Item 2. 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 unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report. 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 II, Item 1A. “Risk Factors” and other sections of this Quarterly Report and our consolidated financial statements and notes thereto included in our Annual Report. The financial data discussed below reflects the historical results of operations and financial position of the Company. References in this Quarterly Report 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 develops, markets, sells, and distributes great tasting, zero sugar beverages made with simple, plant-based ingredients. We are a Delaware public benefit corporation and have been designated as a “Certified B Corporation,” and are focused on addressing the global health challenges resulting from excess sugar consumption by offering a broad portfolio of zero sugar, zero calorie, naturally sweetened beverages. All Zevia® beverages are Non-GMO Project verified, gluten-free, Kosher, vegan and zero sodium and include a variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, and Kidz drinks. Our products are distributed and sold principally 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 and in grocery and natural product stores and specialty outlets. We believe that consumers increasingly select beverage products based on taste, 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.
Key Events During the First Quarter of 2023
Recently, we have implemented certain cost reduction initiatives to help transform our operations, including our network footprint in the U.S. and Canada, to reduce costs in our supply chain. Currently, we use an asset-light business model and owning and maintaining a warehouse is not part of this model. We believe we can achieve our enterprise objectives by leveraging independent third-party manufacturing, warehouse and distribution partners who already provide these services to a broad range of businesses such as ours.
As of March 31, 2023, the Company determined that its warehouse located in Evansville, Indiana, met the criteria to be classified as held-for-sale. As a result, the Company was required to record the warehouses related assets at the lower of carrying value or fair value less any costs to sell. As the fair value less any costs to sell exceeded the carrying value, the related assets were recorded at their carrying value and reclassified from property and equipment, net, to assets held-for-sale on the unaudited condensed consolidated balance sheets as of March 31, 2023, and any resulting gain will be recognized upon closing of any proposed transaction. The Company ceased recording depreciation on property, plant and equipment as of the date the assets triggered held-for-sale accounting. The assets and liabilities held-for-sale are being marketed for sale and it is the Company’s intention to complete the sales of these assets within the next twelve months.
Factors Affecting Our Performance
Macroeconomic Environment
A number of external factors, including the global economy, current and future global health emergencies, inflationary pressures, volatility in the financial markets, financial institution instability, the hostilities in Eastern Europe, and political tensions have impacted and may continue to impact transportation, labor, and commodity costs. During the three months ended March 31, 2023, we continued to experience higher operating costs, including logistics, manufacturing and labor costs, which we expect to continue throughout 2023. These pressures have and are expected to continue to 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 three months ended March 31, 2023 and 2022, 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, and Kidz drinks, 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.
18
The following factors and trends in our business have driven net sales growth over the past two years 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 brand 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
•continuous innovation efforts, enhancement of existing products, and introduction of additional flavors within existing categories, as well as entering into new categories.
We expect both new distribution and increased organic sales from existing outlets and pricing strategies to contribute to our growth going forward, however sales levels in any given period may be impacted by seasonality and customers efforts to manage inventory.
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, raw materials, 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 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, 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.
We elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in our unaudited condensed 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. During the third quarter of 2022, the Company reclassified repackaging and handling costs from cost of goods sold to selling and marketing expenses as a result of an increasing trend in the occurrence of such fulfillment costs in the business. The Company believes this classification change better portrays the financial impacts of the fulfillment activities conducted by the Company. As a result, we reclassified repackaging and handling costs from cost of goods sold to selling and marketing expenses for the three months ended March 31, 2022 to conform to the current presentation - refer to Note 2 - Summary of Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for amounts reclassified.
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.
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, repacking and handling fees 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 programs/spend.
General and Administrative Expenses
General and 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 and other functions. Our general and administrative expenses are expected to grow in absolute dollars but decline as a percentage of net sales over time.
19
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 valuation 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. Throughout the remainder of 2023, we expect our equity-based compensation expense to continue to decrease compared to the year ended December 31, 2022, as a result of the expiration of the lockup period in January 2022, which coincided with the end of the vesting period for the majority of the awards granted pre-IPO, and the acceleration of expense in 2022 in connection with the retirement of certain employees.
Depreciation and Amortization
Depreciation is primarily related to building and related improvements, computer equipment, quality control and marketing equipment, and leasehold improvements. Intangible assets subject to amortization consist of customer relationships and software applications. 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 income, net
Other income, net consists primarily of interest income (expense), and foreign currency (loss) gains.
