ZEVIA PBC The following discussion contains forward-looking statements that involve risks and uncertainties. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. 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 I, Item 1A. "Risk Factors" and other sections of this Annual Report on Form 10-K. The financial data discussed below reflects the historical results of operations and financial position of the Company. References in this Annual Report to "Zevia," the "Company," "we," "us," and "our" refer (1) prior to the consummation of the Reorganization Transactions, toZevia LLC , and (2) after the consummation of the Reorganization Transactions, toZevia PBC and its consolidated subsidiaries unless the context indicates otherwise. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are a high-growth company that develops, markets, sells, and distributes great tasting, zero sugar beverages made with simple, plant-based ingredients. We are aDelaware public benefit corporation and have been designated as a "Certified B Corporation ," and are focused on addressing the global health challenges resulting from excess sugar consumption by offering a broad portfolio of zero sugar, zero calorie, naturally sweetened beverages. All Zevia® beverages areNon-GMO Project verified, gluten-free, Kosher, vegan and zero sodium and include a variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, and Kidz drinks. Our products are distributed and sold principally across theU.S. andCanada through a diverse network of major retailers in the food, drug, warehouse club, mass, natural and e-commerce channels and in grocery and natural product stores and specialty outlets. 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.
IPO and Reorganization Transactions
OnJuly 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 theNew York Stock Exchange under the ticker symbol "ZVIA" onJuly 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 . As ofDecember 31, 2022 ,Zevia PBC holds an economic interest of 68.7% inZevia LLC and the remaining 31.3% represents the non-controlling interest.
Factors Affecting the Comparability of Our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
Impact of the Reorganization Transactions
The Company is classified as a corporation forU.S. federal and state income tax purposes. Our accounting predecessor,Zevia LLC , was and is a flow-through entity forU.S. federal and most applicable state and local income tax purposes. As an entity classified as a partnership for tax purposes,Zevia LLC is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated byZevia LLC is passed through to its members, including the Company.Zevia PBC is taxed as a C corporation and pays corporate federal, state and local taxes with respect to income allocated fromZevia LLC based on the Company's economic ownership interest inZevia LLC , which was 68.7% and 53.4% as ofDecember 31, 2022 and 2021, respectively. Accordingly, the historical results of operations and other financial information set forth in this Annual Report do not include a provision forU.S. federal income taxes for the periods prior to the IPO. Following the completion of the Reorganization Transactions, the Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated fromZevia LLC based on the Company's economic interest inZevia LLC , which was 68.7% and 53.4%, as ofDecember 31, 2022 and 2021, respectively. Subsequent changes in economic ownership inZevia LLC of the Company can occur asZevia LLC holders may convert their shares of Class B common stock into an equivalent number of shares of Class A common stock with income (loss) allocated to the Company based on the economic interest applicable during each reporting period.Zevia LLC is the predecessor of the Company for financial reporting purposes. As a result, the consolidated financial statements of the Company recognize the assets and liabilities received in the Reorganization Transactions at their historical carrying amounts, as reflected in the historical consolidated financial statements ofZevia LLC , the accounting predecessor. In connection with the Reorganization Transactions and the IPO, we entered into the TRA described in Note 17 - Income Taxes and Tax Receivable Agreement in the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Initial Public Offering InJuly 2021 , the Company completed its IPO, which significantly impacted our cash, debt, and equity balances. Concurrent with the IPO, the Company also terminated its previous credit facility, which reduced our outstanding debt to zero, and our interest expense was significantly reduced in the second half of 2021 and in 2022 relative to historical results. 31 --------------------------------------------------------------------------------
Equity-Based Compensation
InMarch 2021 ,Zevia LLC modified certain outstanding RSU awards originally granted inAugust 2020 to provide for vesting as follows: (i) in the event of a change of control, the RSUs shall vest effective as of such change of control, or (ii) in the event of an IPO, the RSUs shall vest in equal monthly installments over a 36-month period following the termination of any lockup period and shall be subject to the participant's continued employment through such vesting date. InJuly 2021 , Zevia modified all outstanding restricted phantom unit awards to permit settlement into shares, eliminating the existing cash-settlement provision. These modifications resulted in the revaluation of the awards in accordance with generally accepted accounting principles inthe United States ("US GAAP"). No equity-based compensation had been recognized for all of the RSUs and restricted phantom awards as the qualifying vesting event (i.e., the IPO) was not probable. The Company recognized equity-based compensation expense of$25.3 million and$77.4 million for the years-endedDecember 31, 2022 and 2021, respectively, attributable to these RSUs and restricted phantom unit awards, as well as other outstanding RSUs issued prior to the IPO. As ofDecember 31, 2022 , the remaining unamortized fair value of the RSU awards will be recognized as equity-based compensation over the remaining service period of the awards which have a remaining vesting period of 25 months. Refer to Note 12 - Equity-based Compensation in the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for unamortized equity-based compensation costs related to each type of equity-based incentive award.
