Zevia PBC - Quarter Report: 2023 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40630

Zevia PBC

(Exact Name of Registrant as Specified in its Charter)



Delaware		86-2862492
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

15821 Ventura Blvd., Suite 135

Encino, CA 91436

(855) 469-3842

(Address including zip code, and telephone number including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.001 per share	ZVIA	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of November 1, 2023, there were 50,407,874 shares and 20,932,461 shares outstanding of the registrant’s Class A and Class B common stock, respectively, $0.001 par value per share.

Table of Contents


		Page
PART I	Financial Information	5
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)	6
	Condensed Consolidated Statements of Changes in Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28

Part II.	Other Information	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
	Signatures	30

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the period ended September 30, 2023 (“Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) about us and our industry that involve substantial known and unknown risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including, without limitation, statements regarding our future results of operations or financial condition, business strategy, expectations about shifting market demand and consumer preferences, ability to effectively compete, commitment to creating ESG impact, human capital objectives, validity of our trademarks and other intellectual property, impact of government regulations, liquidity and capital requirements, and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “consider,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “on track,” “outlook,” “plan,” “potential,” “predict,” “project,” “pursue,” “seek,” “should,” “target,” “will” or “would” or the negative of these words or other similar words, terms or expressions.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 10, 2023 for the period ended December 31, 2022 (“Annual Report”), as well as our subsequent filings with the SEC. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report, including, but not limited to, the following:

•

failure to further develop and maintain our brand;

•

change in consumer preferences, perception and spending habits, particularly due to impacts of inflation, in the beverage industry and on zero sugar, naturally sweetened products, and failure to develop or enrich our product offerings or gain market acceptance of our products, including new offerings;

•

product safety and quality concerns, including those relating to our plant-based sweetening system, which could negatively affect our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing our operating costs and reducing demand for our product offerings;

•

inability to compete in our intensely competitive categories;

•

our history of losses and potential inability to achieve or maintain profitability;

•

changes in the retail landscape or the loss of key retail customers;

•

fluctuation in our net sales and earnings as a result of price concessions, promotional activities and chargebacks;

•

the impact of any future pandemics or other public health crises on our business, results of operations and financial condition;

•

the impact of adverse global macroeconomic conditions, including rising interest rates, instability in financial institutions, recession fears and inflationary pressures, the prospect of a shutdown of the U.S. federal government and geopolitical events or conflicts;

•

failure to attract, hire, train or retain qualified personnel, manage our future growth effectively or maintain our company culture;

•

failure to introduce new products or successfully improve existing products;

•

inaccurate or misleading marketing claims, whether or not substantiated;

•

climate change, adverse weather conditions, natural disasters and other natural conditions;

•

difficulties and challenges associated with expansion into new markets and channels;

•

inability to obtain raw materials on a timely basis or in sufficient quantities to produce our products or meet the demand for our products due to reliance on a limited number of third-party suppliers and trade tensions between the U.S. and China;

•

our ability to address disruptions and logistics challenges in our supply chain;

•

substantial disruption at our independent third-party manufacturing and distribution facilities;

•

concentration in our customer base and the loss of any large customer;

•

extensive governmental regulation and enforcement if we are not in compliance with applicable requirements;

•

dependence on distributions from Zevia LLC to pay any taxes and other expenses;

•

changes in laws and regulations relating to beverage containers and packaging;

•

impacts from our status, duty and liability exposure as a public benefit corporation;

•

loss of any registered trademark or other intellectual property;

•

inadequacy, failure, interruption or security breaches of our information technology systems and failure to comply with data privacy and information security laws and regulations; and

•

other risks, uncertainties and factors set forth under “Item 1A. Risk Factors.” of our Annual Report.

Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report, and while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by applicable law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

PART I – FINANCIAL INFORMATION

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ZEVIA PBC

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


(in thousands, except share and per share amounts)	September 30, 2023			December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	38,542		$	47,399
Accounts receivable, net		16,372			11,077
Inventories		49,398			27,576
Prepaid expenses and other current assets		2,909			2,607
Total current assets		107,221			88,659
Property and equipment, net		2,472			4,641
Right-of-use assets under operating leases, net		2,103			708
Intangible assets, net		3,929			4,385
Other non-current assets		630			539
Total assets	$	116,355		$	98,932
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	37,831		$	8,023
Accrued expenses and other current liabilities		7,174			8,408
Current portion of operating lease liabilities		576			715
Total current liabilities		45,581			17,146
Operating lease liabilities, net of current portion		1,521			—
Total liabilities		47,102			17,146
Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred Stock, $0.001 par value. 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022.		—			—
Class A common stock, $0.001 par value. 550,000,000 shares authorized, 50,347,141 and 47,774,046 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.		50			48
Class B common stock, $0.001 par value. 250,000,000 shares authorized, 20,932,461 and 21,798,600 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.		21			22
Additional paid-in capital		195,268			189,724
Accumulated deficit		(94,082	)		(79,843	)
Total Zevia PBC stockholders’ equity		101,257			109,951
Noncontrolling interests		(32,004	)		(28,165	)
Total equity		69,253			81,786
Total liabilities and equity	$	116,355		$	98,932

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZEVIA PBC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except share and per share amounts)	2023			2022			2023			2022
Net sales	$	43,089		$	44,239		$	128,630		$	127,815
Cost of goods sold		23,517			25,071			69,261			73,445
Gross profit		19,572			19,168			59,369			54,370
Operating expenses:
Selling and marketing		20,455			12,916			48,467			42,845
General and administrative		8,250			8,310			23,102			28,257
Equity-based compensation		1,876			6,837			6,614			23,781
Depreciation and amortization		411			326			1,234			1,005
Total operating expenses		30,992			28,389			79,417			95,888
Loss from operations		(11,420	)		(9,221	)		(20,048	)		(41,518	)
Other income, net		165			26			908			64
Loss before income taxes		(11,255	)		(9,195	)		(19,140	)		(41,454	)
(Benefit) provision for income taxes		(5	)		1			31			23
Net loss and comprehensive loss		(11,250	)		(9,196	)		(19,171	)		(41,477	)
Loss attributable to noncontrolling interest		3,033			1,712			4,932			12,005
Net loss attributable to Zevia PBC	$	(8,217	)	$	(7,484	)	$	(14,239	)	$	(29,472	)

Net loss per share attributable to common stockholders
Basic	$	(0.16	)	$	(0.16	)	$	(0.27	)	$	(0.72	)
Diluted	$	(0.16	)	$	(0.16	)	$	(0.27	)	$	(0.72	)

Weighted average common shares outstanding
Basic		50,754,470			45,938,507			50,074,992			42,155,463
Diluted		50,754,470			45,938,507			50,074,992			42,155,463

