ZEVIA PBC The following discussion contains forward-looking statements that involve risks and uncertainties. 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 "Note Regarding Forward-Looking Statements" included elsewhere in this report. The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this quarterly report and our audited financial statements and notes thereto included in our prospectus datedJuly 21, 2021 (the "Prospectus") as filed with theSEC onJuly 23, 2021 . The financial data discussed below reflect the historical results of operations and financial position ofZevia LLC , our predecessor for accounting purposes, prior to the corporate reorganization and IPO. Overview We are a high-growth beverage company that is disrupting the liquid refreshment beverage industry through delicious and refreshing, zero calorie, zero sugar, naturally sweetened beverages that are all Non-GMO Project Verified. We are a pioneering beverage brand, offering a platform of products that include a broad variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, Kidz drinks and Sparkling Water. All of our beverages are made with only a handful of plant-based ingredients that most consumers can easily pronounce. Our products are distributed across theU.S. andCanada through a diverse network of major retailers in the food, drug, mass, natural and ecommerce channels. 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. Consumers can purchase our products in both brick and mortar and ecommerce channels. Zevia was initially distributed in theU.S. natural products retail channel, where we still maintain the leading position. Fueled by a loyal and growing consumer base, we expanded our presence online and into conventional food, drug and mass retailers. In 2020, Zevia was the highest selling carbonated soft drink brand on Amazon according to Stackline, which we believe is representative of an online product discovery and education-oriented purchasing process that is gaining traction among shoppers. OnJuly 26, 2021 , we completed our IPO of Class A common stock, in which we sold 10,700,000 shares, including the sale of 3,800,000 shares by existing holders. Shares of Class A common stock began trading on theNew York Stock Exchange under the ticker symbol "ZVIA" onJuly 22, 2021 . These shares were sold at an IPO price of$14.00 per share for net proceeds of approximately$139.7 million , after deducting underwriting discounts and commissions of$10.1 million but before estimated offering expenses of the IPO and the Reorganization of approximately$8.4 million payable byZevia LLC . Upon the closing of the IPO, we used (i) approximately$25.5 million to purchase Class B units from certainZevia LLC's unitholders, including certain members of our senior management, at a per-unit price equal to the per-share price paid by the underwriters for shares of Class A common stock, (ii) approximately$0.4 million to cancel and cash-out outstanding options held by certain ofZevia LLC's option holders, including certain members of our senior management, at a per-option price equal to the per-share price paid by the underwriters for shares of Class A common stock, and (iii) approximately$23.7 million to pay the cash consideration to certain pre-IPO institutional investors in connection with the merger of the blocker corporations into the Company with the Company surviving. Accordingly, we have not retained any of those portions of the proceeds. 22 -------------------------------------------------------------------------------- Table of Contents Other Factors Affecting Our Performance COVID-19 UPDATE The COVID-19 pandemic continued to have significant adverse impacts on the national and global economy during the second quarter of 2021. From the beginning of the COVID-19 pandemic, we have remained committed to making the health and wellness of our employees and customers a priority. Based upon the guidance of theU.S. Centers for Disease Control ("CDC") and local health authorities, we maintain appropriate measures to help reduce the spread of infection to our employees and customers, including the institution of social distancing protocols and increased frequency of cleaning and sanitizing in our third-party facilities. Our corporate headquarters remained closed and most of our employees continue to work from home. Although we encountered closures and delays at some of our third-party facilities due to confirmed cases in the workforce or due to government mandate during the course of the pandemic, these closures and delays did not have a material impact on our operations or our ability to serve customer needs. While at this time we are working to manage and mitigate potential disruptions to our supply chain, and we have not experienced decreases in demand or material financial impacts as compared to prior periods, the fluid nature of the COVID-19 pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil with continued supply chain risk. The impact of the COVID-19 pandemic on our operational and financial performance is dependent on future developments, including the duration of the pandemic, actions that may be taken by governmental authorities, the speed at which effective vaccines will be administered to a sufficient number of people to enable cessation of the virus and the related length of its impact on the global economy, all of which are uncertain and difficult to predict at this time. See "Risk Factors- The COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition." 23 -------------------------------------------------------------------------------- Table of Contents The following summarizes the components of our results of operations for the three months and six months endedJune 30, 2020 and 2021, respectively. Components of Our Results of OperationsNet Sales We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, Kidz beverages and Sparkling Water, to our customers, which include grocery distributors, national retailers and natural products retailers, as well as e-commerce channels, in theU.S. andCanada . We offer our customers sales incentives that are designed to support the distribution of our products to consumers. These incentives include discounts, trade promotions, price allowances and product placement fees. The amounts for these incentives are deducted from gross sales to arrive at our net sales. We have experienced substantial growth in net sales in the past three years. The following factors and trends in our business have driven net sales growth over this period and are expected to continue to be key drivers of our net sales growth for the foreseeable future:
• leveraging our platform and mission to grow awareness, increase velocity
and expand our consumer base;
• continuing to grow our strong relationships across our retailer network
and expand distribution amongst existing channels, both
in-store
and online; and
• ongoing innovation efforts, including enhancing existing products and
introducing additional flavors within existing categories, as well as
entering into new categories.
