holding company. In the event that the Company expands its franchise operations, franchise fees and the continued need for the franchisees to purchase product from Reborn Global are expected to ensure consistent cash flow from such franchisees, however we can make no assurance that this will be the case.

 

There is no existing market for our common stock and we do not know if one will develop. Even if a market does develop, the stock prices in the market may not exceed the offering price.

 

Prior to this offering, there has not been a public market for our securities or any of our equity interests. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Capital Market, or how liquid that market may become. An active public market for our common stock may not develop or be sustained after the offering. If an active trading market does not develop or is not sustained, you may have difficulty selling any shares that you buy.

 

The public offering price for the shares of common stock will be determined by negotiations among us and the representative of the underwriters based upon several factors, including prevailing market conditions, our historical performance, estimates of our business potential and earnings prospects, and the market valuations of similar companies, and may not be indicative of prices that will prevail in the open market following this offering. The price at which our securities are traded after this offering may decline below the public offering price, meaning that you may experience a decrease in the value of your common stock regardless of our operating performance or prospects.

  

 

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

 

The public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will suffer immediate dilution of $ per share, representing the difference between the assumed public offering price of $ per share and our pro forma net tangible book value per share after giving effect to the sale of common stock in this offering at the assumed public offering price of $ per share. See “Dilution.”

 

Additional stock issuances could result in significant dilution to our stockholders and cause the trading price of our common stock to decline.

 

We may issue our capital stock or securities convertible into our capital stock from time to time in connection with a financing, acquisition, investments or otherwise. Additional issuances of our stock will result in dilution to existing holders of our stock. Any such issuances could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

 

The trading price of our securities may be volatile, and you could lose all or part of your investment.

 

Prior to this offering, there was no public market for shares of our securities. The public offering price of our securities will be determined through negotiation between us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the trading price of our securities following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock as you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our common stock include the risk factors set forth in this section as well as the following:

 

●

price and volume fluctuations in the overall stock market from time to time;

 

	●	volatility in the trading prices and trading volumes of small-cap stocks;
	●	changes in operating performance and stock market valuations of other small-cap companies generally, or those in our industry in particular;

 

●

sales of shares of our common stock by us or our stockholders;

  

	●	failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
	●	changes in our financial, operating or other metrics, regardless of whether we consider those metrics as reflective of the current state or long-term prospects of our business, and how those results compare to securities analyst expectations, including whether those results fail to meet, exceed or significantly exceed securities analyst expectations, particularly in light of the significant portion of our revenue derived from a limited number of customers;

 

 

	●	announcements by us or our competitors of new products or services;
	●	the public’s reaction to our press releases, other public announcements, and filings with the SEC;
	●	rumors and market speculation involving us or other companies in our industry;
	●	actual or anticipated changes in our results of operations or fluctuations in our results of operations;
	●	actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
	●	litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
	●	actual or perceived privacy or data security incidents;
	●	developments or disputes concerning our intellectual property or other proprietary rights;
	●	announced or completed acquisitions of businesses, applications, products, services or technologies by us or our competitors;
	●	new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
	●	sales of our common stock by us or our stockholders, including the Selling Stockholders, in the future;
	●	changes in accounting standards, policies, guidelines, interpretations or principles;
	●	any significant change in our management; and
	●	general political and economic conditions and slow or negative growth of our markets.

 

In addition, in the past, following periods of volatility in the overall market and in the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

Future sales of shares of our common stock could depress the price of our securities.

 

Sales of a substantial number of shares of our common stock in the public market following the completion of this offering, or the perception that these redemptions, exchanges or sales might occur, could depress the market price of our securities and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equity holders have substantial unrecognized gains on the value of the equity they hold based upon the price of this offering, and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares.

  

Upon completion of this offering, an aggregate of 1,200,000 shares of common stock will be issued hereunder (assuming no exercise of the over-allotment option). We, our executive officers and directors, and certain stockholders have agreed, subject to certain exceptions, not to dispose of or hedge any shares of our common stock for the lock-up period following the date of this prospectus, except with certain underwriters’ prior written consent. See “Underwriting.”

 

Upon the expiration of the lock-up agreements described above, all such shares will be eligible for resale in the public market, subject, in the case of shares held by our affiliates, to volume, manner of sale, and other limitations under Rule 144.

 

 

Our trading price and trading volume could decline if securities or industry analysts do not publish research about our business, or if they publish unfavorable research.

 

Equity research analysts do not currently provide coverage of our common stock, and we cannot assure that any equity research analysts will adequately provide research coverage of our common stock after the listing of our common stock on the Nasdaq Stock Exchange. A lack of adequate research coverage may harm the liquidity and trading price of our common stock. To the extent equity research analysts do provide research coverage of our common stock, we will not have any control over the content and opinions included in their reports. The trading price of our common stock could decline if one or more equity research analysts downgrade our stock or publish other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to regularly publish reports on us, the demand for our common stock could decrease, which in turn could cause our trading price or trading volume to decline.

 

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States, which may harm our business.

 

As a public company listed in the United States, we will incur significant additional legal, accounting, and other expenses. In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and the Nasdaq Capital Market, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased selling, general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts, we fail to comply with new laws, regulations, and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers. Our management and other personnel will devote a substantial amount of time to these compliance initiatives. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. We will need to hire more employees in the future to comply with these requirements, which will increase our costs and expenses.

 

Our management team and other personnel devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition to a public company. To comply with the requirements of being a public company, including the Sarbanes-Oxley Act, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff, which would require us to incur additional expenses and harm our results of operations.

 

Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events would also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

 

We are an “emerging growth company,” and we intend to comply only with reduced disclosure requirements applicable to emerging growth companies. As a result, our securities could be less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering (i.e., December 31, 2022), (b) in which we have total annual gross revenue of over $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock held by non-affiliates exceeds $700 million as of the prior September 30 and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our securities less attractive if we choose to rely on these exemptions. If some investors find our securities less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock, and our trading price may be more volatile.

 

 

General Risks

 

Our quarterly results may fluctuate significantly and may not meet our expectations or those of investors or securities analysts.

 

Our quarterly results of operations, including the levels of our revenue, deferred revenue, working capital, and cash flows, may vary significantly in the future, such that period-to-period comparisons of our results of operations may not be meaningful. Our quarterly financial results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including, but not limited to:

 

	●	the level of demand for our products;
	●	our ability to grow or maintain our dollar-based net retention rate, expand usage within organizations, and sell subscriptions;
	●	the timing and success of new features, integrations, capabilities, and enhancements by us to our products, or by our competitors to their products, or any other changes in the competitive landscape of our market;
	●	our ability to achieve widespread acceptance and use of our products;
	●	errors in our forecasting of the demand for our products, which would lead to lower revenue, increased costs, or both;
	●	security breaches, technical difficulties, or interruptions to our systems;
	●	pricing pressure as a result of competition or otherwise;
	●	the continued ability to hire high quality and experienced talent in a fiercely competitive environment;
	●	the timing of the grant or vesting of equity awards to employees, directors, or consultants;
	●	declines in the values of foreign currencies relative to the U.S. dollar;
	●	changes in, and continuing uncertainty in relation to, the legislative or regulatory environment;
	●	legal and regulatory compliance costs in new and existing markets;
	●	costs and timing of expenses related to the potential acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs;
	●	environmental matters, such as wildfires, and health epidemics, such as the COVID-19 pandemic, influenza, and other highly communicable diseases or viruses;
	●	adverse litigation judgments, other dispute-related settlement payments, or other litigation-related costs; and
	●	general economic conditions in either domestic or international markets, including geopolitical uncertainty and instability and their effects on beverage purchases.

  

 

Any one or more of the factors above may result in significant fluctuations in our results of operations, which may negatively impact the trading price of our common stock. You should not rely on our past results as an indicator of our future performance.

 

Our outstanding indebtedness could materially adversely affect our financial condition and our ability to operate our business, pursue our growth strategy, and react to changes in the economy or industry.

 

As of December 31, 2021, we had $500,000 in principal amount outstanding under U.S. Small Business Administration Loan No. 7331917406 under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic, which we refer to as our EIDL Loan, $167,138 in principal outstanding under the Paycheck Protection Program Loan administered by the U.S. Small Business Administration, and $121,703 in principal outstanding under our loans with Square Capital, LLC and $15,989 in principal outstanding under our U.S. Bank equipment loan agreement. Additionally, we have certain related party outstanding indebtedness, described in more detail in the section entitled “Related Party Transactions”. In addition, subject to certain restrictions under our EIDL Loan, we may incur additional debt.

 

Our substantial debt could have important consequences to you, including the following:

 

	●	it may be difficult for us to satisfy our obligations, including debt service requirements under our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness;
	●	our ability to obtain additional financing for working capital, capital expenditures, debt service requirements or other general corporate purposes may be impaired;
	●	a substantial portion of cash flow from operations may be dedicated to the payment of principal and interest on our debt, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, future business opportunities, acquisitions and other general corporate purposes;
	●	we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for, or react to, changes in our business or industry are more limited;
	●	our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised due to our level of debt; and
	●	our ability to borrow additional funds or to refinance debt may be limited.

 

 A failure to establish and maintain an effective system of disclosure controls and internal control over financial reporting, could adversely affect our ability to produce timely and accurate financial statements or comply with applicable regulations.

 

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of the applicable listing standards of the Nasdaq Exchange. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time consuming, and costly, and place significant strain on our personnel, systems, and resources.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act, is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal controls over financial reporting. For example, as we have prepared to become a public company, we have worked to improve the controls around our key accounting processes and our quarterly close process. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and investments to strengthen our accounting systems.

  

 

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. In addition, changes in accounting principles or interpretations could also challenge our internal controls and require that we establish new business processes, systems, and controls to accommodate such changes. We have limited experience with implementing the systems and controls that will be necessary to operate as a public company, as well as adopting changes in accounting principles or interpretations mandated by the relevant regulatory bodies. Additionally, if these new systems, controls or standards and the associated process changes do not give rise to the benefits that we expect or do not operate as intended, it could adversely affect our financial reporting systems and processes, our ability to produce timely and accurate financial reports or the effectiveness of internal control over financial reporting. Moreover, our business may be harmed if we experience problems with any new systems and controls that result in delays in their implementation or increased costs to correct any post-implementation issues that may arise.

 

Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our consolidated financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Exchange. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could harm our business, results of operations, and financial condition and could cause a decline in the trading price of our common stock. Changes in tax laws or regulations could be enacted or existing tax laws or regulations could be applied to us or our customers in a manner that could increase the costs of our products and harm our business.

 

We will have broad discretion in the use of net proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

 

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion over the use of net proceeds from this offering, including for any of the purposes described in “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Investors may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our failure to apply the net proceeds of this offering effectively could impair our ability to pursue our growth strategy or could require us to raise additional capital.

  

We may engage in merger and acquisition activities, which would require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our business, results of operations, and financial condition.

 

As part of our business strategy to expand our product offerings and grow our business in response to changing technologies, customer demand, and competitive pressures, we have in the past and may in the future make investments or acquisitions in other companies, products or technologies. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to complete acquisitions on favorable terms, if at all. These acquisitions may not ultimately strengthen our competitive position or achieve the goals of such acquisition, and any acquisitions we complete could be viewed negatively by customers or investors. We may encounter difficult or unforeseen expenditures in integrating an acquisition, particularly if we cannot retain the key personnel of the acquired company. In addition, if we fail to successfully integrate such acquisitions, or the assets, technologies or personnel associated with such acquisitions, into our company, the business and results of operations of the combined company would be adversely affected.

 

 

Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses, subject us to increased regulatory requirements, cause adverse tax consequences or unfavorable accounting treatment, expose us to claims and disputes by stockholders and third parties, and adversely impact our business, financial condition, and results of operations. We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash for any such acquisition which would limit other potential uses for our cash. If we incur debt to fund any such acquisition, such debt may subject us to material restrictions in our ability to conduct our business, result in increased fixed obligations, and subject us to covenants or other restrictions that would decrease our operational flexibility and impede our ability to manage our operations. If we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders’ ownership would be diluted.

 

We may need additional capital, and we cannot be sure that additional financing will be available.

 

In the future, we may raise additional capital through additional equity or debt financings to support our business growth, to respond to business opportunities, challenges or unforeseen circumstances, or for other reasons. On an ongoing basis, we are evaluating sources of financing and may raise additional capital in the future. Our ability to obtain additional capital will depend on our development efforts, business plans, investor demand, operating performance, the condition of the capital markets, and other factors. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of existing stockholders, and existing stockholders may experience dilution. Further, if we are unable to obtain additional capital when required, or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges, or unforeseen circumstances would be adversely affected.

 

Our bylaws contain an exclusive forum provision, which could limit a stockholder’s ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

 

Our bylaws contain an exclusive forum provision providing that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers, employees, agents or stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (4) any action asserting a claim that is governed by the internal affairs doctrine. However, the exclusive forum provision states that it shall not apply to actions arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

 

Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our bylaws. The exclusive forum provision, if enforced, may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits and which may increase an investor’s costs to bring a claim. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable.

 

 

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management or hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

 

There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by our stockholders.

 

Our charter documents also contain other provisions that could have an anti-takeover effect, such as:

 

	●	permitting the board of directors to establish the number of directors and fill any vacancies and newly created directorships;
	●	providing that directors may only be removed pursuant to the provisions of Section 141(k) of the Delaware General Corporation Law;
	●	prohibiting cumulative voting for directors;
	●	requiring super-majority voting to amend some provisions in our bylaws;
	●	authorizing the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan; and
	●	eliminating the ability of stockholders to call special meetings of stockholders.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibit a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. Any provision in our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors. Accordingly, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

Catastrophic events may disrupt our business.

 

Labor discord or disruption, geopolitical events, social unrest, war, terrorism, political instability, acts of public violence, boycotts, hostilities and social unrest and other health pandemics that lead to avoidance of public places or cause people to stay at home could harm our business. Additionally, natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and thus could harm our business. In particular, the COVID-19 pandemic, including the reactions of governments, markets, and the general public, may result in a number of adverse consequences for our business, operations, and results of operations, many of which are beyond our control. In the event of a major earthquake, hurricane or catastrophic event such as fire, power loss, telecommunications failure, cyber-attack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, breaches of data security, and loss of critical data, all of which would harm our business, results of operations, and financial condition. In addition, the insurance we maintain would likely not be adequate to cover our losses resulting from disasters or other business interruptions.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” or “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

	●	the COVID-19 pandemic, and governmental mandates and restrictions attributable thereto, and its impact on our business, operations, and the markets and communities in which we and our customers operate;
	●	our inability to successfully identify and secure appropriate sites and timely develop and expand our operations;
	●	sales of our common stock by us or our stockholders, including the Selling Stockholders, which may result in increased volatility in our stock price;
	●	our inability to protect our brand and reputation;
	●	our dependence on a small number of suppliers;
	●	our inability to protect against security breaches of confidential customer information;
	●	our expectations regarding our future operating and financial performance;
	●	the size of our addressable markets, market share, and market trends;
	●	our ability to compete in our industry;
	●	changes in consumer tastes and nutritional and dietary trends;
	●	our ability to effectively manage the continued growth of our workforce and operations;
	●	our inability to open profitable locations;
	●	our failure to generate projected same location sales growth;
	●	the sufficiency of our cash, cash equivalents, and investments to meet our liquidity needs;
	●	our dependence on long-term non-cancelable leases;
	●	our relationship with our employees and the status of our workers;
	●	our inability to maintain good relationships with our business partners;
	●	the effects of seasonal trends on our results of operations;
	●	our vulnerability to global financial market conditions, including the continuing effects from the recent recession;
	●	our ability to attract, retain, and motivate skilled personnel, including key members of our senior management;
	●	our vulnerability to adverse weather conditions in local or regional areas where our locations are located;
	●	the increased expenses associated with being a public company;
	●	our intended use of the net proceeds from this offering; and
	●	the other factors set forth under “Risk Factors” in this prospectus.

  

  

We caution you that the foregoing list may not contain all the forward-looking statements made in this prospectus.

 

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations. 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 prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

 

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, actual results, revised expectations or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

  

  

ORGANIZATIONAL STRUCTURE

 

Incorporation of Reborn Coffee, Inc.

 

Reborn Coffee, Inc. was incorporated on July 31, 2015 in the State of Florida under the name La Veles Inc. La Veles Inc. mostly remained inactive and on February 8, 2017, we filed an amendment to our articles of incorporation to change the name of the Company to Capax Inc. On May 9, 2018, we filed a second amendment to our articles of incorporation to further change the name to Reborn Coffee, Inc. to reflect the reverse merger with Reborn Global when our Company acquired 100% of the equity in Reborn Global, in exchange for the issuance to the stockholders of Reborn Global of 95% ownership of our Company. On July 27, 2022, we migrated our Company from Florida to Delaware and have the same capitalization structure. Reborn today has the following wholly owned subsidiaries:

 

	●	Reborn Global Holdings, Inc., a California corporation incorporated on November 24, 2014. Reborn Global Holdings, Inc. is engaged in the operation of wholesale distribution and retail coffee locations 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 company formed in December, 2020 for purposes of serving as a franchisor to provide premier roaster specialty coffee to franchisees and other customers. Reborn Coffee Franchise is a wholly owned subsidiary of Reborn Coffee Inc. Reborn Coffee Franchise plans to establish and operate Reborn Coffee locations using one or more Reborn Coffee marks. Each future franchisee (of which, as of the date of this prospectus, we have none) would obtain a license and franchise to develop and operate a store under the strict compliance with terms of a franchise agreement. The specific rights the prospective franchisee would be granted is to develop, own, and/or operate franchisee’s Reborn Coffee locations. The non-refundable initial franchise fee is expected to be $20,000. In addition, the prospective franchisee would be required to pay the Company a royalty fee equal to 5% of the weekly gross sales of their respective store.

 

Pre-Offering Capitalization Restructuring and Migration

 

In anticipation of this offering, Reborn converted all Class B common stock to Class A common stock and, following such conversion, amended and restated our articles of incorporation to eliminate our Class B class of common stock (thereby eliminating our multi-class structure) and renamed our Class A common stock to “common stock.” All holders of our common stock vote as a single class on all matters presented to Reborn Coffee’s stockholders for their vote or approval. See the section entitled “Description of Securities” for more information. On July 27, 2022, we migrated our Company from Florida to Delaware and have the same capitalization structure.

  

  

USE OF PROCEEDS

 

We estimate that the net proceeds we will receive from this offering will be approximately $5,010,000 based on an assumed public offering price of $5.00 per share of common stock (assuming no exercise of the over-allotment option), after deducting the underwriting discounts and commissions of $240,000 and estimated offering expenses of $750,000 payable by us and excluding proceeds received from any exercise of the representative’s warrants.

 

We will not receive any of the proceeds from the sale of our common stock by the Selling Stockholders.

 

If the underwriters’ option to purchase additional shares of common stock in this offering from us is exercised in full, our net proceeds will be approximately $5,874,000 after deducting the underwriting discounts and commissions of $276,000 and estimated offering expenses of $750,000 payable by us and excluding proceeds received from any exercise of the representative’s warrants.

 

Each $1.00 increase (decrease) in the assumed public offering price of $5.00 per share of common stock, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase (decrease) net proceeds to us from this offering by approximately $1,152,000, that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares of common stock we are offering. Each 100,000 increase (decrease) in the number of shares of common stock we are offering would increase (decrease) the net proceeds to us from this offering by approximately $480,000, assuming no change in the assumed public offering price per share of common stock.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds we receive from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures, opening new company-owned retail locations, as well as developing our franchise program. We estimate that the average development cost of a company-owned store location is $150,000, and therefore we anticipate that we will use approximately $3,000,000 of the proceeds of this offering to open 20 new company-owned retail locations. Even if we do not consummate this offering, we intend to open 10 new company-owned retail locations by the end of the second quarter of 2023 by raising the requisite funds (i.e., approximately $1,500,000) through private or public offerings, or a combination of both, although there is no guarantee that it will be successful in doing so. We may also use a portion of the net proceeds we receive from this offering to acquire complementary businesses, products, services, or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time. We will have broad discretion over how to use the net proceeds we receive from this offering.

 

The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve and change. The amounts and timing of our actual expenditures, specifically with respect to working capital, may vary significantly depending on numerous factors. The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the public capital markets.

 

 

DIVIDEND POLICY

 

We have never paid cash dividends on our common stock. Payment of dividends will be within the sole discretion of our board of directors and will depend, among other factors, upon our earnings, capital requirements and our operating and financial condition. Additionally, our board of directors may take into account general and economic conditions, our available cash and current and anticipated cash needs, contractual, legal, tax, and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. Further, under Delaware law, we may declare and pay dividends on our common stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. However, the Company is generally prohibited under Delaware law from making a distribution to stockholders to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities exceed the fair value of its assets.

 

Reborn Coffee is a holding company and has no material assets other than its ownership of its wholly owned subsidiaries. Any financing arrangements that we enter into in the future may include restrictive covenants that limit our ability to pay dividends.

 

Since our formation in January 2018, Reborn Coffee, Inc. has, upon board approval, issued Class A common stock and Class B common stock for dividends at par value $0.0001 per share to several individuals.

  

 

CAPITALIZATION

 

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2022:

 

	●	on an actual basis; and
	●	on an adjusted basis giving effect to the sale and issuance of 1,200,000 shares of our common stock by us in this offering, at the assumed public offering price of $5.00 per share and assuming that no representative’s warrants are exercised, no over-allotment option has been exercised, and after deducting estimated underwriting discounts and commissions of $240,000 and estimated offering expenses of $750,000 payable by us, and the application of the proceeds therefrom as described in “Use of Proceeds”.

		As of March 31, 2022
		Actual				Pro forma- As Adjusted
Cash		$	183,191			$	5,193,191
Debt (current and non-current):
Bank notes payables			40,293				40,293
Equipment loan payable			11,192				11,192
Loan payable, PPP			167,138				167,138
Loan payable, EIDL			500,000				500,000
Stockholders’ Equity
Common Stock - $0.0001 par value; 40,000,000 authorized shares; 11,634,523 shares issued and outstanding; 12,834,523 pro forma as adjusted shares at March 31, 2022			1,163				1,263
Preferred Stock - $0.0001 par value; 1,000,000 authorized shares; no shares issued and outstanding; 1,000,000 pro forma adjusted shares at March 31, 2022			-				-
Additional paid-in capital			9,674,035				14,683,915
Accumulated deficit			(9,042,016	)			(9,042,016	)
Stockholder’s equity			633,182				5,643,182
Total Capitalization		$	1,351,805			$	6,361,805

 

You should read this table together with the other information contained in this prospectus, including “Organizational Structure,” “Use of Proceeds,” “Selected Historical and Pro Forma Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical financial statements and related notes thereto included elsewhere in this prospectus.

  

 

DILUTION

 

After giving effect to the issuance and sale of the shares of common stock offered in this offering and the application of the estimated net proceeds of the offering received by us (after deducting estimated underwriting discounts and commissions of $240,000 and estimated offering expenses of $750,000 payable by us), as described in “Use of Proceeds,” based upon an assumed public offering price of $5.00 per share of common stock, and assuming that no representative’s warrants are exercised, our net tangible book value as of March 31, 2022 would have been approximately $2,737,376, or $0.21 per share of common stock. This represents an immediate increase in net tangible book value to our existing stockholders of $0.42 per share and an immediate dilution to new investors in this offering of $4.79 per share. The following table illustrates this dilution on a per share of common stock basis assuming the underwriters do not exercise their option to purchase additional shares of common stock:

 

Assumed public offering price per share of common stock		$	5.00
Net tangible book value per share as of March 31, 2022		$	(0.20	)
Increase in net tangible book value per share attributable to new investors		$	0.41
Adjusted net tangible book value per share after this offering		$	0.21
Dilution per share to new investors		$	(4.79	)

 

A $1.00 increase (decrease) in the assumed public offering price of $5.00 per share of common stock would increase (decrease) our net tangible book value by $960,000, the net tangible book value per share after this offering by $0.07 and the dilution per share to new investors by $0.91, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table presents, as of March 31, 2022, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing common stock at the assumed offering price of $5.00 per share before deducting estimated underwriting discounts and commissions of $240,000 and estimated offering expenses of $750,000 payable by us and assuming no exercise of the over-allotment option.

 

		Shares purchased								Total Consideration								Average Price per
		Number				Percent				Amount				Percent				share
Existing stockholders			11,634,523				90.7	%		$	8,975,199				59.9	%		$	0.77
New investors			1,200,000				9.3	%		$	6,000,000				40.1	%		$	5.0
Total			12,834,523				100	%		$	14,975,199				100.0	%		$	1.17

 

The dilution information above is for illustrative purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual public offering price of our shares of common stock and other terms of this offering determined at pricing.

  

  

HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables present the selected historical consolidated financial data for the Company and its subsidiaries and the selected pro forma combined and consolidated financial data for Reborn Coffee, Inc. for the periods and at the dates indicated.

 

Reborn Coffee is a holding company, and its sole material asset is a controlling equity interest in Reborn Global and its wholly owned subsidiary Reborn Coffee Franchise. Reborn Coffee will operate and control all the business and affairs of Reborn Global and, through Reborn Global and its subsidiaries, conduct our business. The selected historical consolidated statements of income data and selected historical consolidated statements of cash flows data presented below for the years ended December 31, 2021 and 2020 and the selected historical consolidated balance sheet data presented below as of December 31, 2021 and 2020 have been derived from the historical consolidated financial statements of Reborn Coffee, Inc. included elsewhere in this prospectus. The selected historical consolidated financial information of Reborn Coffee as of March 31, 2022 and for the three-month periods ended March 31, 2022 and 2021 was derived from the unaudited historical consolidated financial statements of Reborn Coffee included elsewhere in this prospectus. The unaudited historical consolidated financial statements of Reborn Coffee have been prepared on the same basis as the audited historical consolidated financial statements and, in our opinion, have included all adjustments, which include normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year.

 

The selected historical consolidated financial and other data of Reborn Coffee has not been presented because Reborn Coffee, Inc. is a newly incorporated entity, has had no business transactions or activities to date, and had no assets or liabilities during the periods presented in this section.

 

Historical results are not necessarily indicative of the results expected for any future period. You should read the selected historical consolidated financial data below, together with our audited consolidated financial statements and related notes thereto, the audited consolidated financial statements of Reborn and related notes thereto and our unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus, as well as “Organizational Structure,” “Selected Historical and Pro Forma Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other information appearing elsewhere in this prospectus.

 

Historical Consolidated Statements of Operations Data:

 

		Year Ended December 31,								Three-Months Ended March 31,
		2021				2020				2022				2021
Net revenues:
Stores		$	2,204,201			$	759,644			$	735,996			$	375,961
Wholesale and online			75,871				33,444				17,154				12,968
Total net revenues			2,280,072				793,088				753,150				388,929
Operating costs and expenses:
Product, food and drink costs—stores			821,713				321,244				284,954				134,696
Labor expenses			1,550,041				636,832				534,496				238,168
Occupancy expenses—stores			552,069				256,016				176,184				91,905
Utilities costs			69,674				29,612				19,870				15,953
Cost of sales—wholesale and online			33,231				14,650				7,513				5,680
Rent—corporate			97,824				97,824				24,949				24,456
General and administrative			1,544,501				371,461				231,382				164,030
Depreciation			174,696				121,905				49,134				36,129
Total operating costs and expenses			4,843,749				1,849,544				1,328,482				711,017
Loss from operations			(2,563,677	)			(1,056,456	)			(575,332	)			(322,088	)
Other income (expense):
Other income			7,631				-				15,000				-
Economy injury disaster loan (EIDL) grant income			-				10,000				-				-
Paycheck protection program (PPP) loan forgiven income			115,000				-				-				-
Interest expense			(16,172	)			(21,510	)			(4,780	)			(5,391	)
Loss on extinguishment of debt			(982,383	)			-				-				-
Total other expense			(875,924	)			(11,510	)			10,220				(5,391	)
Loss before income taxes			(3,439,601	)			(1,067,966	)			(565,112	)			(327,479	)
Provision for income taxes			800				800				-				-
Net loss		$	(3,440,401	)		$	(1,068,766	)		$	(565,112	)		$	(327,479	)
Deemed dividend on make-whole provision			-				(206,147	)			-				-
Net loss attributable to common shareholders		$	(3,440,401	)		$	(1,274,913	)		$	(565,112	)		$	(327,479	)
Earnings (loss) per share:
Basic and diluted		$	(0.32	)		$	(0.19	)		$	(0.05	)		$	(0.03	)
Weighted average number of common shares outstanding:
Basic and diluted			10,889,791				6,889,510				11,634,523				10,547,204

 

 

Consolidated Balance Sheet Data:

 

		As of December 31,								As of March 31,
		2021				2020				2022
Cash and cash equivalents		$	905,051			$	128,568			$	183,191
Total assets		$	4,763,529			$	1,975,961			$	4,595,375
Total liabilities		$	3,565,234			$	2,728,357			$	3,962,192
Total stockholders' equity (deficit)		$	1,198,295			$	(752,396	)		$	633,183

 

Other Financial and Operating Data:

 

		Years ended December 31,								Three months ended March 31,
		2021				2020				2022				2021
Key Financial and Operational Metrics:
Locations at the end of period			7				3				8				2
Average unit volumes(1)		$	445,333			$	316,493				N/A				N/A
Comparable location sales growth(2)			40.7	%			27.1	%			N/A				N/A
Operating income			(2,563,677	)			(1,056,456	)			(575,332	)			(322,088	)
Operating profit margin			-112.4	%			-133.2	%			-76.4	%			-82.8	%
Shop-level Contribution(3)			86,818				(125,602	)			15,215				29,558
Shop-level Contribution margin(3)			3.8	%			-15.8	%			2.0	%			7.6	%
EBITDA(3)			(3,248,733	)			(924,551	)			(511,198	)			(285,959	)
Adjusted EBITDA(3)			(2,388,981	)			(914,551	)			(526,198	)			(285,959	)
as a percentage of sales			-104.8	%			-115.3	%			-69.9	%			-82.8	%

 

(1)	Average Unit Volumes (AUVs) consist of the average annual sales of all locations that have been open for the entirety of the fiscal year presented. AUVs are calculated by dividing (x) annual sales for the fiscal year presented for all such locations by (y) the total number of locations in that base. Since AUVs are calculated based on annual sales for the fiscal year presented, they are not shown on an interim basis for the three-months ended March 31, 2021 and 2022. See “Additional Financial Measures and Other Data” for the definition of AUVs.
(2)	Comparable location sales growth represents the change in year-over-year sales for locations open for at least 3 months prior to the start of the accounting period presented, including those temporarily closed for renovations during the year. We utilize the Average Unit Volume, or AUV, metric to measure this for annual periods. Since AUVs are not calculated and disclosed for the interim periods presented, comparable location sales growth is not shown on an interim basis for the three-months ended March 31, 2021 and 2022.
(3)	EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We are presenting EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin because we believe that they provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Additionally, we present Shop-level Contribution because it excludes the impact of general and administrative expenses which are not incurred at the shop-level. We also use Shop-level Contribution to measure operating performance and returns from opening new locations.

 

Adjusted EBITDA Reconciliation:

 

EBITDA is calculated as net income before interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and eliminations described in the table below. Shop-level Contribution represents operating income plus depreciation and amortization, stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, asset disposals, closure costs and location impairments, general and administrative expenses, less corporate-level stock-based compensation expense. Shop-level Contribution margin is defined as Shop-level Contribution divided by sales.

 

We believe that the use of EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that Shop-level Contribution and Shop-level Contribution margin are financial measures which are not indicative of overall results for the Company, and Shop-level Contribution and Shop-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, you should be aware when evaluating EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin in the same fashion.

 

  

Because of these limitations, EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin on a supplemental basis. Our management recognizes that EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin have limitations as analytical financial measures, including the following:

 

	●	EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin do not reflect our capital expenditures or future requirements for capital expenditures;
	●	EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin do not reflect interest expense or the cash requirements necessary to service interest or principal payments associated with our indebtedness;
	●	EBITDA, Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin do not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, and do not reflect cash requirements for such replacements;
	●	Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin do not reflect the costs of stock-based compensation expense, and asset disposals, closure costs and location impairments;
	●	Adjusted EBITDA, Shop-level Contribution and Shop-level Contribution margin do not reflect changes in, or cash requirements for, our working capital needs; and
	●	other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.