Results of Operations
The following table sets forth selected items in our unaudited condensed consolidated statements of operations and comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
(in thousands, except per share amounts) |
|
|
|
|
Net sales |
|
$ |
43,300 |
|
|
$ |
38,034 |
|
|
Cost of goods sold |
|
|
23,195 |
|
|
|
22,155 |
|
|
Gross profit |
|
|
20,105 |
|
|
|
15,879 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
Selling and marketing |
|
|
11,912 |
|
|
|
14,053 |
|
|
General and administrative |
|
|
8,645 |
|
|
|
10,129 |
|
|
Equity-based compensation |
|
|
2,380 |
|
|
|
8,901 |
|
|
Depreciation and amortization |
|
|
419 |
|
|
|
351 |
|
|
Total operating expenses |
|
|
23,356 |
|
|
|
33,434 |
|
|
Loss from operations |
|
|
(3,251 |
) |
|
|
(17,555 |
) |
|
Other income, net |
|
|
340 |
|
|
|
82 |
|
|
Loss before income taxes |
|
|
(2,911 |
) |
|
|
(17,473 |
) |
|
Provision for income taxes |
|
|
1 |
|
|
|
12 |
|
|
Net loss and comprehensive loss |
|
|
(2,912 |
) |
|
|
(17,485 |
) |
|
Loss attributable to noncontrolling interest |
|
|
821 |
|
|
|
6,587 |
|
|
Net loss attributable to Zevia PBC |
|
$ |
(2,091 |
) |
|
$ |
(10,898 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.03 |
) |
|
$ |
(0.28 |
) |
|
Diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.28 |
) |
|
20
The following table presents selected items in our unaudited condensed 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net sales |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
|
54 |
% |
|
|
58 |
% |
Gross profit |
|
|
46 |
% |
|
|
42 |
% |
Operating expenses: |
|
|
|
|
|
|
Selling and marketing |
|
|
28 |
% |
|
|
37 |
% |
General and administrative |
|
|
20 |
% |
|
|
27 |
% |
Equity-based compensation |
|
|
5 |
% |
|
|
23 |
% |
Depreciation and amortization |
|
|
1 |
% |
|
|
1 |
% |
Total operating expenses |
|
|
54 |
% |
|
|
88 |
% |
Loss from operations |
|
|
(8 |
)% |
|
|
(46 |
)% |
Other income, net |
|
|
1 |
% |
|
|
0 |
% |
Loss before income taxes |
|
|
(7 |
)% |
|
|
(46 |
)% |
Provision for income taxes |
|
|
0 |
% |
|
|
0 |
% |
Net loss and comprehensive loss |
|
|
(7 |
)% |
|
|
(46 |
)% |
Loss attributable to noncontrolling interest |
|
|
2 |
% |
|
|
17 |
% |
Net loss attributable to Zevia PBC |
|
|
(5 |
)% |
|
|
(29 |
)% |
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
Net sales |
|
$ |
43,300 |
|
|
$ |
38,034 |
|
|
$ |
5,266 |
|
|
|
13.8 |
% |
Net sales were $43.3 million for the three months ended March 31, 2023 as compared to $38.0 million for the three months ended March 31, 2022. Equivalized cases sold were 3.3 million for the three months ended March 31, 2023 as compared to 3.4 million for the three months ended March 31, 2022. Net sales growth was primarily driven by pricing increases of $5.0 million, partially offset by a decrease in the number of equivalized cases sold. We define an equivalized case as a 288 fluid ounce case.
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
Cost of goods sold |
|
$ |
23,195 |
|
|
$ |
22,155 |
|
|
$ |
1,040 |
|
|
|
4.7 |
% |
Cost of goods sold was $23.2 million for the three months ended March 31, 2023 as compared to $22.2 million for the three months ended March 31, 2022. The increase of $1.0 million or 4.7%, was primarily due to higher manufacturing costs as a result of inflationary pressures and product mix resulting in $1.6 million in higher cost of goods sold, partially offset by a 2.7% decrease in the shipment of equivalized cases resulting in $0.6 million lower costs of goods sold.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
Gross profit |
|
$ |
20,105 |
|
|
$ |
15,879 |
|
|
$ |
4,226 |
|
|
|
26.6 |
% |
Gross margin |
|
|
46.4 |
% |
|
|
41.7 |
% |
|
|
|
|
|
|
Gross profit was $20.1 million for the three months ended March 31, 2023 as compared to $15.9 million for the three months ended March 31, 2022. The increase in gross profit of $4.2 million, or 26.6%, was primarily driven by higher net sales, partially offset by higher cost of goods sold.
