Dutch Bros Inc. (BROS) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this document, includes forward looking statements that involve risks, uncertainties, and assumptions. You should carefully read the “Forward-Looking Statements” and “Risk Factors” sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Form 10-K. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. In addition, the section of this “Management’s Discussion and Analysis of Financial Condition and

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Results of Operations” generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report on Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.

Overview and Highlights

Dutch Bros is a high growth operator and franchisor of drive-thru shops that focus on serving high QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE. Founded in 1992 by brothers Dane and Travis Boersma, Dutch Bros began with a double-head espresso machine and a pushcart in Grants Pass, Oregon. Today, we believe that Dutch Bros is one of the fastest-growing brands in the food service and restaurant industry in the United States by location count.

As of December 31, 2022, we had 671 company-operated and franchised shops in 14 states, an increase of approximately 24.7% from the same period in the prior year. For the year ended December 31, 2022, we generated $739.0 million of revenue, $(19.3) million net loss, and $(0.09) loss per diluted share. We have two reportable operating segments: Company-operated shops and Franchising and other.

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1    Reconciliation of GAAP to non-GAAP results is provided in the section “Non-GAAP Financial Measures” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Key Highlights

•Opened 120 company-operated shops across multiple new operating areas in the year ended December 31, 2022, bringing total company-operated shops to 59.0% of our total shops, an increase of 46.1% over 2021.

•Celebrated 30 years of serving high QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE to our customers in 2022.

•Surpassed 5.2 million registered users on our Dutch Rewards mobile app, and enhanced the customer experience by providing the opportunity for customers to share their rewards with friends and family.

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Impact of Global Events

Inflation and Minimum Wage Increases

Similar to many of our peers in our industry, we encountered current commodities inflation, including dairy, coffee, fuel, and packaging, and experienced continuing legislated minimum wage increases that took effect this year in certain states. We expect these inflationary pressures to continue to affect our operating results in the foreseeable future. While these cost increases have impacted our operating results, we have taken measures to gradually increase our menu prices to help offset these pressures. Such price increases may lead to decreases in consumer demand. We will continue to evaluate further pricing actions to protect our operating results.

COVID-19

The effects from the COVID-19 pandemic continue to evolve, and we cannot easily predict the future potential impacts of the pandemic on our business and operations, or on the United States and global economy in general. This also may include any recurrence of the disease, actions taken by governmental authorities in response to the evolving pandemic, any ongoing effects on consumer demand and spending patterns or other direct and indirect impacts of the pandemic, such as supply chain disruptions. Whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect the continued and future impacts on our results of operations, cash flows or financial condition is yet to be determined.

Due to our drive-thru shops model, we have not experienced materially negative impacts to the same degree as others in our industry. Nevertheless, we have been affected by global shipping delays that have impacted deliveries of supplies to our shops.

Russia and Ukraine War

To date, the war between Russia and Ukraine has not had a material direct impact on our business, financial condition, or results of operations. Indirectly, this conflict and resulting sanctions may have caused or contributed to increases in oil and gas prices. Because of our drive-thru shops model, we are monitoring closely the impact of recent volatility in oil and gas prices on our customers’ behavior and believe such increases may contribute to decreased demand, which we believe is likely to continue. We are also monitoring any broader economic impact of the current war, including its effect on commodities (including oil and gas), transportation costs, liquidity and credit availability, declines in consumer confidence, declines in global economic growth, inflation, uncertainty about economic stability, and increases in unemployment rates.

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Results of Operations

Our historical results have been retroactively revised to reflect an immaterial error correction related to the accrual of employee sick leave. These revisions ensure comparability across all periods reflected herein. For additional information, refer to NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies and NOTE 20 — Segment Reporting in our consolidated financial statements, included elsewhere in this Form 10-K.

The following tables provide our operating results and explanation of changes for the periods presented.

Consolidated Statements of Operations

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Segment Financials

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Key Performance Indicators

The key performance indicators (KPIs) that we use to effectively manage and evaluate our business are as follows:

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1    Represents a temporary shop closure in 2021 that remained closed in 2022, and a permanent shop closure in 2020.

2    AUVs are determined based on the net sales for any trailing twelve-month period for systemwide and company-operated shops that have been open a minimum of 15 months. AUVs are calculated by dividing the systemwide and company-operated shop net sales by the total number of systemwide and company-operated shops, respectively. Management uses this metric as an indicator of shop growth and future expectations of mature locations.

