Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 on Form 10-K to “Zevia,” the “Company,” “we,” “us,” and “our” refer (1) prior to the consummation of the Reorganization Transactions, to Zevia LLC, and (2) after the consummation of the Reorganization Transactions, to Zevia 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 beverage company that is disrupting the liquid refreshment beverage industry through delicious and refreshing, zero calorie, zero sugar, naturally sweetened beverages that are all Non-GMO Project Verified. We are a pioneering beverage brand, offering a platform of products that include a broad variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, Kidz drinks and Sparkling Water. All of our beverages are made with only a handful of plant-based ingredients that most consumers can easily pronounce. Our products are distributed across the U.S. and Canada through a diverse network of major retailers in the food, drug, warehouse club, mass, natural and e-commerce channels. We believe that consumers increasingly select beverage products based on taste and 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.
Consumers can purchase our products in both brick-and-mortar and e-commerce channels. Zevia was initially distributed in the U.S. natural products retail channel, where we still maintain the leading position. Fueled by a loyal and growing consumer base, we expanded our presence online and into conventional food, drug, warehouse club and mass retailers. In 2021, Zevia was the highest selling carbonated soft drink brand on Amazon according to Stackline, which we believe is representative of an online product discovery and education-oriented purchasing process that is gaining traction among shoppers.
IPO and Reorganization Transaction
On July 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 the New York Stock Exchange under the ticker symbol “ZVIA” on July 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. Upon the closing of the IPO, we used (i) $25.5 million to purchase Class B units and corresponding shares of Class B common stock from certain Zevia 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) $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) $23.7 million to pay the cash consideration to certain pre-IPO institutional investors in connection with the merger of the blocker corporations into the Zevia PBC with the Zevia PBC surviving. Accordingly, we have not retained any of those portions of the proceeds. The remaining net proceeds of the IPO of $90.1 million were used to acquire 6,900,000 newly issued Class A units of Zevia LLC at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. The Company retained $81.7 million of the total IPO proceeds after $8.4 million of IPO offering costs. The retained proceeds will ultimately be used by the Company for working capital and other general corporate purposes.
In connection with the IPO, the Company completed the following transactions (“Reorganization Transactions”):
•
Zevia LLC recapitalized its common and preferred membership interests into a single class of common units and each common unit outstanding after giving effect thereto was reclassified as two Class B units on a one-to-two basis;
•
Zevia PBC amended and restated its certificate of incorporation in its entirety to, among other things: (i) authorize 800,000,000 shares of common stock, 550,000,000 shares of which are designated as “Class A Common Stock” and 250,000,000 shares of which are designated as “Class B Common Stock;” and (ii) authorize 10,000,000 shares of undesignated preferred stock that may be issued from time to time by Zevia PBC's Board of Directors in one or more series;
•
Zevia PBC amended and restated its bylaws in their entirety to, among other things: (a) establish procedures relating to the presentation of stockholder proposals at stockholder meetings; (b) establish procedures relating to the nomination of directors; and (c) conform to the provisions of the amended and restated certificate;
•
The limited liability company agreement of Zevia LLC was amended and restated (the “Amended and Restated Zevia LLC Agreement”) to, among other things, provide for Class A units and Class B units and appoint Zevia PBC as the sole managing member of Zevia LLC;
•
Zevia PBC assumed all outstanding equity awards of Zevia LLC on a one-to-two basis;
•
The Amended and Restated Zevia LLC Agreement classified the interests acquired by Zevia PBC as Class A units, reclassified the interests held by the continuing members of Zevia LLC as Class B units and permits the continuing members of Zevia LLC to exchange Class B units for shares of Class A common stock on a one-for-one basis or, at the election of Zevia PBC, for cash. For each membership unit of Zevia LLC that is reclassified as a Class B unit, Zevia PBC issued one corresponding share of its Class B common stock to the continuing members;
•
Zevia PBC contributed approximately $90.1 million of the net proceeds of the IPO to Zevia LLC to acquire 6,900,000 newly issued Class A units of Zevia LLC at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. The Company retained $81.7 million of the total IPO proceeds after $8.4 million of offering costs. The retained proceeds will ultimately be used by the Company for working capital and other general corporate purposes;
31
•
Zevia PBC used approximately $25.5 million of the net proceeds of the IPO to purchase 1,956,142 Class B units and corresponding shares of Class B common stock from certain of Zevia LLC’s unitholders, including certain members of senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. Such units were immediately converted into an equivalent number of Class A units;
•
Zevia PBC used approximately $0.4 million of the net proceeds of the IPO to cancel and cash-out of 32,560 outstanding options held by certain option holders, including certain members of senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. Zevia PBC received an equivalent number of Class A units from Zevia LLC in exchange for the cancellation of such options;
•
Zevia PBC formed a new, first-tier merger subsidiary with respect to each blocker company of certain pre-IPO institutional investors (“Direct Zevia Stockholders”), and contemporaneously with the IPO, each respective merger subsidiary merged with and into the respective blocker company, with the blocker company surviving. Immediately thereafter, each blocker company merged with and into Zevia PBC, with Zevia PBC surviving. As a result of the blocker mergers, the 100% owners of the blocker companies acquired an aggregate of 23,716,450 shares of newly issued Class A common stock and received approximately $23.7 million in cash consideration in exchange for 1,811,298 previously-held Class B units, which were immediately converted into an equivalent number of Class A units in the hands of Zevia PBC, and the blocker companies ceased to own any Zevia LLC units; and
•
Zevia PBC entered into an Amended and Restated Registration Rights Agreement with the Class B stockholders to provide for certain rights and restrictions after the IPO.
Immediately following the closing of the IPO on July 26, 2021, Zevia LLC became the predecessor of Zevia PBC for financial reporting purposes. Zevia PBC is a holding company, and its sole material asset is its controlling equity interest in Zevia LLC. As the sole managing member of Zevia LLC, Zevia PBC operates and controls all of the business and affairs of Zevia LLC. This reorganization is accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements of the Company will recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical financial statements of Zevia LLC. Zevia PBC has consolidated Zevia LLC in its financial statements and record a noncontrolling interest related to the Class B units held by the Class B stockholders on its consolidated balance sheet and statement of operations. As of December 31, 2021, Zevia PBC holds an economic interest of 53.4% in Zevia LLC and the remaining 46.6% 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 a corporation for U.S. federal and state income tax purposes. Our accounting predecessor, Zevia LLC, was and is treated as a flow-through entity for U.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 to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Zevia 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 from Zevia LLC based on the Company's 53.4% economic interest in Zevia LLC. Accordingly, the historical results of operations and other financial information set forth in this Annual Report do not include a provision for U.S. federal income taxes. 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 from Zevia LLC based on the Company's 53.4% economic interest in Zevia LLC.
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 at their historical carrying amounts, as reflected in the historical consolidated financial statements of Zevia LLC, the accounting predecessor.
In addition, in connection with the reorganization transactions and the IPO, we entered into the tax receivable agreements 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
In July 2021, the Company completed its IPO which significantly impacted our cash, debt, and equity balances. Concurrent with the IPO, the Company also terminated its credit facility which reduced our outstanding debt to zero, and our interest expense was significantly reduced in the second half of 2021 relative to historical results.