We also expect expansion of distribution into new channels to be a key driver of our future sales growth. We expect that our sales directly to retailers will increase as a percentage of our net sales over time. We sell our products in theU.S. andCanada , 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 the various ingredients, packaging, in-bound freight and logistics and third-party production fees. Our cost of goods sold also includes other costs incurred to bring the product to saleable condition. Our cost of goods sold is subject to price fluctuations in the marketplace, in particular in the price of aluminum and other raw materials, as well as in the cost of in-bound freight and logistics. Our cost of goods sold is generally higher for cans sold through our ecommerce channel than through our retail store channel due to additional packaging requirements. Our results of operations depend on our ability to arrange for the purchase of raw materials and the production of our products in sufficient quantities at competitive prices. We have long term contracts with certain suppliers of stevia and aluminum cans. We expect over the long term that, as the scale of our business increases, we will purchase a greater percentage of our aluminum cans directly rather than through co-pack arrangements. We have long term contracts with certain manufacturers governing pricing and other terms and minimum commitments on our part, but these contracts generally do not guarantee any minimum production volumes on the part of the manufacturers. We expect our cost of goods sold to increase in absolute dollars as our mix shifts to higher selling price and high margin products. 24 -------------------------------------------------------------------------------- Table of Contents 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. We expect our gross margin to improve over time as we continue to leverage our asset-light business model and realize margin expansion through increased distribution direct to retailers, the increased scale of our business and our continued focus on cost improvements, particularly in our supply chain. Operating Expenses Selling and Marketing Expenses Selling and marketing expenses consist primarily of warehousing and distribution costs and advertising and marketing expenses. Warehousing and distribution costs include storage, transfer and out-bound freight and delivery charges. Advertising and marketing expenses consist of variable costs associated with production and media buying of marketing programs and trade events. Selling and marketing expenses also includes the incremental costs of obtaining contracts, such as sales commissions. Our selling and marketing expenses are expected to increase both in absolute dollars and as a percentage of net sales, both as a result of the increased warehousing and distribution costs resulting from increased net sales, which we expect to be partially offset by our continued focus on cost improvements in our supply chain, and as a result of increased focus on marketing. General and Administrative Expenses Administrative expenses include all salary and other personnel expenses (other than equity-based compensation expense) for our employees, including employees related to management, marketing, sales, product development, quality control, accounting, IT and other functions. Our general and administrative expenses are expected to increase in absolute dollars, but to decrease as a percentage of net sales, over time as we increase our headcount to support our growth and as we increase personnel in legal, accounting, IT and compliance-related expenses to support our obligations as a public company. Equity-based compensation expense is included in general and administrative expenses and consists of the recorded expense of equity-based compensation for our employees and for certain non-employees. We record compensation expense for employee grants using grant date fair value for Restricted Stock Units or a Black-Scholes-Merton option pricing model to calculate the fair value of unit options by date granted. We record compensation expense for non-employee unit options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the unit option is reached or (2) the date at which the non-employee's performance is complete, using the Black-Scholes Merton option pricing model. Equity-based compensation cost for restricted unit awards is measured based on the closing fair market value of our common unit at the date of grant. If we have the option and intent to settle a restricted unit award in cash, the award is classified as a liability and revalued at each balance sheet date. We expect our equity-based compensation expense to increase over time in absolute dollars as we grow our business. In connection with the IPO, 2,082,572 of the Company's restricted stock units and phantom stock units will vest over the 180 days following the IPO (the lockup period). As a result, the Company will recognize approximately$57.5 million of equity-based compensation ratably throughDecember 31, 2021 . In connection with the closing of our Series E Financing inDecember 2020 , we used approximately$175 million of the proceeds to repurchase