BRC Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the annual audited consolidated financial statements, notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), contained in our Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K") . In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause the Company's actual results to differ materially from management’s expectations. When used in this report, the terms “we,” “us,” “our,” “BRCC,” “Black Rifle Coffee,” “Black Rifle Coffee Company,” and the “Company” mean BRC Inc. and its consolidated subsidiaries, collectively, unless the context requires otherwise. 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 2.4 million consumers through our Direct To Consumer ("DTC") channel since inception, more than 231,000 active Coffee Club subscribers, and 13.5 million social media followers across BRCC's, our co-founders', and our key media personalities' accounts as of June 30, 2023. At BRCC, 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 BRCC-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 duty 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 of 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 one roasting facility focused on large batch roasting. Our coffee beans are primarily roasted in-house 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 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 product sold to an intermediary such as grocery stores, who in turn sell those products to consumers, including the Food, Drug and Mass ("FDM") customer set, such as Walmart, specialty retail, such as Bass Pro, and convenience stores which primarily sell our Ready-to-Drink ("RTD") products, such as 7-Eleven. Our Outpost channel includes revenue from our Company-operated and franchised BRCC retail coffee shop locations. We continue to experience strong revenue growth. Revenue increased to $91.9 million and $175.4 million for the three and six months ended June 30, 2023, respectively, as compared to $66.4 million and $132.2 million for the three and six months ended June 30, 2022, respectively, representing growth of 39% and 33%, respectively. This growth was primarily driven by our entry into the FDM market for bagged coffee and rounds products, and increases in RTD product sales, both of which are included in the Wholesale channel. 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 by the individual controlling Authentic Brands prior to the Business Combination, who also controls the combined company post Business Combination. 30 Table of Contents Trends Certain trends affecting our business within the respective sales channels are as follows: • Wholesale channel revenue has increased as we have added new customers and entered the FDM market. We expect to see increased revenue within this channel as we increase investment to obtain new customers and expand in the FDM market. • DTC revenue growth has slightly declined as a result of our decision to redirect investments to other growing areas of the business as we continue to experience elevated DTC customer acquisition costs. • Outpost channel revenue has increased as we continue to open additional stores during 2023. Revenue within this channel will increase as we and our franchise partners continue to open additional stores. 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 with the ability to increase brand awareness and drive consumer interaction. Consumer appreciation of our brands is primarily reflected in the general increase in sales across our three channels 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 28% 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 repurchase 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 continue to 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 another 11-ounce SKU and three high-caffeine, boldly-flavored 15-ounce SKUs. Four of these SKUs have grown to become top-35 products in the RTD coffee category on a dollar to percent average cost value basis and can be found in more than 82,000 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 coffee beans possible to deliver to our customers. 31 Table of Contents 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, and 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. 70% 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, leads cupping, grading, scoring, and sourcing of our coffees. We also must effectively manage our co-manufacturers and suppliers, and are party to long term contracts which frequently require minimum future quantities, which, if not met, will result in "take or pay" charges to us. Results of Our Operations This discussion and analysis pertains to comparisons of material changes on the unaudited consolidated financial statements for three and six months ended June 30, 2023 and 2022. The following table represents the selected results of operations for BRC Inc. for the periods indicated ( dollars in thousands, unaudited ): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue, net $ 91,947 $ 66,365 $ 175,437 $ 132,201 Cost of goods sold 59,741 43,809 115,720 86,432 Gross profit 32,206 22,556 59,717 45,769 Operating expenses Marketing and advertising 7,013 9,026 14,157 17,177 Salaries, wages and benefits 18,356 15,539 38,180 31,557 General and administrative 19,296 14,831 37,054 29,718 Impairment on assets held for sale 1,202 — 1,202 — Total operating expenses 45,867 39,396 90,593 78,452 Operating loss (13,661) (16,840) (30,876) (32,683) Non-operating income (expense) Interest expense, net (791) (176) (1,114) (666) Other income (expense), net (156) (56) 117 293 Change in fair value of earn-out liability — (38,553) — (209,651) Change in fair value of warrant liability — 5,435 — (56,675) Change in fair value of derivative liability — 5,172 — (2,335) Total non-operating income (expenses) (947) (28,178) (997) (269,034) Loss before income taxes (14,608) (45,018) (31,873) (301,717) Income tax expense 57 67 113 195 Net loss $ (14,665) $ (45,085) $ (31,986) $ (301,912) 32 Table of Contents Results of Our Operating Income (Expense) Comparison of the three months ended June 30, 2023 to the three months ended June 30, 2022 The following table compares the three months ended June 30, 2023 to the corresponding period in 2022 ( dollars in thousands, unaudited ): Three Months Ended June 30, 2023 2022 $ Change % Change Revenue, net $ 91,947 $ 66,365 $ 25,582 39 % Cost of goods sold 59,741 43,809 15,932 36 % Gross profit $ 32,206 $ 22,556 $ 9,650 43 % Gross margin (1) 35.0 % 34.0 % Total operating expenses $ 45,867 $ 39,396 $ 6,471 16 % (1) Gross margin is calculated as gross profit as percentage of revenue, net 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. Net revenue for the three months ended June 30, 2023 increased $25.6 million, or 39%, to $91.9 million as compared to $66.4 million for the corresponding period in 2022. This increase was primarily due to our entry into the FDM market for bagged coffee and rounds products, and increases in RTD product sales, both of which are included in the Wholesale channel. The following table summarizes net sales by channel for the periods indicated ( dollars in thousands, unaudited ): Three Months Ended June 30, 2023 2022 $ Change % Change Wholesale $ 50,010 $ 23,971 $ 26,039 109% Direct to Consumer 34,586 36,962 (2,376) (6)% Outpost 7,351 5,432 1,919 35% Total net sales $ 91,947 $ 66,365 $ 25,582 39% Net revenue for our Wholesale channel for the three months ended June 30, 2023 increased $26.0 million, or 109%, to $50.0 million as compared to $24.0 million for the corresponding period in 2022. The largest increase came from the entry into the FDM Wholesale channel. In addition, RTD product sales increased through national distributors and retail accounts from 67,000 doors as of June 30, 2022 to 82,000 doors as of June 30, 2023. Net revenue for our DTC channel for the three months ended June 30, 2023 decreased $2.4 million, or 6%, to $34.6 million as compared to $37.0 million for the corresponding period in 2022, primarily due to decreased marketing spend and the decision to redirect investments to other growing areas of the business as we continue to experience elevated DTC customer acquisition costs. Net revenue for our Outpost channel for the three months ended June 30, 2023 increased $1.9 million, or 35%, to $7.4 million as compared to $5.4 million for the corresponding period in 2022. This was primarily due to an increase in the number of company-owned Outposts which increased to a total of seventeen Outposts as of June 30, 2023 as compared to a total of ten Outposts as of June 30, 2022. 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 expense, and credit card fees. 33 Table of Contents Cost of goods sold for the three months ended June 30, 2023 increased $15.9 million, or 36%, to $59.7 million as compared to $43.8 million for the corresponding period in 2022. The increase in expense was driven primarily by higher sales. Gross margin increased 100 basis points to 35.0% for the three months ended June 30, 2023 as compared to 34.0% for the corresponding period in 2022. Gross margin improved primarily due to favorable product mix shift, as coffee and rounds sold to FDM customers has higher gross margins as compared to other channels. 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 equity-based compensation. General and administration costs include other professional fees and services, and general corporate infrastructure expenses, including utilities and depreciation and amortization. Total operating expenses for the three months ended June 30, 2023 increased $6.5 million, or 16%, to $45.9 million as compared to $39.4 million for the corresponding period in 2022. The following table summarizes operating expenses for the periods indicated ( dollars in thousands, unaudited ): Three Months Ended June 30, 2023 2022 $ Change % Change Marketing and advertising $ 7,013 $ 9,026 $ (2,013) (22) % Salaries, wages and benefits 18,356 15,539 2,817 18 % General and administrative 19,296 14,831 4,465 30 % Impairment on assets held for sale 1,202 — 1,202 100 % Total operating expenses $ 45,867 $ 39,396 $ 6,471 16 % Marketing and advertising expenses decreased by $2.0 million, or 22%, to $7.0 million as compared to $9.0 million for the corresponding period in 2022. This decrease was due to strategic reductions in lower returning advertising platforms, partially offset by increased costs incurred in connection with the expansion of existing partnerships. In addition, marketing and advertising spend has been impacted by channel mix with revenue growth primarily coming from the Wholesale channel, which requires lower marketing spend than DTC. Salaries, wages and benefits expenses increased by $2.8 million, or 18%, to $18.4 million as compared to $15.5 million for the corresponding period in 2022. This increase was due to an increase in