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZEVIA PBC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)


	Class A Common Stock				Class B Common Stock						Additional
(in thousands, except for share amounts)	Shares		Amount		Shares			Amount			Paid in Capital			Accumulated Deficit			Noncontrolling interest			Total Equity
Balance at January 1, 2023		47,774,046	$	48		21,798,600		$	22		$	189,724		$	(79,843	)	$	(28,165	)	$	81,786
Vesting and release of common stock under equity incentive plans, net		981,902		1		—			—			(1	)		—			—			—
Exchange of Class B common stock for Class A common stock		537,991		1		(537,991	)		(1	)		(724	)		—			724			—
Exercise of stock options		30,424		—		—			—			23			—			—			23
Equity-based compensation		—		—		—			—			2,380			—			—			2,380
Net loss		—		—		—			—			—			(2,091	)		(821	)		(2,912	)
Balance at March 31, 2023		49,324,363	$	50		21,260,609		$	21		$	191,402		$	(81,934	)	$	(28,262	)	$	81,277
Vesting and release of common stock under equity incentive plans, net		436,722		—		—			—			—			—			—			—
Exchange of Class B common stock for Class A common stock		5,635		—		(5,635	)		—			(8	)		—			8			—
Exercise of stock options		8,669		—		—			—			—			—			—			—
Equity-based compensation		—		—		—			—			2,358			—			—			2,358
Net loss		—		—		—			—			—			(3,931	)		(1,078	)		(5,009	)
Balance at June 30, 2023		49,775,389	$	50		21,254,974		$	21		$	193,752		$	(85,865	)	$	(29,332	)	$	78,626
Vesting and release of common stock under equity incentive plans, net		236,072		—		—			—			—			—			—			—
Exchange of Class B common stock for Class A common stock		261,990		—		(261,990	)		—			(362	)		—			362			—
Disposition of cost method investment in redemption of Class B common stock		—		—		(60,523	)		—			—			—			(1	)		(1	)
Exercise of stock options		73,690		—		—			—			2			—			—			2
Equity-based compensation		—		—		—			—			1,876			—			—			1,876
Net loss		—		—		—			—			—			(8,217	)		(3,033	)		(11,250	)
Balance at September 30, 2023		50,347,141	$	50		20,932,461		$	21		$	195,268		$	(94,082	)	$	(32,004	)	$	69,253


	Class A Common Stock				Class B Common Stock						Additional
(in thousands, except for share amounts)	Shares		Amount		Shares			Amount			Paid in Capital			Accumulated Deficit			Noncontrolling interest			Total Equity
Balance at January 1, 2022		34,463,417	$	34		30,113,152		$	30		$	174,404		$	(45,986	)	$	(23,923	)	$	104,559
Vesting and release of common stock under equity incentive plans, net		2,298,547		3		—			—			(2,133	)		—			—			(2,130	)
Exchange of Class B common stock for Class A common stock		1,970,802		2		(1,970,802	)		(2	)		(1,929	)		—			1,929			—
Exercise of stock options		56,659		—		—			—			16			—			—			16
Equity-based compensation		—		—		—			—			8,901			—			—			8,901
Net loss		—		—		—			—			—			(10,898	)		(6,587	)		(17,485	)
Balance at March 31, 2022		38,789,425	$	39		28,142,350		$	28		$	179,259		$	(56,884	)	$	(28,581	)	$	93,861
Vesting and release of common stock under equity incentive plans, net		917,664		1		—			—			(1	)		—			—			—
Exchange of Class B common stock for Class A common stock		3,580,288		3		(3,580,288	)		(3	)		(4,153	)		—			4,153			—
Exercise of stock options		119,381		—		—			—			91			—			—			91
Equity-based compensation		—		—		—			—			8,043			—			—			8,043
Net loss		—		—		—			—			—			(11,090	)		(3,706	)		(14,796	)
Balance at June 30, 2022		43,406,758	$	43		24,562,062		$	25		$	183,239		$	(67,974	)	$	(28,134	)	$	87,199
Vesting and release of common stock under equity incentive plans, net		822,113		1		—			—			(1	)		—			—			—
Exchange of Class B common stock for Class A common stock		551,846		1		(551,846	)		(1	)		(660	)		—			660			—
Exercise of stock options		13,519		—		—			—			11			—			—			11
Equity-based compensation		—		—		—			—			6,837			—			—			6,837
Net loss		—		—		—			—			—			(7,484	)		(1,712	)		(9,196	)
Balance at September 30, 2022		44,794,236	$	45		24,010,216		$	24		$	189,426		$	(75,458	)	$	(29,186	)	$	84,851

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZEVIA PBC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,
(in thousands)	2023			2022
Operating activities:
Net loss	$	(19,171	)	$	(41,477	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-cash lease expense		423			483
Depreciation and amortization		1,234			1,005
Loss on sale of property, equipment and software, net		101			3
Amortization of debt issuance cost		57			45
Equity-based compensation		6,614			23,781
Changes in operating assets and liabilities:
Accounts receivable, net		(5,295	)		(4,491	)
Inventories		(21,822	)		(5,782	)
Prepaid expenses and other assets		(451	)		97
Accounts payable		30,312			6,248
Accrued expenses and other current liabilities		(1,234	)		1,245
Operating lease liabilities		(436	)		(503	)
Net cash used in operating activities		(9,668	)		(19,346	)
Investing activities:
Proceeds from maturities of short-term investments		—			30,000
Purchases of property, equipment and software		(1,557	)		(2,182	)
Proceeds from sales of property, equipment and software		2,343			—
Net cash provided by investing activities		786			27,818
Financing activities:
Payment of debt issuance costs		—			(334	)
Minimum tax withholding paid on behalf of employees for net share settlement		—			(2,130	)
Proceeds from exercise of stock options		25			118
Net cash provided by (used in) financing activities		25			(2,346	)
Net change from operating, investing, and financing activities		(8,857	)		6,126
Cash and cash equivalents at beginning of period		47,399			43,110
Cash and cash equivalents at end of period	$	38,542		$	49,236

Non-cash investing and financing activities
Capital expenditures included in accounts payable	$	2		$	70
Conversion of Class B common stock to Class A common stock	$	1,094		$	6,742
Operating lease right-of-use assets obtained in exchange for lease liabilities	$	1,818		$	1,150

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	59		$	—
Cash paid for income taxes	$	94		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

ZEVIA PBC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Organization and operations

Zevia PBC (the “Company,” “we,” “us,” “our”), is a growth 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 Kids drinks. Our products are distributed and sold principally across the United States (“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. The Company’s products are manufactured and maintained at third-party beverage production and warehousing facilities located in both the U.S. and Canada.

