DTS8 COFFEE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
July 31, 2014
July 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Common shares issued for services
Changes in operating assets and liabilities:
Accounts payable and accruals
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for investment in joint venture company
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Shares issued for cash
Repayment to related parties
Loans from related parties
NET CASH PROVIDED BY FINANCING ACTIVITIES
Effect of exchange rate changes on cash and cash equivalents
NET DECREASE IN CASH
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
Cash paid for interest and income taxes:
Income taxes paid
Non-cash investing and financing activities:
Payable investment in joint venture
The accompanying notes are an integral part of these unaudited consolidated financial statements
DTS8 COFFEE COMPANY, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2014
NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS
DTS8 Coffee Company, Ltd. (the "Company") was incorporated in the State of Nevada on March 27, 2009. Effective January 22, 2013, the Company changed its name from Berkeley Coffee & Tea, Inc. to DTS8 Coffee Company, Ltd. On April 30, 2012, the Company acquired one hundred percent (100%) of the issued and outstanding capital stock of DTS8 Holdings Co., Ltd. (DTS8 Holdings), a corporation organized and existing since June 2008, under the laws of Hong Kong and which owns DTS8 Coffee (Shanghai) Co., Ltd. (DTS8 Coffee), a wholly owned foreign subsidiary entity (WOFE) corporation organized and existing in Shanghai since January 19, 2009, under the laws of the Peoples Republic of China, from the sole shareholder Sean Tan. There was a material relationship by and among the parties to the Purchase and Sale Agreement dated January 31, 2012, and closed on April 30, 2012. Sean Tan owned 100% of the issued and outstanding capital stock of DTS8 Holdings and was the Chief Executive Officer of the Company. Sean Tan was and remains the President and Chief Executive Officer of the Company and is the beneficial owner of approximately 42.58% of the Companys outstanding shares of common stock as of July 31, 2014.
The Company established a 100% owned subsidiary of DTS8 Coffee called DTS8 Coffee (Huzhou) Co. Ltd. (DTS8 Huzhou) in Huzhou, Zhejiang Province, China, which is approximately a two hour drive from Shanghai. DTS8 Huzhou is coffee roaster equipped with the standard procedures to ensure that it meets regulatory requirements for food safety and sanitation in China. The incorporation and licensing were completed in March 2013.
DTS8 Holdings, through its subsidiaries DTS8 Coffee and DTS8 Huzhou, is a gourmet coffee roasting, marketing and wholesale distribution company. The Companys office and coffee storage facility is located in Shanghai, China, and its coffee roasting facility is located in Nanxun Town, Huzhou, Zhejiang Province, China. The Company is in the business of roasting, marketing and selling gourmet roasted coffee to customers in Shanghai and other parts of China. It sells gourmet roasted coffee under the DTS8 Coffee label through distribution channels that reach consumers at restaurants, multi-location coffee shops, and offices.
NOTE 2 BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the SEC). In the opinion of management, the financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the results for the periods presented.
The accompanying interim consolidated financial statements have been prepared to present the consolidated statements of financial position, the consolidated statements of operations and comprehensive income/(loss), consolidated statements of changes in stockholders equity and consolidated cash flows of the Company for the period ended July 31, 2014, for inclusion in the Companys Form 10-Q for purposes of complying with the rules and regulations of the SEC as required by Article 8 of Regulation S-X. The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) using the Company and DTS8 Holdings specific information where available and allocations and estimates where data is not maintained on the Company and DTS8 Holdings specific basis within its books and records. Due to the allocations and estimates used to prepare the financial statements, they may not reflect the financial position, cash flows and results of operations of the Company in the future or its operations, cash flows and financial position.
The preparation of financial statements in accordance with US GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues, goodwill impairment and
expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Company's financial position and results of operations.
Certain amounts from prior periods have been reclassified to conform to the current period presentation. This reclassification has resulted in no changes to the Companys accumulated deficit or net loss presented.
NOTE 3 GOING CONCERN UNCERTAINTY
The accompanying interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of the business. The Company has incurred material losses from operations. At July 31, 2014, the Company had an accumulated deficit in addition to limited cash, limited revenue and unprofitable operations. For the three months ended July 31, 2014, the Company sustained net losses. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is contingent upon its ability to obtain additional financing and to generate revenue and cash flow to meet its obligations on a timely basis.
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Companys management, who are responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the financial statements.