Other Factors Affecting Our Performance
Macroeconomic Environment
The global economy, including the emergence of potential new variants of COVID-19 and its resulting impacts on the global economy, including supply chain challenges and labor shortages, have led to broad-based inflation in input costs, logistics, manufacturing and labor costs. During the year endedDecember 31, 2022 , we experienced supply chain constraints and a significant inflationary impact compared to the prior year. These impacts have created headwinds for our products that we expect to continue into 2023. These inflationary pressures have and are expected to continue to impact our margins and operating results. We, along with our competitors, have increased pricing on a number of products in response to widespread inflation. These pricing increases may result in future reductions in volume.
The following summarizes the components of our results of operations for the
years ended
Components of Our Results of Operations
We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, and Kidz drinks, to our customers, which include grocery distributors, national retailers, natural products retailers, warehouse club and e-commerce channels, in theU.S. andCanada . 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. The following factors and trends in our business have driven net sales growth over the past two years and are expected to continue to be key drivers of our net sales growth for the foreseeable future:
•
leveraging our platform and mission to grow brand awareness, increase velocity and expand our consumer base;
•
continuing to grow our strong relationships across our retailer network and expand distribution amongst new and existing channels, both in-store and online; and
•
continuous innovation efforts, enhancement of existing products, and introduction of additional flavors within existing categories, as well as entering into new categories.
We expect both new distribution and increased organic sales from existing outlets and pricing strategies to contribute to our growth going forward, however sales levels in any given period may be impacted by seasonality and customers efforts to manage inventory.
We sell our products in the
Cost of Goods Sold Cost of goods sold consists of all costs to acquire and manufacture our products, including the cost of ingredients, raw materials, packaging, in-bound freight and logistics and third-party production fees. 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 production, packaging, in-bound freight and logistics. 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, 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.
We elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in our consolidated statements of operations and comprehensive 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. During the year endedDecember 31, 2022 , the Company reclassified repackaging and handling costs from cost of goods sold to selling and marketing expenses as a result of an increasing trend in the occurrence of such fulfillment costs in the business. The Company believes this classification change better portrays the financial impacts of the fulfillment activities conducted by the Company. Refer to Note 2 - Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for amounts reclassified. 32 --------------------------------------------------------------------------------
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, as well as the level of discounts and promotions offered during the period. Gross profit may be favorably impacted by leveraging our asset-light business model and 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, repacking and handling fees 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 in absolute dollars, 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 programs/spend.
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, information technology and other functions. Our general and administrative expenses are expected to grow in absolute dollars but decline as a percentage of net sales over time.
Equity-Based Compensation Expense
Equity-based compensation expense consists of the recorded expense of equity-based compensation for our employees and for certain consultants and service providers who are non-employees. We record equity-based compensation expense for employee grants using grant date fair value for RSUs or a Black-Scholes valuation model to calculate the fair value of stock options by date granted. Equity-based compensation cost for RSU awards is measured based on the closing fair market value of the Zevia LLC Class B unit or theZevia PBC Class A common stock, as applicable, on the date of grant. Over time, we expect our equity-based compensation expense to significantly decrease compared to the years endedDecember 31, 2022 and 2021, as a result of the expiration of the lockup period inJanuary 2022 , which coincided with the end of the vesting period for the majority of the awards granted pre-IPO, and the acceleration of expense in 2022 in connection with the retirement of certain employees.
