2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting

The unaudited condensed consolidated financial statements include Reborn Coffee, Inc. and its subsidiaries as of June 30, 2026 and December 31, 2025 and for the three and six months ended June 30, 2026 and 2025.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include Reborn Coffee, Inc. and its subsidiary. All intercompany accounts, transactions, and profits have been eliminated upon consolidation.

Minority Interest

The Company consolidates Reborn Logistics, which is majority-owned subsidiary (51% own) and presents the portion of equity and earnings attributable to the non-controlling interest separately in the unaudited condensed consolidated financial statements. As of June 30, 2026, non-controlling interest was $368,975. For the six months ended June 30, 2026, net income attributable to non-controlling interest was $234,826.

Segment Reporting

FASB ASC Topic 280, Segment Reporting, requires public companies to report financial and descriptive information about their reportable operating segments. Operating segments are identified based on the manner in which the Company’s chief operating decision maker (“CODM”) evaluates financial information, business activities, and performance results.

Management has identified two reportable operating segments: (i) Reborn Coffee, which includes both wholesale and retail sales of coffee, water, and other beverages, and (ii) Reborn Logistics, which provides freight forwarding services.

The Company’s CODM is its Chief Executive Officer. CODM evaluates segment performance primarily based on revenues, income from operations, and other income (expense). Assets by segment are not reviewed by the CODM in assessing segment performance and, accordingly, are not disclosed.

The following table presents a summary of operating performance by reportable segment for the periods indicated:

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include accounts receivables, accrued liabilities, income taxes, long-lived assets, and deferred tax valuation allowances. These estimates generally involve complex issues and require management to make judgments, involve analysis of historical and future trends that can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from estimates.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company’s net revenue primarily consists of revenues from its retail stores and wholesale and online store. Accordingly, the Company recognizes revenue as follows:

Retail Store Revenue

Retail store revenues are recognized at the point of sale when payment is tendered. Retail store revenues are reported net of sales, use, or other transaction taxes collected from customers and remitted to taxing authorities. Sales taxes payable are recorded as accrued liabilities within other current liabilities.

Wholesale and Online Revenue

Wholesale and online revenues are recognized when products are delivered and title passes to the customer or to wholesale distributors. When customers pick up products at the Company’s warehouse or when products are delivered to wholesale distributors, title transfers and revenue is recognized at that time.

Service Income – Reborn Logistics – Related Party

Service income is primarily derived from Reborn Logistics’ freight forwarding and logistics services. The Company recognizes service revenue when shipment transactions are delivered. Each shipment transaction or service order generally represents a separate contract with a customer. A performance obligation is established once a customer agreement with an agreed-upon transaction price exists. The transaction price is typically fixed and is not contingent upon the occurrence or non-occurrence of future events, and payment is generally due within 45 to 60 days from the invoice date. Service income represents related-party revenue from logistics services provided to TJ American, which owns a 49% interest in Reborn Logistics. For six months ended June 30, 2026, substantially all logistics revenue of $7.9 million was generated by TJ America.

The Company’s transportation arrangements involve organizing the movement of freight to a customer’s destination. Transportation services, including certain ancillary services such as loading and unloading, freight insurance, and customs clearance, represent a single performance obligation, as these services are not distinct in the context of the contract. This performance obligation is satisfied and revenue is recognized as control of the services transfers to the customer upon delivery, as the customer’s goods move from origin to destination.

The Company evaluates whether it controls the specified transportation service before that service is transferred to the customer to determine whether it is acting as a principal or an agent. The Company has determined that it acts as the principal in its transportation service arrangements because it is primarily responsible for fulfilling the customer contract and ensuring that the specified transportation service is completed in accordance with the agreed-upon terms. The Company enters into agreements directly with customers, establishes the price charged to customers, and has discretion in selecting and contracting with third-party carriers and negotiating the amounts paid to those carriers. The Company also assumes the risks associated with delivery and collection. These factors indicate that the Company obtains control of the specified transportation service before it is transferred to the customer. Accordingly, service income is presented on a gross basis in the consolidated statements of operations, with amounts paid to third-party carriers recognized as cost of service income.

The Company has entered into license agreements that allow licensees to operate and market Reborn Coffee branded stores and products under the Reborn Coffee trademarks. Under these agreements, the Company provides ongoing services, including training, marketing support, system updates, and other operational assistance. As the Company is required to provide these ongoing services, license revenue is recognized over the term of the license agreement. License agreements typically have initial terms of three years and may be renewed for additional periods. License income represents related-party revenue from certain board members.

Accounts receivable related to license revenue totaled $1,205,000. Since the related accounts receivable had not been collected for more than one year, the Company ceased recognizing license revenue beginning in the second quarter of 2026 and recorded an allowance for doubtful accounts for the total outstanding balance of $682,500. Of the gross receivable, $255,000 arose from a transaction with a member of the Company’s board of directors and, accordingly, represents a related-party transaction.

