DTS8 COFFEE COMPANY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
July 31, 2015
July 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Common shares issued for services
Loss on disposal of fixed assets
Changes in operating assets and liabilities:
Due to related parties
Accounts payable and accruals
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of fixed assets
Cash paid for investment in joint venture company
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Shares issued for cash
Repayment to related parties
NET CASH PROVIDED BY (USED IN) 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, 2015
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.
In March 2013, 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 a coffee roaster equipped with the standard procedures to ensure that it meets regulatory requirements for food safety and sanitation in China.
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 and other labels 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 loss, consolidated statements of changes in stockholders equity and consolidated cash flows of the Company for the period ended July 31, 2015, 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 specific information where available and allocations and estimates where data is not maintained on the Company 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.
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, 2015, the Company had an accumulated deficit in addition to limited cash, limited revenue and unprofitable operations. For the three months ended July 31, 2015, 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 loss, consolidated statements of changes in stockholders deficit and consolidated cash flows of the Company for the three months ended July 31, 2015, 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, 2015, and April 30, 2015, 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, 2015, and April 30, 2015, cash and cash equivalents consisted 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, 2015, and April 30, 2015 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, 2015 and April 30, 2015.
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, 2015 and April 30, 2015, 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 periods ended July 31, 2015 and 2015, 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 RMB is not freely convertible into foreign currencies, all foreign exchange transactions involving RMB 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 RMB 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 translation of RMB to USD, included in accumulated other comprehensive loss in shareholders deficit, were losses of $5,671 and $5,731, as of July 31, 2015, and April 30, 2015, respectively.
The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):
July 31, 2015
April 30, 2015
July 31, 2014
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, 2015, and 2014.
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.
Recently Issued Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a material impact on the Companys consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
NOTE 5 INVENTORY
Inventories consist of the following:
July 31, 2015
April 30, 2015
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, 2015
April 30, 2015
Less accumulated depreciation
Depreciation expenses were $3,943 and $4,423 for the three months ended July 31, 2015 and 2014, respectively.
NOTE 7 CONVERTIBLE NOTE
On March 10, 2015, the Company issued a convertible note in the amount of $54,000. The note is due together with any interest on December 10, 2015 (the Maturity Date). The Company has to pay interest on the unpaid principal balance of the note at the rate of 8% per annum from March 10, 2015 until the Maturity Date. Any amount of principal or interest on the note which is not paid on the Maturity Date shall bear an interest at the rate of 22% per annum from the due date until the note is paid in full. The holder of the note shall have the right from time to time, and at any time during the period beginning on the date which is 180 days following the date of the note and ending on the later of: (i) the Maturity Date and (ii) the date of payment of the note, each in respect of the remaining outstanding principal amount of the note to convert all or any part of the outstanding and unpaid principal amount of the note into fully paid and non-assessable shares of common stock of the Company. The conversion price shall equal, subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company, 61% multiplied by the market price of the average of the lowest three trading prices for the common stock during the 10 trading days prior to the conversion date.
In accordance with ASC 815-15, the Company analyzed the conversion option of the note for derivative accounting consideration. The Company determined that the conversion option of the note should be classified as a liability once the conversion option becomes effective after 180 days because there is no limit to the number of shares of common stock to be issued upon conversion of the note. As of July 31, 2015, the balance payable on the convertible note was $55,740 representing the principal amount of $54,000 plus accrued interest of $1,740.
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 July 31, 2015 and April 30, 2015, $120,000 and $120,000, respectively, was recorded as loan from related parties. Sean Tan was the Companys Chief Executive Officer and prior director to August 10, 2015. No interest payment was due. The loan from related parties bears no interest and has no fixed term of repayment. The Company entered into a debt settlement agreement dated August 28, 2015 with Sean Tan to convert $120,000 of debt owed by the Company, at the fair market price of $0.07 per share, being the closing stock price at August 28, 2015, for a total of 1,714,286 shares of the Companys common stock.
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. For the periods ended July 31, 2015 and April 30, 2015, the Company owed Mr. Tan $128,000 and $110,000, respectively, for the management fees. The Company entered into a debt settlement agreement dated August 28, 2015 with Sean Tan to convert the debt of $128,000 owed by the Company, at the fair market price of $0.07 per share, being the closing stock price at August 28, 2015, for a total of 1,828,571 shares of the Companys common stock. This contract was terminated effective August 10, 2015.
On April 30, 2012, upon its acquisition of DTS8 Holdings, the Company assumed a loan payable of $382,396 owed by DTS8 Coffee 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, 2015 and April 30, 2015, were $278,945 and $382,152, respectively. During the period ended July 31, 2015, the Company paid $103,014 towards the outstanding loan payable. The balance of the amount 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, as of July 31, 2015 and April 30, 2015 and 2014, the Company owed the consultant $192,300 and $160,800, respectively, for consulting services provided to 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. 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. This lease was extended for additional six month term, and now expires on February 17, 2016.
Total lease payments for the periods ended July 31, 2015 and 2014 were $7,309 and $8,351, respectively.
NOTE 10 COMMON STOCK
At July 31, 2015, the Companys authorized capital was 75,000,000 shares of common stock with a par value of $0.001 and 37,291,666 shares were issued and outstanding.
In July 2015, the Company issued 2,500,000 restricted shares of common stock at a price of $0.02 per share for cash proceeds of $50,000.
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. This contract was terminated effective August 10, 2015 upon resignation of Mr. Tan as a director and officer of the Company.
In April 2015, the Company entered into an agreement with a consultant to provide investor related services to the Company until April 2016. The Company issued 800,000 shares of common stock for payment of the fees in lieu of cash for aggregate consideration of $68,000, the estimated fair market value of these shares. It was determined that $0.085 was the fair market value per share. For the year ended April 30, 2015, $68,000 was expensed as consulting fees.
