BRC Inc. (NYSE:BRCC) Q4 2022 Earnings Call Transcript

BRC Inc. (NYSE:BRCC) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Greetings. Welcome to the Black Rifle Coffee Company Fourth Quarter and Full Year 2022 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Tanner Doss, you may begin.

Tanner Doss: Good afternoon, everyone. Thank you for joining Black Rifle Coffee Company's conference call to discuss our fourth quarter 2022 financial results, which we released today and can be found on our website at ir.blackriflcoffee.com. With me on the call today is Evan Hefer, Founder and CEO; Tom Davin, Co-CEO; Greg Iverson, our Chief Financial Officer; Toby Johnson, our Chief Operating Officer; and Heath Nielsen, our Chief Retail Officer. Before we get started, I would like to remind you the company's safe harbor language, which I'm sure you're all familiar with. On today's call, management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.

For a further discussion of risks related to our business, please see our previous filings with the SEC. This call will also contain non-GAAP financial measures such as adjusted EBITDA. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC, and they are also available on our investor website. Now I'd like to turn the call over to Evan Hefer, Founder and CEO of Black Rifle Coffee Company. Evan?

Evan Hefer: Thanks, Tanner, and good afternoon, everyone. It's hard to imagine it's been a full year since our first earnings call as a public company, but I'm excited to share some highlights from 2022 and lay out our goals for 2023. Just under a decade ago, I started this business in my garage with a 1-pound coffee roaster, roasting one bag at a time with my wife. At that time, we were just a small D2C brand focusing on a small portion of the coffee drinking public. Fast forward to today, Black Rifle has established itself not only as a mainstream brand but also as an omnichannel CPG business, less than six months into our launch at Walmart, we have risen to the number four 4 brand in bagged coffee and within that, the number one selling branded 12-ounce bagged coffee, the largest dollar volume package size within Walmart's bagged coffee segment.

We've also solidified ourselves as the fastest-growing brand in ready-to-drink coffee, outpacing the category growth by over four times at year-end. We are the number three RTD coffee within the convenience channel, outpacing Dunkin'. We partnered with some of the most recognizable brands in the world, launching a co-branded coffee with Amazon Prime Video and becoming the official coffee of the Dallas Cowboys. In addition, we've continued to maintain the biggest branded subscription coffee business in the United States and grown the largest social media following across all coffee companies and other lifestyle brands. We've done all of this with our aided brand awareness in the mid-20s. I'm more excited than I've ever been about the future of this brand as we're just getting started on this journey to a $1 billion business.

Looking into 2023, we have three main goals that we are focused on, which are, one, driving top line revenue growth, two, increasing brand awareness, and three, achieving profitability. Our decision to distribute bag coffee and rounds within food, drug and mass or FDM was driven with all three goals in mind. The at-home coffee segment is an $11 billion market with Walmart's coffee sales representing about a third of that volume entering into the FDM channel allowed us to participate in this segment where most coffee is purchased for at-home consumption. Not only is FDM coffee our most profitable channel, but it's also the most cost-efficient way to increase brand awareness and reach new customers. We previously mentioned that 66% of our shoppers exclusively purchased coffee from brick-and-mortar locations.

These shoppers were previously unreachable to our brand, but we are increasing our availability to be accessible wherever coffee customers shop. In late Q3 of 2022, we entered over 4,400 Walmart stores with a product assortment of 24 SKUs, including both bag coffee and rounds. Black Rife has quickly risen to the number four brand in bag coffee, eclipsing the sales of a number of established brands. The incrementality that our brand is driving on shelf is extremely compelling. Per numerator data, almost 35% of households that purchase Black Rifle Coffee or new coffee buyers to Walmart. These shoppers had shopped at Walmart previously, but had not purchased anything from the coffee category in the prior 26 weeks prior to launch. Additionally, the data indicates 62% of their households purchased Black Rifle were switching from another brand.

With over 30 million shoppers visiting Walmart stores each day, we're confident that our premium products and mission-driven brand will continue to create a new and loyal customer while increasing our brand awareness. We are less than six months into our launch into the FDM strategy, and we've been focused on executing and delivering on the commitments of our initial rollout. We're still at the beginning of this journey, but the initial results indicate that we are winning and taking market share from other established brands in the largest coffee retailer in FDM. This confirms that our strategic expansion was the right decision for the company as we continue to transition from primarily D2C to an omnichannel CPG business. Our marketing strategy is mirroring that transition.