The Company completed its initial public offering (“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. Its Class A common stock is listed on the New York Stock Exchange trading under the ticker symbol “ZVIA.”

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all information and footnotes required by US GAAP for complete financial statements and are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023, or for any other interim period or any other future fiscal year. The condensed consolidated balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date but does not include all disclosures, including certain notes, required by US GAAP that are required on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been omitted pursuant to such rules and regulations. Therefore, these interim financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 2022 and accompanying notes included in the Annual Report. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the condensed consolidated financial statements for the periods presented have been reflected.

Principles of Consolidation

The unaudited condensed 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 business and affairs of, Zevia LLC. Accordingly, the Company has prepared these unaudited condensed consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) Topic 810, Consolidation.

On January 1, 2022, the Company and Zevia LLC entered into a service agreement to transfer the services of all employees of the Company to Zevia LLC. Under terms of the service agreement between the entities, the payroll costs of employees are borne by Zevia LLC while certain other non-payroll costs, such as those associated with stock compensation arrangements, remain with the Company. In addition, pursuant to the Thirteenth Amended and Restated Limited Liability Company Agreement of Zevia LLC, dated as of July 21, 2021, Zevia LLC shall reimburse the Company for certain expenses for overhead, administrative, and other expenses, at the Company’s discretion. For the three and nine months ended September 30, 2023 and 2022, we determined that the majority of such costs will be retained by the Company, with certain costs directly attributable to Zevia LLC being borne by that entity. These costs impacted the amount of net loss reported by Zevia LLC and consequently impacted the amount allocated to noncontrolling interest.

Use of estimates

The preparation of the unaudited condensed consolidated 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 amounts 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 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 September 30, 2023, the Company’s operations continued to be impacted by higher operating costs as a result of disruptions and logistics challenges in our supply chain as well as the global economy and economic uncertainties which impacted logistics, manufacturing, and labor costs, which the Company expects to continue throughout 2023. The Company will continue to monitor the situation and the economic environment, including any impact from current and future global events, and their effects on its business and operations.

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 unaudited condensed 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 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 adopted ASU No. 2016-13 as of January 1, 2023. The adoption of ASU No. 2016-13 did not have a significant impact on the Company’s financial statements.

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 Company’s products are distributed and sold principally across the U.S. and Canada through a diverse network of major retailers, including: grocery stores, natural products stores, specialty outlets, and warehouse clubs; and through online/e-commerce channels. The following table disaggregates the Company’s sales by channel:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Retail sales	$	39,533	$	39,287	$	114,525	$	113,047
Online/e-commerce		3,556		4,952	$	14,105		14,768
Net sales	$	43,089	$	44,239	$	128,630	$	127,815

The following table disaggregates the Company’s sales by geographic location of the respective customers:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
United States	$	38,499	$	39,385	$	115,686	$	113,696
Canada		4,590		4,854		12,944		14,119
Net sales	$	43,089	$	44,239	$	128,630	$	127,815

Contract liabilities

The Company did not have any material unsatisfied performance obligations as of September 30, 2023 or December 31, 2022.

4. INVENTORIES

Inventories consist of the following as of:


(in thousands)	September 30, 2023		December 31, 2022
Raw materials	$	12,197	$	7,527
Finished goods		37,201		20,049
Inventories	$	49,398	$	27,576

5. ASSETS HELD-FOR-SALE

During the first quarter of 2023, the Company committed to a plan to sell its warehouse located in Evansville, Indiana. As a result, the Company recorded the related warehouse assets at the lower of carrying value or fair value less any costs to sell and ceased recording depreciation on property, plant and equipment as of the date the assets triggered held-for-sale accounting. On July 28, 2023, the Company completed the sale of its warehouse and related assets located in Evansville, Indiana for net cash proceeds of $2.2 million. The gain recognized on the sale of the assets was not material.

6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following as of:


(in thousands)	September 30, 2023			December 31, 2022
Land	$	—		$	336
Leasehold improvements		1,168			463
Computer equipment and software		843			796
Furniture and equipment		783			544
Vehicles		80			196
Quality control and marketing equipment		2,028			1,636
Buildings and improvements		—			1,610
Assets not yet placed in service		125			1,128
		5,027			6,709
Less accumulated depreciation		(2,555	)		(2,068	)
Property and equipment, net	$	2,472		$	4,641

For the three months ended September 30, 2023 and 2022, depreciation expense, including the amortization of leasehold improvements, amounted to approximately $0.2 million and $0.2 million, respectively. For the nine months ended September 30, 2023 and 2022, depreciation expense, including the amortization of leasehold improvements, amounted to approximately $0.7 million and $0.5 million, respectively. These amounts are included under depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

7. INTANGIBLE ASSETS, NET

The following table provides information pertaining to the Company’s intangible assets as of:


	September 30, 2023
(in thousands)	Weighted-Average Remaining Useful Life		Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Software		1.5	$	2,097	$	(1,555	)	$	542
Customer relationships		2.0		3,007		(2,620	)		387
				5,104		(4,175	)		929
Trademarks	N/A			3,000		—			3,000
Intangible assets, net			$	8,104	$	(4,175	)	$	3,929


	December 31, 2022
(in thousands)	Weighted-Average Remaining Useful Life		Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Software		2.0	$	2,277	$	(1,429	)	$	848
Customer relationships		2.7		3,007		(2,470	)		537
				5,284		(3,899	)		1,385
Trademarks	N/A			3,000		—			3,000
Intangible assets, net			$	8,284	$	(3,899	)	$	4,385

For the three months ended September 30, 2023 and 2022, total amortization expense amounted to $0.2 million and $0.2 million, respectively, including $0.1 million and $0.1 million, respectively of amortization expense related to software. For the nine months ended September 30, 2023 and 2022, total amortization expense amounted to $0.5 million and $0.6 million, respectively, including $0.3 million and $0.4 million, respectively, of amortization expense related to software. These amounts are included under depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. No impairment losses have been recorded on any of the Company’s intangible assets for the three and nine months ended September 30, 2023 and 2022, respectively.

Amortization expense for intangible assets with definite lives is expected to be as follows:


(in thousands)
Remainder of 2023	$	152
2024		574
2025		203
Expected amortization expense for intangible assets with definite lives	$	929

8. DEBT

ABL Credit Facility

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 “Loan and Security Agreement”). The Borrower may draw funds 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 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 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.

Under the Secured Revolving Line of Credit, the Borrower is 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, 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. As of September 30, 2023, the Company was in compliance with its liquidity covenant.