 

A reconciliation of net income to EBITDA and Adjusted EBITDA is provided below:

 

		Years ended December 31,								Three months ended March 31,
		2021				2020				2022				2021
Total net revenue, as reported		$	2,280,072			$	793,088			$	753,150			$	388,929
Loss from operations, as reported		$	(2,563,677	)		$	(1,056,456	)		$	(575,332	)		$	(322,088	)
Operating margin			-112.4	%			-133.2	%			-76.4	%			-82.8	%
Net loss, as reported		$	(3,440,401	)		$	(1,068,766	)		$	(565,112	)		$	(327,479	)
Interest, net			16,172				21,510				4,780				5,391
Taxes			800				800				-				-
Depreciation and amortization			174,696				121,905				49,134				36,129
EBITDA			(3,248,733	)			(924,551	)			(511,198	)			(285,959	)
Other income			(7,631	)							(15,000	)
Loss on extinguishment of debt			982,383				-				-				-
PPP loan forgiveness			(115,000	)			-				-				-
Economy injury disaster loan (EIDL) grant income			-				(10,000	)			-				-
Adjusted EBITDA		$	(2,388,981	)		$	(914,551	)		$	(526,198	)		$	(285,959	)
Adjusted EBITDA margin			-104.8	%		$	-115.3	%			-69.9	%			-73.5	%

 

The following table presents a reconciliation of operating income to Shop-level Contribution:

 

		Years ended December 31,								Three months ended March 31,
		2021				2020				2022				2021
Operating loss, as reported		$	(2,563,677	)		$	(1,056,456	)		$	(575,332	)		$	(322,088	)
Payroll and benefits - Corporate			826,738				339,664				285,082				127,031
Rent - Corporate			97,824				97,824				24,949				24,456
General and administrative expenses			1,551,237				371,461				231,382				164,030
Fully-burdened gross profit		$	(87,878	)		$	(247,507	)		$	(33,919	)		$	(6,571	)
Depreciation and amortization			174,696				121,905				49,134				36,129
Shop-level Contribution		$	86,818			$	(125,602	)		$	15,215			$	29,558
Operating profit margin			-112.4	%			-133.2	%			-76.4	%			-82.8	%
Shop-level Contribution margin			3.8	%			-15.8	%			2.0	%			7.6	%

 

  

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 consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

 

You should review the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

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, Glendale, Corona Del Mar, Arcadia, Laguna Woods, Riverside, San Francisco and Manhattan Beach, with Huntington Beach in development. Additionally, we expect to begin franchising in 2022 and expect to continue to develop additional retail locations as we expand outside of California. We estimate that the average development cost of a company-owned retail location is approximately $150,000. Therefore, taking into account the proceeds from this offering and within a year from its completion, we expect to open up to 20 company-owned retail locations (using approximately $3,000,000 of the proceeds of this offering) and 20 franchise locations (all costs and expenses associated with a franchise store location development are borne by the franchisees). We acknowledge that we have not yet signed any franchise agreements and that such number of franchise locations is purely speculative. Even if we do not consummate this offering, we intend to open 10 new company-owned retail locations by the end of the second quarter of 2023 by raising the requisite funds (i.e., approximately $1,500,000) through private or public offerings, or a combination of both, although there is no guarantee that it will be successful in doing so. 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.

 

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 1st 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. Leading research studies, testing brewing equipment, and refining roasting/brewing methods to a specific, 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 spark 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 9 retail coffee locations, and one in development (i.e., Huntington Beach, California):

 

	●	La Floresta Shopping Village in Brea, California;
	●	La Crescenta, California;

 

	●	Glendale Galleria in Glendale, California;
	●	Galleria at Tyler in Riverside, California;
	●	Home Depot Center in Laguna Woods, California;
	●	Stonestown Galleria in San Francisco, California (opened in first quarter of 2022);
	●	Corona Del Mar, California;
	●	Santa Anita Westfield Mall in Arcadia, California; and
	●	Manhattan Village at Manhattan Beach, California.

 

Liquidity and Capital Resources

 

We have a history of operating losses and negative cash flow. We have incurred recurring net losses, including net losses from operations before income taxes of $565,000 and $327,000 for the three-month periods ended March 31, 2022 and 2021, respectively, and $3.4 million and $1.1 million in 2021 and 2020, respectively. We used $486,000 and $335,000 for the three-month periods ended March 31, 2022 and 2021, respectively, and $1.9 million and $0.9 million of cash for operating activities during 2021 and 2020, respectively.

 

To support our existing and planned business model, we will need to raise additional capital to fund our future operations. Currently, we have no written or oral communication from stockholders, directors or any officers to provide us any forms of cash advances, loans or sources of liquidity to meet our working capital needs or long-term or short-term financial needs.

 

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. For example, we estimate that the average development cost of a company-owned retail location is approximately $150,000. Therefore, taking into account the proceeds from this offering and within a year from its completion, we expect to open up to 20 company-owned retail locations (using approximately $3,000,000 of the proceeds of this offering) and 20 franchise locations (all costs and expenses associated with a franchise store location development are borne by the franchisees). We acknowledge that we have not yet signed any franchise agreements and that such number of franchise locations is purely speculative. Even if we do not consummate this offering, we intend to open 10 new company-owned retail locations by the end of the second quarter of 2023 by raising the requisite funds (i.e., approximately $1,500,000) through private or public offerings, or a combination of both, although there is no guarantee that it will be successful in doing so. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

 

From June 4, 2021 to December 20, 2021, the Company generated $2,826,450 of proceeds from its Regulation A offering pursuant to a circular on Form 1-A (File No. 024-11518). The Company terminated making offers and sales pursuant to the Regulation A offering on December 20, 2021.

 

We have funded our operations primarily with proceeds from private offerings of our common stock and secured and unsecured debt instruments. As of March 31, 2022, we had $183,191 in cash and cash equivalents, which we expect will be sufficient to carry on our operations for the next twelve months. If additional capital does not become available from the proceeds of this offering or from other sources, we will be able to continue operations since we anticipate our monthly revenue of approximately $180,000 and monthly expenses of approximately $120,000 in the next few months. Thus with available cash on hand and positive cash flows from our current operations we believe we may be able to continue operations for twelve months. This expectation anticipates a necessary reduction in the increased level of administrative expenses we have experienced in the past, which have been a significant reason for historical losses and negative operating cash flow. These expenses have been incurred related to expansion plans and enhancing a corporate infrastructure in preparation for public offering. Should capital not be available, it may become necessary to modify these efforts to restrict expenditures. There can be no assurance that such additional capital will be available.

 

Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, the terms of the private placement transactions that we completed in the past, and any restricted availability of credit, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.

 

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 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 prospectus.

 

 

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.

 

Impact of COVID-19

 

The COVID-19 pandemic and resulting disruptions including, without limitation, governmental lockdown mandates and restrictions, made 2020 a challenging year for businesses, particularly in the foodservice and restaurant industries. Reborn Coffee took immediate action to protect the health and safety of our employees and customers including the implementation of all operating protocols dictated by state and local guidelines and instituting strict health and safety practices. Fortunately, we did not experience any significant disruptions in our supply chain operations.

 

Despite efforts to ensure a safe consumer experience, we did experience repressed customer flow through periods when malls and shopping centers were restricted or closed entirely due to governmental lockdown mandates and restrictions. Our current retail locations are within popular shopping areas with anticipated regular customer traffic. Such closures or limitations and restrictions were at times mandated the government, and at other times due to natural customer uncertainties regarding the status of COVID-19. Such restrictions and uncertainties not only impacted anticipated revenues from current locations, but added additional risk to us related to the opening of new locations. Thus, the uncertainty regarding the scope and longevity of such restrictions modified our plans as to how quickly we could enact our expansion plans.

 

More specifically, COVID-19 has challenged our performance at our kiosk locations, though our cafe locations have improved in performance. Shopping mall restrictions and mandates during the pandemic made it difficult for our kiosks to operate at maximum performance, as indoor restrictions of shopping malls affected the way we had to operate business. For instance, we had to offer only to-go/pickup operations to operate while meeting regulations. We have learned how to move forward aggressively despite such regulations and mandates, doing what we can to serve the coffee we are so proud to serve, whether this means offering to-go orders only or working with delivery services.

 

In May 2020, the Company availed itself of a loan under the Paycheck Protection Program (PPP) administered by the U.S. Small Business Administration (SBA) in the amount of $115,000, and $500,000 under the SBA’s Economic Injury Disaster Loan assistance program, all of which is currently outstanding as of December 31, 2021, provided however that repayment was deferred to commence in May 2022. In February 2021, the Company secured a second PPP loan under this program in the amount of approximately $167,000. 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.

 

In January 2022 we announced a price increase of our whole roasted beans by 15% on our website which we attribute to increases due to inflation in the cost of raw green coffee beans, the cost of shipping and supplies, and nationwide increases in labor costs-- factors that may or may not be attributable to the pandemic and/or the governmental policies and mandates that were implemented during and in the wake of COVID-19. As of the date hereof and in January 2022 at the time of our price increase, inflation has not had a material effect on our results of operations since we have been able to offset such increased costs by increasing the price of our whole roasted beans by 15% in January 2022, through increased sales and growth in opening 2 new company-owned retail locations, better lease terms on such new company-owned retail locations, more efficient purchasing practices (e.g., volume purchase discounts), productivity improvements and greater economies of scale. Severe increases in inflation, however, could affect the global and U.S. economies and could have a materially adverse impact on our business, financial condition or results of operations.

 

We do not expect COVID-19 to affect our future operating results significantly, as we are confident that coffee is an essential product that people rely on and will always drink. We intend to meet all governmental business operation regulations and improve sales by whatever means necessary, utilizing resources such as food delivery services and to-go/pickup orders. However, the impact of COVID-19 continues to evolve, and we cannot easily predict the future potential impacts of the pandemic on our business or operations or on the United States or global economy in general. This may include any recurrence of the disease, actions taken in response to the evolving pandemic, any ongoing effects on consumer demand and spending patterns or other impacts of the pandemic. Whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations, cash flows or financial condition is yet to be determined. For additional details regarding the impact of COVID-19 on our business, see “Risk Factors-Risks Related to Our Business-Pandemics or disease outbreaks such as the COVID-19 have had, and may continue to have, an effect on our business and results of operations.”

 

Key Performance Indicators and Non-GAAP Financial Measures

 

To evaluate our business effectively and make the best decisions for Reborn Coffee’s future, we focus on a variety of key performance indicators and financial measures. These measures include EBITDA and Adjusted EBITDA.

 

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

  

See our reconciliation of non-GAAP measures, including EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, and Shop-Level contribution margin under the Section herein entitled “Historical Consolidated Financial and Other Data”.

 

 

Average Unit Volumes (AUVs)

 

“Average Unit Volumes” or “AUVs” consist of the average annual sales of all locations that have been open for the entirety of the fiscal year presented. AUVs are calculated by dividing (x) annual sales for the fiscal year presented for all such locations by (y) the total number of locations in that base. This measurement allows management to assess changes in consumer spending patterns at our locations and the overall performance of our location base.

 

The following table shows the AUVs for the fiscal years for the fiscal years ended December 31, 2021 and 2020, respectively:

 

		Years ended December 31,
		2021				2020
Average Unit Volumes		$	445,333			$	316,493

  

Comparable Location Sales Growth

 

Measuring our comparable location sales growth allows us to evaluate the performance of our existing shop location base. We utilize the Average Unit Volume, or AUV, metric to measure this. Various factors impact comparable restaurant sales, including:

 

	●	consumer recognition of our brand and our ability to respond to changing consumer preferences;
	●	overall economic trends, particularly those related to consumer spending;
	●	our ability to operate restaurants effectively and efficiently to meet consumer expectations;
	●	pricing;
	●	guest traffic;
	●	per-guest spend and average check;
	●	marketing and promotional efforts;
	●	local competition; and
	●	opening of new restaurants in the vicinity of existing locations.

 

The following table shows the comparable location sales growth for the fiscal years ended December 31, 2021 and December 31, 2020, respectively

 

		Years ended December 31,
		2021				2020
Comparable location AUV growth (%)			40.7	%			27.1	%
Comparable location base			2				2

 

Components of Our Results of Operations

 

Revenue

 

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 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 97% 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 3% of the Company’s total revenue.

  

 

	●	Royalties and Other Fees
		Franchise revenues consist of royalty fee and other franchise fees. Royalty fee is based on a percentage of 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 year ended December 31, 2021. Other fees are earned as incurred and the Company did not have any other fee revenue for the year ended December 31, 2021.

 

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 the date of this prospectus, 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 expense are expensed as incurred. Advertising expenses amounted to $82,351 and $73,282 for the years ended December 31, 2021 and 2020, respectively, and is 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 months ended March 31, 2021 Compared to Three months ended March 31, 2022

 

The following table presents selected comparative results of operations from our unaudited financial statements for the three months ended March 31, 2022 compared to three months ended March 31, 2021. 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.

 

		Three Months Ended March 31,								Increase / (Decrease)
		2022				2021				Dollars				Percentage
Net revenues:
Stores		$	735,996			$	375,961			$	360,035				95.8	%
Wholesale and online			17,154				12,968				4,186				32.3	%
Total net revenues			753,150				388,929				364,221				93.6	%
Operating costs and expenses:
Product, food and drink costs—stores			284,954				134,696				150,258				111.6	%
Labor expenses			534,496				238,168				296,328				124.4	%
Occupancy expenses—stores			176,184				91,905				84,279				91.7	%
Utilities costs			19,870				15,953				3,917				24.6	%
Cost of sales—wholesale and online			7,513				5,860				1,833				32.3	%
Rent—corporate			24,949				24,456				493				2.0	%
General and administrative			231,382				164,030				67,352				41.1	%
Depreciation			49,134				36,129				13,005				36.0	%
Total operating costs and expenses			1,328,482				711,017				617,465				86.8	%
Loss from operations			(575,332	)			(322,088	)			(253,244	)			78.6	%
Other income (expense):
Other income			15,000				-				15,000				N/A
Interest expense			(4,780	)			(5,391	)			611				-11.3	%
Total other expense			10,220				(5,391	)			15,611				-289.6	%
Loss before income taxes			(565,112	)			(327,479	)			(237,633	)			72.6	%
Provision for income taxes			-				-				-				0.0	%
Net loss		$	(565,112	)		$	(327,479	)		$	(237,633	)			72.6	%

 

 

		Three Months Ended March 31,
		2022				2021
Net revenues:
Stores			97.7	%			96.7	%
Wholesale and online			2.3	%			3.3	%
Total net revenues			100.0	%			100.0	%
Operating costs and expenses:
Product, food and drink costs—stores			37.8	%			34.6	%
Labor expenses			71.0	%			61.2	%
Occupancy expenses—stores			23.4	%			23.6	%
Utilities costs			2.6	%			4.1	%
Cost of sales—wholesale and online			1.0	%			1.5	%
Rent—corporate			3.3	%			6.3	%
General and administrative			30.7	%			42.2	%
Depreciation			6.5	%			9.3	%
Total operating costs and expenses			176.4	%			182.8	%
Loss from operations			-76.4	%			-82.8	%
Other income (expense):
Other income			2.0	%			0.0	%
Interest expense			-0.6	%			-1.4	%
Total other expense			1.4	%			-1.4	%
Loss before income taxes			-75.0	%			-84.2	%
Provision for income taxes			0.0	%			0.0	%
Net loss			-75.0	%			-84.2	%

 

Revenues. Revenues were approximately $753,000 for the three-month period ended March 31, 2022 compared to $389,000 for the comparable period in 2021, representing an increase of $364,000, or 93.6%. The increase in sales for the period was primarily driven by the opening of the Corona Del Mar, Laguna Woods, Riverside and Santa Anita locations during 2021, and to the continued focus on marketing efforts to grow brand recognition. New locations accounted for approximately $208,000 of the increase. The four locations that were open through both of these periods each experienced significant sales increases for the period, accounting for approximately another $70,000 of the increase. Combined average monthly sales for these locations increased 16.9% for the three-month period ended March 31, 2022 from the comparable period in 2021.

 

Product, food and drink costs. Product, food and drink costs were approximately $285,000 for the three-month period ended March 31, 2022 compared to $135,000 for the comparable period in 2021, representing an increase of approximately $150,000, or 111.6%. The increase in costs for the year was partially driven by the opening of new locations and the overall increase in sales for the year. Product costs related to new locations were approximately $83,000, while increases in sales attributable to existing locations amounted to approximately $60,000 of additional increases in product costs. As a percentage of revenues, product, food and drink costs increased to 37.8% in the three-month period ended March 31, 2022 compared to 34.6% in the comparable period in 2021. The increase in costs as a percentage of sales was primarily driven by general inflationary pressures and the seasonal fluctuations in cost of ingredients. We monitor these fluctuations in 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. For example, green bean suppliers raised pricing by 15 to 20% throughout 2021, higher than the overall rate of inflation, however it has been more stable recently and even decreasing slightly in the second quarter of 2022.

 

Labor. Labor and related costs were approximately $534,000 for the three-month period ended March 31, 2022 compared to $238,000 for the comparable period in 2021, representing an increase of approximately $296,000, or 124.4%. The increase in costs was largely driven by additional labor costs incurred with respect to four new locations opened, comprising approximately $151,000 of the increase in labor and related costs. Remaining increases were driven by increasing costs of attracting new hires in existing locations. As a percentage of sales, labor and related costs increased to 71.0% in the three-month period ended March 31, 2022 compared to 61.2% in the comparable period in 2021. The increase in costs as a percentage of sales was primarily driven by the increasing costs of attracting new hires and the timing of hiring staffs for new locations compared to when operations commenced.

 

Occupancy expenses-stores. Occupancy expenses were approximately $176,000 for the three-month period ended March 31, 2022 compared to $92,000 for the comparable period in 2021, representing an increase of approximately $84,000, or 91.7%. The increase was the result of opening four new locations. As a percentage of sales, occupancy expenses decreased to 23.4% in the three-month period ended March 31, 2022, compared to 23.6% for the comparable period in 2021. The decrease in costs as a percentage of sales is considered due to increased sales for the period for previously established locations with relatively fixed rental expenditures.

 

 

General and administrative expenses. General and administrative expenses were approximately $231,000 for the three-month period ended March 31, 2022 compared to $164,000 for the comparable period in 2021, representing an increase of approximately $67,000, or 41.1%. 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 preparing to become a public company. As a percentage of sales, general and administrative expenses decreased to 30.7% in the three-month period ended March 31, 2022 from 42.2% in the comparable period in 2021, primarily due to the increased sales from four new locations outpacing the increased administrative expenditures for the reasons mentioned above.

 

Depreciation and amortization expenses. Depreciation and amortization expenses incurred were approximately $49,000 for the three-month period ended March 31, 2022 compared to $36,000 for the comparable period in 2021, representing an increase of approximately $13,000, or 36.0%. The increase was primarily due to continued depreciation of equipment additions for locations in the current and prior year. As a percentage of sales, depreciation and amortization expenses decreased to 6.5% in the three-month period ended March 31, 2022 compared to 9.3% for the comparable period in 2021. The change is largely driven by the increase in sales from period to period.

 

Fiscal Year Ended December 31, 2021 Compared to Fiscal Year Ended December 31, 2020

 

The following table presents selected comparative results of operations from our audited financial statements for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020. 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.

 

		Year Ended December 31,								Increase / (Decrease)
		2021				2020				Dollars				Percentage
Net revenues:
Stores		$	2,204,201			$	759,644			$	1,444,557				190.2	%
Wholesale and online			75,871				33,444				42,427				126.9	%
Total net revenues			2,280,072				793,088				1,486,984				187.5	%
Operating costs and expenses:
Product, food and drink costs—stores			821,713				321,244				500,466				155.8	%
Labor expenses			1,550,041				636,832				913,209				143.4	%
Occupancy expenses—stores			552,069				256,016				296,053				115.6	%
Utilities costs			69,674				29,612				40,062				135.3	%
Cost of sales—wholesale and online			33,231				14,650				18,581				126.8	%
Rent—corporate			97,824				97,824				-				0.0	%
General and administrative			1,544,501				371,461				1,173,040				315.8	%
Depreciation			174,696				121,905				52,791				43.3	%
Total operating costs and expenses			4,843,749				1,849,544				2,994,205				162.3	%
Loss from operations			(2,563,677	)			(1,056,456	)			(1,507,221	)			142.7	%
Other income (expense):
Economy injury disaster loan (EIDL) grant income			-				10,000				(10,000	)			-100.0	%
Paycheck protection program (PPP) loan forgiven income			115,000				-				115,000				N/A
Other income			7,631				-				7,631				N/A
Interest expense			(16,172	)			(21,510	)			5,338				-24.8	%
Loss on extinguishment of debt			(982,383	)			-				(982,383	)			N/A
Total other expense			(875,924	)			(11,510	)			(864,414	)			7,510.1	%
Loss before income taxes			(3,439,601	)			(1,067,966	)			(2,371,635	)			222.1	%
Provision for income taxes			800				800				-				0.0	%
Net loss		$	(3,440,401	)		$	(1,068,766	)		$	(2,371,635	)			221.9	%

   

 

		Year Ended December 31,
		2021				2020
Net revenues:
Stores			96.7	%			95.8	%
Wholesale and online			3.3	%			4.2	%
Total net revenues			100.0	%			100.0	%
Operating costs and expenses:
Product, food and drink costs—stores			36.0	%			40.5	%
Labor expenses			68.0	%			80.3	%
Occupancy expenses—stores			24.2	%			32.3	%
Utilities costs			3.1	%			3.7	%
Cost of sales—wholesale and online			1.5	%			1.8	%
Rent—corporate			4.3	%			12.3	%
General and administrative			67.3	%			46.8	%
Depreciation			7.7	%			15.4	%
Total operating costs and expenses			212.4	%			233.2	%
Loss from operations			-112.4	%			-133.2	%
Other income (expense):
Economy injury disaster loan (EIDL) grant income			0.0	%			1.3	%
Paycheck protection program (PPP) loan forgiven income			5.0	%			0.0	%
Other income			0.3	%			0.0	%
Interest expense			-0.7	%			-2.7	%
Loss on extinguishment of debt			-43.0	%			0.0	%
Total other expense			-38.4	%			-1.5	%
Loss before income taxes			-150.9	%			-134.7	%
Provision for income taxes			0.0	%			0.1	%
Net loss			-150.9	%			-134.8	%

 

Revenues. Revenues were approximately $2.3 million for the year ended December 31, 2021 compared to $793,000 for the year ended December 31, 2020, representing an increase of $1.5 million, or 187.5%. The increase in sales for the year was primarily driven by the opening of the Corona Del Mar, Laguna Woods, Riverside and Santa Anita locations during 2021, and to the continued focus on marketing efforts to grow brand recognition. The two locations that were open through all of 2021 each experienced significant sales increases for the year. Sales from new locations accounted for approximately $966,000 of the increase. The two locations that were open through both of these periods each experienced significant sales increases for the period, accounting for approximately another $545,000 of the increase.

 

AUV for these locations increased 40.7% for the year ended December 31, 2021 from prior year. The improvement can also partially be attributed to recovery from the effects of the lockdowns attributable to COVID-19 pandemic on our customer traffic and from the progression of our planned growth. The lockdowns attributable to COVID-19 have challenged our performance at our kiosk locations, though our cafe locations have improved in performance. Shopping mall restrictions and mandates attributable to COVID-19 made it difficult for our kiosks to operate at maximum performance, as such indoor restrictions of shopping malls affected the way we had to operate business. These effects were felt throughout most of 2020, but the lightening and/or removal of such restrictions in 2021 have allowed for a return to normal operations and towards improvement in sales results.

 

Product, food and drink costs. Product, food and drink costs were approximately $822,000 for the year ended December 31, 2021 compared to $321,000 for the year ended December 31, 2020, representing an increase of approximately $500,000, or 155.8%. The increase in costs for the year was partially driven by the opening of four new locations and the increase in sales for the year. Product costs related to new locations were approximately $341,000, while increases in sales attributable to existing locations amounted to approximately $159,000 of additional increases in product costs. As a percentage of revenues, product, food and drink costs decreased to 36.0% in the year ended December 31, 2021 compared to 40.5% in the year ended December 31, 2020. The decrease in costs as a percentage of sales was primarily driven by the seasonal fluctuations in the cost of ingredients and the efficiencies achieved through the experiences gained in the opening of incremental locations.

 

Labor. Labor and related costs were approximately $1.6 million for the year ended December 31, 2021 compared to $637,000 for the year ended December 31, 2020, representing an increase of approximately $913,000, or 143.4%. The increase in costs was largely driven by additional labor costs incurred with respect to the opening of four new locations, comprising approximately $643,000 of the increase in labor and related costs. Remaining increases were driven by increasing costs of attracting new hires in existing locations. As a percentage of sales, labor and related costs decreased to 68.0% in the year ended December 31, 2021 compared to 80.3% in the comparable period in 2020. The decrease in costs as a percentage of sales was primarily driven by increased sales outpacing relatively fixed labor costs in previously established locations and efficiencies achieved through the experiences gained in the opening of incremental locations.

 

Occupancy expenses-stores. Occupancy expenses were approximately $552,000 for the year ended December 31, 2021compared to $256,000 for the year ended December 31, 2020, representing an increase of approximately $296,000, or 115.6%. The increase was experienced as the result of opening four new locations. As a percentage of sales, occupancy expenses decreased to 24.2% in the year ended December 31, 2021, compared to 32.3% for the comparable period in 2020. The decrease in costs as a percentage of sales is considered due to increased sales for the period for previously established locations with relatively fixed rental expenditures.

 

  

General and administrative expenses. General and administrative expenses were approximately $1.5 million for the year ended December 31, 2021 compared to $371,000 for the year ended December 31, 2020, representing an increase of approximately $1.2 million, or 315.8%. 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 four new restaurants, as well as costs associated with outside administrative, legal and professional fees and other general corporate expenses associated with conducting an underwritten public offering. A large portion of this increase is related to stock-based compensation, which amounted to $550,000 for 2021 compared to $0 for 2020.  As a percentage of sales, general and administrative expenses increased to 67.3% in the year ended December 31, 2021 from 46.8% in the comparable period in 2020, primarily due to the increased administrative expenditures as mentioned above.

 

Depreciation and amortization expenses. Depreciation and amortization expenses incurred were approximately $175,000 for the year ended December 31, 2021 compared to $122,000 for the year ended December 31, 2020, representing an increase of approximately $53,000, or 43.3%. The increase was primarily due to continued depreciation of equipment additions for locations in the current and prior year. As a percentage of sales, depreciation and amortization expenses decreased to 7.7% for the year ended December 31, 2021 compared to 15.4% for the comparable period in the prior year. The change is largely driven by the increase in sales from period to period.

 

Segment Performance

 

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-month period ended March 31, 2022 or the year ended December 31, 2021 or since date of formation, December 17, 2020.

 

Income Tax Expense

 

Deferred income taxes reflect the net tax effects of 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:

 

As of December 31, 2020, the Company had available net operating loss carryovers of approximately $4,983,440. 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 2017 and later and subject to California authorities for tax year ended 2016 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 December 31, 2021 and 2020, the Company has no accrued interest or penalties related to uncertain tax positions.

 

As of December 31, 2021, the Company had cumulative net operating loss carryforwards for federal tax purposes of approximately $8,423,041. In addition, the Company had state tax net operating loss carryforwards of approximately $8,423,041. The carryforwards may be applied against future taxable income and expires at various dates subject to certain limitations.

    

Liquidity and Capital Resources

 

		Year Ended December 31,								Three Months Ended March 31,
		2021				2020				2022				2021
Statement of Cash Flow Data:
Net cash used in operating activities			(1,949,820	)			(884,927	)			(485,757	)			(334,573	)
Net cash used in investing activities			(498,224	)			(115,841	)			(149,896	)			(205,619	)
Net cash (used in) provided by financing activities			3,224,527				1,129,336				(86,207	)			556,151

 

 

Cash Flows Provided by Operating Activities

 

Net cash used in operating activities during the three-month period ended March 31, 2022 was $485,757, which resulted from net loss of $565,112, non-cash charges of $49,134 for depreciation and net cash inflows of $26,727 from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of a decrease in inventory of $15,586 and an increase of $44,232 in accrued liabilities, partially offset by increases in accounts receivable of $1,272 and other assets of $28,324 and a decrease in accounts payable of $3,495. The increase in accrued liabilities was primarily due to the timing of cash payments for sales tax and payroll.

 

Net cash used in operating activities during the three-month period ended March 31, 2021 was $334,573, which resulted from net loss of $327,479, non-cash charges of $36,129 for depreciation, and net cash outflows of $55,183 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 inventories of $8,067 and other assets of $40,000 and decreases in accounts payable of $4,407 and accrued liabilities of $5,254, partially offset by a decrease of $2,545 in accounts receivable.

 

Net cash used in operating activities during the year ended December 31, 2021 was $1,949,820, which resulted from net loss of $3,440,401, non-cash charges of $174,696 for depreciation and $550,000 for stock compensation, noncash income of $115,000 from the forgiveness of PPP loans, noncash loss of 982,383 from extinguishment of debt, and net cash outflows of $91,447 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 inventories of $73,598 and other assets of $132,059 and a decrease in accounts payable of $27,571, partially offset by decreases in accounts receivable of $3,853 and increases of $137,898 in accrued liabilities. The increase in accrued liabilities was primarily due to the timing of cash payments for sales tax and operating lease liabilities.

 

Net cash used in operating activities during the year ended December 31, 2020 was $884,927, which resulted from net loss of $1,068,766, non-cash charges of $121,905 for depreciation, and net cash inflows of $61,934 from changes in operating assets and liabilities. The net loss was significantly higher for the period relative to prior periods as a result of closures and reduced customer traffic as a result of the pandemic. The net cash inflows from changes in operating assets and liabilities were primarily the result of increased accounts payable of $72,496 and a decrease of $16,606 in accounts receivable, partially offset by increases of $6,079 in inventories, an increase of $10,000 in prepaid expenses and a decrease of $11,088 in accrued liabilities. The increase in accounts payable was primarily due to the timing of cash payments.

 

Cash Flows Used in Investing Activities

 

Net cash used in investing activities during the three-month periods ended March 31, 2022 and 2021 was $149,896 and $205,619, respectively, and during the years ended December 31, 2021 and 2020 was $498,224 and $115,841, 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 (Used in) Financing Activities

 

Net cash used in financing activities during the three-month period ended March 31, 2022 was $86,207, primarily due to repayments of borrowings.

 

Net cash provided by financing activities during the three-month period ended March 31, 2021 was $556,151, primarily due to approximately $298,636 cash received through borrowings from banks and $450,000 of proceeds from the sales of shares of common stock, offset by approximately $192,000 of repayments of borrowings.

 

Net cash provided by financing activities during the year ended December 31, 2021 was $3,224,527, primarily due to $1.0 million cash received through borrowings from banks and from pandemic relief funds available from government agencies and $2.7 million of proceeds from the sales of shares of common stock, offset by approximately $492,000 of repayments of borrowings.

 

Net cash provided by financing activities during the year ended December 31, 2020 was $1,129,336, primarily due to approximately $265,000 cash received through borrowings from banks and from pandemic relief funds available from government agencies and $1.4 million of proceeds from the sales of shares of common stock, offset by approximately $532,000 of repayments of borrowings.

 

 

As of March 31, 2022, the Company had total assets of $4,595,375. Our cash balance as of March 31, 2022 was $183,191. From inception (of Reborn Global in November 2014) to March 31, 2022, we have not had any positive operating cash flow. The Company raised an aggregate of approximately $5.1 million in equity capital from the sale of our commons stock, mostly to our officers and directors.

 

If capital does not become available from the proceeds of this offering or from other sources, we will be able to continue operations since we anticipate our monthly revenue of approximately $180,000 and monthly expenses of approximately $120,000 in the next few months. Thus with available cash on hand and positive cash flows from our current operations we believe we may be able to continue operations for twelve months. This expectation anticipates a necessary reduction in the increased level of administrative expenses we have experienced in the past, which have been a significant reason for historical losses and negative operating cash flow. These expenses have been incurred related to expansion plans and enhancing a corporate infrastructure in preparation for public offering. Should capital not be available, it may become necessary to modify these efforts to restrict expenditures. There can be no assurance that such additional capital will be available.

 

We believe our operational strategy which focuses on running a low overhead operation will avail us the ability to manage our current operational activities. We plan to use our working capital to attend investor conferences and tradeshows, participating in road shows to meet with potential investors, traveling to meet with investors and paying professional fees needed to comply with SEC regulations.

 

If we succeed in obtaining capital and opening additional cafes, we anticipate that sales at such places will generate sufficient cash flow to support our operations. Yet, there can be no assurance that such sales levels will be achieved. Therefore, we may require additional financing through loans and other arrangements, including the sale of additional equity. There can be no assurance that such additional financing will be available, or if available, can be obtained on satisfactory terms. To the extent that any such financing involves the sale of our equity securities, the interests of our then existing shareholders, including the investors in this offering, could be substantially diluted. In the event that we do not have sufficient capital to support our operations we may have to curtail our operations.

  

Credit Facilities

 

Loan with Fora Financial

 

In October 2019, the Company entered into a loan agreement with Fora Financial in the principal amount of $138,600 and remaining principal amount of $48,510. The loan payable has a maturity date on October 11, 2019. The loan was due on demand. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of $0.

 

Loans with Square Capital

 

Between April and August 2021, the Company entered into loan agreements with Square Capital in the aggregate principal amount of approximately $268,000 with loan costs of $34,840. The loans have maturity dates ranging from September 2022 to February 2023. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of approximately $40,000 and $122,000, respectively.

 

Economic Injury Disaster Loan

 

On May 16, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. As of March 31, 2022, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

  

Pursuant to that certain Loan Authorization and Agreement (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) 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 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 therefore, the full amount of the loan is outstanding as of March 31, 2022 and payments shall commence starting in May 2022.

 

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”).

 

 

Paycheck Protection Program Loan

 

In May 2020, the Company secured a loan under the Paycheck Protection Program administered by the U.S. Small Business Administration (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 owing 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.

   

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.

 

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.

 

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.

 

Quantitative and Qualitative Disclosure of Market Risks

 

Commodity Risks

 

Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including beverage, energy and other commodities. We have been able to offset cost increases resulting from several factors, including market conditions, shortages or interruptions in supply due to weather or other conditions beyond our control, governmental regulations and inflation, by increasing the price of our whole roasted beans by 15% in January 2022, through increased sales and growth in opening 2 new company-owned retail locations, better lease terms on such new company-owned retail locations, more efficient purchasing practices (e.g., volume purchase discounts), productivity improvements and greater economies of scale.

