Dutch Bros Inc. (BROS) FY 2021 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.

The following discussion contains references to calendar year 2021 which represents the consolidated financial results of Dutch Bros Inc. and its subsidiaries, and to calendar year 2020, which represent the consolidated financial results of Dutch Bros OpCo and its subsidiaries.The comparison of the consolidated financial results of Dutch Bros OpCo and its subsidiaries for the calendar years 2020 and 2019 can be found in our final prospectus filed with the SEC on September 16, 2021.

Introduction and Overview

Dutch Bros Inc. is a high growth operator and franchisor of drive-thru coffee shops that focuses 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. Our innovative, hand-crafted beverage-focused lineup features hot and cold espresso-based beverages, cold brew coffee products, proprietary energy drinks, tea, lemonade, smoothies and other beverages. We believe Dutch Bros is more than just the products we serve—we are dedicated to making a massive difference in the lives of our employees, customers and communities, one cup at a time.

As of December 31, 2021, we had 538 company-operated and franchised shops in 12 states, an increase of approximately 22% from the prior year. For the year ended December 31, 2021, we generated $497.9 million of revenue, a $(120.0) million net loss, and $(0.28) loss per diluted share. We have two reportable operating segments: Company-operated shops, and Franchising and other.

Initial Public Offering

Dutch Bros Inc. was incorporated in June 2021 for the purpose of facilitating an initial public offering in order to carry on the Company’s business. On September 17, 2021, we completed our IPO in which we issued and sold approximately 24.2 million shares of Class A common stock (including approximately 3.2 million shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares) at an offering price of $23.00 per share, resulting in net proceeds of approximately $520.8 million after deducting underwriting discounts, commissions and offering costs.

For additional information related to our IPO and organizational structure, see NOTE 1 — Organization and Nature of Operations and NOTE 12 — Equity and Stock-Based Compensation in the consolidated financial statements, Part II, Item 8.

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Impact of COVID-19

The effects of COVID-19 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 in response to the evolving pandemic, any ongoing effects on consumer demand and spending patterns or other impacts of the pandemic. 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 degree as others in our industry, and our consumer demand has increased during the pandemic. Nevertheless, we have been affected by global shipping delays that have impacted deliveries of supplies to our shops.

Results of Operations

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 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 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.

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3    Same shop sales growth 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    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”.

5    Systemwide sales and systemwide same shop sales include company-operated shop revenue and sales at franchised shops during the comparable periods noted. 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 overall Dutch Bros financial health, growth and future expansion prospects.

6    Dutch Rewards, a digitally-based rewards program available exclusively through the Dutch Rewards app, was launched February 2021. As such, there is no information for the comparable periods of 2020. Management uses this metric as an indicator of customer loyalty adoption of our Dutch Rewards app and future promotional plans.

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 Shop Segment Performance

Company-operated Shop Revenue

In 2021, company-operated shop revenue grew 65.1% to $403.7 million, as compared to $244.5 million in 2020, or an increase of $159.2 million. Company-operated shops in the comparable shop base contributed $16.7 million to this increase (9.0% same shop sales), while new company-operated shops opened during 2021 and 2020 contributed $142.5 million to this increase. For purposes of calculating company-operated same shop revenue growth, company-operated shop revenue for 120 shops was included in the comparable shop base.

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Discounts

Prior to implementing our Dutch Rewards app in February 2021, which is a spend-based digital rewards program, we used a paper-based stamp card as our loyalty program. For each beverage purchased, customers received one stamp. After accumulating 10 stamps, customers were eligible to redeem a completed card for a free beverage of any size.

When the COVID-19 pandemic began in 2020, out of an abundance of caution related to social distancing, we suspended physically stamping the paper-based loyalty card. This significantly reduced our sales and promotional discount expenses in 2020, and as a result positively impacted company-operated shop revenue. As a percentage of gross sales, sales and promotional discount expenses in 2020 were 7.5%, compared to 11.7% and 17.1% in 2021 and 2019, respectively. After absorbing the costs associated with registering over 2 million Dutch Rewards program members in the first quarter of 2021, sales and promotional discounts are settling to our targeted go-forward rate, with our longer term run rate expected to be in the low double digits. The positive impact on 2020 company-operated shop revenue brought on by the temporary suspension of the paper-based stamp card resulted in a decrease in the percentage of company-operated shop revenue measure for each cost category in 2020’s results. In the discussions below we identify that impact for each cost category.

Beverage, Food and Packaging Costs

In 2021, beverage, food and packaging costs increased 86.5% to $102.2 million, compared to $54.8 million in 2020. This increase was primarily driven by a 47.9% increase in shop operating weeks due to the opening of new company-operated shops during both 2021 and 2020, as well as the portion of comparable sales growth, which grew 9.0% for 2021. The remainder of the increase was driven by ingredient cost increases as well as a shift in the mix of products sold.

