Reborn Coffee, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The consolidated interim financial statements are unaudited. Reborn operates specialty coffee retail stores and wholesale/online sales, primarily in California, with stores in South Korea and Malaysia.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $1.518 million | $1.122 million | +35.2% |
| Operating loss | $864,000 | $952,000 | Improved by $89,000 |
| Net loss | $991,000 | $964,000 | Widened by $26,000 |
| Loss per share, basic and diluted | $0.60 | $0.63 | Improved per share |
| Net cash used in operations | $1.934 million | $1.663 million | Cash outflow increased |
| Capital expenditures | $987,000 | $471,000 | Increased |
Store revenue was $1.472 million, up 32.7%; wholesale and online revenue was $46,000, up 249.7% from a small base. Management attributed revenue growth mainly to new locations and marketing. Gross profit was approximately $1.157 million, implying a gross margin of about 76%, versus approximately $759,000 and 68% in the prior-year quarter. General and administrative expense was approximately $2.0 million, up 17.3%, reflecting added personnel, professional services, new-store and public-company costs. Interest expense rose to $135,000 from $12,000.
Liquidity, debt and balance sheet
- Cash was $70,000 at March 31, down from $164,000 at year-end. Current assets were $1.693 million and current liabilities $3.927 million, a $2.234 million working-capital deficit.
- Total assets were $10.881 million; total liabilities were $8.309 million. Stockholders’ equity was $2.571 million, up from $846,000 at year-end, largely reflecting $2.7 million of common-stock proceeds during the quarter.
- Borrowings included $1.065 million owed to financial institutions, $709,000 to other lenders, $200,000 to a shareholder, $500,000 of EIDL loans, and $85,000 of PPP loans. Operating lease liabilities totaled $4.512 million.
- Financing activities provided $2.827 million, primarily from the stock issuance; operating and investing activities used $1.934 million and $987,000, respectively.
The company reports recurring losses and negative operating cash flow and states that these conditions raise substantial doubt about its ability to continue as a going concern. Management expects to seek additional equity and/or debt financing but gives no assurance it will be available on acceptable terms. The filing says additional debt financing is anticipated, with no current agreement or understanding about its form, timing or amount.
Material changes, outlook and risks
- In January 2024, the company effected a 1-for-8 reverse stock split. It issued 983,498 shares for $2.7 million during Q1. Common shares outstanding were 3,366,525 as of July 17, 2024.
- After quarter-end, the company issued an $800,000 convertible note and a warrant for 175,000 shares to EF Hutton YA Fund. The stated purchase price was $720,000, less a $36,000 advisory fee paid on the company’s behalf.
- The San Francisco store closed in late May 2024. The company also dismissed BF Borgers as auditor after the SEC’s May 3 order and engaged BCRG Group on May 14.
- Management reported no material impairment indicators for long-lived assets and no legal proceedings expected to have a material adverse effect as of March 31. It provided no specific financial guidance or quantified outlook.
- Disclosure controls and procedures were deemed ineffective as of March 31. Management cited inadequate accounting resources and lack of segregation of duties as material weaknesses; it said additional procedures were performed and the quarter’s financial statements were fairly stated in all material respects.
- Forward-looking risks include funding and liquidity needs, the ability to achieve profitability and manage growth, competition, macroeconomic conditions, and internal-control limitations. The company did not provide the risk-factor disclosure in this 10-Q because it is a smaller reporting company.
Investor facts to verify
- Confirm the company’s near-term cash needs, financing availability and terms, and whether the going-concern uncertainty has changed.
- Review the May convertible note’s conversion terms and the potential dilution from its warrant and other equity arrangements.
- Reconcile operating-cost figures: the financial statements report $306,293 for store product costs and $75,077 for wholesale/online cost of sales, while the MD&A comparison table gives different amounts ($361,043 and $20,327). The filing text does not explain this discrepancy.
- Assess the effect of the San Francisco closure, store-level performance, and expansion spending on future cash flow.
- Monitor remediation of the disclosed material weaknesses and the transition to the new auditor.