 

Labor and Benefits Costs

 

At our company-owned retail locations, our starting wage has historically been the minimum wage in place for that particular state with baristas receiving tips from customers in addition to the wages. We do not, however, reduce the wages we pay to baristas to offset tips. We believe this combination of security and upside earning potential, in addition to our strong culture and focus on development, enables us to attract a higher caliber employee and this directly translates to better customer service.

 

California has experienced minimum wage increases over the past two years. As we consider the potential for future federal and state or local minimum wage increases, our first step is to partially offset such increases with operational efficiencies and cost reduction measures in our supply chain and elsewhere before increasing our menu prices. In the future, we may or may not be able to offset with operational efficiencies or price increases. As of December 31, 2021, we employed approximately 65 hourly workers in our retail locations.

 

 

Interest Rate Risk

 

We have historically been exposed to interest rate risk through fluctuations in interest rates on our debt obligations. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. As of March 31, 2022, we had approximately $719,000 in aggregate outstanding principal balance. Without the EIDL, we have 0 balance with interest rate risk.

 

Impact of Inflation

 

The primary inflation factions affecting our operations are commodity and supplies, energy costs, and materials used in the construction of company-owned retail locations. Our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflation, increasing the costs of labor and materials, and resulting in higher rent expense on new locations.

 

While we have been able to offset inflation and other changes in the costs of core operating resources by increasing the price of our whole roasted beans by 15% in January 2022, through increased sales and growth in opening 2 new company-owned retail locations, better lease terms on such new company-owned retail locations, more efficient purchasing practices (e.g., volume purchase discounts), productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. We monitor changes in components of our product cost routinely when establishing pricing, however from time to time, competitive conditions could limit our pricing flexibility. In addition, macroeconomic conditions could make additional price increases imprudent. There can be no assurance that future cost increases can be offset by increased prices or that increased prices will be fully absorbed by our guests without any resulting change to their visit frequencies or purchasing patterns. In addition, there can be no assurance that we will generate comparable location sales growth, that we will be able to negotiate favorable lease terms, that we can benefit from volume purchase discounts or achieve other operational efficiencies in an amount or to the extent sufficient to offset inflationary or other cost pressures.

 

Select Supplementary Quarterly Data

 

		Mar. 31, 2022				Dec. 31, 2021				Sep. 30, 2021				Jun. 30, 2021				Mar. 31, 2021				Dec. 31, 2020				Sep. 30, 2020				Jun. 30, 2020
Net revenues:
Stores		$	736			$	684			$	668			$	476			$	376			$	275			$	218			$	129
Wholesale and online			17				28				20				15				13				18				7				7
Total net revenues			753				712				688				491				389				293				225				136
Operating costs and expenses:
Product, food and drink costs—stores			285				257				295				135				135				107				91				46
Cost of sales—wholesale and online			8				12				9				6				6				8				3				3
Rent—stores			176				195				71				204				92				96				48				54
Rent—corporate			25				25				23				26				24				24				29				-
Payroll and benefits			534				581				409				322				238				129				211				133
Utilities			20				13				33				7				16				4				8				10
General and administrative			231				445				874				52				164				105				114				69
Depreciation			49				51				42				46				36				32				31				30
Total operating costs and expenses			1,328				1,579				1,756				798				711				503				535				345
Loss from operations			(575	)			(867	)			(1,068	)			(307	)			(322	)			(210	)			(310	)			(209	)
Other income (expense):
Other income			15				8				-				-				-				-				-				-
Economy injury disaster loan (EIDL) grant income			-				-				-				-				-				-				-				10
Paycheck protection program (PPP) loan forgiven income			-				-				115				-				-				-				-				-
Interest expense			(5	)			(5	)			(6	)			(1	)			(5	)			(8	)			(5	)			(5	)
Loss on extinguishment of debt			-				-				(982	)			-				-				-				-				-
Total other expense			10				3				(873	)			(1	)			(5	)			(8	)			(5	)			5
Loss before income taxes			(565	)			(864	)			(1,941	)			(308	)			(327	)			(218	)			(315	)			(204	)
Provision for income taxes			-				-				-				-				-				-				-				-
Net loss		$	(565	)		$	(864	)		$	(1,941	)		$	(308	)		$	(327	)		$	(218	)		$	(315	)		$	(204	)

 

  

BUSINESS

 

Our Company

 

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.

 

The source of coffee is pinnacle to specialty coffee. The coffee industry has gone through various phases including the first, second, third and fourth wave. In the first and second waves of coffee, the single-origin source and type of the coffee is not necessarily in the forefront during the sourcing process. As such, much of the coffee may be a blend with various sources and a mix of Robusta and Arabica coffee beans. The third wave of coffee focuses on a single-origin source and one variety of coffee bean (specifically Arabica beans). Single-origin beans can focus on specific countries and can also have hyper-focused on specific regions in the third wave of coffee, such as Coban in Guatemala. Arabica beans are considered premier due to the specific requirements for growth and the high-quality flavor they produce. Arabica coffee is required to be grown in higher, cooler elevations in regions.

 

Differentiated from other coffee companies, the Reborn Wash Process is the key to creating the clean flavor of our coffee. Our Wash Process is distinguished by the use of magnetized water to wash our green coffee beans when they arrive at the Reborn facility, in order to extract impurities and enhance hydration before the roasting process. Magnetizing water is a process that converts the particles of water, which can naturally appear in various sizes, into evenly sized particles. As a result of this process, we believe that the water increases its hydration and ability to absorb into organic material. Our water is created through a water magnetizing device in which water is flowed through the device and magnetizes the water on-site immediately prior to use.

 

After the wash, we roast our washed-green beans based on the profile of each single-origin. After the coffee beans are roasted, they are then packaged into various products such as whole bean coffee, pour over packs, and cold brew packs. Additionally, whole bean inventory is also supplied to retail locations, kiosk and cafes. A portion of the roasted coffee is also allotted to create our award-winning cold brew concentrate. Our cold brew production is created using a proprietary percolation technique, also using magnetized water at each step to enhance the flavor of the cold brew.

 

We continually innovate in the way we serve coffee. At our cafes, we serve customers our award-winning coffee through cold brew taps in addition to freshly ground coffee beans in espresso-made drinks. Other brew methods, such as an in-house pour over and drip coffee, are also available.

 

In 2015 Jay Kim, our Chief Executive Officer, founded Reborn Coffee. Mr. Kim and his team launched Reborn Coffee with the vision of using the finest pure ingredients and pristine water. We serve customers through our retail store locations in California: Brea, La Crescenta, Glendale, Corona Del Mar, Arcadia, Laguna Woods, Riverside, San Francisco and Manhattan Beach, with Huntington Beach in development. Additionally, we expect to begin franchising in 2022 and expect to continue to develop additional retail locations as we expand outside of California. We estimate that the average development cost of a company-owned retail location is approximately $150,000. Therefore, taking into account the proceeds from this offering and within a year from its completion, we expect to open up to 20 company-owned retail locations (using approximately $3,000,000 of the proceeds of this offering) and 20 franchise locations (all costs and expenses associated with a franchise store location development are borne by the franchisees). We acknowledge that we have not yet signed any franchise agreements and that such number of franchise locations is purely speculative. As evidence of our success, we received 1^st place traditional still in “America’s Best Cold Brew” competition by Coffee Fest in 2017 in Portland and 2018 in Los Angeles.  

 

As of December 31, 2021, all of our 7 retail locations were company-owned. As of the day of this prospectus, we have opened 2 new company-owned retail locations and expect to open a third one, which is currently under development, by 2022 year-end. Our retail locations generated AUV of approximately $445,000 and $316,000 in 2021 and 2020, respectively.

 

In 2021, we generated approximately $2.3 million of revenue, $3.4 million of net loss, a net loss margin of -150.9%, and approximately -$2.4 million of Adjusted EBITDA, a non-GAAP financial measure, resulting in an Adjusted EBITDA margin, a non-GAAP financial measure, of -104.8%. In 2020, we generated approximately $793,000 of revenue, $1.1 million of net loss, a net loss margin of -134.8%, and approximately -$915,000 of Adjusted EBITDA, a non-GAAP financial measure, resulting in an Adjusted EBITDA margin, a non-GAAP financial measure, of -115.3%. In the three months ended March 31, 2022, we generated $753,000 of revenue.

    

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 1st 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. Leading research studies, testing brewing equipment, and refining roasting/brewing methods to a specific, 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 spark 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 our versatility offers an experience that caters to customers’ needs ‒ whether they seek to consume our quality coffee in our inviting store atmospheres which are designed for comfort, 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 United States 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.

 

Branding

 

Reborn Coffee focuses on two key features in our branding, including “Introducing the Fourth Wave” and “America’s Best Cold Brew.” These phrases encapsulate the quality of the Reborn Process of sourcing, washing, roasting, and brewing coffee and the quality of the product that we create.

 

The Reborn brand is essential to our marketing strategy, as it allows us to stand out compared to our competitors. The products aim to make customers feel “reborn” after drinking a cup of coffee.

 

Our Menu and Products

 

We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of high-quality food items. We believe in offering customers the same great taste and quality whether served in store or on the go. We also partner with third-party importers and exporters to purchase and import our green coffee beans. Through these relationships, we source high-quality coffee beans from across the globe, including Mexico, Ethiopia, Colombia, Guatemala, Brazil, and Honduras.

 

Our Retail Locations

 

Reborn Coffee is built upon superior customer service, convenience and a modern experience as well as safe, clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty. Our strategy for expanding our retail business is to increase our category share in an aggressive manner, by opening additional stores in new and existing markets, as well as increasing sales in existing stores. Store growth in specific existing markets will vary due to many factors, including expected financial returns, the maturity of the market, economic conditions, consumer behavior and local business practices. Our retail locations, kiosks and cafes place a premium on customer convenience without sacrificing the personal experience.

 

We estimate that the average development cost of a company-owned retail location is approximately $150,000. Therefore, taking into account the proceeds from this offering and within a year from its completion, we expect to open up to 20 company-owned retail locations (using approximately $3,000,000 of the proceeds of this offering) and 20 franchise locations (all costs and expenses associated with a franchise store location development are borne by the franchisees). We acknowledge that we have not yet signed any franchise agreements and that such number of franchise locations is purely speculative. Our new retail locations are typically 800 to 1,500 square feet and are located in shopping plazas in upscale areas. We strategically position our new locations in areas where large-chain coffee locations have moved out, creating an opportunity for us to remodel a purpose-built coffee retail store. In this way, we are able to open quickly in high traffic areas with established local demand for coffee, ensuring a customer base we can convert into Reborn Coffee customers by offering a specialty coffee experience that wasn’t previously available. Our locations feature patios, contemporary design, and inviting atmospheres for socialization, study, and work. Our retail locations generated AUV of approximately $445,000 and $316,000 in 2021 and 2020, respectively. As we expand our retail footprint and improve customer awareness, we expect our AUV to grow.

   

Franchise Operations

 

In December 2020, the Company formed Reborn Coffee Franchise, LLC in the State of California in order to begin franchising Reborn Coffee retail locations. The Company plans to charge franchisees (of which, as of the date of this prospectus, we have none) a non-refundable franchise fee and certain marketing and royalty fees based on gross sales, however we presently have no contractual commitments or other agreements to do so. We expect to begin franchise sales in the latter part of 2022. We believe that our team’s prior experience building a large, global foodservice business will allow us to scale our anticipated franchise operations. In addition, we have formed a franchise council consisting of a team of franchise experts to advise us. We plan to expand beyond California to additional states to create a national and global presence.

  

Expanding Sales Channels

 

Today, we sell a variety of our coffee and tea products through the enterprise, or commercial, channel, which we refer to as “B2B”, as well as direct-to-consumer via our website. We expect to increase our channel presence by increasing the availability of Reborn Coffee in businesses and enterprises, and expand upon the partnerships we have in place with hotel operators to increase the use and brand awareness in hospitality. We also expect to grow our online sales through new partnerships with third-party retailers. Our products are available in various form factors, such as whole bean roasted coffee bags, single-serve drip bags, and pour over packs. We are exploring partnerships with grocery operators and foodservice providers to expand the Reborn Coffee brand.

 

 

Our Growth

 

We believe Reborn Coffee is in the early stages of rapid growth as we strategically expand our footprint in existing markets and enter new markets.

 

We estimate that the average development cost of a company-owned retail location is approximately $150,000. Therefore, taking into account the proceeds from this offering and within a year from its completion, we expect to open up to 20 company-owned retail locations (using approximately $3,000,000 of the proceeds of this offering) and 20 franchise locations (all costs and expenses associated with a franchise store location development are borne by the franchisees). We acknowledge that we have not yet signed any franchise agreements and that such number of franchise locations is purely speculative. In the future, Reborn Coffee plans to expand across the country with new retail locations to share the quality of our specialty coffee. Reborn Coffee aims also to engage in the sales of franchisees (of which, as of the date of this prospectus, we have none) to propel a new innovated wave in the coffee industry called “The Fourth Wave.” Reborn Coffee will continue to innovate in the coffee industry by making the industry more personal to our consumers and employees. This goal will be achieved through the continued innovation in our products, sourcing directly from farms, and giving customers choices in how their coffee is served to them. As Reborn Coffee expands, we hope to show the world that expanding in volume and size does not diminish the quality and personal element that is instilled in the coffee industry.

 

We believe our brand experience will enable our strong growth and financial performance, such as:  

 

	●	Revenue grew from $0.8 million in 2020, to $2.3 million in 2021.
	●	We continue to accelerate the pace of new “company-owned” (i.e., directly owned by Reborn) stores openings.

 

Specialty Beverages with a Focus on Innovation

 

Since our founding, we have focused on delivering

 

	●	Quality. Reborn Coffee sources the highest quality whole beans globally. We meet with coffee farmers, test coffee bean samples, and roast the beans in our headquarters in Southern California.
	●	Service. Reborn Coffee provides the highest quality service to our customers. We pride ourselves on training our baristas and improving their knowledge of the art of coffee, which in turn allows us to deliver outstanding products and service to our customers.
	●	Innovation. Reborn Coffee is a leader in the “Fourth Wave” premium coffee movement. We introduced our premium pour over pack coffee in 2017 and continue to innovate, recently introducing our unique cold brew system into our retail stores.

 

Experienced Leadership Team

 

Our relentless commitment to excellence is driven by our passionate management team under the leadership of Founder and Chief Executive Officer Jay Kim. Jay launched Reborn Coffee with the vision to provide the best coffee using the purest ingredients. Jay is focused on the expansion of Reborn and he has surrounded himself with leaders with direct experience in beverage and retail. Stephan Kim, our Chief Financial Officer, has almost 20 years of experience in professional accounting and tax consulting services. Other members of our executive leadership team bring high growth, franchise and sector expertise.

 

Our Commitment to Team

 

Reborn Coffee believes in mentoring the developing the next generation of premium coffee baristas. Through our in-depth training, we aim to train dedicated employees who understand the science and art behind every cup of coffee. We also expect to form a training school specializing in creating passionate baristas and coffee connoisseurs, by educating its students about coffee processes and preparation methods. The efforts for the training school are underway and we expect to launch the program in 2022.

 

 

Our Highly Engaged Customers

 

Reborn Coffee customers are loyal to our brand due to our intense focus on premium coffee and customer service.

 

 

 

Community engagement is another essential element of Reborn Coffee’s in-person marketing strategy. Reborn hosts on-site engagements, such as event sponsorships, and engages with local Chambers of Commerce. Previously, we have worked with Lululemon to host yoga sessions outside of our retail locations, creatively engaging the community while simultaneously promoting Reborn as an active lifestyle. We have also hosted pop-up locations on the Facebook campus and participated in large-scale events such as the San Francisco Coffee Festival, further expanding our outreach and introducing our brand name to different communities. We further engage with the community by organizing our own latte art competitions, in which baristas can compete for prizes and customers in the audience can witness the competitive passion Reborn Coffee encompasses.

 

Digital Channels

 

Reborn Coffee focuses on many digital channels in its marketing strategy. Social media is an important leg that creates engagement and education of Reborn Coffee’s brand. Customers primarily engage the brand on Instagram, where we host giveaways, share new store openings, and promote seasonal menus. Through our unique, modern aesthetic and intense focus on high-quality coffee, we are able to share the quality and essence of Reborn Coffee on display inside of our retail locations with existing and future customers on social media platforms.

 

For both the in-store cafe channel and the e-commerce channel, SMS & email marketing are used for reengagement and communication of new products and offerings.

 

Digital advertising channels are also used, primarily to engage the online market audience. Google and Facebook are the primary paid ad channels that we currently utilize. Yelp advertising is also used to engage local customers and tourists who visit specific areas where Reborn Coffee retail locations are located.

 

In-Person Marketing Engagement

 

Engaging customers in-store with a marketing plan is essential for customer retention and new customer generation. Reborn Coffee’s customer loyalty program provides free drinks for every 10 drinks purchased. Additionally, store customers may participate in promotional deals, especially during the holidays and new item releases, to try new innovative items created in-house. We also offer coffee samples of our pour over packs as well as new beans to our retail location customers. The distribution of coffee samples has expanded customers’ knowledge of our products and, led to increased contributing to whole bean sales.

 

Reborn Coffee locations are located in heavily trafficked areas as well as popular malls. As such, the potential for marketing and branding is very high in these locations. Signage and promotional deals with giveaways are essential to attracting new customers.

 

Employees

 

As of December 31, 2021, we have 24 full time and 51 part-time employees, including officers and directors. 

 

Real Estate and Development

 

Locations

 

As of December 31, 2021, we operated 7 company-owned retail locations across California. As of the day of this prospectus, we have opened 2 new locations and expect to open a third one, which is currently under development, by 2022 year-end.

 

We believe there is an opportunity to significantly expand our store base in the United States to over 500 locations nationwide over the long-term. We have developed a disciplined approach to new location development, based on an analytical, research-driven method for site selection and a rigorous real estate review and approval process. By focusing on key demographic characteristics for new site selection, such as population density, climate and median population age, we expect to open locations with attractive returns.

 

Our Real Estate team prospects potential sites within the target trade zones to identify the best locations, including sites formerly occupied by large-chain coffee retailers. Once a new site is developed or re-developed, the location opening process kicks off preparation for a grand opening day. These openings are special celebrations that provide us the opportunity to introduce Reborn Coffee to new communities.

Sustainability

 

Part of giving back to our communities is supporting the environment. Reborn Coffee is focused on and preparing to commit to a series of initiatives to ensure our products, processes and locations are in line with, and moving toward, environmental best practices.

 

Operations

 

Quality and Safety

 

We are focused on maintaining a safe, healthy environment at each location through the careful training and supervision of personnel and by following rigorous quality standards.

 

Point-of-Sale Systems

 

We utilize third-party providers, including Square, for our point-of-sale and inventory management systems. We believe our existing systems can support our anticipated growth.

 

Corporate Enterprise Systems

 

We utilize various enterprise systems to help manage our operations, such as Xero (accounting and ERP system), ADP (HR and payroll system), and Bluecart (inventory management system). Many of these systems were recently upgraded to help support our future growth plans.

 

Properties

 

As of December 31, 2021, we had 7 company-owned retail locations across California, all of which are leased. As of the day of this prospectus, we have opened 2 new company-owned retail locations and expect to open a third one, which is currently under development, by 2022 year-end.

 

Intellectual Property

 

We own many registered trademarks and service marks in the United States and internationally, the most important of which might be our trademarked logo. Other important trademarks include “Reborn Coffee” word marks and our recognizable Reborn sign logo. We believe the Reborn name and the many distinctive marks associated with it are of significant value and are very important to our business. Accordingly, as a general policy, we pursue registration and monitor the use of our marks in the United States and challenge any unauthorized use.

 

We plan to license the use of our marks through franchise agreements, vendor agreements and licensing agreements. These agreements typically restrict third parties’ activities with respect to use of the marks and impose brand standards requirements. We require licensees to inform us of any potential infringement of the marks.

 

Regulatory

 

We are subject to extensive federal, state, and local government regulation, including those relating to, among others, public health and safety, zoning and fire codes, and franchising. Failure to obtain or retain licenses and registrations or exemptions would adversely affect the operation of our locations. Although we have not experienced and do not anticipate experiencing any significant problems obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits, registrations, exemptions or approvals could delay or prevent the opening of, or adversely impact the viability of, a location in a particular area. The development and construction of additional locations will be subject to compliance with the applicable zoning, land use and environmental regulations.

 

 

Our franchising activities are subject to the rules and regulations of the FTC and various state laws regulating the offer and sale of prospective franchises. The FTC’s franchise rules and various state laws require that we furnish a franchise disclosure document (“FDD”) containing certain financial information to prospective franchise partners in a number of states requiring registration of the FDD with state authorities. Substantive state laws that regulate the franchise or franchise relationship exist in a substantial number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchise partner to designate sources of supply.

 

We are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986 and various federal and state laws governing such matters such as minimum wage, overtime, employment tax rates, workers compensation rates, citizenship requirements, and other working conditions. A significant number of shop-level personnel are paid at rates related to the federal minimum wage. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis of a disability and public accommodations in employment, which may require us to design or modify our locations to make reasonable accommodations for disabled persons.

 

Environmental

 

We believe federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of local government bodies with respect to zoning land use and environmental factors may in the future.

 

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 March 31, 2022, 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.

 

 

MANAGEMENT

 

The following table sets forth information for our executive officers, key employees and directors as of July 28, 2022.

 

Name		Age		Position
Executive Officers
Jay Kim		60		Chief Executive Officer and Director
Stephan Kim		46		Chief Financial Officer
Non-Employee, Independent Directors
Farooq M. Arjomand		64		Chairman of the Board of Directors and Independent Director
Dennis R. Egidi		76		Vice Chairman of the Board of Directors and Independent Director
Sehan Kim		69		Independent Director
Hannah Goh		23		Independent Director

  

Executive Officers

 

Jay Kim, age 60, Chief Executive Officer and Director

 

Mr. Kim has served as the Chief Executive Officer of Reborn Coffee since the inception of the Company in 2014. On July 1, 2007, Mr. Kim previously founded Wellspring Industry, Inc., which created the yogurt distribution company “Tutti Frutti” and the bakery-café franchise “O’My Buns.” Tutti Frutti grew to approximately 700 agents worldwide that offered self-serve frozen yogurt. Mr. Kim sold the majority ownership of Wellspring to group of investors in 2017 to focus his efforts on Reborn Coffee.

 

Prior to beginning Wellspring Mr. Kim was the owner of Coffee Roasters in Riverside, California from 2002 to 2007. Mr. Kim worked as the project manager for JES Inc., based in Brea, CA from 1997 to 2002 where he coordinated and managed environmental engineering projects. Mr. Kim worked as a Senior Process Engineer for Allied Signal Environment Catalyst in Tulsa, Oklahoma, from 1992 to 1997 where he coordinated and implemented projects related to plant productivity. He also acted as the leader in start-up plant to be based in Mexico for Allied Signal. From 1988 to 1992 Mr. Kim worked as the plant start-up engineer for Toyota Auto Body Inc.

 

Mr. Kim has a B.S, in Chemical Engineering from California State University at Long Beach and followed a Chemical office basic at US Army Chemical School in 1988. He was commissioned 1st. LT. of the US Army in 1986 and retired from the US Army in 1988.

 

Stephan Kim, age 46, Chief Financial Officer

 

Mr. Kim has served as the full-time Chief Financial Officer of the Company since June 26, 2022. Prior to joining Reborn Coffee, Mr. Kim provided professional accounting and tax consulting services for nearly 20 years to various clients in the consumer retail, healthcare, industrial manufacturing, and technology industries, including public accounting and tax consulting services under his own practice since 2011. Throughout his career as a public accountant, controller and banker in the US and South Korea, Mr. Kim has obtained broad and in-depth expertise on international accounting, finance, taxes and Sarbanes-Oxley 404 compliance. Mr. Kim graduated from Sogang University in South Korea with a B.A. in Sociology and Business in 2002 and earned a Master’s degree in Professional Accountancy from Indiana University in 2005. Mr. Kim began his career in 2002 as a banker with Shinhan Bank in South Korea. From 2005 to 2010, Mr. Kim was an Audit Manager at KPMG, Los Angeles office.

 

Non-Employee Directors

 

Farooq M. Arjomand, age 64, Chairman of the Board of Directors

 

Farooq Arjomand has served as the Chairman of the Board of Directors of Reborn Global since January 2015, and took over as the Chairman of the Board of Reborn Coffee Inc. on May 7, 2018.  In 1984, he started his career as a banker with HSBC and gained experience across all departments—namely, private banking, corporate finance, trade services, and investment banking. During his stint with HSBC, he also became the founding member of Amlak Finance & Emmar Properties in 1997.  Mr. Arjomand founded the Arjomand Group of companies in 2000 and has served as chief executive officer since that company’s inception. Based in Dubai, the Arjomand Group conducts various activities including real estate, manufacturing, trades, financial activities and aviation across the GCC, Asia, Europe and the US.

 

Mr. Arjomand has also served as the Chairman of DAMAC Properties, a leading developer in the Middle East and as a board member of Al Ahlia Insurance Company BSC, Bahrain. Mr. Arjomand also serves as Managing Partner of Barakat Group. Barakat Group has been involved in the manufacturing of juices and food stuffs for the past 30 years. Mr. Arjomand is a citizen of the United Arab Emirates. He graduated with a Business Management degree from Seattle Pacific University in Seattle, Washington.

 

 

Dennis R. Egidi, age 76, Vice Chairman of the Board of Directors

 

Mr. Egidi is a licensed real estate broker in the State of Illinois. Additionally, Mr. Egidi was awarded the CPM® designation through the Institute of Real Estate Management. He holds a bachelor’s degree in civil engineering and attended graduate school in Civil Engineering at the University of Detroit.

 

Mr. Egidi joined Reborn Coffee Inc. as a Director and the Vice Chairman of the Board of Directors in June of 2020. Mr. Egidi formed DRE, Inc., an Illinois real estate development company in 1993, developing over 30 affordable housing projects in Illinois, Ohio, Indiana, Iowa, and California, totaling approximately 5,000 units. Today, he continues to serve as President of DRE, Inc., and acts as Managing General Partner of 15 limited partnerships, of which 5 have been redeveloped over the past 5 years.

 

In addition, Mr. Egidi served as President and Chairman of the board of Promex Midwest, a real estate property management firm. He has been involved in all phases of management in the commercial, residential and industrial building fields in the Midwest. Mr. Egidi has extensive knowledge and experience in the construction industry, having served as Executive Vice President and Chief Estimator for Corbetta Construction Company of Illinois, and then for Contractors and Engineers, Inc. During his 25 years of experience in the construction industry, he was involved in all types of projects ranging from multifamily housing, historical rehabs, high-rise office buildings and shopping centers. 

 

Mr. Egidi and DRE also have experience in the food service industry having developed fast food pizza stores in central Illinois under the Rocky Rococo brand in the 1980s. He was also a principal partner in Cookie Associates of Houston, Texas. Cookie Associates owned and operated 34 “Great American Cookie” stores and kiosks in the Houston market. Most recently, Mr. Egidi, as a principal of TF Investors LLC, was a franchisor of eight Tutti Frutti Frozen Yogurt franchises located in France and England.

 

Sehan Kim, age 69, Director

 

Sehan Kim has been a Director of Reborn Global since January 2015. Sehan Kim joined Magitech Incorporation in 2013 as Vice President of Operations. He oversees operations and management in water, and beverage businesses at Magitech Corporation. He led the major projects at Magitech to install the ERP system and the cold brewed coffee extraction systems.

 

Prior to this position, Sehan Kim from 2005 to 2011, was Senior Vice President at Korean Air Co., Ltd. (“Korean Air”). He was the Head of the Aerospace Division at Korean Air. Prior to that, Sehan Kim was vice president and general manager of the Commercial Aerostructure Businesses at Korean Air from 2001 to 2005, which supplied various aircraft structural components to major commercial airplane manufacturers, including Airbus, Boeing and Embraer.

 

From January 1994 to February 1997 Mr. Kim worked as a Korean Air representative at Boeing in Seattle, Washington, and had on the job training in configuration management at Northrop Aircraft company in Los Angeles, for the Korean Fighter Coproduction Program in 1981. He joined Korean Air in August 1979 as an Aerospace structural engineer. Mr. Sehan Kim studied Aerospace Engineering at Seoul National University in 1973 thru 1977 and holds a master’s Degree in business management from Busan National University.

 

Hannah Goh, age 23, Director

 

In 2017, Ms. Goh served as a Sales Deck Intern at Axa Equitable. She went on to serve as the Vice President of Marketing and Sales of Reborn Coffee Inc. from July 2020 to July 2021. Ms. Goh is actively involved with Phi Chi Theta National Business Fraternity, and in 2020, she became the Eastern Regional Director, a role she continues to serve today. She has also previously served as the Vice President of Internal Affairs and Vice President of Marketing for Phi Chi Theta. In 2021, she began her role as a Digital Business Transformation Management Consultant of Publicis Sapient, an American digital consulting company.

 

Hannah Goh graduated from New York University’s Stern School of Business in 2020, with a B.S. in Business and Political Economy and a minor in Social Entrepreneurship & Digital Art and Design. In 2021, she began her continued education at USC Iovine & Young Academy where she is currently pursuing her M.S. in Integrated Design, Business and Technology.

 

Family Relationships

 

There are no family relationships among our directors or executive officers.

 

Composition of Our Board of Directors

 

Our business and affairs are managed under the direction of our board of directors, a majority of which are independent (i.e., Farooq M. Arjomand, Dennis R. Egidi, Sehan Kim and Hannah Goh). We have five directors with no vacancies. Our current directors will continue to serve as directors until their resignation, removal or successor is duly elected.

 

Our certificate of incorporation and our bylaws permit our board of directors to establish the authorized number of directors from time to time by resolution. Each director serves until the expiration of the term for which such director was elected or appointed, or until such director’s earlier death, resignation or removal.

 

 

Committees of Our Board of Directors

 

Our board of directors has established a compensation committee and an audit committee. The composition and responsibilities of each of the committees of our board of directors are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

 

Audit Committee

 

Effective at the time of effectiveness of the registration statement of which this prospectus forms a part, our audit committee consists of Farooq M. Arjomand, Dennis R. Egidi and Sehan Kim. Each member of our audit committee can read and understand fundamental financial statements in accordance with applicable requirements. The chair of our audit committee is Farooq M. Arjomand, who our board of directors has determined is an “audit committee financial expert” within the meaning of SEC regulations. In arriving at these determinations, our board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector.

 

The principal duties and responsibilities of our audit committee include, among other things:

 

	●	hiring and selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;
	●	helping to ensure the independence and performance of the independent registered public accounting firm;
	●	helping to maintain and foster an open avenue of communication between management and the independent registered public accounting firm;
	●	discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent registered public accounting firm, our interim and year-end operating results;
	●	developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;
	●	reviewing our policies on risk assessment and risk management;
	●	reviewing related party transactions;
	●	obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes its internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and
	●	approving (or, as permitted, pre-approving) all audit and all permissible non-audit services to be performed by the independent registered public accounting firm.

 

Our audit committee will operate under a written charter, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part, that satisfies the applicable listing standards of the Nasdaq Stock Exchange.

 

 

Compensation Committee

 

Effective at the time of effectiveness of the registration statement of which this prospectus forms a part, our compensation committee consists of Farooq M. Arjomand, Dennis R. Egidi and Sehan Kim. The chair of our compensation committee is Dennis R. Egidi.

 

The principal duties and responsibilities of our compensation committee include, among other things:

 

	●	approving the retention of compensation consultants and outside service providers and advisors;
	●	reviewing and approving, or recommending that our board of directors approve, the compensation, individual and corporate performance goals and objectives and other terms of employment of our executive officers, including evaluating the performance of our chief executive officer and, with his assistance, that of our other executive officers;
	●	reviewing and recommending to our board of directors the compensation of our directors;
	●	administering our equity and non-equity incentive plans;
	●	reviewing our practices and policies of employee compensation as they relate to alignment of incentives;
	●	reviewing and evaluating succession plans for the executive officers;
	●	reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and
	●	reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

 

Our compensation committee will operate under a written charter, which will become effective upon the effectiveness of the registration statement of which this prospectus is a part, that satisfies the applicable listing standards of the Nasdaq Capital Market.

 

Director Nominations

 

We do not have a standing nominating committee. In accordance with the Nasdaq Stock Exchange corporate governance standards, a majority of the independent directors may recommend a director nominee for selection by the board of directors. The board of directors believes that the independent directors can satisfactorily carry out the responsibility of properly selecting or approving director nominees without the formation of a standing nominating committee. As there is no standing nominating committee, we do not have a nominating committee charter in place.

 

The board of directors will also consider director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders). Our stockholders that wish to nominate a director for election to our board of directors should follow the procedures set forth in our bylaws.

 

We expect to expand our board of directors in the future to include additional independent directors. In adding additional members to our board of directors, we will consider each candidate’s independence, skills and expertise based on a variety of factors, including the person’s experience or background in management, finance, regulatory matters and corporate governance. Further, when identifying nominees to serve as a director, we expect that our board of directors will seek to create a board of directors that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance.

 

 

The following is a discussion for each director of the specific experience, qualifications, attributes or skills that lead our board of directors to conclude that each individual is qualified to serve as a director of our Company.

 

●

Farooq M. Arjomand – Mr. Arjomand’s experience in founding businesses and operating them are factors considered by the board of directors. Specifically, the board of directors viewed favorably him starting The Arjomand group that he has expanded to various nations in reaching its conclusion.

