NOTE
1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The
Coffeesmiths Collective, Inc., formerly known as DOCASA, Inc. (hereinafter the “Company,” “we,” “us,”
“our,” or “Coffeesmiths Collective”) 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 December 31, 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. As of December 31, 2018, DEPT-UKWS
has had no operations or activity.
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
November 1, 2017, DEPT-UK acquired Tapped and Packed Ltd (“Tapped”), a 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”), a 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.
Effective
October 29, 2018, majority of the shareholders of the Company approved the following changes to the Company’s Articles of
Incorporation:
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. On December 4, 2018, both changes were approved.
On
November 15, 2018, DEPT-UK executed a Share Purchase Agreement with Thomas Acland, David Downie, William Vernon, Kate Elizabeth
Acland, and Martyn Ward for the acquisition of Coffee Global Limited (a/k/a Cafe2u (“Cafe2u”). Cafe2u became a subsidiary
of DEPT-UK as a result of the transaction. Cafe2u is a franchised mobile coffee van and has 85 vans in the UK all operating under
a master franchise agreement.
On
December 1, 2018, Coffeesmiths Collective executed a Capital Contribution Agreement with Paul Leisen, Joan Lundgren, John Sweeney,
Jacob Muller and Travis Schaffner for the acquisition of Dollop Coffee, LLC (“Dollop”). Dollop became a subsidiary
of Coffeesmiths Collective as a result of the transaction. Dollop has coffee cafes and provides roasting and distribution and
has 16 locations in Chicago, Illinois.
On
December 1, 2018, DEPT-UK executed a Share Purchase Agreement with Silverstream Investments Ltd. for the acquisition of The Roastery
Department Ltd. (“The Roastery”). The Roastery became a subsidiary of DEPT-UK as a result of the transaction. The
Roastery is a roastery and has one location in the UK.
On
various dates, DEPT-UK executed various share purchase agreements and asset purchase agreements with various third parties for
coffee shops, roastery, bakery and assets, as applicable. The acquired entities became subsidiaries of DEPT-UK. The acquired assets
were incorporated into the operations of DEPT-UK. These acquisitions, in aggregate, were for $783,869 in cash and deferred cash
payments of $594,692.
Nature
of Operations
We
are in the specialty coffee industry, specifically with company-operated stores. The Company generates revenue through sales at
forty-six company-operated stores in the UK and 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 Coffeesmiths Collectives and its subsidiaries, DEPT-UK, DCIA, DEPT-IL
and DEPT-UK’s subsidiaries, Tapped, Bea’s, Cafe2u, The Roastery, Dept. Cold Brew and others. All significant
inter-company balances and transactions have been eliminated in consolidation.
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.
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.
The Company has no cash in excess of FDIC limits in the US and Financial Services Compensation Scheme in the UK.
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 recorded an allowance for doubtful accounts as of December 31, 2018 of $45,002 and, as December 31, 2017, and
August 31, 2017, no allowance for doubtful accounts was recorded.
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.
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 five years for all assets, 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 year ended December 31, 2018, the four months ended December 31, 2017, and the year ended August
31, 2017, advertising expense was $54,087, $12,548, and $39,628, respectively.
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 December
31, 2018, tax years 2014 - 2018 remain open for IRS audit and tax years 2015–2018 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 December 31, 2018, December 31, 2017,
and August 31, 2017.
Foreign
Currency Translation and Transactions
The
British Pound (“£”) is the functional currency of DEPT-UK and the UK operations 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 shareholders’ 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 shareholders’ equity that, under U.S. GAAP, are excluded
from net loss. As of December 31, 2018, the exchange rate between U.S. Dollars and British Pounds was US$1.28 = £1.00, and
the weighted average exchange rate for the year ended December 31, 2018 was US$1.31 = £1.00. As of December 31, 2017, the
exchange rate between U.S. Dollars and British Pounds was US$1.35 = £1.00, and the weighted average exchange rate for the
four months ended December 31, 2017 was US$1.32 = £1.00. As of August 31, 2017, the exchange rate between U.S. Dollars and
British Pounds was US$1.29 = £1.00, and the weighted average exchange rate for the year ended August 31, 2017 was US$1.31
= £1.00. For the acquisitions described herein, the weighted average exchange rates varied by each acquisition based on
the date of acquisition exchange rate.
Going
Concern
The
Company had net loss attributable to common shareholders for the year ended December 31, 2018 of $2,678,222 and a working
capital deficit as of December 31, 2018 of $744,166, and has cash used in operations of $3,411,266 for the year ended December
31, 2018. In addition, as of December 31, 2018, the Company had a stockholders’ deficit and accumulated deficit of
$3,113,918 and $5,964,764, respectively. 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 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 December 31, 2018 through the date these financial statements were issued.
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.
