Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, references to “we,” “us,” “our,” “Black Rifle Coffee,” “Black Rifle Coffee Company,” “BRCC” and the “Company” in this section are to the business and operations of BRC Inc. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements and related notes thereto included in Part II, Item 8, Financial Statements and
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Supplementary Data in this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause BRCC’s actual results to differ materially from management’s expectations. Factors which could cause such differences are discussed herein and set forth in Part I, Item 1A, Risk Factors in this Annual Report.
Overview
Black Rifle Coffee Company is a rapidly growing, veteran-controlled and led coffee and media company with a loyal and quickly expanding community of more than 2 million consumers through our DTC channel since inception, more than 270,000 active Coffee Club subscribers, and 13.1 million social media followers across BRCC’s, co-founders’, and key media personalities’ accounts as of December 31, 2022. At Black Rifle Coffee, we develop our roast profiles with the same mission focus we learned as military members serving our country. We produce creative and engaging, cause-related media content, self-produced podcasts, and digital and print journalism in-house to inform, inspire, entertain, and build our community. We also sell Black Rifle Coffee-brand apparel, coffee brewing equipment, and outdoor and lifestyle gear that our consumers proudly wear and use to showcase our brand. At the heart of everything we do is our commitment to supporting active military, veterans, first responders, and those who love America.
We utilize a three-pronged approach to craft a unique brand that resonates with our customer base and enhances brand loyalty: Inform, Inspire, and Entertain. We want our audience to love coffee as much as we do, so we strive to inform them on all the awesome facets to coffee. Every day we work to inspire our customers; we take pride in the coffee we roast, the veterans we employ and the causes we support. We give back to the community and are committed to support those who serve. Our “Entertain” marketing strategy drives brand excitement, along with valuable customer insights and data.
We own two roasting facilities, one focused on large batch roasting and the other on small batch roasting. Our coffee beans are primarily roasted in-house and 100% in the United States to ensure consistency and quality of product. Our coffee beans are sourced only from the highest quality suppliers. Our state-of-the-art equipment guarantees freshness and offers significant capacity for expansion.
We have experienced strong revenue growth since inception. Revenue increased to $301.3 million for the year ended December 31, 2022, from $233.1 million for the year ended December 31, 2021, representing growth of 29.3%. Growth in the year ended December 31, 2022, was primarily driven by significant increases in RTD product sales in the Wholesale channel, entry into the Food, Drug and Mass market in the Wholesale channel for bagged coffee and rounds products, and additional store openings in the Outpost channel.
We are a digitally native brand with an established omnichannel business model, reaching our customers through one reportable segment that is comprised of three channels: Direct to Consumer, Wholesale, and Outposts. Our DTC channel includes our e-commerce business, through which consumers order our products online and products are shipped to them. Our Wholesale channel includes products sold to an intermediary such as grocery stores, who in turn sell those products to consumers, including the FDM customer set, such as Walmart, specialty retail, such as Bass Pro, and convenience stores which primarily sell our RTD products, such as 7-Eleven. Our Outpost channel includes revenue from our Company-operated and franchised Black Rifle Coffee retail coffee shop locations.
The Business Combination
In February 2022, we completed the Business Combination and as a result of the consummation of a series of mergers in connection therewith, Authentic Brands became a subsidiary of BRC Inc., with BRC Inc. acting as sole managing member thereof as a public benefit corporation. The Business Combination was accounted for as a reverse acquisition and a recapitalization of Authentic Brands. Accordingly, the Business Combination was reflected as the equivalent of Authentic Brands issuing stock for the net assets of SilverBox, accompanied by a recapitalization. Under this method of accounting, SilverBox is treated as the “acquired” company for financial reporting purposes. The net assets of SilverBox are stated at historical cost, with no goodwill or other intangible assets recorded. This accounting treatment was determined as the individual controlling Authentic Brands prior to the Business Combination also controlled the combined company post business combination.
Key Factors Affecting Our Performance
Our Ability to Increase Brand Awareness
Our ability to promote and maintain brand awareness and loyalty is critical to our success. We believe we have created a highly efficient marketing strategy that provides us the ability to increase brand awareness and drive consumer
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interaction. Consumer appreciation of our brands is primarily reflected in the increase of our sales over the last few years. We expect to continue to develop and implement forward-looking brand strategies that leverage social media and employ targeted digital advertising to expand the reach of our brand.
Our Ability to Grow Our Customer Base in Our Outposts and Wholesale Channels
We are currently growing our customer base through our Outposts and Wholesale channels. We continue to grow our retail footprint through Company-owned and franchised Outposts. Our products are also sold through a growing number of physical retail channels. Wholesale customers include large national retailers, regional retailers, distributors, and dealers.
Our Ability to Acquire and Retain Customers at a Reasonable Cost
We believe our ability to consistently acquire and retain customers at a reasonable cost will be a key factor affecting our future performance. While we have a strong presence in major markets, we still have the opportunity to grow brand awareness, with less than 20% estimated aided awareness in any region of the country. To accomplish this goal, we intend to grow our brand awareness through various avenues such as national television and radio advertising, and through select sponsorship and partnership opportunities. In addition, we will strive to strengthen our social media footprint across various platforms such as Facebook, Google, and YouTube. Our digital capabilities provide a distinct advantage and enable us to form direct relationships with our customers and capture valuable customer data and insights. We utilize digital marketing tools to optimize our marketing initiatives and drive our brand reach.
Our Ability to Drive Repeat Usage of Our Products
We gain substantial economic value from repeat users of our products who consistently re-order our products. The pace of our growth rate will be affected by the repeat usage dynamics of existing and newly acquired customers.
Our Ability to Expand Our Product Line
Our goal is to substantially expand our product line over time to increase our growth opportunity and reduce product-specific risks through diversification into multiple products each designed around daily use. Our pace of growth will be partially affected by the cadence and magnitude of new product launches over time. As an example, we launched RTD coffee products in March 2020 with two 11-ounce SKUs. We have since added three high-caffeine, boldly-flavored 15-ounce SKUs and another 11-ounce SKU. Four of these SKUs have grown to become top-30 products in the RTD coffee category on a dollar to percent average cost value basis and can be found in more than 61,000 locations across the country. Moving forward, we believe that it is important to our business that we continue innovating with new products and flavors and continue to explore the world to find the highest quality beans possible to deliver to our customers.
Our Ability to Manage Our Supply Chain
Our ability to grow and meet future demand will be affected by our ability to properly plan for and source inventory from a variety of suppliers located inside and outside the United States. The majority of our green coffee beans come from Colombia, Nicaragua, and Brazil, but since 2020, we have also sourced green coffee beans from over ten countries in Latin America, Africa, and Asia to diversify our supply chain and offer our customers specialty and limited-time-only roasts. Quality control is also a critically important part of our manufacturing and supply chain operations. 68% of our bagged roasted coffee is roasted in-house and 100% is roasted in the United States. Our licensed, Coffee Quality Institute-certified grader and former Green Beret, Edwin Parnell, leads cupping, grading, scoring, and sourcing of our coffees.
Components of Our Results of Operations
Revenue, net
We sell our products both directly and indirectly to our customers through a broad set of physical and online platforms. Our revenue, net reflects the impact of product returns, as well as discounts and fees for certain sales programs, trade spend, promotions, and loyalty rewards.
Cost of Goods Sold
Cost of goods sold primarily includes raw material costs, labor costs directly related to producing our products, including wages and benefits, shipping costs, and other overhead costs related to certain aspects of production, warehousing, fulfillment, shipping, and credit card fees.
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Operating Expenses
Operating expenses consist of marketing and advertising expenses related to brand marketing campaigns through various online platforms, including email, digital, website, social media, search engine optimization, as well as performance marketing efforts, including retargeting, paid search and product advertisements, as well as social media advertisements and sponsorships. Operating expenses also consist of salaries, wages, and benefits of payroll and payroll related expenses for labor not directly related to producing our products. Payroll expenses include both fixed and variable compensation. Variable compensation includes bonuses and stock-based compensation. Also included are other professional fees and services, and general corporate infrastructure expenses, including utilities and depreciation and amortization.
Interest Expense
Interest expense consists of interest on our borrowing arrangements, the amortization of debt discounts and deferred financing costs. For the year ended December 31, 2021, interest expense also included the extinguishment of debt costs.
Income Tax Provision
The Company accounts for income taxes pursuant to the asset and liability method, which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. The Company reduces the carrying amounts of deferred tax assets (“DTAs”) by a valuation allowance if, based on the evidence available, it is more likely than not that such assets will not be realized. In making the assessment under the more likely than not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the DTAs. The assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods by jurisdiction, the Company's experience with loss carryforwards not expiring unutilized, and all tax planning alternatives that may be available. A valuation allowance is recognized if under applicable accounting standards the Company determines it is more likely than not that its deferred tax assets would not be realized.
In accordance with ASC 740, Income Taxes, the Company evaluates the technical merits of its income tax positions and establishes unrecognized income tax benefits for uncertain tax positions when deemed appropriate. The Company evaluates and accounts for uncertain tax positions using a two-step approach: Step 1. Recognition – occurs when the Company concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustainable upon examination. Step 2. Measurement – determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more likely-than-not threshold of being sustained. See Note 15, Income Taxes for additional information.
Results of Operations
This discussion and analysis pertains to comparisons of material changes in the consolidated financial statements for the years ended December 31, 2022 and 2021. For the comparisons of the years ended December 31, 2021 and 2020, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2021
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Annual Report on Form 10-K. The following table represents the selected results of operations for BRCC for the periods indicated.