 

●

Dennis R. Egidi – Mr. Egidi’ s experience in founding various successful businesses were considered by the board of directors. Specifically, the board of directors viewed favorably his association with the Cookie Associates of Houston as a principal partner and operating 34  “Great American Cookie” stores and kiosks in reaching its conclusion.

 

	●	Jay Kim – Mr. Kim’s career as an entrepreneur and his involvement in various start-ups were factors considered by the board of directors. Specifically, the board of directors viewed favorably his role as a founder of Wellspring Industry Inc., that crated Tutti Frutti Yogurt that he expanded to a successful global franchise in reaching its conclusion.
	●	Sehan Kim – Mr. Kim’s long career in leadership positions were taken into consideration by the board of directors in reaching its conclusion. Specifically, the board of directors viewed his experience in setting up Magitech that installed ERP systems and cold brewed coffee extraction systems in reaching its conclusion.
	●	Hannah Goh – The board of directors considered Ms. Goh’s passion for business, community involvement, and project initiative in reaching its conclusion, viewing favorably her potential to provide a fresh, unique perspective to the board with her combined interests in both business and marketing.

 

In addition to each of the individual skills and backgrounds described above, the board of directors also concluded that each of these individuals will continue to provide knowledgeable advice to our other directors and to senior management on numerous issues facing our Company and on the development and execution of our strategy.

 

Code of Business Conduct and Ethics

 

In filing our Registration Statement on Form S-1 on July 3, 2017, we adopted a Code of Business Conduct and Ethics that applies to all our employees, officers and directors. This includes our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. The full text of our Code of Business Conduct and Ethics will be posted on our website at www.reborncoffee.com. We intend to disclose on our website any future amendments of our Code of Business Conduct and Ethics or waivers that exempt any principal executive officer, principal financial officer, principal accounting officer or controller, persons performing similar functions or our directors from provisions in the Code of Business Conduct and Ethics. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the compensation committee are currently, or have been at any time, one of our executive officers or employees. None of our executive officers currently serve, or have served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

 

Non-Employee Director Compensation

 

We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board will be determined from time to time by our board of directors based upon the amount of time expended by each of the directors on our behalf. Currently, executive officers of our company who are also members of the board of directors do not receive any compensation specifically for their services as directors.

 

 

EXECUTIVE COMPENSATION

 

The following table presents the compensation awarded to or earned by our named executive officers for the years ended December 31, 2020 and December 31, 2021.

 

Summary Compensation Table – Officers

 

Name and				Salary				Bonus				Stock Awards				Option Awards				Non-equity Incentive plan compensation				Change in Pension Value and Nonqualified deferred compensation				All other Compensation				Total
principal position		Year		($)				($)				($)				($)				($)				($)				($)				($)
Jay Kim Chief Executive Officer(1)		2021			50,000				-0-				-0-				-0-				-0-				-0-				-0-				50,000
Kevin Hartley Former Chief Financial Officer (2)		2021			10,000				-0-				200	(3)			-0-				-0-				-0-				-0-				10,200
Jay Kim Chief Executive Officer(1)		2020			50,000				-0-				-0-				-0-				-0-				-0-				-0-				50,000
Kevin Hartley Former Chief Financial Officer (2)		2020			10,000				-0-				200	(3)			-0-				-0-				-0-				-0-				10,200

 

(1)	There is no employment contract with Jay Kim at this time. Nor are there any agreements with Mr. Kim for compensation in the future. A salary and stock options and/or warrants program may be developed in the future.
(2)	We entered into a consulting agreement on September 15, 2021 with Kevin Hartley for his services as CFO of the Company pursuant to which Mr. Hartley received $24,000 per year and additional compensation in the form of shares common stock.
(3)	Kevin Hartley was awarded 2,000,000 shares at a par value of $0.0001 for a book value of $200.

 

Narrative to Summary Compensation Table

 

There is no employment contract with Jay Kim at this time. Nor are there any agreements with Mr. Kim for compensation in the future. A salary and stock options and/or warrants program may be developed in the future.

 

Effective July 27, 2022, the Company executed an employment agreement with Stephan Kim for Mr. Kim to serve as full time Chief Financial Officer of the Company, effective immediately.  Mr. Kim shall receive a monthly payment of $12,000 ($144,000 annually) as compensation for his services, and the Company granted $56,000 worth of shares of RSU, which will be vested in 3 months after employment and can be sold after one year. The terms of the RSUs will be set out in a separate RSU agreement to be executed in the near future. The employment agreement is an at-will agreement and is terminable by either party at any time.  A copy of the agreement is filed herewith as Exhibit 10.11.

 

 

Director Compensation 

 

No compensation was paid to our non-employee directors for services rendered during the years ended December 31, 2021 and 2020. 

 

Indemnification Matters

 

Our certificate of incorporation contains provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by Delaware law. Additionally, a director is not personally liable for monetary damages for breach of fiduciary duty as a director (i) for any breach of his or her duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derives an improper personal benefit.

 

Our certificate of incorporation authorizes us to indemnify our directors, officers, employees and other agents to the fullest extent permitted by Delaware law. Our bylaws provide that we are required to indemnify our directors and officers to the fullest extent permitted by Delaware law and may indemnify our other employees and agents. Our bylaws also provide that, on satisfaction of certain conditions, we will advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe these provisions in our certificate of incorporation and bylaws and these indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain customary directors’ and officers’ liability insurance.

 

The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, executive officers or persons controlling us, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

 

Other than compensation arrangements for our directors and executive officers, which are described elsewhere in this prospectus, below we describe transactions since January 1, 2019 to which we were a party or will be a party, in which:

 

	●	the amounts involved exceeded or will exceed $18,462; and
	●	any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, the foregoing persons (each, a “related party” and collectively, “related parties”), had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described under the section titled “Executive Compensation.”

 

The Company had the following related party transactions:

 

	●	Loan Payable to Others (August 2019 - $40,578 loan) – In August 2019, the Company received a non-bearing interest loan from an individual. The loan payable is due on demand. As of September 30, 2021 and December 31, 2020, there was a balance outstanding of $0 and $(548), respectively. For the years ended December 31, 2021 and 2020, the Company paid $0 and $8,780 in interest. The overpayment amount of $548 was adjusted to accounts receivable at December 31, 2020 and then subsequently written off during the year ended December 31, 2021. The individual is the spouse of Jay Kim, our Chief Executive Officer.
	●	Loan Payable to Director (December 2016 - $ 1,489,809 non-bearing interest loan) – On December 2016, the Company received a non-bearing interest loan from Farooq Arjomand, Chairman of the Board of the Company. The loan payable is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $782,383, respectively. In September 2021, this note was converted into 31,295,320 shares of Class A common stock.
	●	Loan Payable to Officer and Director (December 2016 - $ 1,674,100 non-bearing interest loan) – On December 2016, the Company received a non-bearing interest loan from Jay Kim, Chief Executive Officer of the Company. The loan payable is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $487,499, respectively.
	●	Loan Payable to Director (May 2021 - $ 250,000 non-bearing interest loan) – In May 2021, the Company received a non-bearing interest loan from Dennis Egidi, a member of the Board of Directors of the Company. The loan payable is due on demand. As of December 31, 2021, the outstanding balance of the loan was $0. In September 2021, this note was converted into 9,000,000 shares of Class A common stock.

 

●

Loan Payable to Director (May 2022 - $ 150,000 loan bearing 5% interest) – In May 2022, the Company entered into a convertible note agreement with an entity controlled by Dennis Egidi, a member of the Board of Directors of the Company, for a period of up to one year from the date of the note. The note is a general unsecured obligation and subordinate to all other borrowed funds from banks and commercial finance lenders. Outstanding borrowings under this agreement (as of the date of this prospectus, the full $150,000) bear interest at 5% and will automatically convert into common shares of the Company upon the closing of the next equity financing (including this offering), at a conversion rate to be determined by the Company’s valuation and capitalization at the time of that equity financing. If there is no equity financing prior to December 31, 2022, the outstanding borrowings under these convertible notes and any accrued interest will be payable upon demand of the noteholder at any time.

 

 

PRINCIPAL STOCKHOLDERS

 

The following table sets forth, as of July 28, 2022, information regarding beneficial ownership of our capital stock by:

 

●

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;

 

●

each of our directors and director nominees;

 

●

each of our named executive officers; and

 

●

all of our current executive officers, directors and director nominees as a group.

 

The percentage ownership information under the column titled “Before Offering” is based on 11,354,450 shares of common stock issued and outstanding as of July 28, 2022. The percentage ownership information under the column titled “After Offering” is based on the sale and issuance of 1,200,000 shares of common stock in this offering (assuming no exercise of the over-allotment option), the issuance of 325,495 shares to certain stockholders immediately prior to the closing of this offering which were previously booked as paid for and owed to such stockholders, and does not include any shares that may be issuable pursuant to any convertible notes outstanding.

 

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable within 60 days after July 28, 2022. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Notwithstanding the foregoing, the number of shares for which the representative’s warrants are exercisable is subject to the number of shares of common stock offered by us in this offering. As a result, the below table assumes that the representative’s warrants are not immediately exercisable or exercisable within 60 days after July 28, 2022 for purposes of determining the beneficial ownership before the offering.

 

The information contained in the following table does not necessarily indicate beneficial ownership for any other purpose. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

Table of Contents

 

Except as otherwise noted below, the address for each person or entity listed in the table is c/o Reborn Coffee Inc., 580 N. Berry St. Brea, CA 92821.

 

		Number of Shares				Percentage of Shares Beneficially Owned
Name of Beneficial Owner		Beneficially Owned				Before Offering				After Offering
5% or Greater Stockholders
Directors and Named Executive Officers
Jay Kim, Chief Executive Officer and Director			2,530,333				21.7	%			19.7	%
Stephan Kim, Chief Financial Officer			--				--				--
Kevin Hartley, former Chief Financial Officer			40,000				0.3	%			0.3	%
Farooq M. Arjomand, Chairman of the Board			3,648,631				31.4	%			28.4	%
Dennis R. Egidi, Vice Chairman of the Board			1,242,792				10.7	%			9.7	%
Sehan Kim, Director			382,273				3.3	%			3.0	%
Hannah Goh, Director			1,000,001				8.6	%			7.8	%
All directors, directors nominees and executive officers as a group (7 persons):			8,844,030				76.0	%			68.9	%

 

*	Represents beneficial ownership of less than 1%.

 

 

SELLING STOCKHOLDERS

 

Selling Stockholder Sales

 

This prospectus covers the possible resale by the Selling Stockholders identified in the table below of up to 1,824,246 shares of our common stock held by the named Selling Stockholders therein.

 

The Selling Stockholders may sell some, all or none of their Selling Stockholder Shares. We do not know how long such Selling Stockholders will hold the Selling Stockholder Shares before selling them, and we currently have no agreements, arrangements or understandings with the Selling Stockholders regarding the sale of any of the Selling Stockholder Shares.

 

Unless otherwise indicated in the footnotes to the below table, no Selling Stockholder has had any material relationship with us or any of our affiliates within the past three years other than as a securityholder of our Company.

 

We have prepared the following table based on information furnished to us by or on behalf of the Selling Stockholders. Since the date on which the Selling Stockholders provided this information, the Selling Stockholders may have sold, transferred or otherwise disposed of all or a portion of the Selling Stockholder Shares in a transaction exempt from the registration requirements of the Securities Act. Unless otherwise indicated in the footnotes below, we believe that: (i) none of the Selling Stockholders are broker-dealers or affiliates of broker-dealers, and (ii) no Selling Stockholder has direct or indirect agreements or understandings with any person to distribute their Selling Stockholder Shares. To the extent any Selling Stockholder identified below is, or is affiliated with, a broker-dealer, it could be deemed to be an “underwriter” within the meaning of the Securities Act. Information about the Selling Stockholders may change over time.

 

The following table presents information regarding the Selling Stockholders and the Selling Stockholder Shares that each may offer and sell from time to time under this prospectus. The table is prepared based on information supplied to us by the Selling Stockholders, and reflects their respective holdings as of July 28, 2022, unless otherwise noted in the footnotes to the table. Beneficial ownership is determined in accordance with the rules of the SEC, and thus represents voting or investment power with respect to our securities. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days after the date of this table. To our knowledge and subject to applicable community property rules, the persons and entities named in the table have sole voting and sole investment power with respect to all equity interests beneficially owned. The percentage of shares beneficially owned before and after the offering is based on 11,354,450 shares of our common stock issued and outstanding on July 28, 2022, and 12,679,945 shares issued and outstanding after the offering (assuming the issuance and sale of 1,200,000 shares in this offering (assuming no exercise of the over-allotment option) and 325,495 shares issuable to certain stockholders immediately prior to the closing of this offering).

 

Selling Stockholder		Number of shares of common stock owned by selling stockholder				Number of shares being registered				Number of shares owned after the offering (1)				Percentage owned after the offering
Cromwell Capital Holdings Inc. (2)			532,559				532,559				0				--
Seung Woo Song (3)			335,000				335,000				0				--
Ki Chang Kim (4)			232,559				232,559				0				--
Indrajith Andrew Weeraratne (5)			202,751				201,600				1,151				*
Julie Kim (6)			100,000				100,000				0				--
Nathalie Beyrard (7)			68,140				58,140				10,000				*
Hong Ma (8)			58,140				58,140				0				--
Dung Pham (9)			58,140				58,140				0				--
Robert Blaine (10)			34,280				34,280				0				--
Sang Jae Lee (11)			25,000				25,000				0				--
James Chae (12)			40,000				20,000				20,000				*
Myung Sik Kim (13)			20,000				20,000				0				--
Young Chang Kim (14)			20,000				20,000				0				--
Eugene Nichols (15)			15,050				15,000				50				*
Ray Baum (16)			13,882				13,500				382				*
BL Pacific LLC (17)			10,000				10,000				0				--
Laila Galadari (18)			48,000				8,000				40,000				*
Thomas & Jayne Avery (19)			7,847				7,000				847				*
Nabil Barakat (20)			6,000				6,000				0				--
Chris Higgins (21)			6,471				6,000				471				*
Bo Engberg (22)			5,084				5,000				84				*
Khanh Quoc Nguyen (23)			5,000				5,000				0				--
Pol San (24)			5,500				5,000				500				*
Sithea & Richer San (25)			6,000				5,000				1,000				*
Kyung Park (26)			54,611				4,828				49,783				*
LP Entertainment LLC (27)			4,000				4,000				0				--
Norma Ponce de  Leon (28)			3,550				3,500				50				*
Jonas Persson (29)			3,300				3,000				300				*
Roger Persson (30)			3,100				3,000				100				*
Lise Romanoff (31)			3,050				3,000				50				*
Patrick Bollar (32)			3,436				2,500				936				*
Deborah Mcguirt (33)			2,911				2,500				411				*
Goran Antic (34)			2,200				2,000				200				*
Elaine Chae (35)			2,000				2,000				0				--
Michael Laub (36)			2,000				2,000				0				--
Vivien Flitton (37)			1,550				1,500				50				*
Christopher Kuruppu (38)			1,500				1,500				0				--
Terrance Kuruppu (39)			1,550				1,500				50				*
Dan Wells (40)			1,550				1,500				50				*
John and Mary Hansen (41)			1,000				1,000				0				--
Kazuko Kusunnoki (42)			1,002				1,000				2				*
Jerry A. Lopes (43)			1,005				1,000				5				*
James New (44)			1,000				1,000				0				--
Laurel Thor (45)			1,000				1,000				0				--
TOTAL:							1,824,246

 

*	represents ownership of less than 1%.

(1)	Assumes all shares being registered hereunder by each Selling Stockholder will be sold after this offering.

(2)	The address for this Selling Stockholder is 4533 McArthur Blvd. 5013, Newport Beach, CA 92660. Paul Edalat has sole voting and dispositive power of these shares.

(3)	The address for this Selling Stockholder is 7017 E. Avenida De Santiago, Anaheim, CA 92807.

(4)	The address for this Selling Stockholder is 66 Elysian Fields Dr., Oakland, CA 94605.

(5)	The address for this Selling Stockholder is 7135 Collins Ave., No. 624, Miami Beach, FL 33141. This Selling Shareholder disclaims any beneficial ownership in the shareholdings of BL Pacific LLC.

 

(6)	The address for this Selling Stockholder is 348 Elmhurst Pl., Fullerton, CA 92835.

(7)	The address for this Selling Stockholder is Villa #1, Jumeirah 2, Dubai, United Arab Emirates.

(8)	The address for this Selling Stockholder is 3858 Shouler Lake Ct., Fremont, CA 94555.

(9)	The address for this Selling Stockholder is 1435 Mardan Dr., San Jose, CA 95132.

(10)	The address for this Selling Stockholder is 11037 Lockport Place, Santa Fe Springs, CA 90670.

(11)	The address for this Selling Stockholder is 1903 Deer Haven Dr., Chino Hills, CA 91709.

(12)	The address for this Selling Stockholder is 15476 Canon Ln, Chino Hills, CA 91709.

(13)	The address for this Selling Stockholder is 2903 Yucatan Pl, Diamond Bar, CA 91765.

(14)	The address for this Selling Stockholder is 2550 Paseo el Palacio, Chino Hills, CA 91709.

(15)	The address for this Selling Stockholder is 131 Olivera Way, Palm Beach Gardens, FL 33418.

(16)	The address for this Selling Stockholder is 7040 Avenida Encinas #104208, Carlsbad, CA 92011.

(17)	The address for this Selling Stockholder is 7135 Collins Ave., No. 624, Miami Beach, FL 33141. Indrajith Andrew Weeraratne has voting and dispositive power over these shares. This Selling Shareholder disclaims any shareholdings in which Indrajith Andrew Weeraratne owns personally.

(18)	The address for this Selling Stockholder is Al Manara, Street 19a, Villa 18, Dubai, United Arab Emirates.

(19)	The address for this Selling Stockholder is 815 Canal St., Turnersville, NJ 08012. Thomas Avery and Jayne Avery have joint voting and dispositive control over these shares.

(20)	The address for this Selling Stockholder is 3735 Atlanta Industrial Pkwy NW, Atlanta, GA 30331.

(21)	The address for this Selling Stockholder is 213 Bradley Ave, Bellmawr, NJ 08031-1302.

(22)	The address for this Selling Stockholder is 7135 Collins Ave. #1234, Miami Beach, FL 33141.

(23)	The address for this Selling Stockholder is 14281 Brookhurst St., Garden Grove, CA 92843.

(24)	The address for this Selling Stockholder is 1209 S. Kingsley Dr, Los Angeles, CA 90006.

(25)	The address for this Selling Stockholder is 8817 Ramona St., Bellflower, CA 90706. Sithea San and Richer San have joint voting and dispositive control over these shares.

(26)	The address for this Selling Stockholder is Expo Apart 305 Dong 102 Ho, Yuseong-gu, Daejeon, South Korea.

(27)	The address for this Selling Stockholder is 7416 Spectrum, Irvine, CA 92618. Lara Abou Saleh has sole voting and dispositive power over the shares.

(28)	The address for this Selling Stockholder is 1236 East Granada Street, Mesa, AZ 85203.

(29)	The address for this Selling Stockholder is Goteborgsvagen 316, Halmstad, 302 30, Sweden.

(30)	The address for this Selling Stockholder is Gustaf Janssons vag 9, Halmstad, 302 91, Sweden.

(31)	The address for this Selling Stockholder is 1 Driftwood Street, Marina del Rey, CA 90292.

(32)	The address for this Selling Stockholder is 10042 Pinedale Drive, Colorado Springs, CO 80920.

(33)	The address for this Selling Stockholder is 5924 Millstone Lane, Stone Mountain, GA 30087.

(34)	The address for this Selling Stockholder is 7135 Collins Ave No. 1234, Miami Beach, FL 33141.

(35)	The address for this Selling Stockholder is 1525 18th St, San Francisco, CA 94107.

(36)	The address for this Selling Stockholder is 924 Calle Negocio, San Clemente, CA 92673.

(37)	The address for this Selling Stockholder is 1649 Wellesley Drive, Santa Monica, CA 90405.

(38)	The address for this Selling Stockholder is 4669 Lawton Way #103, Alexandria, VA 22311.

(39)	The address for this Selling Stockholder is 6607 Byrnes Dr., Fairfax, VA 22030.

(40)	The address for this Selling Stockholder is 11559 Ventura Blvd, Studio City, CA 91604.

(41)	The address for this Selling Stockholder is 6500 Sparrow Hawk Drive, West Palm Beach, FL 33412. John Hansen and Mary Hansen have joint voting and dispositive power over the shares.

(42)	The address for this Selling Stockholder is 7135 Collins Ave No. 624, Miami Beach, FL 33141.

(43)	The address for this Selling Stockholder is 249 Tipperary Lane, Alameda, CA 94502.

(44)	The address for this Selling Stockholder is 2700 Donald Ross Rd., Unit 403, Palm Beach Gardens, FL 33410.

(45)	The address for this Selling Stockholder is 211 E. 69th Way, Long Beach, CA 90805.

 

Plan of Distribution

 

We are registering the Selling Stockholder Shares to permit the resale of the Selling Stockholder Shares by the Selling Stockholders from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale of the Selling Stockholder Shares. We will bear all fees and expenses incident to the registration of the Selling Stockholder Shares in the registration statement of which this prospectus forms a part. The Selling Stockholder Shares will not be sold through the underwriters in this offering.

 

The Selling Stockholders may sell all or a portion of the Selling Stockholder Shares beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the Selling Stockholder Shares are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The Selling Stockholder Shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,

 

●

on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 

●

in the over-the-counter market;

 

●

in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

 

●

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

 

●

block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

●

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

●

an exchange distribution in accordance with the rules of the applicable exchange;

 

●

privately negotiated transactions;

 

●

short sales;

 

●

in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security;

 

●

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

●

a combination of any such methods of sale; or

 

●

any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell securities under Rule 144 or any other exemption from registration under the Securities Act, if available, rather than under this prospectus.

 

If the Selling Stockholders effect such transactions by selling Selling Stockholder Shares to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the Selling Stockholders or commissions from purchasers of the Selling Stockholder Shares for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the Selling Stockholder Shares or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Selling Stockholder Shares in the course of hedging in positions they assume. The Selling Stockholders may also sell Selling Stockholder Shares short and deliver Selling Stockholder Shares covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The Selling Stockholders may also loan or pledge Selling Stockholder Shares to broker-dealers that in turn may sell such shares.

 

The Selling Stockholders may pledge or grant a security interest in some or all of the Selling Stockholder Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the Selling Stockholder Shares from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if necessary, the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this prospectus. The Selling Stockholders also may transfer and donate the Selling Stockholder Shares in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

The Selling Stockholders and any broker-dealer participating in the distribution of the Selling Stockholder Shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the Selling Stockholder Shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of Selling Stockholder Shares being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling Stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.

 

Under the securities laws of some states, the Selling Stockholder Shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the Selling Stockholder Shares may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

 

There can be no assurance that any Selling Stockholder will sell any or all of the Selling Stockholder Shares registered pursuant to the registration statement, of which this prospectus forms a part.

 

The Selling Stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the Selling Stockholder Shares by the Selling Stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the Selling Stockholder Shares to engage in market-making activities with respect to the Selling Stockholder Shares. All of the foregoing may affect the marketability of the Selling Stockholder Shares and the ability of any person or entity to engage in market-making activities with respect to the Selling Stockholder Shares.

 

Once sold under the registration statement, of which this prospectus forms a part, the Selling Stockholder Shares will be freely tradeable in the hands of persons other than our affiliates.

 

 

DESCRIPTION OF SECURITIES

 

Under “Description of Securities,” “we,” “us,” “our,” the “Company” and “our Company” refer to Reborn Coffee, Inc. and not to any of its subsidiaries.

 

General

 

The following description of our capital stock and certain provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to the certificate of incorporation and the bylaws. Copies of these documents are filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will be in effect immediately prior to the completion of this offering.

 

Historical Capitalization Structure

 

Historically, we were authorized to issue an aggregate number of 4,000,000,000 shares of capital stock, of which (i) 3,000,000,000 shares are Class A common stock, $0.0001 par value per share; (ii) 400,000,000 shares are Class B common stock, par value $0.0001 per share; and (iii) 600,000,000 shares of preferred stock, $0.0001 par value per share. In anticipation of this offering, Reborn converted all Class B common stock to Class A common stock and, following such conversion, amended and restated its articles of incorporation to eliminate our Class B class of common stock (thereby eliminating our multi-class structure) and renamed our Class A common stock to “common stock.”

 

Class A Common Stock

 

We were authorized to issue 3,000,000,000 shares of Common Stock. 936,491,737 shares of Class A common stock were issued and outstanding as of December 31, 2021.

 

Each share of Class A common stock had one (1) vote per share for all purposes. Our common stock did not provide a preemptive or conversion right and there were no redemption or sinking fund provisions or rights. Holders of our Class A common stock were not entitled to cumulative voting for election of the Company’s board of directors.

 

The holders of our Class A common stock were entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future.

 

Class B Common Stock

 

We were authorized to issue 400,000,000 shares of Class B common stock. 75,330,873 shares of Class B common stock were issued and outstanding as of December 31, 2021.

 

Each share of Class B common stock entitled the holder to ten (10) votes for each one vote per share of the Class A common stock, and with respect to that vote, was entitled to notice of any stockholders’ meeting in accordance with the Company’s bylaws, and shall be entitled to vote, together as a single class with the holders of Class A common stock with respect to any question or matter upon which the holders of Class A common stock have the right to vote. Class B common stock shall also entitle a holder to vote as a separate class as set forth in the Company’s bylaws.

 

The holders of our Class B common stock were entitled to dividends out of funds legally available when and as declared by our board of directors at the same rate per share as the Common Stock. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future.

 

 

Each share of Class B common stock was convertible into one (1) share of Common Stock, subject to adjustment, at any time at the option of the holder.

 

So long as any shares of Class B common stock are outstanding, we have agreed not to take the following actions without the prior written consent of the holders of at least a majority of the voting power of the then outstanding Class B common stock:

 

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sell, convey or otherwise dispose of or encumber all or substantially all of our assets, or merger with or consolidate with another corporation, other than our wholly-owned subsidiary, or effect any transaction or series of transactions in which more than 50% of the voting power of our company is transferred or disposed of;

 

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alter or change any of the rights of the Class B common stock or increase or decrease the number of shares authorized;

 

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authorize or obligate our company to authorize any other equity security or security which is convertible or exercisable into an equity security of our company which has rights, preferences or privileges which are superior to, on a parity with or similar to the Class B common stock;

 

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redeem or repurchase any of our securities;

 

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amend our articles of incorporation; or

 

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change the authorized number of our board of directors.

 

Preferred Stock

 

We were authorized to issue up to 600,000,000 shares of preferred stock, par value $0.0001 per share, in one or more classes or series within a class as may be determined by our board of directors, who were able to 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 by the board of directors ranked senior to other existing classes of capital stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both. As of December 31, 2021, no shares of our preferred stock had been designated any rights and we had no shares of preferred stock issued and outstanding.

 

Current Capitalization Structure

 

Prior to the completion of this offering, we converted all of our Class B shares into Class A shares, amended and restated our charter to eliminate “Class B” shares, renamed “Class A” to simply “common stock”, reduced our authorized common stock to 40,000,000 shares, reduced our authorized preferred stock to 1,000,000 shares, and then we migrated from Florida to Delaware. Our authorized capital stock now consists of shares that are designated solely as common stock, par value of $0.0001 per share.

 

Common Stock

 

Holders of shares of our common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock do not have cumulative voting rights in the election of directors.

 

Holders of shares of our common stock are entitled to receive dividends at the same rate when, as and if declared by our board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to the rights of the holders of one or more outstanding series of our preferred stock.

 

 

Upon our liquidation, dissolution or winding up, and after payment in full of all amounts required to be paid to creditors, the holders of shares of our common will be entitled to receive pro rata our remaining assets available for distribution.

 

All shares of our common stock that will be outstanding at the time of the completion of the offering will be fully paid and non-assessable. The common stock will not be subject to further calls or assessments by us. Holders of shares of our common stock do not have preemptive, subscription, redemption or conversion rights. There will be no redemption or sinking fund provisions applicable to the common stock. The rights, powers, preferences and privileges of holders of our common stock will be subject to those of the holders of any shares of our preferred stock or any other series or class of stock we may authorize and issue in the future.

 

No shares of common stock will be subject to redemption or have preemptive rights to purchase additional shares of common stock. Holders of shares of our common stock do not have subscription, redemption or conversion rights. There will be no redemption or sinking fund provisions applicable to the common stock. Upon consummation of this offering, all the outstanding shares of common stock will be validly issued, fully paid and non-assessable.

 

Anti-Takeover Provisions

 

Because our stockholders do not have cumulative voting rights, stockholders holding a majority of the voting power of our shares of common stock will be able to elect all our directors. A special meeting of stockholders may be called by a majority of our board of directors, the chair of our board of directors, or our chief executive officer. Our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors.

 

This will make it more difficult for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. This intended to preserve our existing control structure following this offering, facilitate our continued product innovation and the risk-taking that it requires, permit us to continue to prioritize our long-term goals rather than short-term results, enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.

 

Section 203 of the Delaware General Corporation Law

 

When we have a class of voting stock that is either listed on a national securities exchange or held of record by more than 2,000 stockholders, we will be subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, subject to certain exceptions.

 

 

Exclusive Forum

 

Our bylaws contain an exclusive forum provision providing that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors, officers, employees, agents or stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws, or (4) any action asserting a claim that is governed by the internal affairs doctrine. However, the exclusive forum provision states that it shall not apply to actions arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934.

 

In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

 

Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision included in our bylaws. The exclusive forum provision, if enforced, may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable.

 

Corporate Opportunities

 

Our certificate of incorporation provides that we renounce any interest or expectancy in the business opportunities of our its officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries and each such party shall not have any obligation to offer us those opportunities unless presented to one of our directors or officers in his or her capacity as a director or officer.

 

Limitations of Liability and Indemnification

 

See “Executive Compensation-Indemnification Matters.”

 

Exchange Listing

 

We have applied list our common stock on the Nasdaq Capital Market under the symbol “REBN.” The transfer agent’s address is 15500 Roosevelt Blvd, Suite 104, Clearwater, Florida 33760 and the telephone number is (469) 633-0101. 

 

Transfer Agent and Registrar

 

Our transfer agent and registrar is Securities Transfer Corporation.

 

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock, including shares issued on the exercise of outstanding options, in the public market after this offering, or the possibility of these sales or issuances occurring, could adversely affect the prevailing market price for our common stock or impair our ability to raise equity capital.

 

Upon the closing of this offering, we will have outstanding an aggregate of shares of common stock. All the common stock sold in this offering by us, plus any shares sold by us on the exercise of the underwriters’ option to purchase additional common stock from us, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.

 

The remaining shares of common stock will be, and shares of common stock subject to stock options will be on issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. Restricted securities may also be sold outside of the United States to non-U.S. persons in accordance with Rule 904 of Regulation S.

 

Subject to the lock-up agreements and market standoff provisions described below and the provisions of Rule 144 or Regulation S under the Securities Act, as well as our insider trading policy, these restricted securities will be available for sale in the public market after the date of this prospectus.

 

Rule 144

 

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, an eligible stockholder is entitled to sell such shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. To be an eligible stockholder under Rule 144, such stockholder must not be deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and must have beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144, subject to the expiration of the lock-up agreements described below.

 

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell shares on expiration of the lock-up agreements described below, subject, in the case of restricted securities, to such shares having been beneficially owned for at least six months. Beginning 90 days after the date of this prospectus, within any three-month period, such stockholders may sell a number of shares that does not exceed the greater of:

 

	●	1% of the number of shares of common stock then outstanding, which will be equal to approximately 126,680 shares immediately after this offering (assuming no exercise of the over-allotment option); or
	●	the average weekly trading volume of our common stock on the Nasdaq Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

 

Rule 701

 

Rule 701 generally allows a stockholder who was issued shares under a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days, to sell these shares in reliance on Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares under Rule 701, subject to the expiration of the lock-up agreements and market standoff provisions described below.

 

Lock-Up - No Sales of Securities

 

We will agree in the Underwriting Agreement that, without the prior written consent of the EF Hutton, to not, for a period of 12 months after the date of the Underwriting Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (ii) file or caused to be filed any registration statement with the SEC relating to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (iii) complete any offering of debt securities, other than entering into a line of credit with a traditional bank or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock.

 

In addition, our directors, officers and certain stockholders have agreed that for a period of 6 months after the date of this prospectus, without the prior written consent of EF Hutton, and subject to certain exceptions, they will not, directly or indirectly, (i) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, whether now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities; (iii) make any demand for or exercise any right with respect to the registration of any such securities; or (iv) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any such securities.

 

These agreements are described in the section titled “Underwriting.”

 

10b5-1 Plans

 

After the offering, certain of our employees, including our executive officers, and/or directors may enter into written trading plans that are intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934. Sales under these trading plans would not be permitted until the expiration of the lock-up agreements or market standoff agreements relating to the offering described above.

 

 

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF OUR COMMON STOCK

 

The following is a summary of certain material U.S. federal income tax considerations generally applicable to the acquisition, ownership and disposition of our shares of common stock. This discussion applies only to shares of common stock that are held as capital assets for U.S. federal income tax purposes and is applicable only to holders who purchased shares of common stock in this offering.