As a percentage of company-operated shop revenue, beverage, food and packaging costs increased to 25.3% in 2021, compared to 22.4% in 2020, or a 290 “basis points” increase. As noted above, the impact of lower promotional discount expenses in 2020 contributed approximately 120 “basis points” of this increase. Ingredient cost increases as well as a shift in the mix of products sold drove 100 “basis points”, and costs associated with opening new stores, many of which are in new markets, contributed 70 “basis points” to the increase.

Labor Costs

In 2021, labor costs increased 72.6% to $123.7 million, compared to $71.7 million in 2020. This growth was primarily driven by a 47.9% increase in shop operating weeks due to the opening of new company-operated shops during both 2021 and 2020.

As a percentage of company-operated shop revenue, labor costs increased to 30.6% in 2021, compared to 29.3% in 2020, or a 130 “basis points” increase. As noted above, the impact of lower promotional discount expenses in 2020 contributed approximately 140 “basis points” of this increase. Additionally, the legislated increases in the minimum wage in our West Coast shops, along with updated minimum staffing standards across all shops contributed 30 “basis points”, which were offset by lower COVID-19 leave costs of 40 “basis points”.

Occupancy and Other Costs

In 2021, occupancy and other costs increased 64.6% to $63.6 million, compared to $38.6 million in 2020. This growth was primarily driven by a 47.9% increase in shop operating weeks due to the opening of new company-operated shops during both 2021 and 2020.

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As a percentage of company-operated shop revenue, occupancy and other costs remained approximately flat at 15.7% in 2021, compared to 15.8% in 2020. The reinstitution of cash as a form of tender in March 2021 drove a 90 “basis points” improvement as a result of lower credit card fees, and the leverage on rent and other occupancy costs provided a 40 “basis points” margin benefit. As noted above, the impact of lower promotional discount expenses in 2020 contributed approximately 130 “basis points” increase as an offset to these improvements.

Pre-opening Costs

In 2021, pre-opening costs increased 37.2% to $12.8 million, compared to $9.3 million in 2020. This growth was primarily driven by the opening of 82 new company-operated shops during 2021 compared to the opening of 59 company-operated shops during 2020.

Depreciation and Amortization

In 2021, depreciation and amortization increased 67.3% to $16.3 million, compared to $9.7 million in 2020. This growth was primarily driven by the opening of 82 new company-operated shops during 2021. As a percentage of company-operated shop revenue, depreciation and amortization was 4.0% for 2021 and remained unchanged compared to 2020.

Company-operated Shop Gross Profit

In 2021, Company-operated shop gross profit increased 41.1% to $85.2 million, compared to $60.4 million in 2020, primarily related to the year-over-year increase in net revenue. As a percentage of company-operated shop revenue, company-operated shop gross profit decreased to 21.1% in 2021, compared to 24.7% in 2020. As noted above, the impact of lower promotional discount expenses in 2020 contributed approximately 360 “basis points” of this decrease. The remainder is primarily due to higher beverage, food and packaging costs brought on by ingredient cost increases and product mix shifts noted above, as well as expenses related to the accelerated pace of new shop openings.

Company-operated Shop Contribution1

In 2021, Company-operated shop contribution increased 44.7% to $101.5 million, compared to $70.1 million in 2020, primarily related to year-over-year increase in net revenue. As a percentage of company-operated shop revenue, company-operated shop contribution decreased to 25.1% in 2021, compared to 28.7% in 2020. As noted above, the impact of lower promotional discount expenses in 2020 contributed approximately 340 “basis points” of this decrease. The remainder is primarily due to higher beverage, food and packaging costs brought on by ingredient cost increases and product mix shifts noted above, as well as expenses related to the accelerated pace of new shop openings.

Franchising and Other Segment Performance

In 2021, Franchising and other revenue grew 13.5% to $94.1 million, compared to $82.9 million in 2020. The increase in revenue was a result of $6.7 million in same shop sales growth, $2.9 million in additional shop weeks from franchise shops opened in 2021 and 2020 , and $1.4 million from no royalty abatement in 2021. This was partially offset by reduced revenue in 2021 as a result of the strategic decision to exit our internal merchandising business related to Dutch-branded goods in 2020, along with changes in franchisee inventory management practices.

Franchising and other gross profit grew 20.2% to $66.6 million in 2021, compared to $55.4 million in 2020. The net increase in revenue noted above, combined with relatively flat cost of sales, drove an increase in franchising and other gross profit.

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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”.

