Dutch Bros Inc

Index for Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

NOTE 1 — Organization and Background

Business

Dutch Bros is in the business of operating and franchising drive-thru coffee shops as well as the wholesale and distribution of coffee, coffee-related products and accessories. As of December 31, 2023, there were 831 shops in operation in 16 U.S. states, of which 542 were company-operated and 289 were franchised.

Organization

Dutch Bros Inc. is the sole managing member of Dutch Bros OpCo and operates and controls all of the business and affairs of Dutch Bros OpCo. As a result, the Company consolidates the financial results of Dutch Bros OpCo and reports a non-controlling interest representing the economic interest in Dutch Bros OpCo held by the other members of Dutch Bros OpCo. The Company’s fiscal year end is December 31.

As of December 31, 2023, the Company held 100.0% of the voting interest and 45.5% of the economic interest of Dutch Bros OpCo. The Continuing Members held none of the voting interest and the remaining 54.5% of the economic interest of Dutch Bros OpCo.

IPO and Reorganization Transactions

In 2021 the Company completed its IPO of approximately 24.2 million shares of Class A common stock at a public offering price of $23.00 per share. In connection with the IPO, the Company completed various reorganization transactions, including amending and restating corporation and LLC documents, acquiring Dutch Bros OpCo’s common and voting units, designating Dutch Bros Inc. as managing member of Dutch Bros OpCo, and entering into Tax Receivable Agreements with the Continuing Members and Pre-IPO Blocker Holders (collectively, the Reorganization Transactions).

Follow-On Offering

On September 12, 2023, Dutch Bros Inc. completed a follow-on offering of approximately 13.3 million shares of Class A common stock at a public offering price of $26.00 per share, which included approximately 1.7 million shares issued pursuant to the exercise in full of the underwriters’ option to purchase additional shares. This resulted in proceeds of approximately $331.2 million, net of underwriting discounts and commissions. The proceeds were used to purchase an equal number of Class A common units of Dutch Bros OpCo. Dutch Bros OpCo used the proceeds for working capital and general corporate purposes, including principal repayment of the Company’s revolving credit facility, and for payment of offering costs of approximately $1.1 million. The offering costs were charged to additional paid-in capital on the Company’s consolidated balance sheet.

NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies

Financial Statements Presentation

The Company’s consolidated financial statements as of December 31, 2023 and for the three years then ended have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC.

Reclassifications

The Company reclassified certain amounts in prior-period consolidated financial statements to conform to the current period's presentation. Accrued compensation and benefits costs have been reclassified from other accrued liabilities and other current liabilities to be presented in a new line on the face of the consolidated balance sheets.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries that it controls due to ownership of a majority voting interest or pursuant to accounting guidance for non-controlling interests. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The presentation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, primarily related to long-lived asset valuation, leases, deferred revenue, tax receivable agreements, income taxes, and equity-based compensation that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all short-term highly liquid instruments with original maturities of three months or less at the time of purchase, as well as credit card receivables for sales to customers in company-operated shops that generally settle within two to five business days. The Company’s cash accounts are maintained at various high credit quality financial institutions and may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The Company categorizes assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are both unobservable and significant to the overall fair value measurements reflecting an entity's estimates of assumptions that market participants would use in pricing the asset or liability.

The Company’s consolidated balance sheets include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, for which the carrying amounts approximate fair value due to their short-term maturity. The fair value of the Company’s variable-rate credit facilities approximate their carrying amounts as the Company’s cost of borrowing is variable and approximates current market prices, which is considered Level 2 in the fair value hierarchy.

Derivative Instruments

The Company manages exposure to fluctuations in interest rates within its consolidated financial statements according to a hedging policy. Under this policy, the Company may from time to time enter into interest rate swap agreements to fix a portion of interest expense and hedge interest rate risk. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. The Company does not enter into derivative instruments for speculative purposes or for any other purpose other than to manage its risks related to fluctuations in interest rates.

By using swap instruments, the Company is exposed to potential credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. The Company minimizes this credit risk by entering into transactions with carefully selected, credit-worthy counterparties.

Cash Flow Hedges

Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items.

For derivative instruments that are designated and qualify as a cash flow hedge, the derivative's gain or loss is reported as a component of other comprehensive income (OCI) and recorded in accumulated other comprehensive income (AOCI) on the Company’s consolidated balance sheets. The gain or loss is subsequently reclassified into net earnings when the hedged exposure affects net earnings, in the same line item as the underlying hedged item on the Company’s consolidated statements of operations.

The Company discontinues hedge accounting when:

•it determines that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item;

•the derivative expires or is sold, terminated or exercised;

•it is no longer probable that the forecasted transaction will occur; or

•management determines that designation of the derivatives as a hedge instrument is no longer appropriate.

Refer to NOTE 10 — Derivative Financial Instruments for further discussion of the Company’s derivative instruments.