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 and Packed Ltd (“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,
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 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 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
|
|
|
(192,645
|
)
|
Short-term note payable
|
|
|
(200,804
|
)
|
Deferred taxes
|
|
|
(1,184
|
)
|
Total identifiable net liabilities
|
|
|
142,748
|
|
Goodwill
|
|
|
2,013,254
|
|
Total consideration
|
|
$
|
2,156,002
|
|
The
revenue and net loss for Tapped, as reflected in the consolidated statement of operations, for the year ended December 31, 2018,
to reflect the current period, was $1,813,980 and $78,765, respectively, and for the four months ended December 31, 2017 and the
year ended August 31, 2017, the financial statements were unavailable.
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 December 31,
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 consolidated statement of operations, for the year ended December 31, 2018,
to reflect the current period, was $1,327,064 and $575,064, respectively, and for the four months ended December 31, 2017 and
the year ended August 31, 2017, the financial statements were unavailable.
Acquisition
of Coffee Global Limited
On
November 15, 2018, DEPT-UK entered into a share purchase agreement for the acquisition of Coffee Global Limited (a/k/a Cafe2u,
the “Coffee Global Acquisition Agreement”) with Thomas Acland, David Downie, William Vernon, Kate Elizabeth Acland,
and Martyn Ward. Pursuant to the Coffee Global Acquisition Agreement, Cafe2u’s stock was transferred to DEPT-UK on November
15, 2018, in consideration of £825,000 ($997,350), to be paid in two installments; 1) £357,000 ($458,299)
at the execution of the agreement, 2) additional consideration (in such sum as to be determined pursuant to the determination
of the Completion Accounts in accordance with the provision of the Share Purchase Agreement) to be paid 50% by shares (340,997)
in the Company and 50% in cash up to the maximum total additional consideration sum of £468,000 ($545,594).
Management has calculated provisional goodwill of $1,192,169, 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 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
|
|
$
|
458,299
|
|
Deferred loan
|
|
|
545,594
|
|
|
|
|
|
|
Total consideration
given
|
|
$
|
1,003,893
|
|
Fair value of identifiable assets acquired,
and liabilities assumed:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,867
|
|
Accounts receivable
|
|
|
39,829
|
|
Inventory
|
|
|
12,461
|
|
Prepaid expenses
|
|
|
12,615
|
|
Fixed assets, net
|
|
|
14,313
|
|
Accrued expenses
|
|
|
(269,315
|
)
|
Taxes payable
|
|
|
(46
|
)
|
Total identifiable net liabilities
|
|
|
(188,276
|
)
|
Goodwill
|
|
|
1,192,169
|
|
Total consideration
|
|
$
|
1,003,893
|
|
The
revenue and income for Cafe2u, as reflected in the consolidated statement of operations, for the years ended December 31, 2018,
to reflect the current period, was $439,494 and $35,532, respectively, and for the four months ended December 31, 2017 and the
year ended August 31, 2017, the financial statements were unavailable.
Acquisition
of The Roastery Department Ltd.
On
December 1, 2018, DEPT-UK executed a Share Purchase Agreement (“The Roastery Acquisition Agreement”) with Silverstream
Investments Ltd. for the acquisition of The Roastery Department Ltd. (“The Roastery”). The Roastery Acquisition Agreement
provided Silverstream with preference shares of DEPT-UK in the amount of £2,750,000 ($3,506,433), which at closing was satisfied
by the issuance of 2,750,000 shares. The Roastery became a subsidiary of DEPT-UK as a result of the transaction. The Roastery
is a specialty coffee roaster and has one location in the UK. Management has calculated provisional goodwill of $3,771,803,
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 and 7.
The
following table summarizes the consideration given by the Company and the provisional fair values of the assets and liabilities
assumed at the acquisition date.
Consideration given:
|
|
|
|
|
|
|
|
|
|
Shares given
|
|
$
|
3,506,433
|
|
|
|
|
|
|
Total consideration
given
|
|
$
|
3,506,433
|
|
Fair value of identifiable assets acquired,
and liabilities assumed:
|
|
|
|
Cash
|
|
$
|
30,497
|
|
Accounts receivable
|
|
|
122,100
|
|
Prepaid expenses
|
|
|
(337
|
)
|
Fixed assets, net
|
|
|
117,137
|
|
Accounts payable
|
|
|
(51,404
|
)
|
Accrued expenses
|
|
|
(580,665
|
)
|
Taxes payable
|
|
|
97,302
|
|
Total identifiable net liabilities
|
|
|
(265,370
|
)
|
Goodwill
|
|
|
3,771,803
|
|
Total consideration
|
|
$
|
3,506,433
|
|
The
revenue and loss for The Roastery, as reflected in the consolidated statement of operations, for the year ended December 31, 2018,
to reflect the current period, was $34,227 and $24,270, respectively.
Acquisition
of Dollop Coffee, LLC
On
December 1, 2018, the Company entered into a Capital Contribution Agreement (the “Dollop Acquisition Agreement”) with
Paul Leisen, Joan Lundgren, John Sweeney, Jacob Muller and Travis Schaffner to acquire 51% of the membership interest of Dollop.