Fiscal Year December 31,
($ in thousands)
Operating expenses
Other income (expense)
Other income (expense), net 339 (55)
Change in fair value of earn-out liabilities (209,651) —
Change in fair value of warrant liabilities (56,675) —
Change in fair value of derivative liabilities (2,335) —
State income tax expense 367 178
Components of Our Operating Income (Expense)
Comparison of the year ended December 31, 2022 to the year ended December 31, 2021
Fiscal Year December 31,
($ in thousands)
Gross margin (gross profit as % of revenue, net) 32.9 % 38.5 %
Revenue, net
Net revenue for the year ended December 31, 2022 increased $68.2 million, or 29.3%, to $301.3 million as compared to $233.1 million for the corresponding period in 2021.
The increase was primarily driven by new products sold, increased points of distribution in the Wholesale channel including entry into FDM, and the opening of new Company-owned Outposts, partially offset by a lower number of subscribers in the DTC channel.
For the year ended December 31, 2022, net revenue from our Wholesale channel increased $63.6 million, or 114.1%, to $119.4 million as compared to $55.8 million for the corresponding period in 2021. The Wholesale channel performance was primarily driven by entry into the FDM market and continued growth in our RTD product from increased points of distribution and new products available for sale.
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For the year ended December 31, 2022, net revenue for our Outpost channel increased $10.9 million, or 90.5%, to $22.9 million as compared to $12.0 million for the corresponding period in 2021 primarily due to increased store openings in 2022. We opened a total of seven new Company-operated Outposts in Texas and Arizona in 2022. In addition, we added three franchise stores.
DTC channel net revenue decreased in aggregate by $6.3 million, or 3.8%, to $159.0 million for the year ended December 31, 2022 as compared to $165.3 million for the corresponding period in 2021 primarily due to a decrease in the number of customers as we strategically shifted advertising spend to other channels and areas with favorable returns. Customer retention held steady throughout the year.
Cost of goods sold
For the year ended December 31, 2022, cost of goods sold increased $58.7 million, or 40.9%, to $202.1 million as compared to $143.4 million over the corresponding period prior year. The increase was primarily driven by higher sales along with product mix shift, as RTD has higher product costs and lower margins as compared to bagged coffee. Gross margin decreased 560 basis points to 32.9% for the year ended December 31, 2022 as compared to 38.5% for the year ended December 31, 2021. Inflation has negatively impacted our costs for raw materials and finished goods, primarily in shipping, green coffee beans, and RTD product.
Operating expenses
Operating expenses for the year ended December 31, 2022 increased $65.7 million, or 64.9%, to $166.9 million as compared to $101.3 million for the corresponding period in 2021.
Salaries, wages and benefits increased $25.5 million, or 65.9%, to $64.3 million for the year ended December 31, 2022, compared to $38.7 million for the corresponding period in 2021. We increased employee headcount to respond to our significant sales growth and invested in existing channels as we built additional capabilities to add incremental revenue streams and expanded products lines, which resulted in higher salaries, wages and benefits. In addition, in 2022, we continued to strengthen our marketing and advertising capabilities, but focused our spend on areas and activities with higher returns. This resulted in increased marketing and advertising expenses of $1.8 million, or 5.0%, to $38.2 million for the year ended December 31, 2022, compared to $36.4 million for the corresponding period in 2021. In addition, General and Administrative expenses increased $38.3 million, or 146.5%, to $64.5 million for the year ended December 31, 2022 as compared to $26.2 million for the same period 2021. The increase is due to growth of corporate infrastructure primarily in information technology software, as well as, professional services to help facilitate the expansion of new and existing sales channels and product lines.
Components of Our Non-Operating Income (Expense)
Comparison of the year ended December 31, 2022 to the year ended December 31, 2021
Fiscal Year December 31,
($ in thousands)
Non-operating income (expense)
Change in fair value of earn-out liability (209,651) — (209,651) —
Change in fair value of warrant liability (56,675) — (56,675) —
Change in fair value of derivative liability (2,335) — (2,335) —
Total non-operating (expense) $ (269,915) $ (2,088)
Interest expense for the year ended December 31, 2022 decreased $0.4 million, or 21.6%, to $1.6 million as compared to $2.0 million for the corresponding period in 2021. The decrease was related to the Company having lower interest rates on outstanding debt when compared to 2021. The Company had higher debt balances in 2022 as compared to the prior year; however the weighted average interest rate in 2022 was lower than 2021. The weighted average interest rate on debt
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for the year ended December 31, 2022 was 3.5% as compared to 4.9% in the corresponding period in 2021.
Other income (expense), net consists of miscellaneous income (expense) items such as bank and credit card fees. The increase for the year ended December 31, 2022 as compared to the prior year was due to the receipt of a credit card rebate of $0.3 million and a $0.1 million grant in 2022 which was offset by recurring bank and credit card fees.
For the year ended December 31, 2022, we recognized losses from the change in fair value of earn-out liabilities, warrant liabilities and derivative liabilities. The losses were recorded for the year ended December 31, 2022, each representing the following:
•Upon the Closing on February 9, 2022, we recognized earn-out liabilities of $218.7 million as a result of certain stockholders being entitled to receive up to 21,241,250 earn-out shares, in the form of Common Units of Authentic Brands and Class A common stock of the Company, if certain milestones were satisfied. A total of 50.0% of the earn-out shares were issuable (“First Tier Vesting Event”), in the aggregate, if the volume weighted average trading price of our Class A Common Stock was $15.00 or greater for any 20 trading days within a period of 30 trading days prior to the fifth anniversary of the Closing. The remaining 50.0% of the earn-out shares were issuable (“Second Tier Vesting Event”), in the aggregate, if the volume weighted average trading price of our Class A Common Stock was $20.00 or greater for any 20 trading days within a period of 30 trading days prior to the seventh anniversary of the Closing. The First Tier Vesting Event occurred in March 2022, and as a result, we remeasured the respective liability to the fair value and recorded a realized loss of $60.0 million. The Second Tier Vesting Event occurred in April 2022, and as a result, we remeasured the respective liability to the fair value and recorded a realized loss of $149.6 million. The change in fair value of the earn-out liabilities was primarily a result of the increase of the closing price of our Class A Common Stock listed on the NYSE from February 9, 2022 to April 5, 2022.
•Upon the Closing on February 9, 2022, we recognized warrant liabilities of $36.5 million. In connection with the redemption of our public and private warrants in May 2022, the warrant liabilities were remeasured to the fair value and a realized loss of $56.7 million was recorded. The change in fair value of the warrant liabilities was primarily a result of the increase of the closing price of our Class A Common Stock listed on the NYSE from February 9, 2022 to May 4, 2022.
•Upon the Closing on February 9, 2022, we recognized a derivative liability of $9.7 million. In connection with the vesting applicable premium that was payable to unitholders of Authentic Brands in May 2022, the derivative liability was remeasured to the fair value and a realized loss of $2.3 million was recorded. The change in fair value of the derivative liability was primarily a result of the increase of the closing price of our Class A Common Stock listed on the NYSE from February 9, 2022 to May 4, 2022.
Income Tax Provision
Fiscal Year December 31,
($ in thousands)
Effective income tax rate 0.11 % —
For further detail of income tax matters, see Note 15, Income Taxes, within the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Income tax expense was $0.4 million and $0.2 million for the year ended December 31, 2022 and 2021 respectively, representing effective tax rates of 0.11% and zero. In addition, the tax benefit for the year ended December 31, 2022 reflects the impact of our assessment that we will not be able to record the benefit of certain current year deferred tax assets for which a valuation allowance is expected.
Liquidity and Capital Resources
Our principal use of cash is to support the growth of our business including increasing working capital requirements related to inventories and, accounts receivable, and general and administrative expenses. Furthermore, we use cash to fund our debt service commitments, capital equipment acquisitions, Outpost build outs and other growth-related needs.
Our primary sources of cash are (1) cash on hand, (2) cash provided by operating activities, and (3) net borrowings from our credit facilities. As of December 31, 2022, our cash and cash equivalents were $39.0 million, our working capital
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was $83.1 million, and we had $31.3 million of available borrowings under our credit facilities. Our ability to draw from the credit facilities is subject to a borrowing base and other covenants. We believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the ordinary course of business and under the current market conditions for at least the next twelve months.
Mortgages, Equipment Line, Revolving Line of Credit, and Notes Payable
In July 2020, we entered into mortgage loan agreements to refinance the purchase of buildings for a total of $5.5 million at an interest rate of 3.67% per annum. The loans are secured by the real property financed. The loans mature on July 29, 2025. The loans are payable in monthly installments of principal and interest commencing on August 29, 2020.
In April 2021, we entered into mortgage loan agreement to purchase a building for a total of $2.2 million at an interest rate of 3.60% per annum. The loan is secured by the real property financed. The loan matures on April 29, 2026. The loan is payable in monthly installments of principal and interest commencing on May 29, 2021.
In July 2020, we entered into an equipment financing agreement which provided a credit line totaling $3.3 million at an interest rate of Bloomberg Short Term Bank Yield Index (“BSBY”) plus 3.50% (the “Equipment Line”). The Equipment Line was amended in April 2021 to include additional availability of $10.0 million. Further, in July 2021, an additional $6.0 million was added to the availability of the Equipment Line. In September 2021, $2.0 million outstanding on the Equipment Line was converted to a 60-month term loan to be utilized for retail expansion (the “Retail Facility”). The Equipment Line is secured by the equipment financed.
