Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A. “Risk Factors” and “Note Regarding Forward-Looking Statements” included elsewhere in this report. The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this quarterly report and our audited financial statements and notes thereto included in our prospectus dated July 21, 2021 (the “Prospectus”) as filed with the SEC on July 23, 2021. The financial data discussed below reflect the historical results of operations and financial position of the Company. References in this Form 10-Q to “Zevia,” the “Company,” “we,” “us,” and “our” refer (1) prior to the consummation of the Reorganization Transactions, to Zevia LLC, and (2) after the consummation of the Reorganization Transactions, to Zevia PBC and its consolidated subsidiaries unless the context indicates otherwise.
Overview
We are a high-growth beverage company that is disrupting the liquid refreshment beverage industry through delicious and refreshing, zero calorie, zero sugar, naturally sweetened beverages that are all Non-GMO Project Verified. We are a pioneering beverage brand, offering a platform of products that include a broad variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, Kidz drinks and Sparkling Water. All of our beverages are made with only a handful of plant-based ingredients that most consumers can easily pronounce. Our products are distributed across the U.S. and Canada through a diverse network of major retailers in the food, drug, mass, natural and ecommerce channels. We believe that consumers increasingly select beverage products based on taste, ingredients and fit with today’s consumer preferences, which has benefited the Zevia brand and resulted in over one billion cans of Zevia sold to date.
Consumers can purchase our products in both brick and mortar and ecommerce channels. Zevia was initially distributed in the U.S. natural products retail channel, where we still maintain the leading position. Fueled by a loyal and growing consumer base, we expanded our presence online and into conventional food, drug and mass retailers. In 2020, Zevia was the highest selling carbonated soft drink brand on Amazon according to Stackline, which we believe is representative of an online product discovery and education-oriented purchasing process that is gaining traction among shoppers.
On July 26, 2021, we completed our IPO of Class A common stock, in which we sold 10,700,000 shares to the Underwriters. Shares of Class A common stock began trading on the New York Stock Exchange under the ticker symbol “ZVIA” on July 22, 2021. These shares were sold at an IPO price of $14.00 per share for net proceeds of approximately $139.7 million, after deducting underwriting discounts and commissions of $10.1 million. Upon the closing of the IPO, we used (i) $25.5 million to purchase Class B units and corresponding shares of Class B common stock from certain Zevia LLC’s unitholders, including certain members of our senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock, (ii) $0.4 million to cancel and cash-out outstanding options held by certain option holders, including certain members of our senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock, and (iii) $23.7 million to pay the cash consideration to certain pre-IPO institutional investors in connection with the merger of the blocker corporations into the Zevia PBC with the Zevia PBC surviving. Accordingly, we have not retained any of those portions of the proceeds. The remaining net proceeds of the IPO of $90.1 million were used to acquire 6,900,000 newly issued Class A units of Zevia LLC at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. The Company retained $82.0 million of the total IPO proceeds after the payment of $8.1 million for the IPO offering costs. The retained proceeds will ultimately be used by the Company for working capital and other general corporate purposes.
Other Factors Affecting Our Performance
COVID-19 UPDATE
The COVID-19 pandemic continued to have significant adverse impacts on the national and global economy during the third quarter of 2021. From the beginning of the COVID-19 pandemic, we have remained committed to making the health and wellness of our employees and customers a priority. Based upon the guidance of the U.S. Centers for Disease Control (“CDC”) and local health authorities, we maintain appropriate measures to help reduce the spread of infection to our employees, suppliers and customers, including the institution of social distancing protocols and increased frequency of cleaning and sanitizing in our third-party facilities. Our corporate headquarters remains closed and most of our employees continue to work from home.
Although we encountered closures and delays at some of our third-party facilities due to confirmed cases in the workforce or due to government mandate during the course of the pandemic, these closures and delays did not have a material impact on our operations or our ability to serve customer needs. While at this time we are working to manage and mitigate potential disruptions to our supply chain, and we have not experienced decreases in demand or material financial impacts as compared to prior periods, the fluid nature of the COVID-19 pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil with continued supply chain risk. The impact of COVID-19 on any of our suppliers, third-party manufacturers, distributors or transportation or logistics providers may negatively affect the price and availability of our ingredients and/or packaging materials and impact our supply chain. Our operational and financial performance is dependent on future developments, including the duration of the pandemic, variants of mutations of the virus, actions that may be taken by governmental authorities, the speed at which effective vaccines will continue to be administered to a sufficient number of people to enable cessation of the virus and the related length of its impact on the global economy, all of which are uncertain and difficult to predict at this time.
