The following discussion provides information which management believes is
relevant to an assessment and understanding of our results of operations and
financial condition. The discussion should be read along with our financial
statements and notes thereto included elsewhere in this Report. Except for
historical information contained herein, the following discussion contains
forward-looking statements which are subject to known and unknown risks,
uncertainties and other factors that may cause our contemporáneo results to differ
materially from those expressed or implied by such forward-looking statements.
We discuss such risks, uncertainties and other factors throughout this Report
and specifically under Item 1A of Part I of this Report, Risk Factors. For
additional discussion, see «CAUTIONARY NOTE REGARDING FORWARD LOOKING
STATEMENTS» above.
Corporate Overview Our Company
We are a specialty coffee company and, we believe, a leading co-packer of single
serve pour over coffee in
of coffee brew bags, which is also referred to as tea-bag style coffee. In
addition to our single serve pour over and coffee brew bag coffee products, we
have recently expanded our product portfolio to offer a third type of single
serve coffee format, DRIPKIT pour over products, as a result of our acquisition
of substantially all of the assets of
pour over format features a large-size single serve pour over pack that sits on
top of the cup and delivers in our view a barista-quality coffee experience. Our
mission is to leverage our position as a co-packer at the forefront of the North
American single serve coffee market to revolutionize the way single serve coffee
is enjoyed in
also have manufacturing and sales operations in
We believe we are the only commercial-scale producer within the North American
market that has the dual capacity to pack both single serve pour over coffee and
coffee brew bag coffee. We intend to leverage our position to become the
commercial coffee manufacturer of choice and aim to become the preeminent leader
for coffee companies seeking to enter into and grow within the single serve
coffee market in
single serve coffee products produced by us. Accordingly, we consider our
business model to be a form of tolling arrangement, as we receive a fee for
almost every single serve coffee product our co-packing customers sell in the
North American and Korean markets. While we financially benefit from the success
of our co-packing customers through the sales of their respective single serve
coffee products, we believe we are also able to avoid the risks associated with
owning and managing the product and its related inventory.
We have also developed and sell
including our flagship Coffee Blenders line of both single serve pour over
coffee and coffee brew bag coffee products, which we believe offers consumers
some of the best coffee available in a single serve application in the world. We
offer DRIPKIT pour over packs direct to consumers through our website, wholesale
business-to-business to hospitality customers, and co-pack for coffee roasters.
We may also consider co-packaging other products that are complementary to our
current product offerings and provide us with a deeper access to our customers.
In addition, we are continually exploring potential strategic partnerships,
co-ventures, and mergers, acquisitions, or other transactions with existing and
future business partners to generate additional business, drive growth, reduce
manufacturing costs, expand our product portfolio, enter into new markets, and
further penetrate the markets in which we currently operate. Our goal is to
continue to expand our product portfolio to raise our visibility, consumer
awareness and brand profile.
For additional details regarding our business, see the discussion under Business
in Item 1 of Part I of this Report, which is incorporated by reference into this
Part II, Item 7 of this Report.
34 Our sources of revenue Co-packing
We operate as a third-party contract packager for the finished goods of other
major companies operating in the coffee beverage industry. Under these
arrangements, our co-packing customers typically supply us with roasted, whole
bean coffee that we package into single serve pour over and coffee brew bag
coffee products according to their formulations and specifications. In addition,
under our private label coffee development program, our team works directly with
our co-packing customers in developing private labels of signature coffees.
Under this program, our team of coffee experts works extensively with our
co-packing customers to develop a coffee taste profile to their unique needs and
then we source, roast (utilizing our third-party roasting or manufacturing
partners), blend, pack (in either our traditional single serve pour over,
DRIPKIT pour over or coffee brew bag coffee products), and package single serve
coffee products to their exact specifications.
