SOLO BRANDS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Risk Factors" and our unaudited consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report, as well as our audited consolidated financial statements included in our 2021 Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item II, Part 1A, "Risk Factors" and elsewhere in this Quarterly Report. See "Special Note Regarding Forward-Looking Statements."
Overview
We own and operate premium authentic lifestyle brands with ingenious products we
market and deliver through our direct-to-consumer ("DTC") platform. We aim to
help our customers enjoy good moments that create lasting memories. We
consistently deliver innovative, high-quality products that are loved by our
customers and revolutionize the outdoor experience, build community and help
everyday people reconnect with what matters most.
Our net sales increased from $69.1 million in the three months ended March 31,
2021 to $82.2 million in the three months ended March 31, 2022 , representing an
increase of 19.0%, including the effect of acquisitions. Our net income
decreased from $22.2 million in the three months ended March 31, 2021 to a net
loss of $3.2 million in the three months ended March 31, 2022 . In addition to
financial outputs, we take deliberate care to monitor and respond to our
customer health as measured by our customer referral rate of 40.4%, our repeat
purchase rate of 50.5%, and our net promoter score of 78 in the three months
ended March 31, 2022 . Together, these health checks ensure we continue to keep
the customer at the center of what we do and drive solid customer lifetime
value.
Outlook
Although we are not immune to the recent macroeconomic headwinds, including inflation, that could impact discretionary spending in 2022, increased freight and raw material costs, and continued supply chain issues that may impact demand for our products and ability to hold margins, we remain optimistic about the future growth opportunities for all our brands. Our first quarter is typically our lowest quarter for sales, but we saw healthy customer interaction and solid demand despite the seasonality component to our business and macroeconomic issues.
Key Factors Affecting Our Results of Operations
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part I, Item 1A. "Risk Factors" included in our 2021 Form 10-K.
Economic Conditions
Demand for our products is impacted by a number of economic factors impacting our customers, such as consumer confidence, demographic trends, employment levels, and other macroeconomic factors. These factors may influence the extent to which consumers invest in outdoor lifestyle products such as fire pits, stoves, grills, consumables, and associated accessories.
Supply Chain
In 2022, some of our factories inChina have closed periodically due to COVID-19 outbreaks. This has had adverse impacts on our business, primarily with the delivery of Solo Stove Pi. Our other products have been minimally impacted due to our strong inventory position.
Inflation
We expect to continue the volatility we experienced in the first quarter of 2022 into the second quarter. We believe consumers continue to feel the pressures of higher inflation, impacting their spending. We secured our contracted freight rates for the current year, and we expect freight rates to be higher in 2022 than last year, which will put pressure on gross margin in 2022. However, we have seen spot rates decrease from the highs in 2021, and we will opportunistically use the spot rates if they are lower than our contracted rates.
Success of Our Innovation Pipeline
Our future growth depends in part on our ability to introduce new and enhanced products. The success of our new and enhanced products depends on many factors, including anticipating consumer trends, finding innovative solutions to consumer needs, differentiating our products from those of our competitors, obtaining protection for our intellectual property and the ability to expand our brand beyond the categories of products we currently sell.
Seasonality/Weather
Sales have historically experienced seasonality, with our highest level of sales
typically being generated in the second and fourth fiscal quarters and the first
fiscal quarter typically generating the lowest sales. This historical sales
trend is supported by the demand for our products at the beginning of the summer
and holiday shopping seasons. Unfavorable weather can impact demand, including
wet or exceptionally hot or dry weather conditions. Widespread wild fires also
have potential to adversely impact our business.
19
--------------------------------------------------------------------------------COVID-19 Impacts
As we continue to monitor and navigate the COVID-19 pandemic and its effects, we may take additional actions based on the requirements and recommendations of local health guidelines, and intend to focus on investments for future, long-term growth. In certain circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. In addition, see Part I, Item 1A. "Risk Factors" included elsewhere in our 2021 Form 10-K.
Ability to Scale Our Operating Model
We depend on third-party manufacturers for the sourcing of our products and generally do not have long-term supply agreements with our manufacturers. Our future performance may be impacted by the inability or unwillingness of our third-party manufacturers to meet our product demand and the availability of land-based and air freight carriers. Our ability to support our growth will also be dependent on attracting, motivating, and retaining personnel.
Business Acquisitions
Our ability to find suitable acquisition targets and integrate them on to the
Components of Our Results of Operations
Net sales are comprised of DTC and wholesale channel sales to retail partners. Net sales in both channels reflect the impact of partial shipments, product returns, and discounts for certain sales programs or promotions.
