Greetings, and welcome to the Black Rifle Coffee Company's Third Quarter 2022 Earnings Call. I would now like to turn the call over to Tanner Doss, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone. Thank you for joining Black Rifle Coffee Company's conference call to discuss our third quarter 2022 financial results, which we released this morning and can be found on our website at ir.blackriflecoffee.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 measure 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 Tom Davin, Co-CEO of Black Rifle Coffee Company. Tom?

Thanks, Tanner, and good morning, everyone. Thanks for joining our third quarter 2022 earnings call. Today, I will update you on our key strategic initiatives that will continue to power our growth into 2023 and beyond. Evan Hefer will further address our entry into the food, drug and mass channel as well as discuss marketing strategy moving into the new year. And Greg Iverson will walk through our Q3 results and balance sheet. As outlined during our last call, we have three key takeaways that summarize the Black Rifle Coffee Company business model. Number one, we are rapidly evolving from a pure play direct-to-consumer company to an omnichannel business model built on a digitally native foundation. Our entry into the food, drug and mass channel is a key piece of the puzzle in order to meet customers wherever they shop. Two, we are continuing to respond to a significant ready-to-drink coffee product demand by adding capacity and execution capability. Number three, Black Rifle Coffee continues to have a unique connection to our loyal and growing community. Let me offer a bit more color on each of these key takeaways. Number one, we are rapidly evolving from a pure-play D2C company to an omnichannel business model built on a digitally native foundation. Three years ago, we generated more than 90% of our revenue from our D2C business. As you can see from today's results, those numbers are changing rapidly as we take advantage of the ever-evolving landscape where consumers want to access their favorite brands wherever they are shopping. Over 66% of coffee drinkers only purchased their coffee for at-home consumption at retail, typically in the food, drug and mass channel. So in order to satisfy our customer, we needed to enter this channel. Further, with Black Rifle Coffee aided brand awareness at 20% or lower across the United States, entering the FDM channel where the majority of coffee is purchased for at-home consumption acts as a billboard for our brand such that we expect to further increase our brand awareness. If you listened to our last earnings call in August, you will remember that we discussed our plans to launch into the FDM channel and promise to update you with more details during this Q3 conference call. We're excited to announce that we launched ground, whole bean and K-Cup rounds in Walmart in the early September timeframe. We're now in 100% distribution across the Walmart footprint, which includes close to 4,400 stores as well as walmart.com. For those who followed the BRCC story for multiple years, you'll recall that we previously stated we would only enter the FDM category with a retailer who could provide us with a high-quality presentation on shelf, where we would not be just a bagger to on the wall of coffee. We're incredibly excited to have started this collaboration. Why? Because America shops at Walmart with 90% of Americans living within 10 miles of a Walmart store. And today, America's coffee is available at Walmart. We are very selective about the opportunities where we mobilize the entire company behind it. And this was one where we knew we would have a fantastic opportunity for both our customers and the Black Rifle Coffee brand. Evan Hefer and our senior leaders are tremendously proud of our cross-functional business teams who rose to the challenge of meeting demanding timelines and execution requirements for our entry into this FDM channel. We are very pleased with the early results of our launch with Walmart, and we'll share more details as this collaboration progresses. In order to get products in store and meet the expected volume of demand from the FDM customer base, we contracted with several new outsourced coffee roasters who can both meet our quality standards and grow with us over time. This new roasting capability for ground, whole bean and K-Cup coffee provides Black Rifle Coffee Company with the ability to meet the demand as we accelerate growth. Number two, we are continuing to respond to significant ready-to-drink product demand by adding additional capacity and execution capability. BRCC's ready-to-drink product continues to be the fastest growing single-serve RTD coffee across all channels of trade, outpacing the RTD coffee category growth by 4.5 times. At the end of Q3, our ready-to-drink product is now sold in approximately 70,000 doors, up 99% from Q3 of last year. More importantly, our percentage ACV or all commodity volume as measured by Nielsen, which measures distribution across both convenience, gas, and FDM channels has increased to 42.3% from 13.6% at the beginning of 2022. Equally as important, our sell-through continues to perform at category-leading levels, as measured