 

This discussion is a summary only and does not describe all of the tax consequences that may be relevant to you in light of your particular circumstances, including but not limited to the alternative minimum tax, the Medicare tax on certain investment income and the different consequences that may apply if you are subject to special rules that apply to certain types of investors, including but not limited to:

 

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our sponsor, other initial shareholders, officers, or directors;

 

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financial institutions or financial services entities;

 

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broker-dealers;

 

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governments or agencies or instrumentalities thereof;

 

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regulated investment companies;

 

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real estate investment trusts;

 

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expatriates or former long-term residents of the United States;

 

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persons that actually or constructively own 5% or more of our voting shares;

 

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insurance companies;

 

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dealers or traders subject to a mark-to-market method of accounting with respect to our shares of common stock;

 

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persons holding our shares of common stock as part of a “straddle,” hedge, integrated transaction or similar transaction;

 

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U.S. holders (as defined below) whose functional currency is not the U.S. dollar;

 

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partnerships or other pass-through entities for U.S. federal income tax purposes and any beneficial owners of such entities; and

 

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tax-exempt entities.

 

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our shares of common stock, the U.S. federal income tax treatment of a partner, member or other beneficial owner in such partnership will generally depend upon the status of the partner, member or other beneficial owner, the activities of the partnership and certain determinations made at the partner, member or other beneficial owner level. If you are a partner, member or other beneficial owner of a partnership for U.S. federal income tax purposes holding our shares of common stock, you are urged to consult your tax advisor regarding the tax consequences of the acquisition, ownership and disposition of our shares of common stock.

 

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations as of the date hereof, which are subject to change, possibly on a retroactive basis, and changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein. We have not sought, and do not intend to seek, a ruling from the IRS with respect to the statements made and conclusions reached in this summary. There is no guarantee that the IRS or any court would agree with such statements and conclusions. This discussion does not address any aspect of state, local or non-U.S. taxation, or any U.S. federal taxes other than income taxes (such as gift and estate taxes).

 

 

WE URGE PROSPECTIVE HOLDERS TO CONSULT THEIR TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR SHARES OF COMMON STOCK, AS WELL AS ANY STATE, LOCAL AND NON-U.S. INCOME, ESTATE AND OTHER TAX CONSIDERATIONS.

 

U.S. Holders

 

This section applies to you if you are a “U.S. holder.” A U.S. holder is a beneficial owner of our, shares of common stock who or that is, for U.S. federal income tax purposes:

 

	●	an individual who is a citizen or resident of the United States;
	●	a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof or the District of Columbia;
	●	an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
	●	a trust, if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have authority to control all substantial decisions of the trust or (ii) it has a valid election in effect under the Treasury Regulations to be treated as a United States person.

 

Taxation of Distributions. If we pay distributions in cash or other property (other than certain distributions of our shares or rights to acquire our shares) to U.S. holders of shares of our common stock, such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of the common stock and will be treated as described under “U.S. Holders — Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below.

 

 

Dividends we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the preferential tax rate for long-term capital gains. It is unclear whether the redemption rights with respect to the common stock described in this prospectus may prevent a U.S. holder from satisfying the applicable holding period requirements with respect to the dividends received deduction or the preferential tax rate on qualified dividend income, as the case may be. If the holding period requirements are not satisfied, then a corporation may not be able to qualify for the dividends received deduction and would have taxable income equal to the entire dividend amount, and non-corporate holders may be subject to tax on such dividend at regular ordinary income tax rates instead of the preferential rate that applies to qualified dividend income.

 

Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock. Upon a sale or other taxable disposition of our common stock (which, in general, would include a redemption of common stock that is treated as a sale of such common stock as described below), a U.S. holder generally will recognize gain or loss in an amount calculated as discussed in the following paragraph. Any such gain or loss will be capital gain or loss, and generally will be long-term capital gain or loss if the U.S. holder’s holding period for the common stock so disposed of exceeds one year. It is unclear, however, whether the redemption rights with respect to the common stock described in this prospectus may suspend the running of the applicable holding period for this purpose. If the running of the holding period for the common stock is suspended, then non-corporate U.S. holders may not be able to satisfy the one-year holding period requirement for long-term capital gain treatment, in which case any gain on a sale or taxable disposition of the shares would be subject to short-term capital gain treatment and would be taxed at regular ordinary income tax rates. Long-term capital gains recognized by non-corporate U.S. holders will be eligible to be taxed at reduced rates. The deductibility of capital losses is subject to limitations.

 

Generally, the amount of gain or loss recognized by a U.S. holder is equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis in its common stock so disposed of. A U.S. holder’s adjusted tax basis in its common stock generally will equal the U.S. holder’s acquisition cost reduced by any prior distributions treated as a return of capital as discussed above under the heading “U.S. Holders — Taxation of Distributions.”

 

Redemption of Common Stock. In the event that a U.S. holder’s common stock is redeemed pursuant to the redemption provisions described in this prospectus under the section of this prospectus entitled “Description of Securities” or if we purchase a U.S. holder’s common stock in an open market transaction (each of which we refer to as a “redemption”), the treatment of the transaction for U.S. federal income tax purposes will depend on whether the redemption qualifies as a sale or exchange of the common stock under Section 302 of the Code. If the redemption qualifies as a sale or exchange of the common stock, the U.S. holder will be treated as described under “U.S. Holders — Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” above. If the redemption does not qualify as a sale or exchange of the common stock, the U.S. holder will be treated as receiving a corporate distribution with the tax consequences described above under “U.S. Holders — Taxation of Distributions”. Whether a redemption qualifies for sale or exchange treatment will depend largely on the total number of shares of our stock treated as held by the U.S. holder (including any stock constructively owned by the U.S. holder) relative to all of our shares outstanding both before and after the redemption. The redemption of common stock generally will be treated as a sale of the common stock (rather than as a corporate distribution) if the redemption (i) is “substantially disproportionate” with respect to the U.S. holder, (ii) results in a “complete termination” of the U.S. holder’s interest in us or (iii) is “not essentially equivalent to a dividend” with respect to the U.S. holder. These tests are explained more fully below.

 

 

In determining whether any of the foregoing tests are satisfied, a U.S. holder takes into account not only stock actually owned by the U.S. holder, but also shares of our stock that are constructively owned by it. A U.S. holder may constructively own, in addition to stock owned directly, stock owned by certain related individuals and entities in which the U.S. holder has an interest or that have an interest in such U.S. holder, as well as any stock the U.S. holder has a right to acquire by exercise of an option. In order to meet the substantially disproportionate test, the percentage of our outstanding voting stock actually and constructively owned by the U.S. holder immediately following the redemption of common stock must, among other requirements, be less than 80% of the percentage of our outstanding voting stock actually and constructively owned by the U.S. holder immediately before the redemption. There will be a complete termination of a U.S. holder’s interest if either (i) all of the shares of our stock actually and constructively owned by the U.S. holder are redeemed or (ii) all of the shares of our stock actually owned by the U.S. holder are redeemed and the U.S. holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of stock owned by certain family members and the U.S. holder does not constructively own any other shares of our stock. The redemption of the common stock will not be essentially equivalent to a dividend with respect to a U.S. holder if the redemption results in a “meaningful reduction” of the U.S. holder’s proportionate interest in us. Whether the redemption will result in a meaningful reduction in a U.S. holder’s proportionate interest in us will depend on the particular facts and circumstances. However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority stockholder in a publicly held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” A U.S. holder should consult with its own tax advisors as to the tax consequences of a redemption.

 

If none of the foregoing tests is satisfied, then the redemption will be treated as a corporate distribution and the tax effects will be as described under “U.S. Holders — Taxation of Distributions,” above. After the application of those rules, any remaining tax basis of the U.S. holder in the redeemed shares of common stock will be added to the U.S. holder’s adjusted tax basis in its remaining shares, or, if it has none, to the U.S. holder’s adjusted tax basis possibly in other stock constructively owned by it.

 

Information Reporting and Backup Withholding. In general, information reporting requirements may apply to dividends paid to a U.S. holder and to the proceeds of the sale or other disposition of our shares of common stock, unless the U.S. holder is an exempt recipient. Backup withholding may apply to such payments if the U.S. holder fails to provide a taxpayer identification number, a certification of exempt status or has been notified by the IRS that it is subject to backup withholding (and such notification has not been withdrawn).

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS.

 

 

All U.S. holders should consult their tax advisors regarding the application of information reporting and backup withholding to them.

 

Non-U.S. Holders

 

This section applies to you if you are a “Non-U.S. holder.” As used herein, the term “Non-U.S. holder” means a beneficial owner of our common stock who or that is an individual, corporation, estate or trust and is not a U.S. holder, but generally does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition. If you are such an individual, you should consult your tax advisor regarding the U.S. federal income tax consequences of the acquisition, ownership or sale or other disposition of our shares of common stock.

 

Taxation of Distributions. In general, any distributions we make to a Non-U.S. holder of shares of our common stock, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute dividends for U.S. federal income tax purposes. Provided such dividends are not effectively connected with the Non-U.S. holder’s conduct of a trade or business within the United States (and are not attributable to a U.S. permanent establishment under an applicable treaty), we will be required to withhold tax from the gross amount of the dividend at a rate of 30%, unless such Non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E, as applicable). In the case of any constructive dividend, it is possible that this tax would be withheld from any amount owed to a Non-U.S. holder by the applicable withholding agent, including cash distributions on other property or sale proceeds from other property subsequently paid or credited to such holder. Any distribution not constituting a dividend will be treated first as reducing (but not below zero) the Non-U.S. holder’s adjusted tax basis in its shares of our common stock and, to the extent such distribution exceeds the Non-U.S. holder’s adjusted tax basis, as gain realized from the sale or other disposition of the common stock, which will be treated as described under “Non-U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below. In addition, if we determine that we are classified as a “United States real property holding corporation” (see “Non-U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock” below) and shares of our common stock are not considered to be regularly traded on an established securities market, we will withhold 15% of any distribution that exceeds our current and accumulated earnings and profits, including a distribution in redemption of shares of our common stock.

 

Dividends we pay to a Non-U.S. holder that are effectively connected with such Non-U.S. holder’s conduct of a trade or business within the United States (or, if an income tax treaty applies, are attributable to a U.S. permanent establishment or fixed base maintained by the non-U.S. holder) will generally not be subject to withholding tax, provided such Non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends will generally be subject to regular U.S. federal income tax as if the Non-U.S. holder were a United States resident, subject to an applicable income tax treaty providing otherwise. A Non-U.S. corporation receiving effectively connected dividends may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower applicable treaty rate).

 

Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock. Subject to the discussion of FATCA and backup withholding below, a Non-U.S. holder generally will not be subject to U.S. federal income or withholding tax in respect of gain recognized on a sale, taxable exchange or other taxable disposition of our common stock unless:

 

	●	the gain is effectively connected with the conduct of a trade or business by the Non-U.S. holder within the United States (and, under certain income tax treaties, is attributable to a permanent establishment or fixed base in the United States maintained by the Non-U.S. holder); or
	●	we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition of the applicable security or the period that the Non-U.S. holder held the applicable security, and, in the case where shares of our common stock are regularly traded on an established securities market, the Non-U.S. holder has owned, directly or constructively, more than 5% of our common stock at any time within the shorter of the five-year period preceding the disposition of the applicable security or such Non-U.S. holder’s holding period for the applicable security. There can be no assurance that our common stock will be treated as regularly traded on an established securities market for this purpose.

 

 

Unless an applicable income tax treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable U.S. federal income tax rates as if the Non-U.S. holder were a United States resident. Any gains described in the first bullet point above of a Non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30% rate (or a lower treaty rate).

 

If the second bullet point above applies to a Non-U.S. holder, gain recognized by such holder on the sale, exchange or other disposition of our common stock will be subject to tax at generally applicable U.S. federal income tax rates. In addition, if shares of our common stock are not considered to be regularly traded on an established securities market, such Non-U.S. holder will be subject to withholding at a rate of 15% of the amount realized upon such disposition. We believe that we are not currently and we do not anticipate becoming a United States real property holding corporation for US federal income tax purposes, although there can be no assurance that we will not become a United States real property holding corporation in the future. We will be classified as a United States real property holding corporation if the fair market value of our “United States real property interests” equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes.

 

Redemption of Common Stock. The characterization for U.S. federal income tax purposes of the redemption of a Non-U.S. holder’s common stock generally will correspond to the U.S. federal income tax characterization of such a redemption of a U.S. holder’s common stock, as described under “U.S. Holders — Redemption of Common Stock” above, and the consequences of the redemption to the Non-U.S. holder will be as described above under “Non-U.S. Holders — Taxation of Distributions” and “Non-U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Common Stock,” as applicable.

 

Information Reporting and Backup Withholding. Information returns will be filed with the IRS in connection with payments of dividends and the proceeds from a sale or other disposition of our, shares of common stock. A Non-U.S. holder may have to comply with certification procedures to establish that it is not a United States person (by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption) in order to avoid information reporting and backup withholding requirements. The certification procedures required to claim a reduced rate of withholding under a treaty generally will satisfy the certification requirements necessary to avoid the backup withholding as well.

 

Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a Non-U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

 

All Non-U.S. holders should consult their tax advisors regarding the application of information reporting and backup withholding to them.

 

FATCA Withholding Taxes. Sections 1471 through 1474 of the Code and the Treasury Regulations and administrative guidance promulgated thereunder (commonly referred as the “Foreign Account Tax Compliance Act” or “FATCA”) generally impose withholding at a rate of 30% in certain circumstances on dividends in respect of our shares of common stock which are held by or through certain foreign financial institutions (including investment funds), unless any such institution (1) enters into, and complies with, an agreement with the IRS to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments, or (2) if required under an intergovernmental agreement between the United States and an applicable foreign country, reports such information to its local tax authority, which will exchange such information with the U.S. authorities. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Accordingly, the entity through which our shares of common stock are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of our shares of common stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exceptions will generally be subject to withholding at a rate of 30%, unless such entity either (1) certifies to us or the applicable withholding agent that such entity does not have any “substantial United States owners” or (2) provides certain information regarding the entity’s “substantial United States owners,” which will in turn be provided to the U.S. Department of Treasury. The U.S. Department of the Treasury has proposed regulations, which eliminate the federal withholding tax of 30% applicable to the gross proceeds of a sale or other disposition of our common stock. Withholding agents may rely on the proposed Treasury Regulations until final regulations are issued. All prospective investors should consult their tax advisors regarding the possible implications of FATCA on their investment in our shares of common stock.

 

THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER’S PARTICULAR SITUATION. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, ESTATE, NON-U.S. AND OTHER TAX LAWS AND TAX TREATIES AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. OR OTHER TAX LAWS.

 

 

UNDERWRITING

 

We are offering the shares of common stock described in this prospectus through EF Hutton, division of Benchmark Investments, LLC, who is acting as the representative of the underwriters of this offering (the “Representative”). The underwriting agreement that we intend to enter into with the Representative (the “Underwriting Agreement”) will provide that the obligations of the underwriters are subject to representations, warranties and conditions contained therein. The underwriters will agree to buy, subject to the terms of the Underwriting Agreement, the number of shares of common stock listed opposite their names below. Pursuant to the Underwriting Agreement, the underwriters will be committed to purchase and pay for all of the shares of common stock if any are purchased, other than those shares of common stock covered by the over-allotment option described below.

 

Underwriters		Assumed Number of Shares of Common Stock(1)
EF Hutton, division of Benchmark Investments, LLC
Total			1,200,000

 

(1)	At an offering price of $5.00 per share of common stock.

 

The underwriters have advised us that they propose to offer the shares of common stock to the public at the public offering price set forth on the cover of this prospectus. The underwriters propose to offer the shares of common stock to certain dealers at the same price less a concession of not more than $ per unit.

 

A copy of the form of underwriting agreement will be filed as an exhibit to the registration statement of which this prospectus is a part.

 

The shares of common stock sold in this offering are expected to be ready for delivery on or about       , 2022, against payment in immediately available funds. The underwriters may reject all or part of any order.

 

Over-Allotment Option

 

Pursuant to the Underwriting Agreement, we will grant to the underwriters an option to purchase from us up to an additional 180,000 shares of common stock, representing 15% of the shares of common stock sold in the offering, assuming a public offering price of $5.00 per share of common stock, solely to cover over-allotments, if any, at the public offering price, less the underwriting discounts. The underwriters may exercise this option any time during the 45-day period after the closing date of the offering, but only to cover over-allotments, if any. To the extent the underwriters exercise the option, the underwriters will become obligated, subject to certain conditions, to purchase the shares for which they exercise the option.

 

		Per Share of Common Stock(1)				Total with No Over- Allotment(1)				Total with Over- Allotment(1)
Initial public offering price		$	5.00			$	6,000,000			$	6,900,000
Underwriting discount to be paid by us (2)		$	0.20			$	240,000			$	276,000
Non-accountable expense allowance (1.0%)		$	0.05			$	50,000			$	69,000
Proceeds, before expenses to us		$	4.75			$	5,710,000			$	6,555,000

 

(1)

At an assumed offering price of $5.00 per share of common stock. The underwriting discount will be 8.0%; provided that it will be equal to 4.0% for the sale of shares to investors introduced to the underwriters by the Company. The above assumes all shares are sold to investors introduced to the underwriters by the Company.

 

 

Underwriting Discount

 

We have agreed to pay the underwriters a cash fee equal to eight percent (8.0%) of the aggregate gross proceeds of received by the Company from the securities sold in this offering, provided that such cash fee will be equal to four percent (4.0%) for the sale of shares to investors introduced to the underwriters by the Company. We have further agreed to pay a non-accountable expense allowance to the representative of the underwriters equal to one percent (1.0%) of the gross proceeds received by the Company at the closing of the offering.

 

Other Compensation

 

In addition, we have agreed to issue to the Representative warrants to purchase a number of shares of common stock equal to 5.0% of the aggregate number of shares of common stock sold in the offering (including shares of common stock sold upon exercise of the over-allotment option). The representative’s warrants will have a term of five years from the effective date of the offering, will have an exercise price equal to 125% of the public offering price set forth on the cover page of this prospectus supplement, will provide for a “cashless” exercise, and will contain certain antidilution adjustments (but excluding any price based anti-dilution). The warrants do not have a demand registration right with a duration of more than five years from the commencement of sales of the offering pursuant to FINRA Rule 5110(g)(8)(C), and do not have piggyback registration rights with a duration of more than seven years from the commencement of sales of the offering pursuant to FINRA Rule 5110(g)(8)(D). Pursuant to FINRA Rule 5110(g), the warrants and any shares of common stock issued upon exercise of the warrants may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities held by the underwriters or related persons do not exceed 1% of the securities being offered; (iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth above for the remainder of the time period.

 

We estimate that our total expenses of this offering, excluding underwriting discounts, will be approximately $750,000, which includes a maximum of $175,000 of out of pocket expenses for “road show,” diligence, and reasonable legal fees and disbursements for underwriters’ counsel, subject to a maximum of $50,000 in the event that this offering is not consummated. We have already advanced $50,000 to EF Hutton, which will be applied against their out of pocket expenses. We have also agreed to reimburse the underwriters, subject to compliance with FINRA Rule 5110(g).

 

Indemnification

 

Pursuant to the Underwriting Agreement, we also intend to agree to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

 

Offering Information

 

No action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. None of the securities included in this offering may be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sales of any of the securities being offered hereby be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of securities and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy our securities in any jurisdiction where that would not be permitted or legal.

 

The underwriters have advised us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

 

The underwriters may allocate no more than $ of the securities issued in this offering to members of management and their affiliates.

 

  

Tail Rights

 

In the event that the Representative does not consummate the offering, the Representative shall be entitled to a cash fee equal to eight percent (8.0%) of the gross proceeds received by the Company from the sale of any securities or debt instruments to any investor actually introduced by the Representative to the Company during the engagement period (the “Tail Financing”), and such Tail Financing is consummated at any time during the engagement period or within the twelve (12) month period following the expiration of the engagement period, provided that such financing is by a party actually introduced to the Company in an offering in which the Company has direct knowledge of such party’s participation and not a party that the Company can demonstrate was already known to the Company. In addition, unless (x) the Company terminates the underwriting agreement for “Cause” (as defined in the Underwriting Agreement), or (y) the Representative fails to provide the underwriting services provided in the underwriting agreement, upon termination of such agreement, if the Company subsequently completes a public or private financing with any investors introduced to the Company by the Representative during the twelve (12) month period following such termination, the Representative shall be entitled to receive the same compensation to be paid to the Representative in connection with this offering.

 

Lock-Up – No Sales of Securities

 

The Company, on behalf of itself and any successor entity, will agree in the Underwriting Agreement that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of the Underwriting Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or caused to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit with a traditional bank or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii), (iii) or (iv) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.

 

In addition, our directors, officers and certain stockholders have agreed that for a period of 6 months after the date of this prospectus, without the prior written consent of the Representative, and subject to certain exceptions, they will not, directly or indirectly, (i) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any common stock of the Company or any securities convertible into or exercisable or exchangeable for the common stock of the Company, whether now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities; (iii) make any demand for or exercise any right with respect to the registration of any such securities; or (iv) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any such securities.

 

Price Stabilization, Short Positions and Penalty Bids

 

To facilitate this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our securities during and after the offering. Specifically, the underwriters may over-allot or otherwise create a short position in our securities for their own account by selling more securities than we have sold to the underwriters. The underwriters may close out any short position by either exercising its option to purchase additional securities or purchasing securities in the open market.

 

In addition, the underwriters may stabilize or maintain the price of our securities by bidding for or purchasing securities in the open market and may impose penalty bids. If penalty bids are imposed, selling concessions allowed to broker-dealers participating in this offering are reclaimed if securities previously distributed in this offering are repurchased, whether in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of our securities at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of our securities to the extent that it discourages resales of our securities. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected on the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.

 

In connection with this offering, the underwriters and selling group members, if any, may also engage in passive market making transactions in our securities on the Nasdaq Capital Market. Passive market making consists of displaying bids on the Nasdaq Capital Market by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of our securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

 

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our securities. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

 

 

Affiliations

 

Each underwriter and its respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. The underwriters may in the future receive customary fees and commissions for these transactions. We have not engaged the underwriters to perform any services for us in the previous 180 days, nor do we have any agreement to engage the underwriters to perform any services for us in the future, subject to the right to act as an advisor as described above.

 

In the ordinary course of its various business activities, each underwriter and its respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for its own account and for the accounts of its customers, and such investment and securities activities may involve securities and/or instruments of the issuer. Each underwriter and its respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

Electronic Offer, Sale and Distribution

 

In connection with this offering, the underwriters or certain of the securities dealers may distribute prospectuses by electronic means, such as e-mail.

 

Selling Restrictions

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

Hong Kong

 

The securities may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (Companies (Winding Up and Miscellaneous Provisions) Ordinance) or which do not constitute an invitation to the public within the meaning of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (Securities and Futures Ordinance), or (ii) to “professional investors” as defined in the Securities and Futures Ordinance and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and no advertisement, invitation or document relating to the securities may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” in Hong Kong as defined in the Securities and Futures Ordinance and any rules made thereunder.

 

Saudi Arabia

 

This prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities Regulations issued by the Capital Market Authority. The Capital Market Authority does not make any representation as to the accuracy or completeness of this prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this prospectus you should consult an authorized financial adviser.

 

United Arab Emirates

 

The securities have not been offered or sold, and will not be offered or sold, directly or indirectly, in the United Arab Emirates, except: (i) in compliance with all applicable laws and regulations of the United Arab Emirates; and (ii) through persons or corporate entities authorized and licensed to provide investment advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the United Arab Emirates. The information contained in this prospectus does not constitute a public offer of securities in the United Arab Emirates in accordance with the Commercial Companies Law (Federal Law No. 8 of 1984 (as amended)) or otherwise and is not intended to be a public offer and is addressed only to persons who are sophisticated investors.

 

South Korea

 

The securities may not be offered, sold and delivered directly or indirectly, or offered or sold to any person for reoffering or resale, directly or indirectly, in South Korea or to any resident of South Korea except pursuant to the applicable laws and regulations of South Korea, including the South Korea Securities and Exchange Act and the Foreign Exchange Transaction Law and the decrees and regulations thereunder. The securities have not been registered with the Financial Services Commission of South Korea for public offering in South Korea. Furthermore, the securities may not be resold to South Korean residents unless the purchaser of the securities complies with all applicable regulatory requirements (including but not limited to government approval requirements under the Foreign Exchange Transaction Law and its subordinate decrees and regulations) in connection with the purchase of the securities.

 

 

LEGAL MATTERS

 

The validity of the shares of common stock being offered by this prospectus will be passed upon for us by K&L Gates, LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Mitchell Silberberg & Knupp LLP, Los Angeles, California.

 

EXPERTS

 

The financial statement of Reborn Coffee, Inc. and subsidiaries as of December 31, 2021 and 2020 and for the years then ended have been included herein in reliance upon the reports of Paris, Kreit & Chiu CPA LLP (formerly Benjamin & Ko), an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

 

Upon the completion of this offering, we will be subject to the information reporting requirements of the Exchange Act, and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available at www.sec.gov.

 

We also maintain a website at www.reborncoffee.com. Information contained in, or accessible through, our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is only as an inactive textual reference.

 

 

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020	F-3
Consolidated Statements of Operations for Fiscal Years ended December 31, 2021 and December 31, 2020	F-4
Consolidated Statement of Stockholders’ Equity for Fiscal Years ended December 31, 2021 and December 31, 2020	F-5
Consolidated Statements of Cash Flows for Fiscal Years ended December 31, 2021 and December 31, 2020	F-6
Notes to the Consolidated Financial Statements Fiscal Years ended December 31, 2021 and December 31, 2020	F-7
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	F-25
Unaudited Condensed Consolidated Statements of Operations for Three Months ended March 31, 2022 and March 31, 2021	F-26
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for Three Months ended March 31, 2022 and March 31, 2021	F-27
Unaudited Condensed Consolidated Statements of Cash Flows for Three Months ended March 31, 2022  and March 31, 2021	F-28
Notes to the Unaudited Condensed Consolidated Financial Statements for Three Months ended March 31, 2022 and March 31, 2021	F-29

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors

and Stockholders of Reborn Coffee, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Reborn Coffee, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related statements of operation, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s accumulated deficit, significant operating losses and cash used in operations raise substantial doubt about its ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Going Concern

 

As described further in Note 2 to the consolidated financial statements, the Company has incurred losses each year since 2018 (year of inception), and expects to incur additional losses in the future.

 

We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows.

 

Our audit procedures related to the Company’s assertion on its ability to continue as a going concern included the following, among others:

 

We reviewed the Company’s working capital and liquidity ratios and forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the consolidated financial statement issuance date. This testing included inquiries with management, comparison of prior period forecasts to actual results, consideration of positive and negative evidence impacting management’s forecasts, the Company’s financing arrangements in place as of the report date, market and industry factors and consideration of the Company’s relationships with its financing partners.

 

Restatement

 

As discussed in Note 15 to the consolidated financial statements, the 2021 consolidated financial statements have been restated to show the effects of a stock split and conversion and elimination of Class B Common Stock. Additionally the 2020 consolidated financial statements have been restated to account for shares issued under a make-whole provision.

 

/s/ Paris, Kreit and Chui CPA LLP

 

We have served as the Company’s auditor since 2020.

 

New York, NY

 

April 13, 2022, except for the effect of a stock split and conversion and elimination of Class B Common Stock as described in Note 15, which is dated June 27, 2022 and the effect of deemed dividends on a make-whole provision as described in Note 15, which is dated August 1, 2022. 

   

Consolidated Balance Sheet

 

December 31,		2021				2020
ASSETS
Current assets:
Cash and cash equivalents		$	905,051			$	128,568
Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively			-				3,853
Inventories, net			88,877				15,279
Prepaid expense and other current assets			191,838				59,779
Total current assets			1,185,766				207,479
Property and equipment, net			1,110,890				627,341
Operating lease right-of-use asset			2,466,873				1,141,141
Total assets		$	4,763,529			$	1,975,961
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	45,748			$	73,319
Accrued expenses and current liabilities			124,535				62,203
Loans payable to financial institutions			98,475				12,549
Loans payable to shareholders			-				1,091,287
Current portion of loan payable, emergency injury disaster loan (EIDL)			7,957				3,448
Current portion of loan payable, payroll protection program (PPP)			42,345				83,056
Current portion of equipment loan payable			15,989				19,187
Current portion of operating lease liabilities			578,419				194,583
Total current liabilities			913,468				1,539,632
Loans payable to financial institutions, less current portion			23,228				-
Loan payable, emergency injury disaster loan (EIDL), less current portion			492,043				146,552
Loan payable, payroll protection program (PPP), less current portion			124,793				31,944
Equipment loan payable, less current portion			-				15,989
Operating lease liabilities, less current portion			2,011,702				994,240
Total liabilities			3,565,234				2,728,357
Commitments and Contingencies
Stockholders’ equity (deficit)
Common Stock, $0.0001 par value, 40,000,000 shares authorized; 11,634,523 and 10,443,721 shares issued and outstanding at December 31, 2021 and 2020, respectively			1,163				1,045
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding at December 31, 2021 and 2020			-				-
Additional paid-in capital			9,674,036				4,733,063
Subscription of common stock			-				(450,000	)
Accumulated deficit			(8,476,904	)			(5,036,504	)
Total stockholders’ equity (deficit)			1,198,295				(752,396	)
Total liabilities and stockholders’ equity		$	4,763,529			$	1,975,961

 

See accompanying notes to consolidated financial statement

  

  

Consolidated Statements of Operations

 

Years Ended December 31,		2021				2020 (As Restated)
Net revenues:
Stores		$	2,204,201			$	759,644
Wholesale and online			75,871				33,444
Total net revenues			2,280,072				793,088
Operating costs and expenses:
Product, food and drink costs—stores			821,713				321,244
Cost of sales—wholesale and online			33,231				14,650
General and administrative			3,988,805				1,513,650
Total operating costs and expenses			4,843,749				1,849,544
Loss from operations			(2,563,677	)			(1,056,456	)
Other income (expense):
Other income			7,631
Economy injury disaster loan (EIDL) grant income			-				10,000
Paycheck protection program (PPP) loan forgiven income			115,000				-
Interest expense			(16,172	)			(21,510	)
Loss on extinguishment of debt			(982,383	)			-
Total other income (expense), net			(875,924	)			(11,510	)
Loss before income taxes			(3,439,601	)			(1,067,966	)
Provision for income taxes			800				800
Net loss		$	(3,440,401	)		$	(1,068,766	)
Deemed dividend on make-whole provision			-				(206,147	)
Net loss attributable to common shareholders		$	(3,440,401	)		$	(1,274,913	)
Loss per share:
Basic and diluted		$	(0.32	)		$	(0.19	)
Weighted average number of common shares outstanding:
Basic and diluted			10,889,791				6,889,510

 

See accompanying notes to consolidated financial statements

  

   

Consolidated Shareholders’ Equity (Deficit)

 

																		Additional				Subscription of								Total Shareholders’
		Common Stock								Preferred Stock								Paid-in				Common				Accumulated				Equity
		Shares				Amount				Shares				Amount				Capital				Stock				Deficit				(Deficit)
Balance as of December 31, 2019			5,675,827			$	568				-			$	-			$	1,957,433			$	(500,000	)		$	(3,967,738	)		$	(2,509,737	)
Net loss			-				-				-				-				-				-				(1,068,766	)			(1,068,766	)
Stock dividends			124,610				13				-				-				(13	)			-				-				-
Issuance of common stock under make-whole provision (as restated)			241,300				24				-				-				206,123				-				-				206,147
Deemed dividend on make-whole provision (As Restated)			-				-				-				-				(206,147	)			-				-				(206,147	)
Payments received from stock subscription			-				-				-				-				-				500,000				-				500,000
Common stock issued			1,569,767				157				-				-				1,349,843				(450,000	)			-				900,000
Conversion of debt into common stock			2,832,216				283				-				-				1,425,825				-				-				1,426,108
Balance as of December 31, 2020 (As Restated)			10,443,721				1,045				-				-				4,733,063				(450,000	)			(5,036,504	)			(752,396	)
Net loss			-				-				-				-				-				-				(3,440,401	)			(3,440,401	)
Conversion of debt into common stock			402,954				40				-				-				2,014,726				-				-				2,014,766
Stock issued for store acquisition			232,558				23				-				-				149,977				-				-				150,000
Stock compensation – issuance for services			110,000				11				-				-				549,989				-				-				550,000
Common stock issued			31,875				3				-				-				(3	)			-				-				-
Payments received from prior year subscription											-												450,000								450,000
Stock subscription			413,415				41				-				-				2,226,284				-				-				2,226,325
Balance as of December 31, 2021			11,634,523			$	1,163				-			$	-			$	9,674,036			$	-			$	(8,476,904	)		$	1,198,295

 

See accompanying notes to consolidated financial statements.

  

 

Consolidated Statements of Cash Flows

 

Years Ended December 31,		2021				2020
Cash flows from operating activities:
Net loss		$	(3,440,401	)		$	(1,068,767	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation			550,000				-
Depreciation			174,696				121,905
Loss on extinguishment of debt			982,383				-
Forgiveness of Paycheck protection program (PPP) loan			(115,000	)			-
Changes in operating assets and liabilities:
Accounts receivable			3,853				16,606
Inventories			(73,598	)			(6,079	)
Prepaid expense and other current assets			(132,059	)			(10,000	)
Accounts payable			(27,571	)			72,496
Accrued expenses and current liabilities			137,898				(11,088	)
Net cash used in operating activities			(1,949,820	)			(884,927	)
Cash flows from investing activities:
Purchases of property and equipment			(348,224	)			(115,841	)
Reacquisition of store			(150,000	)			-
Net cash used in investing activities			(498,224	)			(115,841	)
Cash flows from financing activities:
Bank overdrafts			-				(3,396	)
Proceeds from issuance of common stock			2,688,874				1,400,000
Proceeds from loans			1,028,027				265,000
Repayments of loans			(473,187	)			(513,081	)
Repayments of equipment loan payable			(19,187	)			(19,187	)
Net cash provided by financing activities			3,224,527				1,129,336
Net increase in cash			776,483				128,568
Cash at beginning of period			128,568				-
Cash at end of period		$	905,051			$	128,568
Supplemental disclosures of non-cash financing activities:
Issuance of common shares for repurchase of lease and leasehold improvements		$	150,000			$	-
Conversion of debt to common stock issuances		$	2,014,766			$	1,426,108
Forgiveness of paycheck protection program (PPP) loan		$	115,000			$	-
Deemed dividend on make-whole provision		$	-			$	206,147
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Interest		$	16,172			$	21,510
Income taxes		$	800			$	800

 

See accompanying notes to consolidated financial statements.