Our net sales have historically included a seasonal component. In the DTC channel, our historical net sales tend to be highest in our second and fourth quarters, while our wholesale channel has generated higher sales in the first and third quarters. Additionally, we expect volatility in the results of operations throughout the year relative to the timing of new product launches.
Gross Profit
Gross profit reflects net sales less cost of goods sold, which primarily includes the purchase cost of our products from our third-party manufacturers, inbound freight and duties, product quality testing and inspection costs, and depreciation on molds and equipment that we own.
Selling, General, & Administrative Expenses
Selling, general, and administrative, or SG&A, expenses consist primarily of marketing costs, equity-based compensation expense and benefits costs, costs of our warehousing and logistics operations, costs of operating on third-party DTC marketplaces, professional fees and services, cost of product shipment to our customers, and general corporate infrastructure expenses.
Results of Operations
Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 Net Sales Three Months Ended Three Months Ended March 31, March 31, Change (dollars in thousands) 2022 2021 $ % Net sales$ 82,203 $ 69,071 13,132 19.0% Net sales increased$13.1 million , or 19.0%, to$82.2 million in the three months endedMarch 31, 2022 , compared to$69.1 million in the three months endedMarch 31, 2021 . This increase was primarily driven by a 34.6% increase in total orders period over period and a 13.3% increase in average order size, both of which were due to acquisition activity. Partially offsetting these increases, a$14.2 million decrease resulted from the normalization of demand in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , which reflected an increase in revenue recognized related to an inflated deferred revenue balance at the end of 2020 due to backordered products. 20 --------------------------------------------------------------------------------
Cost of Goods Sold and Gross Profit
Three Months Ended Three Months Ended
March 31, March 31, Change
(dollars in thousands) 2022 2021 $ %
Cost of goods sold $ 33,350 $ 22,607 10,743 47.5%
Gross profit $ 48,853 $ 46,464 2,389 5.1%
Gross margin (Gross profit as a % of net
sales) 59.4 % 67.3 % (7.9)%
Cost of goods sold increased $10.7 million , or 47.5%, to $33.4 million in the
three months ended March 31, 2022 , compared to $22.6 million in the three months
ended March 31, 2021 . $16.3 million of this increase was due to acquisition
activity. Partially offsetting these increases, a $5.5 million decrease was
primarily driven by slower sales of our products. Gross profit also increased
$2.4 million , or 5.1%, to $48.9 million in the three months ended March 31,
2022 , compared to $46.5 million in the three months ended March 31, 2021 ,
primarily due to acquisition activity.
Gross margin decreased 7.9% to 59.4% in the three months ended March 31, 2022 ,
from 67.3% in the three months ended March 31, 2021 . The decrease in gross
margin was primarily due to inventory turns driving recognition of fair value
inventory write-ups from acquisition activity and higher freight costs in the
three months ended March 31, 2022 .
Selling, General, and Administrative Expenses
Three Months Ended Three Months Ended
March 31, March 31, Change
(dollars in thousands) 2022 2021 $ %
Selling, general, and administrative
expenses $ 45,644 $ 18,734 26,910 143.6%
SG&A as a % of net sales 55.5 % 27.1 % 28.4%
SG&A increased $26.9 million , or 143.6%, to $45.6 million in the three months
ended March 31, 2022 , compared to $18.7 million in the three months ended March
31, 2021 . As a percentage of net sales, SG&A increased to 55.5% in the three
months ended March 31, 2022 , from 27.1% in the three months ended March 31,
2021 . $12.4 million of the increase was due to acquisition activity. The
remaining increase in SG&A was primarily driven by the following: a $6.7 million
increase in employee costs as a result of equity-based compensation and
increased headcount, a $3.4 million increase in advertising and marketing spend,
a $1.1 million increase in professional services primarily as a result of the
audit of the 2021 Form 10-K, a $1.0 million increase in rent as a result of a
new global headquarters facility, a $0.9 million increase in insurance as a
result of becoming a public company, and a $0.7 million increase in seller fees.