Additionally, the Company issued shares of common stock of the Company with a fair market value of $50,000, or 62,500 shares,
to Dollop Brand, LLC. As of December 31, 2018, these shares were not issued and recorded as issuable. Management has calculated
provisional goodwill of $1,296,372, 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 and 7.
The
following table summarizes the consideration given by the Company and the provisional fair values of the assets and liabilities
assumed at the acquisition date.
Consideration given:
|
|
|
|
|
|
|
|
|
|
Cash given
|
|
$
|
1,000,000
|
|
Shares given
|
|
|
50,000
|
|
|
|
|
|
|
Total consideration
given
|
|
$
|
1,050,000
|
|
Fair value of identifiable
assets acquired, and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
91,841
|
|
Accounts receivable
|
|
|
51,768
|
|
Inventory
|
|
|
172,368
|
|
Loan receivable
|
|
|
6,130
|
|
Prepaid expenses
|
|
|
30,951
|
|
Fixed assets, net
|
|
|
1,156,486
|
|
Accounts payable
|
|
|
(213,974
|
)
|
Accrued expenses
|
|
|
(251,372
|
)
|
Taxes payable
|
|
|
(89,481
|
)
|
Loans payable, current portion
|
|
|
(133,810
|
)
|
Loans payable,
non-current portion
|
|
|
(1,303,988
|
)
|
Total identifiable net liabilities
|
|
|
(483,082
|
)
|
Percentage of
company acquired
|
|
|
51
|
%
|
Total identifiable net liabilities acquired
|
|
|
(246,372
|
)
|
Goodwill
|
|
|
1,296,372
|
|
Total consideration
|
|
$
|
1,050,000
|
|
The
revenue and loss for Dollop, as reflected in the consolidated statement of operations, for the year ended December 31, 2018 was
$796,453 and $138,870. The December 31, 2017 financials are not available at this time.
Other
Acquisitions
During
the year ended December 31, 2018, the Company executed six purchase agreements and asset purchase agreements with various
third parties to acquire in the aggregate five other coffee shops and one roastery (“Other Acquisitions”). The acquired businesses became
subsidiaries of the Company. The acquired assets were incorporated into the operations of DEPT-UK. These acquisitions, in the
aggregate, were for $660,404 in cash and deferred cash payments of $594,692. See Note 1 and 7.
Consideration
given:
|
|
|
|
|
|
|
|
|
|
Cash given
|
|
$
|
783
,869
|
|
Deferred consideration
|
|
|
594,692
|
|
Total consideration
given
|
|
$
|
1,255,096
|
|
Fair value of identifiable assets
acquired, and liabilities assumed:
|
|
|
|
Cash
|
|
$
|
112,252
|
|
Accounts receivable, net
|
|
|
11,823
|
|
Inventory
|
|
|
14,519
|
|
Prepaid expenses
|
|
|
5,338
|
|
Fixed assets, net
|
|
|
230,360
|
|
Deposits
|
|
|
34,854
|
|
Accounts payable
|
|
|
(23,627
|
)
|
Accrued expenses
|
|
|
(253,034
|
)
|
Taxes payable
|
|
|
(39,399
|
)
|
Loans
|
|
|
(31,651
|
)
|
Deferred taxes
|
|
|
(11,942
|
)
|
Other long-term
liabilities
|
|
|
(1,249
|
)
|
Total identifiable net assets
|
|
|
(158,124
|
)
|
Goodwill
|
|
|
1,413,220
|
|
Total consideration
|
|
$
|
1,255,096
|
|
Pro-Forma Financial Information
The following unaudited pro-forma data
summarizes the result of the operations for the year ended December 31, 2018 and 2017, as if the acquisition of Bea’s, Cafe2u,
The Roastery, Dollop and the Other Acquisitions had been completed on January 1, 2017. 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 January 1, 2017. The Company used the year ended December 31, 2017 to reflect its new fiscal
year.