In April 2021, we entered into a $10.0 million revolving line of credit agreement (the “Credit Facility”). The Credit Facility earned a floating interest rate calculated at the prime rate plus zero percent.
In November 2021, we entered into an amendment to increase the available line under the Credit Facility to $25.0 million. Interest only payments were due and payable in installments commencing November 30, 2021 and continue regularly until the entire amount outstanding is due on June 30, 2023.
In November 2022, Authentic Brands entered into a new senior credit facility, which includes a revolving credit facility of up to $65 million, subject to a borrowing base determined from eligible accounts receivable and inventory (the "Senior Credit Facility"). The Senior Credit Facility bears interest at the BSBY plus 2.25% and matures in November 2027. In connection with the entry into the Senior Credit Facility, Authentic Brands and its subsidiaries each granted a security interest in and liens upon substantially all of their assets in favor of the lender to secure obligations under the Senior Credit Facility. As of December 31, 2022, the balance of the Senior Credit Facility was $30 million and the amount of borrowings available was $21.2 million.
As of December 31, 2022, the Company has $3.5 million of outstanding note payable agreements with a weighted average interest rate of 1.14%. The notes are payable in annual installments scheduled to be paid in full in 2025.
The Company may, in the future, obtain additional credit facilities, increase the size of our existing credit facilities, or issue corporate debt. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. Any debt incurred or issued may be secured or unsecured, bear interest at fixed or variable rates, and may be subject to such terms as the lender may require and management believes acceptable.
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Cash Flows from Operating, Investing and Financing Activities
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
Fiscal Year December 31,
Cash flows provided by (used in):
Comparison of the year ended December 31, 2022 to the year ended December 31, 2021
Operating Activities
Cash flow from operating activities is primarily generated from revenue from our DTC and Wholesale channels.
Net cash used in operating activities was $116.2 million for the year ended December 31, 2022, compared to net cash used by operating activities of $7.7 million for the year ended December 31, 2021. For the year ended December 31, 2022, the $108.5 million increase in cash used in operating activities was due to a net loss from operations of $338.0 million compared to net loss of $13.8 million for the same period in 2021. Total net loss was offset by changes in fair value of the earn-out liability of $209.7 million and warrant liability of $56.7 million. Additionally, there were increases in accounts receivable of $14.9 million and inventories of $56.3 million, offset by a decrease in accounts payable of $6.1 million and increase in accrued liabilities of $16.0 million.
Investing Activities
Net cash used in investing activities was $30.4 million for the year ended December 31, 2022, compared to net cash used in investing activities of $19.3 million for the year ended December 31, 2021. The $11.1 million increase in net cash used was primarily due to continued spend on capital expenditure projects for our Outpost locations, roasting facilities, and software and other information technology investments.
Financing Activities
Net cash provided by financing activities was $167.3 million for the year ended December 31, 2022, compared to net cash provided by financing activities of $9.7 million for the year ended December 31, 2021. The $157.6 million increase in net cash from financing activities was primarily due to cash provided by proceeds from the Business Combination of $338.0 million offset by net cash used in the distribution and redemption of Series A preferred equity of $127.9 million, payment of Business Combination costs of $31.6 million, redemption of Class A and Class B shares of $20.1 million, and redemption of incentive units of $3.6 million. Additionally, the Company received net cash proceeds of $51.3 million from issuance of long-term debt offset by cash used for repayment of long-term debt of $38.8 million during the year ended December 31, 2022 compared to net cash proceeds of $38.4 million from issuance of long-term debt offset by cash used for repayment of long-term debt of $20.1 million during the year ended December 31, 2021.
Commitments
During 2022, the Company entered into several purchase agreements to purchase coffee product from third-party suppliers. The minimum purchase amounts are based on quantity and in the aggregate are anticipated to be approximately $44.6 million for 2023 and $26.5 million for 2024.
In September 2021, the Company entered into a manufacturing and purchase agreement to purchase canned beverage product from a third-party supplier. The initial term ends on December 31, 2023, and automatically renews for two consecutive year periods, unless either party provides notice of cancellation at least 120 days prior to the end of the current
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term. The minimum purchase amount carries a minimum surcharge of approximately $2.3 million for 2023, $19.9 million for 2024 and $22.4 million for 2025.
In November 2021, the Company entered into a manufacturing and purchase agreement to purchase coffee product from a third-party supplier. The term remains in effect until December 31, 2023. The minimum purchase amount is based on quantity and will be approximately $8.8 million on an annual basis.
Liabilities relating to operating leases that have commenced as of December 31, 2022 have been reported on the balance sheet as operating lease liabilities. As of December 31, 2022, we have entered into operating leases that have not yet commenced of $66.8 million, primarily related to real estate leases. These leases will commence between fiscal year 2023 and fiscal year 2024 with lease terms of 10 years to 20 years.
Capital Expenditures
Future capital requirements will vary materially from period to period and will depend on factors such as adding additional roasting capacity, expansion of our corporate and information technology infrastructure relating to growth initiatives and expansion and growth by opening additional company-operated Outposts. We currently expect to fund our material capital requirements with borrowings from our credit facilities, but we may also seek additional debt or equity financing.
Critical Accounting Estimates
Critical accounting estimates are those that management believes are the most important portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.
Our significant accounting estimates are discussed in more detail in Note 2 to our consolidated financial statements included in Item 8 of Part II of this 10-K. The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification 606. Revenue is recognized when a customer obtains control of products or services in an amount that reflects the consideration which we received, or expect to receive, in exchange for those goods or services. We are required to identify our contracts with customers, identify the performance obligations in a contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.
The majority of our revenue is derived from the sale of our products. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled.
Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which is defined by the commercial terms of each purchase but typically occurs at the date of delivery of the merchandise to the customer. As such, customer orders are recorded as deferred revenue prior to delivery of products. In determining whether control has transferred, we considered whether risks and rewards of ownership have transferred to the customer. We estimate which shipments have been delivered and recognize corresponding revenue at the end of the period. Delivery date estimates are based on average transit times calculated based on factors such as the type of carrier, the fulfillment source, the delivery destination and historical transit time experience. Actual shipping times may differ from our estimates.
Loyalty Rewards Program
We have a loyalty points rewards program (the “Loyalty Program”) that is primarily a spend-based program. Customers can earn 1% or 3% on purchases depending on whether the purchase is a subscription or non-subscription. BRCC reserves the right in its sole discretion to modify, change, add, or remove activities which can be accomplished to earn points at any time. Under the Loyalty Program, customers may redeem rewards as they reach minimum thresholds per reward. Loyalty points will expire if there is no account activity (i.e., if there is no new purchase made or order placed) in a
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period of twelve months. Conversion of rewards are non-changeable after redemption, have no cash value, and are non-transferable.
The Company defers revenue associated with the points earned through purchases that are expected to be redeemed, net of estimated unredeemed loyalty points. Loyalty points that are estimated to be unredeemed is based on a historical percentage of expired points. When a customer redeems an earned reward, the Company recognizes revenue for the redeemed product and reduces the related deferred revenue liability. The deferred revenue liability is included in deferred revenue and gift card liability on the consolidated balance sheets.
For those points that are earned through other activities, the Company recognizes the redemption of these points as a discount to the transaction price at time of sale.
Equity-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation — Stock Compensation. Equity-based awards are mainly awarded to employees and members of our Board and measured at fair value at each grant date. We calculate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. We calculate the fair value of restricted stock units on the date of grant based on the closing price of our Class A Common Stock. We calculate the fair value of performance-based restricted stock units on the date of grant using the Monte Carlo pricing model. We recognize expense over the requisite service period for awards expected to vest using the straight-line method and recognize forfeitures as they occur. See Note 13, Equity-Based Compensation within the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for additional information regarding the accounting for stock-based awards.
Before the Business Combination, the Company engaged a third-party appraiser (the “Appraiser”) to assist management in estimating the fair value of the incentive units. The Appraiser considered all three valuation approaches to value the Company’s total equity: the income approach, market approach and cost approach but typically relied primarily on the income and market approaches. The Appraiser then weighed the selected approaches considering the reliability of each approach as of the grant date. Subsequently, the Appraiser allocated the total equity value to the classes of shares. Discounts for lack of marketability were considered based on the facts and circumstances of the class of shares at each grant date.
Applying these valuation and allocation approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding the Company’s expected future revenue, expenses and cash flows, as well as discount rates, valuation multiples, the selection of comparable public companies and comparable transactions and the probability of future events. Changes in any or all of these estimates and assumptions, or the relationships between these assumptions, impact the Company’s valuation as of each valuation date and may have a material impact on the valuation of the Company’s equity and equity awards. These estimates involve inherent uncertainties and, if different assumptions had been used, equity-based compensation expense could have been materially different from the amounts recorded.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in Item 8 of Part II of this 10-K for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent it has made one, of their potential impact on our consolidated financial statements.
JOBS Act
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies for up to five years or until we are no longer an emerging growth company. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, the consolidated financial statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risks
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in costs of key operating resources. Commodity price risk is our primary market risk, which is affected by purchases of coffee beans, dairy products, aluminum cans and other materials and commodities. We purchase and roast quality coffee beans that can be subject to significant volatility. Increases in the “C” coffee commodity price increase the price of high-quality coffee. We generally enter into fixed price purchase commitments for the green coffee we roast.
