UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 333-190067
DOCASA, INC.
(Exact name of Registrant as specified in its charter)
| Nevada | 47-1405387 | |
| (State of incorporation) | (IRS Employer ID Number) |
1901 North Roselle Road, Suite 800
Schaumburg, Illinois 60195
(630) 250-2709
(Registrant’s telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| (Check one): | ||||
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |
| (Do not check if a smaller reporting company) | ||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 12, 2018, there were 209,033,239 of common stock, par value $0.001 per share issued, issuable, and outstanding.
DOCASA, INC.
FORM 10-Q
SEPTEMBER 30, 2018
INDEX
| Page No. | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | F-2 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 7 |
| Item 4. | Controls and Procedures | 7 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 9 |
| Item 1A. | Risk Factors | 9 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 9 |
| Item 3. | Defaults Upon Senior Securities | 9 |
| Item 4. | Mine Safety Disclosures | 9 |
| Item 5. | Other Information | 9 |
| Item 6. | Exhibits | 9 |
| SIGNATURES | 10 | |
| 2 |
PART I – FINANCIAL INFORMATION
TABLE OF CONTENTS
| F-1 |
DOCASA, INC.
and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
| September 30, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 1,104,519 | $ | 139,350 | ||||
| Accounts receivable | 898,438 | 531,872 | ||||||
| Other receivables | - | 8,183 | ||||||
| Prepaid expenses | 551,923 | 396,041 | ||||||
| Inventory | 154,888 | 100,386 | ||||||
| Total current assets | 2,709,768 | 1,175,832 | ||||||
| Fixed assets, net | 3,396,189 | 1,957,650 | ||||||
| Intangible assets, net | 165,087 | 12,559 | ||||||
| Other receivables | 39,088 | 40,509 | ||||||
| Goodwill | 4,399,503 | 2,185,012 | ||||||
| Provisional Deposits | 355,158 | 233,966 | ||||||
| Total assets | $ | 11,064,793 | $ | 5,605,528 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Notes payable, current portion | $ | 198,118 | $ | 171,160 | ||||
| Accounts payable | 1,127,956 | 869,388 | ||||||
| Accrued expenses | 1,651,069 | 529,324 | ||||||
| Accounts payable to related parties | 65,428 | 65,855 | ||||||
| Taxes payable | 94,730 | 120,807 | ||||||
| Capital leases obligations, current portion | 184,505 | 209,539 | ||||||
| Deferred revenue | 31,532 | 35,642 | ||||||
| Total current liabilities | 3,353,338 | 2,001,715 | ||||||
| Non-current liabilities: | ||||||||
| Notes payable, non-current portion (includes $11,014 and $11,414 to related parties for September 30, 2018 and December 31, 2017, respectively) | 245,528 | 357,095 | ||||||
| Capital leases obligations, non-current portion | 292,027 | 370,681 | ||||||
| Other long-term liabilities | 593,743 | 1,206 | ||||||
| Total long-term liabilities | 1,131,298 | 728,982 | ||||||
| Total liabilities | 4,484,636 | 2,730,697 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| Shareholders’ deficit: | ||||||||
| Common stock, $0.001 par value, 250,000,000 shares authorized, 161,945,114 and 160,012,875 shares issued and outstanding, at September 30, 2018 and December 31, 2017, and 47,087,125 and 47,087,125 conditionally issuable, at September 30, 2018 and December 31, 2017, respectively | 209,033 | 207,100 | ||||||
| Additional paid-in capital | 2,386,049 | 758,933 | ||||||
| Class A ordinary shares of DEPT-UK (25,000,000 shares authorized, £1 par value, 0 and 243,800 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | - | - | ||||||
| Class B ordinary shares of DEPT-UK (10,000,000 shares authorized, £1 par value, 0 and 0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | - | - | ||||||
| Accumulated other comprehensive loss | (587,960 | ) | (301,958 | ) | ||||
| Accumulated deficit | (4,253,374 | ) | (2,482,908 | ) | ||||
| Total DOCASA, Inc. shareholders’ deficit | (2,246,252 | ) | (1,818,833 | ) | ||||
| Non-controlling interest: | ||||||||
| Preference shares of DEPT-UK (25,000,000 shares authorized, £1 par value, 6,739,641 and 3,557,796 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively) | ||||||||
| 8,826,409 | 4,693,664 | |||||||
| Total liabilities and shareholders’ deficit | $ | 11,064,793 | $ | 5,605,528 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-2 |
DOCASA, INC.
and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, 2018 | August 31, 2017 | September 30, 2018 | August 31, 2017 | |||||||||||||
| Revenue, net | $ | 2,539,368 | $ | 1,179,809 | $ | 6,454,111 | $ | 3,263,858 | ||||||||
| Operating expenses | ||||||||||||||||
| Direct costs of revenue | 1,972,504 | 1,441,275 | 4,911,631 | 3,060,349 | ||||||||||||
| Professional fees | - | 43,994 | 179,307 | 127,561 | ||||||||||||
| Rent | 339,147 | 146,039 | 927,624 | 369,412 | ||||||||||||
| Depreciation and amortization | 174,739 | 64,668 | 348,105 | 158,522 | ||||||||||||
| Property taxes | - | - | 10,051 | - | ||||||||||||
| Other general and administrative expenses | 881,798 | 516,379 | 1,833,847 | 921,140 | ||||||||||||
| Operating loss | (828,820 | ) | (1,032,546 | ) | (1,756,454 | ) | (1,373,126 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (3,658 | ) | - | (16,797 | ) | - | ||||||||||
| Loss before provision for income taxes | (832,478 | ) | (1,032,546 | ) | (1,773,251 | ) | (1,373,126 | ) | ||||||||
| Provision for income tax | - | - | - | - | ||||||||||||
| Net loss before non-controlling interest | (832,478 | ) | (1,032,546 | ) | (1,773,251 | ) | (1,373,126 | ) | ||||||||
| Loss attributable to non-controlling interest | 1,480 | 1,857 | 2,785 | 1,204 | ||||||||||||
| Net loss attributable to common shareholders | $ | (830,998 | ) | $ | (1,030,689 | ) | $ | (1,770,466 | ) | $ | (1,371,922 | ) | ||||
| Foreign currency translation loss | (15,351 | ) | 20,035 | (286,002 | ) | (26,166 | ) | |||||||||
| Total comprehensive loss | $ | (846,349 | ) | $ | (1,010,654 | ) | $ | (2,056,468 | ) | $ | (1,398,088 | ) | ||||
| Net loss attributable to common shareholders per share - basic | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average number of shares | ||||||||||||||||
| outstanding - basic | 161,945,114 | 150,036,000 | 160,932,465 | 147,100,000 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-3 |
DOCASA, INC.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the nine months ended | ||||||||
| September 30, 2018 | August 31, 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss attributable to common shareholders | $ | (1,770,466 | ) | $ | (1,367,026 | ) | ||
| Adjustments to reconcile net loss before taxes and non-controlling interest to net cash used in operations: | ||||||||
| Depreciation and amortization expense | 348,105 | 158,142 | ||||||
| Loss on disposal of intangible asset | 2,801 | - | ||||||
| Other comprehensive income | (286,002 | ) | (26,166 | ) | ||||
| Bad debt expense | - | 423,680 | ||||||
| Non-controlling interest gain | 2,785 | (1,256 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (354,743 | ) | (202,048 | ) | ||||
| Other receivables | 9,604 | 6,888 | ||||||
| Prepaid expenses | (69,116 | ) | 90,928 | |||||
| Inventory | (11,676 | ) | (8,418 | ) | ||||
| Prepaid expenses and other assets | - | (32,678 | ) | |||||
| Deposits | (66,835 | ) | - | |||||
| Accounts payable | 119,266 | 110,753 | ||||||
| Accounts payable to related parties | (427 | ) | (26,151 | ) | ||||
| Accrued expenses | 722,227 | (47,755 | ) | |||||
| Taxes payable | (26,077 | ) | 84,001 | |||||
| Deferred revenue | (4,110 | ) | 16,359 | |||||
| Other non-current liabilities | 232,497 | 35,297 | ||||||
| Net cash used in operating activities | (1,152,168 | ) | (785,450 | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Acquisition of fixed assets | (1,367,203 | ) | (663,975 | ) | ||||
| Cash paid for Roasted Rituals, net | (22,018 | ) | - | |||||
| Cash paid for purchase of TimberYard | (260,586 | ) | - | |||||
| Cash acquired in purchase of Tradewind | (17,527 | ) | - | |||||
| Net cash used in investing activities | (1,667,334 | ) | (663,975 | ) | ||||
| Cash flows from (used in) financing activities: | ||||||||
| Proceeds from notes payable | 270,497 | 2,938,650 | ||||||
| Payment on capital leases | (103,688 | ) | (57,986 | ) | ||||
| Proceeds from issuance of preference shares | 4,018,899 | 638,037 | ||||||
| Payments on notes payable | (401,037 | ) | (2,067,013 | ) | ||||
| Net cash provided by financing activities | 3,784,671 | 1,451,688 | ||||||
| Net increase in cash | 965,169 | 2,263 | ||||||
| Cash at beginning of period | 139,350 | 91,137 | ||||||
| Cash at end of period | $ | 1,104,519 | $ | 93,400 | ||||
| F-4 |
DOCASA, INC.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the nine months ended | ||||||||
| September 30, 2018 | August 31, 2017 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 4,850 | $ | - | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Issuance of preference shares for liabilities | $ | 111,061 | $ | 592,089 | ||||
| Capital lease additions | $ | 58,668 | $ | - | ||||
| Fair value of shares issued for acquisition | $ | 1,629,049 | $ | - | ||||
| Contingent consideration for acquisitions | $ | 360,040 | $ | - | ||||
| Fixed asset additions by capital leases | $ | - | $ | 357,967 | ||||
| Payment of services by third party | $ | - | $ | 402,592 | ||||
| Issuance of note payable for treasury stock | $ | - | $ | 320,000 | ||||
| Assets and liabilities assumed, net | $ | - | $ | 46,359 | ||||
| Treasury stock acquired | $ | - | $ | (115,000 | ) | |||
| Issuance of common stock for acquisition | $ | - | $ | 110,000 | ||||
| Issuable common stock for contribution | $ | - | $ | (300 | ) | |||
| Assets and liabilities acquired in acquisitions | ||||||||
| Accounts receivable | $ | 11,823 | $ | - | ||||
| Prepaid expenses | $ | 86,766 | $ | - | ||||
| Inventory | $ | 42,826 | $ | - | ||||
| Deposits | $ | 54,357 | $ | - | ||||
| Accounts payable | $ | (250,365 | ) | $ | - | |||
| Accrued expenses | $ | (352,290 | ) | $ | - | |||
| Acquisition of fixed assets | $ | 359,754 | $ | - | ||||
| Acquisition of intangible assets | $ | 156,348 | $ | - | ||||
| Notes payable assumed | $ | (45,931 | ) | $ | - | |||
| Goodwill | $ | 2,214,491 | $ | - | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| F-5 |
DOCASA, INC.