Depreciation and Amortization
Depreciation is primarily related to building and related improvements, computer equipment, quality control and marketing equipment, and leasehold improvements. Intangible assets subject to amortization consist of customer relationships and software applications. Non-amortizable intangible assets consist of trademarks, which represent the Company's exclusive ownership of the Zevia® brand used in connection with the manufacturing, marketing, and distribution of its beverages. We also own several other trademarks in both theU.S. and in foreign countries. Depreciation and amortization expense is expected to increase in-line with ongoing capital expenditures as our business grows.
Other income (expense), net
Other income (expense), net consists primarily of interest income (expense), and foreign currency (loss) gains.
33
--------------------------------------------------------------------------------Results of Operations
The following table sets forth selected items in our consolidated statements of operations and comprehensive loss for the periods presented:
Year Ended December 31,
2022 2021
(in thousands, except per share amounts) Net sales$ 163,181 $ 138,172 Cost of goods sold 93,160 74,231 Gross profit 70,021 63,941 Operating expenses: Selling and marketing 52,869 45,130 General and administrative 36,793 27,516 Equity-based compensation 26,880 77,724 Depreciation and amortization 1,347 997 Total operating expenses 117,889 151,367 Loss from operations (47,868 ) (87,426 ) Other income (expense), net 286 (207 ) Loss before income taxes (47,582 ) (87,633 ) Provision for income taxes (65 ) (34 ) Net loss and comprehensive loss (47,647 ) (87,667 ) Net loss attributable toZevia LLC prior to the Reorganization Transactions -
1,913
Loss attributable to noncontrolling interest 13,790
39,768
Net loss attributable to Zevia PBC$ (33,857 ) $
(45,986 )
Net loss per share attributable to common stockholders Basic$ (0.81 ) $ (1.33 ) (1) Diluted$ (0.81 ) $ (1.33 ) (1) (1) Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period fromJuly 22, 2021 throughDecember 31, 2021 , the period following the Reorganization Transactions and IPO (see Note 16 of Notes to Consolidated Financial Statements)
The following table presents selected items in our consolidated statements of operations and comprehensive loss as a percentage of net sales for the respective periods presented. Percentages may not sum due to rounding:
Year Ended December 31,
2022 2021
Net sales 100 % 100 %
Cost of goods sold 57 % 54 %
Gross profit 43 % 46 %
Operating expenses:
Selling and marketing 32 % 33 %
General and administrative 23 % 20 %
Equity-based compensation 16 % 56 %
Depreciation and amortization 1 % 1 %
Total operating expenses 72 % 110 %
Loss from operations (29 )% (63 )%
Other income (expense), net 0 % (0 )%
Loss before income taxes (29 )% (63 )%
Provision for income taxes (0 )% (0 )
Net loss and comprehensive loss (29 )% (63 )%
Net loss attributable to Zevia LLC prior to the
Reorganization Transactions 0 % 1 %
Loss attributable to noncontrolling interest 8 % 29 %
Net loss attributable to Zevia PBC (21 )% (33 )%
Year Ended
Net Sales Year Ended December 31, Change (in thousands) 2022 2021 Amount Percentage Net sales$ 163,181 $ 138,172 $ 25,009 18.1 % 34
-------------------------------------------------------------------------------- Net sales were$163.2 million for the year endedDecember 31, 2022 as compared to$138.2 million for the year endedDecember 31, 2021 . Equivalized cases sold were 13.6 million for the year endedDecember 31, 2022 as compared to 12.3 million for the year endedDecember 31, 2021 . Net sales growth was primarily driven by the 10.7% increase in the number of equivalized cases sold, including organic growth of$14.3 million , new distribution expansion of$6.3 million , and pricing increases of$4.5 million . We define an equivalized case as a 288 fluid ounce case. Cost of Goods Sold Year Ended December 31, Change (in thousands) 2022 2021 Amount Percentage Cost of goods sold$ 93,160 $ 74,231 $ 18,929 25.5 % Cost of goods sold was$93.2 million for the year endedDecember 31, 2022 as compared to$74.2 million for the year endedDecember 31, 2021 . The increase of$18.9 million , or 25.5%, was primarily due to higher costs due to broad-based inflation resulting in$11.0 million in higher cost of goods sold, and a 10.7% increase in the shipment of equivalized cases resulting in$7.9 million in higher costs of goods sold.