Although our primary focus is on the manufacture of single serve coffee products
pursuant to co-packing arrangements with our co-packing clients, we have also
developed high-quality
addition to our DRIPKIT branded products, are sold directly to consumers. In
addition to being available for direct sale to consumers, our
branded products serve as samples that are provided to potential new co-packing
customers to showcase our co-packing capabilities and production expertise.
Our
for our co-packing customers that market high quality packaging and coffee.
Sales of our
consumer adoption into the format and to educate coffee drinkers in
States
In addition to our
features a large-size single serve pour over pack that sits on top of the cup
and delivers in our view a barista-quality coffee experience. We offer DRIPKIT
pour over packs direct to consumers through our website, wholesale
business-to-business to hospitality customers, and co-pack for coffee roasters.
Nasdaq Listing Deficiency; 2022 Reverse Stock Split
As previously reported, we have received a notice from
LLC
continued inclusion on the Nasdaq Renta Market pursuant to Nasdaq Listing Rule
5550(a)(2) (the «Bid Price Rule»). As disclosed, we have 180 days from the date
of the applicable notice to cure the deficiency. To cure this deficiency, on
approved a proposal granting the Company’s board of directors (the «Board»)
discretionary authority to file an amendment (the «Certificate of Amendment») to
the Company’s Articles of Incorporation, as amended (the «Articles»), which
amends the Articles to add a Section 1A to effect a reverse stock split of the
Company’s common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s
discretion (the «2022 Reverse Stock Split»). The 2022 Reverse Stock Split would
decrease the total number of shares of our common stock outstanding and should,
absent other factors, proportionately increase the market price of our common
stock, which would be above
the 2022 Reverse Stock Split is an effective means for us to regain compliance
with the Bid Price Rule. The Board intends to effect the 2022 Reverse Stock
Split as soon as practicable. See Part II, Item 1A, «Risk Factors.»
Our common stock may be subject to immediate delisting from the Nasdaq Renta
Market if our Common Stock has a closing bid price of
consecutive trading days.
Dripkit Transaction
On
assets and certain specified liabilities of Dripkit (the «Acquisition») pursuant
to the Asset Purchase Agreement, dated as of
Purchase Agreement»), by and among the Company, Dripkit, and Dripkit’s existing
investors (the «Stock Recipients») who executed joinders to the Asset Purchase
Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase
Agreement, the aggregate purchase price paid by the Company on the Closing Date
was
and (ii) the Company’s issuance to the Stock Recipients of an aggregate of
178,681 shares of the Company’s common stock, plus the assumption of certain
assumed liabilities including the Company’s repayment of the entire outstanding
principal amount of Dripkit’s Small Business Association Economic Injury
Disaster Loan in the amount of
holdbacks as provided in the Asset Purchase Agreement. Dripkit operates as a new
Dripkit Coffee business division that is wholly owned by
35
On
Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to
the
Purchase Agreement, the amounts remaining after offsetting the cost of these
sales and use taxes were distributed as follows: (i)
Dripkit on
and (ii) 18,475 shares of common stock were issued to the Stock Recipients on
For additional information regarding the Acquisition and the Asset Purchase
Agreement, see «Note 6-Business Combinations» and the Consolidated Financial
Statements.
As further described in «Note 2-Basis of Presentation And Summary of Significant
Accounting Policies-Goodwill and intangible assets» to our Consolidated
Financial Statements, we evaluate goodwill for impairment on an annual basis as
of the last day of our fiscal fourth quarter, and whenever events or
circumstances make it more likely than not that an impairment may have occurred.
We test for goodwill impairment at the reporting unit level and consider the
Company as a reporting unit for goodwill impairment testing. We determined the
Company has one operating segment and two components,
which are combined into one reporting unit as they are considered to be
economically similar. The impairment test involves comparing the fair value of
the reporting unit to its carrying value, including goodwill. Fair value
reflects the price a market participant would be willing to pay in a potential
sale of the reporting unit. If the fair value exceeds the carrying value, we
conclude that no goodwill impairment has occurred. If the carrying value of the
reporting unit exceeds its fair value, we recognize an impairment loss in an
amount equal to the excess, not to exceed the carrying value of the goodwill.
