Dutch Bros Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with the corresponding 2020 period. Dutch Bros operates and franchises drive-thru beverage shops. At quarter-end it had 503 shops in 11 states: 241 company-operated and 262 franchised. The company completed its IPO on September 17, 2021.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Change / context |
|---|---|---|---|
| Total revenue | $129.8 million | $86.7 million | Up 49.8% |
| Company-operated shop revenue | $108.7 million | $66.7 million | Up 62.9% |
| Franchising and other revenue | $21.1 million | $20.0 million | Up 5.9% |
| Operating income (loss) | $(115.0) million | $8.0 million | Loss primarily reflects elevated SG&A and equity compensation |
| Net income (loss) | $(117.1) million | $6.7 million | Consolidated result |
| Adjusted EBITDA | $20.6 million | $21.2 million | Non-GAAP; down 2.6% |
| Company-operated shop contribution | $27.1 million; 24.9% of shop revenue | $21.9 million; 32.8% | Contribution increased, but margin declined |
For the nine months ended September 30, revenue was $357.8 million versus $237.5 million; consolidated net loss was $111.3 million versus net income of $11.9 million. Adjusted EBITDA was $68.8 million versus $56.7 million. Company-operated same-shop sales grew 4.7% in Q3 and 8.3% year to date; systemwide same-shop sales grew 7.3% and 8.0%, respectively.
Cash flow and balance sheet: Nine-month operating cash flow was $72.3 million, compared with $42.7 million. Capital expenditures were $74.1 million, and net cash used in investing activities was $76.8 million. Cash was $25.9 million at September 30, 2021, versus $31.6 million at December 31, 2020. Current assets of $62.5 million were below current liabilities of $102.0 million. The company had $35.0 million drawn on its revolving credit facility, with $115.0 million of revolving capacity and $200.0 million of term-loan capacity available. It reported compliance with credit-facility covenants. Capital lease obligations totaled $75.4 million; future operating lease payments were $139.8 million.
Material changes and unusual items
- SG&A was $153.7 million in Q3, compared with $26.2 million a year earlier. It included $124.8 million of equity-based compensation and $3.3 million of IPO-related expenses. The IPO-related foundation donation was $1.4 million.
- IPO-related equity awards generated substantial compensation expense: the filing reports $78.6 million of incremental expense from vesting awards at the IPO, within total nine-month equity-based compensation expense of $147.8 million.
- Company-operated shop revenue growth reflected both comparable-shop gains and expansion: 30 new company-operated shops opened in Q3, and 52 opened in the first nine months. Total shop count grew from 415 to 503 year over year.
- The company received approximately $520.8 million of IPO proceeds net of offering costs. Proceeds funded purchases of OpCo units and Class D shares; the company also repaid $198.8 million of term loans after the IPO.
- The September reorganization and IPO resulted in Dutch Bros Inc. owning 28.7% of OpCo’s economic interest at quarter-end, with 71.3% held by non-controlling-interest holders. The consolidated net loss attributable to Dutch Bros Inc. was $6.7 million; reported loss per share of $0.15 applies only to the post-reorganization period beginning September 14.
- The IPO and reorganization created a $109.7 million tax receivable agreement liability. The agreements generally require payment to certain pre-IPO owners of 85% of specified realized or deemed tax benefits.
Outlook, risks, and contingencies
The filing gives no clear full-year revenue or earnings guidance. Management said it planned to open approximately 30 additional company-operated shops and about three franchise shops before year-end 2021, and stated an expectation to generate positive cash flow for the foreseeable future. Management considered cash, operating cash flow, and facility availability adequate for at least the next 12 months, while noting that additional capital could be needed and future capital requirements may vary.
Management cited COVID-19 uncertainty and shipping delays affecting shop supplies. The filing also highlights exposure to commodity and construction inflation, coffee and other supply availability, minimum-wage and staffing costs, competition, rapid-growth execution, franchisee performance, and the company’s concentration in the western United States. A 1% increase in rates on outstanding revolving loans was estimated to add about $0.4 million to annual interest expense.
A previously identified material weakness in internal control over financial reporting had not been remediated as of September 30, 2021; management concluded disclosure controls and procedures were not effective. The filing reports no material legal proceedings and says ordinary-course claims were not expected to have a material adverse effect. The company also disclosed approximately $1.8 million of franchisee lease guarantees, for which it had recorded no liability as the potential liability was considered immaterial.
Important facts for investors to verify
- How much of the GAAP loss and SG&A increase is attributable to IPO-related and equity-compensation items, and the expected future expense recognition of the remaining $89.3 million in unrecognized stock compensation.
- Whether shop-level cost pressures persist: Q3 company-operated contribution margin fell to 24.9% from 32.8%, with higher food, labor, and occupancy costs as a share of sales.
- Execution and funding of the planned shop openings, including construction costs, hiring, and new-market performance.
- The timing and eventual cash cost of tax receivable agreement payments, and the assumptions underlying the $109.7 million recorded liability.
- Progress in remediating the material weakness and establishing effective financial reporting controls.
- Liquidity needs after capital spending, lease commitments, debt service, and any further growth investment.