NOTE 12 CONCENTRATION RISK
The Company conducts business in Shanghai, 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 into 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, 2015, 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 13 SUBSEQUENT EVENTS
On August 10, 2015, Company entered into a management agreement with Douglas Thomas to serve as the President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company. Mr. Thomass engagement commenced on the August 10, 2015, and shall continue on a year-to-year basis until terminated by either party upon sixty days prior written notice to the other party. The Company shall make monthly management fee payment of six thousand dollars ($6,000) to Thomas, in arrears, on the 25th day of each month and four million (4 million) common shares of the Company as engagement bonus remuneration.
The Company entered into a debt settlement agreement dated August 28, 2015 with Sean Tan, the former director and chief executive officer, to convert the debts owed by the Company totalling $248,000, at the fair market price of $0.07 per share, being the closing stock price at August 28, 2015, for a total of 3,542,857 shares of the Companys common stock.
In August 2015, the Company issued 1,000,000 restricted shares of common stock to a director for services rendered to the Company. In addition, the Company hired a new General Manager and a new Legal Representative for its 100% owned subsidiary in Shanghai, China and issued 50,000 shares of common stock each as employment signing bonus.
On September 1, 2015, the Company entered into an agreement with the Companys attorney to provide legal services to the Company till June 30, 2016. The Company planned to issue 1,000,000 shares of common stock at the fair market price on the issuance date for payment of the legal fees in lieu of cash. Through the date of filing, the shares were not issued.
On September 1, 2015, the Company entered into an agreement with a consultant who also provides accounting and financial reporting services to the Company to provide coffee procurement and roasting related service to the Company till April 30, 2016. The Company planned to issue 1,000,000 shares of common stock at the fair market price on the issuance date for payment of the consulting fees in lieu of cash. Through the date of filing, the shares have not been issued.
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 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, 2015, our sales from fresh roasted coffee grew by 12.5%, which is consistent with growth in revenue we experienced for the year ended April 30, 2015. Chinese consumers are now choosing coffee more by its origin country and flavor, rather than by brand, which is similar to the current trend of coffee consumption habits in Western countries. In China, the expanding coffee culture and the popularity of coffee shops in bigger cities is increasing the awareness and sale of fresh roasted coffee. Supplying gourmet, artisan roasted, coffees, fresh from our roaster located in Huzhou, positions us well in Shanghai to participate in the development and evolution of this new coffee drinking culture in all of China. Fresh, artisan roasted coffee is only available at a limited number of premium food service establishments. The opening of new coffee cafes and fast food restaurants has increased coffee sales in China due to the adoption of modern lifestyles and affluence within the country. The evolution in the taste and buying habits of Chinese consumers is creating opportunities for the continued development of a robust coffee market which bodes well for the Companys future revenue growth.
Review of Operations
Sales for the three months ended July 31, 2015 and 2014 were $99,051 compared to $88,063. The increase of approximately 12.5% is attributable to an increase in sales volume to existing and new wholesale customers. Cost of sales were $68,360 and $57,595, respectively, and our gross profits for the three months ended July 31, 2015 and 2014, were $30,691 (31% of sales) and $30,468 (35% of sales), respectively. The gross margin changes are due to the increased cost of sales resulting from increased raw coffee prices during the period while the occupancy costs remained at same level. Our general and administrative expenses were $100,692 and $257,124 during the three months ended July 31, 2015, and 2014. Our expenses for the three months ended July 31, 2014 were higher 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 $7,724 and $7,133during the three months ended July 31, 2015 and 2014. Our losses for the three months ended July 31, 2015 and 2014 were $78,829 and $233,789, respectively, and our currency translation adjustments resulted in a gain of $60 and 316, respectively. Consequently, our accumulated loss to July 31, 2015 was $7,946,307.
Liquidity and Capital Resources
Provided below is selected financial data about us for the periods ended July 31, 2015 and April 30, 2015. Our financial statements and notes thereto are included in this Report under Financial Statements.
July 31, 2015
April 30, 2015
As of July 31, 2015, we had $10,496 in cash, receivables of $73,000, inventory of $40,183 and prepaid expenses of $2,651, while our accounts payable and accruals were $213,660 and due to related parties amount was $719,245. And the net value of our machinery, plant and equipment was $50,797. Our paid in capital was $7,104,909, and stockholders equity was ($809,778). Since our inception on March 27, 2009, we have incurred an accumulated deficit of $7,946,307, and other comprehensive loss from currency translations of $5,671.
As of April 30, 2015, we had $85,665 in cash, receivables of $78,551, inventory of $58,150 and prepaid expenses of $9,004, while our accounts payable and accruals were $240,334, loans from related parties were $772,952 and we had a convertible note payable of $54,000. The net value of our machinery, plant and equipment was $54,907. Our paid in capital was $7,057,409 and shareholders equity deficit was $781,009. We incurred accumulated losses of $7,867,478 and our other comprehensive loss from currency translations was $5,731 as of April 30, 2015.
During the period ended July 31, 2015, 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 for 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, 2015, 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 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 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, 2015 and April 30, 2015, there was no allowance for doubtful accounts. We do not have any off-balance-sheet credit exposure related to our customers.
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, 2015. 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 June 2015, we issued 2,500,000 restricted shares of common stock to an investor at a price of $0.02 per share for cash proceeds of $50,000. The investor is 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 investors who we believe are capable of evaluating the merits and risks of an investment in our common stock. The $50,000 cash proceeds was used for general working capital.
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, 2015.
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/ Douglas Thomas
President, Chief Executive Officer,
Chief Financial Officer, Treasurer, Secretary and Director
(Principal Executive Officer, Principal Financial Officer
and Principal Accounting Officer)
Date: September 14 , 2015