Product, Food and Drink Costs – Stores, Wholesales and Online

Product, food and drink costs – stores, wholesale and online primarily include the costs of ingredients of food and beverage sold and related supplies used in customer service.  The wholesale and online sales also include costs of packaging and shipping.

Cost of service income – Subcontractors

Cost of service income – subcontractors mainly represent the cost of independence contractors and third-party carriers in the performance of its freight forward and transportation services.

Shipping and Handling Costs

The Company incurred freight out costs, which are primarily included in the Company’s cost of sales – wholesale and online.  Freight in costs, when attached to a specific purchase, are included as a component of the cost of the purchased goods and materials items and allocated to accounts in accordance with the nature of the goods.  When the freight in costs are not allocable to an individual purchase or are more significant, they are recorded to a freight and shipping account within cost of sales.

General and Administrative Expense

General and administrative expenses include store-related expenses as well as the Company’s corporate headquarters’ expenses.

Accounts Receivable, Net

Accounts receivables are stated net of allowance for doubtful accounts. The allowance for doubtful accounts is determined primarily on the basis of past collection experience and general economic conditions. The Company determines terms and conditions for its customers based on volume transacted by the customer, customer creditworthiness and past transaction history. As of June 30, 2026 and December 31, 2025, the allowance for doubtful accounts was $511,719 and $75,689, respectively. The allowance as of June 30, 2026 primarily related to a receivable arising from license income. The Company does not have any off-balance sheet exposure related to its customers.

Inventories

Inventories consisted primarily of coffee beans, drink products, and supplies which are recorded at cost or at net realizable value.

Property and Equipment

Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided using both the straight-line and declining balance methods over the following estimated useful lives:

When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed, and any resulting gains or losses are included in the consolidated statements of operations. Leasehold improvements are amortized using the straight-line method over the estimated life of the asset, not to exceed the length of the lease. Repair and maintenance costs are expensed as incurred.

Operating Leases

The Company accounts for its leases under ASC Topic 842, Leases. The Company determines if an arrangement is or contains a lease at inception. The Company’s operating leases with a term greater than one year are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current and operating lease liabilities, net of current in the unaudited condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date, based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate which represents an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date. Operating lease expense is recognized on a straight-line basis over the expected lease term.

Earnings Per Share

FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations.

Basic earnings (loss) per share are computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) 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. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

The Company had potentially dilutive securities, including convertible debentures and warrants, outstanding during the six months ended June 30, 2026 and 2025. Because the Company incurred a net loss for the periods presented, the effect of these securities would have been anti-dilutive and, accordingly, they were excluded from the computation of diluted net loss per share. As a result, basic and diluted net losses per share were the same for the periods presented.

Long-lived Assets

In accordance with FASB ASC Topic 360, Property, Plant, and Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount. As of June 30, 2026 and December 31, 2025, the Company was not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of input, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. There were no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. There have been no transfers between levels.

As of June 30, 2026 and December 31, 2025, the Company believes that the carrying value of accounts receivable, accounts payable, accrued expenses, and other current assets and liabilities approximate fair value due to the short maturity of these financial instruments. The Company had a derivative liability with a fair value of approximately $1.1 million that was measured on a recurring basis and classified within Level 3 of the fair value hierarchy. See Note 11 for additional information. The financial statements include financial instruments at fair value on a recurring or non-recurring basis.  

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial statement and income tax purposes.

The Company follows FASB ASC Topic 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. ASC 740-10-25 provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

We estimate our annual effective income tax rate to be -7.08% for calendar 2026, which is different from the U.S. federal statutory rate, primarily due to its full valuation position and dual rate approach. The Company recorded $160,016 of tax expense as of June 30, 2026. As of June 30, 2026, we have no material unrecognized tax benefits, and we expect no material unrecognized tax benefits for next 12 months.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable arising from its normal business activities. The Company performs ongoing credit evaluations to its customers and establishes allowances when appropriate.

Company purchases from various vendors for its operations. For the three and six months ended June 30, 2026 and 2025, no purchases from any vendors accounted for a significant amount of the Company’s bean coffee purchases.

For the six months ended June 30, 2026, revenue from one customer was approximately $7.9 million, representing a significant concentration of the Company’s revenue.

Related Parties

The Company follows ASC Topic 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. Related parties are any entities or individuals that, through employment, ownership, or other means, possess the ability to direct or cause the direction of management and policies of the Company.

As of June 30, 2026 and December 31, 2025, the Company has $3,759,156 and $2,000,000 of related party loan receivable which is non-interest bearing and payable upon demand.

The following table presents the Company’s related parties and the nature of their relationships:

Recent Accounting Pronouncement

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.