Gross Profit and Gross Margin
Year Ended December 31, Change
(in thousands) 2022 2021 Amount Percentage
Gross profit $ 70,021 $ 63,941 $ 6,080 9.5 %
Gross margin 42.9 % 46.3 %
Gross profit was $70.0 million for the year ended December 31, 2022 as compared
to $63.9 million for the year ended December 31, 2021 . The increase in gross
profit of $6.1 million , or 9.5%, was primarily driven by higher net sales,
partially offset by higher cost of goods sold.
Gross margin for the year ended
Selling and Marketing Expenses
Year Ended December 31 , Change
(in thousands) 2022 2021 Amount
Percentage
Selling and marketing expenses
17.1 %
Selling and marketing expenses were$52.9 million for the year endedDecember 31, 2022 as compared to$45.1 million for the year endedDecember 31, 2021 . The increase of$7.7 million or 17.1%, was largely due to$3.0 million in higher freight and warehousing costs as a result of increases in equivalized cases produced and sold, higher repacking fees of$2.7 million , and higher freight and warehousing costs of$3.0 million due to inflation. These increases were partially offset by a reduction of non-working marketing costs of$1.5 million .
General and Administrative Expenses
Year Ended December 31, Change
(in thousands) 2022 2021 Amount Percentage
General and
administrative
expenses $ 36,793 $ 27,516 $ 9,277 33.7 %
General and administrative expenses were $36.8 million for the year ended
December 31, 2022 as compared to $27.5 million for the year ended December 31,
2021 . The increase of $9.3 million , or 33.7%, was primarily driven by a $8.2
million increase in headcount and personnel costs to support our growth, and a
$1.3 million increase in costs related to being a public company, including
insurance, accounting and compliance, and legal and other professional fees.
Equity-Based Compensation Expense
Year Ended December 31, Change
(in thousands) 2022 2021 Amount Percentage
Equity-based compensation $ 26,880 $ 77,724 $ (50,844 ) N/M
Equity-based compensation expense was $26.9 million for the year ended December
31, 2022 , of which $3.1 million related to RSU awards and restricted phantom
stock awards that vested at the expiration of the IPO lock-up period in January
2022 , $8.2 million related to RSU awards that were accelerated upon retirement
of certain senior management employees, and the remaining $15.6 million related
to outstanding equity-based awards being recognized over the remaining service
periods of the awards. Equity-based compensation expense was $77.7 million for
the year ended December 31, 2021 , reflecting RSU awards and phantom stock awards
that generally vested over six months following the IPO.
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.