Basis of Preparation
The accompanying interim consolidated financial statements have been prepared to present the consolidated statements of financial position, consolidated statements of operations and comprehensive income (loss), consolidated statements of changes in stockholders equity and consolidated cash flows of the Company for the three months ended July 31, 2014, and have been prepared in accordance with US GAAP.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, DTS8 Holdings Co., Ltd., DTS8 Coffee (Shanghai) Co., Ltd, and DTS8 Coffee (Huzhou) Co. Ltd. All significant inter-company transactions and balances have been eliminated upon consolidation.
Use of Estimates
In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues, goodwill impairment and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. As of July 31, 2014, and April 30, 2014, substantially all of the Companys cash and cash equivalents were held by major financial institutions located in the Peoples Republic of China, which management believes are of high credit quality. With respect to accounts receivable, the Company extends credit based on an evaluation of the customers financial condition. The Company
generally does not require collateral for accounts receivable and maintains an allowance for doubtful accounts of accounts receivable if necessary.
Cash and Cash Equivalents
Cash equivalents comprise certain highly liquid instruments with a maturity of three months or less when purchased. As at July 31, 2014, and April 30, 2014, cash and cash equivalents consist of cash only.
Receivables and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at net realizable value and do not bear interest. No allowance for doubtful accounts was made during the period based on managements best estimate of the amount of probable credit losses in existing accounts receivable. The Company evaluates its allowance for doubtful accounts based upon knowledge of its customers and their compliance with credit terms. The evaluation process includes a review of customers accounts on a regular basis. The review process evaluates all account balances with amounts outstanding for 60 days and other specific amounts for which information obtained indicates that the balance may be uncollectible. The Company does not have any off-balance-sheet credit exposure related to its customers. As of July 31, 2014 and April 30, 2014 there was no allowance for doubtful debts.
Inventories are stated at the lower of cost or market. The cost for inventories is determined using the first-in, first-out method. The cost includes all expenditures incurred in bringing the goods to the point of sale and putting them in a sellable condition. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand. In addition, the Company estimates net realizable value based on intended use, current market value and inventory aging analyses. The Company writes down inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and their estimated market value based upon assumptions about future demand and market conditions. Inventories principally consist of green coffee beans, roasted coffee beans and packing supplies.
Property and Equipment
Property and equipment are recorded at cost. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on straight-line basis over their estimated useful lives as set out below. Major remodels and improvements are capitalized. Maintenance and repairs that do not improve or extend the life of the respective assets are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Impairment of Long-Lived assets
The Company accounts for impairment of property and equipment and amortizable intangible assets in accordance with ASC 360, Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross,
undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the assets (or asset groups) fair value. There was no impairment of long-lived assets for the periods ended July 31, 2014 and April 30, 2014.
Impairment of Goodwill
Upon the acquisition of DTS8 Holdings on April 30, 2012, the Company recognised $4,402,737 of goodwill. Goodwill is the excess of the acquisition cost of DTS8 Holdings on April 30, 2012, over the cost of net identifiable assets over the fair value of the amounts assigned to assets acquired and liabilities assumed. Goodwill is tested annually for impairment. The test is performed more frequently if events or changes in circumstances indicate that goodwill might be impaired. Impairment is tested by comparing fair value of the goodwill to its carrying value. Any excess of carrying value over fair value is charged to earnings in the period in which impairment is determined. The Financial Accounting Standard ASU 2011-08 Intangibles Goodwill and Other Testing Goodwill for Impairment allows the Company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company would not be required to calculate the fair value unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. There are a number of events and circumstances for the Company to consider in conducting the qualitative assessment. Management must complete this review by following the steps in ASC 350-20-35-3C to evaluate the fair value of the goodwill. As part of the review of the goodwill and on the understanding that examples included in ASC 350-20-35-3C are not exhaustive lists of items that should be considered, management must consider all known events and circumstances that could trigger an impairment of goodwill.
Fair Value of Financial Instruments
ASC 820 Fair Value Measurements and Disclosures, adopted January 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables qualify as financial instruments. Management concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. The three levels are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value. It is managements opinion that as of July 31, 2014 and April 30, 2014, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
The Company derives its revenue from the sale of roasted coffee. Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectability is reasonably assured. Coffee is considered delivered when title and risk have been transferred to the customer. Retail sales are recorded when payment is tendered at the point of sale. Wholesale sales are recorded upon delivery of coffee to the customers. In the Peoples Republic of China, a value added tax (VAT) of 17% on invoiced amount is collected on behalf of tax authorities. Revenues represent the invoiced value of goods sold, net of VAT.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. For the period ended July 31, 2014 and 2013, the Company did not incur any advertising costs.
The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740 Income Taxes. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.