|
|
For
the Year Ended December 31, 2018
|
|
|
|
Coffeesmiths
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pro-forma
|
|
|
|
|
|
|
Collective
|
|
|
Tapped
|
|
|
Bea’s
|
|
|
Cafe2u
|
|
|
Roastery
|
|
|
Dollop
|
|
|
Acquisitions
|
|
|
Adjustments
|
|
|
Totals
|
|
Revenue, net
|
|
$
|
6,014,245
|
|
|
$
|
1,810,171
|
|
|
$
|
2,004,068
|
|
|
$
|
1,703,889
|
|
|
$
|
654,780
|
|
|
$
|
10,515,437
|
|
|
$
|
1,806,903
|
|
|
$
|
-
|
|
|
$
|
24,509,493
|
|
Operating expenses
|
|
|
7,617,992
|
|
|
|
1,887,572
|
|
|
|
2,801,588
|
|
|
|
1,937,149
|
|
|
|
830,405
|
|
|
|
10,920,579
|
|
|
|
1,912,732
|
|
|
|
-
|
|
|
|
27,908,017
|
|
Loss from operations
|
|
|
(1,603,747
|
)
|
|
|
(77,401
|
)
|
|
|
(797,520
|
)
|
|
|
(233,260
|
)
|
|
|
(175,625
|
)
|
|
|
(405,142
|
)
|
|
|
(105,829
|
)
|
|
|
-
|
|
|
|
(3,398,524
|
)
|
Other income (expense)
|
|
|
(70,996
|
)
|
|
|
(1,199
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72,195
|
)
|
Loss before income taxes
|
|
|
(1,674,743
|
)
|
|
|
(78,600
|
)
|
|
|
(797,520
|
)
|
|
|
(233,260
|
)
|
|
|
(175,625
|
)
|
|
|
(405,142
|
)
|
|
|
(105,829
|
)
|
|
|
-
|
|
|
|
(3,470,719
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(1,674,743
|
)
|
|
$
|
(78,600
|
)
|
|
$
|
(797,520
|
)
|
|
$
|
(233,260
|
)
|
|
$
|
(175,625
|
)
|
|
$
|
(405,142
|
)
|
|
$
|
(105,829
|
)
|
|
$
|
-
|
|
|
$
|
(3,470,719
|
)
|
Net loss per common share - basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.02
|
)
|
Weighted average number of common shares outstanding during
the period - basic
|
|
|
208,288,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,288,685
|
|
|
|
For
the Year Ended December 31, 2017
|
|
|
|
Coffeesmiths
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pro-forma
|
|
|
|
|
|
|
Collective
|
|
|
Tapped
|
|
|
Bea’s
|
|
|
Cafe2u
|
|
|
Roastery
|
|
|
Dollop
|
|
|
Acquisitions
|
|
|
Adjustments
|
|
|
Totals
|
|
Revenue, net
|
|
$
|
4,778,866
|
|
|
$
|
2,208,971
|
|
|
$
|
2,471,550
|
|
|
$
|
3,206,101
|
|
|
$
|
529,559
|
|
|
$
|
10,515,437
|
|
|
$
|
2,182,833
|
|
|
$
|
-
|
|
|
$
|
25,893,317
|
|
Operating expenses
|
|
|
5,852,095
|
|
|
|
2,058,828
|
|
|
|
2,885,938
|
|
|
|
3,180,131
|
|
|
|
783,134
|
|
|
|
10,920,579
|
|
|
|
2,129,158
|
|
|
|
-
|
|
|
|
27,809,862
|
|
Loss from operations
|
|
|
(1,073,229
|
)
|
|
|
150,143
|
|
|
|
(414,388
|
)
|
|
|
25,970
|
|
|
|
(253,575
|
)
|
|
|
(405,142
|
)
|
|
|
53,675
|
|
|
|
-
|
|
|
|
(1,916,545
|
)
|
Other income (expense)
|
|
|
(410
|
)
|
|
|
(873
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,284
|
)
|
Loss before income taxes
|
|
|
(1,073,639
|
)
|
|
|
149,270
|
|
|
|
(414,388
|
)
|
|
|
25,970
|
|
|
|
(253,575
|
)
|
|
|
(405,142
|
)
|
|
|
53,675
|
|
|
|
-
|
|
|
|
(1,917,829
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(1,073,639
|
)
|
|
$
|
149,270
|
|
|
$
|
(414,388
|
)
|
|
$
|
25,970
|
|
|
$
|
(253,575
|
)
|
|
$
|
(405,142
|
)
|
|
$
|
53,675
|
|
|
$
|
-
|
|
|
$
|
(1,917,829
|
)
|
Net loss per common share - basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
Weighted average number of common shares outstanding during
the period - basic
|
|
|
207,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,100,000
|
|
NOTE
3 – INVENTORY
The
Company has inventory of various items used for the sale of coffee and complementary products. As of December 31, 2018, December
31, 2017 and August 31, 2017, the Company had inventory of $391,824, $96,938 and $47,477, 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:
|
|
December 31,
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Consumable products
|
|
$
|
73,758
|
|
|
$
|
39,775
|
|
|
$
|
17,894
|
|
Cold brew
|
|
|
9,687
|
|
|
|
-
|
|
|
|
-
|
|
Retail products
|
|
|
34,333
|
|
|
|
18,030
|
|
|
|
24,117
|
|
Food and drinks
|
|
|
274,046
|
|
|
|
39,133
|
|
|
|
5,466
|
|
Total inventory
|
|
$
|
391,824
|
|
|
$
|
96,938
|
|
|
$
|
47,477
|
|
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, as reflected in the table below:
|
|
December
31,
|
|
|
December
31,
|
|
|
August
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Computer
equipment
|
|
$
|
81,783
|
|
|
$
|
88,484
|
|
|
$
|
62,038
|
|
Motor
vehicles
|
|
|
63,481
|
|
|
|
-
|
|
|
|
-
|
|
Office
equipment
|
|
|
37,307
|
|
|
|
22,599
|
|
|
|
22,526
|
|
Site
furniture, fixtures and fittings