The following summarizes the components of our results of operations for the three and nine months ended September 30, 2021 and 2020, respectively.
19
Components of Our Results of Operations
Net Sales
We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, Kidz beverages and Sparkling Water, to our customers, which include grocery distributors, national retailers, natural products retailers, and e-commerce channels, in the U.S. and Canada.
We offer our customers sales incentives that are designed to support the distribution of our products to consumers. These incentives include discounts, trade promotions, price allowances and product placement fees. The amounts for these incentives are deducted from gross sales to arrive at our net sales.
We have experienced substantial growth in net sales in the past three years. The following factors and trends in our business have driven net sales growth over this period and are expected to continue to be key drivers of our net sales growth for the foreseeable future:
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leveraging our platform and mission to grow awareness, increase velocity and expand our consumer base;
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continuing to grow our strong relationships across our retailer network and expand distribution amongst existing channels, both in-store and online; and
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ongoing innovation efforts, including enhancing existing products and introducing additional flavors within existing categories, as well as entering into new categories.
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We also expect expansion of distribution into new channels to be a key driver of our future sales growth. We expect that our sales directly to retailers will increase as a percentage of our net sales over time.
We sell our products in the U.S. and Canada, direct to retailers and also through distributors. We do not have short- or long-term sales commitments with our customers.
Cost of Goods Sold
Cost of goods sold consists of all costs to acquire and manufacture our products, including the cost of the various ingredients, packaging, in-bound freight and logistics and third-party production fees. Our cost of goods sold also includes other costs incurred to bring the product to saleable condition. Our cost of goods sold is subject to price fluctuations in the marketplace, particularly in the price of aluminum and other raw materials, as well as in the cost of in-bound freight and logistics. Our cost of goods sold is generally higher for products sold through our ecommerce channel than through our retail store channel due to additional packaging requirements. Our results of operations depend on our ability to arrange for the purchase of raw materials and the production of our products in sufficient quantities at competitive prices. We have long term contracts with certain suppliers of stevia and aluminum cans. We expect over the long term that, as the scale of our business increases, we will purchase a greater percentage of our aluminum cans directly rather than through third-party manufacturers. We have long term contracts with certain manufacturers governing pricing and other terms and minimum commitments on our part, but these contracts generally do not guarantee any minimum production volumes on the part of the manufacturers.
We expect our cost of goods sold to increase in absolute dollars as our volume increases and our mix shifts to higher selling price and high margin products.
Gross Profit
Gross profit consists of our net sales less costs of goods sold. Our gross profit and gross margin are affected by the mix of distribution channels of our net sales in each period. We expect our gross margin to improve over time as we continue to leverage our asset-light business model and realize margin expansion through increased distribution direct to retailers, the increased scale of our business and our continued focus on cost improvements, particularly in our supply chain.
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of warehousing and distribution costs and advertising and marketing expenses. Warehousing and distribution costs include storage, transfer and out-bound freight and delivery charges. Advertising and marketing expenses consist of variable costs associated with production and media buying of marketing programs and trade events. Selling and marketing expenses also includes the incremental costs of obtaining contracts, such as sales commissions.
Our selling and marketing expenses are expected to increase both in absolute dollars and as a percentage of net sales, both as a result of the increased warehousing and distribution costs resulting from increased net sales, which we expect to be partially offset by our continued focus on cost improvements in our supply chain, and as a result of increased focus on marketing.
General and Administrative Expenses
Administrative expenses include all salary and other personnel expenses (other than equity-based compensation expense) for our employees, including employees related to management, marketing, sales, product development, quality control, accounting, IT and other functions. Our general and administrative expenses are expected to increase in absolute dollars, but to decrease as a percentage of net sales, over time as we increase our headcount to support our growth and as we increase personnel in legal, accounting, IT and compliance-related expenses to support our obligations as a public company.