The Company has adopted ASC 220, Reporting Comprehensive Income, which requires inclusion of foreign currency translation adjustments, reported separately in its statement of stockholders' equity, in other comprehensive income. During the periods presented, other comprehensive income includes cumulative translation adjustment from foreign currency translation.
Foreign Currency Translation
The Companys functional and reporting currency is United States Dollars (USD). The functional currency of the Companys subsidiaries DTS8 Coffee and DTS8 Huzhou in the Peoples Republic of China is Chinese currency Renminbi (RMB). Since Renminbi is not freely convertible into foreign currencies, all foreign exchange transactions involving Renminbi must take place either through the Peoples Bank of China (the PBOC) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.
The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.
For financial reporting purposes, the financial statements of the Companys subsidiaries DTS8 Coffee and DTS8 Huzhou in the Peoples Republic of China are maintained in Renminbi and translated into USD. Balance sheet accounts with the exception of equity are translated using the closing exchange rate in effect at the balance sheet date, income and expense accounts are translated using the average exchange rate prevailing during the reporting period and the equity accounts were stated at their historical exchange rate.
Adjustments resulting from the Renminbi translation to USD, included in accumulated other comprehensive income (loss) in shareholders equity were losses of $4,302 and $4,618, as of July 31, 2014, and April 30, 2014, respectively.
The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):
July 31, 2014
April 30, 2014
July 31, 2013
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Earnings per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company did not have dilutive securities for the periods ended July 31, 2014 and 2013.
Stock Issued for Services
The Company accounts for stock-based compensation to employees in accordance with ASC 718 which requires companies to measure the cost of services received in exchange for an award of an equity instrument based upon the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period. Stock-based compensation awards to non-employees are accounted for in accordance with ASC 505-50.
Investment in Joint Venture Company
The Company uses the cost method to record investment in the common stock of the joint venture company, Don Manuel (Shanghai) Investment Management Co Ltd., in accordance with ASC 325-20. The Companys 19% equity interest in the joint venture company does not provide it the ability to exercise significant influence. The majority controlling shareholder controls all the decision making related to financial and operational affairs of the joint venture company. Accordingly, Don Manuel (Shanghai) Investment Management Co Ltd. is not subject to significant influence by the Company.
Recently Issued Accounting Pronouncements
Management believes that none of the recently adopted accounting pronouncements will have a material effect on the Companys financial position, results of operations, or cash flows.
NOTE 5 INVENTORY
Inventories consist of the following:
July 31, 2014
April 30, 2014
Raw materials - Green beans
Finished products - Roasted coffee
NOTE 6 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment and accumulated depreciation:
July 31, 2014
April 30, 2014
Less accumulated depreciation
Property, plant and equipment, net
Depreciation expenses were $4,423 and $4,995 for the three months ended July 31, 2014 and 2013, respectively.
NOTE 7 GOODWILL
On April 30, 2012, the Companys acquisition of DTS8 Holdings resulted in recording of goodwill of $4,402,737. As detailed in ASC 350 Intangibles-Goodwill, the Company tests for goodwill impairment at end of its fiscal year and whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds its fair value and may not be recoverable.
On April 30, 2014, in accordance with ASC 350-20-35-3A, the Company performed a test for goodwill impairment. Management completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of the goodwill. As part of managements review of the goodwill and on the understanding that examples included in ASC 350-20-35-3C are not exhaustive lists of items that should be considered, management considered all known events, and circumstances that could trigger an impairment of goodwill. Management concluded that events rose indicating impairment of the goodwill during the year ended April 30, 2014. The general economic conditions in Shanghai, China, are considered positive. However, the events indicating impairment included the Companys inability to raise large public or private equity financing in the United States. The Companys ability to access capital to fund its business operations remained weak and challenging during the year ended April 30, 2014. The differing cultures, consumer preferences, corruption, anti-Chinese sentiments, diverse uncertain government regulations, tax systems and currency regulations are business risks impacting the Companys current operations. In addition, there are no assurance that the Company will be able to obtain additional new license, permits or other approvals on a cost-effective basis or in a timely manner to prevent disruption to its business and operations in Huzhou and Shanghai, China. In addition, the Company has limited revenue and accumulated losses. It requires working capital to fund its business, and be successful in generating increased revenue. Accordingly based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount of the goodwill.
Management carried out the second step of the impairment testing procedure. It included determining the recoverable amount, book value, fair value of the reporting unit. The fair value of the reporting unit was established (non-affiliate shares multiplied by volume weighted average price of the shares at April 30, 2014) and the implied fair value of the goodwill was then computed. The recorded goodwill value exceeded the implied value of the goodwill. Accordingly, management recognized $1,391,979 goodwill impairment charge to the goodwill of $4,402,737. Therefore, $1,391,979 goodwill impairment adjustment for the year ended April 30, 2014 was expensed. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from managements estimates. As a result, additional impairment charges may occur in the future.