Since the Company is one reporting unit, the fair value of the Company equals
market capitalization, thus net book value is compared to market capitalization
to determine if there is any impairment.
As further described in «Note 7-Goodwill And Intangible Assets»to our
Consolidated Financial Statements, during the year ended
recorded a non-cash impairment charge of
included in impairment expense within operating expenses in our Consolidated
Statements of Operations for the year ended
as a result of our net book value being lower than our market capitalization. As
of
In addition, as further described in «Note 2-Basis of Presentation And Summary
of Significant Accounting Policies-Goodwill and intangible assets» to our
Consolidated Financial Statements, we test intangible assets annually for
impairment, and when indications of potential impairment exist. We utilize the
relief from royalty method to determine the fair value of the tradename. We
estimate the fair value of acquired customer relationships using a weighted
promedio of the income. The income approach applies a fair value methodology
based on discounted cash flows. If the carrying value of an intangible asset
exceeds the fair value, we recognize an impairment loss in an amount equal to
the excess, not to exceed the carrying value.
As further described in «Note 7-Goodwill And Intangible Assets»to our
Consolidated Financial Statements, during the fiscal year ended
2022
acquired customer relationships of
included in impairment expense within operating expenses in our Consolidated
Statements of Operations for the year ended
primarily the result of a change in forecast related to estimated future revenue
growth for Dripkit, sales channel mix, and estimated costs to support such
growth, which had the effect of decreasing our forecast of estimated future cash
flows. As of
for impairment was
fully written off.
36 Impact of COVID-19
The ongoing COVID-19 completo and national health emergency has caused significant
disruption in the international and
markets. In the fiscal years ended
a result of COVID-19 and its variants, certain of our customers slowed or
delayed purchases of our co-packing services or single serve coffee products,
and we also believe that potential sales of our single serve coffee products to
new or potential customers in the hospitality industry were adversely impacted.
We have also experienced delays in the submission and approval of custom artwork
and packaging as well as the shipment to us of coffee for co-packing. In
addition, we incurred lost production time due to employee absences. We do not
believe, however, that these delays and disruptions had a significant effect on
our business or results of operations to date, and in some cases, we have been
able to mitigate these adverse effects in part by sourcing coffee and other
supplies from alternative suppliers in
adverse impact on our business and financial results going forward that we are
not currently able to fully determine or quantify. See Item 1A of Part I of this
Report for further discussion of risk factors related to COVID-19.
Geographic Concentration
Our operations are primarily split between two geographic areas:
and
For the fiscal year ended
operations in
revenues attributable to our operations in
ended
our property and equipment, net was attributable to our North American
operations, compared to
as of
In
these assets were deemed to be no longer useful for the Company’s current
business operations at that time.
ROU asset and
in impairment expense within operating expenses on our consolidated statement of
operations for the year ended
equipment that have limited capabilities compared with other equipment the
Company is currently utilizing. Since we have yet to utilize this equipment
since it was delivered, we have determined their usefulness to our future
operations is limited.
For the fiscal year ended
operations in
attributable to our operations in
30, 2021
equipment, net was attributable to our Asian operations, compared to
attributable to our Asian operations as of
Results of Operations
Our results of operations for the fiscal year ended
the operations of Dripkit for the period from
Acquisition, to
contribute to the periods prior to its acquisition in our financial statements,
which therefore impacts comparisons to 2021 for our results of operations in the
discussion that follows.