9. LEASES

The Company leases its office space which has a remaining lease term of 39 months. In January 2023, the Company entered into an amendment to the lease for its corporate headquarters offices to extend the term through December 31, 2026. The Company’s recognized lease costs include:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Income Statement
Operating lease cost(1)	$	183	$	190	$	550	$	519

(1)

Operating lease cost is recorded within general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.


	Nine Months Ended September 30,
	2023			2022
Weighted-average remaining lease term (months)		39.0			15.0
Weighted-average discount rate		7.6	%		7.6	%

The Company’s variable lease costs and short-term lease costs were not material.

The Company is obligated under a non-cancelable lease agreement providing for office space that expires on December 31, 2026. Maturities of lease payments under the non-cancelable lease were as follows:


(in thousands)	September 30, 2023
Remainder of 2023	$	188
2024		702
2025		729
2026	756
Total lease payments		2,375
Less imputed interest		(278	)
Present value of lease liabilities	$	2,097

10. COMMITMENTS AND CONTINGENCIES

Purchase commitments

As of September 30, 2023, 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. Management does not believe that the resolution of these matters would have a material impact on the unaudited condensed consolidated financial statements. The Company has not identified any legal matters where it believes a material loss is reasonably possible.

11. BALANCE SHEET COMPONENTS

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of:


(in thousands)	September 30, 2023		December 31, 2022
Accrued employee compensation benefits	$	1,306	$	3,409
Accrued direct selling costs		1,458		1,593
Accrued customer paid bottle deposits		1,591		1,253
Accrued other		2,819		2,153
Total	$	7,174	$	8,408

12. EQUITY-BASED COMPENSATION

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 the Company and its affiliates.

The number of shares available for issuance under the 2021 Plan is increased on January 1 of each year beginning in 2022 and ending with a final increase in 2031 in an amount equal to the lesser of: (i) 5% of the total number of shares of Class A common stock outstanding on the preceding December 31, or (ii) a smaller number of shares determined by the Company's Board of Directors.

In November 2021, the Company’s Board of Directors approved an amendment to its equity-based compensation plans for a certain number of employees to allow immediate vesting upon retirement of all outstanding RSUs and stock options, and to extend the exercisability of outstanding stock options up to five years after retirement, if they meet certain conditions, including 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 advance notice of his or her resignation to the Company’s Board of Directors. During the three months ended September 30, 2022, one employee, and during the nine months ended September 30, 2022, three employees, retired from the Company and all outstanding awards and related stock compensation expense of $3.8 million and $8.2 million, respectively, were accelerated through their retirement dates.

As of September 30, 2023, the 2021 Plan provides for future grants and/or issuances of up to approximately 2.5 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.

The fair value of stock option awards granted during the period was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:


	Nine Months Ended September 30,
	2023			2022
Stock price	$	2.90		$	3.37
Exercise Price		2.90			3.91
Expected term (years)(1)		6.25			6.25
Expected volatility (2)		65.4	%		62.5	%
Risk-Free interest rate (3)		3.6	%		2.7	%
Dividend yield (4)		0.0	%		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 for grants issued prior to July 21, 2023 (which is the two-year anniversary of the Company's IPO) is based on the historical volatility of a selected peer group over a period equivalent to the expected term, and expected volatility for grants issued subsequent to July 21, 2023 is based on historical volatility of the Company's stock.

(3) The risk-free interest 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 the Company has no plans to declare dividends in the foreseeable future.

The weighted average grant date fair values for stock options granted for the nine months ended September 30, 2023 and 2022 was $1.81 and $1.95, respectively.

The following is a summary of stock option activity for the nine months ended September 30, 2023:


	Shares			Weighted average exercise price		Weighted average remaining life		Intrinsic value (in thousands)
Outstanding Balance as of January 1, 2023		2,769,754		$	3.36
Granted		1,472,639		$	2.90
Exercised		(112,783	)	$	0.23
Forfeited and expired		(811,569	)	$	2.91
Balance as of September 30, 2023		3,318,041		$	3.37		7.7	$	1,426
Exercisable at the end of the period		1,265,798		$	2.55		5.4	$	1,426
Vested and expected to vest		3,318,041		$	3.37		7.7	$	1,426

The total intrinsic values of stock options exercised during the nine months ended September 30, 2023 was $0.3 million.

As of September 30, 2023, total unrecognized compensation expense related to unvested stock options was $3.8 million, which is expected to be recognized over a weighted-average period of 3.0 years.

Restricted Phantom Units and Restricted Stock Units

In July 2021, the Company’s Board of Directors approved an amendment to 2,422,644 restricted phantom units (the “Restricted Phantom Units”) previously granted by Zevia LLC (the “Phantom Unit Amendment"). The Phantom Unit Amendment changed the settlement feature of all outstanding Restricted Phantom Units so that following vesting, each award of Restricted Phantom Units would be settled in shares of Class A common stock having a fair market value equal to (i) the number of Restricted Phantom Units subject to such award, multiplied by (ii) the difference between the fair market value of a share of Class A common stock and the grant date price per Restricted Phantom Unit. All other terms related to the Restricted Phantom Units remained unchanged. As a result of the Phantom Unit Amendment, the estimated fair value of the modified awards was $33.9 million and was recognized as an expense over the vesting period through January 2022 subsequent to the performance condition being met.

In March 2021, the Company’s Board of Directors also approved an amendment to the RSUs granted by Zevia LLC in August 2020 (“the RSU Amendment”). The RSU Amendment changed the vesting of such RSUs to occur 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 initial public offering as in the case of the 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. Additionally, settlement shall occur within 30 days following the vesting of the RSUs and the participant shall be entitled to receive one share of Class A common stock for each vested RSU. All other terms remained unchanged. As a result of the RSU Amendment, the estimated fair value of the modified awards was $48.9 million and are being recognized as expense over the vesting period subsequent to the performance condition being met. As of September 30, 2023, the remaining service period of the awards is 16 months.

The following is a summary of RSU activity for the nine months ended September 30, 2023:


	Shares			Weighted average grant date fair value		Aggregate Intrinsic Value (in thousands)
Balance unvested shares at January 1, 2023		2,560,590		$	3.90
Granted		1,268,930		$	3.09
Vested		(912,902	)	$	3.85
Forfeited		(512,959	)	$	2.80
Balance unvested at September 30, 2023		2,403,659		$	3.72		5,336
Expected to vest at September 30, 2023		2,403,659		$	3.72		5,336

As of September 30, 2023, total unrecognized compensation expense related to unvested RSUs was $6.7 million, which is expected to be recognized over a weighted-average period of 2.3 years.

As of September 30, 2023, there were 597,006 of RSUs outstanding which vested in 2022 but are subjected to a deferred settlement provision over the next two years and therefore have not been released. As a result, these RSUs are not included in the table above.