by units per door per week, BRCC's RTD beverage sell-through is up 8% since the beginning of the year, outpacing the category by double digits. With this rapid growth, you'll recall from our Q2 call that we were in the process of qualifying additional co-manufacturers to meet our growing demand. I'm pleased to announce that both of our two new co-manufacturers are now through the start-up phase and this more than triples our previous available annual capacity. We're very encouraged by the success to date with our ready-to-drink products consisting of four SKUs. Looking to the future, we presented new products from our innovation pipeline last month at the convenience store trade show, NAX in Las Vegas. There is no doubt that innovation within the RTD coffee category will continue to drive growth. We presented three new core SKUs as well as two limited-time seasonal offerings. Resets for 2023 are currently being planned, and we foresee expanding our shelf space as we move from four to seven permanent SKUs and introduce additional LTOs. Enthusiasm from our current customers, suppliers and others has us very excited about 2023 and 2024. Number three, Black Rifle Coffee has a unique connection to our loyal and growing community. We are the only mission-driven lifestyle brand in the coffee industry. The mission is a major driver of our success and continues to bring new customers into the Black Rifle Coffee ecosystem. As we enter new markets or expand our presence in an existing market, we continue to see the community grow. This was evident in our first Phoenix, Arizona outpost grand opening in mid-October. We've long known Phoenix was a top market for Black Rifle Coffee based on our direct-to-consumer business. But we got to witness this fact at our first store within the Phoenix market. We had over 250 customers lined up at 5:30 in the morning on the day of our grand opening, and there was a line out the door for much of the rest of the day. This enthusiasm continued for the remainder of the weekend, and this launch was one of our most successful store opening weekends yet. This couldn't have happened without the leadership of our retail team and our loyal community within the Phoenix market. We'll be back in the area in a few weeks to open our second outpost, and we're looking forward to seeing the excitement for the Black Rifle Coffee Company continue as we build out our footprint in the Phoenix market. Overall, we are pleased with our performance for the quarter. Our wholesale business delivered better than expectations, and our D2C business held its own in a challenging market environment. Before I turn the call over to Evan, I want to provide some transparency into startup delays we had with our new co-manufacturers for a ready-to-drink product that will have a one-time impact on our fourth-quarter revenue. During our Q2 earnings call, we discussed the startup of two new co-manufacturers. At that time, we had completed trial runs and we were excited to move into full production. We had two challenges in transitioning from trial runs into full production. That had a small impact in Q3 and will also have an impact in Q4. One of our new co-manufacturers had a production issue with one ready-to-drink SKU. The issue was not food safety related, but rather a situation where the product did not meet our demanding standards such that we deemed the product not salable. After an in-depth review with our co-manufacturing partner, the problem was identified as equipment related, and after an equipment change, the issue has been fully resolved. The second challenge we had was in procuring raw materials to meet startup timelines in order to produce our ready-to-drink beverages at our co-manufacturers. The delay in raw material deliveries caused our two new co-manufacturing partners to delay manufacturing and release of product from August until November. This raw material issue has also been resolved, and we're currently in full production across all contract manufacturers. Since we launched our ready-to-drink products in 2020, we've been fortunate that demand has far exceeded supply. The downside of such robust demand is that we've not been able to build up an adequate level of safety stock. So when manufacturing delays occur, as we had in the quarter, it directly impacts sales since we did not have inventory on hand to cover production delays. The new capacity we have contracted will also enable Black Rifle Coffee to operate with safety stock levels that help mitigate any further supply chain challenges. Due to these two ready-to-drink production issues, we are bringing down our Q4 revenue target to a range of $90 million to $95 million. Approximately one-third of this adjustment is due to the equipment-related production issue, and two-thirds of the adjustment is due to production delays resulting from raw material issues. I am pleased to share that we are through both issues. Today, we are fully manufacturing and shipping ready-to-drink product on schedule. Further, the startup of these two co-manufacturers will enable enough capacity to meet our 2023 forecast, including a buildup of safety stock. Note that we will not need to start up any additional co-manufacturers to meet our 2023 forecast.