With this, we are able to focus our marketing spend on high-level brand awareness as well as wholesale specific marketing campaigns. We're spending less total dollars in D2C. And because of this, we've elevated our expectations for returns on the spend. This higher return on ad spend ROAs is driving lower customer acquisition costs and increasing profitability. This overall shift into marketing spend will enable leverage on the marketing line for 2023 and beyond. Being efficient in our marketing spend is one of the drivers for achieving profitability in 2023. We are also reducing corporate SG&A costs and driving gross margin as we strive to achieve our adjusted EBITDA goals for the year. Growing our brand and driving profitability allows us to support our mission by continuing to give back to those who have served.

Our mission was the foundation of this company when I started at almost a decade ago. In 2022, we've donated over $2 million in cash in coffee into veteran, active duty and first responder causes. Close to half of all of our employee base are veterans and veterans' spouses, and we continue to hire more as the business grows. We want to be a shining example for how military veterans can build a successful company. Our mission comes with challenges, but so does every mission for which we've deployed. Our challenges are different now, but we meet them with the same determination and expectations for results as I did when I was at Greenbrae. I founded this company to make a difference in veterans lives and we're doing that every day. I'm proud of our team for the tremendous growth they've driven over the past year and how well they've adopted to growing multiple businesses simultaneously.

I'm just as driven now as I was when I started the business back in 2014, 2023 will be a banner year for Black Rifle. With that, I'll turn it over to you, Tom.

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Tom Davin : Thanks, Evan, and good afternoon, everyone. I will begin by highlighting the key initiatives for our commitment of profitability for 2023, including details from each channel of our business. Then I will briefly discuss our Q4 earnings and provide updated guidance for 2023. Commitment to profitability. As some of you may have seen at our ICR presentation in January, we highlighted three key drivers of our commitment to profitability for 2023. Number one, expansion of our wholesale channel. This channel is our most profitable sales channel with our highest margins and return on capital. Our entry into the FDM channel with bank coffee and rounds is a significant catalyst for growth. We launched in late September of last year, and this mix shift will continue to benefit our financial performance in 2023 from having a full year of sales.

Ready-to-drink is continuing to scale rapidly in the convenience store and FDM channels, where we are targeting more than 100,000 doors by year-end, up from 61,000 at the end of 2022. Note that we had approximately 70,000 doors at the end of Q3. On retailer with 18,000 doors ran a test for a limited time in Q2 and Q3. The test was successful, but the doors were not included in the Q4 number because the test was completed in the prior quarter. We're now shipping product to this retailer at the end of Q1 for ongoing distribution, recapturing those 18,000 doors. Innovation will be a key growth driver for this segment. We've introduced innovation for the first time by launching two new core SKUs in Q1, salted caramel and vanilla, plus three additional seasonal limited time offerings.

The first of these LTOs is a Berry Mocha SKU, entering the market at Memorial Day. We believe that taking advantage of the demand for black rifles coffee and RTD within the wholesale channel will create the most strategic value for the company and our shareholders. Number two, price increases. We've now taken pricing across all channels of our business. We've also taken additional pricing actions in February for RTD and another price increase for our direct-to-consumer subscribers in Q1 of 2023. Our consumers have not exhibited any tendencies to trade down nor have we seen lower coffee consumption in response to the price increases. Number three, cost leverage. Over the past couple of years, the management team has invested in developing the omnichannel platform and the infrastructure to support it.

In 2023, we will balance the need to obtain EBITDA profitability while not compromising growth. We began this work in Q1, resulting in reductions to SG&A, including an 8% reduction in corporate headcount. We are being selective with our spending as it has become clear. The wholesale business is going to be our key driver of growth for the next several years, allowing us to focus our efforts and realize operating leverage. Historically, we have invested ahead of revenues. We stood up new lines of business. As we move out of the launch phase, a tailwind for the wholesale channel is that as the business scales, our investment as a percentage of revenue will continue to decrease. Outside of SG&A reduction, we will also benefit from easing inflationary pressures, which we anticipate will support our efforts to create operating leverage.