and Subsidiaries
Notes to Consolidated Condensed Financial Statements
September 30, 2018
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND PRESENTATION
Organization
DOCASA, Inc. (the “Company,” “we,” “us,” “our,” or “DOCASA”) was incorporated in the State of Nevada on July 22, 2014, under the name of FWF Holdings, Inc. The Company changed its name on August 4, 2016. The Company was originally engaged in the business of commercial production and distribution of hot sauce (see Note 3). On August 4, 2016, the Company changed its year end from July 31 to August 31.
On July 8, 2016, the Company experienced a change in control. Atlantik LP (“Atlantik”), a related party, acquired a majority of the issued and outstanding common stock of the Company in accordance with a stock purchase agreement by and between Atlantik and Nami Shams (the “Seller”). On the closing date, July 8, 2016, pursuant to the terms of the stock purchase agreement, Atlantik purchased from the Seller 115,000,000 shares of the Company’s outstanding restricted common stock for $200,000, representing 76.1% of the Company’s outstanding common stock at that time.
On September 1, 2016, the Company acquired 99.8% of the voting stock of the Department of Coffee and Social Affairs Limited, a United Kingdom corporation (the “DEPT-UK”), and the Company agreed to issue DEPT-UK’s majority shareholder 170,000,000 shares of the Company’s common stock—110,000,000 shares initially and 60,000,000 shares at a time determined by the Company’s Board of Directors but no later than August 31, 2017, which deadline was subsequently extended to August 31, 2019. Also, on September 1, 2016, the Company acquired 115,000,000 shares of the Company’s common stock from Atlantik in exchange for issuing Atlantik a promissory note for $320,000, which shares were then cancelled, and which note has since been paid in full. As a result of the acquisition and the issuance of the initial 110,000,000 shares of common stock, and the cancellation of the 115,000,000 Atlantik shares, DEPT-UK is now the majority-owned subsidiary of the Company, and the Company experienced a change of control.
DEPT-UK formed a wholly-owned subsidiary, Department of Coffee and Internal Affairs Limited (“DCIA”), on September 11, 2014, as filed with the Registrar of Companies for England and Wales. As of September 30, 2018, DCIA has had no operations or activity.
On April 5, 2017, the Company formed Department of Coffee and Social Affairs IL, Inc. (“DEPT-IL”), an Illinois corporation.
On May 18, 2017, the Company formed Department of Coffee and Social Affairs White Space Limited (“DEPT-UKWS”), as filed with the Registrar of Companies for England and Wales. DEPT-UKWS is a subsidiary of DEPT-UK.
For financial reporting purposes, the acquisition of DEPT-UK and the change of control in connection with acquisition represented a “reverse merger” rather than a business combination, and DEPT-UK is deemed to be the accounting acquirer in the transaction. For the periods subsequent to August 31, 2016, the acquisition is being accounted for as a reverse-merger and recapitalization. DEPT-UK is the acquirer for financial reporting purposes, and the Company (DOCASA, Inc., f/k/a FWF Holdings, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to the acquisition are those of DEPT-UK and have been recorded at the historical cost basis of DEPT-UK, and the financial statements after completion of the acquisition include the assets and liabilities of both the Company and DEPT-UK, and the historical operations of DEPT-UK prior to closing and operations of both companies from the closing of the acquisition.
On January 2, 2018, with an effective date of November 1, 2017, DEPT-UK acquired Tapped and Packed Ltd (“Tapped”), an UK company, for a combination of cash and shares of common stock of the Company. See Note 2. Tapped became a subsidiary of DEPT-UK as a result of the transaction. Tapped has four shop locations in the UK which serve coffee and food.
On February 23, 2018, the Board of Directors determined to change the Company’s fiscal year end to December 31 from August 31. The Company believes this change will benefit the Company by aligning its reporting periods to be more consistent with peer coffee companies.
On May 23, 2018, DEPT-UK acquired Bea’s of Bloomsbury Limited (“Bea’s”), an UK company, for shares of common stock of the Company. See Note 2. Bea’s became a subsidiary of DEPT-UK as a result of the transaction. Bea’s has five shop locations in the UK which serves coffee and food.
On June 29, 2018, DEPT-UK acquired Tradewind Espresso Ltd (“Tradewind”), an UK company, for cash. See Note 2. Tradewind became a subsidiary of DEPT-UK as a result of the transaction. Tradewind has one shop location in the UK which serves coffee and food.
On June 29, 2018, DEPT-UK acquired Roasted Rituals Coffee Ltd (“Roasted Rituals”), an UK company, for cash. See Note 2. Roasted Rituals became a subsidiary of DEPT-UK as a result of the transaction. Roasted Rituals is a specialty coffee roaster and has one location in the UK.
| F-6 |
Effective October 29, 2018, majority of the shareholders of the Company approved the following changes to the Company’s Articles of Incorporation:
Name Change from “DOCASA, Inc.” to “The Coffeesmiths Collective, Inc.”
On October 29, 2018, the majority of the shareholders of the Company approved the amendment to the Articles of Incorporation to change the Company’s name from “DOCASA, Inc.” to “The Coffeesmiths Collective, Inc.” The purpose of the name change will help further our brand identity and will reflect the major focus of our business operations as a specialty coffee company. The filing of the name change with the state of Nevada was completed and effected as of October 29, 2018. The Company filed with FINRA for a name change and symbol change on November 1, 2018.
Nature of Operations
We are in the specialty coffee industry, specifically with company-operated stores. The Company generates revenue through sales at twenty-eight existing company-operated coffee shop locations in the UK, with three more locations in the US. Similar to other leading operators, we sell our proprietary coffee and related products, and complementary food and snacks.
Principles of Consolidation
The consolidated financial statements include the accounts of DOCASA and its subsidiaries, DEPT-UK, DCIA, DEPT-IL and DEPT-UK’s subsidiaries, Tapped, Bea’s, Roasted Rituals, Tradewind, and DEPT-UKWS. All significant inter-company balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of DOCASA have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and done under §240.13(a) of the Securities Act. The results of operations for the interim period ended September 30, 2018 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2018. In the opinion of the Company’s management, the information contained herein reflects all adjustments (consisting of normal recurring adjustments, unless otherwise indicated) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. The unaudited interim financial statements should be read in conjunction with the audited financial statements in the Company’s Form 10-K for the year ended August 31, 2017, filed on December 18, 2017 and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Change in Fiscal Year
On February 23, 2018, the Board of Directors of the Company determined to change the Company’s fiscal year end to December 31st from August 31st. The Company believes this change will benefit the Company by aligning its reporting periods to be more consistent with peer coffee companies.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, allowance for accounts receivable, estimated lives of intangible and fixed assets, and valuation of share-based payments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable consisted of amounts due from customers primarily for management fees. The Company considered accounts more than 30 days old to be past due. The Company used the allowance method for recognizing bad debts. When an account was deemed uncollectible, it was written off against the allowance. The Company generally does not require collateral for its accounts receivable. Management has not recorded an allowance for doubtful accounts as of September 30, 2018 or December 31, 2017.