  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF OPERATIONS

 

Reborn Coffee, Inc. (“Reborn”) was incorporated in the State of Florida in January 2018. Reborn did not have significant transactions since formation. 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. The franchisee obtains a license to develop and operate a store under the strict compliance with terms of the agreement. The specific rights the franchisee is granted is to develop, own, and/or operate franchisee’s Reborn Coffee stores. The non-refundable initial franchise fee is $20,000. In addition, the franchisee is required to pay the company a royalty fee equal to 5% of the weekly gross sales of their respective store.

 

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reporting

 

The consolidated financial statements include Reborn Coffee, Inc. and its wholly owned subsidiaries as of and for the years ended December 31, 2021 and 2020.

 

Basis of Presentation and Consolidation

 

The accompanying 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.

 

Going Concern

 

The accompanying 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 $8,476,904 at December 31, 2021, and had a net loss of $3,440,401 for the year ended December 31, 2021 and net cash used in operating activities of $1,949,820 for the year ended December 31, 2021. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

   

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 year ended December 31, 2020, however, that of December 31, 2021 has increased from $793,088 to $2,280,072, and the Company expects consistent increase in sales with the opening of more stores.

 

The 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. 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 96% 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 4% of the Company’s total revenue.
	●	Loyalties and Other Fees
		Franchise revenues consists of royalty fee and other franchise fees. Royalty fee is based on a percentage of 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 years ended December 31, 2021 and 2020. Other fees are earned as incurred and the Company did not have any other fee revenue for the years ended December 31, 2021 and 2020.
	●	Customer Loyalty Program
		The Company has a loyalty program whereby a customer and receive a discounted or free beverage after a number of prior purchases.  The costs of providing the reward are recognized when incurred and there is no revenue allocated for original purchases to the provision of the reward since the program is not significant and the usage is uncertain.

 

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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. These include rent and utilities, payroll and benefits, and depreciation expenses.

 

Advertising Expense

 

Advertising costs are expensed as incurred. Advertising expenses amounted to $82,351 and $73,282 for the years ended December 31, 2021 and 2020, 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 payroll and recruiting expense, training, marketing, rent, travel, and supplies, and are expensed as incurred.

  

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 December 31, 2021 and 2020, 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.

 

   

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 (Note 11).

 

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 years ended December 31, 2021 and 2020.

 

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 years ended December 31, 2021 and 2020.

 

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 December 31, 2021 and 2020, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

 

   

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 December 31, 2021 and 2020, 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 years ended December 31, 2021 and 2020.

 

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.

 

The Company purchases from various vendors for its operations. For the years ended December 31, 2021 and 2020, no purchases from any vendors accounted for a significant amount of the Company’s bean coffee purchases.

 

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 temporary store closures, reduced customer traffic and changes made to our operations, had a material negative impact on our financial results for 2021 and 2020.

 

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.

 

   

3. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

December 31,		2021				2020
Furniture and equipment		$	779,649			$	555,802
Leasehold improvement			639,602				532,367
Store construction			52,161				24,998
Store			300,000				-
Total property and equipment			1,771,412				1,113,167
Less accumulated depreciation			(660,522	)			(485,826	)
Total property and equipment, net		$	1,110,890			$	627,341

 

In February 2021, the Company repurchased its retail location in Corona Del Mar.  The purchase price was $300,000, comprised of $150,000 in cash and 23,255,814 shares of the Company’s Class A Common Stock.  The Company recorded the assumption of the ongoing lease for the store, which included a right of use asset of $183,442 and a lease liability of $193,463 (see Note 11). 

 

Depreciation expense on property and equipment amounted to approximately $174,696 and $121,905 for the years ended December 31, 2021 and 2020, respectively.

 

4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS

 

Loans payable to financial institutions consist of the following:

 

December 31,		2021				2020
October 2019- Loan agreement with principal amount of $138,600 and repayment amount of $48,510 for a total of $187,110. The loan payable is due on demand.		$	-			$	12,549
July 2021 - Loan agreement with principal amount of $90,000 and repayment rate of 19% for a total of $101,700. The loan payable matures on January 31, 2023.			52,819				-
August 2021 - Loan agreement with principal amount of $72,500 and a repayment rate of 18.5% for a total of $81,925. The loan payable matures on February 10, 2023			36,502				-
August 2021 - Loan agreement with principal amount of $67,500 and repayment rate of 18.5% for a total of $76,275. The loan payable matures on February 11, 2023			32,382				-
Total loan payable		$	121,703			$	12,549
Less: current portion			(98,475	)			(12,549	)
Total loan payable, net of current		$	23,228			$	-

 

  

4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS (continued)

 

October 2019 - $ 187,100 loan payable

 

In October 2019, the Company entered into a loan agreement with Fora Financial in the principal amount of $138,600 and remaining principal amount of $48,510. The loan payable has a maturity date on October 11, 2019. The loan is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $12,549, respectively.

 

July 2021 - $ 101,700 loan payable

 

In July 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $90,000 with loan cost $11,700. The loan payable has a maturity date on January 31, 2023. As of December 31, 2021 and December 31, 2020, there was a balance outstanding of $52,819 and $0, respectively.

 

August 2021 - $81,925 loan payable

 

In August 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $72,500 with loan cost $9,425. The loan payable has a maturity date on February 10, 2023. As of December 31, 2021 and December 31, 2020, there was a balance outstanding of $36,502 and $0, respectively.

 

August 2021 - $76,275 loan payable

 

In August 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $67,500 with loan cost $8,775. The loan payable has a maturity date on February 11, 2023. As of December 31, 2021 and December 31, 2020, there was a balance outstanding of $32,382 and $0, respectively.

 

  

5. LOANS PAYABLE TO SHAREHOLDERS

 

Loan payable to shareholders consists of the following:

 

December 31,		2021				2020
December 2016 - Non-bearing interest loan payable due on demand		$	-			$	782,383
December 2016 - Non-bearing interest loan payable due on demand			-				307,404
Total loan payable – shareholders		$	-			$	1,089,787

 

December 2016 - $ 1,489,809 non-bearing interest loan

 

On December 2016, the Company received a non-bearing interest loan from Farooq Arjomand, Chairman of the Company. The loan payable is due on demand. The loan was converted to 31,295,320 shares of Class A common stock at $0.025 per share in September 2021. The Company determined the fair value of common stock at $0.050, which was the price per share for the Company’s Reg A offering. The Company accounted for the conversion in accordance with ASC Topic 470-50, Debt – Modification and Extinguishment and as a result of the conversion, the Company recorded a loss on the extinguishment of debt of $782,383 for the year ended December 31, 2021. As of December 31, 2021 and 2020, the loan balance outstanding was $0 and $782,383, respectively.

 

December 2016 - $ 1,674,100 non-bearing interest loan

 

On December 2016, the Company received a non-bearing interest loan from Jay Kim, Chief Executive Officer of the Company. The loan payable is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $307,404, respectively.

 

May 2021 - $ 250,000 non-bearing interest loan

 

In May 2021, the Company received a non-bearing interest loan $250,000 from Dennis Egidi, a member of the Board of Directors of the Company. The loan payable was due on demand. $50,000 of the loan was converted to 1,000,000 shares of Class A common stock at $0.050 per share, in September 2021, and the Class A common stock was transferred to his family members. The remaining $200,000 loan was converted to 8,000,000 shares of Class A common stock at $0.025 per share, in September 2021. The Company determined the fair value of common stock at $0.050, which was the price per share for the Company’s Regulation A offering. The Company accounted for the conversion according to ASC Topic 470-50, Debt – Modification and Extinguishment and as a result of the conversion, the Company recorded a loss on the extinguishment of debt of $200,000 for year ended December 31, 2021. As of December 31, 2021, the outstanding balance of the loan was $0.

  

  

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

 

December 31,		2021				2020
May 16, 2020 ($150,000) - Loan agreement with principal amount of $150,00 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				-
Total long-term loan payable, emergency injury disaster loan (EIDL)			500,000				150,000
Less - current portion			(7,957	)			(3,448	)
Total loan payable, emergency injury disaster loan (EIDL), less current portion		$	492,043			$	146,552

 

The following table provides future minimum payments:

 

For the years ended December 31,		Amount
2022		$	7,957
2023			7,957
2024			7,957
2025			7,957
2026			7,957
Thereafter			460,215
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 SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. As of December 31, 2021, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

 

Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the Company borrowed an aggregate principal amount of the EIDL Loan of $150,000, 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) 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 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, which will be May 2022.

 

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”).

 

June 28, 2021 – $350,000

 

On June 28, 2021, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. As of September 30, 2021, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

 

Pursuant to that certain Amended Loan Authorization and Agreement (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 April 16, 2022 (twenty four months from the original date of the SBA Loan) in the amount of $2,505. The balance of principal and interest is payable thirty years from the original date of the SBA Loan.

 

  

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

 

December 31,		2021				2020
May 3, 2020 ($115,000 PPP)		$	-			$	115,000
February 10, 2021 ($167,138 PPP)			167,138				-
Total long-term loan payable, payroll protection program (PPP)			167,138				115,000
Less - current portion			(42,345	)			(83,056	)
Total loan payable, payroll protection program (PPP), less current portion		$	124,793			$	31,944

 

The following table provides future minimum payments: 

 

For the years ended December 31,		Amount
2022		$	42,345
2023			39,366
2024			39,761
2025			40,161
2026			5,505
Total		$	167,138

 

The Paycheck Protection Program Loan (the “PPP Loan”) is administered by the U.S. Small Business Administration (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 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. As of July 26, 2021, $115,000 in principal and $1,408 in interest were forgiven.

 

   

8. EQUIPMENT LOAN PAYABLE

 

Equipment loan payable consist of the following:

 

December 31,		2021				2020
October 2017 - Loan agreement with principal amount of $82,011 with an interest rate of 6.40% and maturity date on October 1, 2022		$	15,989			$	35,176
Total long-term equity loan payable			15,989				35,176
Less – current portion			(15,989	)			(19,187	)
Total long-term debt, net of current portion		$	-			$	15,989

 

For the year ended December 31,		Amount
2022		$	15,989
Total		$	15,989

 

October 2017 - $ 82,011 equipment loan payable

 

In October 2017, the Company entered into equipment finance loan agreement with US Bank Equipment Finance in the amount of $82,011 with an interest rate of 6.40% and maturity date on October 1, 2022, payable in 60 payments. All principal, together with interest cost is due and payable on October 1, 2022. As of December 31, 2021 and 2020, there was a balance outstanding of $15,989 and $35,176, respectively.

 

9. INCOME TAX

 

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

 

For the Years Ended December 31,		2021				2020
Current provision (benefit):
Federal		$	-			$	-
State			800				800
Total current provision (benefit)			800				800
Deferred provision (benefit):
Federal			-				-
State			-				-
Total deferred provision (benefit)			-				-
Total tax provision (benefit)		$	800			$	800

  

   

9. INCOME TAX (continued)

 

A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:

 

Description		December 31, 2021				December 31, 2020
Statutory federal rate			21.00	%			21.00	%
State income taxes net of federal income tax benefit and others			8.84	%			8.84	%
Permanent differences for tax purposes and others			0.00	%			0.00	%
Change in valuation allowance			-29.84	%			-29.84	%
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% and California state income taxes of 8.84% due to the change in the valuation allowance.

 

Deferred tax assets		December 31, 2021				December 31, 2020
Deferred tax assets:
Net operating loss		$	8,423,041			$	4,983,440
Other temporary differences			-				-
Total deferred tax assets			8,423,041				4,983,440
Less - valuation allowance			(8,423,041	)			(4,983,440	)
Total deferred tax assets, net of 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:

 

As of December 31, 2020, the Company had available net operating loss carryovers of approximately $4,983,440. 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 2017 and later and subject to California authorities for tax year ended 2016 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 December 31, 2021 and December 31, 2020, the Company has no accrued interest or penalties related to uncertain tax positions.

 

As of December 31, 2021, the Company had cumulative net operating loss carryforwards for federal tax purposes of approximately $8,423,041. In addition, the Company had state tax net operating loss carryforwards of approximately $8,423,041. The carryforwards may be applied against future taxable income and expires at various dates subject to certain limitations.

  

   

10. RELATED PARTY TRANSACTIONS

 

The Company had the following related party transactions:

 

	●	Loan Payable to Others (August 2019 - $ 40,578 loan) – In August 2019, the Company received a non-bearing interest loan from the spouse of Jay Kim, our Chief Executive Officer. The loan payable is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $(548), respectively. For the years ended December 31, 2021 and 2020, the Company paid $0 and $17,653 in interest. The overpayment amount of $548 was adjusted to accounts receivable at December 31, 2020 and then subsequently written off during the year ended December 31, 2021.
	●	Loan Payable to Shareholders (December 2016 - $ 1,489,809 non-bearing interest loan) – On December 2016, the Company received a non-bearing interest loan from Farooq Arjomand, Chairman of the Company. The loan payable is due on demand. On September 30, 2021 the loan holder elected to convert $782,383 in principal into 31,295,320 shares of Class A common stock. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $782,383, respectively.
	●	Loan Payable to Shareholder (December 2016 - $ 1,674,100 non-bearing interest loan) – On December 2016, the Company received a non-bearing interest loan from Jay Kim, Chief Executive Officer of the Company. The loan payable is due on demand. As of December 31, 2021 and 2020, there was a balance outstanding of $0 and $487,499, respectively.
	●	Loan Payable to Shareholder (May 2021 - $ 250,000 non-bearing interest loan) – In May 2021, the Company received a non-bearing interest loan from Dennis Egidi, a member of the Board of Directors of the Company. The loan payable is due on demand. On September 30, 2021 the loan holder elected to convert $250,000 in principal into 9,000,000 shares of common stock. As of December 31, 2021, the outstanding balance of the loan was $0.

  

11. 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 on 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 on July 2016 and expires on July 2021.
	●	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.
	●	Glendale – On October 27, 2020, The Company entered a 7-year operating facility lease for its store located at the Glendale Galleria in Glendale, California. The lease started on November 2020 and expires on October 2027.
	●	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.
	●	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 starts in June 2021 and expires in May 2026.
	●	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 starts in June 2021 and expires in April 2028.

  

  

11. COMMITMENTS AND CONTINGENCIES (continued)

 

	●	Corona Del Mar - On February 5, 2021, the Company repurchased its retail store in Corona Del Mar, California. As part of that repurchase, the Company assumed the original operating lease on the facility, with a term of 66 months and an option to extend. The lease expires in December 2022.
	●	Santa Anita - On December 22, 2020, the Company entered into an operating facility lease for its store located at Arcadia, California with a term of 36 months and an option to extend. The lease started in February 2021 and expires in January 2024.

 

The Company adopted ASC 842 as of January 2018 (date of formation).  The Company has an operating lease for the Company’s corporate office and stores and accounts for these leases in accordance with ASC 842, which resulted in the recognition of ROU assets and operating lease liabilities of $2,466,873 and $2,591,121, respectively, as of December 31, 2021. Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance and common area maintenance payments related to rental payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation.

 

For the new leases and adjustments, the Company recorded an additional non-cash increase of $1,595,610 to ROU assets and $1,674,507 to operational lease liabilities for the year ended December 31, 2021 and $1,180,120 to ROU assets and $1,210,700 to operating lease liabilities recognized for the year ended December 31, 2020.

 

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

 

Year ended December 31,		2021				2020
Operating lease expense		$	598,782			$	297,381
Total lease expense		$	598,782			$	297,381

 

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

  

Year ended December 31,		2021				2020
Operating cash flows from operating leases		$	530,063			$	292,174
Cash paid for amounts included in the measurement of lease liabilities		$	530,063			$	292,174
Weighted-average remaining lease term—operating leases							4.6 Years
Weighted-average discount rate—operating leases							8.7	%

  

In accordance with ASC 842, maturities of operating lease liabilities as of December 31, 2021 were as follows:

  

		Operating
For the years ended December 31,		Lease
2022		$	770,240
2023			684,502
2024			597,437
2025			449,712
2026			378,181
Thereafter			242,016
Total undiscounted cash flows		$	3,122,088
Reconciliation of lease liabilities:
Weighted-average remaining lease terms			4.6 Years
Weighted-average discount rate			8.7	%
Present values		$	2,590,121
Lease liabilities—current			578,419
Lease liabilities—long-term			2,011,702
Lease liabilities—total		$	2,590,121
Difference between undiscounted and discounted cash flows		$	531,967

  

Contingencies

 

The Company is subject to various legal proceedings from time to time as part of its business. As of December 31, 2021, 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 and results of operations.

 

   

12. SHAREHOLDERS’ EQUITY

 

Common Stock

 

The Company has authorization to issue and have outstanding at any one time 40,000,000 share 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 share 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 March 31, 2022 and December 31, 2021, no shares of our preferred stock had been designated any rights and we had no shares of preferred stock issued and outstanding. 

 

Subscription of Common Stock Receivables

 

The Company issued 1,569,767 shares of common stock to several individuals in March 2020 and in December 2020 for total proceeds of $1,350,000. The Company received payments in the subsequent period.  During the year ended December 31, 2021, the Company issued an additional 445,290 shares of common stock for proceeds of $2,226,326.

 

Issuance of Common Stock in Settlement of Antidilution Provisions

 

In May 2018, the Company had entered into a share exchange agreement whereby 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 pre-merger 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 pre-merger shareholders of Capax would not be less than the 5% of the total number of shares of voting stock 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 to those pre-merger shareholders which would increase their ownership to five percent (5%) of the total outstanding voting shares of the Company.

 

The Company considered the guidance within ASU 217-11, “Simplifying Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity”, which in part amended and clarified provisions within ASC No. 815, “Derivatives and Hedging”, and ASC No. 480, “Distinguishing Liabilities from Equity”. The Company determined that the standard antidilution provisions within the Capax agreement did not require liability or derivative treatment. As such, additional shares issuable to the Capax shareholders would be recorded within equity as the result of any incremental issuances of equity that result in their cumulative ownership falling below 5%.

 

Through the date of this agreement, the Company issued 325,495 shares of common stock under these provisions, of which 0 and 241,300 shares were issued during the years ended December 31, 2021 and 2020, respectively.

 

On January 25, 2022, the Company modified this agreement with the pre-merger shareholders so that upon the consummation of an underwritten public offering, the antidilution protections would terminate, however the shareholders would still be entitled to the antidilution protection from the date of such amendment (i.e., January 25, 2022) through the closing date of such underwritten public offering should the Company issue any additional shares prior to such closing date. The Company has not issued any additional shares subsequent to December 31, 2021.

 

 

12. SHAREHOLDERS’ EQUITY (continued)

 

Loan conversions

 

The Company issued 2,832,216 shares of common stock during 2020 and an additional 402,954 shares of common stock during 2021 in connection with conversion of loans from shareholders. There were no conversion features in the original loan agreements, the conversions were discretionary and were subject to the approval of the board of directors. The Company accounted for the conversion in accordance with ASC Topic 470-50, Debt – Modification and Extinguishment and as a result of the conversion, the Company recorded a loss on the extinguishment of debt of $982,383 for the year ended December 31, 2021. There was no loss on the extinguishment for the year ended December 31, 2020.

 

Stock Compensation

 

The Company issued a total of 110,000 shares of common stock to employees and consultants for compensation. These shares were valued at $5.00 per share for total stock-based compensation expense of $550,000. These shares were fully vested at issuance and as such the related stock-based compensation was recognized immediately.

 

Reconciliation and Recordation of Previously Issued Shares

 

The Company recorded the issuance of 31,875 shares during the year ended December 31, 2021 to correct for previous issuances which had not been properly recorded on the books and records of the Company. These shares had been issued to two separate stockholders in prior years as part of larger Company transactions, and then subsequently transferred to third parties in private transactions not involving the Company. Although the shares from those previous issuances were understated, the dollar values recorded for those Company transactions were accurately valued. Thus, the recording of such incremental issued shares had no impact on total shareholders’ equity for the year ended December 31, 2021.

 

Dividend policy

 

Dividends are paid at the discretion of the Board of Directors. The Company issued stock dividends amounting to 124,610 shares of common stock during the year ended December 31, 2020. There were no dividends declared for the year ended December 31, 2021. 

 

   

13. 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:

 

Years Ending December 31,		2021				2020
Net Loss		$	(3,440,401	)		$	(1,068,766	)
Less deemed dividend related to shares issued to Capax shareholders under make-whole provisions (Note 12)			-			$	(206,147	)
Net Loss Attributable to Common Shareholders		$	(3,440,401	)		$	(1,274,913	)
Weighted Average Shares of Common Stock Outstanding
Basic			10,899,791				6,889,510
Diluted			10,899,791				6,889,510

 

Years Ending December 31,		2021				2020
Earnings Per Share - Basic
Net Loss Per Share			(0.32	)			(0.19	)
Earnings Per Share - Diluted
Net Loss Per Share			(0.32	)			(0.19	)

 

14. SUBSEQUENT EVENTS

 

The Company evaluated all events or transactions that occurred after December 31, 2021 up through the date the consolidated financial statements were available to be issued. During this period, the Company did not have any material recognizable subsequent events required to be disclosed as of and for the year ended December 31, 2021. 

 

 

15. RESTATEMENT

 

As discussed in Note 12, the Company had entered into a share exchange agreement in May 2018, wherein pre-merger shareholders of Capax were provided covenants protecting their percentage of ownership of the Company. Subsequent to that agreement, incremental shares were earned by those shareholders as a result of other shares of stock issued by the Company for various reasons. Although issuable, this incremental stock for the pre-merger shareholders had not been issued, and as such the Company had not recorded the incremental stock. The Company has now determined that the incremental stock should have been reflected over time as the rights to the stock were created. These consolidated financial statements have been restated to reflect this incremental stock, including its effect on earnings per share calculations for each period presented.

 

Adjustments made to the calculation of basic and diluted loss per share are as follows:

 

		Year Ended December 31, 2021
		Net Loss				Weighted Average Shares of Common Stock Outstanding				Basic and diluted loss per share
As previously reported		$	(3,440,401	)			10,764,944				(0.32	)
Adjustment - deemed dividend related to shares issued in 2020 to Capax shareholders under make-whole provisions (Note 12)			-				134,847				-
As restated		$	(3,440,401	)			10,899,791			$	(0.32	)

 

		Year Ended December 31, 2020
		Net Loss				Weighted Average Shares of Common Stock Outstanding				Basic and diluted loss per share
As previously reported		$	(1,068,766	)			7,454,148				(0.14	)
Adjustment - deemed dividend related to shares issued to Capax shareholders under make-whole provisions (Note 12)			(206,147	)			(564,638	)			(0.05	)
As restated		$	(1,274,913	)			6,889,510			$	(0.19	)

 

In June 2022, the Company approved (a) conversion of all Class B Common Stock into Class A Common Stock, (b) a 1 for 100 reverse split, and (c) 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.

 

 

Unaudited Condensed Consolidated Balance Sheets

 

As of		March 31, 2022				December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	183,191			$	905,051
Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively			1,272				-
Inventories, net			73,291				88,877
Prepaid expense and other current assets			220,162				191,838
Total current assets			477,916				1,185,766
Property and equipment, net			1,211,652				1,110,890
Operating lease right-of-use asset			2,905,807				2,466,873
Total assets		$	4,595,375			$	4,763,529
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	42,253			$	45,748
Accrued expenses and current liabilities			168,767				124,535
Loans payable to financial institutions – current portion			40,293				98,475
Loan payable, emergency injury disaster loan (EIDL) – current portion			10,660				7,957
Loan payable, payroll protection program (PPP) – current portion			39,072				42,345
Equipment loan payable – current portion			11,192				15,989
Operating lease liabilities – current portion			645,353				578,419
Total current liabilities			957,590				913,468
Loans payable to financial institutions – net of current portion			-				23,228
Loan payable, emergency injury disaster loan (EIDL), net of current portion			489,340				492,043
Loan payable, payroll protection program (PPP), net of current portion			128,066				124,793
Operating lease liabilities, net of current portion			2,387,196				2,011,702
Total liabilities			3,962,192				3,565,234
Commitments and Contingencies
Stockholders' equity
Common Stock, $0.0001 par value, 40,000,000 shares authorized; 11,634,523 shares issued and outstanding at March 31, 2022 and December 31, 2021			1,163				1,163
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2022 and December 31, 2021			-				-
Additional paid-in capital			9,674,036				9,674,036
Accumulated deficit			(9,042,016	)			(8,476,904	)
Total stockholders' equity			633,183				1,198,295
Total liabilities and stockholders' equity		$	4,595,375			$	4,763,529

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Condensed Consolidated Statements of Operations

 

For the Three-Month Period Ended March 31,		2022				2021
Net revenues:
Stores		$	735,996			$	375,961
Wholesale and online			17,154				12,968
Total net revenues			753,150				388,929
Operating costs and expenses:
Product, food and drink costs—stores			284,954				134,696
Cost of sales—wholesale and online			7,513				5,680
General and administrative			1,036,015				570,641
Total operating costs and expenses			1,328,482				711,017
Loss from operations			(575,332	)			(322,088	)
Other income (expense):
Other income			15,000				-
Interest expense			(4,780	)			(5,391	)
Total other income (expense), net			10,220				(5,391	)
Loss before income taxes			(565,112	)			(327,479	)
Provision for income taxes			-				-
Net loss		$	(565,112	)		$	(327,479	)
Loss per share:
Basic and diluted		$	(0.05	)		$	(0.03	)
Weighted average number of common shares outstanding:
Basic and diluted			11,634,523				10,547,204

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Condensed Consolidated Stockholders’ Equity (Deficit)

 

																		Additional				Subscription of								Total Shareholders’
		Common Stock								Preferred Stock								Paid-in				Common				Accumulated				Equity
		Shares				Amount				Shares				Amount				Capital				Stock				Deficit				(Deficit)
Balance as of December 31, 2020			10,443,721			$	1,045				-			$	-			$	4,733,063			$	(450,000	)		$	(5,036,503	)		$	(752,396	)
Net loss			-				-				-				-				-				-				(327,479	)			(327,479	)
Stock issued for store acquisition			232,558				23				-				-				149,977				-				-				150,000
Payments received for prior year subscription			-				-				-				-				-				450,000				-				450,000
Balance as of March 31, 2021			10,676,279			$	1,068				-			$	-			$	4,883,040			$	-			$	(5,363,983	)		$	(479,875	)

 

																		Additional				Subscription of								Total Shareholders’
		Common Stock								Preferred Stock								Paid-in				Common				Accumulated				Equity
		Shares				Amount				Shares				Amount				Capital				Stock				Deficit				(Deficit)
Balance as of December 31, 2021			11,634,523			$	1,164				-			$	-			$	9,674,035			$	-			$	(8,476,904	)		$	1,198,295
Net loss			-				-				-				-				-				-				(565,112	)			(565,112	)
Balance as of March 31, 2022			11,634,523			$	1,164				-			$	-			$	9,674,035			$	-			$	(9,042,016	)		$	633,183

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

For the Three Months Ended March 31,		2022				2021
Cash flows from operating activities:
Net loss		$	(565,112	)		$	(327,479	)
Adjustments to reconcile net loss to net cash used in operating activities:
Operating lease			3,494				11,960
Depreciation			49,134				36,129
Changes in operating assets and liabilities:
Accounts receivable			(1,272	)			2,545
Inventories			15,586				(8,067	)
Prepaid expense and other current assets			(28,324	)			(40,000	)
Accounts payable			(3,495	)			(4,407	)
Accrued expenses and current liabilities			44,232				(5,254	)
Net cash used in operating activities			(485,757	)			(334,573	)
Cash flows from investing activities:
Purchases of property and equipment			(149,896	)			(55,619	)
Reacquisition of store			-				(150,000	)
Net cash used in investing activities			(149,896	)			(205,619	)
Cash flows from financing activities:
Proceeds from issuance of common stock			-				450,000
Proceeds from loans			-				298,636
Repayments of loans			(81,410	)			(187,688	)
Repayments of equipment loan payable			(4,797	)			(4,797	)
Net cash (used in) provided by financing activities			(86,207	)			556,151
Net (decrease) increase in cash			(776,860	)			15,959
Cash at beginning of period			905,051				128,568
Cash at end of period		$	183,191			$	144,527
Supplemental disclosures of non-cash financing activities:
Issuance of common shares for repurchase of store		$	-			$	150,000
Supplemental disclosure of cash flow information:
Cash paid during the years for:
Lease liabilities		$	202,458			$	7,605
Interest		$	217			$	563
Income taxes		$	-			$	-

 

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. Reborn did not have significant transactions since formation. 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. The franchisee obtains a license to develop and operate a store under the strict compliance with terms of the agreement. The specific rights the franchisee is granted is to develop, own, and/or operate franchisee’s Reborn Coffee stores. The non-refundable initial franchise fee is $20,000. In addition, the franchisee is required to pay the company a royalty fee equal to 5% of the weekly gross sales of their respective store.

 

Reborn Coffee, Inc., Reborn Global Holdings, Inc., and Reborn Coffee Franchise, LLC will be collectively referred 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 March 31, 2022 and December 31, 2021 and for the three-month periods ended March 31, 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) conversion of all Class B Common Stock into Class A Common Stock, (b) a 1 for 100 reverse split, and (c) 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 $9,042,016 at March 31, 2022 and had a net loss of $565,112 for the three-month period ended March 31, 2022 and net cash used in operating activities of $485,758 for the three-month period ended March 31, 2022. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 three-month period ended March 31, 2021, however, net revenue for the three-month period ended March 31, 2022 has increased from $388,929 to $753,150, and the Company expects consistent increase in sales with the opening of more stores.

 

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. 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 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.

 

●

Loyalties and Other Fees

 

Franchise revenues consists of loyalties and other franchise fees. Loyalties are based on a percentage of franchisee’s weekly gross sales revenue at 5%. The Company recognizes the loyalties as the underlying sales occur. The Company recorded revenue from loyalties of $0 for the three-month periods ended March 31, 2022 and 2021. Other fees are earned as incurred and the Company did not have any other fee revenue for the three-month periods ended March 31, 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.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Advertising Expense

 

Advertising costs are expensed as incurred. Advertising expenses amounted to $9,472 and $45,857 for the three-month periods ended March 31, 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 March 31, 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 (Note 9).

 

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.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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-month periods ended March 31, 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-month periods ended March 31, 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 March 31, 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 March 31, 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.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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-month periods ended March 31, 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 purchase from various vendors for its operations. For the three-month periods ended March 31, 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.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		March 31, 2022				December 31, 2021
Furniture and equipment		$	857,931			$	779,649
Leasehold improvement			639,602				639,602
Store construction			123,775				52,161
Store			300,000				300,000
Total property and equipment			1,921,308				1,771,412
Less accumulated depreciation			(709,656	)			(660,522	)
Total property and equipment, net		$	1,211,652			$	1,110,890

 

In February 2021, the Company repurchased its retail location in Corona Del Mar. The purchase price was $300,000, comprised of $150,000 in cash and 232,558 shares of the Company’s common stock. The Company recorded the assumption of the ongoing lease for the store, which included a right of use asset of $183,442 and a lease liability of $193,463 (see Note 9).

 

Depreciation expense on property and equipment amounted to approximately $49,134 and $36,129 for the three-month periods ended March 31, 2022 and 2021, respectively.

 

4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS

 

Loans payable to financial institutions consist of the following:

 

		March 31, 2022				December 31, 2021
July 2021 - Loan agreement with principal amount of $90,000 and repayment rate of 19% for a total of $101,700. The loan payable matures on January 31, 2023.		$	23,632			$	52,819
August 2021 - Loan agreement with principal amount of $72,500 and repayment rate of 18.5% for a total of $81,925. The loan payable matures on February 10, 2023.			10,354				36,502
August 2021 - Loan agreement with principal amount of $67,500 and repayment rate of 18.5% for a total of $76,275. The loan payable matures on February 11, 2023.			6,307				32,382
Total loan payable		$	40,293			$	121,703
Less: current portion			(40,293	)			(98,475	)
Total loan payable, net of current		$	-			$	23,228

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. LOANS PAYABLE TO FINANCIAL INSTITUTIONS (Continued)

 

July 2021 - $ 101,700 loan payable

 

In July 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $90,000 with loan cost $11,700. The loan payable has a maturity date on January 31, 2023. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of $23,632 and $52,819, respectively.

 

August 2021 - $81,925 loan payable

 

In August 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $72,500 with loan cost $9,425. The loan payable has a maturity date on February 10, 2023. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of $10,354 and $36,502, respectively.

