Zevia PBC — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Zevia sells zero-sugar beverages primarily in the U.S. and Canada. Unless noted otherwise, amounts below are in U.S. dollars, millions.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $44.2 | $39.0 | $127.8 | $104.0 |
| Gross profit / margin | $19.2 / 43.3% | $17.8 / 45.6% | $54.4 / 42.5% | $49.1 / 47.3% |
| Operating loss | $(9.2) | $(49.5) | $(41.5) | $(50.0) |
| Consolidated net loss | $(9.2) | $(49.8) | $(41.5) | $(50.3) |
| Net loss attributable to Zevia PBC | $(7.5) | $(25.8) | $(29.5) | $(25.8) |
| Adjusted EBITDA (non-GAAP) | $(2.1) | $(3.5) | $(16.7) | $(3.4) |
Q3 sales rose 13.6%; equivalized cases increased 2.3%, while product mix and pricing contributed approximately $3.1 million and $2.2 million, respectively. For the first nine months, sales grew 22.9% and cases rose 16.9%, driven by distribution expansion, organic growth, mix and pricing. Net loss per Class A share was $0.17 in Q3 and $0.73 for nine months.
Inflation pressured gross margin: cost of goods sold increased 18.3% in Q3 and 33.9% year to date, faster than sales. Q3 gross profit still increased 7.9%; nine-month gross profit increased 10.6%. Selling and marketing expense was $12.9 million in Q3 and $42.8 million year to date; general and administrative expense was $8.3 million and $28.3 million, respectively.
Cash and cash equivalents were $49.2 million at September 30, compared with $43.1 million at year-end 2021; current assets were $103.4 million and current liabilities $28.3 million. Operating cash use was $19.3 million for nine months, versus $13.1 million in 2021. Investing activities provided $27.8 million, mainly from maturity of $30.0 million in short-term investments, while financing activities used $2.3 million. The company had no borrowings under its $20 million asset-based revolving facility, subject to a borrowing base. Management said cash, operating activities and available facility borrowings should support operations and planned spending beyond the next 12 months.
Material changes and unusual items
- Q3 consolidated net loss improved substantially from 2021, when IPO-related equity compensation was unusually high. Equity-based compensation fell to $6.8 million in Q3 2022 from $45.7 million a year earlier; nine-month expense was $23.8 million versus $45.8 million.
- 2022 equity compensation included $3.8 million in Q3 and $7.8 million year to date associated with accelerated vesting upon employee retirements. The company reported $100.0 million of compensation expense from the IPO through September 30, 2022, reflecting IPO-related award modifications and vesting.
- The company reclassified repackaging and handling costs from cost of goods sold to selling and marketing. Prior-year comparisons were adjusted; $3.2 million of first-half 2022 expenses was also reclassified. This changes presentation of gross margin and selling expense, not total operating results.
- Zevia PBC held a 65.1% economic interest in Zevia LLC; the remaining 34.9% was noncontrolling interest. The PBC-attributable result therefore differs from consolidated net loss.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management expects inflationary pressures and related headwinds to continue through the end of 2022 and into 2023. Price increases may support sales but could reduce volume. The business is seasonal, with generally higher demand in the second and third quarters.
- Risks include inflation in ingredients, aluminum, packaging, freight, manufacturing and labor; supply constraints and labor shortages; and competition and changing consumer preferences. The company noted a North American aluminum-can shortage and that supplier contracts do not cover all expected needs. A hypothetical 10% change in weighted-average aluminum cost would change nine-month cost of goods sold by approximately $1.2 million.
- Customer and supplier concentration is notable: one customer represented 15% of Q3 sales; three raw-material vendors represented 27%, 25% and 15% of Q3 purchases.
- The company had an estimated $55.3 million unrecorded Tax Receivable Agreement liability. Payments depend on tax benefits being realized; the filing says the company established a full valuation allowance because realization of deferred tax assets was not considered more likely than not.
- The revolving facility requires at least $7 million of defined liquidity through December 31, 2023. The company reported compliance at quarter-end. No material legal proceedings or material long-term inventory purchase commitments were reported.
Important facts for investors to verify
- Whether pricing and distribution gains can sustain sales growth without materially weakening volumes, and whether inflation relief can stabilize gross margin.
- Cash burn, inventory and receivables growth, and the borrowing base and covenant availability under the revolving facility.
- The remaining timing and amount of equity-compensation expense, including effects of vesting and future dilution.
- Potential tax benefits and eventual TRA payments, including the assumptions behind the unrecorded $55.3 million estimate.
- Supply continuity and customer/vendor concentration, particularly aluminum-can sourcing and the effect of seasonality on results.