20
Equity-Based Compensation
Equity-based compensation expense consists of the recorded expense of equity-based compensation for our employees and for certain non-employees. We record compensation expense for employee grants using grant date fair value for Restricted Stock Units ("RSUs") or a Black-Scholes-Merton option pricing model to calculate the fair value of stock options by date granted. We record compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes Merton option pricing model. Equity-based compensation cost for restricted unit awards is measured based on the closing fair market value of our common unit at the date of grant. If we have the option and intent to settle a restricted unit award in cash, the award is classified as a liability and revalued at each balance sheet date. We expect our equity-based compensation expense to decrease after the expiration of the lockup period, as defined below, in absolute dollars
In connection with the IPO 4,413,444 of our RSUs and phantom stock units will vest over the 180 days following the IPO (the lockup period). As a result, we are recognizing approximately $61.1 million of equity-based compensation ratably through December 31, 2021.
In connection with the closing of our Series E Financing in December 2020, Zevia LLC used approximately $175 million of the proceeds to repurchase outstanding preferred and common units. The majority of the units repurchased were units that had been purchased by the holders in connection with financing transactions, and a minority of units purchased were units that holders owned as a result of equity awards granted by us.
Depreciation and Amortization
Depreciation is primarily related to building, software applications, computer equipment and leasehold improvements. Intangible assets subject to amortization consist of customer relationships. Non-amortizable intangible assets consist of trademarks, which represent the Company’s exclusive ownership of the Zevia brand used in connection with the manufacture, marketing, and distribution of its carbonated beverages. We also own several other trademarks in both the U.S. and in foreign countries. Depreciation and amortization expense is expected to increase in-line with ongoing capital expenditures as our business grows, which we do not expect to be material, given our asset-light business model.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense and foreign currency transaction gains and losses.
Results of Operations
The following table sets forth selected items in our statements of operations and comprehensive income (loss) for the periods presented:
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For the Three Months
Ended September 30,
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For the Nine Months
Ended September 30,
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2021
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2020
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2021
|
|
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2020
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(in thousands, except for per share amounts)
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Net sales
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$
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38,956
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|
$
|
32,035
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|
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$
|
104,002
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|
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$
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82,202
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Cost of goods sold
|
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|
21,952
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|
17,109
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|
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|
56,570
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|
|
|
44,409
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|
Gross profit
|
|
|
17,004
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|
|
|
14,926
|
|
|
|
47,432
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|
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37,793
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Selling and marketing expenses
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12,834
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6,973
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31,525
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19,611
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General and administrative expenses
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7,698
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4,935
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19,352
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13,853
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Equity-based compensation
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45,731
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28
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45,804
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86
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Depreciation and amortization
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239
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|
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|
256
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|
713
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|
|
729
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Total operating expenses
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66,502
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12,192
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|
97,394
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34,279
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Income (loss) from operations
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(49,498
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)
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|
2,734
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|
|
(49,962
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)
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|
3,514
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Other expense, net
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|
(213
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)
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|
|
(276
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)
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|
|
(251
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)
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|
(543
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)
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Income (loss) before Income Taxes
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(49,711
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)
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2,458
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(50,213
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)
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|
2,971
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Provision for income taxes
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|
(50
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)
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—
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|
|
(50
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)
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|
—
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Net Income (loss) and Comprehensive Income (loss)
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|
(49,761
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)
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2,458
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|
(50,263
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)
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2,971
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Net income (loss) attributable to Zevia LLC prior to the Reorganization Transactions
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(1,411
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)
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2,458