As part of our commitment to growth and profitability, we've recently added two executives who have dramatically enhanced our leadership capabilities. Chris Clark joined as our new Chief Technology Officer from Levi Strauss, where he served as Chief Information Officer. Chris is a West Point graduate and served as a U.S. Army Aviation Officer prior to transitioning into corporate America. We also brought aboard Marty Manning, our Chief Human Resources Officer, who came to us for more than a decade at General Electric and most recently was the CHRO of Ascend Learning. Marty also served in the U.S. Navy as a Surface Warfare Officer and Intelligence Officer. These are just two examples of the caliber of people who are joining our cause to build this business for the future.

Channel highlights. Now I will expand on the key channels and profitability levers we have taken within each. As Evan mentioned earlier, we are fortunate enough to be able to launch bag coffee and rounds or K-Cups in Walmart in September of last year. The launch included an initial assortment of 24 SKUs or roughly 12 linear feet of our ground coffee and K-Cups or what we call round into 4,400 Walmart stores. Note that certain Walmart stores with a smaller coffee section do not have all 24 SKUs. This launch was an exciting opportunity for Black Rifle as the FDM coffee space represents an $11 billion and growing at-home coffee market, which Walmart represents close to a third of that volume. As a P13 Nielsen data, less than four months into our initial launch, we represented 3.5% of Walmart's total coffee business, and this share continues to accelerate, growing to 3.8% through the end of February.

From a dollar standpoint, the 12-ounce bag size is the highest dollar volume pack in the coffee aisle. Black Rifle Coffee is the number one branded bag in this pack size with 22% of the sales over the last four weeks per Nielsen data. Needless to say, we are excited about the consumer response and the initial launch results. We are committed to deepening our current relationship and maximizing the opportunity at hand within FDM. In 2023, we will be bringing relevant shopper innovation and initiating marketing campaigns to drive further awareness and trial. We look forward to sustained growth within the FDM channel as we shift marketing and promotional resources to support expansion. As you can imagine, with the public Nielsen and IRI data, we've had lots of inquiries from other FDM retailers.

And we've looked at at least one additional FDM account during the summer reset period for the FDM coffee aisle. We will scale our FDM business as rapidly as possible without sacrificing quality or customer service. That said, there are several keys to expanding across this channel. Most importantly, our entry into Walmart has shown the relevance of our brand nationally and with a broad base of consumers, which will got our launches with other retailers. We have the capacity to support coffee expansion across the FDM category. We also have the opportunity to tailor our pack sizes to be relevant to grocery shoppers, particularly in the case of rounds or K-Cups. We'll continue a deliberate FDM rollout strategy for the next several years to ensure our brand presentation is maximized and that we deliver a high level of service to all FDM accounts.

RTD growth levers. Now turning to the other portion of the wholesale channel, RTD or ready-to-drink coffee. The addressable market for the ready-to-drink coffee business is $4 billion, growing at approximately 11% per annum versus 3% for the roasted coffee segment, driven primarily by younger consumers. This explosive growth and adoption of cold coffee consumption has been a major reason why we continue prioritizing growth and market share in this category. Throughout 2022, we added 20,000 doors and increased our ACV percentage to 38.3% from 13.5% at the end of 2021. More importantly, per Nielsen, our RTD dollar sales compared to a year ago were up almost 44% over the last 13 weeks through December 31, more than four times the category growth of 9.8%.

This has been achieved by unit growth of 34% versus the category, which shows our demand for the brand and our loyal customer base. As we entered 2023, we are seeing momentum build for the RTD business. Compared to the December results, over the last 13 weeks as of February 25, our dollar growth has increased 1,300 basis points from 44% to 57%, driven by a 500 basis point increase in unit growth from 34% to 39% and a price increase of approximately 800 basis points that occurred in early February. Drivers for this momentum include innovation launches, increased distribution and incremental facings. We announced our first RTD innovation with the launch of two additional core SKUs and three seasonal limited time offerings. We've also continued to expand our distributor network and recently unlocked access to over 12% of the U.S. population, taking our coverage to 96%.

The half one reset period has also allowed us to expand on top of our current base of 150,000 facings, adding an incremental 100,000 facings. We are seeing these incremental facings being reflected in current planograms in both legacy retailers and new doors. Towards the end of Q1, we have begun shipping product in support of roughly 40% of these new facings with the remainder shipping in Q2. In Q3 of last year, we outlined our start-up challenges with new RTD production and ingredient supply, which delayed our ability to fully leverage our RTD capacity unlocks in 2022. These speed bumps are now behind us with all three of our co-man partners executing the 2023 plan to capitalize on all of our growth initiatives for this year and beyond. Lastly, I want to highlight our inventory levels going into F1.

