BRC Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. BRC Inc. sells coffee, ready-to-drink beverages, merchandise and related products through wholesale, direct-to-consumer (DTC) and Outpost channels. Unless noted otherwise, figures below are in millions of dollars. The filing is unaudited.
Financial performance and liquidity
- Revenue: $83.5, up 27% from $65.8. Wholesale rose 82% to $40.0, DTC fell 4% to $36.8, and Outpost increased 21% to $6.7.
- Profitability: Gross profit was $27.5, up 19%; gross margin declined to 33.0% from 35.3%. Operating loss widened to $17.2 from $15.8. Net loss was $17.3; net loss attributable to BRC Inc. was $4.8, or $0.08 per Class A share.
- Cash flow: Operating cash outflow was $15.4, versus $32.6 in Q1 2022, principally reflecting increased accounts payable, partly offset by inventory growth. Capital spending drove investing cash outflow of $4.9. Financing provided $7.3, and cash decreased $13.0 to $26.0.
- Balance sheet: Working capital was $71.4. Inventory increased to $102.9 from $77.2 at year-end 2022. Total debt, net of issuance costs, was $56.2, versus $49.2; cash was $26.0. The company reported $12.3 of availability under its senior credit facility and said it was in compliance with its covenants.
- Other metrics: Operating expenses rose 15% to $44.7. Salaries, wages and benefits increased 24% to $19.8, including $0.7 of severance; general and administrative expense increased 19% to $17.8; marketing expense decreased 12% to $7.1.
Material changes and drivers
- Wholesale drove overall growth, primarily from entering the food, drug and mass retail market and higher ready-to-drink sales. RTD distribution expanded from 47,000 to 63,000 locations year over year.
- DTC revenue declined as the company reduced marketing investment and redirected spending amid elevated customer acquisition costs. Outpost growth reflected an increase to 16 company-operated locations from nine a year earlier.
- Gross margin contracted 230 basis points. Management cited higher coffee and RTD input costs, transportation and carrying costs associated with added co-manufacturing capacity, and a sales mix shift toward lower-margin RTD products.
- Q1 2022 net loss included $240.7 of non-operating fair-value losses on earn-out, warrant and derivative liabilities that were settled before year-end 2022. Those items did not recur in Q1 2023; the comparison therefore does not represent a comparable underlying operating trend. The 2022 per-share and weighted-average share data cover only the post-business-combination period.
Outlook, risks and contingencies
- Outlook: No quantified revenue or earnings guidance is provided. Management expects continued investment in wholesale expansion and Outposts, and says operating losses, negative operating cash flows, G&A expense and capital expenditures may continue or increase. It believes available liquidity will fund obligations for at least the next 12 months, while noting it may seek additional debt or equity financing.
- Liquidity and debt risks: The senior facility has a $15.0 minimum-liquidity covenant; the fixed-charge coverage covenant begins in March 2024. The facility is secured by substantially all assets and bears a variable rate. Management estimates a hypothetical 5% rate increase would add about $1.5 of annual interest expense.
- Supply and cost commitments: Coffee and beverage purchase commitments include minimum amounts and surcharges extending through 2025. Management identifies coffee commodity prices, inflation, shipping, labor and supply-chain availability as risks. Supplier concentration is significant: one wholesale customer represented 24% of Q1 revenue, and three customers represented 57% of receivables at quarter-end.
- Legal and tax matters: A warrant-related lawsuit seeks unspecified damages; the company says it cannot estimate a possible loss. A former consultant disputes royalties and expense reimbursements; the company says it has expensed applicable royalties and agreed reimbursements through quarter-end. The company accrued $0.326 for potential sales and other tax exposure.
- Other: Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing says risk factors were not materially changed from the 2022 Form 10-K.
Facts investors should verify
- Whether wholesale growth and RTD expansion can offset DTC declines without further gross-margin deterioration.
- Inventory levels, cash usage and accounts-payable movements, including the increase in inventory during the quarter.
- Debt balances and borrowing availability: the debt note reports $37.7 outstanding under the senior credit facility, while the market-risk discussion reports $27.3; reconcile this difference with the filing and subsequent disclosures.
- Compliance with the $15.0 minimum-liquidity covenant and the company’s capacity to fund expansion and purchase commitments.
- Developments in the Tang Capital and former-consultant lawsuits, and any changes in customer or supplier concentration.