Equity-Based Compensation
In March 2021, Zevia modified certain outstanding restricted stock unit (“RSU”) awards originally granted in August 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. In July 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 U.S. GAAP. No equity-based compensation had been recognized for all of the RSU and phantom awards as the qualifying vesting event (i.e., the IPO) was not probable. Upon completion of the IPO through December 31, 2021, the Company recognized $77.4 million of compensation expense attributable to these RSUs and restricted phantom unit awards, as well as other outstanding RSUs. The remaining unamortized fair value of the RSUs and phantom unit awards will be recognized as equity-based compensation over the remaining service period of the awards, generally upon termination of the lockup period following the IPO in January 2022 except for the RSUs modified in March 2021, which vest over a 36-month period following the termination of
32
the lockup period. 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
COVID-19 UPDATE
The ongoing COVID-19 pandemic 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 ended December 31, 2021, we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year. These challenges intensified during the later part of the year due to the surge in cases resulting from the Omicron variant. These impacts have created headwinds for our products that we expect to continue into 2022.
These inflationary pressures could 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 December 31, 2021 and 2020, respectively.
Components of Our Results of Operations
Net Sales
We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, Kidz beverages and Sparkling Water, to our customers, which include grocery distributors, national retailers, natural products retailers, warehouse club and e-commerce channels, in the U.S. and Canada.
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.
We have experienced substantial growth in net sales in the past three years. The following factors and trends in our business have driven net sales growth over this period 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 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
•
ongoing innovation efforts, including enhancing existing products and introducing additional flavors within existing categories, as well as entering into new categories.
We also expect expansion of distribution into new channels to be a key driver of our future sales growth. We expect that our sales directly to retailers will increase as a percentage of our net sales over time.
We sell our products in the U.S. and Canada, direct to retailers and also through distributors. We do not have short- or long-term sales commitments with our customers.
Cost of Goods Sold
Cost of goods sold consists of all costs to acquire and manufacture our products, including the cost of ingredients, 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 cost of goods sold is generally higher for products sold through our e-commerce and warehouse club channels than through our retail store channel due to additional packaging requirements. 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 and minimum commitments on our part, 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.
As disclosed in Note 2, Basis Of Presentation And Summary Of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, 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.
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.
33
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 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.
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 ("IT") and other functions. Our general and administrative expenses are expected to increase in absolute dollars over time as we increase our headcount to support our growth and as we increase personnel in legal, accounting, IT and compliance-related expenses to support our obligations as a public company.
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-Merton option pricing 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 the Zevia PBC Class A common stock, as applicable, on the date of grant. We expect our equity-based compensation expense to decrease after the end of expiration of the lockup period in January 2022, which coincides with the end of the vesting period for
In connection with the closing of our Series E Financing in December 2020, Zevia LLC used approximately $175 million of the proceeds to repurchase outstanding preferred and common units. The majority of the units repurchased were units that had been purchased by the holders in connection with financing transactions, and a minority of units purchased were units that holders owned as a result of equity awards granted by the Company.
Depreciation and Amortization
Depreciation is primarily related to building, software applications, computer equipment and leasehold improvements. Intangible assets subject to amortization consist of customer relationships. 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 the U.S. and in foreign countries. Depreciation and amortization expense is expected to increase in-line with ongoing capital expenditures as our business grows.
Other expense, net
Other expense, net consists primarily of interest (income) expense, and foreign currency (gains) losses.
34
Results of Operations
The following table sets forth selected items in our consolidated statements of operations and comprehensive loss for the periods presented:
For the YearEnded December 31,
(in thousands, except per share amounts)
Operating expenses:
Depreciation and amortization 997 932
Other expense, net (207 ) (593 )
Provision for income taxes (34 ) —
Net loss and comprehensive loss (87,667 ) (6,071 )
Loss attributable to noncontrolling interest 39,768 —
Net loss attributable to Zevia PBC $ (45,986 ) $ —
Net loss per share attributable to common stockholders (1)
Basic $ (1.33 ) N/A
Diluted $ (1.33 ) N/A
(1) Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from July 22, 2021 through December 31, 2021, the period following the Reorganization Transactions and initial public offering (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:
For the YearEnded December 31,
Cost of goods sold 56 % 55 %
Gross profit 44 % 45 %
Operating expenses:
Selling and marketing 31 % 25 %
General and administrative 20 % 17 %
Equity-based compensation 56 % 7 %
Depreciation and amortization 1 % 1 %
Total operating expenses 108 % 50 %
Loss from operations (63 )% (5 )%
Other expense, net (0 )% (1 )%
Loss before income taxes (63 )% (6 )%
Provision for income taxes (0 )% —
Net loss and comprehensive loss (63 )% (6 )%
Loss attributable to noncontrolling interest 29 % —
Net loss attributable to Zevia PBC (33 )% —
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net sales
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
Net sales were $138.2 million for the year ended December 31, 2021 as compared to $110.0 million for the year ended December 31, 2020. Net sales increased due to an approximately 25% increase in the number of equivalized cases sold driven by increased distribution and consumer demand. We define an equivalized case as a 288 fluid ounce case.
35
Cost of Goods Sold
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
Cost of goods sold was $77.0 million for the year ended December 31, 2021 as compared to $60.5 million for the year ended December 31, 2020. The increase of $16.4 million or 27% was primarily due to an increase in equivalized cases shipped of 25% and higher cost of goods sold as a result of product mix and inflation headwinds including higher aluminum pricing.
Gross Profit and Gross Margin
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
Gross margin 44 % 45 %
Gross profit was $61.2 million for the year ended December 31, 2021 as compared to $49.5 million for the year ended December 31, 2020. The increase in gross profit of $11.7 million, or 24% was primarily driven by higher net sales.
Gross margin in the year ended December 31, 2021 declined to 44% from 45% in the prior-year period. The decline was primarily due to product mix and inflation.
Selling and Marketing Expenses
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
Selling and marketing expenses were $42.4 million for the year ended December 31, 2021 as compared to $27.3 million for the year ended December 31, 2020. The increase of $15.1 million or 55%, was primarily due to higher freight and warehousing costs primarily due to increases in equivalized cases sold, inflation and higher freight rates amidst a challenging transportation market in the US and Canada and $5.8 million of increased marketing spend for continued investment in increasing velocity and growing the Zevia® brand.
General and Administrative Expenses
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
General and administrative expenses were $27.5 million for the year ended December 31, 2021 and $18.8 million for the year ended December 31, 2020. The increase of $8.7 million, or 46%, was primarily driven by $3.6 million increase in employee salary and related costs primarily due to an overall increase in employee headcount to support our growth, and a $5.1 million increase in costs related to being a public company and to support our growth including insurance, accounting, legal and other professional fees, and other costs including those related to legal matters.
Equity-Based Compensation Expenses
For the YearEnded December 31, Change
(in thousands) 2021 2020 Amount Percentage
Equity-based compensation expense was $77.7 million for the year ended December 31, 2021, reflecting restricted stock unit awards and phantom stock awards that generally vested over six months following the IPO, and $7.9 million for the year ended December 31, 2020 reflecting equity-based compensation expense in connection with a tender offer conducted in that period.
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.
36
Liquidity and Capital Resources
Liquidity and Capital Resources
Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business. Prior to our IPO, we have financed our operations through private sales of equity securities and through sales of our products. In connection with our IPO, which was completed on July 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.