As many of you know, the convenience store reset cycles happen twice a year for seasonal load end, with a majority of resets occurring in the spring. The most impactful way to grow distribution is to work within our customers' timelines and processes. After adding additional capacity in 2022, 2023 is the first year we've been able to produce enough cases to be fully prepared for the half one resets. Our new capacity has allowed us to build adequate inventory to meet commitments to our customers and distributors throughout the year, supporting accelerating growth levels we've seen within our brand in this category. As Greg will tell you later, you should expect our inventory levels to normalize as this product hits the shelves in Q2. Direct-to-consumer.

Now turning to our direct-to-consumer or D2C channel. Our relationship with our consumer is significantly stronger than other traditional brands, with over 2 million lifetime online customers who become advocates and influencers to others driving people to the brand. We have the largest branded coffee subscription business in the U.S. with over 270,000 subscribers at year-end. Like many D2C brands, we've seen the cost to acquire customers continue to climb. In response, we've modified our approach to investing in new subscribers such that we achieve a payback now in one month versus four to six months previously. To date, our churn rate is staying within our historical average of 3% to 4% per month despite the two recent price increases. We continue to refine our marketing strategies and are focused only on spending on initiatives that will meet or beat our demanding internal return thresholds outpost strategy.

Lastly, I want to expand on our outpost channel. In Q4, we opened four company-owned stores in core markets in Texas and Arizona, ending the year with 15 company-owned outposts and 11 franchised outposts. We are a relatively small company with huge demand for our products across multiple sales channels. And because of this, we've had to prioritize internal bandwidth as well as capital. We've decided to phase our growth decisively prioritizing FDM and ready-to-drink sales in the near term, which will also maximize short and long-term profitability. This shift in focus frees up cash from reduced CapEx and SG&A, given that the growth in FDM and RTD is asset-light. We continue to see tremendous long-term opportunity for the outpost segment, but we need to continue refining our prototype model to ensure that our outposts can reach our demanding return thresholds before ramp-up expansion.

Work on the prototype is ongoing. We plan to build prototype units in 2024. For 2023, we now plan to open three company-owned outpost, all of which will be in core Texas markets where we are operating other outposts today. Q4 update and guidance for 2023. Finally, I want to update you on our 2023 full year guidance. Last August, we provided our preliminary 2023 outlook of $500 million or more in revenue. Given the number of market variables we don't fully control, we've concluded that we are overly ambitious with our initial 2023 revenue target due to the timing of various load-in cycles and customer onboardings within the wholesale channel for coffee and RTD and our more disciplined approach to outpost, we're pushing some of our forecasted revenue from 2023 to 2024.

We are still committed to achieving adjusted EBITDA profitability in 2023 and are reaffirming that commitment today. To achieve this outcome, we take a more conservative approach to 2023 revenue and adjusting our SG&A costs accordingly. Today, we are resetting our 2023 revenue target to a range of $400 million to $440 million or approximately 33% to 46% growth over 2022's revenue of $301 million. Our gross margins will be in the range of 36% to 37.5% even with the lower revenue range we're committed to $5 million to $20 million of adjusted EBITDA. Those of you who remember, this is actually very similar to the 2023 outlook we provided when we went public a little over a year ago. To bridge the gap from our initial $500 million revenue target, I want to provide more context for what has changed that led us to revise our outlook.

we made a $40 million adjustment driven by timing to our RTD forecast due to the follow-through from start-up delays in 2022 and a slower ramp-up of sales for the spring reset period. Additionally, we transitioned from a third-party sales firm in Q4 and built an entirely new internal sales team. This allows us to better control our business and relationships with distributors as well as end customers. While leading this transition, our team is taking a more conservative approach to forecasting relative to the third party. All of our sales plans are now built from the bottoms up view of our distributors and end customers. So we have much more confidence given the enhanced visibility this has provided. FDM. We've adjusted the FDM bag coffee and rounds revenue by $30 million based on the timing of adding additional FDM accounts thus pushing some of the revenue into 2024.