The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, such as weather (including the potential effects of climate change), natural disasters, crop disease, inventory levels, and political and economic conditions. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices, increases in the cost of high-quality coffee beans could have a material adverse impact on our profitability.
Interest Rate Risk
In order to maintain liquidity and fund certain business operations, our Senior Credit Facility bears a variable interest rate based on the BSBY plus 2.25%. The Equipment Line bears a variable interest rate based on the BSBY plus 3.50%. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. As of December 31, 2022, we had $30 million outstanding on the Senior Credit Facility with available borrowings of $21.2 million. As of December 31, 2022, we had $3.3 million outstanding on the Equipment Line with available borrowings of $5.9 million. The carrying value of the variable interest rate debt approximates its fair value as the borrowings are based on market interest rates. A hypothetical increase of interest rates of 5% on our outstanding variable rate borrowings would result in additional interest expense of approximately $1.7 million.
Inflation
Inflationary factors such as increases in the cost of our products, overhead costs and parcel freight costs have had an impact on our operating results. While we have begun to partially offset inflation and other changes in costs of essential operating resources by slightly increasing prices, along with more efficient purchasing practices and productivity improvements, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our pricing flexibility. There can be no assurance that future cost increases can be offset by increased prices or that increased prices will be fully absorbed by our customers without any resulting change to their purchasing patterns. In addition, there can be no assurance that we will generate overall revenue growth in an amount sufficient to offset inflationary or other cost pressures. The cost of constructing our Outposts is subject to inflation, which could increase the costs of labor and materials. An increasing rate of inflation in the future may have a material adverse effect on our ability to maintain current levels of gross profit and operating expenses, if the selling prices of our products do not increase with these increased costs.
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Item 8. Financial Statements and Supplementary Data
BRC Inc.
Audited Consolidated Financial Statements of BRC Inc. as of December 31, 2022 and 2021 and for the three years ended December 31, 2022
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders’ Deficit F-4
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of BRC Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BRC Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2022 due to the adoption of Accounting Standards Updated (ASU) No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
San Antonio, Texas
March 15, 2023
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BRC Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, except unit amounts)
December 31
Assets
Current assets:
Prepaid expenses and other current assets 6,783 6,377
Operating lease, right-of-use asset 20,050 —
Identifiable intangibles, net 225 167
Liabilities and stockholders’ equity/members’ deficit
Current liabilities:
Deferred revenue and gift card liability 9,505 7,334
Current maturities of long-term debt, net 2,143 11,979
Current operating lease liability 1,360 —
Current maturities of finance lease obligations 95 85
Non-current liabilities:
Finance lease obligations, net of current maturities 221 228
Operating lease liability 19,466 —
Other non-current liabilities 502 334
Commitments and Contingencies (Note 18)
Stockholders’ equity/members’ deficit:
Additional paid in capital 129,508 —
Total BRC Inc.’s stockholders’ equity/members’ deficit 25,796 (149,491)
Non-controlling interests 70,140 —
Total stockholders’ equity/members’ deficit 95,936 (149,491)
See notes to consolidated financial statements.
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BRC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands)
Year Ended December 31
Operating expenses:
Non-operating income (expenses):
Other income (expense), net 339 (55) (227)
Change in fair value of earn-out liabilities (209,651) — —
Change in fair value of warrant liabilities (56,675) — —
Change in fair value of derivative liabilities (2,335) — —
Less: Net loss attributable to non-controlling interest (255,138)
Net loss attributable to BRC Inc. $ (82,906)
Net loss per share attributable to Class A Common Stock(1)
Basic and diluted $ (1.62)
Weighted-average shares of Class A Common Stock outstanding(1)
(1)For the year ended December 31, 2022, net loss per share of Class A Common Stock and weighted-average shares of Class A Common Stock outstanding is representative of the period from February 9, 2022 through December 31, 2022, the period following the Business Combination, as defined in Note 1 - Organization and Nature of Business. For more information, refer to Note 16 - Net Loss per Share.
See notes to consolidated financial statements.
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BRC INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Amounts in Thousands, except for number of shares)
Shares
Equity-based compensation 1,929 — — — — — — — — — 1,929
Non-employee equity-based compensation 1,384 — — — — — — — — — 1,384
Series A preferred discount amortization (870) — — — — — — — — — (870)
Repayment of notes receivable from members 56 — — — — — — — — — 56
Repurchase member units (125,000) — — — — — — — — — (125,000)
Equity-based compensation 3,204 — — — — — — — — — 3,204
Non-employee equity-based compensation 1,492 — — — — — — — — — 1,492
Repurchase of member units (2,953) — — — — — — — — — (2,953)
Net loss prior to Business Combination — — — — — — — — (2,691) — (2,691)
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See notes to consolidated financial statements.
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BRC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Year Ended December 31
Operating activities
Amortization of debt issuance costs 317 358 133
Loss on extinguishment of debt — 726 —
Bad debt expense (recovery) — (51) 195
Loss from equity method investment — — 52
Loss on disposal of property and equipment — 70 —
Change in fair value of warrant liabilities 209,651 — —
Change in fair value of earn-out liabilities 56,675 — —
Change in fair value of derivative liability 2,335 — —
Changes in operating assets and liabilities:
Operating lease liability 776 — —
Net cash provided by (used in) operating activities (116,190) (7,691) 11,546
Investing activities
Financing activities
Repayment of and restricted cash for capital lease obligations — (1,663) (451)
Repurchase of member units — — (125,000)
Repayment of notes receivable from members — — 56
Payment of Series A preferred dividends — (7,001) —
Distribution and redemption of Series A preferred equity (127,853) — —
Financing lease obligations 3 — —
Proceeds from Business Combination, including PIPE investment 337,957 — —
Payment of Business Combination costs (31,638) — —
Redemption of Class A and Class B shares (20,145) — —
Redemption of Incentive Units (3,627) — —
Beginning cash, cash equivalents, and restricted cash 18,334 35,632 5,035
Ending cash, cash equivalents, and restricted cash $ 38,990 $ 18,334 $ 35,632
See notes to consolidated financial statements.
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BRC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in Thousands)
Year Ended December 31
Non-cash operating activities
Accrued other assets $ — $ 750 $ —
Deferred transaction costs $ — $ 1,214 $ —
Recognition of right-of-use operating lease assets $ 20,050 $ — $ —
Non-cash investing and financing activities
Series A preferred equity exchange for PIPE shares $ 26,203 $ 1,406 $ —
Supplemental cash flow information
See notes to consolidated financial statements.
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BRC Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Unit/Share and per Unit/Share Amounts)
December 31, 2022
1.Organization and Nature of Business
BRC Inc., a Delaware public benefit corporation, previously entered into a Business Combination Agreement, dated as of November 2, 2021, as amended by the First Amendment to Business Combination Agreement, dated as of January 4, 2022 ( the "First Amendment" and the Business Combination Agreement as so amended, the "Business Combination Agreement"), each by and among BRC Inc., SilverBox Engaged Merger Corp I, a Delaware corporation, Authentic Brands LLC, a Delaware limited liability company, and certain other parties thereto. On February 9, 2022 (the “Closing Date”), as contemplated by the Business Combination Agreement, a series of transactions (the "Business Combination") were completed (the “Closing”) for an estimated value of $1,839,815 as a result of which Authentic Brands became a subsidiary of BRC Inc., with BRC Inc. acting as sole managing member thereof as a public benefit corporation.
BRC Inc. conducts substantially all of its business through its solely managed subsidiary, Authentic Brands, and its subsidiaries which are consolidated in these financial statements. Authentic Brands, through its wholly-owned subsidiaries, purchases, roasts, and sells high quality coffee, coffee accessories, and branded apparel through its online channels and business networks. Authentic Brands also develops and promotes online content for the purpose of growing its brands.
Unless the context indicates otherwise, references to "the Company," "we," "us" and "our" refers to BRC Inc. and its consolidated subsidiaries following the Closing.
2.Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The Company has prepared the consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States of America.The consolidated financial statements reflect the financial position and operating results of the Company including wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
The Business Combination was accounted for as a reverse recapitalization transaction between entities under common control, whereas Authentic Brands was considered the accounting acquirer and predecessor entity. The Business Combination was reflected as the equivalent of Authentic Brands issuing stock for the net assets of SilverBox, accompanied by a recapitalization with no incremental goodwill or intangible assets recognized.
Authentic Brands was determined to be the predecessor entity to the Business Combination based on a number of considerations, including:
• Authentic Brands former management making up the majority of the management team of BRC Inc.;
• Authentic Brands former management nominating or representing the majority of BRC Inc.'s board of directors;
• Authentic Brands representing the majority of the continuing operations of BRC Inc.; and
• The chief executive officer of Authentic Brands having voting control of the combined company.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Such estimates include but are not limited to estimated losses on accounts receivable, inventory reserves, undiscounted future cash flows and the fair value of assets or asset groups for the purpose of assessing impairment of long-lived assets, liabilities for contingencies, equity-based compensation, estimates for sales returns and related allowance, loyalty rewards, and deferred revenue. Actual results could differ materially from those estimates.