Thanks, Tom, and good morning, everyone. Thanks again for joining us on our third quarter 2022 earnings call. As Tom mentioned, I wanted to give a bit of background on our decision to enter the FDM space and why we chose to collaborate with Walmart, as well as give you a quick update on the marketing and branding side of the house. First and foremost, we're very grateful for our collaboration we have with Walmart. This couldn't have been done without a tremendous amount of work from our team here at Black Rifle Coffee. I think almost every department at Black Rifle Coffee had a hand in getting this across the finish line, from our internal art department mocking up bags in less than a week to our supply chain team working across the globe to find the product. Most of us at Black Rifle Coffee are used to dealing with tight timelines, pressure-filled situations while we were in the military. So when we gave this timeline, everyone put their heads down and got to work. I can't thank our team enough. And I know that when we see this product on the shelves of Walmart, they have just as much pride as I do in getting this across the finish line. To help put the size of this FDM opportunity in perspective, the at-home coffee market is roughly 40% of the overall coffee market or $18 billion plus of the total addressable market and $11 billion plus within our Black Rifle Coffee serviceable addressable market. To date, we have served the at-home segment primarily through the D2C channel. Here is some additional information that will help explain why we're so excited. Four percent of coffee purchases for at-home consumption are bought solely online. Thirty percent of households are using the omnichannel approach of buying in-store as well as online. The remaining 66% of individuals are only buying their coffee in-store. By moving into the FDM channel, we will unlock a huge incremental opportunity to get Black Rifle Coffee into the hands of our customers, both new and existing. Related, we have a massive brand awareness opportunity with aided brand awareness currently below 20% around the U.S. Entry into the FDM market done correctly with the right partners will boost brand awareness, contribute significant incremental revenue, and be margin accretive as we will ship full truckloads of coffee to stores, as opposed to one to four bags to individual homes. As Tom mentioned, over 90% of the households live within 10 miles of a Walmart store. As we surveyed our subscriber base on their current shopping habits, we learned that our customers are purchasing additional coffee in their weekly grocery runs on top of their Black Rifle Coffee subscription. The main reason is it was available where they were shopping. Our entire omnichannel strategy is predicated on the ability of our customers to purchase our products wherever they shop. When we saw the data, we knew in order to better serve our customers we needed to have our products on the shelves within the FDM channel. As you can see, this is a huge opportunity for BRCC, and we couldn't be happier to collaborate with Walmart on our initial launch into FDM. As Walmart says, America shops at Walmart. And now they can buy America's Coffee in Walmart. We're also using our FDM channel to stay true to our mission in helping veterans, first responders, active-duty military, and their families by donating a portion of our coffee sales to veteran and first responder charities. I'm excited to announce to date that we've already raised over $150,000, and we'll be donating it to various charities that align with our mission. Finally, we wanted to briefly touch on the marketing portion of our business. As I have mentioned previously, our marketing spend has continued to shift from paid media to owned media in our strategy. As you can see from our financials this quarter, our marketing spend was light on a revenue percentage basis. While our continued focus on the wholesale channel has helped, we do foresee our marketing spend to increase as we move into one of our busiest quarters of the year. We just launched our Travis Pastrana final send video, and our Jim Conner video will be launching earlier in December. We'll also be seeing an increased marketing spend for the holiday portions of our Black Rifle Coffee sales. Whether you're seeing us on the shelf at Walmart or on the Jumbotron of the AT&T Stadium or at your local convenience stores, our brand awareness is continuing to grow. We are still confident in our transition of our marketing dollars and plan on seeing leverage on the marketing line as we continue our impressive growth trajectory into 2023.