Accounts Receivable

Accounts receivable, net of allowance for credit losses, consist primarily of royalty revenues, outstanding balances for sales of roasted coffee beans, Blue Rebel, other retail-related supplies to franchisees, and vendor rebates. The allowance for credit losses is estimated based on the Company’s historical losses adjusted for current, reasonable and supportable forecasts of economic conditions and other pertinent factors affecting the Company’s customers, review of specific accounts, and the financial stability and credit worthiness of its customers. Accounts receivable are charged off against the allowance for credit losses when the financial condition of the Company’s customers is adversely affected and they are unable to meet their financial obligations. The Company hadno allowance for credit losses at December 31, 2023 and 2022.

Inventories

Inventories, net consist primarily of roasted and unroasted coffee beans, Blue Rebel, accessories, and other retail related supplies. Inventories are stated at the lower of cost or net realizable value, with cost being determined by the standard cost method which approximates actual cost on a first-in, first-out basis. The Company records product returns as they are received, and obsolete and slow-moving inventory when identified, as these types of transactions have generally been immaterial to the Company’s historical operations.

Property and Equipment

Property and equipment, net are stated at historical cost less accumulated depreciation. Expenditures for maintenance, repairs, and routine replacements are charged to expense as incurred. Expenditures for major repairs and improvements that extend the useful lives of property and equipment are capitalized. When property or equipment is sold or otherwise disposed of, the asset and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in income (loss) from operations in the accompanying consolidated statements of operations. With the exception of the Company’s aircraft which is depreciated under the consumption method, depreciation is computed on a straight-line basis over the following useful lives:

1 Lesser of lease term or useful life

The Company capitalizes costs associated with the acquisition or development of major software for internal use and amortizes the assets over the expected life of the software, generally 3 years. The Company only capitalizes subsequent additions, modifications, or upgrades to internal-use software to the extent that such changes allow the software to perform a task it previously did not perform. The Company expenses software maintenance and training costs as incurred.

Leases

The Company adopted ASC 842, as amended, using the modified retrospective transition method with an effective date of January 1, 2022. The modified retrospective approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. As such, results for reporting periods beginning on or after January 1, 2022 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 (ASC 840).

The Company leases its company-operated shops, warehouse facilities, most headquarters buildings, and certain equipment under non-cancelable lease agreements that expire on various dates through 2043. The Company’s real estate leases consist of commercial ground leases and build-to-suite leases. The Company recognizes a right of use asset and lease liability for each lease with a contractual term of greater than 12 months at lease inception. The Company has elected not to recognize leases with terms of 12 months or less.

The Company’s real estate leases typically have an initial term of 15 years and includeone tothree renewal periods offive-years each. The Company includes renewals in the lease term when it is reasonably certain that the renewal period will be exercised.

The Company calculates right-of-use assets and lease liabilities based on the present value of the fixed minimum lease payments, including any estimated lease incentives, at lease commencement using an estimated incremental borrowing rate corresponding to the lease term and applied on a portfolio basis. The Company has elected not to separate lease and non-lease components.

At lease commencement, the Company determines lease classification as operating or finance, and expense recognition occurs over the lease term from the date the Company takes possession of the property. For operating leases, expense is recognized on a straight-line basis; for finance leases, expense is recognized on an accelerated basis. The Company records lease expense in cost of sales on the Company’s consolidated statements of operations. Variable lease costs are expensed as incurred and recognized in cost of sales on the consolidated statements of operations.

The Company has sale and leaseback transactions that do not qualify for sale-leaseback accounting because of deemed continuing involvement by the Company, which results in the transaction being recorded under the financing method. These financing obligations are included in long-term debt on the Company’s consolidated balance sheets.

For additional information, see NOTE 8 — Leases and NOTE 9 — Debt to the consolidated financial statements.

Business Combinations

The Company accounts for the acquisition of reacquired franchises from franchisees using the acquisition method of accounting for business combinations. The Company allocates the purchase price paid for acquired assets and liabilities in connection with an acquisition based on the Company’s estimated fair value at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value of the following:

•Intangible assets, including valuation methodology, estimations of future cash flows, discount rates, market segment growth rates, assumed market share, and estimated useful life;

•Deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances estimate; and

•Other assets and liabilities, and contingent consideration, as applicable.

Fair value measurements for reacquired franchise rights and property and equipment were determined using the income approach and cost approach, respectively. The fair value measurement of acquired assets and liabilities as of the acquisition date is based on significant inputs not observed in the market, and as such, represents a Level 3 fair value measurement.

Goodwill is measured as the excess of the purchase price paid over the net of the acquisition date fair values of assets acquired and liabilities assumed, Goodwill is allocated to the company-operated shops reportable segment and is expected to be fully deductible for tax purposes.