As of December 31, 2021, we had $43.1 million in cash and cash equivalents, and $30.0 million of short-term investments. We believe that our cash and cash equivalents and short-term investments as of December 31, 2021, together with our operating activities and available borrowings under the new Loan and Security Agreement will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments beyond the next 12 months.
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. We expect operating and capital expenditures to increase in the future 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 will need to raise capital through additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Also, we will continue to assess our liquidity needs as the COVID-19 pandemic, inflationary pressures, and the outbreak of war between Russia and Ukraine continue to evolve and impact the global and national economies and our operations. In addition, the recent outbreak of war between Russia and Ukraine has resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we 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.
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 from Zevia LLC to pay its taxes, its obligations under the Tax Receivable Agreement and other expenses. Any future credit facilities may impose limitations on the ability of Zevia LLC to pay dividends to the Company.
In connection with the IPO and the Reorganization, the Direct Zevia Stockholders and certain continuing members of Zevia LLC received the right to receive future payments pursuant to the Tax Receivable Agreement. The amount payable under the Tax Receivable Agreement will be based on an annual calculation of the reduction in our U.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 of Zevia LLC. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” included in the prospectus dated July 21, 2021 and filed with the SEC on July 23, 2021. We expect that the payments that we may be required to make under the Tax Receivable Agreement 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 Tax Receivable Agreement, 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 $53.7 million through 2036. Under such scenario we would be required to pay the Direct Zevia Stockholders and certain continuing members of Zevia LLC 85% of such amount, or $45.6 million through 2036.
The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and Tax Receivable Agreement payments by us will be calculated using prevailing tax rates applicable to us over the life of the Tax Receivable Agreement and will be dependent on us generating sufficient future taxable income to realize the benefit.
We cannot reasonably estimate future annual payments under the Tax Receivable Agreement given the difficulty in determining those estimates as they are dependent on a number of factors, including the extent of exchanges by continuing Zevia LLC unitholders, the associated fair value of the underlying Zevia 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 Tax Receivable Agreement payment requirement.
However, a significant portion of any potential future payments under the Tax Receivable Agreement is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us, assuming Zevia LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by Zevia 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 Tax Receivable Agreement 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 Tax Receivable Agreement for the factors discussed above, we anticipate funding payments from the Tax Receivable Agreement from cash flows generated from operations.
Credit Facility
Stonegate Credit Facility
In 2019, we entered into a loan agreement providing for a $9.0 million revolving line of credit (the “Stonegate Credit Facility”) with Stonegate Asset Company II, LLC, with a maturity date in April 2022. Borrowings under the revolving line are secured by accounts receivable and inventory. In June 2020, we amended the Stonegate Credit Facility and increased it to $12.0 million. As of June 30, 2021 and December 31, 2020, the revolving line interest rate was 7.5% annual percentage rate and there was no outstanding balance. On June 1, 2021, we extended the Stonegate Credit Facility through April 2023 and there were no other modifications made to the terms and conditions. In July 2021 and subsequent to the IPO, we terminated the Stonegate Credit Facility. There were no material early-termination fees or any other penalties associated with the termination of the Stonegate Credit Facility.
37
ABL Credit Facility
Subsequent to year-end, on February 22, 2022, Zevia LLC (the “Borrower”) obtained a revolving credit facility (the “Secured Revolving Line of Credit”) by entering into a Loan and Security Agreement with Bank of America, N.A. The Borrower may draw loans under the Secured Revolving Line of Credit 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 and the Borrower has the option to increase the commitment under the Secured Revolving Line of Credit by up to $10 million, subject to certain conditions. The Secured Line of Credit matures in five years on February 22, 2027.
Loans under the Secured Revolving Line of Credit bear interest based on either, at the Borrower’s 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.
The Borrower is 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 until December 31, 2023. Thereafter, the Borrower 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.
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.
For the YearEnded December 31,
Cash (used in) provided by:
Investing activities $ (33,143 ) $ (805 )
Net Cash Used in Operating Activities
Our cash flows used in operating activities are primarily influenced by working capital requirements.
Net cash used in operating activities of $17.8 million for the year ended December 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 were primarily due to an increase in inventories of $10.7 million in anticipation of future sales, an increase in accounts receivable of $2.1 million due to increases 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 and accrued expenses and other current liabilities due to our overall growth.
Net cash used in operating activities of $3.3 million for the year ended December 31, 2020 was primarily driven by a net loss of $6.1 million and by a net decrease in cash related to changes in operating assets and liabilities of $6.6 million partially offset by non-cash expenses of $9.4 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities primarily consisted of a $9.4 million increase in inventories as a precaution to ensure bolster supplies in the midst of a pandemic, and a $2.1 million increase in accounts receivable due to increase in net sales, partially offset by a $5.5 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.
Net Cash Used in Investing Activities
Net cash used in investing activities of $33.1 million for the year ended December 31, 2021 was primarily due to payments for purchases of short-term investments of $30.0 million and the purchases of property and equipment of $3.1 million, of which $1.7 million was invested in a warehouse facility and the remaining capital expenditures were for software applications and computer equipment used in ongoing operations.
Net cash used in investing activities of $0.8 million for the year ended December 31, 2020 was due to purchases of software applications and computer equipment used in ongoing operations.
Net Cash Provided by Financing Activities
Net cash provided by financing activities of $79.1 million for the year ended December 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 corresponding shares of Class B common stock from certain Zevia 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 into Zevia PBC with Zevia PBC surviving. The IPO related amounts were partially offset by distribution to unitholders for tax payments of $2.7 million.
Net cash provided by financing activities of $15.8 million in the year ended December 31, 2020 was due to borrowings net of repayments under the Company’s Credit Facility and the Paycheck Protection Program.
38
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 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 Tax Receivable Agreement 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 analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with 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 comparative measures. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net loss or income and other results stated in accordance with 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:
For the Year Ended December 31,
Net loss and comprehensive loss $ (87,667 ) $ (6,071 )
Other (income) expense, net* 207 593
Provision (benefit) for income taxes 34 —
Depreciation and amortization 997 932
Equity-based compensation expense 77,724 7,870
* Includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets.
Commitments
Effective March 2019, we entered into an amendment to our lease for our corporate offices at 15821 Ventura Boulevard, Suite 145, Los Angeles, California, 91436 for a term of three years.
The following table summarizes our significant contractual obligations as of December 31, 2021:
Payments Due by Period
Total Less Than One Year 1-3 Years 3-5 Years More Than Five Years
(in thousands)
Rent obligations (1) $ 219 $ 219 $ — $ — $ —
Equipment lease obligations (2) 22 21 1 — —
(1) Real estate lease payments
(2) Vehicle leases 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 December 31, 2021.
Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space, and vehicles. For a further discussion on our debt and operating lease commitments as of December 31, 2021, see the sections above as well as Note 7, Debt, and Note 8, Leases, included in the Consolidated Financial Statements of this Annual Report.
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
39
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, included in the Notes to Consolidated Financial Statements 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 $0.4 million for the year ended December 31, 2021
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 at December 31, 2021 or December 31, 2020.
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.
Income Taxes
The Company is the managing member of Zevia LLC and, as a result, consolidates the financial results of Zevia LLC in the consolidated financial statements. Zevia LLC is a pass-through entity for U.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 to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Zevia 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 from Zevia LLC based on the Company's 53.4% economic interest in Zevia LLC.