Changes in the carrying amount of the goodwill for the periods ended July 31, 2014 and April 30, 2014, are as follows:
April 30, 2013
Goodwill, net of impairment
Impairment charge for the year ended April 30, 2014
April 30 2014
Goodwill, net of impairment
Impairment charge for the period ended July 31, 2014
July 31, 2014
Goodwill, net of impairment
NOTE 8 RELATED PARTY TRANSACTIONS
Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Upon the acquisition of DTS8 Holdings on April 30, 2012, the Company assumed a loan from Sean Tan to DTS8 Holdings. As of April 31, 2014, and April 30, 2013, $120,000 and $120,000, respectively, was recorded as loan from related parties. Sean Tan is the Companys Chief Executive Officer and director. No interest payment was due. The loan from related parties bears no interest and has no fixed term of repayment. Sean Tan has agreed not to demand payment within the next fiscal year.
On March 31, 2011, the Company entered into a management agreement with Sean Tan, the Companys officer and director, to serve as the President and Chief Executive Officer of the Company. Mr. Tans engagement commenced on March 1, 2011, and shall continue on a year-to-year basis until terminated by either party upon 60 days prior written notice to the other party. The monthly management fee payment of $6,000 to Mr. Tan is paid in arrears on the last day of each month.
The spouse of the Companys Chief Executive Officer and director loaned the Company $13,842 as of July 31, 2014 and $13,143 as of April 30, 2014, recorded as as loan from related parties. The loan from related parties bears no interest and has no fixed term of repayment.
On April 30, 2012, upon its acquisition of DTS8 Holdings, the Company assumed a loan payable of $382,396 owed by DTS8 Coffee (Shanghai) Co. Ltd to a consultant who provides accounting and financial reporting services to the Company through his company from time to time on a monthly basis. The amounts owed as loan payable as of July 31, 2014, and April 30, 2014, were $378,818 and $379,403, respectively. The loan is unsecured, non-interest bearing, has no fixed term of repayment, and is repayable on demand, and the consultant has agreed not to demand payment within the next fiscal year. In addition, for the periods ended July 31, 2014 and April 30, 2014, the Company owed the consultant $129,100 and $118,900, respectively, for consulting services provided to the Company. Neither the consultant nor his company is a shareholder of the Company.
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office and coffee distribution and storage facility located at Building B, #439, Jinyuan Ba Lu, Jiangqiao Town, Jiading District, Shanghai 201812, China. A new lease commenced on October 1, 2013, and expires on September 30, 2017. The leased area is approximately 92 square meters (990 square feet).
The Company also leases a warehouse for its coffee roasting and manufacturing at 801 Jiahe Road, 2nd Floor, Nanxun Town, Huzhou City, 313009, Zhejiang, China. The leased area is approximately 1,041 square meters (11,205 square feet). The lease commenced on August 16, 2013, and expires on August 17, 2015.
Total lease payments for the periods ended July 31, 2014 and 2013 were $8,351 and $4,756, respectively. Future lease payments required subsequent to July 31, 2014, are as follows:
April 30, 2015
April 30, 2016
April 30, 2017
April 30, 2018
NOTE 10 COMMON STOCK
At July 31, 2014, the Companys authorized capital was 75,000,000 common shares with a par value of $0.001 and 32,208,333 common shares were issued and outstanding.
In July 2014, the Company issued 1,000,000 restricted shares of common stock to a consultant at a fair market price of $0.16 per share as payment for consulting services. Total value of the services, valued at the fair market price, was $160,000. For the period ended July 31, 2014, $160,000 was expensed as consulting fees.
In July 2014, the Company issued 500,000 restricted shares of common stock at a price of $0.15 per share for cash proceeds of $75,000.
NOTE 11 CONTRACTS AND AGREEMENTS
On March 31, 2011, the Company entered into a management agreement with Sean Tan, the Companys officer and director to serve as the President and Chief Executive Officer of the Company. Mr. Tans engagement commenced on March 1, 2011, and shall continue on a year-to-year basis until terminated by either party upon 60 days prior written notice to the other party. The monthly management fee payment of $6,000 to Mr. Tan is paid in arrears on the last day of each month.