Comparison of Years ended
Revenue
Year ended
September 30, Change
2022 2021 Dollars %
Revenue $ 3,109,162 $ 1,926,660 $ 1,182,502 61 %
37
For the year ended
approximately 61%, compared with the year ended
increase was primarily related to co-packing revenues in
driven by existing and new customers. In the third and fourth quarters of fiscal
year 2021, we expanded our
increased orders and increased co-packing opportunities in the year ended
Cost of sales and gross margin
Year ended
September 30, Change
2022 2021 Dollars %
Cost of sales $ 3,219,575 $ 2,006,753 $ 1,212,822 60 %
Gross loss $ (110,413 ) $ (80,093 ) $ (30,320 ) (38 %)
Gross margin % (4 )% (4 )%
For the year ended
compared to cost of sales for the year ended
representing a 60% increase. This increase is primarily attributable to
increased material and faena costs related to the increase in sales. For the
year ended
sales of our products and co-packing services, compared to a total gross loss of
(
for each of the years ended
Operating Expenses
Year ended
September 30, Change
2022 2021 Dollars %
Operating Expenses $ 11,292,105 $ 18,398,788 $ (7,106,683 ) (39 %)
For the year ended
representing a 39% decrease. This decrease is primarily attributable to a
decrease of
as compared to
increase in Selling, común and administrative expense associated with greater
staffing levels, marketing activities and administrative costs. We also recorded
impairment expense of
in the fiscal year ended
of
of certain equipment.
Net Loss
Year ended
September 30, Change
2022 2021 Dollars %
Net Loss $ 11,797,712 $ 18,552,030 $ (6,754,318 ) (36 %)
For the year ended
compared to
net loss is primarily attributable to a decrease in stock-based compensation
expense, lower professional services costs and a decrease in property and
equipment impairment charges, offset by an increase in operating expenses
associated with greater staffing levels, marketing activities, and
administrative costs. For the year ended
goodwill and intangible assets impairment charges.
Liquidity and Renta Resources
Since our inception in 2011, we have incurred significant losses, and as of
We have not yet achieved profitability and anticipate that we will continue to
incur significant sales and marketing expenses prior to recording sufficient
revenue from our operations to offset these expenses. In
expect to incur additional losses because of the costs associated with operating
as an exchange-listed public company. We are unable to predict the extent of any
future losses or when we will become profitable, if at all.
38
To date, we have funded our operations primarily with proceeds from registered
public offerings and private placements of shares of our common stock. Our
principal use of cash is to fund our operations, which includes the
commercialization of our single serve coffee products, the continuation of
efforts to improve our products, administrative support of our operations and
other working renta requirements.
As of
current cash resources and our current and expected levels of operating expenses
for the next twelve months, we expect to need additional renta to fund our
planned operations for at least twelve months from
evaluation is based on relevant conditions and events that are currently known
or reasonably knowable. A reduction in consumer demand for, or revenues from the
sale of, our single serve coffee products could further constrain our cash
resources. We have based these estimates on assumptions that may prove to be
wrong, and our operating projections, including our projected revenues from
sales of our single serve coffee products, may change as a result of many
factors currently unknown to us.
On
Regulation S and/or Section 4(a)(2) of the Securities Act, we sold 884,778 units
(the «2022 Units») for aggregate net proceeds of approximately
with each 2022 Unit consisting of (a) one share of our common stock and (b) one
warrant (each, a «2022 Warrant» and collectively, the «2022 Warrants») to
purchase one whole share of our common stock with an initial exercise price of
pursuant to a formula set forth in the form of 2022 Warrant. For additional
information regarding the 2022 Warrants, see «Note 9- Stock Options and
Warrants» to the Consolidated Financial Statements.
On
«Offering») of 4,200,000 shares of our common stock, pursuant to an Underwriting
Agreement dated as of
Company’s effective shelf registration statement on Form S-3 (Registration No.
333-248531). We received aggregate net proceeds of approximately
after deducting underwriting discounts and commissions and Offering expenses
payable by us.