13. SEGMENT REPORTING

The Company has one operating and reporting segment, and operates as a product portfolio with a single business platform. In reaching this conclusion, management considered the definition of the Chief Operating Decision Maker (“CODM”); how the business is defined by the CODM; the nature of the information provided to the CODM and how that information is used to make operating decisions; and how resources and performance are accessed. The Company’s CODM is the Chief Executive Officer. The results of the operations are provided to and analyzed by the CODM at the Company's level and accordingly, key resource decisions and assessment of performance are performed at the Company's level. The Company has a common management team across all product lines and does not manage these products as individual businesses and as a result, cash flows are not distinct.

14. MAJOR CUSTOMERS, ACCOUNTS RECEIVABLE AND VENDOR CONCENTRATION

The table below represents the Company’s major customers that accounted for more than 10% of total net sales for the periods:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Customer A		13	%		15	%		13	%		16	%
Customer B	*			*				11	%		10	%
Customer D		11	%	*			*			*

The table below represents the Company’s customers that accounted for more than 10% of total accounts receivable, net as of:


	September 30, 2023			December 31, 2022
Customer D		10	%		10	%
Customer E		13	%		17	%
Customer H	*				12	%

The table below represents raw material vendors that accounted for more than 10% of all raw material purchases for the following periods:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Vendor A		22	%		27	%		22	%		28	%
Vendor B		13	%		25	%		16	%		16	%
Vendor C		11	%		15	%		13	%		13	%
Vendor E		21	%	*				14	%	*

* Less than 10% of total net sales, accounts receivable, net or raw material purchases.

15. LOSS PER SHARE

Basic loss per share of Class A common stock is computed by dividing net loss attributable to the Company for the period by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted loss per share of Class A common stock is computed by dividing net loss attributable to the Company by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities and assumed conversion of Class B common stock into shares of Class A common stock on a one-for-one basis using the if-converted method.

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted loss per share of Class A common stock:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023				2022				2023				2022
(in thousands, except for share and per share amounts)
Net loss per share:
Numerator:
Net loss and comprehensive loss	$	(11,250	)		$	(9,196	)		$	(19,171	)		$	(41,477	)
Less: net loss attributable to non-controlling interests		3,033				1,712				4,932				12,005
Add: adjustment to reallocate net loss to controlling interest		(19	)	(1)		(41	)	(1)		603		(1)		(1,065	)	(1)
Net loss to Zevia PBC - basic	$	(8,236	)		$	(7,525	)		$	(13,636	)		$	(30,537	)

Denominator:
Weighted-average shares of Class A common stock outstanding – basic		50,144,198				44,073,000				49,317,058				40,393,978
Add: weighted average shares of vested and unreleased RSUs		610,272		(2)		1,865,507		(2)		757,933		(2)		1,761,485		(2)
Weighted-average basic and diluted shares		50,754,470				45,938,507				50,074,992				42,155,463
Loss per share of Class A common stock – basic	$	(0.16	)		$	(0.16	)	(3)	$	(0.27	)		$	(0.72	)	(3)
Loss per share of Class A common stock – diluted	$	(0.16	)		$	(0.16	)	(3)	$	(0.27	)		$	(0.72	)	(3)

(1) The numerator for the basic and diluted loss per share is adjusted for additional losses being attributed to controlling interest as a result of the impacts of vested but unreleased RSUs being included in the denominator of the basic and diluted loss per share.

(2) The denominator for basic and diluted loss per share includes vested and unreleased RSUs as there are no conditions that would prevent these RSUs from being issued in the future as shares of Class A common stock except for the mere passage of time.

(3) Subsequent to the issuance of the Company’s financial statements for the three and nine months ended September 30, 2022, the Company revised basic and diluted loss per share amounts for the first, second, and third quarter of 2022 to include the impact of vested but unreleased RSUs which were previously excluded from the respective basic and diluted loss per share computations. The impact of this immaterial correction was to decrease both basic and diluted loss per share by $0.01 from the amounts previously reported in the Company’s Form 10-Q for the three and nine months ended September 30, 2022.

Zevia LLC Class B Common Units, stock options and RSUs were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive. The following weighted average outstanding shares were excluded from the computation of diluted loss per share available to Class A common stockholders as they were anti-dilutive:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Zevia LLC Class B Common Units exchangeable to shares of Class A common stock		20,952,967		24,394,109		21,278,538		26,936,871
Stock options		3,571,659		2,637,539		3,480,778		2,044,472
Restricted stock units		2,638,287		2,911,356		2,775,861		3,742,307

16. INCOME TAXES AND TAX RECEIVABLE AGREEMENT

Income Taxes

The Company is the managing member of Zevia LLC and as a result, consolidates the financial results of Zevia LLC in the unaudited condensed consolidated financial statements of Zevia PBC. Zevia LLC is a pass-through entity for U.S. federal and most applicable state and local income tax purposes following the Reorganization Transactions effected in connection with the IPO. 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 C corporation and pays corporate federal, state and local taxes with respect to income allocated from Zevia LLC based on Zevia PBC's economic interest in Zevia LLC, which was 70.6% and 68.7% as of September 30, 2023 and December 31, 2022, respectively.

The provision for income taxes differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate of 21% to income before provision of income taxes due to Zevia LLC’s pass-through structure for U.S. income tax purposes, pass-through permanent differences, state franchise taxes, tax effects of stock-based compensation, and the valuation allowance against the deferred tax assets. Except for state franchise taxes, Zevia PBC did not recognize an income tax expense (benefit) on its share of pre-tax book loss, exclusive of the noncontrolling interest of 29.4%, due to the full valuation allowance against its deferred tax assets.

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 PBC 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 shareholders of blocker companies of certain pre-IPO institutional investors (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 course of mergers related to the IPO (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 members’ 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. 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 plus 300 basis points from the due date (without extensions) of such tax return.

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 September 30, 2023, the Company believes 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 as of September 30, 2023; 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 $54.1 million and $55.8 million at September 30, 2023 and December 31, 2022, respectively. The increase in the TRA liability is primarily related to Class B to Class A exchanges during the three and nine months ended September 30, 2023. If utilization of the DTAs 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 an expense within its condensed consolidated statements of operations and comprehensive loss.

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 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 Kids 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 Third Quarter of 2023

We previously implemented certain critical initiatives designed to transform our operations in order to help support our continued growth, enhance our customer service, and drive efficiencies. During the second and third fiscal quarters, in connection with these initiatives, we faced short-term supply chain logistics challenges which hindered fulfillment and impacted net sales results and selling and marketing expenses in these quarters. We have since implemented further measures that are designed to address these challenges and restore service levels to previous levels, such as changes in the supply chain organization and leadership, pausing certain actions of our supply chain transition, and further automation of inventory reporting and processing to provide higher visibility, and we currently expect to resolve these challenges by the end of 2023.

