Reborn Coffee, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited. The company operates specialty coffee retail stores and wholesale/online channels, primarily in California; it reported nine retail locations and four more in development. Store sales generated about 98% of first-half revenue.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $788,476 | $491,192 | $1,541,626 | $880,121 |
| Operating loss | $(928,392) | $(307,302) | $(1,503,724) | $(629,390) |
| Net loss | $(937,148) | $(307,684) | $(1,502,260) | $(635,163) |
| Basic and diluted loss per share | $(0.08) | $(0.03) | $(0.13) | $(0.06) |
| Cash used in operating activities | Not separately stated | Not separately stated | $(1,199,979) | $(538,352) |
- Revenue rose 60.5% in Q2 and 75.2% in the first half. Management attributed the growth mainly to stores opened during 2021 and marketing efforts. Wholesale and online revenue declined 18.5% in Q2.
- Direct product and sales costs were $284,436 in Q2 and $576,903 for the first half. Based on reported revenue and those costs, gross margin was approximately 63.9% in Q2 and 62.6% in the first half. Store product costs rose to 35.4% of revenue in Q2 and 36.6% in the first half, versus 27.6% and 30.7%, respectively, a year earlier.
- General and administrative expense increased 118.3% in Q2 to $1,432,432 and 101.2% in the first half to $2,468,447. It exceeded revenue in both periods.
- At June 30, cash was $149,824; current assets were $474,211 and current liabilities were $1,627,601, implying a working-capital deficit of about $1.15 million. Stockholders’ equity was a deficit of $78,965, compared with positive equity of $1,198,295 at year-end 2021.
- Six-month investing cash outflow was $168,397, primarily for property and equipment. Financing provided $613,149, including $594,529 drawn on a new line of credit and $150,000 of shareholder loans, partly offset by debt repayments.
- Debt included the $594,529 line of credit, $150,000 shareholder loan, $500,000 EIDL, $167,138 PPP loan and $6,312 equipment loan. The $2 million line of credit carried 5% interest and matured December 31, 2022. Operating lease liabilities totaled $3,082,771, separate from borrowings.
Material changes and outlook
- Losses and operating cash use increased substantially from the prior-year periods, despite higher sales. Management cited added administrative staffing, professional and public-company preparation costs, new-store costs, and inflation and seasonal ingredient-cost pressures.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing a $9,979,164 accumulated deficit, first-half net loss of $1,502,260, and operating cash use of $1,199,979. Management intended to raise capital and grow revenue; it acknowledged that additional financing was not assured.
- After quarter-end, in August 2022, the company completed an IPO of 1,440,000 shares at $5 per share, producing $7.2 million gross and approximately $6.2 million net proceeds. No over-allotment or underwriter warrants had been exercised as disclosed.
- Management described plans to open up to 20 company-owned stores within a year and pursue up to 20 franchise locations. It said the franchise target was speculative and that no franchise agreements had been signed. No formal financial guidance was provided.
- The stated planned IPO-proceeds uses include approximately $8 million for an electric-boat manufacturing plant, $2 million for production and inventory, and $2.6 million for working capital. The electric-boat plan appears inconsistent with the coffee business described in this filing and the stated uses exceed the IPO’s approximately $6.2 million net proceeds; investors should verify these disclosures and any related financing.
- Management said it had raised whole-bean prices by 15% in January 2022 and had so far offset higher costs through pricing, sales growth, purchasing efficiencies and productivity. It warned that severe inflation could materially harm results. COVID-19 effects remained uncertain, although management did not expect a significant future operating impact.
- Disclosure controls and internal control over financial reporting were reported ineffective as of June 30, 2022, attributed by management to an insufficient accounting and finance team.
- The filing reported no material pending or threatened legal proceedings. The company completed a 1-for-100 reverse stock split in June and migrated its incorporation from Florida to Delaware in July 2022.
Key facts investors should verify
- How much IPO cash remained available after the offering and subsequent spending, and whether the financing addressed the disclosed going-concern uncertainty.
- The apparent mismatch between the coffee business and the electric-boat use of proceeds, including the funding source for planned uses that exceed net IPO proceeds.
- The December 31, 2022 line-of-credit maturity, outstanding balance, repayment terms and availability of any refinancing.
- Whether store-level margins, overhead and cash burn improve as new locations open, and whether the expansion targets are funded and achievable.
- Progress in remediating ineffective disclosure and financial-reporting controls, and the effect of higher ingredient, labor and lease costs.