Inventory
Inventory is recorded at the lower of cost or market and the cost of sales are recorded utilizing the first in first out (“FIFO”) method.
| F-7 |
Fixed Assets
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of three years for computer equipment, five years for office furniture and fixtures, and the lesser of the lease term or the useful life of the leased equipment. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold are expensed as incurred.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have adopted this update. We do not believe this guidance will impact the recognition of our primary source of revenue from company-owned coffee shops. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company accounts for non-employee share-based awards in accordance with the measurement and recognition provisions ASC Topic 505-50. The Company estimates the fair value of stock options at the grant date by using the Black-Scholes option-pricing model.
Advertising
Advertising is expensed as incurred and is included in other general and administrative expenses on the accompanying condensed consolidated statement of operations. For the nine months ended September 30, 2018 and August 31, 2017 advertising expense was $0 and $8,137, respectively.
| F-8 |
Income Taxes
The Company adopted the provisions of ASC 740, “Income Taxes.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying condensed consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of September 30, 2018, tax years 2014 - 2017 remain open for IRS audit and tax years 2015–2017 remain open for HM Revenue & Customs (“HMRC”) audit. The Company has received no notice of audit from the IRS or HMRC for any of the open tax years.
Net Earnings (Loss) Per Share
In accordance with ASC 260-10, “Earnings Per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common stock shares outstanding during the period. The Company does not currently have any potential dilutive securities outstanding as of September 30, 2018 and August 31, 2017.
Foreign Currency Translation and Transactions
The British Pound (“£”) is the functional currency of DEPT-UK and Tapped whereas the financial statements are reported in United States Dollar (“USD,” “$”). Assets and liabilities are translated based on the exchange rates at the condensed consolidated balance sheet date, while revenue and expense accounts are translated at the average exchange rates prevailing during the period. Equity accounts are translated at historical exchange rates. The resulting translation gain and loss adjustments are accumulated as a component of stockholders’ equity and other comprehensive loss.
Comprehensive Loss
The Company reports comprehensive loss and its components in its consolidated financial statements. Comprehensive loss consists of net loss on foreign currency translation adjustments affecting stockholders’ equity that, under U.S. GAAP, are excluded from net loss. As of September 30, 2018, the exchange rate between U.S. Dollars and British Pounds was US$1.30 = £1.00, and the weighted average exchange rate for the nine months ended September 30, 2018 was US$1.33 = £1.00. As of December 31, 2017, the exchange rate between U.S. Dollars and British Pounds was US$1.35 = £1.00.
Going Concern
The Company had net loss attributable to common shareholders for the nine months ended September 30, 2018 of $1,770,466 and a working capital deficit as of September 30, 2018 of $643,570, and has cash used in operations of $1,152,168 for the nine months ended September 30, 2018. In addition, as of September 30, 2018, the Company had a stockholders’ deficit and accumulated deficit of $2,246,252 and $4,253,374, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements.
There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
Effect of Recent Accounting Pronouncements
The Company reviews new accounting standards and updates as issued. No new standards or updates had any material effect on these financial statements. The accounting pronouncements and updates issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these financial statements. Management does believe that some of the subsequent pronouncements will have a material effect on these financial statements as presented and does not anticipate the need for any future restatement of these financial statements because of the retro-active application of any accounting pronouncements issued subsequent to September 30, 2018 through the date these financial statements were issued.
| F-9 |
In February 2016, the Financial Accounting Standards Board (“FASB”) issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company expects the ASU to have a material effect on the Company’s results of operations and financial position, and the ASU will have no effect on cash flows.
ASU 2014-09, Revenue – Revenue from Contracts with Customers. In May 2014, the FASB issued a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures. We adopted the new revenue guidance effective January 1, 2017, by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings. The effect of the adoption was immaterial, with an immaterial impact to our net income on an ongoing basis. Adoption of the new standard will also result in changes in classification between Revenues and Direct costs of revenue.
NOTE 2 – ACQUISITIONS
Acquisition of Tapped and Packed Ltd
On November 1, 2017, DEPT-UK entered into an acquisition agreement (the “Tapped Acquisition Agreement”) with Tapped, a United Kingdom corporation. Richard Lilley, an individual (“Lilley”), was the owner of record of 100 capital shares of Tapped. Pursuant to the Tapped Acquisition Agreement, Tapped stock was transferred to DEPT-UK on November 1, 2017, in consideration of £175,000 and 1,546,875 shares of common stock of the Company. The £175,000 was paid in October 2017 as a prepayment to the completion date of November 1, 2017. Stefan Allesch-Taylor (“Allesch-Taylor”), Chairman of the Company, utilized his personally owned shares of common stock of the Company, and assigned the 1,546,875 shares (the “Allesch-Taylor Shares”) from his ownership to Lilley. In exchange for the use of the Allesch-Taylor Shares, which were provisionally valued at $1,918,125 (“Provisional Share Compensation Value”), the Board of Directors issued Allesch-Taylor 1,325,000 Preference Shares of DEPT-UK. The Provisional Share Compensation Value was determined by the previous day’s closing price of $1.24 per share. The Company’s common stock is thinly-traded and an insignificant amount of stock traded has historically caused significant fluctuations in the price per share of the Company’s common stock. The Company will utilize an independent third-party business valuation to determine the value of Tapped, as well as get an independent valuation of the Company’s common stock as of the date of the transaction. Management believes that the separate valuations will determine a fair and reasonable valuation thereby reducing the provisional goodwill recorded, as of September 30, 2018, of $2,185,012. The Allesch-Taylor Shares of common stock were assigned to Lilley on or about October 19, 2017 and were released in accordance to the agreement. See Notes 1, 7 and 8. Also in connection with the Tapped Acquisition Agreement, Gill and Lopez were appointed to serve on Tapped’s Board of Directors.
The following table summarizes the consideration given for DEPT-UK and the provisional fair values of the assets and liabilities assumed at the acquisition date.
| Consideration given: | ||||
| Cash given | $ | 237,877 | ||
| Common stock shares given | 1,918,125 | |||
| Total consideration given | $ | 2,156,002 | ||
| Fair value of identifiable assets acquired, and liabilities assumed: | ||||
| Cash | $ | 200,582 | ||
| Prepaid expense | 92,052 | |||
| Inventory | 51,411 | |||
| Fixed assets, net | 73,337 | |||
| Deposits | 119,999 | |||
| Accrued expenses | (195,621 | ) | ||
| Short-term note payable | (200,804 | ) | ||
| Director note | (168,782 | ) | ||
| Deferred taxes | (1,184 | ) | ||
| Total identifiable net liabilities | (29,010 | ) | ||
| Goodwill | 2,185,012 | |||
| Total consideration | $ | 2,156,002 |
The revenue and net loss for Tapped, as reflected in the unaudited condensed consolidated statement of operations, for the nine months ended September 30, 2018, to reflect the current period, was $1,472,570 and $103,940, respectively.
| F-10 |
Acquisition of Bea’s of Bloomsbury Limited
On May 23, 2018, DEPT-UK entered into an acquisition agreement (the “Bea’s Acquisition Agreement”) with Bea’s, a United Kingdom corporation. Pursuant to the Bea’s Acquisition Agreement, Bea’s stock was transferred to DEPT-UK on May 23, 2018, in consideration of 1,933,239 shares of common stock of the Company. The Company’s common stock was valued at $0.84 therefore the Company recorded the value of $1,623,921. Management recorded a provisional goodwill, as of September 30, 2018, of $1,698,321, which is attributable to common synergies, the workforce, and may be adjusted based on management’s final determination of the fair value of the assets and liabilities acquired. See Notes 1, 7 and 8.