35
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Liquidity and Capital ResourcesLiquidity and Capital Resources
As ofDecember 31, 2022 , we had$47.4 million in cash and cash equivalents. We believe that our cash and cash equivalents as ofDecember 31, 2022 , together with our operating activities and available borrowings under the Secured Revolving Line of Credit, will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments beyond the next 12 months. Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from sales of our products, and borrowing capacity currently available under our Secured Revolving Line of Credit. Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. 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. In future years, we may experience an increase in operating and capital expenditures from time to time, as needed, as we expand business activities and increase headcount to promote growth. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may seek alternative financing through additional equity or debt financing transactions. Additional funds may not be available on terms favorable to us or at all. Also, we will continue to assess our liquidity needs in light of current and future global health emergencies, inflationary pressures, the hostilities inEastern Europe , and political tensions between theU.S. andChina that may continue to disrupt and impact the global and national economies and global financial markets. If the disruption continues into the future, we may not be able to access the financial markets and 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. Prior to our IPO, we had financed our operations through private sales of equity securities and through sales of our products. In connection with our IPO, which was completed onJuly 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, we incurred$8.4 million of offering costs in connection with the IPO. 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 fromZevia LLC to pay its taxes, its obligations under the TRA and other expenses. Any future credit facilities may impose limitations on the ability ofZevia LLC to pay dividends to the Company. In connection with the IPO and the Reorganization Transactions, the Direct Zevia Stockholders and certain continuing members ofZevia LLC received the right to receive future payments pursuant to the TRA. The amount payable under the TRA will be based on an annual calculation of the reduction in ourU.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 ofZevia LLC . See "Certain Relationships andRelated Party Transactions-Tax Receivable Agreement" included in the prospectus datedJuly 21, 2021 and filed with theSEC onJuly 23, 2021 . We expect that the payments that we may be required to make under the TRA 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 TRA, 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$65.7 million through 2037. Under such scenario we would be required to pay the Direct Zevia Stockholders and certain continuing members ofZevia LLC 85% of such amount, or$55.8 million through 2037. The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and TRA payments by us will be calculated using prevailing tax rates applicable to us over the life of the TRA and will be dependent on us generating sufficient future taxable income to realize the benefit. We cannot reasonably estimate future annual payments under the TRA given the difficulty in determining those estimates as they are dependent on a number of factors, including the extent of exchanges by continuingZevia LLC unitholders, the associated fair value of the underlyingZevia 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 TRA payment requirement. However, a significant portion of any potential future payments under the TRA is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us, assumingZevia LLC generates sufficient income to utilize the deductions. If sufficient income is not generated byZevia 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 TRA 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 TRA for the factors discussed above, we anticipate funding payments from the TRA from cash flows generated from operations. 36 --------------------------------------------------------------------------------
Credit Facility ABL Credit Facility OnFebruary 22, 2022 , we obtained a revolving credit facility (the "Secured Revolving Line of Credit") by entering into a Loan and Security Agreement withBank of America, N.A . Under the Secured Revolving Line of Credit, we may draw funds up to an amount not to exceed the lesser of (i) a$20 million revolving commitment and (ii) a borrowing base which is comprised of inventory and receivables. Up to$2 million of the Secured Revolving Line of Credit may be used for letter of credit issuances with the option to increase the commitment under the Secured Revolving Line of Credit by up to$10 million , subject to certain conditions. The Secured Revolving Line of Credit matures onFebruary 22, 2027 . There have been no amounts drawn from the Secured Revolving Line of Credit. The Secured Revolving Line of Credit is secured by a first priority security interest in substantially all of the Company's assets. Loans under the Secured Revolving Line of Credit bear interest based on either, at our option, the Bloomberg Short-Term Bank Yield Index rate plus an applicable margin between 1.50% to 2.00% or the Base Rate (customarily defined) plus an applicable margin between 0.50% to 1.00% with margin, in each case, determined by the average daily availability under the Secured Revolving Line of Credit. We are required under the Secured Revolving Line of Credit to comply with certain covenants, including, among others, by maintaining Liquidity (as defined therein) of$7 million at all times untilDecember 31, 2023 . Thereafter, we must satisfy a financial covenant requiring a minimum fixed charge coverage ratio of 1.00 to 1.00 as of the last day of any fiscal quarter following the occurrence of certain events of default that are continuing or any day on which availability under the Secured Revolving Line of Credit is less than the greater of$3 million and 17.5% of the borrowing base, and must again satisfy such financial covenant as of the last day of each fiscal quarter thereafter until such time as there are no events of default and availability has been above such threshold for 30 consecutive days. As ofDecember 31, 2022 , the Company was in compliance with its liquidity covenant.
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.
Twelve Months Ended December 31,
(in thousands) 2022 2021
Cash (used in) provided by:
Operating activities
Our cash flows used in operating activities are primarily influenced by working capital requirements.