employee headcount to support our significant sales growth and investment in new stores opened and existing channels as we continue to build out additional revenue streams and expand product lines. General and administrative expenses increased by $4.5 million, or 30%, to $19.3 million as compared to $14.8 million for the corresponding period in 2022. The increase was primarily due to continued legal fees related to non-routine legal matters arising from the Business Combination in 2022. The Company recorded an impairment of $1.2 million relating to an Outpost location which is recorded as an asset held for sale. 34 Table of Contents Comparison of the six months ended June 30, 2023 to the six months ended June 30,2022 The following table compares the six months ended June 30, 2023 to the corresponding period in 2022 ( dollars in thousands, unaudited ): Six Months Ended June 30, 2023 2022 $ Change % Change Revenue, net $ 175,437 $ 132,201 $ 43,236 33 % Cost of goods sold 115,720 86,432 29,288 34 % Gross profit $ 59,717 $ 45,769 $ 13,948 30 % Gross margin (1) 34.0 % 34.6 % Total operating expenses $ 90,593 $ 78,452 $ 12,141 15 % (1) Gross margin is calculated as gross profit as percentage of revenue, net 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. Net revenue for the six months ended June 30, 2023 increased $43.2 million, or 33%, to $175.4 million as compared to $132.2 million for the corresponding period in 2022. This increase was primarily due to our entry into the FDM market for bagged coffee and rounds products, and increases in RTD product sales, both of which are included in the Wholesale channel. The following table summarizes net sales by channel for the periods indicated ( dollars in thousands, unaudited ): Six Months Ended June 30, 2023 2022 $ Change % Change Wholesale $ 90,007 $ 45,926 $ 44,081 96% Direct to Consumer 71,366 75,294 (3,928) (5)% Outpost 14,064 10,981 3,083 28% Total net sales $ 175,437 $ 132,201 $ 43,236 33% Net revenue for our Wholesale channel for the six months ended June 30, 2023 increased $44.1 million, or 96%, to $90.0 million as compared to $45.9 million for the corresponding period in 2022. The largest increase came from the entry into FDM within our Wholesale channel. In addition, RTD product sales in our Wholesale channel increased through national distributors and retail accounts from 67,000 doors as of June 30, 2022 to 82,000 doors as of June 30, 2023. Net revenue for our DTC channel for the six months ended June 30, 2023 decreased $3.9 million, or 5%, to $71.4 million as compared to $75.3 million for the corresponding period in 2022, primarily due to decreased marketing spend and the decision to redirect investments to other growing areas of the business as we continue to experience elevated DTC customer acquisition costs. Net revenue for our Outpost channel for the six months ended June 30, 2023 increased $3.1 million, or 28%, to $14.1 million as compared to $11.0 million for the corresponding period in 2022. This was primarily due to an increase in the number of company-owned Outposts which increased to a total of seventeen Outposts as of June 30, 2023 as compared to a total of ten Outposts as of June 30, 2022. 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 expense, shipping, and credit card fees. 35 Table of Contents Cost of goods sold for the six months ended June 30, 2023 increased $29.3 million, or 34%, to $115.7 million as compared to $86.4 million for the corresponding period in 2022. The increase was driven primarily by higher sales. In addition, product costs increased due to the increased price of raw coffee beans and RTD raw materials from adding capacity to new co-manufacturing locations leading to higher volumes of transportation and carrying cost. Product mix shift also impacted margins, as FDM has higher gross margins as compared to other channels. Gross margin decreased 60 basis points to 34.0% for the six months ended June 30, 2023 as compared to 34.6% for the corresponding period in 2022. 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 equity-based compensation. General and administration costs include other professional fees and services, and general corporate infrastructure expenses, including utilities and depreciation and amortization. Total operating expenses for the six months ended June 30, 2023 increased $12.1 million, or 15%, to $90.6 million as compared to $78.5 million for the corresponding period in 2022. The following table summarizes operating expenses for the periods indicated ( dollars in thousands, unaudited ): Six Months Ended June 30, 2023 2022 $ Change % Change Marketing and advertising $ 14,157 $ 17,177 $ (3,020) (18) % Salaries, wages and benefits 38,180 31,557 6,623 21 % General and administrative 37,054 29,718 7,336 25 % Impairment on assets held for sale 1,202 — 1,202 100 % Total operating expenses $ 90,593 $ 78,452 $ 12,141 15 % Marketing and advertising expenses decreased by $3.0 million, or 18%, to $14.2 million as compared to $17.2 million for the corresponding period in 2022. This decrease was due to strategic reductions in lower returning advertising platforms, partially offset by increased costs incurred in connection with the expansion of existing partnerships. In addition, marketing and advertising spend has been impacted by channel mix with revenue growth primarily coming from the Wholesale channel, which requires lower marketing spend than DTC. Salaries, wages