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 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 of December 31, 2021, we have a full valuation allowance against deferred tax assets totaling $58.9 million.
40
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 of December 31, 2021. 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 of Zevia, 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 of Zevia, LLC. The Company intends to treat any exchanges of Class B units as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that Zevia, LLC 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 Tax Receivable Agreement ("TRA") with continuing members of Zevia 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 from Zevia PBC's acquisition of continuing member's Zevia 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 in Zevia, 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 and the amount of existing tax basis and the anticipated tax basis adjustments. 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 of Zevia LLC units for shares of Class A common stock, and our possible utilization of certain tax attributes. As a result, payments that Zevia PBC may make under the tax receivable agreements 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 of December 31, 2021, 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 $45.6 million at December 31, 2021. 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 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 we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our 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 we issue more than $1.0 billion of non-convertible debt securities over a three- year period.
41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to certain market risks in the ordinary course of our business. These risks primarily consist of raw material prices, foreign exchange, and inflation as follows:
Raw Material Risk
Our profitability is dependent on, among other things, our ability to anticipate and react to raw material costs. Currently, a key ingredient in our products is stevia extract. We recently signed a new two-year agreement with a large multi-national ingredient company for the supply of stevia on similar terms as our prior agreement with the same ingredient company, including fixed pricing for the duration of the term. The prices of stevia and other ingredients we use are subject to many factors beyond our control, such as marketing conditions, climate change, supply chain challenges, and adverse weather conditions.
The price for aluminum cans also fluctuates depending on market conditions. There is currently an ongoing North American shortage of aluminum cans. We have contracts with certain suppliers of aluminum cans, but such contracts do not cover all of our expected future needs for aluminum cans. We might not be able to source enough aluminum cans in the future to meet our consumers’ demand. Our ability to continue to procure enough aluminum cans at reasonable prices will depend on future developments that are highly uncertain. For the year ended December 31, 2021, a hypothetical 10% increase or 10% decrease in the weighted average cost of aluminum, would have resulted in an increase of approximately $1.0 million or a decrease of $1.0 million, respectively, to cost of goods sold.
We are working to diversify our sources of supply and intend to enter into additional long-term contracts to better ensure stability of prices of our raw materials.
Foreign Exchange Risk
The majority of our sales and costs are denominated in United States dollars and are not subject to foreign exchange risk. As we source some ingredients and packaging materials from international sources, our results of operations could be impacted by changes in exchange rates. We sell and distribute our products to Canadian customers, who are invoiced and remit payment in Canadian dollars. All Canadian dollar transactions are translated into United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for sales and expenses. To the extent we increase sourcing from outside the United States or increase net sales outside of the United States that are denominated in currencies other than the U.S. dollar, the impact of changes in exchange rates on our results of operations would increase. Foreign exchange gains and losses were not material for the years ended December 31, 2021 and 2020.
Inflation Risk
We believe that inflation has had a material effect on our business, results of operations, or financial condition. If our costs were to become subject to further and prolonged significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, results of operations and financial condition.
Commodity Risk
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of aluminum, diesel fuel, cartons and corrugate.
42
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 44
Consolidated Balance Sheets 45
Consolidated Statements of Operations and Comprehensive Loss 46
Consolidated Statements of Cash Flows 48
Notes to Consolidated Financial Statements 49
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Zevia PBC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Zevia PBC and its subsidiary (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred units and changes in equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes collectively referred to as the "financial statements". In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with the accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 11, 2022
We have served as the Company’s auditor since 2020.
44
ZEVIA PBC
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Short-term investments 30,000 —
Prepaid expenses and other current assets 3,421 1,492
Property and equipment, net 3,664 991
Right-of-use assets under operating leases, net 211 773
Other non-current assets 301 81
Current liabilities:
Accrued expenses and other current liabilities 6,705 4,479
Operating lease liabilities 236 623
Operating lease liabilities, net of current portion 1 238
Commitments and contingencies (Note 9)
Redeemable convertible preferred units:
Permanent Equity (Deficit)
Additional paid-in capital 174,404 —
Accumulated deficit (45,986 ) —
Noncontrolling interests (23,923 ) —
The accompanying notes are an integral part of these consolidated financial statements.
45
ZEVIA PBC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended December 31,
(in thousands, except share and per share amounts) 2021 2020
Operating expenses:
Depreciation and amortization 997 932
Other expense, net (207 ) (593 )
Provision for income taxes (34 ) —
Net loss and comprehensive loss (87,667 ) (6,071 )
Loss attributable to noncontrolling interest 39,768 —
Net loss attributable to Zevia PBC $ (45,986 ) $ —
Net loss per share attributable to common stockholders (1)
Basic $ (1.33 ) N/A
Diluted $ (1.33 ) N/A
Weighted average common shares outstanding (1)
(1) Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from July 22,2021 through December 31, 2021, the period following the reorganization transactions and initial public offering(see Note 16).
The accompanying notes are an integral part of these consolidated financial statements.
46
ZEVIA PBC
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED UNITS AND CHANGES IN EQUITY (DEFICIT)
Series E Preferred units issuance cost 11,851,993 190,435 — — — — — — — — —
Exercise of common units — — 30 — — — — — — — 30
Equity-based compensation — — 7,870 — — — — — — — 7,870
Secondary sale of preferred units — — 311 — — — — — — — 311
Net loss — — (6,071 ) — — — — — — — (6,071 )
Exercise of Common units prior to reorganization — — 10 — — — — — — — 10
Equity-based compensation prior to reorganization — — 73 — — — — — — — 73
Net loss prior to reorganization — — (1,913 ) — — — — — — — (1,913 )
Impact of Reorganization and IPO
Cancellation of options in connection with IPO — — (423 ) 32,560 — — — 425 — — 2
Cancellation of options — — — — — — — (4 ) — — (4 )
Offering costs — — — — — — — (8,367 ) — — (8,367 )
Exercise of stock options — — — 46,967 — — — (178 ) — — (178 )
Equity-based compensation — — — — — — — 77,651 — — 77,651
The accompanying notes are an integral part of these consolidated financial statements.
47
ZEVIA PBC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 997 932
(Gain) loss on sale of equipment (4 ) 2
Amortization of debt issuance cost 94 52
Changes in operating assets and liabilities:
Accounts receivable, net (2,062 ) (2,069 )
Prepaid expenses and other assets (2,481 ) (187 )
Accrued expenses and other current liabilities 1,960 3,155
Operating lease liabilities (624 ) (416 )
Net cash used in operating activities (17,806 ) (3,258 )
Investing activities:
Payments for purchases of short-term investments (30,000 ) —
Purchases of property and equipment (3,143 ) (805 )
Net cash used in investing activities (33,143 ) (805 )
Financing activities:
Repayment of revolving line of credit (1) (74,721 ) (113,056 )
Proceeds from Paycheck Protection Program Loan — 1,429
Repayment of Paycheck Protection Program Loan — (1,429 )
Repurchase of common and redeemable convertible preferred units — (175,000 )
Payment of debt issuance costs — (20 )
Distribution to unitholders for tax payments (2,669 ) —
Proceeds from exercise of common units 10 30
Proceeds from the cancellation of options in IPO 2 —
Payment for cancellation of options (4 ) —
Payment of offering costs (8,101 ) —
Repurchase of Zevia LLC units (17 ) —
Exercise of stock options (178 ) —
Net cash provided by financing activities 79,123 15,756
Net change from operating, investing, and financing activities 28,174 11,693
Cash and cash equivalents at beginning of year 14,936 3,243
Cash and cash equivalents at end of year $ 43,110 $ 14,936
Non-cash investing activities
Capital expenditures included in accounts payable $ 125 $ —
Non-cash financing activities
Unpaid IPO offering costs $ 266 $ —
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 148 $ 321
(1)
Zevia PBC’s revolving line of credit provides for daily drawdowns and repayments of amounts outstanding. As of December 31, 2021, no amounts were outstanding due to the termination of the line of credit in July 2021. Consistent with the provisions of ASC Topic 230, Statement of Cash Flows, Zevia PBC has presented daily draw-downs and repayments under its revolving line of credit with its lender on a gross basis in the consolidated statements of cash flows for the years ended December 31, 2021, and 2020.