|
|
|
797,509
|
|
|
|
454,070
|
|
|
|
366,661
|
|
Leasehold
improvements
|
|
|
4,957,158
|
|
|
|
1,808,104
|
|
|
|
1,606,067
|
|
Site
equipment and machinery
|
|
|
730,172
|
|
|
|
499,831
|
|
|
|
236,972
|
|
Subtotal
|
|
|
6,667,410
|
|
|
|
2,873,088
|
|
|
|
2,294,264
|
|
Less:
Accumulated depreciation
|
|
|
(1,297,274
|
)
|
|
|
(897,016
|
)
|
|
|
(622,088
|
)
|
Fixed
assets, net
|
|
$
|
5,370,137
|
|
|
$
|
1,976,072
|
|
|
$
|
1,672,176
|
|
The
depreciation expense for the year ended December 31, 2018, the four months ended December 31, 2017, and the year ended August
31, 2017, was $539,539, $99,460, and $183,374, 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 year ended December 31, 2018, the four months ended December 31, 2017, and the year ended August
31, 2017, was $3,497, $2,357, and $7,271, respectively. The variance between the expense and the increase in accumulated
amortization is due to timing of the currency translation calculation.
The
future estimated amortization expense is as follows:
2019
|
|
$
|
7,603
|
|
2020
|
|
$
|
-
|
|
2021
|
|
$
|
-
|
|
2022
|
|
$
|
-
|
|
2023
|
|
$
|
-
|
|
Future
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
Goodwill
The
Company has goodwill related to the various acquisitions. The Company has not determined the deductibility of goodwill for tax
purposes. As of December 31, 2018, the Company has $11,227,064 of goodwill, as allocated below:
Balance, August 31, 2017
|
|
$
|
-
|
|
Acquisitions
|
|
|
2,013,254
|
|
Balance, December 31, 2017
|
|
|
2,013,254
|
|
Acquisitions
|
|
|
9,371,885
|
|
Balance, December 31, 2018
|
|
$
|
11,385,139
|
|
NOTE
6 – NOTES PAYABLE
The
Company has notes payable as of December 31, 2018, December 31, 2017, and August 31, 2017, are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
August 31, 2017
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
Arch Investments
|
|
$
|
2,194
|
|
|
$
|
-
|
|
|
$
|
2,194
|
|
|
$
|
2,194
|
|
|
$
|
-
|
|
|
$
|
2,194
|
|
|
$
|
2,194
|
|
|
$
|
-
|
|
|
$
|
2,194
|
|
Arch Investments
|
|
|
5,067
|
|
|
|
-
|
|
|
|
5,067
|
|
|
|
5,067
|
|
|
|
-
|
|
|
|
5,067
|
|
|
|
5,067
|
|
|
|
-
|
|
|
|
5,067
|
|
Arch Investments
|
|
|
5,065
|
|
|
|
-
|
|
|
|
5,065
|
|
|
|
5,065
|
|
|
|
-
|
|
|
|
5,065
|
|
|
|
5,065
|
|
|
|
-
|
|
|
|
5,065
|
|
Arch Investments
|
|
|
15,873
|
|
|
|
-
|
|
|
|
15,873
|
|
|
|
15,873
|
|
|
|
-
|
|
|
|
15,873
|
|
|
|
15,873
|
|
|
|
-
|
|
|
|
15,873
|
|
Arch Investments
|
|
|
4,349
|
|
|
|
-
|
|
|
|
4,349
|
|
|
|
4,349
|
|
|
|
-
|
|
|
|
4,349
|
|
|
|
4,349
|
|
|
|
-
|
|
|
|
4,349
|
|
HSBC
|
|
|
262,158
|
|
|
|
13,343
|
|
|
|
275,501
|
|
|
|
391,898
|
|
|
|
4,852
|
|
|
|
396,750
|
|
|
|
409,718
|
|
|
|
-
|
|
|
|
409,718
|
|
HSBC
|
|
|
65,159
|
|
|
|
3,063
|
|
|
|
68,222
|
|
|
|
92,281
|
|
|
|
9,482
|
|
|
|
101,763
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deij Capital Limited (1)
|
|
|
10,786
|
|
|
|
-
|
|
|
|
10,786
|
|
|
|
11,417
|
|
|
|
-
|
|
|
|
11,417
|
|
|
|
70,079
|
|
|
|
-
|
|
|
|
70,079
|
|
Chase SBA
|
|
|
191,667
|
|
|
|
-
|
|
|
|
191,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Chase
|
|
|
614,702
|
|
|
|
-
|
|
|
|
614,702
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Pinnacle
|
|
|
81,385
|
|
|
|
-
|
|
|
|
81,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Schaffner
|
|
|
398,210
|
|
|
|
-
|
|
|
|
398,210
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Coffee Global Loan
|
|
|
(8,724
|
)
|
|
|
-
|
|
|
|
(8,724
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
BSD LLC Loan
|
|
|
226
|
|
|
|
-
|
|
|
|
226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Citibank LOC
|
|
|
65,589
|
|
|
|
-
|
|
|
|
65,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HSBC
|
|
|
15,160
|
|
|
|
-
|
|
|
|
15,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HP Loan
|
|
|
22,644
|
|
|
|
-
|
|
|
|
22,644
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,751,510
|
|
|
$
|
16,406
|
|
|
$
|
1,767,916
|
|
|
$
|
528,144
|
|
|
$
|
14,334
|
|
|
$
|
542,478
|
|
|
$
|
512,345
|
|
|
$
|
-
|
|
|
$
|
512,345
|
|
(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 December 31, 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. On October 1, 2018, Deij Capital forgave this business loan (see Note 7).