and benefits expenses increased by $6.6 million, or 21%, to $38.2 million as compared to $31.6 million for the corresponding period in 2022. This increase was due to an increase in employee headcount to support our significant sales growth and investment in new stores opened and existing channels as we continue to build out additional revenue streams and expand product lines, as well as, $1.1 million in severance related to reductions in headcount across the company. General and administrative expenses increased by $7.3 million, or 25%, to $37.1 million as compared to $29.7 million for the corresponding period in 2022. The increase was due to growth of corporate infrastructure primarily in information technology, as well as, professional services to support the expansion of new and existing sales channels and product lines. The Company recorded an impairment of $1.2 million relating to an Outpost location which is recorded as an asset held for sale. 36 Table of Contents Results of Our Non-Operating Income (Expenses) Comparison of the three months ended June 30, 2023 to the three months ended June 30, 2022 The following table summarizes non-operating income (expenses) for the periods indicated ( dollars in thousands, unaudited ): Three Months Ended June 30, 2023 2022 $ Change % Change Interest expense $ (791) $ (176) $ (615) 349 % Other income (expense), net (156) (56) (100) 179 % Change in fair value of earn-out liability — (38,553) 38,553 (100) % Change in fair value of warrant liability — 5,435 (5,435) 100 % Change in fair value of derivative liability — 5,172 (5,172) 100 % Total non-operating income (expenses) $ (947) $ (28,178) $ 27,231 (97) % Interest expense for the three months ended June 30, 2023 increased $0.6 million, or 349%, to $0.8 million as compared to $0.2 million for the corresponding period in 2022. The increase in interest expense is a result of an increase in total debt balances and a higher weighted average interest rate for the three months ended June 30, 2023 of 6.97% as compared to 3.20% in the corresponding period in 2022, offset by capitalized interest for current projects. Other income (expense), net consists of miscellaneous income (expense) items such as bank fees and credit card rebates. The decrease for the three months ended June 30, 2023, as compared to the corresponding period in 2022 was due to lower credit card rebates received in 2023. For the three months ended June 30, 2022, we recognized losses from the change in fair value of earn-out liabilities, warrant liabilities and derivative liabilities. The liabilities were settled prior to December 31, 2022 and therefore were not recurring for the three months ended June 30, 2023. Comparison of the six months ended June 30, 2023 to the six months ended June 30, 2022 The following table summarizes non-operating income (expenses) for the periods indicated ( dollars in thousands, unaudited ): Six Months Ended June 30, 2023 2022 $ Change % Change Interest expense $ (1,114) $ (666) $ (448) 67 % Other income (expense), net 117 293 (176) 60 % Change in fair value of earn-out liability — (209,651) 209,651 (100) % Change in fair value of warrant liability — (56,675) 56,675 (100) % Change in fair value of derivative liability — (2,335) 2,335 (100) % Total non-operating income (expenses) $ (997) $ (269,034) $ 268,037 (100) % Interest expense for the six months ended June 30, 2023 increased $0.4 million, or 67%, to $1.1 million as compared to $0.7 million for the corresponding period in 2022. The increase in interest expense is a result of an increase in total debt balances and a higher weighted average interest rate for the six months ended June 30, 2023 of 5.22% as compared to 3.18% in the corresponding period in 2022, offset by capitalized interest for current projects. Other income (expense), net consists of miscellaneous income (expense) items such as bank fees and credit card rebates. The decrease for the six months ended June 30, 2023, as compared to the corresponding period in 2022,was due to lower credit card rebates received in 2023. 37 Table of Contents For the six months ended June 30, 2022, we recognized losses from the change in fair value of earn-out liabilities, warrant liabilities and derivative liabilities. The liabilities were settled prior to December 31, 2022 and therefore were not recurring for the six months ended June 30, 2023. Liquidity and Capital Resources Cash Overview Our principal use of cash is to support operational expenses associated with non-capitalizable costs, which largely consist of working capital requirements related to accounts receivable, inventories, accounts payable, and general and administrative expenses. Furthermore, we use cash to fund our debt service commitments, capital equipment purchases, Outposts build-out 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 facility. As of June 30, 2023, our cash and cash equivalents were $19.8 million and our working capital was $81.3 million. Credit Facilities and Promissory Note The equipment financing loan is secured by the equipment financed and is at an interest rate of the Bloomberg Short Term Bank Yield Index ("BSBY") plus 3.50%. As of June 30, 2023, the Company has available credit under the equipment financing loan and the retail facility of $6.3 million and $4.5 million, respectively. As of June 30, 2023, we have $4.9 million available borrowings under our credit facility. Our ability