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|
(1,913
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)
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|
2,971
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Loss attributable to noncontrolling interest
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22,527
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—
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22,527
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—
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Net loss attributable to Zevia PBC
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$
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(25,823
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)
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$
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—
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|
$
|
(25,823
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)
|
|
$
|
—
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Net loss per share attributable to common stockholders (1)
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Basic
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$
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(0.75
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)
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N/A
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|
$
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(0.75
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)
|
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N/A
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Diluted
|
|
$
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(0.75
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)
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|
N/A
|
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|
$
|
(0.75
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)
|
|
N/A
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(1) Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from July 22,2021 through September 30, 2021, the period following the reorganization transactions and initial public offering (see Note 14)
21
The following table presents selected items in our statements of operations and comprehensive income (loss) as a percentage of net sales for the respective periods presented. Percentages may not sum due to rounding:
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For the Three Months
Ended September 30,
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For the Nine Months
Ended September 30,
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|
2021
|
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|
2020
|
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|
2021
|
|
|
2020
|
|
Net sales
|
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|
100
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%
|
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|
100
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%
|
|
|
100
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%
|
|
|
100
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%
|
Cost of goods sold
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|
56
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%
|
|
|
53
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%
|
|
|
54
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%
|
|
|
54
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%
|
Gross profit
|
|
|
44
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%
|
|
|
47
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%
|
|
|
46
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%
|
|
|
46
|
%
|
Selling and marketing expenses
|
|
|
33
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%
|
|
|
22
|
%
|
|
|
30
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%
|
|
|
24
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%
|
General and administrative expenses
|
|
|
20
|
%
|
|
|
15
|
%
|
|
|
19
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%
|
|
|
17
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%
|
Equity-based compensation
|
|
|
117
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%
|
|
|
0
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%
|
|
|
44
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%
|
|
|
0
|
%
|
Depreciation and amortization
|
|
|
1
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%
|
|
|
1
|
%
|
|
|
1
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%
|
|
|
1
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%
|
Total operating expenses
|
|
|
171
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%
|
|
|
38
|
%
|
|
|
94
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%
|
|
|
42
|
%
|
Income (loss) from operations
|
|
|
(127
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)%
|
|
|
9
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%
|
|
|
(48
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)%
|
|
|
4
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%
|
Other expense, net
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|
|
(1
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)%
|
|
|
(1
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)%
|
|
|
(0
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)%
|
|
|
(1
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)%
|
Income (loss) before Income Taxes
|
|
|
(128
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)%
|
|
|
8
|
%
|
|
|
(48
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)%
|
|
|
4
|
%
|
Provision for income taxes
|
|
|
(0
|
)%
|
|
|
0
|
%
|
|
|
(0
|
)%
|
|
|
0
|
%
|
Net Income (loss) and Comprehensive Income (loss)
|
|
|
(128
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)%
|
|
|
8
|
%
|
|
|
(48
|
)%
|
|
|
4
|
%
|
Net income (loss) attributable to Zevia LLC prior to the Reorganization Transactions
|
|
|
(4
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)%
|
|
|
8
|
%
|
|
|
(2
|
)%
|
|
|
4
|
%
|
Loss attributable to noncontrolling interest
|
|
|
58
|
%
|
|
|
0
|
%
|
|
|
22
|
%
|
|
|
0
|
%
|
Net loss attributable to Zevia PBC
|
|
|
(66
|
)%
|
|
|
0
|
%
|
|
|
(25
|
)%
|
|
|
0
|
%
|
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Net sales
|
|
$
|
38,956
|
|
|
$
|
32,035
|
|
|
$
|
6,921
|
|
|
|
22
|
%
|
Net sales were $39.0 million for the three months ended September 30, 2021 as compared to $32.0 million for the three months ended September 30, 2020. Net sales increased due to an approximately 26% increase in the number of equivalized cases sold to 3.5 million cases, partially offset by a 4% decrease in net average price per equivalized case due to trade promotions to drive consumer trial and repeat purchasing during the three months ended September 30, 2021. We define an equivalized case as a 288 fluid ounce case.
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Cost of goods sold
|
|
$
|
21,952
|
|
|
$
|
17,109
|
|
|
$
|
4,843
|
|
|
|
28
|
%
|
Cost of goods sold was $22.0 million for the three months ended September 30, 2021 as compared to $17.1 million for the three months ended September 30, 2020. The increase of $4.8 million or 28% was primarily due to volume increases.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Gross profit
|
|
$
|
17,004
|
|
|
$
|
14,926
|
|
|
$
|
2,078
|
|
|
|
14
|
%
|
Gross margin
|
|
|
44
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
Gross profit was $17.0 million for the three months ended September 30, 2021 as compared to $14.9 million for the three months ended September 30, 2020. The increase in gross profit of $2.1 million or 14% was primarily driven by higher net sales.
22
Gross margin in the three months ended September 30, 2021 declined to 44% from 47% in the prior-year period. The decline was primarily due to lower net price realization as a result of trade promotions to drive consumer trial and repeat purchasing in 2021.
As disclosed in Note 2, Basis Of Presentation And Summary Of Significant Accounting Policies, in the Notes to Audited Financial Statements for the years ended December 31, 2020 and 2019 included in the Prospectus, we elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in the accompanying condensed statements of operations and comprehensive income (loss). As a result, our gross profit and profit margin may not be comparable to other entities that present shipping and handling costs as a component of cost of goods sold.