Thanks, Evan, and good morning, everyone. Today, I will expand on the update that Tom provided on our third quarter results and provide a brief update on our balance sheet and liquidity before we open the call to your questions. In the discussion of our third quarter financial results, I will be providing both GAAP and non-GAAP results, which exclude the impact of the RTD production issue that Tom mentioned earlier in the call. We're providing the non-GAAP results because we believe they are a better indication of our overall business performance. Beginning with revenue. For the third quarter, total revenue increased 26% to $75.5 million compared to $60.1 million in Q3 of last year. Excluding the $600,000 adjustment to revenue for the RTD production issue, total revenue increased 27% from a year ago to $76.1 million. The meaningful increase in revenue was driven primarily by our entry into the FDM channel and expansion of our RTD product in our wholesale channel. Now I will give some additional details on our three sales channels. First, our direct-to-consumer revenue grew 2% to $38.1 million compared to $37.5 million in Q3 of last year. This increase was primarily due to an increase in pricing on bag coffee, partially offset by continued lower sales volumes from non-subscription customers. We entered the quarter with 278,000 subscribers representing growth of 1.7% over Q3 of last year but a decline of 3.4% sequentially from the end of Q2. The small decline in subscribers from Q2 was a result of our decision to redirect investments to other faster-growing areas of the business as we continue to experience elevated D2C customer acquisition costs. Turning to our wholesale channel. Revenue increased 66% to $32.2 million in Q3 compared to $19.5 million during the prior year period. Excluding the effects of the RTD production issue, wholesale revenue grew 69% to $32.8 million. The increase was primarily driven by our entry into the FDM wholesale channel with an initial load-in order during September. In addition, RTD doors increased to nearly 70,000, almost doubling from a year ago. Internally, we measure the growth of our RTD business on a percent ACV, which can generally be thought of as the percentage of stores selling our products. Currently, our percent ACV is sitting at 42.3%, and up from 13.4% at the start of 2022. While I'd note, our distribution from a percent ACV perspective has increased dramatically with further room to expand, we are still broadly undersupplied at our existing retail partner locations. We believe there is significant opportunity to both expand distribution points and increase velocities, SKU breadth, and facings at existing partner locations. Moving to our Outpost channel. Revenue increased 65% to $5.2 million in Q3 compared to $3.1 million in Q3 of last year. This was primarily due to an increase in the number of company-owned outposts, which grew to 11 outposts as of the end of Q3 with the opening of our first store in the Phoenix, Arizona Metro area. Turning now to profitability. Our Q3 margin was 31.7%, decreasing 830 basis points from 40% in Q3 of last year. Excluding the $3.4 million impact from the RTD production issue, our Q3 gross margin was 36%, an approximate 400 basis point decrease from the prior year period. This decrease was driven by higher product costs, including increases in green coffee and RTD ingredients as well as a continued shift in our product mix as our RTD has a higher product cost and lower gross margin as compared to rounds and ground and whole bean coffee. Importantly, our Q3 gross margin, excluding the charge from the RTD production issue, increased approximately 190 basis points on a sequential basis from Q2 as a result of our productivity and pricing initiatives and the load-in order for FDM. As we mentioned on our last call, our entry into FDM is immediately margin accretive, based on the significant efficiencies from shipping bag coffee and rounds by the truckload rather than individual parcels in our D2C channel. Turning to our operating expenses. We continue to make critical investments to support our growth. As such, our operating expenses during Q3 increased by approximately 45% to $39.6 million as compared to $27.2 million last year. I will quickly walk through the drivers of these expenses beginning with marketing and advertising. For the third quarter of 2022, marketing expenses decreased by 24% to $7.4 million from $9.8 million in the prior year period. As a percentage of sales, marketing decreased to 