As I mentioned earlier, we've had strong interest from multiple large FDM players. We are currently working on different sizing of products, building out our supply chain and refining our pricing architecture for these potential customers. There's interest from certain retailers to include Black Rifle Coffee in their 2023 summer resets, but we will be able to do a much more comprehensive across the FDM channel in 2024. Based on the initial results at Walmart showing Black Rifle's brand strength across all regions of the country and our relevance to a broad set of shoppers. We'll be able to design these launches as national rollouts with the optimal shelf assortment for our brand. Outpost. We're making a $10 million reduction in outpost revenue given the slower pace of openings in '22 and '23 as we prioritize our investments to support the wholesale channel.

While we know our retail business has significant growth potential, the core of any strategy is prioritizing resource allocation. With the ROIC highest in the wholesale business, we're shifting our resource to capitalize on that demand and achieve adjusted EBITDA and profitability in 2023. We are excited for the opportunities ahead for the Black Rifle Coffee Company and believe we are well positioned for sustained profitable growth for years to come. With that, I will turn it over to Greg to walk through the financials and give some additional details on our full year guidance as well as some detail regarding Q1.

Gregory Iverson: Thanks, Tom, and good afternoon, everyone. Today, I will discuss our 2022 fourth quarter and full year financial results, touch on our balance sheet and liquidity position and then share some further details on our fiscal year 2023 outlook. Turning first to our financial results. For the fourth quarter, total revenue increased 30% to $93.6 million compared to $71.8 million in Q4 of last year. For the full year, our total revenue grew by 29% to $301.3 million. The meaningful increase in revenue was driven by growth within our wholesale and outpost channels, which continued their impressive growth from 2021 by 140% and 33%, respectively. Now I will give some additional details on our three sales channels. First, our direct-to-consumer revenue decreased 8% in the fourth quarter to $45.6 million compared to $49.6 million last year.

For the full year 2022, our direct-to-consumer revenue decreased by $6.3 million or 3.8% to $159 million due to a decrease in our new customer acquisition for non-subscription customers. This decline was mainly attributable to decreased digital advertising spend as we continue to prioritize our high-growth and high returning wholesale channel. Turning to wholesale. Our wholesale revenue increased 140.1% to $41.2 million in Q4 compared to $17.2 million last year. For the full year 2022, our wholesale revenue increased $63.6 million or 114%, bringing our total wholesale revenue to $119.4 million. The increase was primarily driven by growth in our RTD product, which ended the year in over 61,000 doors. Our percent ACV or all commodity volume, as measured by Nielsen, which measures distribution across both convenience, gas and FDM increased to 38.3% versus 13.5% a year ago.

Additionally, our entry into food, drug and mass also drove very significant growth during the last four months of the year as we successfully launched into over 4,400 Walmart stores. Next, revenue and outpost increased 34.3% to $6.8 million in Q4 compared to $5.1 million last year. Outpost revenue growth throughout 2022 increased $10.9 million or 91% to $22.9 million compared to $12 million for 2021. Throughout 2022, we opened a total of seven new company-operated stores in Texas and Arizona, bringing our total number of outpost to 26 and with 15 company-owned stores and 11 franchised stores. Turning to our profitability. Our Q4 gross margin was 31.5%, decreasing 290 basis points from 34.3% in Q4 of last year. For the full year 2022, our gross margin was 32.9%, a decrease of 556 basis points from 38.5% in 2021.

The decrease was driven by inflationary pressures, as well as costs related to RTD production start-up, which reduced our Q4 gross margin by 190 basis points and full year 2022 gross margin by 170 basis points. We have taken action across multiple fronts to combat the cost of inflation we have been experiencing. In addition, as Tom mentioned, we took price in line with our competitors across our product portfolio and in each sales channel. We implemented the majority of these pricing actions in the second half of 2022 and into Q1 of 2023, so the full impact of these actions will flow through our P&L throughout the remainder of 2023. As a result, we expect our margins will improve sequentially beginning in Q1. As a percentage of sales, our operating expenses during Q1 increased by 1,200 basis points to 52.3% as compared to last year.

For the full year, our operating expenses increased to 55.4% of sales, up 1,200 basis points from 2021. I will walk through the drivers of these increases beginning with marketing and advertising. For the fourth quarter of 2022, marketing expense increased 22.5% to $13.6 million from $11.1 million in the fourth quarter of 2021. As a percentage of sales, marketing decreased by approximately 90 basis points to 14.5% compared to the same quarter last year. For full year 2022, our marketing expense increased 5% to $38.2 million compared to $36.4 million in 2021. Importantly, for the full year 2022, marketing expense as a percentage of revenue decreased from 15.6% to 12.7%, a decline of 290 basis points as we're beginning to see the leverage on our branding investments as our business scales and we focus our investments in our wholesale channel.