Net cash used in operating activities of$20.8 million for the year endedDecember 31, 2022 was primarily driven by a net loss of$47.6 million and by a net decrease in cash related to changes in operating assets and liabilities of$2.1 million , partially offset by non-cash expenses of$28.9 million primarily related to equity-based compensation and depreciation and amortization expense. Changes in cash flows related to operating assets and liabilities were primarily due to an increase in accounts receivable of$2.0 million due to increases in net sales and a decrease in accounts payable and accrued expenses and other current liabilities of$4.1 million , primarily due to timing of inventory purchases, partially offset by decrease in inventories of$3.9 million due to timing of inventory purchases and a$0.8 million decrease in prepaid expenses and other assets, primarily insurance expenses as a result of becoming a public company. Net cash used in operating activities of$17.8 million for the year endedDecember 31, 2021 was primarily driven by a net loss of$87.7 million and by a net decrease in cash related to changes in operating assets and liabilities of$9.5 million , partially offset by non-cash expenses of$79.4 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities primarily consisted of a$10.7 million increase in anticipation of future sales, a$2.1 million increase in accounts receivable due to increase in net sales, and a$2.5 million increase in prepaid expenses and other assets, primarily insurance expenses as a result of becoming a public company, partially offset by a$6.4 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities of$27.4 million for the year endedDecember 31, 2022 was primarily due to proceeds from maturities of short-term investments of$30.0 million , offset by capital expenditures of$2.6 million for the purchase of marketing fixtures, software applications and computer equipment used in ongoing operations.
Net cash used in investing activities of
Net cash used in financing activities of$2.3 million for the year endedDecember 31, 2022 was primarily due to minimum tax withholdings paid on behalf of employees for net share settlements of$2.1 million and payment of debt issuance costs of$0.3 million in connection with the Secured Revolving Line of Credit. Net cash provided by financing activities of$79.1 million for the year endedDecember 31, 2021 was due to our IPO of Class A common stock, in which received net proceeds of$139.7 million , after deducting underwriting discounts and commissions of$10.1 million . We paid offering expenses related to 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 37 -------------------------------------------------------------------------------- corresponding shares of Class B common stock from certainZevia 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 intoZevia PBC withZevia PBC surviving. The IPO related amounts were partially offset by distribution to unitholders for tax payments of$2.7 million .
Non-GAAP Financial Measures
We report our financial results in accordance with US GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our operating performance. We calculate Adjusted EBITDA as net loss adjusted to exclude: (1) other income (expense), net, which includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets, (2) provision (benefit) for income taxes, (3) depreciation and amortization, and (4) equity-based compensation. Adjusted EBITDA may in the future also be adjusted for amounts impacting net income related to the TRA liability and other infrequent and unusual transactions. Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with US GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with US GAAP, provides 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 is helpful to our investors as it is a measure 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 is presented for supplemental informational purposes only, has limitations as an analytical tool 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 (income) expense, foreign currency (gains)/losses and (gains)/losses on disposal of fixed assets. In addition, our use of Adjusted EBITDA may not be comparable to similarly-titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income (loss) and other results stated in accordance with US GAAP.
The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with US GAAP, to Adjusted EBITDA for the periods presented:
Year Ended December 31,
(in thousands) 2022 2021
Net loss and comprehensive loss $ (47,647 ) $ (87,667 )
Other (income) expense, net* (286 ) 207
Provision for income taxes 65 34
Depreciation and amortization 1,347 997
Equity-based compensation 26,880 77,724
Adjusted EBITDA $ (19,641 ) $ (8,705 ) * Includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets.