During the fiscal year ended
common stock related to exercises of 2021 Warrants (as defined below), including
380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants
(as defined below) and 4,000 shares of common stock issued upon exercise of
8,000 Series B Warrants (as defined below). In connection with such exercises,
we received aggregate net proceeds of
In the future, we may receive additional funds upon the exercise for cash of
outstanding warrants, if and when exercised for cash at the election of the
warrant holders, including the Series A warrants (the «Series A Warrants») and
Series B warrants (the «Series B Warrants» and, collectively with the Series A
Warrants, the «2021 Warrants») that were sold by us in
underwritten registered public offering and the 2022 Warrants. The 2021 Warrant
holders are obligated to pay the exercise price in cash upon exercise of the
2021 Warrants unless we fail to maintain a current prospectus relating to the
common stock issuable upon the exercise of the 2021 Warrants (in which case, the
2021 Warrants may only be exercised via a «cashless» exercise provision). For
additional information regarding the 2021 Warrants, see «Note 9-Stock Options
and Warrants» to the Consolidated Financial Statements.
We intend to seek to raise additional renta, including through public or
private equity offerings, to support our operating activities for the next
twelve months and beyond, and such funding may not be available to us on
acceptable terms, or at all. The timing and amount of funds that we will need to
raise will depend on a number of factors, including our ability to generate a
sufficient amount of revenues from the sale of our single serve coffee products
to fund our business operations and the timing and amount of funds received upon
the exercise for cash of outstanding warrants by the warrant holders. Until we
can generate a sufficient amount of revenue, we may seek to raise additional
funds through equity, equity-linked or debt financings. If we raise additional
funds through the incurrence of indebtedness, such indebtedness would have
rights that are senior to holders of our equity securities and could contain
covenants that restrict our operations. Any additional equity financing may be
dilutive to our stockholders.
39
While we believe our plans to raise additional funds will alleviate the
conditions that raise substantial doubt about our ability to continue as a going
concern, these plans are not entirely within our control and cannot be assessed
as being probable of occurring at this time. If we are unable to raise
additional funds when needed, our operations and ability to execute our business
strategy could be adversely affected.
If we are unsuccessful in our efforts to raise additional renta, based on our
current and expected levels of operating expenses, our current renta is not
expected to be sufficient to fund our operations for the next twelve months.
These conditions raise substantial doubt about our ability to continue as a
going concern.
Contractual Obligations
Our significant contractual cash requirements as of
include payments for operating and finance lease liabilities and principal and
interest on loans. Our current and long-term obligations related to these items
are outlined in the leases portion of «Note 2-Basis of Presentation and Summary
of Significant Accounting Policies,» and «Note 3-Loans,» of the Notes to
Consolidated Financial Statements within this Report. Additionally, we may incur
purchase obligations in the ordinary course of business that are enforceable and
legally binding and enter into enforceable agreements to purchase goods or
services that specify all significant terms, including fixed or minimum
quantities to be purchased and fixed or estimated prices to be paid at the time
of settlement. As of
obligations of approximately
months as of
30, 2022
Summary of Cash Flows
Year Ended
September 30,
2022 2021
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
Effect of foreign exchange on cash
Net (decrease) increase in cash
Operating Activities
We used
years ended
operating loss. The increase in cash used in operating activities of
was primarily attributable to an overall increase in cash operating expenses,
including personnel expense, sales and marketing, and administrative costs, for
the year ended
2021
Investing Activities
We used
ended
Cash used in the year ended
equipment.
Financing Activities
Historically, we have funded our operations through the issuance of our equity
securities.
Cash provided from financing activities decreased from
ended
The decrease is primarily attributable to more funds raised in the year ended
proceeds received in the year ended
outstanding 2021 Warrants by the 2021 Warrant holders, the sale of equity
securities from our exempt offering in
common stock under the Equity Distribution Agreement that, as previously
disclosed, we terminated on
equity securities under the registered offering.