 

August 2021 - $76,275 loan payable

 

In August 2021, the Company entered into a loan agreement with Square Capital in the principal amount of $67,500 with loan cost $8,775. The loan payable has a maturity date on February 11, 2023. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of $6,307 and $32,382, respectively.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

		March 31, 2022				December 31, 2021
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			(10,660	)			(7,957	)
Total loan payable, emergency injury disaster loan (EIDL), less current portion		$	489,340			$	492,043

 

The following table provides future minimum payments:

 

For the years ended December 31,		Amount
2022 (remaining nine months)			7,957
2023			10,964
2024			11,382
2025			11,816
2026			12,267
Thereafter			445,614
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 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 March 31, 2022, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

 

Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the Company borrowed an aggregate principal amount of the EIDL Loan of $150,000, 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) 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 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”).

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5. LOAN PAYABLES, EMERGENCY INJURY DISASTER LOAN (EIDL) (continued)

 

June 28, 2021 – $350,000

 

On June 28, 2021, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from 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 March 31, 2022, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

 

Pursuant to that certain Amended Loan Authorization and Agreement (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 April 16, 2022 (twenty four months from the original date of the SBA Loan) in the amount of $2,505. The balance of principal and interest is payable thirty years from the original date of the SBA Loan.

 

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

 

		March 31, 2022				December 31, 2021
February 10, 2021 ($167,138 PPP)		$	167,138			$	167,138
Total long-term loan payable, payroll protection program (PPP)			167,138				167,138
Less - current portion			(39,072	)			(42,345	)
Total loan payable, payroll protection program (PPP), less current portion		$	128,066			$	124,793

 

The Paycheck Protection Program Loan (the “PPP Loan”) is administered by the U.S. Small Business Administration (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 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.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. EQUIPMENT LOAN PAYABLE

 

Equipment loan payable consist of the following:

 

		March 31, 2022				December 31, 2021
October 2017 - Loan agreement with principal amount of $82,011 with an interest rate of 6.40% and maturity date on October 1, 2022		$	11,192			$	15,989
Total long-term equity loan payable			11,192				15,989
Less – current portion			(11,192	)			(15,989	)
Total long-term debt, net of current portion		$	-			$	-

 

For the year ended December 31,		Amount
2022		$	11,192
Total long-term debt		$	11,192

 

October 2017 - $82,011 equipment loan payable

 

In October 2017, the Company entered into equipment finance loan agreement with US Bank Equipment Finance in the amount of $82,011 with an interest rate of 6.40% and maturity date on October 1, 2022, payable in 60 payments. All principal, together with interest cost is due and payable on October 1, 2022. As of March 31, 2022 and December 31, 2021, there was a balance outstanding of $11,192 and $15,989, respectively.

 

8. INCOME TAX

 

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

 

For the Three-Month Periods Ended March 31,			2022				2021
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 is as follows:

 

Description		Rate
Statutory federal rate			21.00	%
State income taxes net of federal income tax benefit and others			8.84	%
Permanent differences for tax purposes and others			0.00	%
Change in valuation allowance			-29.84	%
Effective tax rate			0	%

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. INCOME TAX (continued)

 

The income tax benefit differs from the amount computed by applying the U.S. federal statutory tax rate of 21% and California state income taxes of 8.84% due to the change 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		March 31, 2022				December 31, 2021
Deferred tax assets:
Net operating loss		$	8,988,153			$	8,423,041
Other temporary differences			-				-
Total deferred tax assets			8,988,153				8,423,041
Less - valuation allowance			(8,988,153	)			(8,423,041	)
Total deferred tax assets, net of valuation allowance		$	-			$	-

 

As of December 31, 2021, the Company had available net operating loss carryovers of approximately $8,423,041. 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 2017 and later and subject to California authorities for tax year ended 2016 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 March 31, 2022 and December 31, 2021, the Company has no accrued interest or penalties related to uncertain tax positions.

 

As of March 31, 2022, the Company had cumulative net operating loss carryforwards for federal tax purposes of approximately $8,988,153. In addition, the Company had state tax net operating loss carryforwards of approximately $8,988,153. The carryforwards may be applied against future taxable income and expires at various dates subject to certain limitations.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. 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 72 months term with option to extend. The lease starts on September 2018 and expires on 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 60 months term with option to extend. The lease started on July 2016 and expires on July 2021.

 

●

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.

 

●

Glendale – On October 27, 2020, The Company entered a 7-year operating facility lease for its store located at the Glendale Galleria in Glendale, California. The lease starts on November 2020 and expires in October 2027.

●

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 84 months term with option to extend. The lease starts in April 2021 and expires in March 2028.

 

●

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 60 months term with option to extend. The lease starts in June 2021 and expires in May 2026.

 

●

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 84 months term with option to extend. The lease starts in June 2021 and expires in April 2028.

 

●

Corona Del Mar - On February 5, 2021, the Company repurchased its retail store in Corona Del Mar, California. As part of that repurchase, the Company assumed the original operating lease on the facility, with 66 months term with an option to extend. The lease expires in December 2022.

 

●

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 starts in February 2021 and expires in January 2024.

 

●

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 starts in March 2022 and expires in February 2027.

 

The Company adopted ASC 842 as of January 2018 (date of formation). The Company has operating leases for the Company’s corporate office and stores and accounts for these leases in accordance with ASC 842, which resulted in the recognition of ROU assets and operating lease liabilities of $2,905,807 and $3,032,549, respectively, as of March 31, 2022. Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance and common area maintenance payments related to rental payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation.

 

For the new lease and adjustments, the Company recorded an additional non-cash increase of $438,934 to ROU assets and $442,428 to operational lease liabilities for the three-month period ended March 31, 2022.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. COMMITMENTS AND CONTINGENCIES (continued)

 

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

 

Three-month period ended March 31,		2022				2021
Operating lease expense		$	205,952			$	139,126
Total lease expense		$	205,952			$	139,126

 

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

 

Three-month period ended March 31,		2022				2021
Operating cash flows from operating leases		$	202,458			$	7,605
Cash paid for amounts included in the measurement of lease liabilities		$	202,458			$	7,605
Weighted-average remaining lease term—operating leases							3.6 Years
Weighted-average discount rate—operating leases							8.8	%

 

In accordance with ASC 842, maturities of operating lease liabilities as of March 31, 2022 were as follows:

 

		Operating
For the years ended December 31,		Lease
2022 (remaining nine months)		$	676,670
2023			832,533
2024			752,914
2025			610,034
2026			541,797
Thereafter			269,573
Total undiscounted cash flows		$	3,683,522
Reconciliation of lease liabilities:
Weighted-average remaining lease terms			3.6 Years
Weighted-average discount rate			8.8	%
Present values		$	3,032,549
Lease liabilities—current			645,353
Lease liabilities—long-term			2,387,196
Lease liabilities—total		$	3,032,549
Difference between undiscounted and discounted cash flows		$	650,973

 

Contingencies

 

The Company is subject to various legal proceedings from time to time as part of its business. As of March 31, 2022, 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, and results of operations.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. SHAREHOLDERS’ EQUITY

 

Common Stock

 

The Company has authorization to issue and have outstanding at any one time 40,000,000 share 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 share 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 March 31, 2022 and December 31, 2021, no shares of our preferred stock had been designated any rights and we had no shares of preferred stock issued and outstanding.

 

Subscription of Common Stock Receivables

 

The Company issued 1,569,768 shares of common stock to several individuals in March 2020 and in December 2020 for total proceeds of $1,350,000, of which $450,000 was received in the subsequent period.

 

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 shareholder 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 (“IPO”), 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 IPO, eliminating the one-year period following an IPO 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.

 

Dividend policy

 

Dividends are paid at the discretion of the Board of Directors. There were no dividends declared for the three-month periods ended March 31, 2022 and 2021.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. 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:

 

Three-month Period Ending March 31,		2022				2021
Net Loss		$	(565,112	)		$	(327,479	)
Weighted Average Shares of Common Stock Outstanding
Basic			11,634,523				10,547,204
Diluted			11,634,523				10,547,204
Three-month Period Ending March 31,			2022				2021
Earnings Per Share - Basic
Net Loss Per Share			(0.05	)			(0.03	)
Earnings Per Share - Diluted
Net Loss Per Share			(0.05	)			(0.03	)

 

12. SUBSEQUENT EVENTS

 

The Company evaluated all events or transactions that occurred after March 31, 2022 up through the date the unaudited condensed consolidated financial statements were available to be issued. 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 March 31, 2022, except for the following:

 

Convertible Notes – In April and May 2022, the Company entered into convertible note agreements with lenders, some of which are stockholders of the Company, for up to $2,150,000 in incremental borrowings for a period of up to one year from the date of the agreement. These notes are general unsecured obligations and are subordinate to all other borrowed funds from banks and commercial finance lenders. Outstanding borrowings under this agreement will bear interest at 5%. Any borrowings under these agreements plus accrued interest will automatically convert into common shares of the Company upon the closing of the next equity financing, at a conversion rate to be determined by the Company’s valuation and capitalization at the time of that equity financing. If there is no equity financing prior to December 31, 2022, the outstanding borrowings under these convertible notes and any accrued interest will be payable upon demand of the noteholder at any time.

 

In June 2022, the Company approved (a) conversion of all Class B Common Stock into Class A Common Stock, (b) a 1 for 100 reverse split, and (c) 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.

 

 

 

 

1,200,000 SHARES OF COMMON STOCK AT $5.00 PER SHARE

 

PROSPECTUS

EF HUTTON

division of Benchmark Investments, LLC

 

                           , 2022

 

Through and including                               , 2022 (the 25th day after the date of the prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

    

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Unless otherwise indicated, all references to “Reborn Coffee,” “Reborn,” the “company,” “we,” “our,” “us” or similar terms refer to Reborn Coffee, Inc. and its subsidiaries.

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table sets forth all expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates.

 

SEC registration fee		$	1,700
FINRA filing fee		$	6,500
Nasdaq listing fee		$	100,000
Printing and engraving expenses		$	25,000
Legal and other advisory fees and expenses		$	600,000
Accounting fees and expenses		$	50,000
Custodian, transfer agent and registrar fees		$	11,000
Miscellaneous		$	5,750
Total		$	750,000

 

*

To be filed by amendment.

 

Item 14. Indemnification of Directors and Officers.

 

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. Our certificate of incorporation permits indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our bylaws provide that we will indemnify our directors and executive officers and permit us to indemnify our other officers, employees and other agents, in each case to the maximum extent permitted by the Delaware General Corporation Law.

 

We have entered into indemnification agreements with our directors and executive officers, whereby we have agreed to indemnify our directors and executive officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or executive officer was, or is threatened to be made, a party by reason of the fact that such director or executive officer is or was a director, executive officer, employee or agent of Reborn Inc., provided that such director or executive officer acted in good faith and in a manner that the director or executive officer reasonably believed to be in, or not opposed to, the best interest of Reborn Inc. At present, there is no pending litigation or proceeding involving a director or executive officer of Reborn Inc. regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.

 

We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act and the Securities Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.

 

The underwriters are obligated, under certain circumstances, under the underwriting agreement filed as Exhibit 1.1 hereto, to indemnify us and our officers and directors against liabilities under the Securities Act.

 

  

Item 15. Recent Sales of Unregistered Securities.

 

On May 5, 2018, Reborn (previously known as Capax) executed a reverse merger agreement with Reborn Global, pursuant to which Mr. Weeraratne converted 11,000,000 Class B shares into 11,000,000 Class A shares and the Company issued the following shareholders of Reborn Global the following Class A and Class B shares with their cost basis from RBGH carrying forward to the shares of the Company:

 

		Class A				Class B				Total				Cost				Amount
Farooq M. Arjomand			171,868,053				16,666,667				188,534,720				0.002652				500,000.00
Jay Kim			106,245,706				10,303,030				116,548,736				0.002652				309,091.00
Sehan Kim			18,592,998				1,803,030				20,396,029				0.002652				54,091.00
Dr. Kyung Bae Park			12,655,738				1,227,273				13,883,011				0.002652				36,818.00
Dr. Robert Blaine			3,427,904								3,427,904				0.029172				100,000.00
TOTAL			312,790,400				30,000,000				342,790,400								1,000,000.00

 

On November 1, 2018, Reborn issued Mr. Weeraratne 10,000,000 Class A shares at the par value of $0.0001 per share as consulting fees to continue to work for the Company as a consultant.

 

On December 19, 2018, the following shareholders bought the following number of Class A common shares for $0.005 per share for aggregate consideration of $200,000:

 

	●	Seung Woo Song 33,500,000
	●	Sang Jae Lee 2,500,000
	●	Myung Sik Kim 2,000,000
	●	Young Chang Kim 2,000,000

 

On February 26, 2019 Cromwell Capital Holdings Inc., bought 30,000,000 Class A common shares at $.0049 per share for a total of $147,999.

 

On December 24, 2019 Hannah Ying Goh bought 91,160,001 Class A shares and 8,839,999 Class B shares at $0.005 per share for a total of $500,000.

 

On March 12, 2020 Dennis R Egidi bought 106,000,001 Class A shares and 10,279,069 Class B shares at $0.0086 per share for a total of $1,000,000.

 

On September 10, 2020 Farooq M Arjomand bought 124,534,405 Class A shares and 12,076,395 Class B shares at $0.005 per share for a total of $683,054.

 

On September 10, 2020 Jay Kim bought 124,534,405 Class A shares and 12,076,395 Class B shares at $0.005 per share for a total of $683,054.

 

On September 10, 2020 Julie Kim bought 10,000,000 Class A shares at $0.006 per share for a total of $60,000.

 

On September 10, 2020 Dr. Thomas Tan bought 4,000,000 Class A shares at $0.0250 per share for a total of $100,000.

 

On September 10, 2020 Khanh Quoc Nguyen bought 500,000 Class A shares at $0.02 per share for a total of $10,000.

 

On September 10, 2020 Mr. Weeraratne was issued 5,000,000 Class A common shares as consulting fees at the par value $0.0001 per share.

 

   

On September 10, 2020 Kevin Hartley, our former Chief Financial Officer, was issued 2,000,000 Class A common shares as consulting fees at the par value $0.0001 per share.

 

On July 20, 2020, at Dr. Park and Sehan Kim’s request the total shares of 43,688,292 that consisted of Class A and class B shares, that they owned were reallocated 87.5% to Sehan Kim and 12.5% to Dr. Park as follows:

 

	●	Sehan Kim 34,847,966 Class A, 3,379,289 Class B shares
	●	Dr. Park 4,978,280 Class A shares, 482,756 Class B shares

 

On December 20, 2020, Ki Chang Kim bought 23,255,813 Class A shares at $0.0086 per share for a total of $200,000.

 

On December 30, 2020, Hong Ma bought 5,813,954 Class A shares at $0.0086 per share for a total of $50,000.

 

On December 30, 2020, Dong Pham bought 5,813,954 Class A shares at $0.0086 per share for a total of $50,000.

 

On December 30, 2020, Nathalie Beyrard bought 5,813,954 Class A shares at $0.0086 per share for a total of $50,000.

 

On December 30, 2020, Cromwell Capital Holdings Inc. bought 23,255,814 Class A shares at $0.00645 per share for a total of $150,000 –50% of CDM location purchased value.

 

During the six months ended June 30, 2021, the Company sold 3,095,000 shares of Class A common stock for $154,750 at $0.05 per share to various investors.

 

Between July 1, 2021 and September 30, 2021, the Company received approximately $1,930,000 of proceeds related to the sale of 38,652,600 shares of its Class A common stock to various purchasers at a price of $0.05 per share.

 

The Registrant made no offers or sales of any securities between September 30, 2021 and November 10, 2021.

 

Between November 11, 2021 and December 21, 2021, the Company sold 2,820,000 shares of Class A common stock to various purchasers at a price of $0.05 per share.

 

All of the offers and sales set forth above by Registrant qualified for exemptions under Section 4(a)(2) of the Securities Act of 1933 since none of the issuances of shares involved a public offering as defined in Section 4(a)(2), or the offers and sale were made pursuant to an offering that qualified for an exemption from registration under Regulation A pursuant to a circular on Form 1-A (File No. 024-11518) which was qualified by the SEC on June 4, 2021 and which terminated on December 20, 2021.

 

   

Item 16. Exhibits and Financial Statement Schedules.

 

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

 

1.1		Form of Underwriting Agreement		Filed herewith
3.1		Certificate of Incorporation of Registrant (Delaware), dated July 27, 2022		Previously filed
3.2		Bylaws of Registrant (Delaware)		Previously filed
4.1		Specimen Common Stock Certificate (Delaware)		Previously filed
4.2		Form of Representative’s Warrant		Previously filed
5.1		Opinion of K&L Gates LLP		Previously filed
10.1		Share Exchange Agreement, dated May 7, 2018 by and among Capax, Reborn and each of the RB shareholders		Previously filed
10.2		Form of Letter Agreement (Lockup) by and among Registrant, officers and directors of Registrant and EF Hutton		Filed herewith
10.3		Form of Director and Officer Indemnity Agreement		Previously filed
10.4		Shopping Center Lease by and between Reborn Global Holdings, Inc. and La Floresta Regency, LLC, effective July 25, 2016.		Previously filed
10.5		Standard Industrial/Commercial Multi-Tenant Lease, as amended, by and between Reborn Global Holdings, Inc. and Foothill Crescenta, LLC, effective December 6, 2016.		Previously filed
10.6		Shopping Center Lease by and between Reborn Global Holdings, Inc. and Sibling Associates, LLC, effective July 12, 2017.		Previously filed
10.7		Standard Lease by and between Reborn Global Holdings, Inc. and El Toro, LP, effective February 12, 2021.		Previously filed
10.8		Form of Subscription Agreement (Regulation A+ Offering).		Previously filed
10.9		Consulting Agreement by and between the Company and Kevin Hartley, effective September 15, 2021,		Previously filed
10.10		Amendment to Share Exchange Agreement, dated January 25, 2022, by and among Reborn Coffee Inc., Andrew Weeraratne and each of the former shareholders of Reborn Global Holdings, Inc., a California corporation.		Previously filed
10.11		Offer of Employment by and between the Company and Stephan Kim, dated July 27, 2022.		Previously filed
21.1		Subsidiaries of Registrant		Previously filed
23.1		Consent of Auditor		Filed herewith
23.2		Consent of K&L Gates LLP (included in Exhibit 5.1)		Previously filed
24.1		Power of Attorney		Previously filed
107		Filing Fee Table		Previously filed

 

All financial statement schedules are omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or the notes thereto.

 

   

Item 17. Undertakings.

 

(a)	The undersigned registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b)	Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c)	The undersigned registrant hereby undertakes that:

 

(1)

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective.

 

For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

   

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 6 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Brea, State of California, on August 9, 2022.

  

	Reborn Coffee, Inc.
	By:	/s/ Jay Kim
	Name:	Jay Kim
	Title:	Chief Executive Officer

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

  

Signature		Title		Date
/s/ Jay Kim		Chief Executive Officer (Principal Executive Officer)		August 9, 2022
Jay Kim
/s/ Stephan Kim		Chief Financial Officer (Principal Financial and Accounting Officer)		August 9, 2022
Stephan Kim
/s/ Farooq M. Arjomand		Chairman of the Board of Directors		August 9, 2022
Farooq M. Arjomand
/s/ Dennis R. Egidi		Vice Chairman of the Board of Directors		August 9, 2022
Dennis R. Egidi
/s/ Sehan Kim		Director		August 9, 2022
Sehan Kim
/s/ Hannah Goh		Director		August 9, 2022
Hannah Goh

 

 

II-6

 

 

Exhibit 1.1

 

UNDERWRITING AGREEMENT
between
REBORN COFFEE, INC.
and
EF HUTTON,
division of Benchmark Investments, LLC,
as Representative of the Several Underwriters

 

REBORN COFFEE, INC.
UNDERWRITING AGREEMENT

 

New York, New York

[●], 2022

 

EF HUTTON,

division of Benchmark Investments, LLC

as Representative of the several Underwriters named on Schedule 1 attached hereto

590 Madison Avenue, 39th Floor

New York, New York 10022

 

Ladies and Gentlemen:

 

The undersigned, Reborn Coffee, Inc., a corporation formed under the laws of the State of Delaware (the “Company”), hereby confirms its agreement (this “Agreement”) with EF Hutton, division of Benchmark Investments, LLC (hereinafter referred to as “you” (including its correlatives) or the “Representative”), and with the other underwriters named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:

 

1.

PURCHASE AND SALE OF SECURITIES.

 

1.1

Firm Shares.

 

1.1.1 Nature and Purchase of Firm Shares.

 

(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [●] authorized but unissued shares (the “Firm Shares”) of common stock of the Company, par value $0.0001 per share (the “Common Stock”).

 

(ii) The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof, at a purchase price of $[●] per Firm Share (92% of the public offering price for each Firm Share); provided that the purchase price shall be $[●] per Firm Share (96% of the public offering price for each Firm Share) for the sale of Firm Shares to investors introduced to the Underwriters by the Company. The Firm Shares are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).

 

1.1.2 Payment and Delivery of Firm Shares.

 

(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Mitchell Silberberg & Knupp LLP, 2049 Century Park East, 18th Floor, Los Angeles, California 90067 (“Representative Counsel”), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”

 

 

(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least one (1) Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed; provided, however, for clarification, commercial banks shall not be deemed to be authorized or required by law to remain closed due to “stay-at- home,” “shelter-in-place,” “non-essential employee” or any other similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long as the electronic funds transfer systems (including for wire transfers) of commercial banks in The City of New York generally are open for use by customers on such day.

 

1.2 Over-allotment Option.

 

1.2.1 Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option to purchase from the Company up to [●] additional shares of Common Stock (the “Option Shares”), representing fifteen percent (15%) of the Firm Shares sold in the Offering (the “Over-allotment Option”). The purchase price to be paid per Option Share shall be equal to the price per Firm Share set forth in Section 1.1.1 hereof. The Firm Shares and the Option Shares are hereinafter referred to together as the “Public Securities.” The offering and sale of the Public Securities is herein referred to as the “Offering.”

 

 

1.2.2 Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the date of this Agreement. The Underwriters shall not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or facsimile or other electronic transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than one (1) Business Day after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.

 

1.2.3 Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to the Representative of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least one (1) Business Day prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Representative for applicable Option Shares.

 

1.3 Representative’s Warrants.

 

1.3.1 Purchase Warrants. The Company hereby agrees to issue to the Representative (and/or its designees) on the Closing Date or the Option Closing Date, as applicable, one or more warrants for the purchase of an aggregate of [●] shares of Common Stock, representing 5% of the number of Firm Shares and Option Shares sold on the Closing Date or the Option Closing Date, as applicable, in the form attached hereto as Exhibit A (the “Representative’s Warrants”), shall be exercisable, in whole or in part, commencing on a date which is six (6) months after the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price per share of Common Stock of $[●], which is equal to 125.0% of the initial public offering price of the Firm Shares. The Representative’s Warrants and the shares of Common Stock issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrants and the underlying shares of Common Stock during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.

 

 

1.3.2 Delivery. Delivery of the Representative’s Warrants shall be made on the Closing Date or the Option Closing Date(s), as applicable, and shall be issued in the name or names and in such authorized denominations as the Representative may request.

 

1.4 Non-Accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.10, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.0%) of the aggregate gross proceeds raised in the Offering; provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.

 

2.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:

 

2.1 Filing of Registration Statement.

 

2.1.1 Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and any amendment or amendments thereto, on Form S-1 (File No. 333-261937), including any related prospectus or prospectuses, for the registration of the Public Securities and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A (the “Rule 430A Information”) of the Securities Act Regulations, is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.

 

Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], 2022, that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering, that includes the Rule 430A Information, is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.

 

 

“Applicable Time” means [●] [a.m./p.m.], Eastern time, on the date of this Agreement.

 

“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

 

“Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.

 

“Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

 

“Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.

 

2.1.2 Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number 001-[●]) providing for the registration of the Common Stock pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The registration of the Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.

 

2.2 Stock Exchange Listing. The shares of Common Stock have been approved for listing on the Nasdaq Stock Market LLC (the “Exchange”), subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the shares of Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

 

2.3 No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.

 

2.4 Disclosures in Registration Statement.

 

2.4.1 Compliance with Securities Act and 10b-5 Representation.

 

(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with the Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to the Commission’s EDGAR filing system (“EDGAR”), except to the extent permitted by Regulation S-T promulgated under the Securities Act (“Regulation S-T”).

 

(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

 

(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus hereto does not conflict with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the following disclosure contained in the “Underwriting” section of the Prospectus: the names of the Underwriters, the information in the table under the subheading titled “Over-Allotment Option” and the information under the subheadings titled “Price Stabilization, Short Positions, and Penalty Bids”, “Offering Information”, “Affiliations”, and “Electronic Offer, Sale and Distribution” (the “Underwriters’ Information”).

 

 

(iv)   Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.

 

2.4.2 Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental or regulatory agency, authority, body, entity or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity” and collectively, “Governmental Entities”), including, without limitation, those relating to environmental laws and regulations.

 

2.4.3 Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign laws, rules and regulations relating to the Offering and the Company’s business as currently conducted or contemplated are correct and complete in all material respects and no other such laws, rules or regulations are required under the Securities Act and the Securities Act Regulations to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.

 

 

2.4.4 No Other Distribution of Offering Materials. The Company has not, directly or indirectly, distributed and will not distribute any offering material in connection with the Offering other than any Preliminary Prospectus, any Issuer Free Writing Prospectus, the Prospectus and other materials, if any, permitted under the Securities Act and consistent with Section 3.2 below.

 

2.4.5 Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.

 

2.5 Changes After Dates in Registration Statement.

 

2.5.1 No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor any change or development that, singularly or in the aggregate, would reasonably be expected to result in a material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.

 

2.5.2 Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

 

2.6 Reserved.

 

2.7 Independent Accountants. Paris, Kreit & Chiu CPA LLP (formerly Benjamin & Ko) (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.

 

 

2.8 Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons, if any, that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) since the date of the last balance sheet included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, neither the Company nor any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a “Subsidiary” and, collectively, the “Subsidiaries”) has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company, or, other than in the course of business, any grants under any stock compensation plan, and (d) there has not been any material adverse change in the Company’s long-term or short-term debt. The Company represents that it has no direct or indirect Subsidiaries other than those listed in Exhibit 21.1 to the Registration Statement.

 

2.9 Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.

 

 

2.10 Valid Issuance of Securities, etc.

 

2.10.1   Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission or the ability to force the Company to repurchase such securities with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights, rights of first refusal or rights of participation of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock, options, warrants and other outstanding securities convertible into or exercisable for shares of Common Stock, were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares of Common Stock, exempt from such registration requirements. The description of the Company’s stock option, stock bonus and other related plans or arrangements, and options and/or other rights granted thereunder, as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, accurately and fairly present, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights.

 

2.10.2   Securities Sold Pursuant to this Agreement. The Public Securities and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities and Representative’s Securities are and will be free from all preemptive rights of any holders of any security of the Company, or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has been duly and validly taken. The Representative’s Warrants, when issued and paid for pursuant to this Agreement, will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the underlying shares of Common Stock. The Public Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Representative’s Warrants has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Representative’s Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Representative’s Warrants, such shares of Common Stock will be validly issued, fully paid and nonassessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; and such shares of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company.

 

 

2.11 Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any options, warrants, rights or other securities exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in the Registration Statement or any other registration statement to be filed by the Company.

 

2.12 Validity and Binding Effect of Agreements. The execution, delivery and performance of this Agreement and the Representative’s Warrants have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

2.13 No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Representative’s Warrants, and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or any other agreement or instrument to which the Company is a party or as to which any property of the Company is a party except breaches, conflicts or defaults that would not reasonably be expected to result in a Material Adverse Change; (ii) result in any violation of the provisions of the Company’s Certificate of Incorporation (as the same have been amended or restated from time to time, the “Charter”) or the amended and restated bylaws of the Company (the “Bylaws”); or (iii) violate in any material respect any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof having jurisdiction over the Company.

 

2.14 No Defaults; Violations. No default exists in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its Charter or Bylaws, or in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity.

 

 

2.15 Corporate Power; Licenses; Consents.

 

2.15.1   Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all consents, authorizations, approvals, licenses, certificates, clearances, permits and orders and supplements and amendments thereto (each an “Authorization”, and collectively, “Authorizations”) of and from all Governmental Entities that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.15.2   Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and the Representative’s Warrants and to carry out the provisions and conditions hereof and thereof, and all Authorizations required in connection therewith have been obtained. No Authorization of, and no filing with, any Governmental Entity or another body is required for the valid issuance, sale and delivery of the Public Securities and the Representative’s Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrants and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable Securities Act and Securities Act Regulations, the necessary filings and approvals from the Exchange to list the Public Securities and Representative’s Securities, state or foreign securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”), such consents and approvals as have been obtained and are in full force and effect, and such consents, approvals, orders, authorizations and filings the failure of which to make or obtain is not reasonably likely to result in a Material Adverse Change.

 

2.16 D&O Questionnaires. All information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Insiders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.25 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.

 

2.17 Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or in connection with the Company’s listing application for the listing of the Public Securities on the Exchange.

 

2.18 Good Standing. The Company has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of the State of Delaware as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.

 

 

2.19 Insurance. The Company carries or is entitled to the benefits of insurance (including, without limitation, as to directors and officers insurance coverage), with reputable insurers, in such amounts and covering such risks which the Company believes are adequate as are customary for companies engaged in similar business, and to the Company’s knowledge all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.

 

2.20 Transactions Affecting Disclosure to FINRA.

 

2.20.1   Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA.

 

2.20.2   Payments Within Twelve (12) Months. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder in connection with the Offering.

 

2.20.3   Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.

 

2.20.4   FINRA Affiliation. There is no (i) officer or director of the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

2.20.5   Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.

 

 

2.21 Foreign Corrupt Practices Act. None of the Company or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of, and with authority from, the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that could reasonably be expected to (i) subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, have had a Material Adverse Change or (iii) if not continued in the future, adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.

 

2.22 Compliance with OFAC. None of the Company or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of, and with authority from, the Company, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

2.23 Anti-Money Laundering Laws. The operations of the Company are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements, including those of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the applicable money laundering statutes of all jurisdictions where the Company or any of its subsidiaries conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any Governmental Entity (collectively, the “Anti-Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Anti-Money Laundering Laws is pending or, to the Company’s knowledge, threatened.

 

2.24 Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to the Representative or to Representative Counsel on the Closing Date or on the Option Closing Date shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.

 

2.25 Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and certain owners of record of the Company’s outstanding shares of Common Stock (or securities convertible or exercisable into shares of Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in a form substantially similar to that attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.

 

 

2.26 Subsidiaries. All direct and indirect Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a material adverse effect on the assets, business or operations of the Company taken as a whole. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.27 Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required under the Securities Act and the Securities Act Regulations.

 

2.28 Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the rules and regulations of the Commission promulgated thereunder (the “Exchange Act Regulations”), the Sarbanes- Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.

 

2.29 Sarbanes-Oxley Compliance.

 

2.29.1   Disclosure Controls. The Company has designed a system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act Regulations) that will comply with the requirements of the Exchange Act within the time period required and has been designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

 

2.29.2   Compliance. The Company is and at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act that are then in effect and with which the Company is required to comply with as of the Applicable Time or on the Closing Date, and has taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act then applicable to the Company.

 

 

2.30 Accounting Controls. The Company maintains systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, its principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. To the Company’s knowledge, the Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

 

2.31 No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.

 

2.32 No Labor Disputes. No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent. The Company is not aware that any officer, key employee or significant group of employees of the Company plans to terminate employment with the Company.

 

2.33 Intellectual Property Rights. The Company owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except where the failure to own, possess or have valid rights to use any of the foregoing would not reasonably be expected to result in a Material Adverse Change on the Company. To the knowledge of the Company, no action or use by the Company necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus would reasonably be expected to involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others. The Company has not received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change: (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in violation of the rights of any persons.

 

 

2.34 Taxes. The Company has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. The Company has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company except those that are being contested in good faith or as would not have, individually or in the aggregate, result in a Material Adverse Change. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no material issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. To the Company’s knowledge, there are no tax liens against the assets, properties or business of the Company. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.

 

2.35 ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.

 

2.36 Compliance with Laws. The Company: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the business of the Company as currently conducted (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or written notice from any Governmental Entity alleging or asserting noncompliance with any Applicable Laws or any Authorizations; (C) possesses all Authorizations and such Authorizations are valid and in full force and effect and are not in violation of any term of any such Authorizations; (D) has not received written notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any activity conducted by the Company is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought, would result in a Material Adverse Result, nor, to the Company’s knowledge, has there been any material noncompliance with or violation of any Applicable Laws by the Company that could reasonably be expected to require the issuance of any such communication or result in an investigation, corrective action, or enforcement action by any Governmental Entity; (E) has not received written notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Entity is considering such action; and (F) has filed, obtained, maintained or submitted all reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct on the date filed (or were corrected or supplemented by a subsequent submission), except where the failure to be so in compliance would not, individually or in the aggregate, result in a Material Adverse Change.

 

 

2.37 Emerging Growth Company. From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly in or through any Person authorized to act on its behalf in any Testing-the Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act. “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.

 

2.38 Environmental Laws. The Company is in compliance with all foreign, federal, state and local rules, laws and regulations relating to the use, treatment, storage and disposal of hazardous or toxic substances or waste and protection of health and safety or the environment which are applicable to their businesses (“Environmental Laws”), except where the failure to comply would not, singularly or in the aggregate, result in a Material Adverse Change. There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company (or, to the Company’s knowledge, any other entity for whose acts or omissions the Company is or may otherwise be liable) upon any of the property now or previously owned or leased by the Company, or upon any other property, in violation of any law, statute, ordinance, rule, regulation, order, judgment, decree or permit or which would, under any law, statute, ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Change; and there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company has knowledge, except for any such disposal, discharge, emission, or other release of any kind which would not have, singularly or in the aggregate with all such discharges and other releases, a Material Adverse Change. In the ordinary course of business, the Company conducts periodic reviews of the effect of Environmental Laws on its business and assets, in the course of which they identify and evaluate associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or governmental permits issued thereunder, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such reviews, the Company has reasonably concluded that such associated costs and liabilities would not have, singularly or in the aggregate, a Material Adverse Change.