9.8% or by 650 basis points compared to the same quarter last year. The decrease in expense as a percentage of revenue was driven by reductions in lower-yielding advertising spend as well as growth in our wholesale and outpost channels, which require lower marketing spend than D2C. As Evan mentioned in his remarks, we will see an uptick in our Q4 marketing spend as compared to Q3 as we have two large activations planned for the quarter as well as our increased marketing spend during the holiday shopping season. Next, salaries, wages, and benefits increased 50% to $15.8 million from $10.5 million in the third quarter of 2021. As a percentage of revenue, they increased by 350 basis points to 21% compared to 17.5% in Q3 of last year. The increase was primarily driven by increased employee headcount to support our significant sales growth, especially investments in key positions to support the growth of our wholesale and outpost channels. Within wholesale, we've made significant additions to our internal sales teams as well as additional leadership hires for our coffee entry into the FDM channel. Furthermore, as I mentioned last quarter, a large portion of our outpost cost structure is included in the salaries, wages, and benefits line as we typically bring on 35 to 40 new employees for each outpost opening. As we build our Outpost business, you will continue to see growth in salaries, wages, and benefits. Finally, G&A expenses increased $9.4 million or 137% to $16.3 million compared to $6.9 million in the third quarter of 2021. As a percentage of revenue, G&A increased to 21.6% of revenue compared to 11.5% last year. This increase was primarily driven by increased consulting and other professional services needed to support the rapid growth of our business across multiple sales channels and the transition to operating as a public company. We also had 11 company-owned outposts in 2022 versus 4 in 2021 and the incremental lease and other occupancy costs for these outposts also contributed to the increase. While these investments in G&A over the past several quarters have been significant, we will begin to see meaningful leverage on our G&A as we quickly scale revenues for our wholesale and outpost channels, while the pace of G&A growth moderates. In addition to the GAAP measures I've discussed, adjusted EBITDA is an important profitability measure that we use internally to manage our business. For the third quarter of 2022, adjusted EBITDA was a loss of $5.3 million versus positive adjusted EBITDA of $146,000 a year ago. This increased loss was primarily due to the increased operating expenses incurred in advance of the revenue we expect from those investments, as well as lower margins from inflationary pressures and product mix shifts that were not fully offset by our productivity and pricing initiatives. While our adjusted EBITDA was negative for the quarter, we generated positive adjusted EBITDA during the month of September, which was the month we delivered the initial load-in for FDM. We wouldn't normally talk about an individual month within a quarter, but we believe it's an important data point and a significant benefit of our move into FDM. Now we are not forecasting to be adjusted EBITDA positive in the fourth quarter, but we're making great progress on our path to profitability. Looking forward to 2023, we remain optimistic with the 2023 revenue forecast of $500 million and adjusted EBITDA margin of low to mid-single digits that we mentioned on our last earnings call. We look forward to sharing our 2023 outlook in more detail with you when we report our fourth quarter results. Now I'll briefly walk through our balance sheet for the third quarter of 2022. Our balance sheet remains strong with $71.2 million of cash and cash equivalents as of quarter end compared to $18.3 million as of December 31, 2021. At September 30, we had $31.5 million of long-term debt compared with $22.7 million as of December 31, 2021. I'm also pleased to share that we recently entered into a new senior credit facility with our longtime banking partner, Regions Bank. As we've mentioned, our primary use of capital near term is our investment in inventory and receivables that are needed to support the growth of our wholesale channel at an incredibly rapid pace. This new credit facility includes a $65 million revolving loan facility that gives us the flexibility we need to ensure we maintain plenty of liquidity while we rapidly expand our business to address the strong customer demand for our brand.