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 December 31, 2018.
As of December 30, 2018, December 31, 2017, and August 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 December 31, 2018. As of December 31, 2018, December 31,
2017, and August 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 December 31, 2018.
As of December 31, 2018, December 31, 2017, and August 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 December 31,
2018. As of December 31, 2018, December 31, 2017, and August 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 December 31,
2018. As of December 31, 2018, December 31, 2017, and August 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 December 31, 2018, December 31, 2017, and August 31, 2017, was $264,587 (£249,067), $391,828
(£290,243), and $409,718 (£317,941), respectively. As of December 31, 2018, the current portion was $105,834
and the non-current portion was $211,975.
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 December 31, 2018, and 2017, was
$23,356 and $68,925, respectively. As of December 31, 2018, the current portion was $129,814 and the non-current portion was $41,826.
On July 28, 2017, Dollop, prior to being
acquired by the Company, entered into a business loan with Chase SBA. The loan is for ten years, with an interest rate of 6.51%.
The loan was for $217,500. The outstanding principal as of December 31, 2018 was $191,666. As of December 31, 2018, the current
portion was $29,707 and the non-current portion was $161,960.
On August 9, 2018, Dollop, prior to being
acquired by the Company, entered into a business loan with Chase. The loan is for five years, with an interest rate of 8.35%.
The loan was for $650,000. The outstanding principal as of December 31, 2018 was $614,702. As of December 31, 2018, the current
portion was $107,892 and the non-current portion was $506,810.
On October 17, 2017, Dollop, prior to being
acquired by the Company, entered into a promissory note with Travis Schaffner. The maturity date is January 20, 2026,
with an interest rate of 1.83%. The note was for $449,054. The outstanding principal as of December 31, 2018 was $398,210.
As of December 31, 2018, the current portion was $60,000 and the non-current portion was $338,210.
On February 13, 2018, Dollop, prior to
being acquired by the Company, entered into a business loan with Pinnacle Capital Partners. The loan is for five years, with an
interest rate of 6%. The loan was for $101,700. The outstanding principal as of December 31, 2018 was $81,385. As of December
31, 2018, the current portion was $26,346 and the non-current portion was $55,039.
Maturities of the long-term debt for each
of the next five years and thereafter are as follows:
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
482,417
|
|
2020
|
|
|
328,861
|
|
2021
|
|
|
281,175
|
|
2022
|
|
|
201,374
|
|
2023
|
|
|
234,077
|
|
Future
|
|
|
223,606
|
|
Total
|
|
$
|
1,751,510
|
|
NOTE
7 – RELATED PARTIES TRANSACTIONS
For the year ended August 31,
2017, the Company purchased $194,352 (£150,817) 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).
For
the year ended August 31, 2017, the Company made sales or advances of $530,780 to The Roastery Department Ltd. (“The Roastery
Department”) and made purchases from it of £217,418, for the year ended August 31, 2017. As of August 31, 2017, the
Company had receivables and payables from The Roastery Department. The period ended August 31, 2017 netted as payables
of $1,198,811 (£930,277). 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. On December 1, 2018, DEPT-UK acquired The Roastery Department (see Note
2). The outstanding balances between the Company and The Roastery Department have been eliminated through intercompany eliminations.
As
of December 31, 2018, and 2017, and August 31, 2017, the Company owed Allesch-Taylor, the Company’s chairman, payables of
$37,698 (£28,777), $39,667 (£29,383), and $41,174 (£31,951), respectively.
As
of December 31, 2018, and 2017, and August 31, 2017, the Company owed Lopez, the Company’s chief executive officer, payables
of $26,430, $14,679, and $893, respectively.
As
of December 31, 2018, and 2017, and August 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 $0 (£0), $11,413 (£8,454), and $70,079 (£56,454),
respectively. On October 1, 2018, Deij Capital forgave this business loan (see Note 6).
