BRC Inc. — Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. BRC Inc. sells coffee, ready-to-drink (RTD) beverages, apparel and related products through wholesale, direct-to-consumer (DTC), and Outpost channels. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $91.9M | $66.4M | $175.4M | $132.2M |
| Gross profit / margin | $32.2M / 35.0% | $22.6M / 34.0% | $59.7M / 34.0% | $45.8M / 34.6% |
| Operating loss | $(13.7)M | $(16.8)M | $(30.9)M | $(32.7)M |
| Consolidated net loss | $(14.7)M | $(45.1)M | $(32.0)M | $(301.9)M |
| Net loss attributable to BRC Inc. | $(4.2)M | $(10.8)M | $(9.0)M | $(73.7)M |
For Q2, gross margin expanded 1.0 percentage point, while operating expenses rose 16% to $45.9M. Six-month gross margin declined 0.6 percentage point. Interest expense increased to $0.8M for Q2 and $1.1M for the six-month period, reflecting higher debt and borrowing rates. The much larger 2022 net losses included fair-value losses on earn-out, warrant and derivative liabilities that were settled before 2023; those items make headline net-loss comparisons less representative of operating performance.
Cash flow and balance sheet: Cash was $19.8M at June 30, down from $39.0M at year-end 2022; working capital was $81.3M. Six-month operating cash use was $40.5M, investing cash use was $9.8M, and financing provided $31.1M. Inventory rose to $109.7M from $77.2M, including RTD finished goods of $64.3M versus $33.4M. Long-term debt, net of issuance costs, was $77.9M, compared with $49.2M at year-end; total liabilities were $195.7M.
Material changes and business drivers
- Revenue increased 39% in Q2 and 33% for the six months. Wholesale drove the growth: Q2 revenue rose 109% to $50.0M, principally from entry into food, drug and mass retail and higher RTD sales. RTD products were in about 82,000 retail locations, up from 67,000 a year earlier.
- DTC revenue fell 6% in Q2 and 5% year to date, as the company reduced marketing investment amid elevated customer acquisition costs. Outpost revenue rose 35% in Q2 and 28% year to date; company-operated Outposts totaled 17, versus 10 a year earlier.
- Q2 gross-margin improvement reflected favorable mix, including FDM sales. For the first half, management cited higher coffee and RTD input costs, transportation and carrying costs, partly offset by mix.
- Marketing expense declined, but salaries and benefits increased with staffing and expansion costs; first-half expense included $1.1M of severance. General and administrative expense increased, with legal fees and investment in corporate infrastructure cited as drivers.
Outlook, financing, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said it expects possible continued operating losses and negative operating cash flow, with G&A and capital expenditures expected to rise as the business expands. Management believed available liquidity would fund obligations and commitments for at least 12 months under then-current conditions, while noting that additional financing may be sought.
- As of June 30, the Regions senior credit facility had $61.8M outstanding and $4.9M of availability, subject to a $15M minimum-liquidity covenant; the company reported covenant compliance. On August 10, 2023, after quarter-end, the company entered replacement financing: a $75M asset-based revolving facility, a $50M term loan and a $6M bridge loan. Proceeds and approximately $13.9M of ABL borrowings were used in part to retire prior facilities. The new facilities have financial tests, restrictions and variable-rate interest; the term loan rate is SOFR plus 8.50% or base rate plus 7.50%. The filing highlights debt-service, refinancing and covenant risks.
- Purchase commitments under supplier agreements totaled $88.1M: $19.3M for the remainder of 2023, $46.4M for 2024 and $22.4M for 2025. Some are take-or-pay commitments; the company was negotiating amendments or terminations and warned unsuccessful negotiations could result in future losses.
- A company-owned Outpost property was classified as held for sale and impaired by $1.2M. A separate office-property sale agreed after quarter-end was expected to generate an estimated $1.4M gain, subject to closing and estimates.
- Risk disclosures emphasize supplier and co-manufacturer concentration, inventory forecasting and take-or-pay exposure, coffee and other input-cost volatility, DTC acquisition costs, execution of wholesale and Outpost growth, and the impact of variable-rate debt. One wholesale customer and its affiliate represented 27% of Q2 revenue and 25% of six-month revenue; two customers and affiliates represented 52% of receivables at quarter-end.
- Legal matters include a warrant-related contract claim seeking unspecified damages and a former consultant’s disputed royalty and reimbursement claims. The company said it could not estimate the outcome or potential loss of the warrant matter; it stated it had accrued royalties for relevant co-manufactured products and agreed reimbursements in the consultant dispute.
Important facts for investors to verify
- Whether wholesale growth, including FDM and RTD, continues to offset declining DTC sales and whether channel growth supports sustainable margins.
- Inventory levels, cash conversion and operating cash use, particularly given the increase in RTD finished goods and the supplier purchase commitments.
- Borrowings, availability, interest expense and compliance with the post-quarter financing agreements’ liquidity, EBITDA and fixed-charge covenants.
- Outcomes of supplier negotiations, the property sales, and the disclosed legal matters, including any resulting gains, losses or cash requirements.