3    Same shop sales reflects the change in year-over-year sales, for the comparable shop base, which we define as shops open for 15 complete months or longer. Management uses this metric as an indicator of shop growth and future expansion strategy. The number of shops included in the systemwide and company-operated comparable bases for the respective periods are presented in the following table.

4    Systemwide sales and systemwide same shop sales are operating measures that include sales at company-operated shops and sales at franchised shops during the comparable periods presented. Franchise sales represent sales at all franchise shops and are revenues to our franchise partners. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. As these metrics include sales reported to us by our non-consolidated franchise partners, these metrics should be considered as a supplement to, not a substitute for, our results as reported under GAAP. Management uses these metrics as indicators of our system’s overall financial health, growth and future expansion prospects.

5    Company-operated and franchise shops operating weeks are calculated based on the number operating days for the shop base and dividing by 7. Our shop base is defined as shops opened as of the period end date. The operating weeks calculations, reflect re-acquired franchises through 2022. Management uses these metrics as indicators of our system’s overall financial health, growth and future expansion prospects.

6    Dutch Rewards, a digitally-based rewards program available exclusively through the Dutch Rewards mobile app, was launched February 2021. Management uses this metric as an indicator of customer loyalty adoption of our Dutch Rewards mobile app and future promotional plans.

7    Our historical results have been revised to reflect immaterial corrections related to the accrual of employee sick leave. For additional information, refer to NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies and NOTE 20 — Segment Reporting, included elsewhere in this Form 10-K. The impacts of the immaterial error corrections on our non-GAAP measures, not included elsewhere in this Form 10-K, are presented below for the years ended December 31, 2021 and 2020, respectively.

8    Reconciliation of GAAP to non-GAAP results is provided in the section “Non-GAAP Financial Measures” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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Company-operated Shop Results

The results for our company-operated shops segment were as follows:

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1    Reconciliation of GAAP to non-GAAP results is provided in the section “Non-GAAP Financial Measures” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Company-operated Shops Segment Performance

Company-operated Shop Revenues

Year Ended December 31, 2022 v 2021

The Company-operated shop revenue increase was primarily driven by the following:

+    $224.4 million from company-operated shops opened in the last 15 months.

+    $4.9 million from revenue recognized as a result of loyalty points collected prior to January 1, 2022 that expired on December 31, 2022.

+    $2.5 million from revenue recognized as a result of estimated unredeemed loyalty points and rewards from purchases made in 2022.

Dutch Rewards Loyalty Program

In February 2021, Dutch Rewards was established. Accessible through a mobile app, Dutch Rewards provides the following key opportunities for customers:

•Collect points based on purchases

•Convert points to rewards

•Rewards can be redeemed for free drinks

•Receive birthday awards

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Points collected prior to January 1, 2022, if not redeemed for rewards, expired on December 31, 2022. Points collected on or after January 1, 2022, if not redeemed for rewards within 180 days, will automatically expire and be removed from the customers’ accounts.

Rewards are earned by redeeming points. Rewards that are not used within six months of issuance will automatically expire and be removed from the customers’ accounts.

Birthday awards automatically expire and are removed from the customers’ accounts after 8 to 30 days, depending on the specific award.

Impact of Dutch Rewards Loyalty Breakage

For the three months ended December 31, 2022, we recorded the first estimates of the impact of future expiration patterns on unredeemed points, rewards, and awards.

Based on the terms and conditions of the Dutch Rewards program, we experienced the first actual instance of points expirations in July 2022. No breakage estimates were made for the three months ended September 30, 2022, as the information was considered insufficient to make reasonable estimates.

The following information was collected and used in developing our estimates for the three months ended December 31, 2022 (points converted to redemption value):

•Based on two quarters of activity, we observed that expired points represented approximately 8% of points collected from purchases in 2022

•Approximately 16% of the points collected in 2021 expired and were unredeemed

For the three months ended December 31, 2022, we recognized revenue of $7.4 million, including $4.9 million for points collected from purchases prior to January 1, 2022 that expired on December 31, 2022.

Birthday awards have been a key part of the program since its inception. Although no breakage accounting entries were booked for birthday awards until December 31, 2022, based on the short duration of the birthday awards, any estimated breakage prior to December 31, 2022 would have been immaterial.

Customers typically use rewards converted from points very promptly. Although no breakage accounting entries were booked for rewards converted from points until December 31, 2022, based on the short duration of the rewards converted from points, any estimated breakage prior to December 31, 2022 would have been immaterial.

