Reborn Coffee, Inc. — Q1 2023 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Reborn operates specialty coffee retail locations and wholesale/online sales, primarily in California; it reported 12 retail locations and no franchisees. Retail stores generated about 99% of revenue.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1.122 million | $753,150 | +49.0% |
| Gross profit | Approximately $753,000 | Approximately $461,000 | +63.4% |
| Gross margin | Approximately 67.1% | Approximately 61.2% | +5.9 percentage points |
| General and administrative expense | $1.705 million | $1.036 million | +64.5% |
| Operating loss | $951,961 | $575,332 | Loss increased |
| Net loss / loss per share | $964,164 / $0.08 | $565,112 / $0.05 | Loss increased |
| Cash used in operations | $1.663 million | $485,757 | Cash use increased |
| Capital expenditures | $470,851 | $149,896 | Cash use increased |
Revenue growth was attributed primarily to new locations and marketing. Store revenue rose 50.7% to $1.109 million, while wholesale and online revenue declined 22.6% to $13,270. Management attributed higher G&A to additional administrative staff, professional services, growth-related corporate costs, restaurant openings, and public-company expenses. Gross margin improved as sales grew, but the operating loss widened.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $873,101 at March 31, 2023, down from $3.019 million at December 31, 2022. Prepaid expenses and other current assets increased by about $880,000 during the quarter and contributed to operating cash outflow.
- Current assets were $2.358 million and current liabilities were $1.284 million. Total assets were $8.165 million; total liabilities were $4.843 million; stockholders’ equity was $3.322 million.
- Loans outstanding, excluding lease liabilities, totaled approximately $683,497: $50,898 in Square Capital financing, $500,000 in SBA EIDL loans, and $132,599 in PPP loans. Operating lease liabilities totaled $3.743 million.
- Net cash used in financing activities was $11,776, primarily loan repayments. The company reported recurring losses and negative operating cash flow, and said it expects to need additional capital; it reported no current financing agreements or assurance that financing will be available.
Outlook, risks and notable items
- Subsequent event: In April 2023, the company acquired a Brea warehouse and roasting facility for $3.8 million. It financed $2.85 million with a two-year loan at 11.25% interest and paid approximately $950,000 at closing.
- Going-concern and funding risk: Management cited operating losses, cash burn, anticipated need for additional debt financing, and uncertainty that financing can be obtained or the company can continue as a going concern. It also noted competition and that loan renewals carry risks.
- Controls: Management concluded disclosure controls and procedures were ineffective as of March 31, 2023. Identified material weaknesses include inadequate accounting resources, insufficient segregation of duties, and the need for a stronger internal-control environment.
- Other risks: The filing discusses exposure to inflation, rising interest rates, market volatility, competition, and the lingering effects of COVID-19. No material legal proceedings were reported. The company reported no impairment indicators for long-lived assets.
- No formal financial guidance is provided in the filing. Management said it plans to fund operations and growth and may need additional capital.
Important facts for investors to verify
- Cash runway and access to financing, including the cash impact of the April facility purchase and its high-interest loan.
- Whether new and planned locations can generate sales and margins sufficient to offset higher corporate and operating costs.
- Progress in remediating the disclosed material weaknesses and improving accounting staffing and segregation of duties.
- The cover page reports 13,163,126 shares outstanding, while the equity statement reports 13,162,723 at March 31, 2023; verify the share count discrepancy.
- Debt repayment terms, lease commitments, and the status of any remaining PPP loan forgiveness.