Goodwill

The Company reviews the recoverability of goodwill on a reporting unit basis at least annually, as of the beginning of the Company’s fourth fiscal quarter, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The annual impairment test includes an option to perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value; the qualitative test may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company is required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. The Company performed annual qualitative impairment assessments for each of the three years in the period ended December 31, 2023, andno impairment charges were recognized.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company’s assessment of recoverability of property and equipment and finite-lived intangible assets is performed at the component level, which is generally an individual shop, and requires judgment and an estimate of future undiscounted shop-generated cash flows. Estimates of fair values are based on the best information available and require the use of estimates, judgments, and projections. The Company tests for recoverability by comparing the carrying value of the asset (asset group) to the undiscounted cash flows. If the carrying value is not recoverable, the Company would recognize an impairment loss if the carrying value of the asset (asset group) exceeds the fair value. The Company performed an annual qualitative assessment in its fourth fiscal quarter of 2023, which indicated no changes in circumstances or triggering events for impairment.

Revenue Recognition

Consolidated revenues are recognized net of any discounts, returns, allowances and sales incentives in accordance with Accounting Standards Codification (ASC) Topic 606 (ASC 606), Revenue from Contracts with Customers.

Company-operated Shops Revenue

Retail sales from company-operated shops and through online channels are recognized at the point in time when the products are sold to the customers. The Company reports revenues net of sales taxes collected from customers and remitted to government taxing authorities.

Loyalty Program

Dutch Rewards, the Company’s digital loyalty program that is accessible via mobile app, provides the following key opportunities for customers:

•Collect points based on purchases

•Convert points to rewards

•Redeem rewards for free drinks

•Receive birthday and other promotional awards

Points earned and not redeemed for rewards within 180 days automatically expire, and rewards that are not used withinsix months of issuance automatically expire. Separately, birthday and other promotional awards automatically expire after eight to 30 days, depending on the specific award.

The Company defers revenue based on the estimated value of beverages for which the points, rewards, and awards are expected to be redeemed. Based on historical expiration rates, a portion of points, rewards, and awards are not expected to be redeemed and are recognized as breakage. For the year ended December 31, 2023, the Company recognized breakage of approximately $3.3 million. The Company completed its initial breakage assessment as of December 31, 2022, which resulted in revenue recognized of $7.4 million, including $4.9 million for points collected prior to January 1, 2022 that expired on December 31, 2022.

Gift Card Program

The Company operates a gift card program and maintains a contract liability for gift cards sold, recognizing revenue from gift cards when a gift card is redeemed. Gift cards do not have an expiration date or a service fee causing a decrement to the customer balance. Based on historical redemptions rates, a portion of gift cards are not expected to be redeemed and are recognized as breakage.

Franchising Revenue

Franchise royalty fees are generally computed as a percentage of net franchise sales and are charged for continuing support of franchisees for various services provided by the Company. These services are highly interrelated, and as such are accounted for as a single performance obligation.

Separately, the Company receives marketing fees from franchisees for promotion of the Dutch Bros brand. Contributions are based on a percentage of shop sales and marketing expenditures include payments to third parties and other costs. If receipts exceed expenditures, the excess is recorded as an accrued liability. As of December 31, 2023 and 2022, no excess marketing fees were accrued in the Company’s consolidated financial statements.

Initial and other deferred franchise fees are recorded as a contract liability, and revenue is recognized ratably over the term of the franchise agreement, which is generallyten years.

Other franchising revenue, including coffee bean sales, Dutch Bros. Blue Rebel beverage sales, accessories and other sales, are recognized when shipped.

Other Revenue

Other revenue includes retail coffee and other food and beverage sales, recognized at the date of sale, as well as sales of products through the Company website, recognized at the point in time of shipment to customers.

Deferred Revenue

Deferred revenue primarily consists of the unredeemed gift card liability and unredeemed points/rewards from our Dutch Rewards loyalty program. Deferred revenue also includes bean and beverage sales to distributors where the performance obligation has not yet been satisfied as control has not transferred to the customer.

Shop Pre-opening Expenses

Pre-opening expenses incurred with the opening of new company-operated shops are expensed as incurred. These costs include rent expense, wages, benefits, travel and lodging for the training and opening management teams, and beverage and other operating expenses incurred prior to a shop opening for business and are included in cost of sales.

Vendor Rebates

The Company has entered into food and beverage supply agreements with certain major vendors. Per the terms of these arrangements, vendor rebates are provided to the Company based on the dollar value of purchases for systemwide shops. These rebates are recognized as earned throughout the year and are recorded as accounts receivable and a reduction to cost of sales.

Advertising Expense

Advertising costs are expensed as incurred. Franchise shops contribute to an advertising fund that the Company manages on behalf of the shops. Under the Company’s standard franchise agreement, the contributions received must be spent on specific marketing-related activities. The expenditures are primarily amounts paid to third parties and other costs. Advertising expense was as follows for the periods presented:

Equity-based Compensation

The Company granted time-based restricted stock awards (RSAs) to certain officers and employees in connection with the Reorganization Transactions and the IPO, and restricted stock units (RSUs) to directors and certain employees. The RSAs and RSUs are accounted for as equity-classified awards, and are granted at the fair value of the underlying Class A common stock of Dutch Bros Inc. as of the grant date and vest over the requisite service period.

