BRC Inc. 2023 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are unaudited and generally in millions unless noted. BRC sells coffee, ready-to-drink beverages, apparel and related products through Wholesale, direct-to-consumer (DTC) and Outpost channels.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $100.5 | $75.5 | $276.0 | $207.7 |
| Gross profit / margin | $34.1 / 33.9% | $23.9 / 31.7% | $93.8 / 34.0% | $69.7 / 33.6% |
| Operating loss | $(7.0) | $(15.6) | $(38.0) | $(48.3) |
| Consolidated net loss | $(10.7) | $(16.1) | $(42.7) | $(318.0) |
| Net loss attributable to BRC Inc. | $(3.2) | $(4.0) | $(12.3) | $(77.7) |
| Class A loss per share | $(0.05) | $(0.08) | $(0.21) | $(1.54) |
Revenue grew 33% in both comparison periods. Q3 gross margin improved 220 basis points and nine-month margin improved 40 basis points, with management citing favorable product mix, including higher-margin FDM sales. The company remained loss-making; Q3 net interest expense increased to $3.5 million from $0.5 million, and nine-month interest expense rose to $4.7 million from $1.1 million. The large nine-month 2022 net loss included $268.7 million of fair-value losses on earn-out, warrant and derivative liabilities that did not recur in 2023.
Revenue mix and operating changes
- Wholesale: Q3 revenue increased 91% to $61.5 million; nine-month revenue increased 94% to $151.5 million. Growth was led by entry into food, drug and mass retail for bagged coffee and rounds, and increased ready-to-drink sales. Ready-to-drink products were in 84,900 retail locations, versus 69,900 a year earlier.
- DTC: Q3 revenue fell 14% to $32.8 million; nine-month revenue fell 8% to $104.2 million. Management attributed the decline to reduced marketing investment and elevated customer-acquisition costs.
- Outposts: Q3 revenue increased 20% to $6.2 million; nine-month revenue increased 26% to $20.3 million. BRC had 17 company-operated locations at quarter-end, compared with 11 a year earlier.
- Q3 operating expenses rose 4% to $41.0 million. For nine months, they rose 12% to $131.8 million, including higher G&A, headcount and severance costs; marketing expense decreased 9% year over year.
Cash flow, debt and liquidity
- Nine-month operating cash use was $47.0 million, improving from $79.0 million used in the prior-year period. Investing cash use was $6.7 million, primarily reflecting $12.2 million of property and equipment purchases, partly offset by asset-sale proceeds. Financing provided $22.8 million. Cash, cash equivalents and restricted cash declined by $30.9 million; period-end cash was $6.7 million and restricted cash was $1.5 million.
- Working capital was $64.0 million at September 30. Inventory was $91.4 million, up from $77.2 million at year-end 2022.
- Debt, net of issuance costs and discounts, totaled $72.0 million, compared with $49.2 million at December 31, 2022. Principal outstanding was $77.3 million. In August, the company refinanced into a $75 million secured asset-based revolving facility and a $50 million term loan, and also obtained a $6 million bridge loan. At quarter-end, the ABL balance was $23.9 million and management reported approximately $19.9 million of available ABL borrowing, subject to the borrowing base and covenants.
- Management cited quarter-end interest rates of 9.3% on the ABL and 13.9% on the term loan. Debt is variable-rate; a hypothetical 5% rate increase was estimated to add approximately $3.7 million of annual interest expense.
- Debt agreements impose financial tests and operating restrictions, including minimum liquidity of $15 million before specified release conditions. The filing says management believes available liquidity will fund obligations and commitments for at least 12 months, but the low cash balance and borrowing conditions make liquidity and covenant compliance important to monitor.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management expects positive cash flows from continued revenue growth and lower G&A and capital expenditures over the next 12 months, and expects to fund material needs from operations and the ABL; additional financing may be sought.
- The company disclosed $91.4 million of future minimum purchase commitments, including $19.0 million for the remainder of 2023 and $49.9 million for 2024. Some supplier contracts have take-or-pay terms; negotiations to amend or terminate certain agreements may not succeed and could result in future losses.
- A third-quarter barter arrangement exchanges products with a stated retail value of $41.6 million for advertising over four years. BRC recorded $7.48 million of prepaid advertising in exchange for inventory in the quarter. Credits unused at the end of the term expire, and the company warns that advertising value, usability and sales impact may be uncertain.
- Q3 included a net $0.6 million gain in other operating income, with a $1.1 million gain on sale of an office property offset by a loss on disposal of an Outpost property and other equipment. The Outpost location was leased back after its property sale. The nine-month period also included a $1.2 million Outpost impairment.
- Material risks include high variable-rate debt and covenant constraints, dependence on co-manufacturers and concentrated suppliers, coffee and other commodity-price volatility, customer concentration, DTC acquisition costs, and purchase commitments. Two wholesale customers and affiliates represented 41% of receivables at quarter-end; one wholesale customer and its affiliate represented 28% of Q3 revenue.
- The company faces warrant-related litigation brought by Tang Capital and Clark, plus a dispute with former consultant Strategy and Execution over royalties and expenses. Outcomes and potential losses in the warrant cases could not be estimated; the Clark case was stayed pending the Tang matter.
- After quarter-end, BRC announced that Chris Mondzelewski would become CEO effective January 1, 2024, succeeding Evan Hafer and Tom Davin in those roles. Hafer is to become Founder and Executive Chairman.
Important facts for investors to verify
- Whether BRC maintains required liquidity and EBITDA levels and complies with its new secured-debt covenants; confirm current available borrowing and the status of the bridge loan, whose stated maturity was November 8, 2023.
- Whether operating cash use and working-capital needs improve enough to support debt service, planned growth and the company’s 12-month liquidity assessment.
- Whether wholesale growth and gross-margin gains persist, and whether they offset continued DTC revenue declines and higher interest costs.
- Whether the $41.6 million barter arrangement delivers usable advertising value and whether supplier negotiations reduce take-or-pay exposure.
- Developments in the warrant and consultant disputes, customer and supplier concentration, and the CEO transition.