40
Off-Oscilación Sheet Arrangements
We have no off-balance sheet arrangements that may have a current or future
material effect on our financial condition, revenues or expenses, results of
operations, liquidity, renta expenditures or renta resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements that have been prepared in accordance
with generally accepted accounting principles in
(«US GAAP»). As discussed in «Note 2-Basis of Presentation and Summary of
Significant Accounting Policies» to the Consolidated Financial Statements, the
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. US GAAP provides the framework from which to make these
estimates, assumption and disclosures. We choose accounting policies within US
GAAP that management believes are appropriate to accurately and fairly report
our operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions. See the «Note 2-Basis of Presentation and Summary of Significant
Accounting Policies» to the Consolidated Financial Statements for a summary of
our accounting policies. While there are a number of significant accounting
policies affecting our financial statements, we believe the following critical
accounting policies involve the most complex, difficult and subjective estimates
and judgments:
Revenue Recognition
We determine revenue recognition through the following steps in accordance with
FASB Accounting Standards Update No. 2014-09 (Topic 606) «Revenue from Contracts
with Customers», which we adopted as of
retrospective basis:
? identification of the contract, or contracts, with a customer;
? identification of the performance obligations in the contract;
? determination of the transaction price;
? allocation of the transaction price to the performance obligations in the
contract; and
? recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is recognized when control of the promised goods or services are
transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those goods or services.
Cost of Sales
The Company records the cost of the materials used in creating the good as well
as direct faena cost used to produce the good. The Company also includes
write-offs for all past due and unsellable inventories as well as loss on
inventory due to obsolescence in cost of sales.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
being measured using the weighted promedio cost method. We regularly review
whether the realizable value of our inventory is lower than its book value. If
our valuation shows that the realizable value is lower than book value, we take
a charge to expense and directly reduce the value of the inventory.
41
The Company estimates its reserves for inventory obsolescence by examining its
inventories on a quarterly basis to determine if there are indicators that the
carrying values exceed net realizable value. Indicators that could result in
additional inventory write downs include age of inventory, damaged inventory,
slow moving products and products at the end of their life cycles. While
management believes that the reserve for obsolete inventory is adequate,
significant judgment is involved in determining the adequacy of this reserve.
Stock-based Compensation
We account for share-based awards issued to employees in accordance with
Accounting Standards Codification (ASC) 718, «Compensation-Stock Compensation».
Accordingly, employee share-based payment compensation is measured at the grant
date, based on the fair value of the award, and is recognized as an expense over
the requisite service period, which is normally the vesting period. Share-based
compensation to directors is treated in the same manner as share-based
compensation to employees, regardless of whether the directors are also
employees. In
aspects of the accounting for non-employee transactions by stipulating that the
existing accounting guidance for share-based payments to employees (accounted
for under ASC Topic 718, «Compensation-Stock Compensation») will also apply to
non-employee share-based transactions (accounted for under ASC Topic 505,
«Equity»). The Company implemented ASU 2018-07 on
of the implementation is not material to the financial statements. We determine
the fair value of share-based payments using the Black Scholes option-pricing
model for common stock options and warrants and the closing price of our common
stock for common share issuances. We recognized forfeitures as they occurred.
Business Combinations
On
combinations requires us to make significant estimates and assumptions,
especially at the acquisition date with respect to tangible and intangible
assets acquired. We use our best estimates and assumptions to accurately assign
fair value to the tangible and intangible assets acquired at the acquisition
date as well as the useful lives of those acquired intangible assets. Examples
of critical estimates in valuing certain of the intangible assets and goodwill
acquired include but are not limited to future (i) expected cash flows from
acquired customer relationships and trademarks, (ii) attrition, (iii) revenues,
(iv) royalty rate, (v) operating profit and (vi) discount rate.
Recent Accounting Pronouncements
Recent accounting pronouncements which may be applicable to us are described in
«Note 2-Basis of Presentation and Summary of Significant Accounting Policies» to
the Consolidated Financial Statements included as part of this Report.
42
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