The cost of the RSAs and RSUs is recognized as expense over the grantee’s requisite service period, and forfeitures are accounted for as they occur. To date, the Company has not granted any performance-based awards .

Tax Receivables Agreements

In connection with the IPO and Reorganization Transactions, the Company entered into (i) the Exchange Tax Receivable Agreement with the holders of Class B common stock and Class C common stock (the Exchange Tax Receivable Agreement), and (ii) the Reorganization Tax Receivable Agreement with the holders of Class D common stock (the Reorganization Tax Receivable Agreement and together with the Exchange Tax Receivable Agreement, the Tax Receivable Agreements or TRAs). These TRAs provide for the payment by Dutch Bros Inc. to Continuing Members and the Pre-IPO Blocker Holders of 85.0% of the benefits, if any, Dutch Bros Inc. would be deemed to realize (calculated using certain assumptions) as a result of certain tax attributes and benefits covered by the TRAs.

The Company expects to obtain an increase in its share of the tax basis in the net assets of Dutch Bros OpCo when OpCo Units are exchanged by Pre-IPO Dutch Bros OpCo Unitholders. The Company treats any redemptions and exchanges of OpCo Units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that it would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

TRA-related liabilities are classified on the Company’s consolidated balance sheets as current or non-current assets based on the expected date of payment under the captions “Current portion of tax receivable agreements liability” and “Tax receivable agreements liability, net of current portion,” respectively. The Company does not currently have any current portion of tax receivable agreements liability.

Income Taxes

The Company is a corporation and sole managing member of Dutch Bros OpCo which is treated as a partnership for tax purposes.

The Company records income tax provision, deferred tax assets, deferred tax liabilities, uncertain tax positions, and valuation allowance, as applicable, only for the items for which the Company is responsible to the relevant tax authority.

Deferred income taxes result from temporary differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws expected to be in effect when such differences are expected to reverse. These temporary differences are reflected as deferred income tax assets, net on the consolidated balance sheets. A deferred tax asset is recognized if it is more likely than not that a tax benefit will be realized.

The Company recognizes tax benefits from entity-level uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Income (Loss) Per Share

Basic income (loss) per share of Class A and Class D common stock is computed by dividing net income (loss) attributable to Dutch Bros Inc. by the weighted-average number of shares of Class A and Class D common stock outstanding during the period. Diluted income (loss) per share of Class A and Class D common stock is computed by dividing net income (loss) attributable to Dutch Bros Inc., adjusted for the assumed exchange of all potentially dilutive instruments for Class A common stock, by the weighted-average number of shares of Class A and Class D common stock outstanding, adjusted to give effect to potentially dilutive elements. Share counts used in the diluted income (loss) per share calculations are adjusted for the deemed repurchases provided for in the treasury stock method for restricted stock awards and restricted stock units, and under the if-converted method for the outstanding convertible Class B and Class C common stock, if dilutive.

Shares of the Company’s Class B and Class C common stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted income (loss) per share of Class B and Class C common stock under the two-class method has not been presented.

Recently Issued Accounting Standards

In October 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this update modify the disclosure or presentation requirements of a variety of Topics in the ASC in response to the SEC’s Release No. 33-10532, Disclosure Update and Simplification initiative, and align the ASC’s requirements with the SEC’s regulations. For entities subject to the SEC's existing disclosure requirements, the effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective. Early adoption is prohibited, and amendments should be applied prospectively. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the ASC and will not become effective for any entity. The Company does not expect this standard to have a material impact on its consolidated financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. These improvements should enable investors to better understand an entity's overall performance and assist in assessing potential future cash flows. Effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Public entities should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently reviewing the potential impacts the new standard may have on its consolidated financial statements and related disclosures, including potential changes to business processes, policies and procedures that may be required.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update enhance the transparency and decision usefulness of income tax disclosures, primarily through improvements to the rate reconciliation and income taxes paid information, specifically requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation, and (2) income taxes paid disaggregation by jurisdiction. These amendments allow investors to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affects its income tax rate and prospects for future cash flows. Effective for public business entities' annual periods beginning after December 15, 2024, and should be applied on a prospective basis. Early adoption is permitted for annual financial statements that have not yet been issued. The Company is currently assessing the potential impacts of this standard on its income tax disclosures.

Recently Adopted Accounting Standards

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update provide specific guidance to address diversity in practice related to (1) recognition of an acquired contract liability, and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 are applied on a prospective basis, and were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company’s adoption of this standard effective January 1, 2023 did not have a material impact on its consolidated financial statements.

In July 2023, the FASB issued ASU No. 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. The ASU amends and supersedes various SEC paragraphs pursuant to SEC staff guidance and was effective upon issuance. The new standard has had no material impact on the Company's consolidated financial statements.

In August 2023, the FASB issued ASU No. 2023-04, Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121. The ASU amends and supersedes various SEC paragraphs pursuant to SEC staff guidance and was effective upon issuance. The new standard has had no material impact on the Company's consolidated financial statements.