I trust you can sense our excitement for the future. To recap the three key takeaways for this call: Number one, we are rapidly evolving from a pure-play D2C company to an omnichannel business model built on a digitally native foundation. Our entry into the FDM segment is a key piece of the puzzle in order to meet our customers wherever they shop; Number two, we are continuing to respond to significant ready-to-drink product demand by adding capacity and execution capability; Number three, Black Rifle Coffee has a unique connection to our loyal and growing community. With that, I'll turn the call over to the operator for questions.

Our first question has come from the line of George Kelly with Roth Capital Partners.

So first one for you, just has to do with this year's guidance, the cut there, the $20 million. Wondering if you may have sort of detailed or quantified exactly where that's coming from. I think most of it's RTD, but could you just specify exactly what that is?

Sure, George, it's Greg Iverson. Happy to do that. And it was included in our remarks, but just reiterating, it relates entirely to the RTD products line, and there's really two factors. One is we mentioned a production issue where we have some products that we ultimately decided we're not going to sell. And then we also had a delay in supply chain perspective and products getting to our new co-manufacturers that delayed those start-ups. We said that of the reduction in our outlook for Q4, about one-third of it was related to the product manufacturing issue and then about two-thirds related to getting the ingredients to the co-manufacturers.

Okay, excellent. For my second question regarding RTD, I believe you mentioned in your prepared remarks that you now have three partners providing additional capacity. Is that correct? Were you able to secure more capacity with those two new partners, or are there plans for more partners in the future to achieve that threefold increase?

George, it's Toby. So the additional capacity that we talked about is with our original co-man partner plus the additional two that we've signed on. So we've completed the startup phase with those two incremental co-manufacturers and the tripling of capacity is just taking that run rate of that additional capacity and annualizing it into 2023. So we feel good about the fact that we are through that startup phase, and we have enough capacity without having to do any additional startups in 2023.

Okay. Okay. And then last question for me is about the Walmart launch. I know it's early, but can you talk about what you've seen in your D2C business since you launched? And has there been any kind of noticeable change either uptake or down to cannibalization that you've noticed?

George, Tom Davin here. Thanks for the question. We have not. So obviously, shopping at Walmart is a different occasion than somebody buying online. And we've been very pleased that not only are we doing well at Walmart, but our churn has stayed very constant in the direct-to-consumer business.

Our next questions come from the line of Michael Baker with D.A. Davidson.

Okay. Also, a question on the Walmart initiative, which I think is the big news of the day. Yes, it's early, we get that. But any initial POS data, sell-through, et cetera?

So our initial velocities are at or slightly above what we had projected. We are relatively new in the distribution, but we're really excited about the performance out of the gates. One, from a consumer standpoint, the feedback from our consumers has been strong. There's about 30 million people a day that go into a Walmart and they seem to be really happy as they go down the coffee aisle and find Black Rifle on the shelf. We've also looked at it from a competitive standpoint at our initial entry into Walmart. We're about 2.4 share of the overall coffee category in Walmart based on the data. And we're looking versus the competition. I think we mentioned in our prepared remarks that for the last four weeks, we've passed some established coffee brands in our size, including Peet's and Death Wish, and continue to grow as we add in new SKUs, et cetera, with our full rollout plan. So we're anticipating that growth to continue to build, and we are really excited about the collaboration with Walmart.

That's helpful. It leads into my next question about the $500 million plan for next year. What are you planning to include in that regarding the rollout to Walmart? Are you aiming to utilize Walmart's full capacity, or is this still early in the rollout? How might that $500 million investment grow as we expand our partnership with Walmart?

Yes, Michael, it's Greg Iverson. So if you remember on our earnings call last quarter, we said that across the entirety of the wholesale channel, expect that to comprise more than 60% of our revenues. And so that still is absolutely true. In terms of the two big growth opportunities, Walmart and the FDM channel broadly is definitely one of the big opportunities and RTD is a big opportunity as well. We have some information in terms of what this initial rollout looks like. Toby just gave the update in terms of where we're at today in terms of share. We certainly see the opportunity as well as our partner sees the opportunity for us to continue to gain share. So it will continue to ramp up in each of the quarters. I don't know that we'd ever stay at a point where we've fully penetrated within Walmart. We see a lot of opportunity to continue to grow our brand presence within their footprint.

