Zevia PBC — Q3 2023 Form 10-Q
Business context and period. Zevia develops and sells zero-sugar, zero-calorie beverages, principally in the U.S. and Canada. This unaudited quarterly report covers the three and nine months ended September 30, 2023; the comparable periods are 2022. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $43.1 million | $44.2 million | $128.6 million | $127.8 million |
| Gross profit / margin | $19.6 million / 45.4% | $19.2 million / 43.3% | $59.4 million / 46.2% | $54.4 million / 42.5% |
| Operating loss | $(11.4) million | $(9.2) million | $(20.0) million | $(41.5) million |
| Net loss | $(11.3) million | $(9.2) million | $(19.2) million | $(41.5) million |
| Net loss attributable to Zevia PBC | $(8.2) million | $(7.5) million | $(14.2) million | $(29.5) million |
| Adjusted EBITDA (non-GAAP) | $(9.1) million | $(2.1) million | $(12.2) million | $(16.7) million |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(9.7) million | $(19.3) million |
- Cash and liquidity: Cash and cash equivalents were $38.5 million at September 30, 2023, down from $47.4 million at December 31, 2022. Current assets were $107.2 million and current liabilities $45.6 million. Management said cash, operating activities and available credit were expected to fund operations and planned spending beyond the next 12 months.
- Debt: No borrowings were outstanding under the $20 million asset-based revolving facility, subject to a borrowing base; the commitment may be increased by up to $10 million subject to conditions. It matures in February 2027 and is secured by substantially all company assets. Zevia reported compliance with its $7 million minimum-liquidity covenant as of September 30, 2023.
- Working capital and assets: Inventory increased to $49.4 million from $27.6 million at year-end 2022, while accounts payable rose to $37.8 million from $8.0 million. The company attributed working-capital movements in part to increased inventory production and timing of purchases. It sold its Evansville warehouse in July for net proceeds of approximately $2.2 million; the gain was immaterial.
Changes versus the prior-year periods
- Q3 net sales declined 2.6%; equivalized cases sold fell 8.2% to 3.3 million. The filing attributes the volume decline primarily to short-term supply-chain logistics challenges that hindered fulfillment. Pricing contributed $1.5 million, partly offsetting the volume impact.
- For the first nine months, sales rose 0.6%, despite equivalized cases declining 9.6% to 9.9 million. Pricing increases added $9.4 million, partly offset by an estimated $8.6 million sales reduction from lower case volume, primarily tied to fulfillment challenges.
- Gross margin improved in both periods, supported by pricing and improved cost rates and product mix. Inventory losses associated mainly with legacy warehouse exits and the brand-refresh rollout partially offset gains.
- Q3 selling and marketing expense increased 58.4% to $20.5 million, including higher freight, freight-transfer and warehousing costs. This contributed to a larger operating and net loss in Q3. Nine-month selling and marketing expense rose 13.1%.
- Nine-month net loss narrowed substantially, alongside lower equity-based compensation and lower general and administrative costs. Equity-based compensation declined to $6.6 million from $23.8 million, including because of prior-year accelerated vesting and IPO-related award expense. Adjusted EBITDA remained negative and worsened in Q3.
Outlook, risks and unusual items
- Management said it had changed supply-chain organization and leadership, paused certain transition actions, and increased automation of inventory reporting and processing. It expected to resolve the fulfillment challenges by the end of 2023; this is forward-looking and not a reported outcome.
- Management expected higher logistics, manufacturing and labor costs to continue through Q4 2023 and into 2024, pressuring margins and results. Pricing increases may reduce future volumes. Sales may also vary with seasonality, customer inventory management and the ability to fulfill demand; the second and third quarters are typically stronger.
- Risks include competition and changing consumer demand, customer and supplier concentration, reliance on third-party manufacturing and distribution, supply-chain disruption, inflation and commodity costs, and the possibility that pricing cannot fully offset cost increases. Four customers each accounted for more than 10% of sales in at least one reported period; several raw-material vendors represented more than 10% of purchases.
- Stevia supply is covered by a two-year agreement effective October 15, 2023, with fixed pricing for its term on terms similar to the prior agreement. The company is also seeking alternative sources; availability is not assured. A hypothetical 10% change in aluminum cost would have changed nine-month cost of goods sold by approximately $0.9 million.
- The company disclosed a tax receivable agreement under which it may owe eligible holders 85% of certain realized tax benefits. No TRA liability was recorded because realization of the related deferred tax assets was not considered more likely than not; the potential liability if those benefits were fully realizable was $54.1 million at September 30, 2023. A qualifying change of control, uncured breach or early termination could accelerate payment obligations under the agreement.
- Management said it did not believe pending legal matters would materially affect the financial statements and identified no matter with a material loss reasonably possible. No material legal proceedings were reported. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Key facts for investors to verify
- Whether fulfillment and service levels returned to prior levels by the end of 2023, and whether the supply-chain actions reduced freight and warehousing costs.
- Whether sales volumes stabilize or recover, and whether pricing continues to support revenue and gross margin without materially reducing demand.
- Whether elevated inventory converts to sales and cash, and how accounts payable and other working-capital balances change.
- Cash burn, liquidity headroom under the borrowing-base facility and covenant compliance, especially as the credit agreement’s covenant terms change after December 31, 2023.
- Whether the company generates sufficient taxable income to realize tax benefits that could trigger TRA payments, including the potential acceleration provisions.
- Progress on supplier diversification and exposure to key raw-material vendors, aluminum costs, inflation, and customer concentration.