The following table summarizes the consideration given by DEPT-UK and the provisional fair values of the assets and liabilities assumed at the acquisition date.
| Consideration given: | ||||
| Common stock shares given | $ | 1,623,921 | ||
| Total consideration given | $ | 1,623,921 | ||
| Fair value of identifiable assets acquired, and liabilities assumed: | ||||
| Prepaid expense | $ | 86,764 | ||
| Inventory | 36,311 | |||
| Fixed assets, net | 315,558 | |||
| Deposits | 54,357 | |||
| Accounts payable | (250,365 | ) | ||
| Accrued expenses | (271,096 | ) | ||
| Short-term note payable | (45,931 | ) | ||
| Total identifiable net liabilities | (74,400 | ) | ||
| Goodwill | 1,698,321 | |||
| Total consideration | $ | 1,623,921 |
The revenue and loss for Bea’s, as reflected in the unaudited condensed consolidated statement of operations, for the nine months ended September 30, 2018, to reflect the current period, was $856,176 and $210,099, respectively, and for the nine months ended August 31, 2017, the historical financial statements are unavailable.
Acquisition of Roasted Rituals Coffee Ltd
On June 29, 2018, DEPT-UK entered into an acquisition agreement (the “Roasted Rituals Acquisition Agreement”) with Roasted Rituals, a United Kingdom corporation. Pursuant to the Roasted Rituals Acquisition Agreement, Roasted Rituals’ stock was transferred to DEPT-UK on June 29, 2018, in consideration of £175,000. The £175,000 is to be paid in tranches; £37,500 at closing, £62,500 on the first anniversary of the closing date, and £75,000 on the second anniversary of the closing date. The Company has recorded the liabilities as short-term and long-term, respectively. Management has calculated provisional goodwill of $181,593, which is attributable to common synergies, the workforce, and may be adjusted based on management’s final determination of the fair value of the assets and liabilities acquired. See Note 1 and 7.
The following table summarizes the consideration given for DEPT-UK and the provisional fair values of the assets and liabilities assumed at the acquisition date.
| Consideration given: | ||||
| Cash given | $ | 49,096 | ||
| Accrued consideration | 180,020 | |||
| Total consideration given | $ | 229,116 | ||
| Fair value of identifiable assets acquired, and liabilities assumed: | ||||
| Cash | $ | 27,078 | ||
| Accounts receivable, net | 11,350 | |||
| Fixed assets, net | 11,344 | |||
| Accrued expenses | (2,249 | ) | ||
| Total identifiable net assets | 47,523 | |||
| Goodwill | 181,593 | |||
| Total consideration | $ | 229,116 |
The revenue and income for Roasted Rituals, as reflected in the unaudited condensed consolidated statement of operations, for the nine months ended September 30, 2018, to reflect the current period, was $54,198 and $9,121, respectively, and for the nine months ended August 31, 2017, the financial statements are unavailable.
| F-11 |
Acquisition of Tradewind Espresso Ltd
On June 29, 2018, DEPT-UK entered into an acquisition agreement (the “Roasted Rituals Acquisition Agreement”) with Roasted Rituals, a United Kingdom corporation. Pursuant to the Roasted Rituals Acquisition Agreement, Roasted Rituals’ stock was transferred to DEPT-UK on June 29, 2018, in consideration of £175,000. The £175,000 is to be paid in tranches; £37,500 at closing, £62,500 on the first anniversary of the closing date, and £75,000 on the second anniversary of the closing date. The Company has recorded the liabilities as short-term and long-term, respectively. Management has calculated provisional goodwill of $197,565, which is attributable to common synergies, the workforce, and may be adjusted based on management’s final determination of the fair value of the assets and liabilities acquired. See Note 1 and 7.
The following table summarizes the consideration given by DEPT-UK and the provisional fair values of the assets and liabilities assumed at the acquisition date.
| Consideration given: | ||||
| Cash given | $ | 49,096 | ||
| Accrued consideration | 180,020 | |||
| Total consideration given | $ | 229,116 | ||
| Fair value of identifiable assets acquired, and liabilities assumed: | ||||
| Cash | $ | 31,569 | ||
| Accounts receivable, net | 473 | |||
| Fixed assets, net | 13,308 | |||
| Accrued expenses | (13,799 | ) | ||
| Total identifiable net assets | 31,551 | |||
| Goodwill | 197,565 | |||
| Total consideration | $ | 229,116 |
The revenue and loss for Tradewinds, as reflected in the unaudited condensed consolidated statement of operations, for the nine months ended September 30, 2018, to reflect the current period, was $159,080 and $4,721, respectively, and for the nine months ended August 31, 2017, the financial statements were unavailable.
Acquisition of Timberyard Limited
On September 4, 2018, DEPT-UK entered into an asset sale agreement (the “Timberyard Asset Sale Agreement”) with the Joint Administrators of Timberyard Limited (“Timberyard”). Pursuant to the Timberyard Asset Sale Agreement, certain assets of Timberyard were transferred to DEPT-UK on September 4, 2018, in consideration of £250,000. The £250,000 is to be paid in two tranches; £200,000 at closing, £50,000 no later than twelve calendar months after the closing date. Management has calculated provisional goodwill of $78,178, which is attributable to common synergies, the workforce, and may be adjusted based on management’s final determination of the fair value of the assets acquired.
The following table summarizes the consideration given by DEPT-UK and the provisional fair values of the assets assumed at the acquisition date.
| Consideration given: | ||||
| Cash given | $ | 260,584 | ||
| Accrued consideration | 65,147 | |||
| Total consideration given | $ | 325,731 | ||
| Fair value of identifiable assets acquired, and liabilities assumed: | ||||
| Plant and machinery | $ | 19,544 | ||
| Inventory | 6,515 | |||
| Intangible assets | 156,348 | |||
| Goodwill | 143,324 | |||
| Total consideration | $ | 325,731 |
The revenue and loss for the assets of Timberyard, as reflected in the unaudited condensed consolidated statement of operations, for the nine months ended September 30, 2018, to reflect the current period, was $75,505 and $10,425, respectively, and for the nine months ended August 31, 2017, the financial statements were unavailable.
| F-12 |
Pro-Forma Financial Information
The following unaudited pro-forma data summarizes the result of the operations for the nine months ended September 30, 2018 and August 31, 2017, as if the acquisition of Bea’s, Roasted Rituals, Tradewind and TimberYard had been completed on January 1, 2018 and September 1, 2016, respectively, which was the beginning of the Company’s previous adjusted fiscal year (for comparison purposes) prior to the change to a calendar year end in March 2018. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on September 1, 2016.
| For the Nine months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||
| Roasted | Pro-forma | |||||||||||||||||||||||||||||||
| DOCASA | Tapped | Bea’s | Rituals | Tradewind | TimberYard | Adjustments | Totals | |||||||||||||||||||||||||
| Revenue, net | $ | 4,236,465 | $ | 1,472,570 | $ | 1,537,172 | $ | 105,185 | $ | 307,368 | $ | 393,926 | $ | - | $ | 8,052,686 | ||||||||||||||||
| Operating expenses | 5,483,838 | 1,576,510 | 1,991,685 | 100,134 | 311,962 | 369,470 | - | 9,833,599 | ||||||||||||||||||||||||
| Income (loss) from operations | (1,247,373 | ) | (103,940 | ) | (454,513 | ) | 5,051 | (4,594 | ) | 24,456 | - | (1,780,913 | ) | |||||||||||||||||||
| Other income (expense) | (16,474 | ) | - | (323 | ) | - | - | - | - | (16,797 | ) | |||||||||||||||||||||
| Loss before income taxes | (1,263,847 | ) | (103,940 | ) | (454,836 | ) | 5,051 | (4,594 | ) | - | (1,797,710 | ) | ||||||||||||||||||||
| Net loss attributable to common shareholders | $ | (1,263,847 | ) | $ | (103,940 | ) | $ | (454,836 | ) | $ | 5,051 | $ | (4,594 | ) | $ | - | $ | (1,797,710 | ) | |||||||||||||
| Net loss per common share - basic | $ | (0.01 | ) | 24,456 | $ | (0.01 | ) | |||||||||||||||||||||||||
| Weighted average number of common shares outstanding during the period - basic | 161,945,114 | 24,456 | 161,945,114 | |||||||||||||||||||||||||||||
| F-13 |
| For the Nine months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||
| Roasted | Pro-forma | |||||||||||||||||||||||||||||||
| DOCASA | Tapped | Bea’s | Rituals | Tradewind | TimberYard | Adjustments | Totals | |||||||||||||||||||||||||
| Revenue, net | $ | 3,263,858 | $ | 1,490,668 | $ | 1,606,587 | $ | 136,834 | $ | 297,544 | - | $ | - | $ | 6,795,491 | |||||||||||||||||
| Operating expenses | 4,666,563 | 1,226,267 | 1,837,858 | 96,084 | 305,562 | - | - | 8,132,334 | ||||||||||||||||||||||||
| Loss from operations | (1,402,705 | ) | 264,401 | (231,271 | ) | 40,750 | (8,018 | ) | - | - | (1,336,843 | ) | ||||||||||||||||||||
| Other income (expense) | 2,448 | - | - | - | - | - | - | 2,448 | ||||||||||||||||||||||||
| Loss before income taxes | (1,400,257 | ) | 264,401 | (231,271 | ) | 40,750 | (8,018 | ) | - | - | (1,334,395 | ) | ||||||||||||||||||||
| Net loss attributable to common shareholders | $ | (1,400,257 | ) | $ | 264,401 | $ | (231,271 | ) | $ | 40,750 | $ | (8,018 | ) | - | $ | - | $ | (1,334,395 | ) | |||||||||||||
| Net loss per common share - basic | $ | (0.01 | ) | - | $ | (0.01 | ) | |||||||||||||||||||||||||
| Weighted average number of common shares outstanding during the period - basic | 150,036,000 | - | 150,036,000 | |||||||||||||||||||||||||||||
NOTE 3 – INVENTORY
The Company has inventory of various items used for the sale of coffee and complementary products. As of September 30, 2018, and December 31, 2017, the Company had inventory of $154,888 and $100,386, respectively. The Company accounts for its inventory using the lower of cost or market and the cost of sales are recorded utilizing the first in first out (“FIFO”) method.