Factors Affecting Our Performance

Macroeconomic Environment

In addition to the supply chain challenges discussed above, a number of external factors, including the global economy, global health emergencies, inflationary pressures, rising interest rates, volatility in the financial markets, recession fears, financial institution instability, the potential shutdown of the U.S. government, global hostilities, and political tensions between the U.S. and China have impacted and may continue to impact transportation, labor, and commodity costs. During the three and nine months ended September 30, 2023, we continued to experience slightly higher operating costs, including logistics, manufacturing and labor costs, which we expect to continue during the fourth quarter of 2023 and into 2024. 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 and nine months ended September 30, 2023 and 2022, respectively.

Components of Our Results of Operations

Net Sales

We generate net sales from the sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, and Kids drinks, to our customers, which include grocery distributors, national retailers, natural products retailers, warehouse club retailers and retailers with 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.

The following factors and trends in our business have driven net sales over the past two years and are expected to continue to be key drivers of our net sales 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 future growth; however sales levels in any given period may continue to be impacted by seasonality, customers efforts to manage inventory, and our ability to fulfill customer demands.

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 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.

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 and efficiency improvements.

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, as well as sampling and in-store demonstration costs. 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 in the long-term, both as a result of the increased warehousing and distribution costs resulting from increased net sales and as a result of increased focus on marketing programs/spend, which we expect to be partially offset by our continued focus on cost improvements in our supply chain. Our selling expenses are expected to increase in the short-term compared to the prior year as a result of supply chain logistics challenges – refer to the Key Events During the Third Quarter of 2023 section above for additional information.

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.

Equity-Based Compensation Expense

Equity-based compensation expense consists of the recorded expense of equity-based compensation for our employees and, if any, 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. Through 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 September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
(in thousands, except per share amounts)
Net sales	$	43,089		$	44,239		$	128,630		$	127,815
Cost of goods sold		23,517			25,071			69,261			73,445
Gross profit		19,572			19,168			59,369			54,370
Operating expenses:
Selling and marketing		20,455			12,916			48,467			42,845
General and administrative		8,250			8,310			23,102			28,257
Equity-based compensation		1,876			6,837			6,614			23,781
Depreciation and amortization		411			326			1,234			1,005
Total operating expenses		30,992			28,389			79,417			95,888
Loss from operations		(11,420	)		(9,221	)		(20,048	)		(41,518	)
Other income, net		165			26			908			64
Loss before income taxes		(11,255	)		(9,195	)		(19,140	)		(41,454	)
(Benefit) provision for income taxes		(5	)		1			31			23
Net loss and comprehensive loss		(11,250	)		(9,196	)		(19,171	)		(41,477	)
Loss attributable to noncontrolling interest		3,033			1,712			4,932			12,005
Net loss attributable to Zevia PBC	$	(8,217	)	$	(7,484	)	$	(14,239	)	$	(29,472	)

Net loss per share attributable to common stockholders
Basic	$	(0.16	)	$	(0.16	)	$	(0.27	)	$	(0.72	)
Diluted	$	(0.16	)	$	(0.16	)	$	(0.27	)	$	(0.72	)

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 September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net sales		100	%		100	%		100	%		100	%
Cost of goods sold		55	%		57	%		54	%		57	%
Gross profit		45	%		43	%		46	%		43	%
Operating expenses:
Selling and marketing		47	%		29	%		38	%		34	%
General and administrative		19	%		19	%		18	%		22	%
Equity-based compensation		4	%		15	%		5	%		19	%
Depreciation and amortization		1	%		1	%		1	%		1	%
Total operating expenses		72	%		64	%		62	%		75	%
Loss from operations		(27	)%		(21	)%		(16	)%		(32	)%
Other income, net		0	%		0	%		1	%		0	%
Loss before income taxes		(26	)%		(21	)%		(15	)%		(32	)%
(Benefit) provision for income taxes		(0	)%		0	%		0	%		0
Net loss and comprehensive loss		(26	)%		(21	)%		(15	)%		(32	)%
Loss attributable to noncontrolling interest		7	%		4	%		4	%		9	%
Net loss attributable to Zevia PBC		(19	)%		(17	)%		(11	)%		(23	)%

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Net Sales


	Three Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
Net sales	$	43,089	$	44,239	$	(1,150	)		(2.6	)%

Net sales were $43.1 million for the three months ended September 30, 2023 as compared to $44.2 million for the three months ended September 30, 2022. Equivalized cases sold were 3.3 million during the three months ended September 30, 2023 as compared to 3.6 million equivalized cases sold during the three months ended September 30, 2022. Net sales declines were primarily driven by a decrease in the number of equivalized cases sold, resulting in $2.7 million lower net sales primarily caused by short-term supply chain logistics challenges hindering fulfillment discussed in the Key Events During the Third Quarter of 2023 section above, partially offset by pricing increases of $1.5 million. We define an equivalized case as a 288 fluid ounce case.

Cost of Goods Sold


	Three Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
Cost of goods sold	$	23,517	$	25,071	$	(1,554	)		(6.2	)%

Cost of goods sold was $23.5 million for the three months ended September 30, 2023 as compared to $25.1 million for the three months ended September 30, 2022. The decrease of $1.6 million, or 6.2%, was primarily due to a 8.2% decrease in the shipment of equivalized cases resulting in $2.1 million lower costs of goods sold, as well as favorable costs of goods sold from improved rates and product mix of $1.1 million, partially offset by higher inventory losses primarily related to the exiting of legacy warehouses and the brand-refresh rollout of $1.6 million.

Gross Profit and Gross Margin


	Three Months Ended September 30,						Change
(in thousands)	2023			2022			Amount		Percentage
Gross profit	$	19,572		$	19,168		$	404		2.1	%
Gross margin		45.4	%		43.3	%

Gross profit was $19.6 million for the three months ended September 30, 2023 as compared to $19.2 million for the three months ended September 30, 2022. The increase in gross profit of $0.4 million, or 2.1%, was primarily driven by pricing increases taken in 2022 and 2023 as well as favorable cost of goods sold from improved rates and product mix, partially offset by lower volumes and higher inventory losses related to the exiting of legacy warehouses and the brand-refresh rollout.

Gross margin for the three months ended September 30, 2023 improved to 45.4% from 43.3% in the prior-year period. The improvement was primarily due to pricing increases taken in 2022 and 2023 as well as favorable cost of goods sold from improved rates and product mix, partially offset by higher inventory losses related to the exiting of legacy warehouses and the brand-refresh rollout.