Depreciation and Amortization Expenses
Three Months Ended Three Months Ended
March 31, March 31, Change
(dollars in thousands) 2022 2021 $ %
Depreciation and amortization expenses $ 5,935 $ 3,593 2,342 65.2%
Depreciation and amortization expenses as
a % of net sales 7.2 % 5.2 % 2.0%
Depreciation and amortization expenses increased $2.3 million , or 65.2%, to $5.9
million in the three months ended March 31, 2022 , compared to $3.6 million in
the three months ended March 31, 2021 . As a percentage of net sales,
depreciation and amortization increased to 7.2% in the three months ended March
31, 2022 , from 5.2% in the three months ended March 31, 2021 . The increase in
depreciation and amortization expenses was primarily driven by a $1.6 million
increase in amortization related to increases in definite-lived intangible
assets as a result of acquisition activity.
Interest Expense
Interest expense was
Income Taxes
We are the sole managing member of Holdings, and as a result, consolidate the financial results of Holdings. Holdings is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership, Holdings is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of Holdings, as well as any stand-alone income or loss generated bySolo Brands, Inc. 21 -------------------------------------------------------------------------------- Income taxes was a benefit of$0.9 million in the three months endedMarch 31, 2022 , and a nominal expense in the three months endedMarch 31, 2021 . Income taxes represents federal, state, and local income taxes on our allocable share of taxable income of Holdings, as well as Oru's and Chubbies' federal and state tax expense andSolo Brands Europe BV foreign tax expense.
Liquidity and Capital Resources
Historically, our cash requirements have principally been for working capital purposes. We expect these needs to continue as we develop and grow our business. We fund our working capital, primarily inventory, and accounts receivable, from cash flows from operating activities, cash on hand, and borrowings under our Revolving Credit Facility. Current Liquidity As ofMarch 31, 2022 , we had a cash balance of$15.9 million , working capital (excluding cash) of$112.0 million , and$297.5 million of borrowings available under the Revolving Credit Facility.
Revolving Credit Facility and Term Loan
OnMay 12, 2021 , we entered into a credit agreement withJPMorgan Chase Bank, N.A ., the Lenders and L/C Issuers party thereto (each as defined therein) and the other parties thereto (as subsequently amended onJune 2, 2021 , andSeptember 1, 2021 , the "Revolving Credit Facility"). As so amended, the Revolving Credit Facility allows us to borrow up to$350.0 million of revolving loans, including the ability to issue up to$20.0 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under the Revolving Credit Facility, it does reduce the amounts available under the Revolving Credit Facility. The Revolving Credit Facility matures onMay 12, 2026 and bears interest at a rate equal to the base rate as defined in the agreement plus an applicable margin, which as ofMarch 31, 2022 , was based on LIBOR. Interest is due on the last business day of each March, June, September and December. OnMarch 31, 2022 , we had$52.5 million in outstanding borrowings and$297.5 million available for future borrowings on the Revolving Credit Facility. All outstanding principal and interest due under the Revolving Credit Facility are due at maturity. In addition to the above, the amendment onSeptember 1, 2021 included a provision to borrow up to$100.0 million under a term loan (the "Term Loan"). The proceeds from the Term Loan were used to fund the Chubbies acquisition. The Term Loan matures onSeptember 1, 2026 , and the weighted average interest rate on the Term Loan during the three months endedMarch 31, 2022 was 1.35%. We were required to make quarterly principal payments on the Term Loan beginning onDecember 31, 2021 . OnMarch 31, 2022 , we had$98.8 million outstanding on the Term Loan. All outstanding principal and interest due on the Term Loan are due at maturity. The recent changes in our working capital requirements generally reflect the growth in our business. Although we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash requirements, we believe that our available cash on hand, along with amounts available under our Revolving Credit Facility will be sufficient to satisfy our liquidity requirements for at least the next twelve months. However, the continued growth of our business, including our expansion into international markets, may significantly increase our expenses (including our capital expenditures) and cash requirements. Furthermore, we will continue to seek possible brand and mission consistent acquisition opportunities that would require additional capital. In addition, the amount of our future product sales is difficult to predict, and actual sales may not be in line with our forecasts. As a result, we may be required to seek additional funds in the future from issuances of equity or debt, obtaining additional credit facilities, or loans from other sources.
Other Terms of the Revolving Credit Facility
We may request incremental term loans, incremental equivalent debt, or revolving commitment increases (we refer to each as an Incremental Increase) in amounts such that, after giving pro forma effect to such Incremental Increase, our total secured net leverage ratio (as defined in the Revolving Credit Facility) would not exceed the then-applicable cap under the Revolving Credit Facility. In the event that any lenders fund any of the Incremental Increases, the terms and provisions of each Incremental Increase, including the interest rate, shall be determined by us and the lenders, but in no event shall the terms and provisions, when taken as a whole and subject to certain exceptions, of the applicable Incremental Increase, be more favorable to any lender providing any portion of such Incremental Increase than the terms and provisions of the loans provided under the Revolving Credit Facility unless such terms and conditions reflect market terms and conditions at the time of incurrence or issuance thereof as determined by us in good faith. The Revolving Credit Facility is (a) jointly and severally guaranteed by the Guarantors and any future subsidiaries that execute a joinder to the guaranty and related collateral agreements and (b) secured by a first priority lien on substantially all of our and the Guarantors' assets, subject to certain customary exceptions.