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1    The comparable shop bases were 89, 120, and 173 for the years ended December 31, 2020, 2021, and 2022, respectively. The comparable shop base includes mature shops, which we define as open longer than 15 months.

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Beverage, Food, and Packaging Costs

Year Ended December 31, 2022 v 2021

The beverage, food, and packaging costs impacts for the year-over-year comparison were driven by the following (in dollars and basis points):

Labor Costs

Year Ended December 31, 2022 v 2021

The labor costs impacts for the year-over-year comparison were driven by the following (in dollars and basis points):

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Occupancy and Other Costs

Year Ended December 31, 2022 v 2021

The occupancy and other costs impacts for the year-over-year comparison were driven by the following (in dollars and basis points):

Pre-opening Costs

Year Ended December 31, 2022 v 2021

The increase in pre-opening costs was primarily driven by opening 38 more company-operated shops in the year ended December 31, 2022 as compared to 2021, while also realizing cost and operational efficiencies.

Depreciation and Amortization

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Year Ended December 31, 2022 v 2021

The increase in depreciation and amortization were primarily driven by the opening of 120 new company-operated shops during 2022.

Company-operated Shop Gross Profit and Contribution1 2

Year Ended December 31, 2022 v 2021

The Company-operated gross profit and contribution impacts for the year-over-year comparison were driven by the following (in basis points):

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1    Reconciliation of GAAP to non-GAAP results is provided in the section “Non-GAAP Financial Measures” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

2    Recognition of $4.9 million of revenue from the loyalty points collected prior to January 1, 2022 that expired on December 31, 2022, which is included in company-operated shop gross margin and contribution. For additional details, see NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies and NOTE 3 — Revenue Recognition.

3    Recognition of $2.5 million of revenue from the estimated unredeemed loyalty points and rewards from purchases made in 2022.

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Franchising and Other Segment Performance

Year Ended December 31, 2022 v 2021

The Franchising and other gross profit impacts for the year-over-year comparison, were driven by the following (in dollars and basis points):

Selling, General, and Administrative

Year Ended December 31, 2022 v 2021

The selling, general, and administrative impacts for the year-over-year comparison were driven by the following (in dollars and basis points):

-    $116.1 million or 1,570 bps from lower equity-based compensation charges related to one-time awards vested as of the IPO.

-    $10.3 million or 140 bps from non-recurring costs and donations associated with our IPO in the prior year.

+    $31.6 million from investments in human capital, processes, and systems to support our revenue growth.

+    $8.3 million or 110 bps from higher costs incurred as a result of being a public company.

+    $2.4 million or 30 bps from company-wide event costs celebrating 30 years serving high QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE to our customers.

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+    $2.3 million or 30 bps from the write-off of prepaid expenses for COVID-19 impacted projects and events. Our 2023 annual kick-off meeting and our virtual corporate engagement platform built in response to COVID-19 as a substitute for in-person engagement practices pre-pandemic were both cancelled due to COVID-19.

The summation of the impact of the specific items above would have decreased selling, general and administrative expenses from prior year by 1,540 bps to be 37.7% of revenue. However, leverage from revenue growth reduces that percentage by 1,290 bps to be 24.8% of revenue.

Other Expense

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1    Effective as of the second half of 2022 and on a prospective basis, we recorded commitment fees for the unused portion of the revolving credit facility as interest expense. These amounts were previously recorded as selling, general, and administrative expense.

Year Ended December 31, 2022 v 2021

The increase in interest expense, net was primarily driven by additional finance leases for new shop builds, increased borrowings associated with our credit facility, and activity related to our interest rate swap.

The increase in other income (expense) was primarily driven by the recognition of a remeasurement gain related to the TRAs liability and sales of previously written off Dutchwear inventory.

Income Tax Expense (Benefit)

Year Ended December 31, 2022 v 2021

The increase in tax expense was primarily driven by mix of income earned by state tax jurisdiction and lower loss attributable to non-controlling interests, partially offset by adjustments to the outside basis differences as a result of the 2021 tax filings and higher tax credits.

Liquidity and Capital Resources

Cash Overview

We had cash and cash equivalents of $20.2 million and $18.5 million as of December 31, 2022 and December 31, 2021, respectively.