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. Mr. Shahid was compensated
$67,803 for the year ended August 31, 2017.
On
December 21, 2018, the Company advanced $511,738 (£401,402) funds to MDG 02 Limited (“MDG”), a company
owned by Gill, a director of the Company, in return for an option to purchase 100% of the share capital of MDG for £1.
MDG used the proceeds to acquire two coffee shops in the UK. The option expires on December 20, 2038. Gill provided the option
to the Company as an informal security for the repayment of the advanced funds. The advance is not formally documented and does
not bear or accrued interest. The Company accounts for the option as a financial instrument, with a fair value
that is not readily determinable.
The
above related party transactions are not considered as arm’s length transactions.
NOTE
8 – SHAREHOLDERS’ 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 shareholder 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).
On
December 1, 2018, the Company recorded 62,500 shares of common stock as issuable in regards to the acquisition of Dollop (see
Note 2).
As
of December 31, 2018, the Company has not granted any stock options and has not recorded any stock-based compensation.
Preference
Shares and Non-Controlling Interest
Non-controlling
interest is shown as a component of shareholders’ deficit on the consolidated balance sheets and the share of new loss attributable to non-controlling interest is shown as a component of net loss in the consolidation statements of
operations and comprehensive loss.
The
following schedule discloses the effects of changes in the Company’s ownership interest in its subsidiaries on the Company’s
equity:
|
|
|
For
the Year Ended
|
|
|
|
|
December
31, 2018
|
|
Net
loss attributable to The Coffeesmiths Collective, Inc.
|
|
$
|
2,682,300
|
|
Decrease
in additional paid in capital related to Recognition of Non-Controlling Interest Attributable to Department of Coffee and Social Affairs Ltd.
|
|
|
4,077
|
|
Change
in net loss attributable to The Coffeesmiths Collective, Inc. and transfers to Non-Controlling Interest
|
|
$
|
2,678,222
|
|
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 the holders 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 December 31, 2018, December 31, 2017 and August 31, 2017, 14,509,672,
3,575,078 and 1,642,826 shares were outstanding, respectively. Of the outstanding shares, 1,603,460,
1,708,209 and 368,209 were issued to related parties (Stefan Allesch-Taylor and Matthew Gill), as of December
31, 2018, December 31, 2017 and August 31, 2017, respectively.
DEPT-UK
has a non-controlling interest of 0.2%. For the year ended December 31, 2018, the Company had a non-controlling
interest of $4,077. For the four months ended December 31, 2017 and the year ended August 31, 2017, the Company
had a non-controlling interest of $638 and $1,230, respectively.
On
February 28, 2017, 51,500 Preference Shares were issued to Deij Capital in exchange for a debt of $36,500 (£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.
During
the four months ended December 31, 2017, 20,000 Preference Shares were issued for contributions of $26,558 (£20,000) to
DEPT-UK.
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.
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.
On
December 1, 2018, 2,750,000 Preference Shares were issued for the purchase of The Roastery valued at $3,506,433 (£2,750,000).
During
the year ended December 31, 2018, 10,934,594 Preference Shares were issued for contributions of $10,592,782 (£8,184,574)
to DEPT-UK.
Contributions
were used to fund working capital, acquisitions and capital expenditures. The Preference Shares are reflected on the consolidated
balance sheet as non-controlling interest.
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 April 16, 2019, 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:
2019
|
|
$
|
2,607,092
|
|
2020
|
|
|
2,411,427
|
|
2021
|
|
|
2,192,946
|
|
2022
|
|
|
1,828,417
|
|
2023
|
|
|
1,408,960
|
|
Future
|
|
|
3,505,437
|
|
Total
|
|
$
|
13,954,279
|
|
Note:
The above table will change in each future filing due to currency translation as applicable.
The
Company
has 29 leases in the UK, of which one
is for the administrative office, a central kitchen, two roasteries and 24 storefronts. We have 20 leases
in the United States, 19 storefronts and one roastery. Various leases have break out dates prior to expiration.
Rent
expense for the year ended December 31, 2018, the four months ended December 31, 2017, and the year ended August 31, 2017, was
$1,488,265, $252,528, and $463,655, 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 December 31, 2018. There have been no losses in these accounts through
December 31, 2018.
Concentration
of Customer
The
Company has one customer, which, for the year ended December 31, 2018, the four months ended December 31, 2017, and the year ended
August 31, 2017, had sales of $535,785 (£408,996, 5.3% of total revenue), $295,659 (£223,476,
14.3% of total revenue), and $557,416 (£426,180, 13.3% of total revenue), respectively. The Company has a contract with
the customer that expires in February 2020.