The Revolving Credit Facility requires us to comply with certain financial ratios, including:
•at the end of each fiscal quarter, a total net leverage ratio (as defined in the Revolving Credit Facility) for the four quarters then ended of not more than: 4.00 to 1.00, for each quarter ending in 2021, 2022, and onJune 30, 2023 ; 3.75 to 1.00, for each quarter endingJune 30, 2023 throughMarch 31, 2024 ; and 3.50 to 1.00, for each quarter endingJune 30, 2024 or thereafter; •at the end of each fiscal quarter commencing with the quarter endingSeptember 30, 2021 , an interest coverage ratio (as defined in the Revolving Credit Facility) for the four quarters then ended of not less than 3.00 to 1.00. 22 -------------------------------------------------------------------------------- In addition, the Revolving Credit Facility contains customary financial and non-financial covenants limiting, among other things, mergers and acquisitions; investments, loans, and advances; affiliate transactions; changes to capital structure and the business; additional indebtedness; additional liens; the payment of dividends; and the sale of assets, in each case, subject to certain customary exceptions. The Revolving Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, defaults under other material debt, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the Revolving Credit Facility to be in full force and effect, and a change of control of our business. We were in compliance with all covenants under the Revolving Credit Facility as ofMarch 31, 2022 . Cash Flows Three Months Ended Three Months Ended March 31, March 31, (dollars in thousands) 2022 2021 Cash flows provided by (used in): Operating activities $ (25,511) $ (5,806) Investing activities (2,470) (684) Financing activities $ 18,747 $ (113) Operating activities Net cash used in operating activities was$25.5 million in the three months endedMarch 31, 2022 , compared to net cash used in operating activities of$5.8 million in the three months endedMarch 31, 2021 . The$19.7 million increase in cash used in operating activities was primarily due to the following: •net income (loss) decreased$25.5 million , partially offset by increases in non-cash adjustments to net income of$8.0 million , which resulted in a cash usage of$17.5 million ; and •changes in inventory decreased operating cash flow by$21.6 million , primarily driven by purchases of additional inventory to meet the increased demand of our products. Partially offsetting these increases in cash used in operating activities were the following: •changes in deferred revenue increased operating cash flow by$17.3 million , primarily driven by shipments of previously backordered products; and •changes in accrued expenses and other current liabilities increased operating cash flow by$9.1 million , primarily driven by the establishment of accruals for federal and state income taxes as a result of becoming a taxable corporation and the timing of tax distributions to noncontrolling interests.
Investing activities
Cash used in investing activities was$2.5 million in the three months endedMarch 31, 2022 , compared to cash used in investing activities of$0.7 million in the three months endedMarch 31, 2021 . The increase in cash used in investing activities was due to a$1.0 million increase in capital expenditures and$0.8 million of working capital settlements paid for prior year acquisitions.
Financing activities
Cash provided by financing activities was$18.7 million in the three months endedMarch 31, 2022 , compared to cash used in financing activities of$0.1 million in the three months endedMarch 31, 2021 . The$18.9 million increase in cash provided by financing activities was primarily due to$20.0 million of borrowings on the Revolving Credit Facility during the three months endedMarch 31, 2022 . Contractual Obligations For information regarding our contractual obligations, see Note 8, Long-Term Debt, Note 9, Leases, and Note 12, Commitments and Contingencies, in this Quarterly Report and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. See Note 2, Significant Accounting Policies, to the audited consolidated financial statements included in our 2021 Form 10-K for more information about our significant accounting policies, including our critical accounting policies. The critical accounting estimates that reflect our 23 -------------------------------------------------------------------------------- more significant judgments and estimates used in the preparation of our consolidated financial statements are described in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Form 10-K. During the three months endedMarch 31, 2022 , there were no material changes to our critical accounting policies and estimates from those discussed in our 2021 Form 10-K. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see "Recently Adopted Accounting Pronouncements" and "Recently Issued Accounting Pronouncements-Not Yet Adopted" in Note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report.
JOBS Act
We currently qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
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