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Revenue from Contracts with Customers
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, or Accounting Standards Codification 606 (“ASC 606”) on January 1, 2019. There were no impacts to the timing of revenue recognition upon the adoption of the standard. Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products. Revenue also excludes any amounts collected on behalf of third parties, including sales and indirect taxes. Revenue recognition is evaluated through the following five steps:
1.Identification of the contract with a customer;
2.Identification of the performance obligations in the contract;
3.Determination of the transaction price;
4.Allocation of the transaction price to the performance obligations in the contract; and
5.Recognition of revenue when or as a performance obligation is satisfied.
Sources and Timing of Revenue
The Company’s revenue is derived from product sales through its e-commerce websites and direct to businesses. In addition, the Company derives revenues from Company-operated store locations, and franchise and license agreements. Revenues from the sale of products and merchandise are recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer and in an amount that reflects the expected consideration to be received in exchange for such goods. As such, customer orders are recorded as deferred revenue prior to delivery of products. As the Company ships high volumes of packages through multiple carriers, it is not practical for the Company to track the actual delivery date of each shipment. Therefore, the Company uses estimates to determine which shipments are delivered and, therefore, recognize revenue at the end of the period. Delivery date estimates are based on average transit times calculated based on factors such as the type of carrier, the fulfillment source, the delivery destination and historical transit time experience. Actual shipping times may differ from the Company’s estimates. Costs to obtain or fulfill a contract with a customer are expensed as incurred and are generally not significant.
Revenues from Company-operated stores are recognized when payment is tendered at the point of sale as the performance obligation has been satisfied. Store revenues are reported excluding sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities.
Deferred Revenue
Deferred revenue consists of amounts billed to or received from customers prior to delivery of products. The Company recognizes such amounts in revenues as the product is delivered.
Gift Cards
Gift cards are offered through the Company’s e-commerce websites through the form of an e-certificate. When a gift card is purchased, the Company recognizes a corresponding liability for the full amount of the gift card, which is recorded in “Deferred revenue and gift card liability” on the consolidated balance sheets. Gift cards can be redeemed online and on the Company’s website. When a gift card is redeemed, the Company reduces the corresponding liability and recognizes revenue. There are no expiration dates to the gift cards. While the Company will continue to honor all gift cards presented for payment, the Company may determine the likelihood of redemption, based on historical experience, is deemed to be remote for certain cards due to long periods of inactivity. In these circumstances if the Company also determines there is no requirement for remitting balances to government agencies under unclaimed property laws, unredeemed card balances may then be recognized as breakage income, which is included in “Revenue, net” on the consolidated statements of operations. The Company recordedno breakage income for the years ended December 31, 2022, 2021 and 2020.
Loyalty Rewards Program
In August 2020, BRCC LLC established its BRCC Loyalty Points rewards program (the “Loyalty Program”), which is primarily a spend-based program. BRCC’s customers who establish an online account are enrolled in the Loyalty Program. Under the program, there are two levels in which customers can participate. Subscription customers (in the BRCC Coffee Club or subscribed to another subscription product type) are considered to be in the highest tier and earn 3.0% on
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purchases. Non-subscription customers earn 1.0% on purchases. In addition to earning points on purchases, customers can earn points through other activities. BRCC reserves the right in its sole discretion to modify, change, add, or remove activities which can be accomplished to earn points at any time. Under the Loyalty Program, customers may redeem rewards as they reach minimum thresholds per reward. The Company reserves the right to modify, change, add, or remove rewards and their points thresholds at any time. BRCC loyalty points will expire if there is no account activity (i.e., if there is no new purchase made or order placed) in a period of twelve months. Conversion of rewards are non-changeable after redemption, have no cash value, and are non-transferrable. A portion of rewards are expected to expire and not be redeemed and will be recognized as income over time. Based on historical expiration rates, the Company estimates a certain percentage of rewards to expire and reassesses this estimate on a quarterly basis. The Company recognized $1,033 and $368 of income related to expired rewards for the years ending December 31, 2022 and 2021, respectively, which was included in “Revenue, net” on the consolidated statement of operations.
The Company defers revenue associated with the points earned through purchases that are expected to be redeemed, net of estimated unredeemed loyalty points. When a customer redeems an earned reward, the Company recognizes revenue for the redeemed product and reduces the related deferred revenue liability. The deferred revenue liability is included in “Deferred revenue and gift card liability” on the consolidated balance sheets.
For those points that are earned through other activities, the Company recognizes the redemption of these points as a discount to the transaction price at time of sale.
The following table provides information about changes in our deferred revenue and gift card liability during the years ended December 31, 2022 and 2021:
Increase from deferral of revenue 7,782
Decrease from revenue recognition (5,063)
Increase from deferral of revenue 7,426
Decrease from revenue recognition (5,255)
Franchise Store Revenues
Franchise rights may be granted through franchise agreements that set out the terms of the arrangement with the franchisee. The franchise agreements require that the franchisee remit continuing fees to the Company as a percentage of the applicable store’s revenues in exchange for the license of the intellectual property associated with BRCC’s brands. In addition, a portion of these fees are used for national marketing campaigns. Continuing fees represent a portion of the consideration the Company receives under the franchise agreement. Continuing fees are typically billed and paid monthly. Continuing fees are recognized as the related store sales occur.
Under the franchise agreement, BRCC sells product to its franchisees. The revenue associated with these product sales are recognized when control of the product passes to the franchisee, typically at the date of delivery of the merchandise to the franchisee and in an amount that reflects the expected consideration to be received in exchange for such goods.
The franchise agreements also typically require upfront franchise fees such as initial fees paid for the execution of a franchise agreement. The fees associated with these agreements are typically billed and paid when a new franchise agreement becomes effective. The Company has determined that the services it provides in exchange for upfront franchise fees, which primarily relate to pre-opening support, are highly interrelated with the franchise right and are not individually distinct from the ongoing services provided to the Company’s franchisees. As a result, upfront franchise fees are recognized as revenue over the term of each respective franchise agreement, generally 10 years. Revenues for these upfront franchise fees are recognized on a straight-line basis, which is consistent with the franchisee’s right to use and benefit from the intellectual property. Revenues from continuing fees and upfront franchise fees are presented within Revenue in the consolidated statements of operations.
License Revenues
License rights may be granted through license agreements that set out the terms of the Company’s arrangement with the licensee. The Company’s license agreements require that the licensee remit continuing fees to the Company as a percentage of the applicable store’s revenues in exchange for the license of the intellectual property associated with
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BRCC’s brands. In addition, licensed store revenues consist of product sales to the licensee. The revenue associated with these product sales are recognized when control of the product passes to the licensee, typically at the date of delivery of the merchandise to the licensee and in an amount that reflects the expected consideration to be received in exchange for such goods. Continuing fees are recognized as the related store sales occur.
The Company’s license agreements also typically require upfront license fees such as initial fees paid for the execution of a license agreement. The fees associated with these agreements are typically billed and paid when a new license agreement becomes effective. The Company has determined the services it provides in exchange for upfront license fees, which primarily relate to initial license set up and are not individually distinct from the ongoing services it provides to its licensees. As a result, upfront license fees are recognized as revenue over the term of each respective license agreement, generally 10 years. Revenues for these upfront license fees are recognized on a straight-line basis, which is consistent with the licensee’s right to use and benefit from the intellectual property. Revenues from continuing fees and upfront license fees are presented within “Revenue, net” in the consolidated statements of operations.
Disaggregation of Revenue
The Company disaggregates revenue by sales channel. The Direct to Consumer channel is principally comprised of revenue from our e-commerce websites and subscription services directly to the consumer. The Wholesale channel includes product revenue sold to an intermediary and not directly to the consumer. The Outpost channel includes revenue from Company-operated stores, gift cards, franchise store and licensing.
The following table disaggregates revenue by sales channel:
December 31
Substantially all revenue is generated from customers located in the United States. One customer and their affiliate represents 12% of revenue for the year ended December 31, 2022. No customers for the years ended December 31, 2021 and 2020 exceeded 10% of revenue.
Sales Returns and Discounts
The Company’s product sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, charge backs, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur.
The Company inspects returned items when they arrive at its processing facilities. The Company refunds the full cost of the merchandise returned if the returned item is defective or the Company or its partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products the Company refunds the full cost of the merchandise less the original shipping charge and actual return shipping fees. If the customer returns an item that has been opened or shows signs of wear, the Company issues a partial refund minus the original shipping charge and actual return shipping fees. Coffee products are not eligible for returns. Revenue is recorded net of estimated returns. The Company records an allowance for returns based on current period revenues and historical returns experience. The Company analyzes actual historical returns, current economic trends and changes in order volume and acceptance of its products when evaluating the adequacy of the sales returns allowance in any accounting period. The allowance for sales returns and charge backs was $942 and $199 as of December 31, 2022 and 2021, respectively, and included in accounts receivable.
Shipping and Handling Fees and Costs
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of the performance obligation.
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Segment Information
The Company reports operations as a single reportable segment and manages the business as a single-brand consumer products business. This is supported by the operational structure, which includes sales, product design, operations, marketing, and administrative functions focused on the entire product suite rather than individual product categories or sales channels. Our chief operating decision maker reviews financial information on a consolidated basis and does not regularly review financial information for individual sales channels, product categories or geographic regions that would allow decisions to be made about allocation of resources or performance.
Cost of Goods Sold
Cost of goods sold includes product costs, labor costs, occupancy costs, outbound shipping costs, handling and fulfillment costs, credit card fees, and royalty fees, and is recorded in the period incurred.
Cash, and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents also include proceeds due from credit card transactions with settlement terms of less than five days. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances, and it believes credit risk to be minimal.