Moving on, salaries, wages and benefits expense for the fourth quarter of 2022 increased 87.8% to $16.9 million from $8.9 million in the fourth quarter of 2021. As a percentage of revenue, it increased by approximately 550 basis points to 18% compared to 12.5% last year. For the year, salaries, wages and benefits increased 66% to $64.3 million compared to $38.7 million for 2021. The increase was driven by employee head count to support our significant sales growth across multiple sales channels. We've invested heavily in building out our management teams, particularly within our wholesale sales channel. Also, as a reminder, a large portion of our outpost cost structure is included in the salaries, wages and benefits line as it includes the compensation costs for our employees working at our outpost.

G&A expenses increased 112.6% to $18.5 million compared to $8.7 million in the fourth quarter of 2021. As a percentage of revenue, G&A increased by approximately 760 basis points to 19.7% of revenue compared to 12.1% last year. For the full year, G&A increased 146.5% to $64.5 million compared to $26.2 million for the same period in 2021. This increase was driven by our investments in corporate infrastructure, including technology, to support the growth of our business across multiple channels, as well as growth in our corporate outposts. As Evan and Tom mentioned, we invested capital in all areas of the business to scale each of our channels after becoming a public company. Now that we're into 2023, we are beginning to see the operating leverage in those investments.

Additionally, given the prioritization around our wholesale business, we have taken the opportunity to rightsize some of the areas of our business. To that end, we've made material progress on rightsizing our corporate SG&A in Q1. We look forward to sharing more details on those initiatives on our first quarter earnings call. In addition to the GAAP measures I have just mentioned, adjusted EBITDA is an important profitability measure that we use to manage our business internally. For the quarter, adjusted EBITDA was a loss of $11.4 million compared to a loss of $863,000 in 2021. For the year, we reported an adjusted EBITDA loss of $34 million compared to a loss of $145,000 a year ago. This decrease was primarily due to increased spending to scale and rapidly grow our multiple sales channels.

Now I'll briefly touch on our balance sheet and liquidity. We ended 2022 with $38.9 million of cash on the balance sheet compared to $18.3 million as of December 31, 2021. We also had $49.2 million of debt compared to $34.7 million as of December 31, 2021. On our balance sheet, you will also see a material inventory build, which is mostly in RTD. You will remember that last year, we were selling every case that we made and it forced us to focus on our core customer base and not be able to onboard new distributors or customers. Accordingly, for the first time, we have been building inventory to support the accelerated growth we are anticipating in RTD throughout 2023. Due to this inventory build, we used $37.5 million of cash in Q4 and to prepare for the RTD expansion.

So while we drew down some of our liquidity for that, we expect to turn much of that working capital into cash beginning in our second quarter. Today, we have $55 million of liquidity, which we define as cash plus available borrowings on our senior credit facility, which is prior to our $15 million minimum liquidity condition required under the facility. We believe our current liquidity, combined with positive EBITDA in 2023, prudent working capital management and focused CapEx investment provide us sufficient liquidity to continue growing the business. Before we take your questions, I'd like to expand on the 2023 guidance that Tom shared earlier in our call. While we do not plan on providing quarterly guidance for the remainder of the year, given how far we are into Q1 and our newly announced 2023 plan, we thought it would be helpful to provide some color on Q1 and our quarterly cadence throughout 2023.

For Q1, we expect revenue of $80 million to $82 million. The small range is primarily due to order fulfillment timing for RTD and FDM orders expected to be fulfilled during the last week of the quarter as some of those deliveries may move into April. Turning to gross margin. We expect an improvement in our Q1 gross margin of 100 basis points versus Q4 of 2022. Lastly, for Q1 adjusted EBITDA, we expect to see a sequential improvement of a couple of million dollars from Q4 of 2022 on a lower revenue base, but higher gross margin and lower SG&A. For the remainder of the year, we expect to see revenue growth rates and our gross margin accelerate. And lastly, we expect our adjusted EBITDA will approach breakeven in Q2 and be positive in Q3, an increase into Q4.

With that, I will turn the call over to the operator for questions.

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