to draw from the credit facilities is subject to a borrowing base and other covenants, including a $15.0 million minimum liquidity condition. On August 10, 2023, we entered into the Credit Agreements and retired our previous credit facility and real estate term loan facility with Regions Bank and the equipment financing facility with Regions Commercial Equipment Finance, LLC and Regions Equipment Finance Corporation. See Note 15, Subsequent Events , to the unaudited consolidated financial statements included in Item 1 of Part I of this 10-Q for information regarding the Credit Agreements. Cash Requirements We believe that these sources of liquidity will be sufficient to fund our debt service requirements, lease obligations 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. We expect we may continue to incur net operating losses and negative cash flows from operations, and we expect our general and administrative expenses and capital expenditures will continue to increase over time as we continue to expand our operations, product offerings and customer base. Our future capital requirements may vary materially from period to period and will depend on many factors, primarily our continued expansion into the Wholesale channel and growth of Outposts as well as decisions on whether to manufacture products in house versus outsourcing production to co-manufacturers. We currently expect to fund our material capital requirements, mainly working capital, with proceeds from operations and our asset-backed revolving credit facility, but we may also seek additional debt or equity financing. 38 Table of Contents Cash Flows The following table summarizes our cash flows for the periods indicated ( amounts in thousands, unaudited ): Six Months Ended June 30, 2023 2022 $ Change % Change Cash flows used in operating activities $ (40,457) $ (54,536) $ 14,079 26 % Cash flows used in investing activities (9,823) (9,400) (423) (5) % Cash flows provided by financing activities 31,072 138,687 (107,615) (78) % Net increase (decrease) in cash and cash equivalents $ (19,208) $ 74,751 $ (93,959) (126) % Operating Activities Cash flow from operating activities is primarily generated from revenue from our Wholesale channels. Net cash used in operating activities was $40.5 million for the six months ended June 30, 2023, compared to net cash used in operating activities of $54.5 million for the corresponding period in 2022. The total decrease of $14.1 million in net cash used was primarily due to an increase in accounts payable with decreases in accounts receivable and prepaid expenses and other assets. These changes were partially offset by an increase in inventory for the period. Investing Activities Net cash used in investing activities was $9.8 million for the six months ended June 30, 2023, compared to net cash used in investing activities of $9.4 million for the corresponding period in 2022. The $0.4 million increase in net cash used was primarily due to continued capital expenditure projects for our Outpost locations and roasting facility offset by proceeds from the sale of equipment. Financing Activities Net cash provided by financing activities was $31.1 million for the six months ended June 30, 2023, compared to net cash provided by financing activities of $138.7 million for the corresponding period in 2022. The $107.6 million decrease in net cash provided by financing activities was primarily due to activity related to the Business Combination that occurred in the six months ended June 30, 2022 that was not recurring in the same period for 2023. For the six months ended June 30, 2023, net cash provided by financing was due to proceeds from issuance of long-term debt, net of repayment of long-term debt. Commitments The Company has entered into manufacturing and purchase agreements to purchase and produce coffee product from third-party suppliers. These purchase agreements are typically obligations to purchase minimum volumes with fixed pricing if the volume terms are not fulfilled, in the form of a take-or-pay provision. The minimum purchase amounts are based on quantity and, in the aggregate, will be approximately $19.3 million for the remainder of 2023, $46.4 million for 2024 and $22.4 million for 2025. The Company is negotiating with suppliers to amend or terminate certain purchase agreements. If negotiations to amend or terminate the agreements are not successful, the Company may incur losses in future periods. Liabilities relating to operating leases that have commenced as of June 30, 2023 have been reported on the balance sheet as operating lease liabilities. As of June 30, 2023, we have entered into operating leases that have not yet commenced which primarily relate to real estate leases. These leases will commence between fiscal year 2023 and fiscal year 2025 with lease terms of 10 years to 20 years. JOBS Act The Jumpstart Our Business Startups ("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 39 Table of Contents 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 unaudited 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. Critical Accounting Estimates The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgements regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our unaudited consolidated financial statements. While we believe that our estimates, assumptions and judgements are reasonable, they are based on information available when the estimate was made.