Selling and Marketing Expenses


	Three Months Ended September 30,				Change
(in thousands)	2023		2022		Amount		Percentage
Selling and marketing expenses	$	20,455	$	12,916	$	7,539		58.4	%

Selling and marketing expenses were $20.5 million for the three months ended September 30, 2023 as compared to $12.9 million for the three months ended September 30, 2022. The increase of $7.5 million, or 58.4%, was primarily due to $4.4 million of higher freight and freight transfer costs related to short-term supply chain logistics challenges hindering fulfillment discussed in the Key Events During the Third Quarter of 2023 section above, and $3.1 million of higher warehousing costs resulting from increased level of handling and storage costs driven by higher levels of inventory production.

General and Administrative Expenses


	Three Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
General and administrative expenses	$	8,250	$	8,310	$	(60	)		(0.7	)%

General and administrative expenses were $8.3 million for the three months ended September 30, 2023 as compared to $8.3 million for the three months ended September 30, 2022. The decrease of $0.1 million, or 0.7%, was primarily driven by a decrease in employee costs.

Equity-Based Compensation Expenses


	Three Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
Equity-based compensation	$	1,876	$	6,837	$	(4,961	)		(72.6	)%

Equity-based compensation expense was $1.9 million for the three months ended September 30, 2023 as compared to $6.8 million for the three months ended September 30, 2022, primarily related to outstanding equity-based awards being recognized over the remaining service periods of the awards. The decrease of $5.0 million was primarily driven by $3.8 million of lower equity-based compensation expense due to the acceleration of vesting of RSU awards upon retirement of a senior management employee in the third quarter of 2022. The remaining $1.2 million decrease was largely related to the accelerated method of expense recognition on certain equity awards issued in connection with the Company’s IPO in 2021, partially offset by equity-based compensation expense related to new equity awards granted.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022

Net Sales


	Nine Months Ended September 30,				Change
(in thousands)	2023		2022		Amount		Percentage
Net sales	$	128,630	$	127,815	$	815		0.6	%

Net sales were $128.6 million for the nine months ended September 30, 2023 as compared to $127.8 million for the nine months ended September 30, 2022. Equivalized cases sold were 9.9 million during the nine months ended September 30, 2023 as compared to 10.9 million equivalized cases sold during the nine months ended September 30, 2022. Net sales growth was primarily driven by pricing increases of $9.4 million, partially offset by a decrease in the number of equivalized cases sold, resulting in $8.6 million lower net sales, which was mainly caused by short-term supply chain logistics challenges hindering fulfillment discussed in the Key Events During the Third Quarter of 2023 section above. We define an equivalized case as a 288 fluid ounce case.

Cost of Goods Sold


	Nine Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
Cost of goods sold	$	69,261	$	73,445	$	(4,184	)		(5.7	)%

Cost of goods sold was $69.3 million for the nine months ended September 30, 2023 as compared to $73.4 million for the nine months ended September 30, 2022. The decrease of $4.2 million, or 5.7%, was primarily due to a 9.6% decrease in the shipment of equivalized cases resulting in $7.0 million lower costs of goods sold, partially offset by higher inventory losses generally related to the exiting of legacy warehouses and the brand-refresh rollout of $2.4 million, and an increase of $0.4 million as a result of slightly higher manufacturing costs as a result of inflationary pressures and labor rates.

Gross Profit and Gross Margin


	Nine Months Ended September 30,						Change
(in thousands)	2023			2022			Amount		Percentage
Gross profit	$	59,369		$	54,370		$	4,999		9.2	%
Gross margin		46.2	%		42.5	%

Gross profit was $59.4 million for the nine months ended September 30, 2023 as compared to $54.4 million for the nine months ended September 30, 2022. The increase in gross profit of $5.0 million, or 9.2%, was primarily driven by pricing increases taken in 2022 and 2023, partially offset by lower volumes, slightly higher manufacturing costs as a result of inflationary pressures and labor rates, and higher inventory losses primarily related to the exiting of legacy warehouses and the brand-refresh rollout.

Gross margin for the nine months ended September 30, 2023 improved to 46.2% from 42.5% in the prior-year period. The improvement was primarily due to pricing increases taken in 2022 and 2023, partially offset by slightly higher manufacturing costs as a result of inflationary pressures and labor rates and higher inventory losses primarily related to the exiting of legacy warehouses and the brand-refresh rollout.

Selling and Marketing Expenses


	Nine Months Ended September 30,				Change
(in thousands)	2023		2022		Amount		Percentage
Selling and marketing expenses	$	48,467	$	42,845	$	5,622		13.1	%

Selling and marketing expenses were $48.5 million for the nine months ended September 30, 2023 as compared to $42.8 million for the nine months ended September 30, 2022. The increase of $5.6 million, or 13.1%, was primarily due to $4.1 million of higher freight transfer costs related to short-term supply chain logistics challenges hindering fulfillment discussed in the Key Events During the Third Quarter of 2023 section above, and $3.4 million higher warehousing costs resulting from increased level of handling and storage costs driven by higher levels of inventory production, partially offset by a decrease in freight out of $1.2 million as a result of decreases in the shipment of equivalized cases and a reduction of non-working marketing costs offset by higher spend related to the brand-refresh rollout of $0.7 million.

General and Administrative Expenses


	Nine Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
General and administrative expenses	$	23,102	$	28,257	$	(5,155	)		(18.2	)%

General and administrative expenses were $23.1 million for the nine months ended September 30, 2023 as compared to $28.3 million for the nine months ended September 30, 2022. The decrease of $5.2 million, or 18.2%, was primarily driven by a $2.7 million decrease in employee costs, and $2.5 million decrease in public company costs and reductions in discretionary spend due to expense optimization initiatives.

Equity-Based Compensation Expense


	Nine Months Ended September 30,				Change
(in thousands)	2023		2022		Amount			Percentage
Equity-based compensation	$	6,614	$	23,781	$	(17,167	)		(72.2	)%

Equity-based compensation expense was $6.6 million for the nine months ended September 30, 2023 as compared to $23.8 million for the nine months ended September 30, 2022, primarily related to outstanding equity-based awards being recognized over the remaining service periods of the awards. The decrease of $17.2 million was primarily driven by $10.8 million of lower equity-based compensation expense due to the acceleration of vesting of RSU awards upon retirement of senior management employees during the nine months ended September 30, 2022, $4.7 million of expense related to the accelerated method of expense recognition on certain equity awards issued in connection with the Company’s IPO in 2021, and $2.7 million related to RSU and restricted phantom stock awards that vested over six months following the IPO in the prior year, partially offset by equity-based compensation expense related to new equity awards granted.