Let me ask this another way. Currently, the share is 2.4%. What share is included in the $500 million? Have you quantified that or are you willing to share that information?

It's something we've quantified, is something we think about and work through, something we certainly discussed with them, but no, it's not something we're guiding to.

Our next questions come from the line of Bill Chappell with Truist Securities.

This is Stephen Lang on for Bill Chappell. Can you maybe talk about what you're seeing in direct-to-consumer sales? It seems like the channels kind of continued to gain a fairly substantial amount of subscribers, but the revenues are kind of only slightly up. But can you provide some further color on if there's some shift in spending or maybe something else that we're not seeing?

Yes, this is Tom Davin. Thank you for the question. In the direct-to-consumer subscriber segment, we are experiencing steady performance. There has been a slight decline compared to the sequential Q2 numbers on the subscriber side and some softness in the non-subscription business within D2C, but overall, it remains steady compared to the previous quarter and the same period last year.

Yes. This is Evan, by the way. I believe this means we have had to change our approach to spending marketing dollars, moving towards a more omnichannel strategy. We're no longer dedicating 90% of our marketing budget to a direct-to-consumer plan. As we consider how to market our product while branching out into different channels, we need to diversify our marketing spending, which will naturally reduce emphasis on some channels. That’s just a simple calculation.

And then just a quick clarification. I see inventories are kind of up almost like 50% since the end of June. Is this kind of getting ahead of the holiday selling period? Or can you kind of talk about more what that build looks like?

Sure, Steve. It's Greg Iverson. Happy to do that. The building inventory really relates to the ready-to-drink product. And so as we mentioned on our last call, with this emphasis in the wholesale channel, our primary use of capital near term is for us to build out inventories and then ultimately receivables to support the rapid growth across both the ready-to-drink product as well as the food, drug, and mass channel. With the new co-manufacturers that we brought on, and Toby addressed just a moment ago in terms of the capacity, but we've built up a lot of raw material ingredient inventory to support the growth in that channel. So it's something that we've planned on. It's a big part of the reason why, as you probably also saw that this morning, we announced a new $65 million senior credit facility to allow us to continue to fund that working capital build.

Our next questions come from the line of Matt Curtis with William Blair.

I guess a question on Outpost. I mean, obviously, the stores are still opening very strongly. But now that to while since you've begun opening outposts. I'm just wondering what you can tell us about what the maturity curve of sales volumes looks like. I mean, are you seeing a significant honeymoon bulge that then sells into a more consistent sales volume? Just anything you could tell us would be helpful.

Yes, it's Heath Nielsen. In any natural retail opening, you will observe that. We are very pleased to see that our average transaction remains very strong. With the introduction of specific limited-time offers that we've launched recently, we have been able to continue gaining traction within the retail outpost.

Okay. Great. And then I guess just getting back to the sales guidance for the fourth quarter. I guess I'm still just surprised by the magnitude of the adjustment. I mean, is there anything you can tell us to help us reconcile exactly what is driving the reduction or the magnitude of the reduction, I mean?

We aimed to clarify our situation in our script and reiterated it just now, highlighting two main factors. The first is a manufacturing issue, which accounted for about one-third of our reduced outlook. We have seen an overwhelming demand for our ready-to-drink product, and historically, our capacity has been very limited. Expanding our capacity by bringing on new co-manufacturers has been a crucial initiative for us. After launching initial test runs and completing the quality assurance process, we started production. Unfortunately, we faced a production problem with one co-manufacturer that required us to voluntarily pull the product, and the large size of these production runs meant that pulling one significantly affected the quarter. Additionally, as Toby mentioned, we have made substantial additions to our capacity, so any delays in those production runs have also had a considerable impact on the quarter. The good news is that we have resolved both issues and are now shipping full production runs from both co-manufacturers. While these challenges had a significant effect on the third quarter and will have a larger impact on the fourth quarter, we have addressed these issues, and they will not affect us in 2023.