The inventory is as follows:
| September 30, 2018 | December 31, 2017 | |||||||
| Consumable products | $ | 59,432 | $ | 37,750 | ||||
| Cold brew | 1,117 | 7,119 | ||||||
| Retail products | 21,213 | 18,725 | ||||||
| Food and drinks | 73,126 | 36,792 | ||||||
| Total inventory | $ | 154,888 | $ | 100,386 | ||||
NOTE 4 – FIXED ASSETS
The Company has fixed assets including computer equipment, office equipment, site equipment and machinery, site fit out costs, site furniture, fixtures and fittings.
The depreciation expense for the nine months ended September 30, 2018 and August 31, 2017, was $347,087 and $152,666, respectively. The variance between the expense and the increase in accumulated depreciation is due to timing of the currency translation calculation.
NOTE 5 – INTANGIBLE ASSETS
Website Development
The Company has intangible assets related to website development. The amortization of the intangible assets is over a three-year period.
The amortization expense for the nine months ended September 30, 2018 and August 31, 2017, was $1,018 and $5,856, respectively. The variance between the expense and the increase in accumulated amortization is due to timing of the currency translation calculation.
Goodwill
The Company has goodwill related to the acquisitions of Tapped, Bea’s, Tradewind, Roasted Rituals and TimberYard. The Company has not determined the deductibility of goodwill for tax purposes. As of September 30, 2018, the Company has $4,399,503 of goodwill, as allocated below:
| Balance, December 31, 2017 | $ | 2,185,012 | ||
| Acquisitions | 2,214,491 | |||
| Balance, September 30, 2018 | $ | 4,399,503 |
| F-14 |
NOTE 6 – NOTES PAYABLE
The Company has notes payable as of September 30, 2018 and December 31, 2017, are as follows:
Notes payable - current
| September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
| Accrued | Accrued | |||||||||||||||||||||||
| Principal | Interest | Total | Principal | Interest | Total | |||||||||||||||||||
| Arch Investments | $ | 2,194 | $ | - | $ | 2,194 | $ | 2,194 | $ | - | $ | 2,194 | ||||||||||||
| Arch Investments | 5,067 | - | 5,067 | 5,067 | - | 5,067 | ||||||||||||||||||
| Arch Investments | 5,065 | - | 5,065 | 5,065 | - | 5,065 | ||||||||||||||||||
| Arch Investments | 15,873 | - | 15,873 | 15,873 | - | 15,873 | ||||||||||||||||||
| Arch Investments | 4,349 | - | 4,349 | 4,349 | - | 4,349 | ||||||||||||||||||
| HSBC | 138,685 | - | 138,685 | 111,970 | - | 111,970 | ||||||||||||||||||
| HSBC | 26,885 | - | 26,885 | 26,642 | - | 26,642 | ||||||||||||||||||
| Total | $ | 198,118 | $ | - | $ | 198,118 | $ | 171,160 | $ | - | $ | 171,160 | ||||||||||||
Notes payable - non-current
| September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
| Accrued | Accrued | |||||||||||||||||||||||
| Principal | Interest | Total | Principal | Interest | Total | |||||||||||||||||||
| Deij Capital Limited (1) | $ | 11,014 | $ | - | $ | 11,014 | $ | 11,414 | $ | - | $ | 11,414 | ||||||||||||
| HSBC | 189,115 | - | 189,115 | 280,011 | - | 280,011 | ||||||||||||||||||
| HSBC | 45,399 | - | 45,399 | 65,670 | - | 65,670 | ||||||||||||||||||
| Total | $ | 245,528 | $ | - | $ | 245,528 | $ | 357,095 | $ | - | $ | 357,095 | ||||||||||||
(1) Related party
On July 1, 2014, DEPT-UK entered into a business loan with Deij Capital Limited (“Deij Capital”), a related party in which Gill is the director and owner. The loan is for 3 years, with an interest rate of 0%. The note has been extended to July 1, 2019. The imputed interest is deemed immaterial as of September 30, 2018. The facility loan was for $171,437 (£100,000) to be drawn down as and when required. On September 30, 2016, Deij Capital converted the balance due of $179,534 (£135,464) into 135,464 shares of Preference Shares. On May 31, 2017, Deij Capital converted of the balance due $63,990 (£51,500) into 51,500 shares of Preference Shares. The outstanding principal as of September 30, 2018 and December 31, 2017 was $11,014 (£8,454) and $11,414 (£8,454), respectively. The accrued interest as of September 30, 2018 and December 31, 2017, was $0 (£0) and $0 (£0), respectively. On October 1, 2018, Deij Capital forgave this business loan (see Notes 7 and 13).
On July 31, 2014, DOCASA executed a promissory note for $2,194 with Nami Shams, a former officer and director of the Company. The note has no set term of repayment and is non-interest bearing. The imputed interest is deemed immaterial as of September 30, 2018. As of September 30, 2018, and December 31, 2017, the principal was $2,194. This note was acquired by Arch Investments, LLC.
On April 30, 2015, DOCASA executed a promissory note for $5,067 with Nami Shams, a former officer and director of the Company. The note has no set term of repayment and is non-interest bearing. On July 20, 2016, Arch Investments, LLC acquired this promissory note due to Nami Shams. The imputed interest is deemed immaterial as of September 30, 2018. As of September 30, 2018, and December 31, 2017, the principal was $5,067.
On July 31, 2015, DOCASA executed a promissory note for $5,065 with Nami Shams, a former officer and director of the Company. The note has no set term of repayment and is non-interest bearing. The imputed interest is deemed immaterial as of September 30, 2018. As of September 30, 2018, and December 31, 2017, the principal was $5,065. This note was acquired by Arch Investments, LLC.
On October 31, 2015, DOCASA executed a promissory note for $15,873 with Nami Shams, a former officer and director of the Company. The note has no set term of repayment and is non-interest bearing. The imputed interest is deemed immaterial as of September 30, 2018. As of September 30, 2018, and December 31, 2017, the principal was $15,873. This note was acquired by Arch Investments, LLC.
On January 31, 2016, DOCASA executed a promissory note for $4,349 with Nami Shams, a former officer and director of the Company. The note has no set term of repayment and is non-interest bearing. The imputed interest is deemed immaterial as of September 30, 2018. As of September 30, 2018, and December 31, 2017, the principal was $4,349. This note was acquired by Arch Investments, LLC.
On July 28, 2016, DEPT-UK entered into a business loan with HSBC. The loan is a development loan drawn down against development invoices. The loan is for four years, with an interest rate of 4.5% over the Bank of England base rate. The loan repayment is monthly, interest-only payments for the first nine months followed by monthly repayments of principal and interest over the remaining forty-two months. The loan was for $437,992 (£352,500) with an initial $115,767 (£93,178) drawn. The outstanding principal and accrued interest as of September 30, 2018, and December 31, 2017, was $324,800 (£249,846) and $391,981 (£290,294), respectively. As of September 30, 2018, the current portion was $138,685 and the non-current portion was $189,115.
On September 8, 2016, Tapped, prior to being acquired by DEPT-UK, entered into a business loan with HSBC. The loan is for five years, with an interest rate of 5.51%. The loan was for £90,000. The outstanding principal as of September 30, 2018, and December 31, 2017, was $72,284 and $92,312, respectively. As of September 30, 2018, the current portion was $26,885 and the non-current portion was $45,399.
| F-15 |
NOTE 7 – RELATED PARTIES TRANSACTIONS
For the nine months ended September 30, 2018 and August 31, 2017, the Company purchased $92,067 (£70,821) and $154,648 (£120,007), respectively, of cakes from Dee Light Bakery Limited (“Dee Light”), a company which Gill, the vice chairman of the Company, was a 50% shareholder (until November 2016). As of September 30, 2018, and December 31, 2017, the Company owed Dee Light $34,889 (£26,838) and $82,259 (£63,833), respectively.