In January 2014, the Company entered into an agreement with the Companys attorney to provide legal services to the Company until December 31, 2014. The Company issued 300,000 shares of common stock for payment of the legal fees in lieu of cash for aggregate consideration of $96,000, the estimated fair market value of these shares. It was determined that $0.32 was the fair market value per share and $96,000 was expensed as legal fees to April 30, 2014.
In January 2014, the Company entered into an agreement with a coffee agronomist to provide coffee quality related services to the Company until December 31, 2014. The Company issued 600,000 shares of common stock for payment of the consulting fees in lieu of cash for aggregate consideration of $192,000, the estimated fair market value of these shares. It was determined that $0.32 was the fair market value per share and $192,000 was expensed as consulting fees to April 30, 2014.
In July 2014, the Company amended an agreement with a consultant to provide sales-related services to the Company until April 2015. The Company issued 1,000,000 shares of common stock for payment of the consulting fees in lieu of cash for an aggregate consideration of $160,000, the estimated fair market value of these shares. It was determined that $0.16 was the fair market value per share and $160,000 was expensed as consulting fees in period ended July 31, 2014.
NOTE 12 INVESTMENT IN JOINT VENTURE COMPANY
Effective June 10, 2014, the Company owned a 19% equity interest in a joint venture company, Don Manuel (Shanghai) Investment Management Co. Ltd., established in the Shanghai Tax Free Zone, to own, manage and operate Café De La Don Manuel branded coffee cafes throughout China. The agreement governing the creation and operation of the company is dated May 27, 2014, and is valid until May 27, 2025. The registered capital of the Don Manuel (Shanghai) Investment Management Co Ltd is RMB 5 million (approximately $830,000). The Companys share of the cash investment is $162,800 for the 19% equity interest. The Company paid $5,000 and the balance of $157,800 is recorded as a payable. The $157,800 is to be paid after the opening of the first café, which is scheduled to occur in October 2014. The flagship café is located in the Bund area of Shanghai.
NOTE 13 CONCENTRATION RISK
The Company conducts business in China. Consequently, any political, economic and social unrest and/or instability in China may adversely affect the Companys business operations. In particular, instability in the supply of raw green beans to China could result in a decrease in the availability of coffee beans needed for the continued operation and growth of the Companys business. It could also lead to an increase in the purchasing costs and increased operating costs. This may adversely affect the Companys business.
As of July 31, 2014, approximately 88% of the Companys revenue was derived from one customer. The Company anticipates in the future that the reliance on one customer will decline, as it obtains new customers and increases its revenue.
NOTE 14 SUBSEQUENT EVENTS
The Company has evaluated the subsequent events from the balance sheet date through the date the financial statements were issued, and determined that no significant events have occurred.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
All references in this Report to the Company, we, us or our are to DTS8 Coffee Company, Ltd. and its 100% owned subsidiary DTS8 Holdings Co. Ltd. (DTS8 Holdings), which owns 100% of DTS8 Coffee (Shanghai) Co., Ltd. (DTS8 Coffee) which owns 100% of DTS8 Coffee (Huzhou) Co., Ltd. (DTS8 Huzhou).
This Report contains forward-looking statements that involve risk and uncertainties. We use forward-looking statements that you can identify by words or terminology such as "may", "should", "could", "predict", "potential", "continue", "expect", "anticipate", "future", "intend", "plan", "believe", "estimate" and similar expressions (or the negative of these expressions). Except for historical information, this Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) and statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. All statements other than statements of historical facts included in this report, including, without limitation, statements under Managements Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, business strategy and other plans and objectives for future operations, and future product demand, supply, costs, marketing, transportation and pricing factors, are forward-looking statements. Actual results, levels of activity, performance, achievements and events may vary materially from those implied by the forward-looking statements. These statements are based on our current beliefs, expectations and assumptions. Any such statements should be considered in light of various risks and uncertainties that could cause results to differ materially from expectations, estimates or forecasts expressed. The various risks and uncertainties include, but are not limited to: changes in general economic conditions, changes in business conditions in the coffee industry, fluctuations in consumer demand for coffee products, the availability and costs of green beans, increased competition within the green bean and roasted coffee businesses, our lack of successful operating history, our history of continued losses, our inability to successfully implement our business plan, fluctuations in the price of green coffee, concentration of single product and sales, lack of significant experience in the coffee industry of our employees, inability to hire, train and retain qualified personnel, inability to acquire customers, natural disasters, adverse weather conditions, diseases, political and social instability in countries where we source green coffee beans, weak consumer demand for our roasted coffee, and the fact that we own only one roasting plant and interruption to our only roasting plant may cause significant disruption to our roasting operation. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this Report. Readers should carefully review this Report in its entirety, including but not limited to our financial statements and the notes thereto. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended July 31, 2014, our revenue from fresh roasted coffee grew by 23%, which is consistent with the 22% growth in revenue we experienced for the year ended April 30, 2014. Our strategy to market DTS8 brand as fresh roasted premium gourmet coffee to customers in China is based on the trends of coffee consumption habits in Western countries. In China, the country of origin of coffee beans is receiving increased attention from coffee drinkers. The rising coffee culture as well as the popularity of coffee shops in the first and second tier cities is boosting fresh roasted coffee sales. This trend bodes well for us as a roaster of fresh gourmet coffee from several coffee producing countries. Our marketing efforts combined with the growth of gourmet coffee shop chains in Shanghai, China, are expected to increase the sales of our fresh roasted coffee. We have an exclusive license from Coffee Holdings Company, Inc. to roast, market and sell Don Manuel brand 100% Colombian Coffee in the Peoples Republic of China. The Don Manuel brand is widely distributed and sold in the United States. Don Manuel brand 100% Colombian Coffee beans are grown at higher elevations and are artisan roasted to give a rich smooth-bodied coffee with sweet-toned syrupy notes and chocolate. The coffee has a balanced acidity and a
smooth, clean finish. The combination of the Don Manuel and DTS8 Coffee brands allows for additional growth opportunities of our business into select channels of distribution in China and other geographic territories.
Review of Operations
Sales for the three months ended July 31, 2014 and 2013 were $88,063 compared to $71,355. The increase of approximately 23% is attributable to an increase in sales volume to existing and new wholesale customers. Cost of sales were $57,595 and $45,875, respectively, and our gross profits for the three months ended July 31, 2014 and 2013, were $30,468 (35% of sales) and $25,480 (36% of sales). The gross margin changes are due to the reduced cost of sales resulting from reduced raw coffee prices during the period and a decrease in occupancy costs. Our general and administrative expenses were $257,124 and $85,125 during the three months ended July 31, 2014, and 2013. Our expenses for the three months ended July 31, 2014 increased due to higher office and administration costs and shares issued at a fair market value of $160,000 for consulting services during the period. Our marketing expenses were $7,133 and $4,397 during the three months ended July 31, 2014 and 2013. Our losses for the three months ended July 31, 2014 and 2013 were $233,789 and $64,042, respectively, and our currency translation adjustments resulted in gain of $316 and loss of $1,646, respectively. Consequently, our accumulated loss to July 31, 2014 was $4,306,576.
Liquidity and Capital Resources
Provided below is selected financial data about us for the periods ended July 31, 2014 and April 30, 2014. Our financial statements and notes thereto are included in this Report under Financial Statements.
July 31, 2014
April 30, 2014
As of July 31, 2014, we had $28,199 in cash, receivables of $68,530, inventory of $29,411 and prepaid expenses of $2,672, while our accounts payable and accruals were $459,780 and loan from related parties were $512,660. Our paid in capital was $6,676,492 and stockholders equity was $2,397,822. Since our inception on March 27, 2009, we have incurred an accumulated deficit of $4,306,576 and other comprehensive loss from currency translations of $4,302.
As of April 30, 2014, we had $33,339 in cash, receivables of $69,526, inventory of $36,647 and prepaid expenses of $8,459, while our accounts payable and accruals were $322,306 and loan from related parties were $512,546. Goodwill net of impairment was $3,010,758 and net value of our machinery, plant and equipment was $72,418. Our paid in capital was $6,442,992 and stockholders equity was $2,396,295. Our accumulated deficit was $4,072,787 and our other comprehensive loss from currency translations was $4,618 as of April 30, 2014.
During the period ended July 31, 2014, we financed our operations by selling shares of common stock. Our ability to continue with our business is subject to our ability to continue generating additional revenue and obtaining equity financing to funds for our working capital. To fund our ongoing operations, we may be forced to find alternate sources of financing, which at this time cannot be assured.
As of the date of this Report, we have not incurred any coffee related research and development expenses and do not plan to incur any research or development expenses in the future.
Our consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred material recurring losses from operations. As of July 31, 2014, we had an accumulated deficit, limited cash and unprofitable operations. These factors, among others, indicate that we may be unable to continue as a going concern for a
reasonable period of time. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern. Our continuation as a going concern is contingent upon our ability to obtain additional financing and to generate revenue and cash flow to meet our obligations on a timely basis. Any failure to generate revenue and profits will raise substantial doubt about our ability to continue as a going concern. We plan to retain any cash we earn in order to develop our business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies & Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operations and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 4 to the financial statements included in this Report.