Operating Expenses
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Selling and marketing expenses
|
|
$
|
12,834
|
|
|
$
|
6,973
|
|
|
$
|
5,861
|
|
|
|
84
|
%
|
Selling and marketing expenses were $12.8 million for the three months ended September 30, 2021 as compared to $7.0 million for the three months ended September 30, 2020. The increase of $5.9 million or 84%, was primarily due to overall net sales growth and higher freight costs amidst a challenging transportation market in the US and Canada as well as $2.7 million of increased marketing spend to continue to invest and grow the Zevia brand.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
General and administrative expenses
|
|
$
|
7,698
|
|
|
$
|
4,935
|
|
|
$
|
2,763
|
|
|
|
56
|
%
|
General and administrative expenses were $7.7 million for the three months ended September 30, 2021 and $4.9 million for the three months ended September 30, 2020. The increase of $2.8 million, or 56%, was driven by $1.7 million increase in costs related to being a public company including insurance, accounting, legal and other professional fees and other costs including those related to legal matters and $1.1 million in employee salary and related costs primarily due to an overall increase in employee headcount to support our growth.
Equity-Based Compensation Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Equity-Based Compensation
|
|
$
|
45,731
|
|
|
$
|
28
|
|
|
$
|
45,703
|
|
|
|
163225
|
%
|
Equity-based compensation expense was $45.7 million for the three months ended September 30, 2021 and $28,000 for the three months ended September 30, 2020. The increase of $45.7 million was primarily driven by new RSU awards and RSU and phantom stock awards previously granted by Zevia LLC, modified in March and July 2021, that generally vest over six months following the IPO.
First Nine Months Ended September 30, 2021 Compared to First Nine Months Ended September 30, 2020
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Net sales
|
|
$
|
104,002
|
|
|
$
|
82,202
|
|
|
$
|
21,800
|
|
|
|
27
|
%
|
Net sales were $104.0 million for the nine months ended September 30, 2021 as compared to $82.2 million for the nine months ended September 30, 2020. Net sales increased due to an approximately 26% increase in the number of equivalized cases sold as net average price per equivalized case was essentially flat on a per case basis. We define an equivalized case as a 288 fluid ounce case.
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Cost of goods sold
|
|
$
|
56,570
|
|
|
$
|
44,409
|
|
|
$
|
12,161
|
|
|
|
27
|
%
|
23
Cost of goods sold was $56.6 million for the nine months ended September 30, 2021 as compared to $44.4 million for the nine months ended September 30, 2020. The increase of $12.2 million or 27% was primarily due to volume increases.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Gross profit
|
|
$
|
47,432
|
|
|
$
|
37,793
|
|
|
$
|
9,639
|
|
|
|
26
|
%
|
Gross margin
|
|
|
46
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
Gross profit was $47.4 million for the nine months ended September 30, 2021 as compared to $37.8 million for the nine months ended September 30, 2020. The increase in gross profit of $9.6 million, or 26% was primarily driven by higher net sales.
Gross margin in the nine months ended September 30, 2021 remained flat at 46% from the prior-year period.
As disclosed in Note 2, Basis Of Presentation And Summary Of Significant Accounting Policies, in the Notes to Audited Financial Statements for the years ended December 31, 2020 and 2019 included in the Prospectus, we elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in the accompanying condensed statements of operations and comprehensive income (loss). As a result, our gross profit and profit margin may not be comparable to other entities that present shipping and handling costs as a component of cost of goods sold.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Selling and marketing expenses
|
|
$
|
31,525
|
|
|
$
|
19,611
|
|
|
$
|
11,914
|
|
|
|
61
|
%
|
Selling and marketing expenses were $31.5 million for the nine months ended September 30, 2021 as compared to $19.6 million for the nine months ended September 30, 2020. The increase of $11.9 million or 61%, was primarily due to due to overall net sales growth and higher freight costs amidst a challenging transportation market in the US and Canada as well as $4.7 million of increased marketing spend to continue to invest and grow the Zevia brand.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
General and administrative expenses
|
|
$
|
19,352
|
|
|
$
|
13,853
|
|
|
$
|
5,499
|
|
|
|
40
|
%
|
General and administrative expenses were $19.4 million for the nine months ended September 30, 2021 and $13.9 million for the nine months ended September 30, 2020. The increase of $5.5 million, or 40%, was primarily driven by $2.7 million in employee salary and related costs primarily due to an overall increase in employee headcount to support our growth and $2.5 million increase in costs related to being a public company including insurance, accounting, legal and other professional fees and other costs including those related to legal matters.