NOTE
11 – REVENUE CLASSES
Selected
financial information for the Company’s operating revenue classes are as follows:
|
|
For
the year
|
|
|
For
the four
|
|
|
For
the year
|
|
|
|
ended
|
|
|
months
ended
|
|
|
ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
August
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee and complementary
food products
|
|
$
|
9,306,337
|
|
|
$
|
1,823,938
|
|
|
$
|
3,669,307
|
|
Coffee school
|
|
|
7,592
|
|
|
|
3,704
|
|
|
|
12,425
|
|
Management
fees
|
|
|
735,917
|
|
|
|
238,468
|
|
|
|
498,751
|
|
Total
|
|
$
|
10,049,846
|
|
|
$
|
2,066,111
|
|
|
$
|
4,180,483
|
|
NOTE
12 – CAPITAL LEASE OBLIGATIONS
The
Company leases various assets under capital lease. As of December 31, 2018, December 31, 2017, and August 31, 2017, capital lease
obligations consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
August
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Computer equipment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
57,128
|
|
Office equipment
|
|
|
86,476
|
|
|
|
-
|
|
|
|
20,420
|
|
Site equipment and machinery
|
|
|
263,469
|
|
|
|
356,778
|
|
|
|
355,914
|
|
Site fit out costs
|
|
|
23,274
|
|
|
|
25,358
|
|
|
|
-
|
|
Site furniture,
fixtures and fittings
|
|
|
58,776
|
|
|
|
138,454
|
|
|
|
233,669
|
|
Total fixed assets
|
|
|
431,995
|
|
|
|
520,591
|
|
|
|
667,131
|
|
Less: Accumulated
depreciation
|
|
|
106,739
|
|
|
|
69,857
|
|
|
|
240,246
|
|
Fixed assets,
net
|
|
$
|
325,256
|
|
|
$
|
450,733
|
|
|
$
|
426,885
|
|
Aggregate
future minimum rentals under capital leases are as follows:
2019
|
|
$
|
201,294
|
|
2020
|
|
|
190,601
|
|
2021
|
|
|
62,972
|
|
2022
|
|
|
25,655
|
|
2023
|
|
|
-
|
|
Future
|
|
|
-
|
|
Total
|
|
|
480,522
|
|
Less: Interest
|
|
|
59,701
|
|
Present value of minimum lease payments
|
|
|
420,821
|
|
Less: Current
portion of capital lease obligations
|
|
|
175,005
|
|
Capital lease
obligations, net of current portion
|
|
$
|
245,816
|
|
NOTE 13 – INCOME TAXES
As of December 31, 2018, December 31,
2017, and August 31, 2017, the Company has U.S. net operating loss carry forwards of $919,868, $300,416, and $88,646. The
carry forward expires through the year 2039. The Company’s net operating loss carry forwards may be subject to annual
limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in
Section 382 of the Internal Revenue Code.
The Company’s tax expense differs
from the “expected” tax expense for Federal income tax purposes (computed by applying the United States Federal tax
rate of 21% to loss before taxes for fiscal year 2018 and the four months ended December 31, 2017), as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) at the statutory rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(30,812
|
)
|
|
$
|
(9,331
|
)
|
|
$
|
(45,553
|
)
|
Non-U.S.
|
|
|
(481,759
|
)
|
|
|
(3,555
|
)
|
|
|
(367,468
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
(11,738
|
)
|
|
|
(89,615
|
)
|
|
|
(3,606
|
)
|
Non-deductible items
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Federal
|
|
|
4,618
|
|
|
|
-
|
|
|
|
15,832
|
|
Non-U.S.
|
|
|
519,691
|
|
|
|
102,501
|
|
|
|
367,468
|
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
33,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax effects of the temporary differences
between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.
The tax years 2018 and 2017 remains to
examination by federal agencies and other jurisdictions in which it operates.
The tax effect of significant components
of the Company’s deferred tax assets and liabilities at December 31, 2018 and 2017, are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
561,409
|
|
|
$
|
177,351
|
|
|
$
|
30,140
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(561,409
|
)
|
|
|
(177,351
|
)
|
|
|
(30,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history
of the Company, the net deferred tax assets for 2018 and 2017 were fully offset by a 100% valuation allowance. The valuation allowance
for the remaining net deferred tax assets was $561,409, $177,351, and $30,140 as of December 31, 2018, December 31, 2017, and August
31, 2017, respectively.
On December 22, 2017, the United States
Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 34% to 21%. In addition
to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects
the way we can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax
assets recorded on our balance sheet. Given that the deferred tax assets are offset by a full valuation allowance, these changes
will have no net impact on the Company’s financial position and net loss.
The Company believes that the goodwill
attributable to acquisitions (see Note 2) will be tax deductible, as applicable.
NOTE
14 – SUBSEQUENT EVENTS
Subsequent to December 31, 2018, the Company
executed an asset purchase agreement and share purchase agreements with various third parties for the acquisition of 18 coffee
shops, a trademark and assets for approximately £5.7 million. The acquisitions, as applicable, became subsidiaries of DEPT-UK
as a result of the transaction.
On
February 18, 2019, Dept. Cold Brew changed its name to Baker & Spice (London) Ltd.