We derive our revenue from sale of roasted coffee. Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectability is reasonably assured. Coffee is considered delivered when title and risk have been transferred to the customer. Retail sales are recorded when payment is tendered at point of sale. Wholesale sales are recorded upon delivery of coffee to the customers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line or accelerated methods over the estimated useful lives of the assets. The useful lives of property, plant and equipment for purposes of computing depreciation are five to ten years for equipment. We evaluate the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. We determine impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
Trade accounts receivable are recorded at the net realizable value and do not bear interest. No allowance for doubtful accounts was made during period based on managements best estimate of the amount of probable credit losses in existing accounts receivable. We evaluate our allowance for doubtful accounts based upon knowledge of our customers and their compliance with credit terms. The evaluation process includes a review of customers accounts on a regular basis. The review process evaluates all account balances with amounts outstanding for 60 days and other specific amounts for which information obtained indicates that the balance may be uncollectible. As at July 31, 2014 and April 30, 2014, there was no allowance for doubtful accounts. We do not have any off-balance-sheet credit exposure related to our customers.
Upon the acquisition of DTS8 Holdings on April 30, 2012, we recognised $4,402,737 of goodwill. Goodwill is the excess of the acquisition cost of DTS8 Holdings on April 30, 2012, over the cost of net identifiable assets over the fair value of the amounts assigned to assets acquired and liabilities assumed. Goodwill is tested annually for impairment. The test is performed more frequently if events or changes in circumstances indicate that goodwill might be impaired. Impairment is tested by comparing fair value of the goodwill to its carrying value. Any excess of carrying value over fair value is charged to earnings in the period in which impairment is determined. The Financial Accounting Standard ASU 2011-08 Intangibles Goodwill and Other Testing Goodwill for Impairment allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We would not be required to calculate the fair value unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. There are a number of events and circumstances for us to consider in conducting the qualitative assessment. Management completed this review by following the steps in ASC 350-20-35-3C to evaluate the fair value of the goodwill. As part of the review of the goodwill and on the understanding that examples included in ASC 350-20-35-3C are not exhaustive lists of items that should be considered, management considered all known events and circumstances that could trigger an impairment of goodwill.
Seasonality and Other Factors That May Affect Our Future Results
Historically, coffee consumption is affected by weather seasons in China. We have experienced increased sales during the winter season, and a decline in sales, compared to winter sales, during the summer season in China. Our quarterly revenues are affected by seasonality but we may conceal the impact of the seasonal influences due to the growth in our revenue. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. The availability and price of high quality Arabica coffee beans could impact our profitability and growth of our business. Our principal raw material is green coffee beans. We source our green coffee beans from coffee farmers and brokers. Although most coffee beans are traded in the commodity market, the high-grade Arabica coffee beans we buy tend to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. If we are unable to source sufficient quantities of green coffee beans to meet our demands for growth and expansion, then our business could be negatively impacted.
The prices we pay for coffee beans are subject to movements in the commodity market for coffee. The price can fluctuate depending on such things as weather patterns in coffee-producing countries, economic and political conditions affecting coffee-producing countries, foreign currency fluctuations, coffee-producing countries export quotas, commodity market investor activity and general economic conditions. In addition, coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide. If the price for coffee beans increases and we are not able to adjust our pricing and cost structure accordingly, our margins and profitability will decrease. Our ability to raise sales prices in response to rising coffee bean prices may be limited and depends largely on what our competitors do in response to price pressures, and our profitability could be adversely affected if coffee bean prices were to rise substantially. Moreover, passing price increases on to our customers could result in losses in sales volume or margins in the future. Similarly, rapid sharp decreases in the cost of coffee beans could also force us to lower sales prices before we have realized cost reductions in our coffee bean inventory.
Our operations in China may be adversely affected by factors outside of our control. As a result, our business and operations are subject to a number of additional risks, including international economic and political conditions and the possibility of instability, differing cultures and consumer preferences, corruption, anti-American sentiment, diverse government regulations and tax systems, currency regulations and fluctuations and uncertain. Although we believe we have obtained all the requisite approvals to do business in China, there is no assurance that we would be able to obtain additional new license, permits or other approvals on a cost-effective basis or in a timely manner to prevent disruption to our business and operations.
We have only one coffee roasting facility. A significant interruption in the operation of our roasting and warehousing facility could potentially disrupt our operations. Our roasting and warehousing facility is located in Huzhou, Zejiang Province, China. A significant interruption as a result of a natural disaster, technical or labor
difficulties, fire or other causes could cause a shortage of coffee for our customers and significantly impair our ability to operate our business.