Accounts Receivable
Accounts receivable consist primarily of trade amounts due from business customers at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. From time to time, the Company grants credit to some of its business customers on normal credit terms. The Company maintains an allowance for doubtful accounts receivable based upon its business customers’ financial condition and payment history, and its historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $156 and $112 as of December 31, 2022 and 2021, respectively.
Inventories
Inventories are stated at the lower of standard cost, which approximates First In , First Out (FIFO), or net realizable value. The Company records inventory reserves for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of the specific identification method. Finished goods includes allocations of labor and occupancy expenses.
Property and Equipment
Property and equipment are stated at cost with depreciation calculated using the straight-line method over the estimated useful lives of the related assets or the term of the related finance lease, whichever is shorter. Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings for the period. The cost of maintenance and repairs are charged to earnings as incurred; significant renewals and improvements are capitalized.
Estimated useful lives are as follows:
EstimatedUseful Lives
Land —
Building and Leasehold improvements 5 – 39 years
Computer equipment and software 3 years
Machinery and equipment 5 – 15 years
Vehicles 5 years
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Internal Use Software
In accordance with ASC 350-40, Intangibles — Goodwill and Other, Internal-Use Software (ASC 350-40), the Company capitalizes qualifying internal use software costs that are incurred during the application development stage if management with the relevant authority authorizes the project, it is probable the project will be completed, and the software will be used to perform the function intended. Capitalized internal use software costs are reported in property and equipment on the consolidated balance sheets and are amortized over the expected economic life of three years using the straight-line method once the software is ready for intended use. Costs incurred for enhancements that are expected to result in additional significant functionality are capitalized and amortized over the estimated useful life of the enhancement. Costs related to preliminary project activities and post-implementation activities, including training and maintenance, are expensed as incurred. Capitalized software costs net of accumulated amortization are included as a component of property and equipment in the consolidated balance sheets.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and identifiable intangible assets, when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted pre-tax cash flows of the related operations. If these undiscounted cash flows are less than the carrying amount of the related asset, an impairment is recognized for the excess of the carrying value over its fair value. No impairment loss was recognized for the years ended December 31, 2022, 2021 and 2020.
Leases
The Company leases certain property and equipment under non-cancelable finance and operating leases which expire at various dates through 2026. The Company’s operating leases relate to roasting facilities in Tennessee and retail stores.
At the inception of each lease, the Company determines the appropriate classification for each lease as operating or finance. The Company has estimated that the lease term for retail stores is generally 10 to 15 years. Any initial direct costs are capitalized and amortized over the life of the lease.
Operating Leases
Operating leases can contain escalating rentals over the lease term, as well as optional renewal periods. Rent expense for operating leases is recorded on a straight-line basis over the lease term and begins when the Company has the right to use the property. Any difference between rent expense and cash payment is recorded as deferred rent on the accompanying consolidated balance sheets. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions to rent expense over the term of the lease.
Finance Leases
Property under finance leases is stated at the net present value of the related minimum lease payments at lease inception and amortized over the initial lease term.
Income Taxes
The Company accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if it is determined that it is more likely than not that the DTA will not be realized. The Company records interest and penalty expense related to income taxes as interest and other expense, respectively.
The Company evaluates and accounts for uncertain tax positions using a two-step approach: Step 1. Recognition – occurs when the Company concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustainable upon examination. Step 2. Measurement – determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more likely-than-not threshold of being sustained.
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Equity-Based Compensation
The Company recognizes the cost of equity-based compensation awards and incentive unit awards based on the fair value estimated in accordance with FASB ASC 718, Stock Based Compensation (ASC 718). The Company records equity-based compensation expense for awards with only a service based vesting condition based on the fair value of such awards at the grant date and recognizes compensation expense on a straight-line basis over the requisite service period. Equity-based compensation expense for awards with market based vesting conditions is recorded based on the fair value of such awards at the grant date and recognized on an accelerated basis over the requisite service period. The assumptions used to calculate the fair value of equity awards granted are evaluated and revised, as necessary, to reflect the Company’s historical experience and current market conditions. For more information, see Note 13, Equity-Based Compensation.
Earnings per Share
Basic net loss per share is calculated by dividing net loss attributable to Class A common stockholders by the weighted-average shares of Class A common shares outstanding without the consideration for potential dilutive securities. Diluted net loss per share represents basic net loss per share adjusted to include the potentially dilutive effect of outstanding unvested share awards, and units of Authentic Brands designated as common units (the “Common Units”) and restricted units (the “Restricted Common Units”) in the Third Amended and Restated Limited Liability Company Operating Agreement of Authentic Brands (the "LLC Agreement") that are exchangeable into shares of Class A common stock. Diluted net loss per share is computed by dividing the net income attributable to Class A common shareholders by the weighted-average number of shares of Class A common stock outstanding for the period determined using the treasury stock method and if-converted method, as applicable. For more information, see Note 16, Net Loss Per Share.
Concentrations of Credit Risk
The Company’s assets that are potentially subject to concentrations of credit risk are cash and accounts receivable. Cash balances are maintained in financial institutions which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which its accounts are maintained and has not experienced any losses in such accounts. The accounts receivable of the Company are spread over a number of customers, of which three customers accounted for 51.0% of total outstanding receivables as of December 31, 2022 and one customer accounted for 19.0% of total outstanding receivables as of December 31, 2021. The Company performs ongoing credit evaluations as to the financial condition of its customers and creditors with respect to trade accounts.
Marketing and Advertising Expenses
The Company’s marketing and advertising expenses are primarily internet marketing expenses, commercial sponsorships and advertising time slots. Marketing expenses are recognized as incurred based on the terms of the individual agreements, which are generally, but not limited to: a commission for traffic driven to its websites that generate a sale, programmatic targeting advertisements, national television and radio advertisements, or payments to social media influencers. We may also enter into marketing service agreements with third party production and content providers where we prepay for certain services or deliverables. Prepaid marketing and advertising expenses totaled $1,050and $1,941 for the years ended December 31, 2022 and 2021, respectively.
Fair Value Measurements
The Company’s financial instruments consist primarily of accounts receivable, accounts payable and long-term debt. The carrying amounts of accounts receivable and accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair value of variable rate long-term debt is based upon the current market rates for debt with similar credit risk and maturity, which approximated its carrying value, as interest is based upon the Bloomberg Short-Term Bank Yield Index or Prime rates plus an applicable floating margin. In measuring fair value, the Company reflects the impact of credit risk on liabilities, as well as any collateral. The Company also considers the credit standing of counterparties in measuring the fair value of assets.
The Company uses any of three valuation techniques to measure fair value: the market approach, the income approach, and the cost approach in determining the appropriate valuation technique based on the nature of the asset or liability being measured and the reliability of the inputs used in arriving at fair value.
The Company follows the provisions of ASC 820, Fair Value Measurements (ASC 820) for non-financial assets and liabilities measured on a non-recurring basis.
The inputs used in applying valuation techniques include assumptions that market participants would use in pricing the asset or liability (i.e., assumptions about risk). Inputs may be observable or unobservable. The Company uses observable
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inputs in the Company’s valuation techniques and classifies those inputs in accordance with the fair value hierarchy established by applicable accounting guidance, which prioritizes those inputs. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels are defined as follows:
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Series A Redeemable Preferred Equity
The Company accounted for its preferred equity as temporary equity, given the Series A preferred units were probable of becoming redeemable (i.e., exercise of the exit rights is the passage of time). The Series A preferred units had been subsequently remeasured by accreting changes in the redemption value from the date of issuance to the expected redemption date using the effective interest method. The Series A preferred units were redeemed in February 2022 in connection with the Business Combination. For more information, see Note 12, Series A Redeemable Preferred Equity and Derivative Liability.
Comprehensive Income (Loss)
Comprehensive income (loss) is equivalent to net income (loss) in each of the periods presented. As such, no statement of comprehensive income (loss) is presented.
New Accounting Pronouncements
On January 1, 2022, the Company adopted a new standard from the FASB which simplified guidance on an issuer's accounting for convertible instruments and contracts in an entity's own equity. It also amended certain guidance related to the computation of earnings per share for convertible instruments and contracts in an entity's own equity. There was no material impact to the Company's financial statements as a result of this adoption.
On January 1, 2022, the Company adopted new guidance from the FASB on the recognition and measurement of leased assets and liabilities utilizing the modified retrospective approach. As a result, the prior period information reported under the previous lease guidance has not been restated.
As permitted under the new guidance, the Company elected certain practical expedients, which allowed us to retain our prior conclusions regarding lease identification, classification and initial direct costs. For our lease agreements with lease and non-lease components, we elected the practical expedient to account for these as a single lease component for all underlying classes of assets. Upon adoption, we elected to use hindsight for our existing leases in determining lease term and in assessing impairment. Additionally, for short-term leases with an initial lease term of 12 months or could reasonably be certain will not be exercised or material to the financial statements, we elected to not record right-of-use assets or corresponding lease obligations on our consolidated balance sheet. We will continue to record rent expense for each short-term lease on a straight-line basis over the lease term.
The new guidance had a material impact on our consolidated balance sheet; however, it did not have a material impact on our consolidated statement of operations. The most material impact was the recognition of right-of-use assets of $7,560, with corresponding lease liabilities of $7,689 relating to our operating leases. Existing deferred rent of approximately $129, previously recorded within other long-term liabilities, was recorded as an offset to our gross operating lease right-of-use assets. See Note 8, Leases, for further discussion regarding the adoption of this guidance.