Equity-Based Compensation Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
Change
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
Amount
|
|
|
Percentage
|
|
Equity-Based Compensation
|
|
$
|
45,804
|
|
|
$
|
86
|
|
|
$
|
45,718
|
|
|
|
53160
|
%
|
Equity-based compensation expense was $45.8 million for the nine months ended September 30, 2021 and $0.1 million for the nine months ended September 30, 2020. The increase of $45.7 million was primarily driven by new RSU awards and RSU and phantom stock awards previously granted by Zevia LLC, modified in March and July 2021, that generally vest over six months following the IPO.
24
Seasonality
Generally, we experience greater demand for our products during the second and third fiscal quarters, which correspond to the warmer months of the year in our major markets. As our business continues to grow, we expect to see continued seasonality effects, with net sales tending to be greater in the second and third quarters of the year.
Liquidity and Capital Resources
Liquidity and Capital Resources
Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. Prior to our IPO, we have financed our operations through private sales of equity securities and through sales of our products. In connection with our IPO, which was completed on July 26, 2021, we sold an aggregate of 10,700,000 shares of our Class A common stock at an IPO price of $14.00 per share and retained approximately $90.1 million in net proceeds, after deducting underwriting discounts and commissions and giving effect to the use of proceeds thereto. In addition, the Company incurred and paid $8.1 million of offering costs in connection with the IPO.
As of September 30, 2021, we had $78.7 million in cash. We believe that our cash and cash equivalents as of September 30, 2021, together with our operating activities will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments for at least the next 12 months.
Future capital requirements will depend on many factors, including our rate of revenue growth, gross margin and the level of expenditures in all areas of the Company. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we will need to raise capital through additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. In addition, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could negatively affect our operations in the future. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.
Upon consummation of the IPO, the Company became a holding company with no operations of its own. Accordingly, the Company will be dependent on distributions from Zevia LLC to pay its taxes, its obligations under the Tax Receivable Agreement and other expenses. Any future credit facilities may impose limitations on the ability of Zevia LLC to pay dividends to the Company.
In connection with the IPO and the Reorganization, the Direct Zevia Stockholders and certain continuing members of Zevia LLC received the right to receive future payments pursuant to the Tax Receivable Agreement. The amount payable under the Tax Receivable Agreement will be based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of certain pre-IPO tax attributes and tax benefits resulting from sales and exchanges by continuing members of Zevia LLC. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” included in our Prospectus filed with the SEC on July 23, 2021. We expect that the payments that we may be required to make under the Tax Receivable Agreement may be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the reduction in tax payments for us associated with the federal, state and local tax benefits described above would aggregate to approximately $54.4 million through 2036. Under such scenario we would be required to pay the Direct Zevia Stockholders and certain continuing members of Zevia LLC 85% of such amount, or $46.2 million through 2036.
The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and tax receivable agreement payments by us will be calculated using prevailing tax rates applicable to us over the life of the Tax Receivable Agreements and will be dependent on us generating sufficient future taxable income to realize the benefit.
We cannot reasonably estimate future annual payments under the Tax Receivable Agreement given the difficulty in determining those estimates as they are dependent on a number of factors, including the extent of exchanges by continuing Zevia LLC unitholders, the associated fair value of the underlying Zevia LLC units at the time of those exchanges, the tax rates applicable, our future income, and the associated tax benefits that might be realized that would trigger a Tax Receivable Agreement payment requirement.
However, a significant portion of any potential future payments under the Tax Receivable Agreement is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us, assuming Zevia LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by Zevia LLC, the associated taxable income of Zevia will be impacted and the associated tax benefits to be realized will be limited, thereby similarly reducing the associated Tax Receivable Agreement payments to be made. Given the length of time over which payments would be payable, the impact to liquidity in any single year is greatly reduced.
Although the timing and extent of future payments could vary significantly under the Tax Receivable Agreement for the factors discussed above, we anticipate funding payments from the Tax Receivable Agreement from cash flows generated from operations.
Credit Facility
Credit Facility
In 2019, we entered into a loan agreement providing for a $9.0 million revolving line of credit (the “Credit Facility”) with Stonegate, with a maturity date in April 2022. Borrowings under the revolving line are secured by accounts receivable and inventory. In June 2020, we amended the Credit Facility and increased it to $12.0 million. As of June 30, 2021 and December 31, 2020, the revolving line interest rate was 7.5% annual percentage rate and there was no outstanding balance. On June 1, 2021, we extended the Credit Facility through April 2023 and there were no other modifications made to the
25
terms and conditions. In July 2021 and subsequent to the IPO, Zevia terminated the Credit Facility. There were no material early-termination fees or any other penalties associated with the termination of the Credit Facility.