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 fiscal quarters of the year.

Liquidity and Capital Resources

As of September 30, 2023, we had $38.5 million in cash and cash equivalents. We believe that our cash and cash equivalents as of September 30, 2023, together with our operating activities and available borrowings under the Secured Revolving Line of Credit (as defined below), 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, rising interest rates, volatility in the financial markets, recession fears, financial institution instability, the potential shutdown of the U.S. government, current and future global hostilities, 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 $63.6 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 $54.1 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.

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 September 30, 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.


	Nine Months Ended September 30,
(in thousands)	2023			2022
Cash (used in) provided by:
Operating activities	$	(9,668	)	$	(19,346	)
Investing activities	$	786		$	27,818
Financing activities	$	25		$	(2,346	)

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 $9.7 million for the nine months ended September 30, 2023 was primarily driven by a net loss of $19.2 million, partially offset by non-cash expenses of $8.4 million primarily related to equity-based compensation and depreciation and amortization expense and a net increase in cash related to changes in operating assets and liabilities of $1.1 million. Changes in cash flows related to operating assets and liabilities were primarily due to an increase of $29.1 million in accounts payable, accrued expenses and other current liabilities due to timing of purchases and increased production of inventory, partially offset by an increase in inventories of $21.8 million due to increased production of inventory as a result of the supply chain logistics challenges discussed in the Key Events During the Third Quarter of 2023, increase in accounts receivable of $5.3 million due to timing of invoices, and an increase in prepaid expenses and other assets of $0.5 million due to timing of prepayments.

Net cash used in operating activities of $19.3 million for the nine months ended September 30, 2022 was primarily driven by net loss of $41.5 million and a net decrease in cash related to changes in operating assets and liabilities of $3.2 million, partially offset by non-cash expenses of $25.3 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities primarily consisted of a $4.5 million increases in accounts receivable due to increase in net sales, a $5.8 million increase in inventory due to the timing of inventory purchases and the anticipation of future sales, partially offset by a $0.1 million decrease in prepaid expenses and other assets primarily related to amortization of prepaid insurance policies, and a $7.5 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.

Net Cash Provided by Investing Activities

Net cash provided by investing activities of $0.8 million for the nine months ended September 30, 2023 was primarily due to proceeds from the sale of its warehouse and related assets of $2.3 million, partially offset by purchases of property, equipment, and software of $1.6 million for leasehold improvements and computer equipment and software used in ongoing operations.

Net cash provided by investing activities of $27.8 million for the nine months ended September 30, 2022 was primarily due to proceeds from maturities of short-term investments of $30.0 million, offset by purchases of property, equipment and software of $2.2 million for marketing fixtures, software applications and computer equipment used in ongoing operations.

Net Cash Provided By (Used in) Financing Activities

Net cash provided by financing activities of $25 thousand for the nine months ended September 30, 2023 was primarily due to proceeds from the exercise of stock options.

Net cash used in financing activities of $2.3 million for the nine months ended September 30, 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 $0.3 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 September 30,						Nine Months Ended September 30,
(in thousands)	2023			2022			2023			2022
Net loss and comprehensive loss	$	(11,250	)	$	(9,196	)	$	(19,171	)	$	(41,477	)
Other income, net*		(165	)		(26	)		(908	)		(64	)
(Benefit) provision for income taxes		(5	)		1			31			23
Depreciation and amortization		411			326			1,234			1,005
Equity-based compensation		1,876			6,837			6,614			23,781
Adjusted EBITDA	$	(9,133	)	$	(2,058	)	$	(12,200	)	$	(16,732	)

* 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 its corporate headquarters offices to extend the lease 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 September 30, 2023, see the sections above including Note 8, Debt, and Note 9, Leases, included in the unaudited condensed consolidated financial statements of this Quarterly Report.

Our inventory purchase commitments are generally short-term in nature and have customary commercial terms. We did not have any material long-term inventory purchase commitments as of September 30, 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.

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.

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.

Item 3. 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, inflation and commodities 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 have a two-year agreement effective October 15, 2023 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. We are also in the process of identifying alternative sources of supply to mitigate potential supply disruptions. However, there can be no assurance that we will be able to secure alternative sources of supply. Additionally, the prices of stevia and other ingredients we use are subject to many factors beyond our control, such as market conditions, climate change, supply chain challenges, and adverse weather conditions.

The price for aluminum cans fluctuates depending on market conditions. Our ability to continue to procure enough aluminum cans at reasonable prices will depend on future developments that are highly uncertain. For the nine months ended September 30, 2023, a hypothetical 10% increase or 10% decrease in the weighted average cost of aluminum would have resulted in an increase of approximately $0.9 million or a decrease of $0.9 million, respectively, to cost of goods sold.

We continue to seek and 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 U.S. 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 U.S. 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 U.S. or increase net sales outside of the U.S. 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 three and nine months ended September 30, 2023 and 2022, respectively.

Inflation Risk

We believe that inflation has had a material effect on our business, results of operations, and 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.

Item 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Based on the foregoing evaluation, management determined that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

Internal Control over Financial Reporting

Management determined that as of September 30, 2023, no changes in our internal control over financial reporting had occurred during the fiscal quarter then ended that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not subject to any material legal proceedings.

Item 1A. Risk Factors

Our business is subject to various risks, including those described in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report. Except as disclosed in the section titled “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2023, there have been no material changes from the risk factors disclosed in Item 1A of our Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None.

EXHIBIT INDEX


Exhibit No.		Description of Exhibit

3.1		Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2021).

3.2		Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2021).

4.1		Description of Securities (incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2022).

10.1#*		Separation Agreement and General Release of Claims between the Company and Quincy B. Troupe.

10.2#*		Letter Agreement between the Company and Florence Neubauer.

10.3#*		Severance Agreement between the Company and Florence Neubauer.

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		Inline XBRL Instance Document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*	Filed herewith.
**	Furnished herewith.
#	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

Zevia PBC

By:

/s/ Amy E. Taylor

Name:

Amy E. Taylor

Title:

President and Chief Executive Officer

(Principal Executive Officer)

Date:

November 7, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:		/s/ Amy E. Taylor
	Name:	Amy E. Taylor
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)
	Date:	November 7, 2023


By:		/s/ Florence Neubauer
	Name:	Florence Neubauer
	Title:	Interim Chief Financial Officer
		(Principal Financial Officer)
	Date:	November 7, 2023


By:		/s/ Hany Mikhail
	Name:	Hany Mikhail
	Title:	Chief Accounting Officer
		(Principal Accounting Officer)
	Date:	November 7, 2023