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Selling, General and Administrative

In 2021, selling, general and administrative expenses increased 152.2% to $265.0 million, compared to $105.1 million in 2020. As a percentage of revenue, selling, general and administrative expenses increased to 53.2% in 2021, compared to 32.1% in 2020. We recognized equity-based compensation charges of $157.7 million in 2021 compared to $35.1 million in 2020. In 2021, as a result of the Reorganization Transactions and IPO, we recognized equity-based compensation related to the grant and vesting of stock awards, restricted stock awards and restricted stock units in Dutch Bros PubCo to certain eligible employees. The remainder of the change was primarily driven by IPO costs, which were partially offset by leverage from our investment in infrastructure and above-shop headcount.

Other Expense

Interest Expense, Net

In 2021, interest expense, net grew 89.9%, to $7.1 million, compared to $3.7 million in 2020. This increase was primarily driven by increased borrowings associated with refinancing of our Senior Secured Credit Facility and interest on capital leases.

Other Income (Expense)

In 2021, other expense was $(1.2) million, compared to $(0.4) million in 2020, primarily related to write-off of fees associated with early extinguishment of debt in 2021.

Income Tax Expense (Benefit)

In 2021, income tax expense (benefit) was $(1.6) million, compared to $0.8 million in 2020. The tax benefit was primarily driven by losses allocated from Dutch Bros OpCo to the Company, partially offset by state taxes and a valuation allowance related to our charitable contributions.

Liquidity and Capital Resources

Cash Overview

We had cash and cash equivalents of $18.5 million and $31.6 million as of December 31, 2021 and December 31, 2020, respectively.

For the year ended December 31, 2021, our principal sources of liquidity were cash flows from operations, proceeds from our initial public offering and our Senior Secured Credit Facility (as defined below). Our principal uses of liquidity for the year ended December 31, 2021 were to pay off our term loans and fund our working capital needs.

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Cash Flows

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

Operating Activities

In 2021, net cash provided by operating activities was $80.4 million, compared to $53.5 million in 2020, an increase of $26.8 million, primarily related to increased deferred revenue and associated obligations on our Dutch Rewards loyalty app, as well as higher accrued compensation and other costs resulting from company growth and headcount expansion. These increases were partially offset by higher inventory as a result of additional company-operated shops.

Investing Activities

In 2021, net cash used in investing activities was $121.1 million, compared to $45.6 million in 2020, an increase of $75.5 million, primarily related to investment in capital expenditures as a result of new company-operated shop openings.

Financing Activities

For 2021, net cash provided by financing activities was $27.6 million, compared to net cash provided by financing activities of $8.1 million in 2020, an increase of $19.5 million, primarily due to the net proceeds from our initial public offering and draws from term and revolving loans under our Senior Secured Credit Facility, which were partially offset by payments in 2021 to repurchase equity and members’ units, payoff term loans under our Senior Secured Credit Facility, and provide distributions to members.

Cash Requirements

We believe that cash provided by operating activities, cash and cash equivalents, and proceeds from our Senior Secured Credit Facilities are adequate to fund our debt service requirements, operating 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 these new shop builds and/or acquisitions with additional proceeds from our Senior Secured Credit Facilities. The total capital expenditures for fiscal year 2022 are estimated to be approximately $175 million to $200 million.

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 that we entered into may be significant, and we are currently unable to estimate the amounts and timing of the payments that may be due thereunder.

Other than operating expenses, our cash requirements for fiscal year 2022 are expected to consist primarily of capital expenditures for investments in our new and existing shops, our supply chain, and our corporate facilities.

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The following table summarizes our current and long-term material cash requirements as of December 31, 2021, which we expect to fund primarily with operating cash flows and as needed proceeds from our Senior Secured Credit Facilities.

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1    Amounts include future minimum lease payments, excluding any taxes, insurance, and other related expenses.

2    Amounts include principal and interest under our Senior Secured Credit Facility, revolving line of credit due May 2026.

3    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, buybacks of franchise shops, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts.

4    Liabilities under Tax Receivable Agreement include estimated amounts to be paid to the non-controlling interest holders, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits.

5    As of December 31, 2021, capital lease obligations, debt obligations, and liabilities under tax receivable agreement are all included in our balance sheet. All other material cash requirements listed are not included on our balance sheet.

Senior Secured Credit Facilities

JP Morgan Credit Facility

On May 12, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and other financial institutions as the lenders party thereto (the Senior Secured Credit Facility). The Senior Secured Credit Facility consists of a $200 million term loan credit facility, a $150 million revolving credit facility and an uncommitted incremental facility of up to $100 million. Upon entering into the Senior Secured Credit Facility, we drew a $200 million term loan to pay a distribution to existing pre-IPO stockholders and a $25 million revolving loan.

Loans under the Senior Secured Credit Facility will mature and all amounts outstanding will be due and payable on May 12, 2026. The principal balance of the term loans amortizes each quarter at a rate between 2.5% and 12.5% per annum. Loans under the Senior Secured Credit Facility bear interest at a rate equal to either the adjusted LIBOR rate or an alternate base rate, plus an applicable spread based on our net lease-adjusted total leverage ratio. Our obligations under the Senior Secured Credit Facility are guaranteed by our subsidiaries and secured by substantially all of our and such subsidiary guarantors’ assets.

The Senior Secured Credit Facility contains financial covenants that require us to not exceed a maximum net lease-adjusted total leverage ratio and maintain a minimum fixed charge coverage ratio. The Senior Secured Credit Facility also contains certain negative covenants that, among other things, restrict our ability to: incur additional debt; grant liens on assets; sell or dispose of assets; merge with or acquire other companies, or make other investments; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; and pay dividends or make other distributions. As of the date of this Form 10-K, we were in compliance with all covenants under the Senior Secured Credit Facility.

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On September 17, 2021, we completed the IPO and subsequently paid in full our term loans which totaled $198.8 million. As of December 31, 2021, we had no outstanding term loans and $65.0 million of outstanding revolving loans with $85.0 million available for borrowing under the revolving credit facility. The revolving loans bear interest at 2.375% as of December 31, 2021.

Credit Facility Update

On February 28, 2022 (the Effective Date) the Company amended its Senior Secured Credit Facility with JPMorgan Chase, N.A. The new facility (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 the Company 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, the Company drew $100 million in term loans and approximately $30 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.

The 2022 Credit Facility contains financial covenants that require our 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, restrict our ability to incur additional debt, grant liens on assets, merge with or acquire other companies, make other investments, dispose of assets, and enter into sale and leaseback transactions and swap agreements. 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.

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 for further information on our critical accounting estimates and policies, which are as follows:

Dutch Rewards Loyalty Program

The estimation of the standalone selling price of points and other rewards issued to customers involves several assumptions, primarily the estimated value of product for which the reward is expected to be redeemed. Our estimate of points and other rewards we expect to be redeemed is based on historical company-specific data. 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.

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Property & Equipment, Intangible Assets, and Goodwill

The valuation methods and assumptions used in assessing the potential impairment of property and equipment, intangible assets, and goodwill, including the determination of asset groupings and the identification and allocation of goodwill to reporting units.

Leases

The estimation and assumptions of our lease terms, including assumed renewal periods for both operating and capital leases. The estimation of our incremental borrowing rate applied in calculation of the net present value of minimum lease payments for our capital leases.

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.

We account for amounts payable under the TRAs in accordance with Accounting Standards Codification (ASC) Topic 450, Contingencies. As such, subsequent changes to the measurement of the TRA liability are recognized in the statements of operations. As of December 31, 2021, our TRA liability was $109.7 million related to our projected obligations under the TRAs in connection with the Reorganization Transactions and OpCo units exchanged. See NOTE 10 — Tax Receivable Agreements for further details.

Income Taxes

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 11 — Income Taxes for further details.

Non-GAAP Financial Measures

In addition to disclosing financial results in accordance with U.S. 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 U.S. GAAP, and the financial results calculated in accordance with U.S. GAAP and reconciliations from these results should be carefully evaluated.

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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 charges. This is a standard metric used across the industry by our 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: royalty abatement expenses, COVID-19: first responder donation, impacts of transition from paper stamp card to Dutch Rewards loyalty app, and expenses associated with the exit of our in-house merchandising business, Dutchwear. 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.

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 stock awards for certain employees.

Donations associated with equity offerings

As part of 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.

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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: royalty abatement

In April 2020, we permitted franchise partners to skip one month of royalty payments to support their cash flow needs. We discontinued this support one month later in May 2020.

COVID-19: first responder donation

During 2020, we made specific donations to the First Responders First organization to support the acquisition and distribution of personal protective equipment for first responders.

Dutch Rewards transition

In 2019, we recorded a sales allowance under the new revenue recognition standard to establish the contract liability for our stamp card loyalty program. In 2020, we discontinued issuing new stamp cards under the stamp card loyalty program, which we recognized previously deferred revenue as a result of customers redeeming their stamp cards. In 2021, the stamp card loyalty program was cancelled.

Dutchwear merchandising adjustment

During 2020, we incurred a series of costs associated with the strategic decision to exit our internal merchandising business related to Dutch-branded goods such as mugs and cups. These costs include write-off and disposal of obsolete inventory and severance for staff dedicated to in-house support services related to our Dutchwear business.

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

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