Cash Flows
The following table presents the major components of net cash flows from and used in operating, investing and financing activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
Cash (used in) provided by:
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(13,094
|
)
|
|
$
|
(2,121
|
)
|
Investing activities
|
|
$
|
(2,308
|
)
|
|
$
|
(781
|
)
|
Financing activities
|
|
$
|
79,186
|
|
|
$
|
4,142
|
|
Net Cash Used in Operating Activities
Our cash flows used in operating activities are primarily influenced by working capital requirements.
Net cash used in operating activities of $13.1 million for the nine months ended September 30, 2021 was primarily driven by a net loss of $50.3 million and by a net decrease in cash related to changes in operating assets and liabilities of $9.9 million partially offset by non-cash expenses of $47.0 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities were due to increases in net sales and anticipated future growth and a $3.6 million increase in prepaid insurance expenses as a result of becoming a public company.
Net cash used in operating activities of $2.1 million for the nine months ended September 30, 2020 was primarily driven by a net decrease in cash related to changes in operating assets and liabilities of $6.3 million partially offset by a net income of $3.0 million and non-cash expenses of $1.2 million primarily related to depreciation and amortization. Changes in cash flows related to operating assets and liabilities primarily consisted of a $9.7 million increase in inventories as a precaution to ensure bolster supplies in the midst of a pandemic and $3.4 million in accounts receivable due to increases in net sales, partially offset by a $7.4 million increase in accounts payable, accrued expenses and other current liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities of $2.3 million for the nine months ended September 30, 2021 was primarily due to the purchase of a warehouse facility used in ongoing operations.
Net cash used in investing activities of $0.8 million for the nine months ended September 30, 2020 was due to purchases of software applications and computer equipment used in ongoing operations.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $79.2 million for the nine months ended September 30, 2021 was due to our IPO of Class A common stock, in which we sold 10,700,000 shares to the Underwriters. Shares of Class A common stock began trading on the New York Stock Exchange under the ticker symbol “ZVIA” on July 22, 2021. These shares were sold at an IPO price of $14.00 per share for net proceeds of $139.7 million, after deducting underwriting discounts and commissions of $10.1 million but before offering expenses of the IPO and the Reorganization of $8.1 million. Upon the closing of the IPO, we used (i) approximately $25.5 million to purchase Class B units and corresponding shares of Class B common stock from certain Zevia LLC’s unitholders, including certain members of our senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock, (ii) approximately $0.4 million to cancel and cash-out outstanding options held by certain option holders, including certain members of our senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock, and (iii) approximately $23.7 million to pay the cash consideration to certain pre-IPO institutional investors in connection with the merger of the blocker corporations into Zevia PBC with Zevia PBC surviving. The IPO related amounts were partially offset by distribution to unitholders for tax payments of $2.7 million.
Net cash provided by financing activities of $4.1 million in the nine months ended September 30, 2020 was due to borrowings net of repayments under the Company’s Credit Facility and the Paycheck Protection Program.
Non-GAAP Financial Measures
We report our financial results in accordance with US GAAP. However, management believes that Adjusted EBITDA and Adjusted Net Income (Loss), non-GAAP financial measures, provide investors with additional useful information in evaluating our performance.
We calculate Adjusted EBITDA as net (loss) income adjusted to exclude: (1) income tax expense, (2) depreciation and amortization, (3) other income (expense), net, (4) interest expense, and (5) equity-based compensation expense. Adjusted EBITDA may in the future also be adjusted for amounts impacting net income related to the Tax Receivable Agreement liability and other infrequent and unusual transactions. We calculate Adjusted Net Income (Loss) as net (loss) income adjusted to exclude equity-based compensation expense.