Gross margin for the three months ended March 31, 2023 improved to 46.4% from 41.7% in the prior-year period. The improvement was primarily due to pricing increases taken in 2022 partially offset by slightly higher manufacturing costs as a result of inflationary pressures.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
Selling and marketing expenses |
|
$ |
11,912 |
|
|
$ |
14,053 |
|
|
$ |
(2,141 |
) |
|
|
(15.2 |
)% |
Selling and marketing expenses were $11.9 million for the three months ended March 31, 2023 as compared to $14.1 million for the three months ended March 31, 2022. The decrease of $2.1 million, or 15.2%, was largely due to lower freight and warehousing costs of $1.3 million driven by pricing, efficiencies in supply chain, and decrease in the shipment of equivalized cases, and a reduction of non-working marketing costs of $0.9 million.
21
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
|
General and administrative expenses |
|
$ |
8,645 |
|
|
$ |
10,129 |
|
|
$ |
(1,484 |
) |
|
|
(14.7 |
)% |
General and administrative expenses were $8.6 million for the three months ended March 31, 2023 as compared to $10.1 million for the three months ended March 31, 2022. The decrease of $1.5 million, or 14.7%, was primarily driven by a $1.2 million decrease in public company costs due to expense optimization initiatives, and a $0.2 million decrease in headcount and personnel costs.
Equity-Based Compensation Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
(in thousands) |
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
Percentage |
Equity-based compensation |
|
$ |
2,380 |
|
|
$ |
8,901 |
|
|
$ |
(6,521 |
) |
|
N/M |
Equity-based compensation expense was $2.4 million for the three months ended March 31, 2023 related to outstanding equity-based awards being recognized over the remaining service periods of the awards. The decrease of $6.5 million was primarily driven by RSU and restricted phantom stock awards that vested over six months following the IPO in the prior year.
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.
Liquidity and Capital Resources
Liquidity and Capital Resources
As of March 31, 2023, we had $56.0 million in cash and cash equivalents. We believe that our cash and cash equivalents as of March 31, 2023, together with our operating activities and available borrowings under the Secured Revolving Line of Credit, will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments beyond the next 12 months.
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from sales of our products, and borrowing capacity currently available under our Secured Revolving Line of Credit. Our primary cash needs are for operating expenses, working capital, and capital expenditures to support the growth in our business.
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. In future years, we may experience an increase in operating and capital expenditures from time to time, as needed, as we expand business activities. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may seek alternative financing through additional equity or debt financing transactions. Additional funds may not be available on terms favorable to us or at all. Also, we will continue to assess our liquidity needs in light of current and future global health emergencies, inflationary pressures, volatility in the financial markets, financial institution instability, the hostilities in Eastern Europe, and political tensions between the U.S. and China that may continue to disrupt and impact the global and national economies and global financial markets. If any disruption continues into the future, we may not be able to access the financial markets and 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.
The Company is a holding company, and is the sole managing member of Zevia LLC. The Company operates and controls all of the business and affairs of Zevia LLC. Accordingly, the Company is dependent on distributions from Zevia LLC to pay its taxes, its obligations under the TRA 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 Transactions in July 2021, the Direct Zevia Stockholders and certain continuing members of Zevia LLC received the right to receive future payments pursuant to the TRA. The amount payable under the TRA 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 TRA 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 TRA, 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 $66.4 million through 2037. 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 $56.4 million through 2037.
The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and TRA payments by us will be calculated using prevailing tax rates applicable to us over the life of the TRA and will be dependent on us generating sufficient future taxable income to realize the benefit.
We cannot reasonably estimate future annual payments under the TRA 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 TRA payment requirement.
22
However, a significant portion of any potential future payments under the TRA 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 TRA 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 TRA for the factors discussed above, we anticipate funding payments from the TRA from cash flows generated from operations.
Credit Facility
ABL Credit Facility
On February 22, 2022, we 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 “Loan and Security Agreement”). Under the Secured Revolving Line of Credit, we may draw funds 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 with the option to increase the commitment under the Secured Revolving Line of Credit by up to $10 million, subject to certain conditions. The Secured Revolving Line of Credit matures on February 22, 2027. There have been no amounts drawn under the Secured Revolving Line of Credit. The Secured Revolving Line of Credit is secured by a first priority security interest in substantially all of the Company's assets.