Okay. Got it. And then, I guess, the last question for me. It sounds like you're still making a lot of progress on the product innovation front. Can you tell us how many new SKUs you plan to launch next year, if you've decided that yet? Maybe it makes more sense to talk about that by channel.

So I'll hop in on RTD, in particular. And we're really excited. We brought our innovation to NAX in early October to interface with our distributors, customers directly. We have samples of everything that we're planning to launch in 2023. And this is the first time we're bringing news to the category. We are focused on growth and being agile as a company, but we're also disciplined where we need to be. In the case of RTD, we've been focused on our four core SKUs. But as we unlock our capacity, we can bring news to the category. So in addition to those four SKUs, we are adding permanent SKUs to the lineup. Those will launch in Q1 and be available for all the resets that are taking place. One is a 15-ounce SKU of vanilla. We also have an 11-ounce SKU of salted caramel and a highly incremental SKU of 6.5 ounces that we're really excited to complement the portfolio with. We additionally shared a couple of limited time offers, one for the summer, a very white and blue, very patriotic and highlights what we stand for as a company and then a fall Pumpkin Spice limited-time offer. The feedback was incredible. We're taking orders and beginning production on the permanent SKUs right now so that we can add those to our reset windows in the first half. And across the rest of the portfolio, I mean, innovation is part of our DNA. We launched a new ECS coffee every month. That will continue. We're looking at channel innovation as we continue our expansion, and we'll continue to innovate across the portfolio to drive growth and excitement for our consumers.

The retail outpost innovation has a lot to do with the cold beverage platform. We talked about our penetration of cold beverages being in the mid-30s. So for Heath and the retail team driving that up is a huge priority. Plus we have seasonal limited-time offers. We've got several in the market right now, the retail outpost. So that is all going well.

Our next questions come from Michael Baker with D.A. Davidson.

Just a quick follow-up regarding the fourth quarter. What was the plan for the fourth quarter? Should we take the full year guidance of $321 million and subtract year-to-date figures, and was that the original plan? Also, does the $76 million from the third quarter align with your plan? Additionally, can you provide some insights on how to consider the EBITDA in the fourth quarter, given the lower sales?

Yes. Yes, Mike. So with regard to Q3, Q3 came in pretty much in line with what we were expecting to see. If you remember, last quarter in our outlook, we talked about a full year number, but then we referenced expecting about 60% or more of the revenue to fall in the fourth quarter. So based on that math, you can see we came in, in Q3 right in line with that expectation. So you're absolutely right. It's if you take the fourth quarter guidance versus the nine-month year-to-date, that's what we're guiding to for the full year. And then, in answer to the second part of your question, from a Q4 profitability perspective, starting first with Q3, we had a relatively strong Q3 quarter from a profitability perspective. You can see we had a step-up sequentially in our gross margin; we had a meaningful step-up sequentially in our adjusted EBITDA. From a Q4 perspective, there's a couple of things that are important from a seasonal perspective. So number one is we do run more promotions and discounts within our D2C channel during the peak holiday shopping season. And so that historically has a meaningful impact on our gross margin, so bringing Q4 margins down lower than Q3. From a pricing perspective, we had a nice lift in Q3 related to pricing. We don't have any significant incremental pricing actions that are built into the fourth quarter. And the last thing I'll mention is our marketing spend is also more significant in the fourth quarter. Evan mentioned earlier today, we have a couple of significant activations in the fourth quarter, but then we'll also be spending a little bit more to drive traffic to the sites related to, like I said, this peak holiday shopping season. So netting all that out, expect adjusted EBITDA not to be at the same level as we had in Q3, so somewhere between where we were in Q2 and Q3.

Thank you. There are no further questions at this time. I would now like to hand the call back over to Tom Davin for any closing comments.

Thank you very much. And so we're pleased to report the third quarter and we're charging hard into the fourth quarter. Thank you, everyone, for joining the call, and we'll see you out in the marketplace.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.