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For the year ended December 31, 2022, our principal sources of liquidity were cash flows from our term loan and revolving credit facilities, and operations. Our principal uses of liquidity for the year ended December 31, 2022 were to pay off our prior revolving credit facility and fund our new shop builds and working capital needs.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

The decrease in operating activities cash flows was primarily driven by:

-    Higher cost of sales and inventory due to increases in the number of shops and raw material costs

-    Higher lease costs as a result of a increase in the number of company-operated shops

Investing Activities

The increase in investing activities cash outflows was primarily driven by:

+    Investment in capital expenditures as a result of new company-operated shop openings

Financing Activities

The increase in financing activities cash flows was primarily driven by:

+    Higher net proceeds from our credit facilities

-    Non-recurring net IPO related activities in the prior year

Cash Requirements

We believe that cash provided by operating activities, cash and cash equivalents, and proceeds from our 2022 Credit Facility are adequate to fund our debt service requirements, lease obligations, and working capital obligations for at least the next 12 months.

Our future capital requirements may vary materially from period to period and will depend on many factors, primarily our expansion and growth by opening additional company-operated shops and/or reacquiring existing franchised shops. We currently expect to fund our material capital requirements in the long term with additional proceeds from our 2022 Credit Facility, but we may also seek additional debt or equity financing.

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From time to time, we may explore additional financing sources which could include equity, equity‑linked, and debt financing arrangements. Further, the payments that we may be required to make under the TRAs may be significant, and we are currently unable to estimate the timing of the payments that may be due thereunder.

Other than operating expenses, our cash requirements for 2023 are expected to consist primarily of capital expenditures for investments in our new and existing shops, our supply chain, and our corporate facilities, including new roasting facility that is estimated to be approximately $15 million to $20 million. The total capital expenditures for 2023 are estimated to be approximately $225 million to $250 million.

We expect to fund our current and long-term material cash requirements primarily with operating cash flows, and, as needed, proceeds from our 2022 Credit Facility. Our current and long-term material cash requirements as of December 31, 2022, primarily include the following:

•Debt Obligations: Refer to NOTE 9 — Debt, of the notes to the consolidated financial statements, included elsewhere in this Form 10-K, for further information of our obligations and the timing of expected payments. In addition, we have approximately $113 million revolving loans outstanding, which are expected to be paid within 1 year.

•Operating and Finance Leases: Refer to NOTE 8 — Leases, of the notes to the consolidated financial statements, included elsewhere in this Form 10-K, for further information of our obligations and the timing of expected payments.

•Purchase Obligations: include all legally binding contracts, including firm minimum commitments for inventory purchases, commitments for the purchase, construction or remodeling of real estate facilities, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. As of December 31, 2022, purchase obligations were approximately $160 million, of which substantially all are expected to be paid within one year.

•TRAs Obligations: Refer to NOTE 12 — Tax Receivable Agreements and NOTE 18 — Commitments and Contingencies, of the notes to the consolidated financial statements, included elsewhere in this Form 10-K, for further information of our obligations and the timing of expected payments.

Credit Facility

JP Morgan Credit Facility

On February 28, 2022 (the Effective Date) we amended our Senior Secured Credit Facility with JPMorgan Chase, N.A. The 2022 Credit Facility has a total capacity of $500 million, consisting of a $250 million revolving credit facility, a term loan facility of up to $100 million, and a delayed draw term loan facility of up to $150 million. The revolving credit facility includes sub-limits for issuance of letters of credit and swing line loans of up to $50 million and $15 million, respectively. It also contains an option allowing Dutch Bros PubCo to increase the size of the 2022 Credit Facility by up to an additional $150 million, with the agreement of the committing lenders. The 2022 Credit Facility expires five years after the Effective Date.

Upon entering into the 2022 Credit Facility, we drew a $100 million term loan and approximately $28 million in revolving loans, and the existing credit facility was repaid and terminated.

Interest on borrowings under the 2022 Credit Facility is based on (a) the Alternate Base Rate plus an applicable margin, or (b) the Adjusted Term SOFR Rate plus an applicable margin, and is payable in accordance with the selected interest rate period (at least quarterly) and upon maturity. Principal payments for the term loans are required on a quarterly basis in accordance with an amortization schedule and upon certain disposition of assets.

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Obligations under the 2022 Credit Facility are guaranteed by Dutch Bros OpCo and its subsidiaries, and secured by a first priority perfected security interest in substantially all of the assets of the guarantors.

Interest Rate Swap Contract

On April 1, 2022, Dutch Bros PubCo entered into an interest rate swap transaction with JPMorgan Chase Bank, N.A. with respect to $70 million of the term loan under the 2022 Credit Facility. The purpose of the floating-to-fixed interest rate swap was to fix the interest base rate charged on the term loan at 2.67% for the $70 million notional amount. The interest rate swap matures on February 28, 2027.