NOTE 3 — Revenue Recognition

Revenue

The following table disaggregates revenue by major component:

Deferred Revenue

Deferred revenue activity related to the Company’s gift card and loyalty programs was as follows:

Deferred revenue also includes sales to distributors where the performance obligation has not been satisfied and control has not been transferred to the customer as of the reporting date, as well as initial unearned franchise fees from franchise partners. These deferred revenues reported in the Company’s consolidated balance sheets were as follows:

Revenue recognized during the three years ended December 31, 2023 that was included in the respective deferred revenue liability balances at the beginning of the period are shown below.

1 Amounts exclude cash loads and transactions related to the Company’s loyalty rewards program.

Future recognition of initial unearned franchise fees as of December 31, 2023 is as follows:

NOTE 4 — Shop Acquisitions

During the year ended December 31, 2023, the Company did not repurchase the franchise rights and assets of any shops from franchise partners.

For the year ended December 31, 2022, the Company repurchased the franchise rights and assets ofseven shops fromtwo separate franchise partners in Washington. The following table summarizes the allocations of the purchase prices to the estimated fair values of assets acquired and liabilities assumed. The fair values for the 2022 acquisitions were considered final as of December 31, 2022.

Reacquired franchise rights had a weighted-average useful life of 4.2 years at the time of purchase for the acquisitions made during the year ended December 31, 2022.

The results of operations for the 2022 acquisitions are included in the Company’s consolidated statements of operations beginning on the dates of acquisition. Revenues of approximately $9.3 million and net income of approximately $1.6 million are included in the Company’s consolidated statements of operations for the year ended December 31, 2022.

The following table reflects the unaudited pro forma results of the Company and thefive shops purchased in 2022 as if the acquisitions had taken place as of January 1, 2021:

NOTE 5 — Inventories

Inventories, net consist of the following:

NOTE 6 — Property and Equipment

Property and equipment, net consists of the following:

1 Aircraft is depreciated under the consumption method.

2 Construction-in-progress primarily consists of construction and equipment costs for new and existing shops, as well as our new roasting facility in Texas.

Depreciation expense included in the Company’s consolidated statements of operations was as follows:

No impairment charges were recognized for the three years ended December 31, 2023.

NOTE 7 — Intangible Assets and Goodwill

Intangible Assets

The details of the intangible assets are as follows:

Amortization expense included in the Company’s consolidated statements of operations was as follows:

The estimated future amortization expense of the reacquired franchise rights as of December 31, 2023 is as follows:

Goodwill

The carrying amount and activity of goodwill was as follows:

No impairment charges were recognized for the three years ended December 31, 2023.

NOTE 8 — Leases

A summary of finance and operating lease right-of-use assets and lease liabilities as of December 31, 2023 is as follows:

The components of lease cost were as follows for the periods presented:

Future minimum lease payments for finance and operating lease liabilities as of December 31, 2023 are as follows:

A summary of lease terms and discount rates for finance and operating leases is as follows:

Supplemental cash flow information related to leases as of December 31, 2023 is as follows for the periods presented:

1 The 2022 amounts include the transition adjustment for the adoption of ASU 2016-02, as amended.

NOTE 9 — Debt

On August 4, 2023, the Company amended its senior secured credit facility, dated February 28, 2022, with JPMorgan Chase Bank, N.A. (as amended, the 2022 Credit Facility) to increase borrowing capacity by $150 million to a total of $650 million. The 2022 Credit Facility consists of a $350 million revolving credit facility, a term loan facility of up to $100 million, and a delayed draw term loan facility of up to $200 million. The 2022 Credit Facility also includes sublimits for letters of credit and swingline loans of up to $50 million and $15 million, respectively. The 2022 Credit Facility expires on February 28, 2027 (the Maturity Date), and portions of the delayed draw term loan facility expire in February 2024 and February 2025.

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 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 up through and including the Maturity Date.

The Company is required to pay a commitment fee on a quarterly basis, at a per annum rate of between 0.20% and 0.45% (depending on the Company’s maximum net lease-adjusted total leverage ratio) based on the (i) average daily unused portion of the revolving credit facility, and (ii) the daily undrawn amount of the delayed draw term loan facility. These fees are recorded as interest expense on the Company’s consolidated statements of operations.

The 2022 Credit Facility contains financial covenants that require the Company to not exceed a maximum net lease-adjusted total leverage ratio and maintain a minimum fixed charge coverage ratio. The 2022 Credit Facility also contains certain negative covenants that, among other things, limit the Company’s ability to incur additional debt, grant liens on assets, merge with or acquire other companies, make other investments, dispose of assets, and make restricted payments. Obligations under the 2022 Credit Facility are guaranteed by Dutch Bros OpCo and certain of its subsidiaries, and secured by a first priority perfected security interest in substantially all of the assets of the guarantors.