Commitments
EffectiveMarch 2022 , the Company entered into an amendment to the lease for our corporate headquarters offices to extend the term throughDecember 31, 2023 and expand the total square footage from 17,923 square feet to 20,185 square feet commencing onMay 1, 2022 . InJanuary 2023 , the Company extended the lease term throughDecember 31, 2026 . The following table summarizes our significant contractual obligations as ofDecember 31, 2022 : Payments Due by Period Less Than One More Than Five Total Year 1-3 Years 3-5 Years Years (in thousands) Rent obligations (1)$ 745 $ 745 $ - $ - $ - Total$ 745 $ 745 $ - $ - $ -
(1) Real estate lease payments
Our inventory purchase commitments are generally short-term in nature and have
ordinary commercial terms. We did not have any material long-term inventory
purchase commitments as of
Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space. For a further discussion on our debt and operating lease commitments as ofDecember 31, 2022 , see the sections above as well as Note 7 - Debt, and Note 8 - Leases, in the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
We expect to satisfy these commitments through a combination of cash on hand and cash generated from sales of our products.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K 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. Critical accounting estimates are those that we consider the most important to the portrayal of our financial condition and operating results because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. See Note 2. Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report, for information about these policies as well as a description of our other accounting policies. Our critical accounting estimates are described below. Revenue Recognition We recognize revenue when performance obligations under the terms of a contract with the customer are satisfied. Accruals for customer incentives and allowances, sales returns and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends. These incentives and discounts include cash discounts, price allowances, volume-based rebates, product placement fees and certain other financial support for items such as trade promotions, displays, new products, consumer incentives and advertising assistance. Our customer incentives and allowances contain uncertainties because it requires management to make assumptions and to apply judgment regarding our contractual terms in order to estimate our customer participation and volume performance levels which impact the revenue recognition. Our estimates are based primarily on a combination of known or historical transaction experiences. Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined. Additionally, judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense, which is a component of our selling and marketing expenses. A 10% change in the accrual for customer incentives and allowances would have affected our income from operations by$0.6 million and$0.4 million for the years endedDecember 31, 2022 and 2021, respectively.
Inventories
Inventories consist of raw materials and finished goods. Raw materials include costs for the Company's ingredients and packaging inventories. The costs of finished goods inventories include production fees from third-party manufacturers. Inventories are stated at the lower of average cost or net realizable value. The Company regularly reviews whether the net realizable value of its inventory is lower than its carrying value. Indicators that could result in inventory write downs include age of inventory, damaged inventory, slow moving products, and products at the end of their life cycles. While management believes that inventory is appropriately stated at the lower of average cost or net realizable value, judgment is involved in determining the net realizable value of inventory. The lower of average cost or net realizable value adjustments were not material atDecember 31, 2022 orDecember 31, 2021 . We periodically write-down our inventory to the lower of cost and net realizable value based on our estimates that consider historical usage, future demand, and inventory production date. These factors are impacted by market and economic conditions and changes in strategic direction. The calculation of our inventory valuation, specifically the write-down for excess or obsolete inventories, requires management to make assumptions and to apply judgment regarding forecasted customer demand that may turn out to be inaccurate. Inventory valuation reserves, once established, are not reversed until the related inventory has been sold or scrapped. Inventory valuation reserves were$0.4 million as ofDecember 31, 2022 and 2021.