Critical Accounting Estimates

The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments 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 consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.

Refer to NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies within the consolidated financial statements, included elsewhere in this Form 10-K, for further information on our critical accounting estimates and policies, which are as follows:

Dutch Rewards Loyalty Program

In February 2021, Dutch Rewards was established. Eligible customers who register for the Dutch Rewards loyalty program collect points for every dollar spent. After accumulating a certain number of points, the customer can convert the points into a reward that can be redeemed for a free drink. Points collected, if not redeemed for rewards expire within 180 days, and rewards that are not used expire six months after issuance.

The estimation of the standalone selling price of points and rewards issued to customers involves several assumptions, primarily the valuation of points, estimated value of product for which a reward is expected to be redeemed, and estimated probability of future expirations of points and rewards. Our estimate of points and other rewards that we expect to be redeemed is based on current and historical company-specific data including redemption rates. These inputs are subject to change over time due to factors such as menu price increases, changes in points redemption options, and changes in customer behavior. Changes in our estimates and inputs could result in material changes to our Dutch Rewards program liability and loyalty program revenue.

Based on the terms and conditions of the Dutch Rewards program, we experienced the first actual instance of points expirations starting in the second half of 2022. Our historical data was considered insufficient to make reasonable estimates of the probability of future expirations of points and rewards through the end of the third quarter. We began estimating breakage in the fourth quarter. See NOTE 3 — Revenue Recognition for further details.

Leases

At the commencement of each lease, we evaluate the lease agreement to determine whether it is an operating or finance lease. The evaluation requires significant judgments in determining the fair value of the lease right-of-use asset and the lease liability and appropriate lease terms.

Our lease agreements generally do not provide an implicit interest rate; as such, the discount rate used to measure the initial lease liability is equal to the rate the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The discount rate is subject to fluctuation based on market interest rates and our credit risk profile.

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We also estimate the lease term at commencement. The lease term commences on the date when we take possession of the leased property, irrespective of the contractual lease payments schedule. To determine the length of the lease term at inception, we consider both termination and renewal option periods available. Reasonably certain renewal periods are included in the lease term at commencement, and are generally based on historical leasing activity.

Variations in judgment applied to these estimates could result in material differences such as the following:

• Lease expenses, including rent, depreciation and amortization

• Fair value of lease right-of-use asset and lease liability

• Reasonably certain lease term

See NOTE 8 — Leases for further details.

Income Taxes

In determining the provision for income taxes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment.

Our expense/(benefit) for income taxes, deferred tax assets and liabilities including valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance.

Deferred taxes are recorded using the asset and liability method, whereby tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We regularly evaluate the valuation allowances established for deferred tax assets for which future realization is uncertain. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence, including scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax planning strategies and results of recent operations. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is recorded. See NOTE 13 — Income Taxes for further details.

Tax Receivable Agreements

In connection with our IPO, we entered into two TRAs with certain non-controlling interest owners (the Continuing Members). The TRAs generally provide for us to pay the Continuing Members 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize or are deemed to realize in certain circumstances. We will retain the benefit of the remaining 15% of these net cash savings. As of December 31, 2022, we recognized $220.9 million of liabilities relating to our obligations under the TRAs.

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Changes in the projected TRAs liability resulting from these tax benefit arrangements may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and impact the expected future tax benefits to be received by the Company. Estimating future taxable income is a key input in calculating the TRAs liability, and is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions. See NOTE 12 — Tax Receivable Agreements for further details.

Non-GAAP Financial Measures

In addition to disclosing financial results in accordance with GAAP, this document contains references to the non-GAAP financial measures below. We believe these non-GAAP financial measures provide investors with useful supplemental information about our operating performance, enable comparison of financial trends and results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance.

Our non-GAAP financial measures reflect adjustments based on one or more of the following items. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated.

Company-operated shop contribution (in dollars and as a percentage of revenue)

Definition and/or calculation

Company-operated segment gross profit, before company-operated shop depreciation and amortization. Company-operated shop contribution in dollars (as defined), taken as a percentage of company-operated shop revenue.

Usefulness to management and investors

This non-GAAP measure is used by our management in making performance decisions without the impact of non-cash depreciation and amortization charges. This is a standard metric used across our industry by investors.

EBITDA, Adjusted EBITDA (in dollars and as a percentage of revenue)

EBITDA — definition and/or calculation

Net income (loss) before interest expense (net of interest income), income taxes expense (benefit), and depreciation and amortization expense.

