BRC Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 10, 2022. BRC sells coffee, RTD beverages, apparel and related products through direct-to-consumer (DTC), wholesale and Outpost retail channels. The February 2022 Business Combination changed the company’s capital structure; nine-month 2022 per-share results cover only the post-combination period.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $75.5 million | $60.1 million | $207.7 million | $161.3 million |
| Gross profit | $23.9 million | $24.1 million | $69.7 million | $65.0 million |
| Gross margin | 31.7% | 40.0% | 33.6% | 40.3% |
| Operating expenses | $39.6 million | $27.2 million | $118.0 million | $72.5 million |
| Operating loss | $15.6 million | $3.1 million | $48.3 million | $7.5 million |
| Net loss | $16.1 million | $4.1 million | $318.0 million | $9.2 million |
Q3 net loss attributable to BRC Inc. was $4.0 million; the remaining $12.1 million was attributed to non-controlling interests. Nine-month net loss included $209.7 million of earn-out, $56.7 million of warrant and $2.3 million of derivative fair-value losses, which were largely noncash and associated with the Business Combination and subsequent vesting/redemption events. Post-combination basic and diluted loss per Class A share was $1.54 for the period from February 9 through September 30.
Revenue by channel: Q3 DTC revenue was $38.1 million (up 2%), wholesale $32.2 million (up 66%) and Outposts $5.2 million (up 65%). For the first nine months, DTC was $113.4 million (down 2%), wholesale $78.2 million (up 102%) and Outposts $16.1 million (up 131%).
Cash, debt and liquidity
- Cash and cash equivalents were $71.2 million at September 30, 2022, versus $18.3 million at December 31, 2021. Working capital was $82.7 million.
- Nine-month operating cash outflow was $79.0 million, investing cash outflow $20.0 million, and financing cash inflow $151.8 million. Operating cash use rose from $10.7 million in the prior-year period, driven chiefly by higher receivables and inventory and lower accounts payable.
- Net capital expenditures were not reported separately; purchases of property, plant and equipment were $20.0 million. The company reported $40.9 million of inventory, up from $20.9 million at year-end.
- Total debt, net of issuance costs, was $33.6 million, including $16.2 million current maturities. The company reported $21.0 million of available borrowing under its credit facilities at September 30.
- Operating lease liabilities totaled $74.3 million. A further $64.3 million of signed operating leases had not yet commenced, primarily for real estate, with 10- to 20-year terms.
Material changes, outlook and risks
- Revenue growth was led by wholesale expansion, including RTD sales and entry into food-drug-mass retail, and by additional Outpost locations. Retail doors for RTD products nearly doubled to 70,400 from 35,800 year over year. The company had 11 company-operated Outposts versus four a year earlier.
- Margin contracted as cost of goods sold rose 43%, faster than revenue growth of 26%. Management cited higher coffee and RTD costs, shipping and fulfillment inflation, a shift toward lower-margin RTD products, and a $2.6 million RTD product write-off. Q3 operating expenses rose 45%; higher payroll and public-company/professional costs more than offset lower marketing spend.
- Management said available cash, operating cash and credit facilities should fund ordinary-course needs for at least 12 months, while also expecting possible continued operating losses and negative operating cash flow, and higher G&A and capital spending as the business expands. No specific financial guidance was provided.
- In November 2022, the company entered a five-year, $65 million revolving senior credit facility, replacing its prior facility, and repaid the $14 million outstanding balance. Substantially all assets secure the new facility.
- After quarter-end, certain RTD lots were withdrawn for flavor and texture issues. The company recorded about $561,000 of customer credits and $2.875 million of replacement-product costs and inventory write-offs in the September 30 statements; another $626,000 of affected product produced after quarter-end was expected to be expensed in Q4.
- Key risks include coffee and other commodity costs, inflation, variable interest rates, supply-chain and co-manufacturer dependence, customer concentration, DTC trends and execution of wholesale and retail expansion. One customer accounted for 13% of Q3 revenue; two customers represented 57% of receivables at quarter-end. Management said pending legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether wholesale and RTD growth can continue without further gross-margin deterioration or product-quality issues.
- How quickly working-capital needs, especially inventory and receivables, can be converted to operating cash flow.
- Utilization, borrowing conditions and covenants under the new $65 million secured revolving facility, alongside the company’s debt and long-term lease commitments.
- The full financial and customer impact of the RTD withdrawal, including the additional Q4 expense disclosed after quarter-end.
- How to interpret nine-month earnings and per-share figures given the February Business Combination, non-controlling interests and large fair-value charges.