The accompanying notes are an integral part of these consolidated financial statements.
48
ZEVIA PBC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Organization and operations
Zevia PBC (the "Company") develops, markets, sells, and distributes a wide variety of zero calorie, non-GMO verified, carbonated and non-carbonated soft drinks and other beverages under the Zevia® brand name. Zevia PBC’s products are sold principally in the United States and Canada through various retailer channels (both brick-and-mortar and e-commerce), including grocery stores, natural products stores, warehouse clubs, and specialty outlets. Zevia PBC’s products are manufactured and generally maintained at third-party beverage production and warehousing facilities located in both the United States and Canada.
Initial Public Offering and Reorganization Transactions
On July 21, 2021, the registration statement on Form S-1 of Zevia PBC was declared effective by the Securities and Exchange Commission ("SEC") related to the initial public offering ("IPO") of its Class A common stock. On July 22, 2021, the Company’s Class A common stock began trading on the New York Stock Exchange under the ticker symbol “ZVIA”. The Company completed the IPO of 10,700,000 shares of its Class A common stock at an offering price of $14.00 per share on July 26, 2021. The Company received aggregate net proceeds of approximately $139.7 million after deducting underwriting discounts and commissions of $10.1 million. The underwriters did not exercise their option to purchase 1,605,000 additional shares of Class A common stock and that option expired on August 20, 2021.
In connection with the IPO, the Company completed the following transactions (“Reorganization Transactions”):
•
Zevia LLC recapitalized its common and preferred membership interests into a single class of common units and each common unit outstanding after giving effect thereto was reclassified as two Class B units on a one-to-two basis;
•
The Company amended and restated its certificate of incorporation in its entirety to, among other things: (i) authorize 800,000,000 shares of common stock, 550,000,000 shares of which are designated as “Class A Common Stock” and 250,000,000 shares of which are designated as “Class B Common Stock;” and (ii) authorize 10,000,000 shares of undesignated preferred stock that may be issued from time to time by the Company's Board of Directors in one or more series and amended and restated its bylaws in their entirety to, among other things: (a) establish procedures relating to the presentation of stockholder proposals at stockholder meetings; (b) establish procedures relating to the nomination of directors; and (c) conform to the provisions of the amended and restated certificate;
•
The limited liability company agreement of Zevia LLC was amended and restated (the “Amended and Restated Zevia LLC Agreement”) to, among other things, provide for Class A units and Class B units and appoint the Company as the sole managing member of Zevia LLC;
•
The Company assumed all outstanding equity awards of Zevia LLC on a one-to-two basis;
•
The Amended and Restated Zevia LLC Agreement classified the interests acquired by the Company as Class A units, reclassified the interests held by the continuing members of Zevia LLC as Class B units and permits the continuing members of Zevia LLC to exchange Class B units for shares of Class A common stock on a one-for-one basis or, at the election of the Company, for cash. For each membership unit of Zevia LLC that is reclassified as a Class B unit, the Company issued one corresponding share of its Class B common stock to the continuing members;
•
The Company contributed approximately $90.1 million of the net proceeds of the IPO to Zevia LLC to acquire 6,900,000 newly issued Class A units of Zevia LLC at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. The Company retained $81.7 million of the total IPO proceeds after $8.4 million of offering costs. The retained proceeds will ultimately be used by the Company for working capital and other general corporate purposes;
•
The Company used approximately $25.5 million of the net proceeds of the IPO to purchase 1,956,142 Class B units and corresponding shares of Class B common stock from certain of Zevia LLC’s unitholders, including certain members of senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. Such units were immediately converted into an equivalent number of Class A units;
•
The Company used approximately $0.4 million of the net proceeds of the IPO to cancel and cash-out of 32,560 outstanding options held by certain option holders, including certain members of senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock in the IPO. The Company received an equivalent number of Class A units from Zevia LLC in exchange for the cancellation of such options;
•
Zevia PBC formed a new, first-tier merger subsidiary with respect to each blocker company of certain pre-IPO institutional investors (“Direct Zevia Stockholders”), and contemporaneously with the IPO, each respective merger subsidiary merged with and into the respective blocker company, with the blocker company surviving. Immediately thereafter, each blocker company merged with and into Zevia PBC, with Zevia PBC surviving. As a result of the blocker mergers, the 100% owners of the blocker companies acquired an aggregate of 23,716,450 shares of newly issued Class A common stock and received approximately $23.7 million in cash consideration in exchange for 1,811,298 previously-held Class B units, which were immediately converted into an equivalent number of Class A units in the hands of Zevia PBC, and the blocker companies ceased to own any Zevia LLC units; and
•
The Company entered into an Amended and Restated Registration Rights Agreement with the Class B stockholders to provide for certain rights and restrictions after the IPO.
Immediately following the closing of the IPO on July 26, 2021, Zevia LLC became the predecessor of the Company for financial reporting purposes. The Company is a holding company, and its sole material asset is its controlling equity interest in Zevia LLC. As the sole managing member of Zevia
49
LLC, the Company operates and controls all of the business and affairs of Zevia LLC. This reorganization is accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements of the Company will recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical financial statements of Zevia LLC. The Company has consolidated Zevia LLC in its financial statements and record a noncontrolling interest related to the Class B units held by the Class B stockholders on its consolidated balance sheet and statement of operations. As of December 31, 2021, the Company holds an economic interest of 53.4% in Zevia LLC and the remaining 46.6% represents the non-controlling interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary, Zevia LLC, that it controls due to ownership of a majority voting interest. All intercompany transactions and balances have been eliminated in consolidation.
The Company owns a majority economic interest in, and operates and controls all of the businesses and affairs of, Zevia LLC. Accordingly, the Company has prepared these consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) Topic 810, Consolidation.
The Reorganization Transactions were accounted for consistent with a combination of entities under common control. As a result, the financial reports filed with the SEC by the Company subsequent to the Reorganization Transactions are prepared “as if” Zevia LLC is the accounting predecessor of the Company. The historical operations of Zevia LLC are deemed to be those of the Company. Thus, the consolidated financial statements included in this report reflect (i) the historical operating results and financial position of Zevia LLC prior to the Reorganization Transactions; (ii) the consolidated results of operations and financial position of the Company and Zevia LLC following the Reorganization Transactions; and (iii) the Company's equity structure for all periods presented. No step-up basis of intangible assets or goodwill was recorded.