The FASB issued a new credit loss standard that introduces a new credit loss methodology for estimating allowances for credit losses. The standard requires measurement and recognition of expected credit losses for financial assets held by
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the Company be recognized immediately over the remaining life of the financial assets. The estimate of expected losses is based on information about past and current economic conditions and reasonable forecasts of future economic conditions that affect financial assets deemed uncollectible. The new standard takes effect in fiscal years beginning after December 15, 2022 and upon adoption, we do not expect the new standard to have a material impact to the consolidated financial statements.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA introduces a 15% corporate alternative minimum tax ("CAMT") for corporations whose average annual adjusted financial statement income for any consecutive three-tax-year period preceding the applicable tax year exceeds $1 billion, and a 1% excise tax on certain stock repurchases. The CAMT and the excise tax are effective in taxable years beginning after December 31, 2022. The Company is evaluating the provisions of the new law and its potential impact but we do not expect the enactment of these provisions to have a material impact to the consolidated financial statements.
3.Product Sales and Marketing Services Agreement
The Company entered into a product sales and marketing services agreement (the “Agreement”) with a large retailer to sell select coffee products and merchandise items to the retailer to be sold in the retailer’s stores and website. The Agreement was effective January 28, 2020 and is to continue through April 2, 2025. After this initial term, the Agreement automatically renews for an additional two years until terminated in accordance with its terms.
The revenues associated to product sales to the retailer are recognized when control of the product passes to the retailer, typically at the date of delivery of the merchandise to the retailer and in an amount that reflects the expected consideration to be received in exchange for such goods. In addition to product sales, the Agreement provides a licensing agreement with the retailer and its suppliers. The licensing agreement provides the retailer and its suppliers license rights to the intellectual property of select BRCC brands. These license rights provide the retailer the ability to manufacture its own BRCC branded soft goods and hard goods. License fees are recognized as the related purchases occur by the retailer. For the year ended December 31, 2022, the Company’s revenues related to the Agreement for product sales and license fees were $6,355 and $924, respectively. For the year ended December 31, 2021, the Company’s revenues related to the Agreement for product sales and licenses fees were $8,121 and $1,111, respectively.
As part of the Agreement, the Company entered into a marketing services agreement, which is effective through April 2, 2025. As part of the marketing services agreement, the Company granted 5,430 Class B common units in the Company which vest over a 30-month period from date of grant. The equity grant date is January 28, 2020, and total expense related to the equity award was $3,725.
In December 2021, the Agreement was amended to reduce the marketing service fees paid to the retailer over the term of the Agreement. The Company has accrued marketing expenses relating to the Agreement of $250 and $950 at December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, the Company recognized marketing expenses of $1,849 and $1,606, respectively.
The following is the amended future minimum cash payments due to the retailer:
The marketing services agreement is a separate distinct service from the product supply agreement. The Company will expense the costs associated with the Agreement in accordance with applicable guidance related to similar transactions.
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4.Inventories
Inventories consist of the following:
December 31
Coffee:
Ready-to-Drink (raw materials) 16,610 —
Apparel and other merchandise 6,928 7,886
5.Property and Equipment, Net and Other Assets
Property and equipment, net consists of the following:
December 31
Computer equipment and software 6,071 3,474
Less: accumulated depreciation and amortization (9,733) (5,406)
The portion of depreciation expense related to production and distribution facilities is included in cost of goods sold including occupancy costs on the consolidated statements of operations. Depreciation expense recorded in cost of goods sold and general and administrative expenses was as follows:
December 31
The total depreciation expense for internal use software included in the above table was $732, $798 and $138 for the years ended December 31, 2022, 2021 and 2020, respectively.
Substantially all long-lived assets are located in the United States.
Other Assets
In August 2021, the Company entered into an agreement with a related party, whereby the Company agreed to reimburse the related party for initial direct costs incurred totaling $1,000 for establishing retail coffee shop locations in the Phoenix, Arizona metropolitan area. After additional site evaluation in the fourth quarter 2021, the direct costs were subsequently written down to $571 as some locations will not be utilized.
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In the fourth quarter of 2022, additional site evaluations were completed and an additional $331 was written off as the decision was made to not utilize certain sites. The remaining direct costs are included in Other assets for the respective Outposts and will be amortized over the life of the completed lease agreements.
6. Accrued Liabilities
Accrued liabilities consist of the following:
December 31
Accrued compensation and benefits $ 7,393 $ 2,799
Accrued Series A preferred equity distribution — 2,650
Accrued inventory purchases 15,035 —
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7. Long-Term Debt
The Company’s long-term debt was as follows:
December 31
Equipment term loan 3,814 —
Credit facility — 8,000
Senior Credit Facility 30,000 —
Less debt issuance costs (400) (439)
Current maturities:
Current maturities of principal $ 2,259 $ 12,273
Less current portion of debt issuance costs (116) (294)
Current maturities of long-term debt, net $ 2,143 $ 11,979
Long-term debt:
Less non-current portion of debt issuance costs (284) (145)
Future contractual maturities of credit facilities and other debt as of December 31, 2022 are as follows:
Year ending December 31:
Debt Issuance Costs
The Company capitalizes fees associated with the origination of its credit facilities and other debt which are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the related loans. The debt issuance costs are amortized using the effective interest method. The Company incurred debt issuance costs of $288 and $338 for the years ended December 31, 2022 and 2021, respectively. Amortization of the debt issuance costs for the years ended December 31, 2022, 2021 and 2020 was $317, $358 and $133, respectively, and are included in interest expense in the consolidated statements of operations.
Mortgages
In July 2020, the Company entered into mortgage loan agreements to refinance the purchase of buildings for a total of $5,500 at an interest rate of 3.67% per annum. The loans are secured by the real property financed. The loans mature on July 29, 2025. The loans are payable in monthly installments of principal and interest of $32 commencing on August 29, 2020.
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In April 2021, the Company entered into a mortgage loan agreement to purchase a building for a total of $2,200 at an interest rate of 3.60% per annum. The loan is secured by the real property financed. The loan matures on April 29, 2026. The loan is payable in monthly installments of principal and interest of $13 that commenced on May 29, 2021.
Equipment Financing Loan
In July 2020, the Company entered into an equipment financing agreement which provided a credit line totaling $3,250 at an interest rate of Bloomberg Short Term Bank Yield Index plus 3.50%. The credit line is secured by the equipment financed.
In April 2021, the Company increased its equipment credit line by $10,000. Further, in July 2021, an additional $6,000 was added to the available credit on the equipment finance loan. In September 2021, $1,998 outstanding on the equipment credit line was converted to a 60-month term loan at an interest rate of 4.05% to be utilized for retail expansion (“Retail Facility”).
Equipment Term Loan
In August 2022, borrowings under the equipment financing loan of $4,043 were converted into the Equipment Term Loan (the “Term Loan”). The Term Loan is secured by the equipment financed and matures in June 2029 bearing an interest rate of 6.88%.
Credit Facility
In April 2021, the Company entered into a $10,000 revolving line of credit agreement (“Credit Facility”).
In November 2021, the Company entered into an amendment to increase the Credit Facility to $25,000. Interest only payments were due and payable in installments commencing November 30, 2021 and continue regularly until the entire amount outstanding is due on June 30, 2023. As of December 31, 2022, no amounts were outstanding under the Credit Facility.
Senior Credit Facility
In November 2022, Authentic Brands and certain of its subsidiaries entered into a new credit agreement with Regions Bank, which provides for a revolving credit facility of up to $65,000, subject to a borrowing base determined from eligible accounts receivable and inventory (the "Senior Credit Facility"). In connection with the entry into the Senior Credit Facility, Authentic Brands and certain of its subsidiaries each granted a security interest in and liens upon substantially all of their assets in favor of the lender to secure obligations under the Senior Credit Facility. As of December 31, 2022, Authentic Brands has available credit under the Senior Credit Facility of $21,194. The Senior Credit Facility bears a variable interest rate based on the BSBY plus an applicable margin of either (i) 2.25% if excess borrowing availability is less than or equal to fifty percent of borrowing base, or (ii) 2.00% if excess borrowing availability is greater than fifty percent of borrowing base and matures in November 2027.
The Senior Credit Facility contains customary representations and affirmative and negative covenants, including limitations on Authentic Brands’ and its subsidiaries’ ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, and enter into affiliate transactions, in each case, subject to customary exceptions. In addition, the Senior Credit Facility contains financial covenants requiring Authentic Brands to maintain (i) minimum liquidity (as defined in the credit agreement) of at least $15,000, and (ii) a fixed charge coverage ratio (as defined in the credit agreement) of not less than 1:00 to 1:00, measured on a trailing 12-month basis beginning in March 2024 and for each month thereafter. At December 31, 2022, the Company was in compliance with such covenants. The Senior Credit Facility also includes events of default customary for
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facilities of this type and upon the occurrence of such events of default, among other things, all outstanding amounts under the Senior Credit Facility may be accelerated and the lender may terminate is commitments thereunder.
Promissory Note
In November 2021, the Company entered into a revolving loan agreement to borrow an aggregate principal amount not to exceed $15,000 (the “Promissory Note”). The Promissory Note matured on June 30, 2022.
In January 2022, the Company borrowed $5,000 under the Promissory Note. In February 2022, Authentic Brands repaid the $15,000 outstanding on the Promissory Note and the Promissory Note was terminated.