For the nine months ended September 30, 2018 and August 31, 2017, the Company made sales or advances of $478,405 and $389,456, respectively, to The Roastery Department Ltd. (“The Roastery Department”) and made purchases from it of £217,709 and £176,967 for the nine months ended September 30, 2018 and August 31, 2017, respectively. As of September 30, 2018, and December 31, 2017, the Company both has receivables and payables from The Roastery Department, which netted as receivables of $615,698 (£472,553) and $406,658 (£312,113), respectively. Gill, the Company’s vice chairman, and Ashley Lopez (“Lopez”), the Company’s chief executive officer, were both unpaid directors of The Roastery Department until they resigned on December 1, 2016. The Company, when purchasing products from The Roastery Department, was provided a discount due to the strategic relationship between the two parties which provided the Company its purchases at cost.
As of September 30, 2018, and December 31, 2017, the Company owed Allesch-Taylor, the Company’s chairman, payables of $36,981 (£28,383) and $36,729 (£29,383), respectively.
As of September 30, 2018, and December 31, 2017, the Company owed Lopez, the Company’s chief executive officer, payables of $28,448 and $14,613, respectively.
As of September 30, 2018, and December 31, 2017, the Company owed Deij Capital, a company in which Gill, the deputy chairman of the Company, is the director and owner, notes payable of $11,014 (£8,454) and $11,414 (£8,454), respectively. On October 1, 2018, Deij Capital forgave this business loan (see Notes 6 and 13).
The Company has an employment agreement with Lopez, our CEO, and did have a consulting agreement with Clearbrook Capital Partners LLP (“Clearbrook”), an entity where Kazi Shahid, our former CFO, was a partner and also served as CFO. Allesch-Taylor is a director of Clearbrook. The agreement with Clearbrook was terminated on March 15, 2017.
On September 30, 2018, DEPT-UK acquired certain assets (the “Dee Light Asset Sale Agreement”) with Dee Light. Pursuant to the Dee Light Asset Sale Agreement, certain assets of Dee Light were transferred to DEPT-UK on September 30, 2018, in consideration of $187,620 (£144,000).
The above related party transactions are not considered as arm’s length transactions.
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
The Company is authorized to issue up to 250,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.
On May 23, 2018, the Company issued 1,932,239 shares of common stock to various third parties as compensation for the acquisition of Bea’s (see Notes 1 and 2).
As of September 30, 2018, the Company has not granted any stock options and has not recorded any stock-based compensation.
Preference Shares and Non-Controlling Interest
The Articles of Association of DEPT-UK, pursuant to the Companies Act 2006, authorized DEPT-UK to issue up to 25,000,000 preference shares, par value £1.00 per share (such subsidiary preference shares referred to herein as “Preference Shares”). Such Preference Shares have no votes and limited distribution rights. Subject to the provisions of the Companies Act 2006, DEPT-UK shall have the right pursuant to Section 687-688 of the Companies Act 2006 to redeem at par the whole or any part of the Preference Shares at any time or times after the date of issue of the said Preference Shares upon giving to DEPT-UK not less than three months’ previous notice in writing. The Preference Shares, at the discretion of the Board of Director of DEPT-UK, can be purchased at the value they were issued or can be converted into contributed capital. The Preference Shares are accounted for as non-controlling interest. As of September 30, 2018, and December 31, 2017, 6,739,641 and 3,557,796 shares were outstanding, respectively. Of the outstanding shares, 1,603,460 and 1,708,209 were issued to related parties, as of September 30, 2018, and December 31, 2017, respectively.
DEPT-UK has a non-controlling interest of 0.2%. For the nine months ended September 30, 2018, the Company had a non-controlling interest of $2,785. For the nine months ended August 31, 2017, the Company had a non-controlling interest of $1,204.
On February 28, 2017, 51,500 Preference Shares were issued to Deij Capital in exchange for a debt of $63,990 (£51,500). See Note 7.
On December 5, 2017, Borough Capital contributed $25,000 (£18,583) to DEPT-UK, in exchange for 18,583 Preference Shares.
On December 14, 2017, Borough Capital contributed $45,000 (£33,488) to the DEPT-UK, in exchange for 33,488 Preference Shares.
| F-16 |
On January 17, 2018, Borough Capital, in regards to an October 2017 contribution of $111,061 to DEPT-UK, converted the liability into 79,563 Preference Shares.
During the three months ended June 30, 2018, 682,282 Preference Shares were issued for contributions of $863,120 to DEPT-UK.
During the three months ended September 30, 2018, 2,420,000 Preference Shares were issued for contributions of $3,157,259 to DEPT-UK.
Acquisition of Tapped and Packed Ltd
On November 1, 2017, DEPT-UK entered into the Tapped Acquisition Agreement with Tapped, a United Kingdom corporation. See Note 2.
The dollar amount of Preference Shares, as recorded, were recorded to non-controlling interest as part of consolidation.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of November 14, 2018, there were no pending or threatened lawsuits.
Lease Commitment
We lease office space in Schaumburg, Illinois, pursuant to a lease that is monthly. This facility serves as our corporate office.
Future minimum lease payments under leases with the various subsidiaries, are as follows:
| 2018 | $ | 515,527 | ||
| 2019 | 2,106,335 | |||
| 2020 | 1,973,781 | |||
| 2021 | 1,703,832 | |||
| 2022 | 1,321,706 | |||
| Future | 5,012,260 | |||
| Total | $ | 12,633,441 |
Note: The above table will change in each future filing due to currency translation as applicable.
DEPT-UK has 18 leases, of which one is for the UK administrative office, and 17 operational leases. The Company has two leases in the United States for DEPT-IL. Various leases have break out dates prior to expiration.
The Company is a primary leaseholder on one lease which it has subleased to the Roastery and is responsible for the monthly payments which approximate $292 (£221).
Rent expense for the nine months ended September 30, 2018 and August 31, 2017, was $927,624 and $367,461, respectively.
NOTE 10 – CONCENTRATIONS
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.
The Company places its temporary cash investments with financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) for the United States and the Financial Services Compensation Scheme (“FSCS”) for the United Kingdom. No amounts exceeded federally insured limits as of September 30, 2018. There have been no losses in these accounts through September 30, 2018.
Concentration of Customer
The Company has one customer, which, for the nine months ended September 30, 2018 and August 31, 2017, had sales of $391,705 (£295,358, 6.1% of total revenue) and $456,189 (£347,580, 14.0% of total revenue), respectively. The Company has a contract with the customer that expires in February 2020.
| F-17 |
NOTE 11 – REVENUE CLASSES
Selected financial information for the Company’s operating revenue classes are as follows:
| Revenues: | For the nine months ended | For the nine months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 5,889,473 | £ | 4,530,364 | $ | 2,864,544 | £ | 2,226,099 | ||||||||
| Coffee school | 6,874 | 5,183 | 7,045 | 5,475 | ||||||||||||
| Management fees | 557,764 | 420,573 | 392,269 | 304,841 | ||||||||||||
| Total | $ | 6,454,111 | £ | 4,956,120 | $ | 3,263,858 | £ | 2,536,415 | ||||||||
| Direct costs of revenue: | For the nine months ended | For the nine months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 4,753,121 | £ | 3,656,247 | $ | 2,990,374 | £ | 2,336,230 | ||||||||
| Coffee school | 1,930 | 1,508 | 1,235 | 965 | ||||||||||||
| Management fees | 156,580 | 122,328 | 68,740 | 53,703 | ||||||||||||
| Total | $ | 4,911,631 | £ | 3,780,083 | $ | 3,060,349 | £ | 2,390,898 | ||||||||
The acquisition of Tapped, effective November 1, 2017, is reflective in 2018 for the nine months. The acquisition of Bea’s, Tradewind, Roasted Ritual in May 2018, June 2018 and June 2018, respectively, are not significant.
NOTE 12 – CAPITAL LEASE OBLIGATIONS
The Company leases various assets under capital lease. As of September 30, 2018, and December 31, 2017, capital lease obligations consisted of the following:
| September 30, 2018 | December 31, 2017 | |||||||
| Computer equipment | $ | 29,206 | $ | 32,429 | ||||
| Office equipment | 60,360 | 49,429 | ||||||
| Site equipment and machinery | 83,596 | 45,134 | ||||||
| Site fit out costs | 111,932 | 206,750 | ||||||
| Site furniture, fixtures and fittings | 61,439 | 96,539 | ||||||
| Total fixed assets | 346,533 | 430,281 | ||||||
| Less: Accumulated depreciation | 75,358 | 137,689 | ||||||
| Fixed assets, net | $ | 271,175 | $ | 292,592 | ||||
Aggregate future minimum rentals under capital leases are as follows:
| 2018 | $ | 184,505 | ||
| 2019 | 111,336 | |||
| 2020 | 63,781 | |||
| 2021 | 17,220 | |||
| 2022 | 3,106 | |||
| Future | - | |||
| Total | 379,948 | |||
| Less: Interest | 96,584 | |||
| Present value of minimum lease payments | 476,532 | |||
| Less: Current portion of capital lease obligations | 184,505 | |||
| Capital lease obligations, net of current portion | $ | 292,027 |
Note: The above schedule reflects only items that have payments associated with them.