Reclassifications
Certain amounts from prior periods have been reclassified in the consolidated balance sheet, consolidated statement of operations and comprehensive loss, and statement of cash flows to conform to the current period presentation. For the activity in the periods prior to the IPO and Reorganization Transactions, common stock, additional paid-in capital, and accumulated deficit information has been combined and presented as member’s deficit in the accompanying consolidated balance sheets and consolidated statements of changes in redeemable convertible preferred units and changes in equity (deficit).
Consolidated Balance Sheet:
The following table presents the reclassifications made to the Consolidated Balance Sheet:
Accrued expenses and other current liabilities 3,429 1,050 4,479
Other current liabilities 2,251 (2,251 ) —
Consolidated Statement of Operations and Comprehensive Loss:
The following table presents the reclassifications made to the Consolidated Statement of Operations and Comprehensive Loss:
Consolidated Statements of Cash Flows:
The following table presents the reclassifications made to the Consolidated Statement of Cash Flows:
Non-cash lease expense $ — $ 509 $ 509
Changes in operating assets and liabilities:
Right of use asset 509 (509 ) —
Prepaid expenses and other current assets (188 ) 1 (187 )
Other non-current assets 1 (1 ) —
Accrued expenses and other current liabilities 2,412 743 3,155
Other current liabilities 943 (943 ) —
Operating lease liabilities, net of current portion (612 ) 612 —
50
Use of estimates
The preparation of the financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amount of net sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by the Company relate to net sales and associated cost recognition; the useful lives assigned to and the recoverability of property and equipment; reserves recorded for inventory obsolescence; the incremental borrowing rate for lease liabilities; allowance for doubtful accounts; recoverability of intangible assets, realization of deferred tax assets, and the determination of the fair value of equity instruments, including redeemable convertible preferred and common units, restricted unit awards, and equity-based compensation awards. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of its assets and liabilities.
As of December 31, 2021, the Company’s operations have not been adversely impacted by the COVID-19 pandemic to a significant extent. The global impact of COVID-19 continues to rapidly evolve, and the Company will continue to monitor the situation and the effects on its business and operations, particularly if the COVID-19 pandemic continues and persists for an extended period of time.
Cash, cash equivalents and investments
Cash and cash equivalents include cash and investments in short-term, highly liquid securities, with original maturities of three months or less. Investments with original maturities at the date of acquisition of more than three months are classified as short-term investments or long-term investments based on the remaining contractual maturity of the security at the reporting date. As of December 31, 2021, the Company held $27.0 million of time deposits with contractual maturities of less than three months, which are classified as cash and cash equivalents on the consolidated balance sheets, and $30.0 million of time deposits with contractual maturities of greater than three months but less than one year which are classified as short-term investments on the consolidated balance sheets. As of December 31, 2020, the Company did not hold any investments.
The Company maintains cash deposits with high credit quality financial institutions. The deposits with these financial institutions may exceed the federally insured limits; however, these deposits typically are redeemable upon demand. The Company has not experienced any loss because of these deposits and does not expect to incur any losses in the future.
Fair value of financial instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings or other comprehensive income when they occur. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the assets or liabilities, such as inherent risk, transfer restrictions, and credit risk. The three-level hierarchy for disclosure of fair value measurements is as follows:
•
Level 1. Quoted prices in active markets for identical assets or liabilities.
•
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
•
Level 3. Unobservable inputs for the asset or liability.
The Company’s material financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying values of the Company’s cash, short-term investments, accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their fair values at December 31, 2021 and 2020 due to the short period of time to maturity or repayment. As of December 31, 2021 and 2020, all cash and cash equivalents and short-term investments were considered Level 1.
As of December 31, 2021 and 2020, the Company did not have any assets or liabilities measured on a recurring basis without observable market values that would require a high level of judgment to determine fair value (Level 3).
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. For the years ended December 31, 2021 and 2020, there were no transfers between levels of the fair value hierarchy.
Other comprehensive loss
The nature of the Company’s operations does not give rise to consequential other comprehensive loss.
Accounts receivable and allowance for doubtful accounts
Trade receivables are recorded at net realizable value, which includes an appropriate allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition, credit rating, and trade references. The Company monitors exposure to credit losses and maintains an allowance for anticipated losses based on each customer’s credit condition and payment behavior. The Company’s accounts receivable balance is net of an allowance for doubtful accounts. The allowance for doubtful accounts was not material at December 31, 2021 or December 31, 2020. Changes in the Allowance for Doubtful Accounts were as follows:
Year Ended December 31,
Balance, beginning of the year $ — $ (25 )
Provision for bad debt (10 ) —
Deductions and write-offs — 25
Balance, end of the year $ (10 ) $ —
51
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 inventory reserve was not material at December 31, 2021 or December 31, 2020.
Property and equipment, net
Property and equipment are recorded at cost. Additions, replacements, and leasehold improvements are capitalized, while maintenance and repairs that do not extend the useful life of an asset are expensed as incurred. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the improvement. When assets are retired or otherwise disposed, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized.
Depreciation and amortization are computed using the following estimated useful lives of the assets:
Asset Years
Leasehold improvements Shorter of lease term or estimated useful life
Computer equipment and software 3
Furniture and equipment 4-7
Vehicles 8
Quality control equipment 2-7
Buildings and improvements 7-30
Certain external and internal computer software costs acquired for internal use are capitalized. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized costs are included within property and equipment.
The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In order to assess recoverability, the Company compares the estimated undiscounted future pre-tax cash flows from the use of the group of assets, as defined, to the carrying amount of such assets. Measurement of an impairment loss is based on the excess of the carrying amount of the group of assets over the long-lived asset’s fair value. The Company did not recognize any impairment charges associated with long-lived assets during the years ended December 31, 2021 and 2020.
Leases
The Company leases office space and vehicles under operating leases. Right of use ("ROU") lease assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments. Both the ROU lease asset and liability are recognized as of the lease commencement date based on the present value of the lease payments over the lease term. The Company’s leases do not provide an implicit borrowing rate that can readily be determined. Therefore, the Company applies a discount rate based on the incremental borrowing rate, which is determined using the Company’s synthetic credit rating and other information available as of the lease commencement date. ROU lease assets also include any lease payments made before their contractual due dates and exclude any lease incentives.
The Company’s lease agreements may include options to extend the lease term or to terminate the lease early. The Company includes options to extend or terminate leases upon determination of the ROU lease asset and liability when it is reasonably certain the Company will exercise these options. Operating lease expense attributable to lease payments is recognized on a straight-line basis over the lease term and is included in general, and administrative expense on the consolidated statements of operations and comprehensive loss.
The Company has lease arrangements that include lease and non-lease components. The non-lease components in the arrangements are not significant when compared to the lease components. For all leases, the Company accounts for the lease and non-lease components as a single component.
The Company evaluates ROU assets for impairment consistent under the impairment of long-lived assets policy.
The Company had no material finance leases as of December 31, 2021 and 2020.
Intangible assets, net
Intangible assets subject to amortization consist of customer relationships, which were acquired and are amortized over their estimated useful life of 15 years. In accordance with Accounting Standard Codification ("ASC") Topic 350, Intangibles—Goodwill and Other, intangible assets with definite lives are treated as a long-lived asset and are evaluated for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. If impaired, the asset is written down to its estimated fair market value, which is generally measured by discounting future cash flows.