Adjusted EBITDA — definition and/or calculation

Defined as EBITDA (as defined above), excluding equity-based compensation, expenses and donations associated with equity offerings, COVID-19: “Thank You” pay and catastrophic leave expenses, COVID-19: prepaid costs not utilized, costs incurred for company-wide milestone events, executives transitions costs, and (gain) loss on the remeasurement of the liability related to the TRAs. Adjusted EBITDA in dollars (as defined), taken as a percentage of total revenue.

Usefulness to management and investors

These non-GAAP measures are supplemental operating performance measures we believe facilitate comparisons to historical performance and competitors’ operating results. We believe the non-GAAP measures presented provide investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance.

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Adjusted selling, general, and administrative (in dollars and as a percentage of revenue)

Definition and/or calculation

Selling, general, and administrative expenses, excluding equity-based compensation expense, expenses and donations associated with equity offering, COVID-19: prepaid costs not utilized, costs incurred for company-wide milestone events, and executive transitions costs.

Usefulness to management and investors

This non-GAAP measure is used as a supplemental measure of operating performance that we believe is useful to evaluate our performance period over period and relative to our competitors. We believe the non-GAAP measures presented provide investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance.

Non-GAAP adjustments

Below are the definitions of the non-GAAP adjustments that are used in the calculation of our non-GAAP measures, as described above.

Equity-based compensation

Non-cash expenses related to the grant and vesting of stock awards, restricted stock awards and restricted stock units in Dutch Bros PubCo and/or Profit Interest Units in Dutch Bros OpCo to certain eligible employees. These awards are accounted for in accordance with guidance prescribed for in accounting for share-based compensation.

Expenses associated with equity offerings

Costs incurred as a result of our equity offerings. These costs include legal fees, consulting fees, tax and accounting fees, and payroll taxes related to the grant and vesting of equity awards for certain employees.

Donations associated with equity offerings

In connection with our IPO, we made a donation to the Dutch Bros Foundation. This donation is separate from other donations to the Dutch Bros Foundation that we may periodically make.

COVID-19: “Thank You” pay and catastrophic leave

Costs related to two separate programs established to support employees during the COVID-19 pandemic. We implemented an hourly wage supplement program for shop employees who continued to work while their state or county was under a stay at home order or similar lockdown requirement. This program lasted in various markets until April 2021. We also established a catastrophic leave policy that provided paid leave to employees who were required to quarantine due to in-shop exposures and could not work their regular hours. All COVID-19-related protocols, including catastrophic leave, will remain in effect until the end of the COVID-19 pandemic as determined by the appropriate government agency.

COVID-19: Prepaid costs not utilized

Costs related to the write-off of previously prepaid expenses for the cancellation of our 2023 annual kick-off meeting as a result of COVID-19 concerns and the development of a virtual corporate engagement platform built in response to the health restrictions of the COVID-19 pandemic. The platform was developed as a substitute for in person engagement practices used pre-pandemic. The platform has been determined ineffective, particularly as we shift back to in-person events with the easing of restrictions related to the COVID-19 pandemic.

Milestone events

Costs incurred for company-wide events to celebrate 30 years of serving high QUALITY, hand-crafted beverages with unparalleled SPEED and superior SERVICE to our customers.

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Executives transition costs

Employee severance and related benefit costs, as well as sign-on bonus(es) for several executive-level transitions occurring in 2022 and 2023.

TRAs remeasurements

(Gain) loss impacts on consolidated statements of operations related to adjustments of our TRAs liabilities.

Following are the reconciliations of the most comparable GAAP metric to non-GAAP metrics presented:

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1    Our historical results have been revised to reflect immaterial corrections related to the accrual of employee sick leave. For additional information, refer to NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies and NOTE 20 — Segment Reporting, included elsewhere in this Form 10-K. The impacts of the immaterial corrections on our non-GAAP measures, not included elsewhere in this Form 10-K, are presented below for the year ended December 31, 2021 and 2020, respectively.

2    Includes the recognition of $4.9 million of revenue from the loyalty points earned prior to January 1, 2022 that expired on December 31, 2022. For additional details, see NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies and NOTE 3 — Revenue Recognition.

3    Effective as of the second half of 2022, we recorded commitment fees for the unused portion of the revolving credit facility as interest expense. These amounts were previously recorded as selling, general, and administrative expense.

4    Selling, general, and administrative expenses include depreciation and amortization.