NOTE 13 – SUBSEQUENT EVENTS
Management has reviewed and evaluated subsequent events through the date on which the current financial statements were available to be issued and did not have any material recognizable subsequent events after September 30, 2018 except as follows.
On October 1, 2018, Deij Capital forgave the business loan dated July 1, 2014 which had a principal balance of $11,164 as of September 30, 2018. See Notes 6 and 7.
On October 4, 2018, DEPT-UK executed a Share Purchase Agreement with Charlie Stead for the acquisition of Crazy Fox Espresso Bar Limited, for $39,226 (£30,139). A pro-forma is unavailable until a later date when the financials are finalized.
| F-18 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” “will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 8-K for the fiscal year ended August 31, 2016 and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read together with our financial statements and related notes included elsewhere in this report.
Company Overview
The Company was a startup company that was incorporated in Nevada on July 22, 2014 and established a fiscal year end of July 31. On August 4, 2016, the Company filed with the State of Nevada to change its fiscal year to August 31.
On July 8, 2016, the Company experienced a change in control. Atlantik LP (“Atlantik”) acquired a majority of the issued and outstanding common stock of the Company in accordance with a stock purchase agreement by and between Atlantik and Nami Shams (the “Seller”). On the closing date, July 8, 2016, pursuant to the terms of the stock purchase agreement, Atlantik purchased from the Seller 115,000,000 shares of the Company’s outstanding restricted common stock for $200,000, representing 76.1% of the Company’s outstanding common stock at that time.
On September 1, 2016, the Company acquired 99.8% of the voting stock of the Department of Coffee and Social Affairs Limited, a United Kingdom corporation (the “DEPT-UK”), and the Company agreed to issue DEPT-UK’s majority shareholder 170,000,000 shares of the Company’s common stock—110,000,000 shares initially and 60,000,000 shares at a time determined by the Company’s Board of Directors but no later than August 31, 2017, which deadline was subsequently extended to August 31, 2019. Also, on September 1, 2016, the Company acquired 115,000,000 shares of the Company’s common stock from Atlantik in exchange for issuing Atlantik a promissory note for $320,000, which shares were then cancelled, and which note has since been paid in full. As a result of the acquisition and the issuance of the initial 110,000,000 shares of common stock, and the cancellation of the 115,000,000 Atlantik shares, DEPT-UK is now the majority-owned subsidiary of the Company, and the Company experienced a change of control.
Prior to the acquisition, we were a company that was originally engaged in the business of commercial production and distribution of hot sauce.
On January 2, 2018, with an effective date of November 1, 2017, DEPT-UK acquired Tapped and Packed Ltd (“Tapped”), an UK coffee shop company with four locations.
On May 23, 2018, DEPT-UK acquired Bea’s of Bloomsbury Limited (“Bea’s”), an UK company with five shop locations in the UK which serves coffee and food.
On June 29, 2018, DEPT-UK acquired Tradewind Espresso Ltd (“Tradewind”), an UK company with one shop location in the UK which serve coffee and food.
On June 29, 2018, DEPT-UK acquired Roasted Rituals Coffee Ltd (“Roasted Rituals”), an UK company which is a specialty coffee roaster and has one shop location in the UK.
We are currently devoting substantially all of our efforts as an artisan coffee company that serves premium single origin coffee to the United Kingdom’s discerning coffee drinkers as well as a selection of quality foods. In October 2017 and August 2018, we opened our first and second, respectively, coffee shop in the United States, in Chicago, Illinois.
The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-Q.
| 3 |
Results of Operations
For the Three Months Ended September 30, 2018 and August 31, 2017
Revenue
For the three months ended September 30, 2018, the Company had $2,539,368 of revenue, compared to $1,179,809 for the three months ended August 31, 2017. Revenue in U.S. Dollars increased by 115%, as a result of multiple new coffee shop locations being in service during the three months ended September 30, 2018, as well as the effect of the acquisitions of Tapped, Bea’s, Roasted Rituals and Tradewind, as compared to the three months ended August 31, 2017. In the three months ended September 30, 2018, the Company had 31 coffee shop locations in operation, with four of the shops being acquired in the acquisition of Tapped, five of the shops being acquired in the acquisition of Bea’s, and one shop each in the acquisitions of Tradewind and Roasted Rituals. Coffee shops opened in the prior year performed within management’s expectations for the three months ended September 30, 2018. Company revenues, by revenue class, are as follows:
| Revenues: | For the three months ended | For the three months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 2,351,031 | £ | 1,810,680 | $ | 1,037,619 | £ | 810,640 | ||||||||
| Coffee school | 88 | 67 | 139 | 109 | ||||||||||||
| Management fees | 188,249 | 142,613 | 142,051 | 110,977 | ||||||||||||
| Total | $ | 2,539,368 | £ | 1,953,360 | $ | 1,179,809 | £ | 921,726 | ||||||||
Operating Expenses
Direct costs of Revenue
For the three months ended September 30, 2018, direct costs of revenue were $1,972,504 compared to $1,441,275 for the three months ended August 31, 2017. Direct costs of revenue reflect an increase of $531,229, or 37% in direct costs of revenue. The increase is primarily due to the acquisition of Tapped and new shops.
| Direct costs of revenue: | For the three months ended | For the three months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 1,928,137 | £ | 1,482,649 | $ | 1,430,387 | £ | 1,083,627 | ||||||||
| Coffee school | 822 | 642 | 677 | 513 | ||||||||||||
| Management fees | 43,545 | 34,020 | 10,211 | 7,736 | ||||||||||||
| Total | $ | 1,972,504 | £ | 1,517,311 | $ | 1,441,275 | £ | 1,091,876 | ||||||||
General and Administrative Expenses
For the three months ended September 30, 2018, general and administrative expenses were $1,395,684 compared to $771,080 for the three months ended August 31, 2017, or an increase of $624,604. The expenses for the three months ended September 30, 2018, were as follows: rent, $339,147; depreciation and amortization, $174,739; and other, $881,798. The expenses for the three months ended August 31, 2017, were as follows: professional fees, $43,994; rent, $146,039; depreciation and amortization, $64,668; and other, $516,379. The increase in general and administrative expenses during the three months ended September 30, 2018, as compared to August 31, 2017, are primarily a result of the increase in operating expenses associated with opening new coffee shop locations and the acquisition of Tapped and other shops.
Net Loss
The Company generated net loss before taxes and non-controlling interest of $832,478 for the three months ended September 30, 2018, compared to net loss before taxes and non-controlling interest of $1,032,546 for the three months ended August 31, 2017. For both comparative periods, the Company’s primary expenses were direct costs of revenue. As discussed above, the costs associated with setting up new locations and the acquisition of Tapped resulted in much of the increase in expenses which reduces our net loss during the three months ended September 30, 2018, as compared to the three months ended August 31, 2017.
| 4 |
For the Nine months Ended September 30, 2018 and August 31, 2017
Revenue
For the nine months ended September 30, 2018, the Company had $6,454,111 of revenue, compared to $3,263,858 for the nine months ended August 31, 2017. Revenue in U.S. Dollars increased by 98%, as a result of multiple new coffee shop locations being in service during the nine months ended September 30, 2018, as well as the effect of the acquisitions of Tapped, Bea’s, Roasted Rituals, Tradewind and TimberYard, as compared to the nine months ended August 31, 2017. In the nine months ended September 30, 2018, the Company had 31 coffee shop locations in operation, with four of the shops being acquired in the acquisition of Tapped, five of the shops being acquired in the acquisition of Bea’s, and one shop each in the acquisitions of Tradewind and Roasted Rituals and two shops for TimberYard. The revenue for the nine months ended September 30, 2018 for Tapped was $1,472,570. The revenues for Bea’s was $856,176 for approximately 132 days. Additionally, coffee shops opened in the prior year performed within management’s expectations for the nine months ended September 30, 2018. Company revenues, by revenue class, are as follows:
| Revenues: | For the nine months ended | For the nine months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 5,889,473 | £ | 4,530,364 | $ | 2,864,544 | £ | 2,226,099 | ||||||||
| Coffee school | 6,874 | 5,183 | 7,045 | 5,475 | ||||||||||||
| Management fees | 557,764 | 420,573 | 392,269 | 304,841 | ||||||||||||
| Total | $ | 6,454,111 | £ | 4,956,120 | $ | 3,263,858 | £ | 2,536,415 | ||||||||
Operating Expenses
Direct costs of Revenue
For the nine months ended September 30, 2018, direct costs of revenue were $4,911,631 compared to $3,060,349 for the nine months ended August 31, 2017. Direct costs of revenue reflect an increase of $1,851,282, or 60% in direct costs of revenue. The increase is primarily due to the acquisition of Tapped and new shops.