Non-amortizable intangible assets consist of trademarks which represent the Company’s exclusive ownership of the Zevia® brand used in connection with the manufacture, marketing, and distribution of its carbonated beverages. The Company also owns several other trademarks in both the United States and in foreign countries. Intangible assets not subject to amortization are evaluated for impairment annually, or sooner if management believes such assets may be impaired. An impairment loss is recognized if the asset’s carrying amount exceeds its estimated fair market value. For the years ended December 31, 2021 and 2020, no impairment losses were recorded.
52
Debt issuance cost
Costs incurred in connection with securing a revolving line of credit agreement are capitalized. These costs are amortized over the term of the credit agreement. Debt issuance costs are included in Other Non-Current Assets in the accompanying consolidated balance sheets. Net debt issuance costs totaled zero and $0.1 million as of December 31, 2021 and 2020, respectively.
Customer incentives and allowances
The Company offers its customers sales incentives that are designed to support the distribution of its products to consumers. 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. These amounts are deducted from gross sales and are included under Net sales in the accompanying consolidated statements of operations and comprehensive loss. The Company maintains an allowance representing the estimated cost of certain customer incentives incurred but not yet realized as of the end of each respective year, which is recorded as an offset against customer accounts receivable, and is included under Accounts receivable, net in the accompanying consolidated balance sheets. The customer incentives and allowances were $3.5 million and $1.6 million as of December 31, 2021 and 2020, respectively.
Revenue recognition
The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred either upon shipment or delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, net of accruals for customer incentives and allowances. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers.
Customer incentives and allowances are estimated based on agreed upon terms as well as historical trends and current economic and market conditions, while cash discounts are based on trade terms and require management judgment with respect to estimating customer participation and performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
The Company accounts for costs associated with shipping and handling activities that occur after the transfer of control as a fulfillment activity, instead of a separate performance obligation.
The Company excludes from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.
The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms.
Cost of goods sold
Cost of goods sold consists of all costs to acquire and manufacture the Company’s products including the cost of the various ingredients, packaging, in-bound freight, and third-party production fees—which are typically incurred at a flat rate per case produced—and all other costs incurred to bring the product to salable condition. The Company’s cost of goods sold is generally subject to price fluctuations in the marketplace for aluminum, logistics costs such as fuel, freight and warehousing for raw materials, bottling tolling fees, as well as shifting product mix. The Company has elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in the accompanying consolidated statements of operations and comprehensive loss. Such costs amounted to approximately $13.2 million and $8.6 million for the years ended December 31, 2021 and 2020, respectively.
Selling and marketing expenses
Selling and marketing expenses in the accompanying consolidated statements of operations and comprehensive loss include warehousing and distribution costs, shipping and handling costs, advertising and marketing costs, which generally are expensed as incurred. Warehousing and distribution costs include storage, transfer and out-bound freight and delivery charges. The Company expenses sales and marketing costs as incurred. Advertising and marketing expenses represent costs associated with the promotion of the Zevia® brand and products as outlined in ASC Topic 730-25, Other Expenses – Advertising Costs, such as those for digital and other forms of advertising. Advertising and marketing expenses amounted to approximately $12.6 million and $6.8 million for the years ended December 31, 2021 and 2020, respectively.
General and administrative expenses
General and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss include personnel-related expenses, including salaries, bonuses, and benefits, technology expenses, professional fees, facility costs, including insurance, utilities and rent relating to our headquarters, and overhead costs. These costs are expensed as incurred.
53
Equity-based compensation expense
The Company records equity-based compensation expense for employees and nonemployees under the provisions of ASC Topic 718, Compensation—Stock compensation (“ASC 718”), using a Black-Scholes-Merton option pricing model to calculate the fair value of stock options by date granted. The determination of the grant date fair value of stock options issued is affected by a number of variables, including the fair value of the Company’s common stock, the expected common stock price volatility over the expected life of the options, the expected term of the stock option, risk-free interest rates, and the expected dividend yield of the Company’s common stock. The Company derives its volatility from the average historical volatilities of several peer public companies over a period equivalent to the expected term of the awards. The Company estimates the expected term based on the simplified method prescribed by guidance provided by the Securities and Exchange Commission. This decision was based on the lack of relevant historical data due to the Company’s limited experience for the Company’s common stock. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant. Expected dividend yield is 0.0% as the Company has not paid and does not anticipate paying dividends on its common stock. The fair value of stock options is recognized as expense on a straight-line basis over the requisite service period, which is typically four years. Equity-based compensation cost for restricted stock awards is measured based on the fair market value of the Company’s common stock at the date of grant and is recognized as expense over the requisite service period, which is the vesting period on a straight-line basis. Forfeitures are recognized as incurred.
Foreign currency transactions
The functional currency of the Company is the U.S. Dollar. The Company sells and distributes its products to Canadian customers, who are invoiced and remit payment in Canadian dollars. All Canadian dollar transactions are translated into United States dollars using period-end rates of exchange for assets and liabilities, and average rates of exchange for the period for net sales and expenses. Foreign currency transaction (losses) gains for the years ended December 31, 2021 and 2020 amounted to approximately $(15,000) and $95,000, respectively, and are included under other income (expense), net in the accompanying consolidated statements of operations and comprehensive loss.
Income Taxes
The Company is the managing member of Zevia LLC and, as a result, consolidates the financial results of Zevia LLC in the consolidated financial statements. Zevia LLC is a pass-through entity for U.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 to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Zevia 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 from Zevia LLC based on the Company's 53.4% economic interest in Zevia LLC.
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 recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. If we determine that we would be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the DTA valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740, Income Taxes on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize both accrued interest and penalties, when appropriate, in provision for income taxes in the accompanying consolidated statements of operations and comprehensive loss.
Recent accounting pronouncements
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act ("JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements – Recently Adopted
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock, as well as amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related earnings per share guidance and requires the application of the if-converted method for calculating diluted earnings per share, with the treasury stock method no longer permissible. The ASU is applicable to the Company for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company early adopted the ASU as of January 1, 2021 and applied the accounting standard update in computing diluted earnings per share for its redeemable convertible preferred units. The adoption of ASU 2020-06 did not have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. This ASU is effective for private companies for annual reporting periods beginning after
54
December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The Company adopted the ASU as of January 1, 2021. The adoption of ASU 2018-15 did not have a significant impact on the Company’s financial statements.
Recently Issued Accounting Pronouncements – Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides for a new impairment model that requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for private companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2022. The Company currently does not expect this guidance to have a significant impact on the Company’s financial statements as it does not have a history of material credit losses.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. This ASU improves areas of GAAP and reduces cost and complexity while maintaining usefulness. The main provisions remove certain exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. In addition, the amendments simplify income tax accounting in the areas such as income based franchise taxes, eliminating the requirements to allocate consolidated current and deferred tax expense in certain instances and a requirement that an entity reflects the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This ASU is effective for private companies for annual reporting periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. The Company currently does not expect this guidance to have a significant impact on the Company’s financial statements.