Income Taxes
The Company is the managing member ofZevia LLC and, as a result, consolidates the financial results ofZevia LLC in the consolidated financial statements.Zevia LLC is a pass-through entity forU.S. federal and most applicable state and local income tax purposes. As an entity classified as a partnership for tax purposes,Zevia LLC is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated byZevia LLC is passed through to its members, including the Company. The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated fromZevia LLC based on the Company's economic interest inZevia LLC , which was 68.7% and 53.4% as ofDecember 31, 2022 and 2021, respectively. Subsequent changes in economic ownership inZevia LLC of the Company can occur asZevia LLC holders may convert their shares of Class B common stock into an equivalent number of shares of Class A common stock with income (loss) allocated to the Company based on the economic interest applicable during each reporting period. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities ("DTAs" and "DTLs") for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, historical levels of income, projections of future income, expectations and risk associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. To the extent that we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against deferred tax assets. The determination of recording or releasing a tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that we will generate sufficient future taxable income against which the benefits of our deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to our ability to generate revenue, gross profits, operating income and taxable income in future periods. Although we believe that 39 -------------------------------------------------------------------------------- the judgment we used is reasonable, actual results can differ due to a change in market conditions, changes in tax laws and other factors. As ofDecember 31, 2022 , we have a full valuation allowance against deferred tax assets totaling$72.7 million . In accordance with ASC 740, Income Taxes we perform a comprehensive review of uncertain tax positions regularly. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. We determine the tax liability for uncertain tax positions based on a two-step process. The first step is to determine whether it is more likely than not based on technical merits that each income tax position would be sustained upon examination. The second step is to measure the tax benefit as the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement with a tax authority that has full knowledge of all relevant information. The assessment of each tax position requires significant judgment and estimates. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits, issuance of new regulations or new case law, negotiations with tax authorities, and expiration of statutes of limitations. We did not record any unrecognized tax benefit as ofDecember 31, 2022 . We recognize both accrued interest and penalties, when appropriate, in income taxes in the accompanying consolidated statements of operations and comprehensive loss.
Tax Receivable Agreement
The Company expects to obtain an increase in its share of tax basis in the net assets ofZevia, LLC when Class B units are exchanged by the holders of Class B units for shares of Class A common stock of the Company and upon certain qualifying transactions. Each change in outstanding shares of Class A common stock of the Company results in a corresponding change in the Company's ownership of Class A units ofZevia, LLC . The Company intends to treat any exchanges of Class B units as direct purchases of LLC interests forU.S. federal income tax purposes. These increases in tax basis may reduce the amounts thatZevia PBC would otherwise pay in the future to various taxing authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In connection with the IPO, the Company entered into a TRA with continuing members ofZevia LLC and the Direct Zevia Stockholders. In the event that such parties exchange any or all of their Class B units for Class A common stock, the TRA requires the Company to make payments to such holders for 85% of the tax benefits realized, or in some cases deemed to be realized, by the Company by such exchange as a result of (i) certain favorable tax attributes acquired from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies' allocable share of existing tax basis), (ii) increases in tax basis resulting fromZevia PBC's acquisition of continuing member'sZevia LLC units in connection with the IPO and in future exchanges and, (iii) tax basis increases attributable to payments made under the TRA (including tax benefits related to imputed interest). The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits. The Company expects to benefit from the remaining 15% of any tax benefits that it may actually realize. The TRA payments are not conditioned upon any continued ownership interest inZevia, LLC or the Company. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable. The Company calculates the liability under the TRA using a complex TRA model, which includes an assumption related to the fair market value of assets. Payments are generally due under the TRA within a specified period of time following the filing of the Company's tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of the Secured Overnight Financing Rate ("SOFR") plus 300 basis points from the due date (without extensions) of such tax return. The amount of existing tax basis and the anticipated tax basis adjustments will vary depending upon a number of factors, including our blended federal and state tax rate and the amount and timing of our income, the increase in the Zevia's allocable share of existing tax basis and the tax basis adjustment of the tangible and intangible assets of the Company upon the exchange ofZevia LLC units for shares of Class A common stock, and our possible utilization of certain tax attributes. As a result, payments thatZevia PBC may make under the TRA could be substantial. The TRA provides that if (i) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur; (ii) there is a material uncured breach of any obligations under the TRA; or (iii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor's obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any Class B units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination. As ofDecember 31, 2022 , the Company has concluded, based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized; therefore, the Company has not recorded a liability related to the tax savings it may realize from utilization of such deferred tax assets. The TRA liability that would be recognized if the associated tax benefits were determined to be fully realizable totaled$55.8 million atDecember 31, 2022 . If utilization of the deferred tax asset subject to the TRA becomes more likely than not in the future, the Company will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements included in this Annual Report 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 any of the following events occur; (i) we have more than$1.235 billion in annual revenue, (ii) we have more than$700.0 40
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million in market value of our Class A common stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or (iii) we issue more than$1.0 billion of non-convertible debt securities over a three-year period.
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