Adjusted EBITDA and Adjusted Net Income (Loss) are financial measures that are not required by, or presented in accordance with US GAAP. We believe that Adjusted EBITDA and Adjusted Net Income (Loss), when taken together with our financial results presented in accordance with US GAAP,
26
provide meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA and Adjusted Net Income (Loss) are helpful to our investors as they are measures used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA and Adjusted Net Income (Loss) are presented for supplemental informational purposes only, have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with US GAAP. Some of the limitations of Adjusted EBITDA include that (1) it does not properly reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures, (3) it does not consider the impact of equity-based compensation expense, including the potential dilutive impact thereof, and (4) it does not reflect other non-operating expenses, including interest expense. A limitation of Adjusted Net Income (Loss) is that it does not consider the impact of equity-based compensation expense, including the potential dilutive impact thereof. In addition, our use of Adjusted EBITDA and Adjusted Net Income (Loss) may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA or Adjusted Net Income (Loss) in the same manner, limiting their usefulness as comparative measures. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA and Adjusted Net Income (Loss) alongside other financial measures, including our net loss or income and other results stated in accordance with US GAAP.
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with US GAAP, to adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss) and comprehensive income (loss)
|
|
$
|
(49,761
|
)
|
|
$
|
2,458
|
|
|
$
|
(50,263
|
)
|
|
$
|
2,971
|
|
Income tax expense (benefit)
|
|
|
50
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
239
|
|
|
|
256
|
|
|
|
713
|
|
|
|
729
|
|
Other expense, net
|
|
|
213
|
|
|
|
276
|
|
|
|
251
|
|
|
|
543
|
|
Equity-based compensation expense
|
|
|
45,731
|
|
|
|
28
|
|
|
|
45,804
|
|
|
|
86
|
|
Adjusted EBITDA
|
|
$
|
(3,528
|
)
|
|
$
|
3,018
|
|
|
$
|
(3,445
|
)
|
|
$
|
4,329
|
|
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with US GAAP, to adjusted net income (loss) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income (loss) and comprehensive income (loss)
|
|
$
|
(49,761
|
)
|
|
$
|
2,458
|
|
|
$
|
(50,263
|
)
|
|
$
|
2,971
|
|
Equity-based compensation expense
|
|
|
45,731
|
|
|
|
28
|
|
|
|
45,804
|
|
|
|
86
|
|
Adjusted net income (loss)
|
|
$
|
(4,030
|
)
|
|
$
|
2,486
|
|
|
$
|
(4,459
|
)
|
|
$
|
3,057
|
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or any holdings in variable interest entities.
Commitments
There have been no significant changes during the three months ended September 30, 2021 to the contractual obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Prospectus.
Critical Accounting Policies and Estimates
Our condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with US GAAP. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the Prospectus and the notes to the audited financial statements appearing elsewhere in the Prospectus. During the three and nine months ended September 30, 2021, there were no material changes to our critical accounting policies from those discussed in our Prospectus.
27
Recent Accounting Pronouncements
Refer to Note 2 to our condensed financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may take advantage of these exemptions until we are no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three- year period.
Use of Proceeds
On July 26, 2021, we completed our IPO, pursuant to which we issued and sold an aggregate of 10,700,000 shares of Class A common stock at the IPO price of $14.00 per share. The aggregate gross proceeds to the Company from our IPO were $149.8 million and the net proceeds were $139.7 million after deducting underwriting discounts and commissions of $10.1 million. The offer and sale of the shares of Class A common stock in the IPO were registered pursuant to registration statements on Form S-1 (File No. 333-257378), which the SEC declared effective on July 21, 2021. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates. The underwriters for our IPO were Goldman Sachs & Co. LLC, BofA Securities, Inc., Morgan Stanley & Co. LLC, Stephens Inc., BMO Capital Markets Corp., Wells Fargo Securities, LLC, Telsey Advisory Group LLC, Loop Capital Markets LLC, Academy Securities, Inc., AmeriVet Securities, Inc. and Samuel A. Ramirez & Company, Inc.
Upon the closing of the IPO, we used (i) approximately $25.5 million to purchase Class B units and corresponding shares of Class B common stock from certain Zevia LLC unitholders, including certain members of our senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock, (ii) approximately $0.4 million to cancel and cash-out outstanding options held by certain of Zevia LLC’s option holders, including certain members of our senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock, and (iii) approximately $23.7 million to pay the cash consideration to certain pre-IPO institutional investors in connection with the merger of the blocker corporations into the Company. Accordingly, we have not retained any of those portions of the proceeds. The Company used the remaining net proceeds of $90.1 million to acquire newly issued Class A units of Zevia LLC at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock which was retained by the Company before the payment of $8.1 million for the IPO offering costs. The net retained proceeds of $82.0 million will ultimately be used by the Company for working capital and other general corporate purposes.