In April 2021, the FASB issued ASU No. 2021-04, which included Topic 260, Earnings Per Share and Topic 718, Compensation - Stock Compensation. This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. This ASU is effective for all entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company currently does not expect this guidance to have a significant impact on the Company’s financial statements as the Company does not have freestanding equity-classified written call options.
Any other recently issued accounting pronouncements are neither relevant, nor expected to have a material impact on the Company’s financial statements.
3. REVENUES
Disaggregation of Revenue
The following table disaggregates the Company’s sales by channel:
Year Ended December 31,
Contract liabilities
The Company did not have any material unsatisfied performance obligations as of December 31, 2021 and December 31, 2020, respectively.
4. INVENTORIES
Inventories consist of the following as of:
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following as of:
Computer equipment and software 2,254 1,454
Furniture and equipment 521 473
Vehicles 38 —
Quality control equipment 532 340
Buildings and improvements 1,443 —
Assets not yet placed in service 456 —
Less accumulated depreciation (2,379 ) (1,744 )
Property and equipment, net $ 3,664 $ 991
55
During the year ended December 31, 2021, the Company purchased a warehouse facility in Evansville, Indiana for a total purchase price of $1.7 million. For the year ended December 31, 2021 and 2020, depreciation expense, including the amortization of leasehold improvements, amounted to approximately $0.8 million and $0.7 million, respectively. These amounts are included under depreciation and amortization in the accompanying consolidated statements of operations and comprehensive loss.
6. INTANGIBLE ASSETS, NET
The following table provides information pertaining to the Company’s intangible assets as of:
(in thousands) Useful lives December 31, 2021 December 31, 2020
Accumulated amortization (2,269 ) (2,068 )
For the years ended December 31, 2021 and 2020, total amortization expense amounted to $0.2 million and $0.2 million, respectively. No impairment losses have been recorded on any of the Company’s intangible assets for the years ended December 31, 2021 and 2020.
Amortization expense for intangible assets with definite lives is expected to be as follows:
(in thousands)
Expected amortization expense for intangible assets with definite lives $ 738
7. DEBT
Credit Facility
In 2019, Zevia LLC entered into a loan agreement providing for a $9.0 million revolving line of credit (the “Credit Facility”) with Stonegate Asset Company II, LLC (“Stonegate”), with a maturity date in April 2022. Borrowings under the revolving line were secured by accounts receivable and inventory. In June 2020, Zevia amended the Credit Facility and increased it to $12.0 million. As of December 31, 2020, the revolving line interest rate was 7.5% annual percentage rate and there was no outstanding balance. On June 1, 2021, Zevia extended the Credit Facility through April 2023 and there were no other modifications made to the terms and conditions. In July 2021 and subsequent to the IPO, Zevia terminated the Credit Facility. Early-termination fees were not material and were included in interest expense within other expenses, net in the accompanying consolidated statements of operations and comprehensive loss.
Paycheck Protection Program (“PPP”) Loan
As a result of COVID-19, the Company faced risks to raising necessary capital which could have significantly disrupted our business. To help mitigate those risks and support the Company’s ongoing operations, in April 2020, the Company received loan proceeds in the amount of $1.4 million under the PPP. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The loans and accrued interest are forgivable after 24 weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the forgiveness period. Any unforgiven portion of the PPP loan would be payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company did not apply for forgiveness of the loan and has paid back the full amount of the proceeds and interest as of December 31, 2020.
8. LEASES
The Company leases office space and vehicles. The leases have remaining lease terms of four to fifteen months. The Company’s recognized lease costs include:
Year Ended December 31,
Income Statement
(1)
Operating lease cost is recorded within general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.
Year Ended December 31,
Weighted-average remaining lease term (months) 4.6 16.3
Weighted-average discount rate 7.56 % 7.56 %
56
The Company’s variable lease costs and short-term lease costs were not material.
The Company is obligated under various non-cancellable lease agreements providing for office space and vehicles that expire at various dates through 2023. Maturities of lease payments under non-cancellable leases were as follows:
(in thousands) December 31, 2021
Total lease payments 241
Less Imputed Interest (4 )
Present value of lease liabilities $ 237
9. COMMITMENTS AND CONTINGENCIES
Purchase commitments
As of December 31, 2021 the Company does not have any material agreements with suppliers for the purchase of raw material with minimum purchase quantities.
Legal proceedings
The Company is involved from time to time in various claims, proceedings, and litigation. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable, and the amount of loss can be reasonably estimated. The Company has not identified any material legal matters where it believes an unfavorable material outcome is reasonably possible and/or for which an estimate of possible losses can be made. Management does not believe that the resolution of these matters would have a material impact on the consolidated financial statements.
10. EMPLOYEE BENEFIT PLAN
Employees of the Company may participate in the Zevia LLC 401(k) Plan (the “Plan”), a defined contribution plan which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute from 1% to 90% of their pre-tax earnings, up to the statutory limit. Effective January 1, 2020, the Company began offering matching contributions to the Plan of up to 4% of employee pre-tax earnings. For the years ended December 31, 2021 and 2020, the Company incurred contribution expense of $0.4 million and $0.2 million, respectively.
11. BALANCE SHEET COMPONENTS
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of:
December 31,
Accrued employee compensation benefits $ 3,032 $ 3,594
12. EQUITY-BASED COMPENSATION
In connection with the IPO, the Company assumed all outstanding equity awards of Zevia LLC on a one-to-two basis and assumed all equity incentive plans and related award agreements from Zevia LLC.
In July 2021, prior to the IPO, the Company adopted the Zevia PBC 2021 Equity Incentive Plan (the “2021 Plan”) under which the Company may grant options, stock appreciation rights, restricted stock units (RSUs), restricted stock awards, other equity-based awards and incentive bonuses to employees, officers, non-employee directors and other service providers of Zevia PBC and its affiliates.
In October and November 2021, Zevia amended outstanding RSU awards and outstanding stock options held by certain senior management employees, in each case, to provide for accelerated vesting upon the holder’s retirement on or after January 17, 2022. For this purpose, “retirement” generally includes a resignation after the holder has reached 50 years of age with at least 10 years of service to the Company, so long as the holder provides one year advance notice of such retirement unless waived by the Company.
As of December 31, 2021, the 2021 Plan provides for future grants and/or issuances of up to approximately 3.5 million shares of our common stock. Stock-based awards under our employee compensation plans are made with newly issued shares reserved for this purpose.
Stock Options
The Company uses a Black-Scholes valuation model to measure stock option expense as of each respective grant date. Generally, stock option grants vest ratably over four years, have a ten-year term, and have an exercise price equal to the fair market value as of the grant date. The fair value of stock options is amortized to expense over the vesting period.
In July 2021 immediately following the effectiveness of the Company’s registration statement on the Form S-1, the Company’s Board of Directors approved the issuance of 186,000 stock options under the 2021 Plan to certain employees and non-employee directors. The fair value of stock option
57
awards granted during the year ended December 31, 2021 was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
Stock price $ 14
Exercise Price $ 14
Expected term (years)(1) 6.06
Expected volatility (2) 47.5 %
Risk-Free interest rate (3) 0.9 %
Dividend yield (4) 0.0 %
(1) Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.
(2) Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term.
(3) The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.
(4) We have assumed a dividend yield of zero as we have no plans to declare dividends in the foreseeable future.
A summary of stock option activity for the year ended December 31, 2021: