ZVIA

Business Context and Reporting Period

Zevia PBC (ZVIA) is a growth beverage company developing and distributing zero-sugar, plant-based sweetened beverages. This Form 10-Q covers the quarterly period ended June 30, 2024. The company operates as a single reporting segment and is classified as an emerging growth company and a smaller reporting company.

Key Financial Metrics

Note: The company has a $20 million secured revolving line of credit with no outstanding balance as of June 30, 2024.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 4.3% in Q2 and 7.4% YTD compared to 2023. This was driven by a reduction in equivalized cases sold (down 6.1% in Q2 and 9.1% YTD) due to delays in SKU distribution recovery and lost distribution in the club channel. Pricing increases partially offset volume declines.
• Margin Compression: Gross margin declined to 41.9% in Q2 (from 46.6% in Q2 2023) and 43.8% YTD (from 46.5% in YTD 2023). Drivers included higher inventory write-downs (specifically club excess inventory), unfavorable unit costs from enhanced packaging, and increased promotional spending.
• Operating Expenses: Selling and marketing expenses decreased 15.4% in Q2 due to lower freight and warehousing costs, partially offset by increased brand marketing spend. General and administrative expenses increased 24.0% in Q2, largely due to a prior-year accrual reversal.
• Restructuring: The company incurred $0.9 million in restructuring costs in Q2 2024 related to a "Productivity Initiative," including employee severance and exiting two third-party warehouse facilities. No such costs were incurred in the prior year.

Outlook, Risks, and Management Commentary

• Productivity Initiative: Management expects the ongoing restructuring to yield annualized benefits of $8.0 million to $12.0 million, with completion expected by the end of 2024. Benefits include reduced cost of goods sold and operating expenses.
• Supply Chain Changes: Beginning in Q1 2024, contract manufacturers assumed responsibility for raw material procurement, sold to Zevia as finished goods. This shift increased vendor concentration (three vendors accounted for ~89% of purchases YTD 2024).
• NYSE Listing Compliance: On June 26, 2024, Zevia received notice from the NYSE regarding non-compliance with minimum bid price requirements (average closing price below $1.00 for 30 consecutive days). The company has a six-month cure period to regain compliance; failure may result in delisting proceedings.
• Liquidity: Management believes current cash ($28.9 million) and available credit facilities are sufficient for operations beyond the next 12 months. However, the company remains dependent on distributions from its subsidiary, Zevia LLC, to pay taxes and obligations under its Tax Receivable Agreement (TRA).
• Tax Receivable Agreement (TRA): A potential liability of $56.4 million exists if tax benefits are realized, though no liability is currently recorded due to valuation allowances against deferred tax assets.

Investor Verification Checklist

• Stock Price Compliance: Monitor the company's ability to maintain a closing share price of at least $1.00 to avoid NYSE delisting.
• Inventory Levels: Verify the reduction of excess inventory, particularly in the club channel, to assess future write-down risks.
• Productivity Initiative Execution: Track the realization of the projected $8.0–$12.0 million in annualized cost savings.
• Vendor Concentration: Assess risks associated with the high concentration of raw material and finished goods purchases among three vendors.
• Cash Burn Rate: Review operating cash flow trends given the continued net losses and the need to fund operations without significant external financing.