Zevia PBC — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Zevia sells zero-sugar beverages in the U.S. and Canada through retail and e-commerce channels. The company consolidates Zevia LLC and held a 63.9% economic interest in it at quarter-end.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net sales | $45.5 | $34.4 | $83.6 | $65.0 |
| Gross profit / margin | $17.4 / 38% | $16.2 / 47% | $32.0 / 38% | $30.4 / 47% |
| Operating loss | $(14.7) | $(0.7) | $(32.3) | $(0.5) |
| Consolidated net loss | $(14.8) | $(0.7) | $(32.3) | $(0.5) |
| Net loss attributable to Zevia PBC | $(11.1) | Not applicable | $(22.0) | Not applicable |
| Adjusted EBITDA, non-GAAP | $(6.4) | $(0.4) | $(14.7) | $0.1 |
- Revenue growth: Q2 sales rose 33%; equivalized cases increased 30%. H1 sales rose 28%; cases increased 26%. Growth reflected distribution expansion, organic growth, pricing and promotional optimization. Retail sales were $39.6 million and online/e-commerce sales were $5.9 million in Q2.
- Margins and expenses: Gross margin fell 9 percentage points to 38% in both Q2 and H1, primarily from inflation in product costs. Selling and marketing and general and administrative expenses also rose with freight, warehousing, staffing and public-company costs.
- Cash flow: H1 operating cash use was $19.6 million, versus $0.04 million in the prior-year period. Investing activities provided $28.4 million, mainly from $30.0 million in maturities of short-term investments; financing activities used $2.4 million.
- Liquidity and debt: Cash and cash equivalents were $49.6 million at June 30, compared with $43.1 million at year-end 2021; short-term investments declined from $30.0 million to zero. The company reported no borrowings on its new revolving facility. The facility has a $20 million commitment, subject to its borrowing base, and matures in 2027. The company reported compliance with its $7 million minimum-liquidity covenant.
- Balance sheet: Total liabilities were $25.5 million, including $1.1 million in operating lease liabilities. Total equity was $87.2 million.
Material changes and unusual items
- Q2 equity-based compensation was $8.0 million, including $3.8 million related to awards accelerated upon senior-management retirements. H1 expense was $16.9 million, compared with $0.1 million in H1 2021. The company reported $93.9 million of such expense from the IPO through June 30, 2022.
- Management attributed the gross-margin decline to broad-based inflation. Q2 cost of goods sold rose 56%, faster than the 33% increase in sales; management cited $5.1 million of additional costs from inflation. H1 cost of goods sold rose 49%, with $9.2 million of the increase attributed primarily to inflation.
- Accounts receivable increased to $17.1 million from $9.0 million at year-end, and inventory rose to $33.9 million from $31.5 million.
- On August 1, 2022, Amy Taylor became CEO, succeeding Padraic Spence, who remained non-executive chair. A separate subsequent event disclosed the Chief Strategy Officer and Executive Vice President of Sales and Marketing’s planned July 15 retirement; related award acceleration was expected to be recognized in Q3.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management expected inflationary headwinds to continue throughout 2022 and said pricing increases could reduce future sales volumes. It expected cash, operating activity and available revolver capacity to fund operations and planned expenditures for more than 12 months.
- Key risks include inflation and freight costs, supply-chain and labor constraints, aluminum-can availability, competition, changing consumer preferences, retailer concentration and dependence on a limited number of raw-material vendors. One vendor represented 28% of H1 raw-material purchases; the three customers individually exceeding 10% of H1 sales represented 16%, 11% and 11%.
- The company disclosed no material legal proceedings or material long-term inventory purchase commitments. Management reported no material changes to previously disclosed risk factors and said disclosure controls were effective as of June 30, 2022.
- The tax receivable agreement (TRA) could require payment of 85% of certain realized tax benefits. No TRA liability was recorded because management concluded realization of the related deferred tax assets was not more likely than not; the estimated unrecorded TRA liability was approximately $52.5 million. Actual payments depend on future taxable income and other factors.
Important facts for investors to verify
- Whether pricing and distribution growth can offset persistent input, freight and labor inflation without materially reducing volumes or gross margin.
- Cash conversion and working-capital trends, particularly receivables and inventory growth, alongside the reported $19.6 million H1 operating cash outflow.
- The effect of continuing equity compensation, including the Q3 expense expected from the executive retirement, on reported results and dilution.
- Revolver borrowing-base availability and covenant headroom, and the potential timing and amount of any future TRA payments.
- Customer and supplier concentration, aluminum-can supply availability, and the impact of the CEO and other leadership transitions.