 

2.39 Title to Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has good and marketable title in fee simple to, or has valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and all of the leases and subleases material to the business of the Company and under which the Company holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and the Company has not received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company to the continued possession of the leased or subleased premises under any such lease or sublease.

 

 

2.40 Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s liquidity or the availability of or requirements for its capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.

 

2.41 Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.42 Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the Effective Date and at the time of any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the Effective Date, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.

 

2.43 Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.

 

2.44 Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.

 

2.45 Electronic Road Show. The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) of the Securities Act Regulations such that no filing of any “road show” (as defined in Rule 433(h) of the Securities Act Regulations) is required in connection with the Offering.

 

 

2.46 Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Public Securities to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.

 

2.47 Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

2.48 Integration. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities issued in such prior offerings under the Securities Act.

 

2.49 Confidentiality and Non-Competition. No director, officer, key employee or consultant of the Company is subject to any confidentiality, non-disclosure, non-competition agreement or non-solicitation agreement with any employer (other than the Company) or prior employer that could materially affect his or her ability to be and act in his or her respective capacity of the Company or be reasonable expected to result in a Material Adverse Change.

 

2.50 Corporate Records. The minute books of the Company have been made available to the Representative and Representative Counsel and such books (i) contain minutes of all material meetings and actions of the Board of Directors (including each board committee) and stockholders of the Company, and (ii) reflect all material transactions referred to in such minutes.

 

2.51 Diligence Materials. The Company has provided to the Representative and Representative Counsel all materials required or necessary to respond in all material respects to the diligence request submitted to the Company or Company Counsel by the Representative.

 

2.52 Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders (without the consent of the Representative) has taken, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

 

 

3.

COVENANTS OF THE COMPANY.

 

The Company covenants and agrees as follows:

 

3.1 Amendments to Registration Statement. The Company shall deliver to the Representative, at least one (1) Business Day (or such shorter time mutually agreed by the parties hereto) prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

 

3.2 Federal Securities Laws.

 

3.2.1 Compliance. The Company, subject to Section 3.2.2, shall comply with the requirements of Rule 430A of the Securities Act Regulations, and will, during the period required to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus, notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of its receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement; and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its best efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.

 

3.2.2 Continued Compliance. The Company shall comply with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of Representative Counsel or Company Counsel, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement; and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or Representative Counsel shall reasonably object.

 

 

3.2.3 Exchange Act Registration. Until the later of (i) three (3) years after the date of this Agreement and (ii) the expiration date of the Representative’s Warrants (or the date that all of the Representative’s Warrants have been exercised, if earlier), the Company shall use its reasonable best efforts to maintain the registration of the Common Stock under the Exchange Act. The Company shall not deregister the Common Stock under the Exchange Act without the prior written consent of the Representative.

 

3.2.4 Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus set forth in Schedule 2-B. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representative as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus the Company has knowledge that there has occurred or is occurring an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

 

3.2.5 Testing-the-Waters Communications. If at any time following the distribution of any Written Testing-the-Waters Communication the Company has knowledge that there occurred or is occurring an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

 

3.3 Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, conformed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to each Underwriter, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) upon receipt of a written request therefor from such Underwriter. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

3.4 Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

 

3.5 Effectiveness and Events Requiring Notice to the Representative. The Company shall use its best efforts to cause the Registration Statement to remain effective with a current prospectus through and including the expiration date of the Representative’s Warrants (or the date that all of the Representative’s Warrants have been exercised, if earlier), and shall notify the Representative immediately and confirm the notice in writing: (i) of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities or the Representative’s Securities, as applicable, for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company shall use its commercially reasonable efforts to obtain promptly the lifting of such order.

 

3.6 Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.

 

3.7 Listing. The Company shall use its reasonable best efforts to maintain the listing of the shares of Common Stock on the Exchange for at least three (3) years from the date of this Agreement.

 

3.8 Financial Public Relations. As of the Effective Date, the Company shall have retained a financial public relations firm reasonably acceptable to the Representative and the Company, which firm shall be experienced in assisting issuers in initial public offerings of securities and in their relations with their security holders, and shall retain such firm or another firm reasonably acceptable to the Representative for a period of not less than two (2) years after the Effective Date.

 

3.9 Reports to the Representative.

 

3.9.1 Periodic Reports, etc. For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K prepared and filed by the Company; (iv) a copy of each registration statement filed by the Company under the Securities Act; (v) a copy of each report or other communication furnished to stockholders and (vi) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request. Documents filed with the Commission pursuant to its EDGAR system or press releases shall be deemed to have been delivered to the Representative pursuant to this Section 3.9.1. Any documents not filed with the Commission pursuant to its EDGAR system shall be delivered to [email protected], with a copy to [email protected].

 

 

3.9.2 Transfer Agent; Transfer Sheets. For a period of three (3) years after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. Securities Transfer Corporation is acceptable to the Representative to act as Transfer Agent for the shares of Common Stock.

 

3.9.3 Trading Reports. During such time as any of the Public Securities are listed on the Exchange, the Company shall provide to the Representative, at the Company’s expense, such reports published by the Exchange relating to price trading of the Public Securities, as the Representative shall reasonably request.

 

3.10 Payment of Expenses. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses related to the Offering or otherwise incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Public Securities and Representative’s Securities with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Public Securities and Representative’s Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine, including any fees charged by DTC; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements relating to the registration or qualification of the Public Securities under the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate; (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs and expenses of a public relations firm; (i) the costs of preparing, printing and delivering certificates representing the Public Securities; (j) fees and expenses of the Transfer Agent for the shares of Common Stock; (k) stock transfer and/or stamp taxes, if any, payable upon the transfer of the Public Securities from the Company to the Underwriters; (l) the costs associated with one set of bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, each of which the Company or its designee shall provide within a reasonable time after the Closing Date in such quantities as the Representative may reasonably request; (m) the fees and expenses of the Company’s accountants; (n) the fees and expenses of the Company’s legal counsel and other agents and representatives; (o) the fees and expenses of Representative Counsel; (p) the cost associated with the Underwriters’ use of Ipreo’s book- building, prospectus tracking and compliance software for the Offering; (q) to the extent approved by the Company in writing, the costs associated with post-Closing advertising of the Offering in the national editions of the Wall Street Journal and New York Times; and (r) the Underwriters’ actual accountable expenses for the Offering, including, without limitation related to the “road show.” Notwithstanding the foregoing, the Company’s obligations to reimburse the Representative for any out-of-pocket expenses actually incurred as set forth in the preceding sentence shall not exceed $175,000 in the aggregate for all of the foregoing fees and expenses. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters, less the Advance (as such term is defined in Section 8.3 hereof).

 

 

3.11 Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

3.12 Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by an independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.

 

3.13 Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

 

3.14 Internal Controls. The Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

3.15 Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm, as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board, reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that Paris, Kreit & Chiu CPA LLP (formerly Benjamin & Ko) is acceptable to the Representative.

 

 

3.16 FINRA. For a period of 90 days from the later of the Closing Date or the Option Closing Date, the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).

 

3.17 No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.

 

3.18 Company Lock-Up Agreements. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company other than a registration statement on Form S-4 or S-8; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit or senior credit facility with a traditional bank or other lending institution; or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii), (iii), or (iv) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.

 

The restrictions contained in this Section 3.18 shall not apply to (i) the Public Securities or the Representative’s Securities; (ii) the issuance by the Company of shares of Common Stock upon the exercise of a stock option or warrant or the conversion of a security, in each case outstanding on the date hereof, provided that such options, warrants, securities are disclosed in the Registration Statement, the Pricing Disclosure Package or the Prospectus and have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities or to extend the term of such securities, (iii) the issuance of shares of Common Stock issued as part of the purchase price in connection with acquisitions or strategic transactions, or (iv) the issuance by the Company of any shares of Common Stock or standard options to purchase Common Stock to directors, officers or employees of the Company in their capacity as such pursuant to an Approved Stock Plan (as defined below). “Approved Stock Plan” means any employee benefit plan which has been approved by the board of directors of the Company prior to or subsequent to the date hereof pursuant to which shares of Common Stock and standard options to purchase Common Stock may be issued to any employee, officer or director for services provided to the Company in their capacity as such.

 

 

3.19 Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.25 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.

 

3.20 Blue Sky Qualifications. The Company shall use its best efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may reasonably designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

 

3.21 Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.

 

3.22 Press Releases. Prior to the Closing Date and any Option Closing Date, the Company shall not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Representative is notified), without the prior written consent of the Representative, which consent shall not be unreasonably withheld, unless in the judgment of the Company and its counsel, and after notification to the Representative, such press release or communication is required by law.

 

3.23 Sarbanes-Oxley. For a period of one (1) year after the date of this Agreement, the Company shall at all times comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act in effect from time to time.

 

3.24 IRS Forms. If requested by the Representative, the Company shall deliver to each Underwriter (or its agent), prior to or at the Closing Date, a properly completed and executed Internal Revenue Service (“IRS”) Form W-9 or an IRS Form W-8, as appropriate, together with all required attachments to such form.

 

 

4.

CONDITIONS OF UNDERWRITERS’ OBLIGATIONS.

 

The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:

 

4.1 Regulatory Matters.

 

4.1.1 Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus shall have been issued and no proceedings for any of those purposes shall have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) under the Securities Act Regulations (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A under the Securities Act Regulations.

 

4.1.2 FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

 

4.1.3 Exchange Clearance. On the Closing Date, the Common Stock shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company’s shares of Common Stock, including the Option Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance.

 

4.2 Company Counsel Matters.

 

4.2.1 Closing Date Opinion of Counsel. On the Closing Date, the Representative shall have received the favorable opinions and negative assurance letter of K&L Gates LLP (“Company Counsel”), counsel to the Company, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

 

4.2.2 Option Closing Date Opinions of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinion and negative assurance letter of Company Counsel listed in Section 4.2.1, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in its opinion or their respective opinions delivered on the Closing Date.

 

 

4.2.3 Reliance. The opinion of Company Counsel and any opinion relied upon by Company Counsel shall include a statement to the effect that it may be relied upon by Representative Counsel in its opinion delivered to the Underwriters.

 

4.3 Comfort Letters.

 

4.3.1 Comfort Letter. At the time this Agreement is executed the Representative shall have received a cold comfort letter from the Auditors containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance reasonably satisfactory in all respects to the Representative and to Representative Counsel from the Auditors, dated as of the date of this Agreement.

 

4.3.2 Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditors a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditors reaffirms the statements made in the letter furnished pursuant to Section 4.3.1.

 

4.4 Officers’ Certificates.

 

4.4.1 Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer and its Chief Financial Officer stating that on behalf of the Company and not in an individual capacity that (i) such officers have examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to their knowledge after reasonable investigation, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included in the Pricing Disclosure Package, any Material Adverse Change.

 

 

4.4.2 Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, certifying on behalf of the Company and not in an individual capacity: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

 

4.5 No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no Material Adverse Change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may reasonably be expected to cause a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

4.6 No Material Misstatement or Omission. The Underwriters shall not have discovered and disclosed to the Company on or prior to the Closing Date and any Option Closing Date that the Registration Statement or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Representative Counsel, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in the opinion of Representative Counsel, is material or omits to state any fact which, in the opinion of Representative Counsel, is material and is necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.

 

 

4.7 Corporate Proceedings. All corporate proceedings and other legal matters incident to the authorization, form and validity of each of this Agreement, the Public Securities, the Registration Statement, the Pricing Disclosure Package, each Issuer Free Writing Prospectus, if any, and the Prospectus and all other legal matters relating to this Agreement, the Representative’s Warrants and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to Representative Counsel, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters.

 

4.8 Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.

 

4.9 Representative’s Warrants. On the Closing Date, the Company shall have delivered to the Representative executed copies of the Representative’s Warrants.

 

4.10 Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and Representative’s Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representative and Representative Counsel.

 

5.

INDEMNIFICATION.

 

5.1 Indemnification of the Underwriters.

 

5.1.1 General. The Company shall indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives, partners, shareholders, affiliates, counsel and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus or any Issuer Free Writing Prospectus (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities and the Representative’s Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party (a) is based on the Underwriters’ Information or material omission therefrom, (b) results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof, or (c) is found in a final, non-appealable judgment of a court of competent jurisdiction to have resulted primarily from the willful misconduct or gross negligence of such Underwriter Indemnified Party.

 

 

5.1.2 Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) the action includes both the Company and the indemnified party as defendants and such indemnified party or parties shall have been advised by its counsel that there may be defenses available to it or them which are different from or additional to those available to the Company which makes it impossible or inadvisable for the Company and such indemnified party to be represented in the action by the same counsel (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Parties who are party to such action (in addition to local counsel) shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if any Underwriter Indemnified Party shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld.

 

5.2 Indemnification of the Company. Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to such losses, liabilities, claims, damages and expenses (or actions in respect thereof) which arise out of or are based upon untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus or any Issuer Free Writing Prospectus.

 

 

5.3 Contribution.

 

5.3.1 Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and each of the Underwriters, on the other hand, from the Offering, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total proceeds from the Offering (before deducting expenses) received by the Company bear to the total underwriting discount and commissions received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, on the one hand, and the Underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company through the Representative by or on behalf of any Underwriter for use in any Preliminary Prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriters’ Information and any material information that was omitted therefrom. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage, expense, liability, action, investigation or proceeding referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third party witness in respect of, or otherwise incurred in connection with, any such loss, claim, damage, expense, liability, action, investigation or proceeding. Notwithstanding the provisions of this Section 5.3.1 no Underwriter shall be required to contribute any amount in excess of the total discount and commission received by such Underwriter in connection with the Offering less the amount of any damages which such Underwriter has otherwise paid or becomes liable to pay by reason of any untrue or alleged untrue statement, omission or alleged omission, act or alleged act or failure to act or alleged failure to act. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

5.3.2 Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute as provided in this Section 5.3 are several and in proportion to their respective underwriting obligation, and not joint.

 

 

6.

DEFAULT BY AN UNDERWRITER.

 

6.1 Default Not Exceeding 10% of Firm Shares or Option Shares. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.

 

6.2 Default Exceeding 10% of Firm Shares or Option Shares. In the event that the default addressed in Section 6.1 relates to more than 10% of the number of Firm Shares or Option Shares, the Representative may in its discretion arrange for itself or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the number of Firm Shares or Option Shares, the Representative does not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to the Representative to purchase said Firm Shares or Option Shares on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3.10 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.

 

6.3 Postponement of Closing Date. In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the reasonable opinion of Representative Counsel may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares or Option Shares.

 

7.

ADDITIONAL COVENANTS.

 

7.1 Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity, without the Representative’s prior written consent, for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.

 

 

7.2 Tail Period. Notwithstanding any other provision of this Agreement, in the event that the Offering is not consummated by the Underwriters as contemplated herein, the Company agrees to pay the Representative a cash fee equal to eight percent (8.0%) of the gross proceeds received by the Company from the sale of the securities offered to any investor actually introduced by the Representative to the Company during the Engagement Period (as defined below) (the “Tail Financing”), and such Tail Financing is consummated at any time during the Engagement Period or within the twelve (12) month period following the expiration of the Engagement Period, provided that such financing is by a party actually introduced to the Company in an offering in which the Company has direct knowledge of such party’s participation and not a party that the Company can demonstrate was already known to the Company. In addition, unless (x) the Company terminates this Agreement for “Cause” (as defined below), or (y) the Representative fails to provide the underwriting services provided in this Agreement, upon termination of this Agreement, if the Company subsequently completes a public or private financing with any investors introduced to the Company by the Representative during the twelve (12) month period following such termination, the Representative shall be entitled to receive the same compensation to be paid to the Representative in connection with the Offering. “Cause”, for the purpose of this Agreement, shall mean, as determined by a court of competent jurisdiction, willful misconduct, gross negligence or a material breach of this Agreement by the Representative. In the event that the Company believes that the Representative has engaged in conduct constituting Cause, the Company must first notify the Representative in writing of the facts and circumstances supporting such an assertion(s), and the Representative shall have twenty (20) days to cure such alleged conduct. “Engagement Period” shall mean the period beginning on September 9, 2021, and ending on the earlier of (i) twelve (12) months from the date of such date, (ii) the final closing, if any, of the Offering, or (iii) the date that either party to this Agreement gives the other party to this Agreement at least thirty (30) days’ advance written notice of termination of that certain engagement letter agreement by and between the Company and the Representative, dated as of September 9, 2021 in accordance with the terms thereof.

 

8.

EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.

 

8.1 Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.

 

8.2 Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative’s reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative’s reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of a Material Adverse Change, or an adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities.

 

 

8.3 Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative Counsel) up to $50,000, inclusive of the payments totaling up to $50,000 in advance for accountable expenses previously paid by the Company to the Representative (the “Advance”), and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement.

 

Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(g)(4)(A).

 

8.4 Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

 

8.5 Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.

 

9.

MISCELLANEOUS.

 

9.1 Constructive Knowledge. Whenever a representation or warranty or other statement in this Agreement (including, without limitation, schedules hereto) is made with respect to a party’s “knowledge,” such statement refers to the knowledge, after reasonable inquiry, of such party’s employees or agents who were or are responsible for or involved with the indicated matter.

 

9.2 Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by email or facsimile transmission and confirmed and shall be deemed given when so delivered or emailed or faxed and confirmed (which confirmation may be by email or facsimile transmission) or if mailed, two (2) days after such mailing.

 

 

If to the Representative:

 

EF Hutton

 

590 Madison Avenue, 39th Floor

New York, New York 10022

Attn: Joseph T. Rallo

Email: [email protected]

 

with a copy (which shall not constitute notice) to:

 

Mitchell Silberberg & Knupp LLP

437 Madison Avenue

New York, New York 10022

Attn: Blake Baron

Fax No.: (917) 546-7686

 

If to the Company:

 

Reborn Coffee, Inc.

580 N. Berry Street

Brea, California 92821

Attn: Jay Kim, Chief Executive Officer

Fax No.: [ ]

 

with a copy (which shall not constitute notice) to:

 

K&L Gates LLP

599 Lexington Avenue

New York, New York 10022

Attn: Matthew G. Ogurick

Fax No.: [ ]

 

9.3 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

 

9.4 Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.

 

9.5 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

 

9.6 Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.

 

9.7 Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof to the extent that such principles or rules would require or permit the application of the laws of any jurisdiction other than those of the State of New York. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

9.8 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.

 

9.9 Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

[Signature Page Follows]

 

 

If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

 

	Very truly yours,
	Reborn Coffee, Inc.
	By:
	Name:
	Title:

 

as of the date first written above mentioned, on behalf of itself and as Representative of the several Underwriters named on Schedule 1 hereto:

 

EF HUTTON,
division of Benchmark Investments, LLC
By:
	Name:	Sam Fleischman
	Title:	Supervisory Principal

[Signature Page to Underwriting Agreement]

 

 

SCHEDULE 1

 

Underwriter		Total Number of Firm Shares to be Purchased				Number of Additional Option Shares to be Purchased if the Over-Allotment Option is Fully Exercised
EF Hutton, division of Benchmark Investments, LLC
TOTAL

 

 

SCHEDULE 2-A

 

Pricing Information

 

Number of Firm Shares:

Number of Option Shares:

Public Offering Price per Firm Share:

Public Offering Price per Option Share:

Underwriting Discount per Firm Share:

Underwriting Discount per Option Share:

Proceeds to Company per Firm Share (before expenses):

Proceeds to Company per Option Share (before expenses):

 

 

SCHEDULE 2-B

 

Issuer General Use Free Writing Prospectuses

 

None.

 

 

SCHEDULE 3

 

List of Lock-Up Parties

 

Jay Kim

Stephan Kim

Farooq M. Arjomand

Dennis R. Egidi

Sehan Kim

Hannah Goh

 

 

EXHIBIT A

 

Form of Representative’s Warrant

 

THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) EF HUTTON, DIVISION OF BENCHMARK INVESTMENTS, LLC OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF EF HUTTON, DIVISION OF BENCHMARK INVESTMENTS, LLC OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.

 

THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [ ] [DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING]. VOID AFTER 5:00 P.M., EASTERN TIME, [ ] [DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING].

 

COMMON STOCK PURCHASE WARRANT

 

For the Purchase of [   ] Shares of Common Stock of

 

Reborn Coffee, Inc.

 

1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of EF Hutton, division of Benchmark Investments, LLC (“Holder”), as registered owner of this Purchase Warrant Reborn Coffee, Inc., a Delaware corporation (the “Company”), Holder is entitled, at any time or from time to time from [ ] [DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [ ] [DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ ] shares of common stock of the Company, par value $0.0001 per share (the “Shares”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[ ] per Share; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context. The term “Effective Date” shall mean [   ], 2022, the date on which the Registration Statement on Form S-1 (File No. 333- 261937) of the Company was declared effective by the Securities and Exchange Commission.

 

 

2.

Exercise.

 

2.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

 

2.2 Cashless Exercise. If at any time after the Commencement Date there is no effective registration statement registering, or no current prospectus available for, the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 2.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:

 

X = Y(A-B)

 

A

 

Where,

 

X = The number of Shares to be issued to Holder;

 

Y = The number of Shares for which the Purchase Warrant is being exercised; A = The fair market value of one Share; and

 

B = The Exercise Price.

 

For purposes of this Section 2.2, the fair market value of a Share is defined as follows:

 

(i) if the Company’s common stock is traded on a securities exchange, the value shall be deemed to be the closing price on such exchange prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or

 

(ii) if the Company’s common stock is actively traded over-the-counter, the value shall be deemed to be the closing bid price prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.

 

 

2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE LAW. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE LAW WHICH, IN THE OPINION OF COUNSEL TO THE COMPANY, IS AVAILABLE.”

 

3.      Transfer.

 

3.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant or the securities issuable hereunder for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) EF Hutton, division of Benchmark Investments, LLC (“EF Hutton”) or an underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of EF Hutton or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(e)(1), or (b) for a period of one hundred eighty (180) days following the Effective Date, cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(e)(2). On and after one hundred eighty (180) days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) business days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

 

3.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of K&L Gates LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.

 

 

4.

Registration Rights.

 

4.1

Demand Registration.

 

4.1.1 Grant of Right. The Company, upon written demand (a “Demand Notice”) of the Holders of at least 51% of the Purchase Warrants and/or the underlying Shares, agrees to register, on one (1) occasion, all or any portion of the Shares underlying the Purchase Warrants (collectively, the “Registrable Securities”). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty (30) days after such offering is consummated. The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holders to all other registered Holders of the Purchase Warrants and/or the Registrable Securities within ten (10) days after the date of the receipt of any such Demand Notice.

 

4.1.2 Terms. The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 4.1.1, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such states as are reasonably requested by the Holders; provided, however, that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal stockholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the prospectuses provided by the Company to sell the shares covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder shall be entitled to a demand registration under this Section 4.1.2 on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary of the Effective Date in accordance with FINRA Rule 5110(g)(8)(C).

 

 

4.2

“Piggy-Back” Registration.

 

4.2.1 Grant of Right. In addition to the demand right of registration described in Section 4.1 hereof, the Holder shall have the right, for a period of no more than seven (7) years from the Effective Date in accordance with FINRA Rule 5110(g)(8)(D), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or Form S-4 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of common stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.

 

4.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days’ written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2; provided, however, that such registration rights shall terminate on the seventh anniversary of the Effective Date.

 

4.3

General Terms.

 

4.3.1 Indemnification. The Company shall indemnify the Holders of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement between the Underwriters and the Company, dated as of [ ], 2022. The Holders of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

 

 

4.3.2 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holders to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

 

4.3.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

 

4.3.4 Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by any Holders whose Registrable Securities are being registered pursuant to this Section 4, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.

 

4.3.5 Documents to be Delivered by Holders. Each of the Holders participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.

 

 

4.3.6 Damages. Should the registration or the effectiveness thereof required by Sections 4.1 and 4.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holders shall, in addition to any other legal or other relief available to the Holders, be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.

 

4.4 Termination of Registration Rights. The registration rights afforded to the Holders under this Section 4 shall terminate on the earliest date when all Registrable Securities of such Holder either: (i) have been publicly sold by such Holder pursuant to a Registration Statement, (ii) have been covered by an effective Registration Statement on Form S-1 or Form S-3 (or successor form), which may be kept effective as an evergreen Registration Statement, or (iii) may be sold by the Holder within a 90 day period without registration pursuant to Rule 144 or consistent with applicable SEC interpretive guidance (including CD&I no. 201.04 (April 2, 2007) or similar interpretive guidance).

 

5.	New Purchase Warrants to be Issued.

 

5.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.

 

5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

 

 

6.	Adjustments.

 

6.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:

 

6.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.

 

6.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.

 

6.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.

 

6.1.4 Changes in Form of Purchase Warrant. Except as may otherwise be required under Section 6.2 hereof, this form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.

 

 

6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.

 

6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.

 

7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non- assessable and not subject to preemptive rights of any stockholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.

 

8.	Certain Notice Requirements.

 

8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.

 

 

8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.

 

8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Executive Officer or Chief Financial Officer.

 

8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to the following address or to such other address as the Company may designate by notice to the Holders:

 

If to the Holder:

 

EF Hutton

 

590 Madison Avenue, 39th Floor

New York, New York 10022

Attn: Joseph T. Rallo

 

with a copy (which shall not constitute notice) to:

 

Mitchell Silberberg & Knupp LLP

437 Madison Avenue

New York, New York 10022

Attn: Blake Baron

Fax No.: (917) 546-7686

 

If to the Company:

 

Reborn Coffee, Inc.

580 N. Berry Street

Brea, California 92821

Attn: Jay Kim, Chief Executive Officer

Fax No.: [ ]

 

with a copy (which shall not constitute notice) to:

 

K&L Gates LLP

599 Lexington Avenue

New York, New York 10022

Attn: Matthew G. Ogurick

Fax No.: [   ]

 

 

9.	Miscellaneous.

 

9.1 Amendments. The Company and EF Hutton may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and EF Hutton may deem necessary or desirable and that the Company and EF Hutton deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.

 

9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.

 

9.3 Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

 

9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.

 

9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

 

9.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

9.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.

 

9.8 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and EF Hutton enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.

 

[Signature Page Follows]

 

 

IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the __ day of ______________, 2022.

 

Reborn Coffee, Inc.
By:
	Name:
	Title:

 

 

[Form to be used to exercise Purchase Warrant]

 

Date:           , 202_

 

The undersigned hereby elects irrevocably to exercise the Purchase Warrant for shares of common stock, par value $0.0001 per share (the “Shares”), of Reborn Coffee, Inc., a Delaware corporation (the “Company”), and hereby makes payment of $ (at the rate of $ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.

 

or

 

The undersigned hereby elects irrevocably to convert its right to purchase Shares of the Company under the Purchase Warrant for Shares, as determined in accordance with the following formula:

 

X = Y(A-B)

 

A

 

Where,

 

X = The number of Shares to be issued to Holder;

 

Y = The number of Shares for which the Purchase Warrant is being exercised;

 

A = The fair market value of one Share which is equal to $ ; and

 

B = The Exercise Price which is equal to $ per share

 

The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.

 

Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.

 

Signature

Signature Guaranteed

 

INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
	(Print in Block Letters)
Address:

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

 

[Form to be used to assign Purchase Warrant]

 

ASSIGNMENT

 

(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):

 

FOR VALUE RECEIVED, _ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of Reborn Coffee, Inc., a Delaware corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

 

Dated: _________, 20__

 

Signature___________________________________

 

Signature Guaranteed__________________________

 

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

 

 

EXHIBIT B

 

Form of Lock-Up Agreement

 

____________, 2022

 

EF HUTTON,

 

division of Benchmark Investments, LLC

 

as Representative of the Underwriters

 

590 Madison Avenue, 39th Floor

 

New York, New York 10022

 

Ladies and Gentlemen:

 

The undersigned understands that EF Hutton, division of Benchmark Investments, LLC (the “Representative”) proposes to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Reborn Coffee, Inc., a Delaware corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock of the Company, par value $0.0001 per share (the “Common Stock or the “Securities”).

 

To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending six (6) months after the date of the Underwriting Agreement (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Stock or any securities convertible into or exercisable or exchangeable for the Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 13 or Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or other public announcement shall be required or shall be voluntarily made during the Lock-Up Period in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; or (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock- Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) it shall be a condition to any such transfer that (i) the transferee/donee agrees to be bound by the terms of this lock-up agreement (including, without limitation, the restrictions set forth in the preceding sentence) to the same extent as if the transferee/donee were a party hereto; (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the Lock-Up Period; and (iii) the undersigned notifies the Representative at least two (2) business days prior to the proposed transfer or disposition.

 

 

In addition, the foregoing restrictions shall not apply to (i) the exercise or vesting of stock options or other equity awards granted pursuant to the Company’s equity incentive plans; provided that it shall apply to any of the undersigned’s Common Stock issued upon such exercise, (ii) the conversion or exercise of convertible debt or warrants; provided that it shall apply to any of the undersigned’s Common Stock issued upon such exercise, or (iii) the establishment of any new plan (a “Plan”) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act; provided that no sales of the undersigned’s Securities shall be made pursuant to such new Plan prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof), and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof).

 

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Securities subject to this lock-up agreement except in compliance with this lock-up agreement.

 

If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any Securities that the undersigned may purchase in the Public Offering; (ii) the Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.

 

The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

 

The undersigned understands that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Securities to be sold thereunder, the undersigned shall be released from all obligations under this lock-up agreement.

 

 

This lock-up agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

	Very truly yours,
	(Name - Please Print)
	(Signature)
	(Name of Signatory, in the case of entities - Please Print)
	(Title of Signatory, in the case of entities - Please Print)
	(Name - Please Print)
	Address:

 

 

EXHIBIT C

 

Form of Press Release

 

[____________]

 

[Date]

 

Reborn Coffee, Inc. (the “Company”) announced today that EF Hutton, division of Benchmark Investments, LLC, acting as representative for the underwriters in the Company’s recent public offering of the Company’s common stock, is [waiving] [releasing] a lock-up restriction with respect to _______________ shares of common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on___________, 2__, and such shares of common stock may be sold on or after such date.

 

This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.

 

 

 

 

Exhibit 10.2

 

Form of Lock-Up Agreement

 

____________, 2022

 

EF HUTTON,

 

division of Benchmark Investments, LLC

 

as Representative of the Underwriters

 

590 Madison Avenue, 39th Floor

 

New York, New York 10022

 

Ladies and Gentlemen:

 

The undersigned understands that EF Hutton, division of Benchmark Investments, LLC (the “Representative”) proposes to enter into an Underwriting Agreement (the “Underwriting Agreement”) with Reborn Coffee, Inc., a Delaware corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock of the Company, par value $0.0001 per share (the “Common Stock or the “Securities”).

 

To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending 6 months (or, in the case of the Company, 12 months) after the date of the Underwriting Agreement (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Stock or any securities convertible into or exercisable or exchangeable for the Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 13 or Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or other public announcement shall be required or shall be voluntarily made during the Lock-Up Period in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; or (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock- Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) it shall be a condition to any such transfer that (i) the transferee/donee agrees to be bound by the terms of this lock-up agreement (including, without limitation, the restrictions set forth in the preceding sentence) to the same extent as if the transferee/donee were a party hereto; (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the Lock-Up Period; and (iii) the undersigned notifies the Representative at least two (2) business days prior to the proposed transfer or disposition.

 

 

In addition, the foregoing restrictions shall not apply to (i) the exercise or vesting of stock options or other equity awards granted pursuant to the Company’s equity incentive plans; provided that it shall apply to any of the undersigned’s Common Stock issued upon such exercise, (ii) the conversion or exercise of convertible debt or warrants; provided that it shall apply to any of the undersigned’s Common Stock issued upon such exercise, or (iii) the establishment of any new plan (a “Plan”) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act; provided that no sales of the undersigned’s Securities shall be made pursuant to such new Plan prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof), and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof).

 

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Securities subject to this lock-up agreement except in compliance with this lock-up agreement.

 

If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any Securities that the undersigned may purchase in the Public Offering; (ii) the Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.

 

The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

 

The undersigned understands that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Securities to be sold thereunder, the undersigned shall be released from all obligations under this lock-up agreement.

 

 

This lock-up agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

	Very truly yours,
	(Name - Please Print)
	(Signature)
	(Name of Signatory, in the case of entities - Please Print)
	(Title of Signatory, in the case of entities - Please Print)
	(Name - Please Print)

  

	Address:

 

 

3

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the inclusion in this Registration Statement of Reborn Coffee, Inc. on Amendment No.6 to Form S-1 to be filed on or about August 9, 2022 of our report dated April 13, 2022, except for the effect of a stock split and conversion and elimination of Class B Common Stock as described in Note 15, which is dated June 27, 2022 and the effect of the deemed dividend on a make-whole provision as described in Note 15, which is dated August 1, 2022, on our audits of the consolidated financial statements of Reborn Coffee, Inc. and subsidiaries as of December 31, 2021 and 2020, and for the years then ended. We also consent to the reference to our firm under the heading “Experts” in such Registration Statement.

 

/s/ Paris, Kreit & Chiu CPA LLP

(formerly Benjamin & Ko)

 

New York, NY

August 9, 2022