In September 2023, the Company used proceeds received from the Follow-On Offering to repay approximately $202.7 million of the 2022 Credit Facility, representing the balance of the Company’s revolving loans as of the repayment date. As of December 31, 2023, $349.4 million was available for borrowing on the revolving credit facility, net of a $0.6 million letter of credit outstanding.

As of December 31, 2023, approximately $95.6 million of principal was outstanding on the term loan. The term loan bears interest at 6.96% as of December 31, 2023. The Company was in compliance with its financial covenants as of that date.

Long-Term Debt

The Company’s long-term debt consisted of the following for the periods presented:

1 Represents failed sale-leaseback arrangements.

Future annual maturities of long-term debt as of December 31, 2023 are as follows:

NOTE 10 — Derivative Financial Instruments

The Company has a receive-variable (Receive Leg), pay-fixed (Pay Leg) interest rate swap with JPMorgan Chase Bank, N.A. The interest rate swap has a notional amount of $70 million and hedges interest rate risk on the term loan under the 2022 Credit Facility. The interest rate swap matures on February 28, 2027 and has a fixed rate of 2.67% per annum for the Pay Leg. The variable rate on the Receive Leg of the interest rate swap is the one-month adjusted term SOFR plus an applicable margin. As of December 31, 2023, the one-month adjusted term SOFR was 5.36%.

The Company typically designates all interest rate swaps as cash flow hedges, and accordingly, records the change in fair value for the effective portion of the interest rate swap in AOCI rather than in current period earnings until the underlying hedged transaction affects earnings. As of December 31, 2023, the Company expects to reclassify a gain of approximately $1.4 million from AOCI to earnings within the next twelve months.

Designated as a Level 2 instrument within the fair value hierarchy, the fair value and effect of the derivative instrument included in the Company’s consolidated financial statements was as follows:

There were no changes to the interest rate swap contract resulting from the amendment to the Company’s 2022 Credit Facility as discussed in NOTE 9 — Debt.

NOTE 11 — Tax Receivable Agreements

The changes related to the Company’s TRAs were as follows:

1 Impact primarily related to state tax rates and adjustments from previous estimates upon finalization of the tax attributes subject to the TRA.

NOTE 12 — Income Taxes

The Company’s income tax expense (benefit) consisted of the following:

The Company’s effective income tax rate differs from the U.S. federal statutory income tax rate as itemized below:

The components of the Company’s deferred tax assets are as follows:

The Company recognizes deferred tax assets to the extent, based on available evidence, that it is more likely than not that they will be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent results of operations. For the year ended December 31, 2023, the Company recorded a valuation allowance on its deferred tax assets, primarily related to the Company’s charitable contributions, of which it does not expect to recognize the benefit from in the foreseeable future. The Company hasno deferred tax liabilities.

As of December 31, 2023, the Company had U.S. federal net operating losses of $142.8 million and tax credit carryforwards of approximately $5.0 million. The Company’s federal net operating losses do not expire and tax credits will begin to expire in 2038 if not utilized. As of December 31, 2023, the Company had $95.0 million of state tax net operating losses andno state tax credits. Of the state tax net operating losses, $90.0 million will begin to expire in 2033 if not utilized and the remaining $5.0 million do not expire.

Utilization of net operating losses, credit carryforwards, and certain deductions may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The tax benefits related to future utilization of federal and state net operating losses, tax credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examinations from various taxing authorities.

There wereno interest and penalties accrued for the three years ended December 31, 2023. The Company has assessed its tax positions taken and concluded there are no significant uncertain tax positions. The Company hasno unrecognized tax benefits as of December 31, 2023 or 2022, that, if recognized, would affect the amount of income tax expense reported.

The Company files returns with the Internal Revenue Service and multiple state jurisdictions, which are subject to examination by the taxing authorities for years 2018 and later. The earlier tax years are subject to examination due to the utilization of net operating losses in recent tax years. None of our federal or state income tax returns are currently under examination by federal or state taxing authorities.

NOTE 13 — Equity-Based Compensation

Equity Awards

As of December 31, 2023, the Company had equity-based compensation awards outstanding consisting of time-based RSAs and RSUs with three years service vesting periods. Awards currently outstanding vest under one of the following schedules:

•Approximately one-third installments on each first, second, and third anniversary of the vesting commencement date;

•50% each of the second and third anniversaries of the vesting commencement date; or

•100% vesting on the third anniversary of the vesting commencement date.

Vesting of all awards granted are subject to the grantee’s continued service to the Company through the applicable vesting date.

Restricted Stock Awards

Activity for the Company’s RSAs was as follows:

Restricted Stock Units

Activity for the Company’s RSUs was as follows:

Total release date fair value of vested restricted stock awards and units for the years ended December 31, 2023 and 2022 are presented below.