Our gourmet coffee contains caffeine. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. An unfavorable report on the health effects of caffeine in China could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profitability.
Factors That May Affect Owning DTS8 Coffee Company, Ltd. Common Stock
As of July 31, 2014, Sean Tan, our President and Chief Executive Officer, was the beneficial owner of approximately 42.58% of our outstanding shares of common stock; this allows him to control matters requiring approval of our shareholders. Such concentrated control may adversely affect the price of our common stock because it may be more difficult for us to attract investors. Investors will know that matters requiring stockholders consent will likely be decided by Mr. Tan, who can control matters requiring approval by our stockholders, including the election of directors. Moreover, if Mr. Tan elects to sell a substantial number of his shares, investors will likely lose confidence in our ability to earn revenue and will see such a sale as a sign that our business is failing. Each of these factors, independently or collectively, will likely harm the market price of our stock.
Purchasers of our common stock should have long-term investment intent and should recognize that it may be difficult to sell the shares, notwithstanding the fact that they are not restricted securities. We cannot predict the extent to which a trading market will develop or how liquid a market might become.
Section 3(a)(51)(A)) of the Exchange Act defines a penny stock as an equity security that is not registered on a national stock exchange or authorized for quotation on NASDAQ, and that sells for under $5.00 per share. Our common stock is considered a penny stock according to this definition. A purchase of a penny stock is an extremely high risk stock purchase that could result in the entire loss of an individuals investment. Since our stock will be considered a penny stock, a broker-dealer is required to provide a risk disclosure statement detailing the inherent risks in investing in a penny stock to a customer prior to recommending the sale of its stock. This could severely limit the ability to create a market for shares of our stock and make it difficult for an investor to liquidate his or her shares.
QUANTITAIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTROL AND PROCEDURES
Evaluation of Controls and Procedures
We evaluated the effectiveness of our disclosure controls and procedures, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, as of the end of the period covered by this Report, being July 31, 2014. This evaluation was conducted with the participation of our principal executive officer and our principal accounting officer.
Disclosure controls are those controls and other procedures designed to ensure information we are required to disclose in the reports we file pursuant to the Exchange Act is correctly recorded, processed, summarized and reported. We maintain a system of internal accounting controls that is designed to provide reasonable assurance assets are safeguarded and transactions are executed and properly recorded in accordance with managements authorization. This system is continually reviewed and augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness.
Our management does not expect our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance the objectives of a control system are met. Further, any control system
reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Control over Financial Reporting
Based upon their evaluation of our controls over financial reporting, as required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, our principal executive officer and principal accounting officer have concluded that our disclosure controls are, and will be, effective in providing reasonable assurance that material information relating to us is accumulated and communicated to management, including our principal executive and principal financial officer(s), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal controls that occurred during the quarter covered by this Report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
PART II - OTHER INFORMATION
As of the date of this Report, there is no litigation pending or threatened by or against us. However, from time to time we may be subject to legal proceedings and claims in the ordinary course of business. Such claims, even if not meritorious, would result in the expenditure by us of significant financial and managerial resources.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In July 2014, we issued 500,000 restricted shares of common stock to one investor at a price of $0.15 per share for cash proceeds of $75,000. The investor was an accredited investor, as that term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the Securities Act), and the shares are exempt from registration as contained in Section 4(2) of the Securities Act based upon the fact that the shares were issued in a private transaction without the use of general solicitation or advertising to the investor who we believe is capable of evaluating the merits and risks of an investment in our common stock.
In July 2014, we issued 1,000,000 restricted shares of common stock to a consultant at a fair market price of $0.16 per share as payment for consulting services. Total value of the services, valued at the fair market price, was $160,000. For the period ended July 31, 2014, $160,000 was expensed as consulting fees. The shares were issued with a restrictive legend and in reliance on an exemption from registration under Section 4(2) of the Securities Act.
We do not have any stock repurchase plan.
DEFAULT UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
As of the date of this Report, our management is unaware of any additional information to be reported on Form 8-K during the quarter ended July 31, 2014.
No material changes were made to the procedures by which security holders may recommend nominees our board of directors.
Articles of Incorporation
Code of Conduct
Section 302 Certification
Section 906 Certification
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation
* XBRL Information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DTS8 COFFEE COMPANY, LTD.
/s/ Sean Tan
President, Chief Executive Officer
Chief Financial Officer, Treasurer
Secretary and Director
(Principal Executive Officer, Principal Financial Officer
and Principal Accounting Officer)
Date: September , 2014