Reborn Coffee, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Reborn operates coffee shops and wholesale/online sales, primarily in California; retail stores generated about 99% of revenue. The company reported 14 retail locations and had no franchisees.
Financial performance
- Revenue: Q2 revenue was $1.519 million, up 92.6% year over year; six-month revenue was $2.641 million, up 71.3%. Growth was attributed primarily to new store openings and marketing.
- Profitability: Q2 net loss was $1.294 million, versus $937,148 a year earlier; six-month net loss was $2.258 million, versus $1.502 million. Q2 loss per share was $0.10; six-month loss per share was $0.17.
- Costs and margins: Store product, food and drink costs were 34.1% of Q2 revenue versus 35.4% in 2022, and 33.4% for the six-month period versus 36.6%. Calculated gross margin after store and wholesale/online costs was approximately 65.2% for Q2 and 66.0% for the first half. General and administrative expense rose 52.8% in Q2 and 57.7% for the first half, including costs to support growth, new locations, professional services and public-company requirements.
- Cash flow: First-half operating cash outflow was $2.283 million, compared with $1.200 million in 2022. Investing outflow was $4.418 million, primarily reflecting property and equipment purchases, including the Brea warehouse and roasting facility. Financing provided $4.019 million. Cash declined to $337,492 from $3.019 million at year-end 2022.
- Liquidity: Current assets were $1.749 million and current liabilities $2.763 million at June 30; the company’s current ratio was approximately 0.63. Prepaid expense and other current assets were $1.284 million.
- Debt and leases: Borrowings totaled approximately $4.715 million, excluding lease liabilities, including a $2.850 million mortgage, $974,027 outstanding across credit facilities, $269,762 of Square Capital loans, $500,000 of EIDL loans and $120,824 of PPP loans. Operating lease liabilities totaled $4.381 million. The mortgage is a two-year, prime-plus-3% loan with interest-only payments and a balloon payment at maturity; the DRE facility is variable-rate, with an 8% floor.
- Balance sheet: Total assets were $12.058 million, total liabilities $9.779 million, and stockholders’ equity $2.279 million. Property and equipment, net, increased to $5.864 million from $1.582 million at year-end.
Changes, outlook and risks
- Sales increased substantially year over year, but losses widened as operating expenses, interest expense and investment in expansion rose. First-half interest expense increased to $106,435 from $14,976.
- The company said additional capital is needed to fund operations and anticipated further debt financing, but disclosed no current financing agreement or assurance that financing could be obtained. Management warned there is no assurance the company can continue as a going concern.
- No specific revenue, earnings or store-opening guidance was provided. Management cited cost control and revenue growth as important to future cash needs.
- Disclosure controls and procedures were deemed ineffective at June 30, 2023. Management identified material weaknesses related to limited accounting resources, inadequate segregation of duties and the internal-control environment; it said additional procedures supported the reported statements.
- The filing reported no material legal proceedings and no material recognizable subsequent events through the filing date. The company cited general risks including competition, macroeconomic conditions, inflation, interest rates, liquidity, growth execution and COVID-19-related effects.
Important facts for investors to verify
- Cash runway, expected operating cash needs and the availability, terms and timing of additional financing.
- Repayment and refinancing requirements for the December 2023 credit-line maturity and the mortgage balloon payment, as well as variable-rate borrowing costs and guarantees.
- Store-level economics and whether revenue growth can outpace general and administrative expense and other expansion costs.
- Management’s remediation plans and progress on the disclosed material weaknesses in internal controls.
- Credit-facility balances: the balance sheet reports $974,027 in line of credit, while the notes describe approximately $499,000 under one facility and $475,000 under the DRE facility; confirm the composition and terms of each borrowing.