Notes PayableAgreements
In May 2021, the Company entered into a note payable agreement for $365 at an interest rate of 1.07% per annum. The note matures on May 14, 2025. The loan is payable in four annual installments of principal commencing in May 2021. In May 2022, Authentic Brands fully repaid the note payable for $272.
In July and September 2021, the Company entered into note payable agreements for $2,588 at an interest rate of approximately 1.00% per annum to repurchase Incentive Units from former employees. The notes are payable in four annual installment payments. As of December 31, 2022, the outstanding balance on this note payable is $1,941.
In January 2022, the Company entered into a note payable agreement for $1,599 at an interest rate of 1.30% per annum to repurchase Incentive Units from a former employee. The note matures on January 14, 2026. The loan is payable in four annual installments of principal commencing on January 14, 2023.
Guaranty
In March 2022, BRC Inc. entered into a guaranty agreement to guaranty payment of all the Authentic Brands’ outstanding mortgage loans, the equipment financing loan, and the Retail Facility. That guaranty agreement was terminated in November 2022 in connection with the entry into the Senior Credit Facility.
8. Leases
The majority of our leases are operating leases for our Company-operated Outposts. We also lease distribution and warehouse facilities. We do not enter into material lease transactions with related parties. We categorize leases as either operating or finance leases at the commencement date of the lease. Operating lease agreements may contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. We have lease agreements with lease and non-lease components, which are accounted for together as a single lease component for underlying classes of assets.
We recognize a right-of-use (“ROU”) asset and lease liability for each operating lease with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term. Our leases often include options to extend or terminate at our sole discretion, which are included in the determination of lease term when they are reasonably certain to be exercised.
Our lease liability represents the present value of future lease payments over the lease term. We cannot determine the interest rate implicit in each of our leases. Therefore, we use market and term-specific incremental borrowing rates. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. We considered a combination of factors, including the rates that we currently pay on our lines of credit, lease terms and the effect of adjusting the rate to reflect the term consideration of collateral. Our credit-adjusted risk-free rate takes into consideration the interest rate we pay on our Retail Facility.
Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs and short-term lease costs. Our real estate leases may require we pay certain expenses, such as common area maintenance costs, real estate taxes and other executory costs, of which any fixed portion would be included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our Company-operated Outposts, and their related costs are recorded within General and administrative expenses on the statement of operations.
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The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, initial direct costs, and any material tenant improvement allowances reasonably certain to be received. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
The components of lease costs:
December 31,
Operating leases costs $ 1,579
Short-term lease costs 201
Total lease costs $ 1,780
The following table includes supplemental information:
December 31,
Weighted-average remaining operating lease term (in years) 9
Weighted-average operating lease discount rate 4.56%
Cash paid related to operating lease liabilities was$1,600 for the year ended December 31, 2022.
The total operating lease liability arising from ROU assets was $13,777 for the year ended December 31, 2022. This amount excludes the initial impact of adoption. See Note 2, Summary of Significant Accounting Policies, for additional information.
Finance lease assets are recorded in property, plant, and equipment, net with the corresponding finance lease liabilities on the consolidated balance sheet. Finance leases were immaterial as of December 31, 2022.
Minimum future maturities of operating lease liabilities as of December 31, 2022 were as follows:
Less imputed interest (30,330)
As of December 31, 2022, we have entered into operating leases that have not yet commenced of $66,843, primarily related to real estate leases. These leases will commence between fiscal year 2023 and fiscal year 2024 with lease terms of 10 years to 20 years.
Previous Lease Guidance Disclosures
Rent expense for operating lease agreements under the previous lease guidance, which excludes certain amounts required under the new guidance, was $1,224 and $820 for years ended December 31, 2021 and 2020 respectively.
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The minimum future rental payments under non-cancelable operating leases and finance leases under the previous lease guidance as of December 31, 2022:
Operating Leases Finance Leases
Year ending December 31:
Total minimum lease payments $ 16,261 $ 357
Finance Leases:
Less amount representing interest 44
Present value of net minimum lease payments 313
Less current portion 85
Finance lease obligations, net of current maturities $ 228
9. Earn-out Liability
At the Closing, certain stockholders were entitled to receive up to 21,241,250 earn-out shares, in the form of Common Units of Authentic Brands and Class A Common Stock of the Company, if certain milestones were satisfied. A total of 50.0% of the earn-out shares were issuable ("First Tier Vesting Event"), in the aggregate, if the volume weighted average trading price of the Company's Class A Common Stock was $15.00 or greater for any 20 trading days within a period of 30 trading days prior to the fifth anniversary of the Closing. The remaining 50.0% of earn-out shares were issuable ("Second Tier Vesting Event"), in the aggregate, if the volume weighted average trading price of the Company’s Class A Common Stock was $20.00 or greater for any 20 trading days within a period of 30 trading days prior to the seventh anniversary of the Closing.
In March 2022, the First Tier Vesting Event occurred, as a result of which 694,062 shares of Class C Common Stock (as defined below) were exchanged for 694,062 shares of Class A Common Stock and 9,926,563 Restricted Common Units of Authentic Brands were converted into Common Units of Authentic Brands and BRC Inc. issued 9,926,563 shares of Class B Common Stock to the holders thereof.
In April 2022, the Second Tier Vesting Event occurred, as a result of which 694,063 shares of Class C Common Stock were exchanged for 694,063 shares of Class A Common Stock and 9,926,562 Restricted Common Units of Authentic Brands were converted into Common Units of Authentic Brands and BRC Inc. issued 9,926,562 shares of Class B Common Stock to the holders thereof.
The earn-out liabilities were initially measured at fair value at the Closing and subsequently remeasured at the end of each reporting period and vesting dates. The changes in fair value of the earn-out liabilities were recorded as Non-operating income (expense), net in the consolidated statement of operations.
The following table is a summary of the earn-out liability changes in fair value and the reported balances:
Total
Loss on change in fair value 171,098
First Tier Vesting Event (172,372)
Loss on change in fair value 38,553
Second Tier Vesting Event (255,957)
Balance as of December 31, 2022 $ —
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10. Warrant Liability
In connection with the Business Combination, the Company assumed from SilverBox 11,499,974 public warrants and 6,266,667 private placement warrants. Each warrant entitled its holder to purchase one share of Class A Common Stock at an exercise price of $11.50 per share, subject to certain adjustments.
In May 2022, the Company redeemed all of its outstanding public and private placement warrants in accordance with a warrant agreement between Continental Stock Transfer & Trust Company and SilverBox (the “Warrant Agreement”). During the redemption period, the holders of warrants had the option to exercise warrants on a “cashless” basis to receive 0.361 shares of Class A Common Stock per warrant in lieu of receiving the redemption price. In connection with the redemption, 11,396,726 public warrants and 6,266,667 private placement warrants, representing approximately 99.0% of the public warrants and 100.0% of the private placement warrants, respectively, were exercised on a cashless basis in exchange for an aggregate of 6,376,346 shares of Class A Common Stock. A total of 103,218 public warrants remained unexercised in May 2022 and such unexercised public warrants were redeemed for an aggregate redemption price of $10.00, representing a redemption price of $0.10 per warrant. Following the redemption, the Company had no warrants outstanding. In connection with the redemption, the warrants ceased trading on the New York Stock Exchange and were delisted.
The warrant liabilities were initially measured at fair value at the Closing and subsequently remeasured at the end of each reporting period. The changes in fair value of the warrant liabilities were recorded as Non-operating income (expense), net in the consolidated statement of operations.
The following table is a summary of the warrants changes in fair value and the reported balances:
Total
Initial fair value, as of February 9, 2022 $ 36,484
Loss on change in fair value 62,110
Gain on change in fair value (5,435)
Warrant redemption (93,159)
Balance as of December 31, 2022 $ —
11. Stockholders’ Equity
In conjunction with the Business Combination on February 9, 2022, 18,769 class A common units and 73,890 class B common units of Authentic Brands (the holders thereof, the "Existing Members") were converted into an aggregate of 139,106,323 Common Units in Authentic Brands and 19,853,125 Restricted Common Units in Authentic Brands. The Existing Members also received 139,106,323 shares of Class B Common Stock of the Company.
Subsequent to the Business Combination, the Company's authorized capital stock consists of 2,802,500,000 shares including (i) 2,500,000,000 shares of Class A Common Stock, (ii) 300,000,000 shares of Class B Common Stock, (iii) 1,500,000 shares of Class C common stock, par value $0.0001 per share, and (iv) 1,000,000 shares of Preferred Stock, par value $0.0001 per share. The Class C Common Stock is divided into two series as follows: (a) 750,000 shares of Series C-1 Common Stock, par value $0.0001 per share; and (b) 750,000 shares of Series C-2 Common Stock, par value $0.0001 per share.
Holders of the Company's Class A Common Stock and the Class B Common Stock are each entitled to one vote per share, and holders of the Class C Common Stock do not have any voting rights. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of our Class A Common Stock are entitled to receive dividends and other distributions as may from time to time be declared by the our board of directors at its discretion out of legally available Company assets, ratably in proportion to the number of shares held by each such holder, and at such times and in such amounts as the board of directors in its discretion may determine. No dividends or other distributions will be declared or paid on the Class B Common Stock or the Class C Common Stock.
A holder of Class B Common Stock may transfer or assign shares of Class B Common Stock only if such holder also simultaneously transfers an equal number of such holder’s Common Units in compliance with and as permitted by the LLC Agreement.