Loans under the Secured Revolving Line of Credit bear interest based on either, at our 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.
Under the Secured Revolving Line of Credit, we are required 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, we 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. As of March 31, 2023, the Company was in compliance with its liquidity covenant.
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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Cash provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
$ |
9,397 |
|
|
$ |
(11,400 |
) |
Investing activities |
|
$ |
(862 |
) |
|
$ |
(565 |
) |
Financing activities |
|
$ |
23 |
|
|
$ |
(2,327 |
) |
Net Cash Provided by (Used in) Operating Activities
Our cash flows provided by (used in) operating activities are primarily influenced by working capital requirements.
Net cash provided by operating activities of $9.4 million for the three months ended March 31, 2023 was primarily driven by a net increase in cash related to changes in operating assets and liabilities of $9.3 million, partially offset by a net loss of $2.9 million and non-cash expenses of $3.0 million primarily related to equity-based compensation and depreciation and amortization expense. Changes in cash flows related to operating assets and liabilities were primarily due to an increase of $13.6 in accounts payable, accrued expenses and other current liabilities due to timing of purchases and increased production of inventory and a decrease in prepaid expenses and other assets of $0.5 million primarily due to amortization of prepaid insurance policies, partially offset by an increase in accounts receivable of $3.2 million due to increases in net sales, and an increase in inventories of $1.4 million due to timing of purchases.
Net cash used in operating activities of $11.4 million for the three months ended March 31, 2022 was primarily driven by net loss of $17.5 million and by a net decrease in cash related to changes in operating assets and liabilities of $3.3 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 were primarily due to an increase in accounts receivable of $4.4 million due to increases in net sales, an increase in inventories of $0.9 million in anticipation of future sales, offset by a $1.0 million decrease in prepaid expenses and other assets primarily due to amortization of prepaid insurance policies, and a $1.2 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 $0.9 million for the three months ended March 31, 2023 was primarily due to purchases of property, equipment, and software of $0.9 million for leasehold improvements and computer equipment and software used in ongoing operations.
Net cash used in investing activities of $0.6 million for the three months ended March 31, 2022 was due to purchases of property and equipment of $0.6 million for marketing fixtures, software applications and computer equipment used in ongoing operations.
23
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities of $23 thousand for the three months ended March 31, 2023 was primarily due to proceeds from the exercise of stock options.
Net cash used in financing activities of $2.3 million for the three months ended March 31, 2022 was primarily due to minimum tax withholdings paid on behalf of employees for net share settlements of $2.1 million and payment of debt issuance costs of $0.2 million in connection with the closing of the transaction of the Loan and Security Agreement.
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 operating 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 TRA 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 an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with US 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 a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income (loss) and other results stated in accordance with US 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Net loss and comprehensive loss |
|
$ |
(2,912 |
) |
|
$ |
(17,485 |
) |
Other income, net* |
|
|
(340 |
) |
|
|
(82 |
) |
Provision for income taxes |
|
|
1 |
|
|
|
12 |
|
Depreciation and amortization |
|
|
419 |
|
|
|
351 |
|
Equity-based compensation |
|
|
2,380 |
|
|
|
8,901 |
|
Adjusted EBITDA |
|
$ |
(452 |
) |
|
$ |
(8,303 |
) |
* Includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets.
Commitments
Effective March 2022, the Company entered into an amendment to the lease for our corporate headquarters offices to extend the term through December 31, 2023 and expand the total square footage from 17,923 square feet to 20,185 square feet which commenced on May 1, 2022. In January 2023, the Company further extended the lease term through December 31, 2026.
Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space. For a further discussion on our debt and operating lease commitments as of March 31, 2023, see the sections above including Note 8, Debt, and Note 9, Leases, in the unaudited condensed consolidated financial statements of this Quarterly Report.
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 March 31, 2023.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report 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 between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
There have been no material changes to our critical accounting policies from those discussed in our Annual Report.
24
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, included in the unaudited condensed consolidated financial statements of this Quarterly 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 any of the following events occur: (i) we have more than $1.235 billion in annual revenue, (ii) we have more than $700.0 million in market value of our Class A common 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 (iii) we issue more than $1.0 billion of non-convertible debt securities over a three-year period.