Equity-Based Compensation

Equity-based compensation expense is recognized on a straight-line basis and is included in the Company’s consolidated statements of operations as follows:

As of December 31, 2023, total unrecognized stock-based compensation related to unvested stock awards was $13.8 million, which will be recognized as follows:

NOTE 14 — Employee Benefit Plans

The Company’s 401(k) plan (the 401(k) Plan) covers substantially all employees of the Company who meet certain requirements. Contributions to the 401(k) Plan are determined by each participant by means of an elective compensation deferral, subject to annual limits. The Company matches 100% of employee contributions, up to 4% of eligible compensation. The total employer matching contributions to the 401(k) Plan recognized in the Company’s consolidated statements of operations were as follows:

NOTE 15 — Non-Controlling Interests

Dutch Bros Inc. is the sole managing member of Dutch Bros OpCo, and, as a result, consolidates the financial results of Dutch Bros OpCo. The Company reports a non-controlling interest representing the economic interest in the Dutch Bros OpCo held by the other members of Dutch Bros OpCo. The Third Amended and Restated Limited Liability Company Agreement of Dutch Bros OpCo provides that holders of Dutch Bros OpCo Class A common units may, from time to time, require Dutch Bros OpCo to redeem all or a portion of its Dutch Bros OpCo Class A common units for newly-issued shares of Class A common stock on aone-for-one basis. In connection with any redemption or exchange, Dutch Bros Inc. will receive a corresponding number of Dutch Bros OpCo Class A common units, increasing Dutch Bros Inc.’s total ownership in Dutch Bros OpCo. Changes in Dutch Bros Inc.’s ownership in Dutch Bros OpCo, while Dutch Bros Inc. retains its controlling interest in Dutch Bros OpCo, will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Dutch Bros OpCo Class A common units by the other members of Dutch Bros OpCo will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in-capital.

The following table summarizes the ownership interest in Dutch Bros OpCo:

1 Includes approximately 1.3 million Dutch Bros OpCo Class A common units related to unvested restricted stock awards held by former Profits Interest Units holders. These Dutch Bros OpCo Class A common units are excluded from non-controlling interest calculations.

The weighted-average ownership percentage for the applicable reporting period is used to attribute net income (loss) to Dutch Bros Inc. and the non-controlling interest holders. The non-controlling interest holders’ weighted-average ownership percentage were as follows for the periods presented:

¹ For the period from the September 14, 2021 Reorganization date to December 31, 2021.

The following table summarizes the effect of changes in ownership of Dutch Bros OpCo on the Company’s equity for the periods presented:

NOTE 16 — Income (Loss) Per Share

The following tables set forth the numerators and denominators used to compute basic and diluted net income (loss) per share of Class A and Class D common stock for the periods presented.

The following Class A common stock equivalents were excluded from diluted net income (loss) per share in the periods presented because they were anti-dilutive:

NOTE 17 — Commitments and Contingencies

Purchase Obligations

The Company enters into fixed-price and price-to-be fixed green coffee purchase commitments. For both fixed-price and price-to-be fixed purchase commitments, the Company expects to take delivery of green coffee and to utilize the coffee in a reasonable period of time in the ordinary course of business. Such contracts are used in the normal purchases of green coffee and not for speculative purposes. The Company does not enter into futures contracts or other derivative instruments related to its green coffee purchase commitments.

Guarantees

The Company periodically provides guarantees to franchise partners for lease payments. Annually, the Company determines if a liability needs to be recorded related to these guarantees. As of December 31, 2023 and December 31, 2022, the Company had guaranteed approximately $1.4 million and $1.6 million, respectively, in franchise partners’ lease payments and has not established a liability for these guarantees as any liability arising from the guarantees is not material to the consolidated financial statements.

Legal Proceedings

The Company is a party to routine legal actions arising in the ordinary course of and incidental to its business. These claims, legal proceedings, and litigation principally arise from alleged casualty, employment, and other disputes.

In determining loss contingencies, the Company considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recognized when it is considered probable that a liability has been incurred and when the amount of loss can be reasonably estimated.

Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, developments in legislation or regulations that affect the validity of certain claims and defenses, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matter.

Any claim, proceeding or litigation has an element of uncertainty, and an unfavorable outcome may have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

Litigation Related to Securities Claims

On March 1, 2023, plaintiff Jerry Peacock filed a putative class action lawsuit in U.S. District Court for the Southern District of New York against Dutch Bros Inc. and certain of its executive officers for alleged violations of U.S. federal securities laws. On August 3, 2023, the court appointed a lead plaintiff and re-captioned the case Douglas Rein, Individually and On Behalf of All Others Similarly Situated v. Dutch Bros, Inc. et al. On August 31, 2023 an amended complaint was filed (the Amended Complaint) which asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), on behalf of a proposed class consisting of those who acquired Dutch Bros Inc.’s securities between November 10, 2021 and May 11, 2022. The Amended Complaint generally alleges that the defendants made false or misleading statements about the impact of commodity inflation on the Company’s financial results for the first quarter of 2022. The Amended Complaint primarily seeks compensatory damages for all affected members of the purported class. Briefing on the defendants’ motion to dismiss the Amended Complaint was completed on November 9, 2023.

In addition, on June 14, 2023, June 30, 2023, and July 18, 2023, respectively, plaintiffs Brennan Hudson, Darren Wakefield, and Amanda Boster each filed a putative stockholder derivative lawsuit in U.S. District Court for the Southern District of New York. The complaints name Dutch Bros Inc. as a nominal defendant and purport to bring claims on behalf of Dutch Bros Inc. against certain of Dutch Bros Inc.’s directors and executive officers for alleged breaches of their fiduciary duties in relation to substantially the same factual allegations as the above-described putative class action lawsuit. The complaints each primarily seek to recover for Dutch Bros Inc. compensatory damages for losses allegedly sustained by Dutch Bros Inc. related to the facts alleged, restitution, and equitable relief in the form of revisions to Dutch Bros Inc.’s governing documents. On July 27, 2023, thethree actions were consolidated, and the consolidated action is now captioned In re Dutch Bros Inc. Derivative Litigation. On September 14, 2023, the court entered an order staying the consolidated action pending the resolution of the motion to dismiss in the above-described putative class action lawsuit and entry of a scheduling order in the consolidated action.

On November 3, 2023, plaintiff David Briggs filed a putative stockholder derivative lawsuit in the Delaware Court of Chancery. The complaint names Dutch Bros Inc. as a nominal defendant and purports to bring claims on behalf of Dutch Bros Inc. against certain of Dutch Bros Inc.’s directors and executive officers for alleged breaches of their fiduciary duties in relation to substantially the same factual allegations as the above-described putative class action lawsuit. The complaint primarily seeks to recover for Dutch Bros Inc. compensatory damages for losses allegedly sustained by Dutch Bros Inc. related to the facts alleged, restitution, and equitable relief in the form of revisions to Dutch Bros Inc.’s governing documents. On January 24, 2024, the court entered an order staying this action pending the resolution of the motion to dismiss in the above-described putative class action lawsuit.

The Company intends to vigorously defend these lawsuits. Given the nature of these cases, including that the proceedings are in their early stages, the Company is unable to predict the ultimate outcome of these cases or estimate the range of potential loss, if any.

Liabilities Under Tax Receivable Agreements

Under the TRAs, Dutch Bros Inc. is contractually committed to pay the non-controlling interest holders 85% of the amount of any tax benefits that Dutch Bros Inc. actually realizes, or in some cases is deemed to realize, as a result of certain transactions. As of December 31, 2023, Dutch Bros Inc. recognized $290.9 million of liabilities related to its obligations under the TRAs.

NOTE 18 — Related Party Transactions

The Company’s donations to the Dutch Bros Foundation (the Foundation), a not-for-profit founded by the Company that provides philanthropy to coffee farmers and local communities and for which the Company’s Chief Executive Officer (CEO) and Chief Operating Officer (COO) serve on the board of directors, were as follows:

For the year ended December 31, 2023, the Company and the Foundation focused on local community givebacks.

NOTE 19 — Segment Reporting

Segment information is prepared on the same basis that the Company’s CEO, who is the chief operating decision maker (the CODM), manages the segments, evaluates financial results and makes key operating decisions. The Company’s CEO evaluates the financial performance of the Company based ontwo operating segments: Company-operated shops and Franchising and other. The Company-operated shops segment includes coffee shop sales to customers. The Franchising and other segment includes bean and product sales to franchise partners and includes the initial franchise fees, royalties, and marketing fees.

The CODM reviews segment performance and allocates resources based upon segment contribution, which is defined as segment gross profit before depreciation and amortization.

All segment revenue is earned in the United States, and there are no intersegment revenues. The CODM does not evaluate operating segments using discrete asset information, and we do not identify or allocate assets by operating segments.

Selling, general and administrative expenses primarily consist of the Company’s unallocated corporate expenses. Unallocated corporate expenses include corporate administrative functions that support the segments but are not directly attributable to or managed by any segment and are not included in the reported financial results of the segments.

No changes have been made to the Company’s segments during the year ended December 31, 2023. In addition, no customer represented 10% or more of total revenue for the three years ended December 31, 2023.

Financial information for the Company’s reportable segments was as follows for the periods presented:

NOTE 20 — Subsequent Events

Organization Realignment and Restructuring

On January 29, 2024, the Company’s Board of Directors approved an organizational realignment and restructuring plan to expand the Company’s support operations at its Phoenix, Arizona office. As part of this large-scale initiative, the Company will relocate certain of its support center staff from the Grants Pass, Oregon headquarters to the Arizona office, and anticipates that by January 1, 2025, approximately 40% of the Company’s total support operations staff will be located in Phoenix, Arizona. The Company expects to incur approximately $24 million to $31 million in costs related to this initiative and approximately $6 million to $10 million in capital expenditures related to the Arizona office expansion.

On February 20, 2024, the Company drew $150 million on its delayed draw term loan facility under the 2022 Credit Facility before this portion was set to expire on February 28, 2024. The remaining $50 million of the delayed draw term loan facility is available until February 2025. The Company expects to use the funds for general corporate purposes, including, but not limited to, building new shops.