| Direct costs of revenue: | For the nine months ended | For the nine months ended | ||||||||||||||
| September 30, 2018 | August 31, 2017 | |||||||||||||||
| Coffee and complementary food products | $ | 4,753,121 | £ | 3,656,247 | $ | 2,990,374 | £ | 2,336,230 | ||||||||
| Coffee school | 1,930 | 1,508 | 1,235 | 965 | ||||||||||||
| Management fees | 156,580 | 122,328 | 68,740 | 53,703 | ||||||||||||
| Total | $ | 4,911,631 | £ | 3,780,083 | $ | 3,060,349 | £ | 2,390,898 | ||||||||
General and Administrative Expenses
For the nine months ended September 30, 2018, general and administrative expenses were $3,298,934 compared to $1,576,635 for the nine months ended August 31, 2017, or an increase of $1,722,299. The expenses for the nine months ended September 30, 2018, were as follows: professional fees, $179,307; rent, $927,624; depreciation and amortization, $348,105; property taxes, $10,051; and other, $1,833,847. The expenses for the nine months ended August 31, 2017, were as follows: professional fees, $127,561; rent, $369,412; depreciation and amortization, $158,522; and other, $921,140. The increase in general and administrative expenses during the nine months ended September 30, 2018, as compared to August 31, 2017, are primarily a result of the increase in operating expenses associated with opening new coffee shop locations and the acquisition of Tapped.
Net Loss
The Company generated net loss before taxes and non-controlling interest of $1,773,251 for the nine months ended September 30, 2018, compared to net loss before taxes and non-controlling interest of $1,373,126 for the nine months ended August 31, 2017. For both comparative periods, the Company’s primary expenses were direct costs of revenue. As discussed above, the costs associated with setting up new locations and the acquisition of Tapped resulted in much of the increase in expenses which reduces our net income during the nine months ended September 30, 2018, as compared to the nine months ended August 31, 2017.
The Company has one customer, which, for the nine months ended September 30, 2018 and August 31, 2017, had sales of $391,705 (£295,358, 6.1% of total revenue) and $456,189 (£347,580, 14.0% of total revenue), respectively. The Company has a contract with the customer that expires in February 2020.
Liquidity and Capital Resources
General
At September 30, 2018, the Company had cash and cash equivalents of $1,104,519. The Company has historically met its cash needs through a combination of cash flows from operating activities and proceeds from private placements of our securities and loans. The Company plans to continue meeting its cash needs through the same methods used historically.
The Company’s operating activities used cash of $1,152,168 for the nine months ended September 30, 2018 and used cash of $785,450 for the nine months ended August 31, 2017, respectively. The principal elements of cash flow from operations for the nine months ended September 30, 2018, included a net loss attributable to common shareholders of $1,770,466, and an increase in accounts payable of $119,265 and accrued expenses of $722,227, offset primarily by an increase in accounts receivable of $354,743 and an increase in prepaid expenses of $69,116.
| 5 |
Cash used in investing activities during the nine months ended September 30, 2018, was $1,667,334 compared to $663,975 during the nine months ended May 31, 2017, which was primarily related in both periods to the acquisition of fixed assets and Tapped. For the period ended September 30, 2018, the acquisitions of Roasted Rituals, Tradewind and TimberYard were reflected.
Cash provided by the Company’s financing activities was $3,784,671 for the nine months ended September 30, 2018, compared to cash provided by financing activities of $1,451,688 during the nine months ended August 31, 2017.
As of September 30, 2018, current liabilities exceeded current assets. Current assets were $1,175,832 at December 31, 2017 and $2,709,768 at September 30, 2018, whereas current liabilities increased from $2,001,715 at December 31, 2017, to $3,353,338 at September 30, 2018.
| For the nine months ended | ||||||||
| September 30, 2018 | August 31, 2017 | |||||||
| Cash used in operating activities | $ | (1,152,168 | ) | $ | (785,450 | ) | ||
| Cash used in investing activities | (1,667,334 | ) | (663,975 | ) | ||||
| Cash provided by financing activities | 3,784,671 | 1,451,688 | ||||||
| Net changes to cash | $ | 965,169 | $ | 2,263 | ||||
Going Concern
The Company has a net loss attributable to common shareholders for the nine months ended September 30, 2018 of $1,770,466 and a working capital deficit as of September 30, 2018 of $643,570, and has cash used in operations of $1,152,168 for the nine months ended September 30, 2018. In addition, as of September 30, 2018, the Company had a stockholders’ deficit and accumulated deficit of $2,246,252 and $4,253,374, respectively. Without further funding, these conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.
There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
Off Balance Sheet Arrangements
The Company currently has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the web site and property and equipment, valuation of warrant and beneficial conversion feature debt discounts, valuation of share-based payments and the valuation allowance on deferred tax assets.
Changes in Accounting Principles. No significant changes in accounting principles were adopted during the period ended September 30, 2018.
Impairment of Long-Lived Assets. The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments and Fair Value Measurements. The Company measures their financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses escrow liability and short-term loans the carrying amounts approximate fair value due to their short maturities.
| 6 |
We have adopted accounting guidance for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have adopted this update. We do not believe this guidance will impact the recognition of our primary source of revenue from company-owned coffee shops. We also do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
The Company has primary revenue streams as follows:
| ● | Sale of coffee and complementary food products to consumer. | |
| ● | Coffee school. | |
| ● | Coffee services. |
Stock-Based Compensation. The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1, “Summary of Significant Accounting Policies” in our audited financial statements for the year ended August 31, 2017, included in our Annual Report on Form 10-K, as filed on December 18, 2017, for a discussion of our critical accounting policies and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms and that information required to be disclosed is accumulated and communicated to the chief executive and interim chief financial officer to allow timely decisions regarding disclosure.
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As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective as of such date. The Chief Executive Officer and Chief Financial Officer have determined that the Company continues to have the following deficiencies which represent a material weakness:
| 1. | The Company intends to appoint additional independent directors; | |
| 2. | Lack of in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions; | |
| 3. | Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting; | |
| 4. | Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes. |
To remediate our internal control weaknesses, management intends to implement the following measures:
| ● | The Company will add sufficient number of independent directors to the board and appoint additional member(s) to the Audit Committee. | |
| ● | The Company will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements. | |
| ● | The Company will hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting. | |
| ● | Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures. |
The additional hiring and appointment of independent directors will be addressed in the future.
Changes in Internal Control Over Financial Reporting
As described herein, we experienced a change of control as a result of the acquisition of DEPT-UK. In connection with the acquisition, (i) Stefan Allesch-Taylor and Matthew Gill were appointed to serve on our Board of Directors, serving as Chairman and Vice-Chairman, respectively, Ashley Lopez was appointed as our Chief Executive Officer and President, and Kazi Shahid was appointed Chief Financial Officer. Due to acquisition and our modified business plan, we are in the process of finalizing our controls over our new business operations and processes. In March 2017, Mr. Shahid resigned as Chief Financial Officer of the Company and its subsidiary, DEPT-UK, and our Chief Executive Officer, Ms. Lopez, assumed, on an interim basis, the duties of the Chief Financial Officer. There are no changes in our internal controls over financial reporting other than as described above.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, which is the same person, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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There are no pending legal proceedings in which we are a party or in which any of our directors, officers or affiliates, any owner of record or beneficiary of more than 5% of any class of our voting securities is a party adverse to us or has a material interest adverse to us. Our property is not the subject of any pending legal proceedings.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
The shares described above were issued or will be issued based on exemptions from registration under Section 4(a)(2) of the Securities Act of 1933 and Regulation D promulgated thereunder as there was no general solicitation, and the transactions did not involve a public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
In August 2018, the Company changed its transfer agent to Action Stock Transfer Corporation, located at 2469 E. Fort Union Boulevard, Suite 214, Salt Lake City, Utah 84121,
| (1) | Filed herewith |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 14, 2018 | By: | /s/ Ashley Lopez |
| Ashley Lopez | ||
| Principal Executive Officer |
| Date: November 14, 2018 | By: | /s/ Phillip Maritz |
| Phillip Maritz | ||
| Principal Financial Officer |
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