outstanding preferred and common units. The majority of the units repurchased were units that had been purchased by the holders in connection with financing transactions, and a minority of units purchased were units that holders owned as a result of equity awards granted by us. General and administrative expenses in 2020 include equity-based compensation expense of$7.8 million as a result of this transaction, which represents the excess of the tender offer repurchase price over the fair value of the units and unit options repurchased, which were held by both current and former employees. Depreciation and Amortization Depreciation is primarily related to building, software applications, computer equipment and leasehold improvements. Intangible assets subject to amortization consist of customer relationships. Non-amortizable intangible assets consist of trademarks, which represent the Company's exclusive ownership of the Zevia brand used in connection with the manufacture, marketing, and distribution of its carbonated beverages. The Company also owns several other trademarks in both theU.S. and in foreign countries. Depreciation and amortization expense is expected to increase in-line with ongoing capital expenditures as our business grows, which we do not expect to be material, given our asset-light business model. Other Income (Expense), net Other income (expense), net consists primarily of interest expense and foreign currency transaction gains and losses. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth selected items in our statements of operations and comprehensive income (loss) for the periods presented: For the Three Months Ended For the Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) Net sales$ 34,352 $ 27,677 $ 65,046 $ 50,167 Cost of goods sold 18,112 13,842 34,618 27,300 Gross profit 16,240 13,835 30,428 22,867 Selling and marketing expenses 10,703 5,717 18,691 12,638 General and administrative expenses(1) 6,014 4,643 11,727 8,976 Depreciation and amortization 230 250 474 473 Total operating expenses 16,947 10,610 30,892 22,087 Income (loss) from operations (707 ) 3,225 (464 ) 780 Other expense, net (42 ) (118 ) (38 ) (267 ) Net income (loss) and comprehensive income (loss)$ (749 ) $ 3,107 $ (502 ) $ 513
(1) General and administrative expenses include equity-based compensation expense
of less than
and
The following table presents selected items in our statements of operations and comprehensive income (loss) as a percentage of net sales for the respective periods presented. Percentages may not sum due to rounding:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net sales 100 % 100 % 100 % 100 %
Cost of goods sold 53 50 53 54
Gross profit 47 50 47 46
Selling and marketing expenses 31 21 29 25
General and administrative
expenses 18 17 18 18
Depreciation and amortization 1 1 1 1
Total operating expenses 49 38 47 44
Income (loss) from operations (2 )% 12 % (1 )% 2 %
Other expense, net 0 0 0 (1 )
Net income (loss) and
comprehensive income (loss) (2 )% 11 % (1 )% 1 %
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Net sales
For the Three Months Ended
June 30, Change
(in thousands) 2021 2020 Amount Percentage
Net sales $ 34,352 $ 27,677 $ 6,675 24 %
Net sales were $34.4 million for the three months ended June 30, 2021 as
compared to $27.7 million for the three months ended June 30, 2020 . Net sales
increased due to an approximately 29% increase in the number of equivalized
cases sold despite outbound shipment disruptions that temporarily impacted our
ecommerce sales, partially offset by a 4% decrease in net average price per
equivalized case due to higher trade discounts during the three months ended
June 30, 2021 . We define an equivalized case as a 288 fluid ounce case.
26
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Cost of Goods Sold
For the Three Months Ended
June 30, Change
(in thousands) 2021 2020 Amount Percentage
Cost of goods sold $ 18,112 $ 13,842 $ 4,270 31 %
Cost of goods sold was $18.1 million for the three months ended June 30, 2021 as
compared to $13.8 million for the three months ended June 30, 2020 . The increase
of $4.3 million or 31% was primarily due to volume increases as cost of goods
sold was essentially flat on a per case basis compared to the prior period.
Gross Profit and Gross Margin
For the Three Months Ended
June 30, Change
(in thousands) 2021 2020 Amount Percentage
Gross profit $ 16,240 $ 13,835 $ 2,405 17 %
Gross margin 47 % 50 %
Gross profit was $16.2 million for the three months ended June 30, 2021 as
compared to $13.8 million for the three months ended June 30, 2020 . The increase
in gross profit of $2.4 million or 17% was primarily driven by higher net
revenue.
Gross margin in the three months ended June 30, 2021 declined to 47% from 50% in
the prior-year period. The decline was primarily due to lower net price
realization as a result of higher trade discounts in 2021. In 2020, trade
discounts were significantly lower largely associated with the COVID-19
pandemic.
As disclosed in Note 2,
Basis Of Presentation And Summary Of Significant Accounting Policies
, in the Notes to Audited Financial Statements for the years ended December 31,
2020 and 2019 included in the Prospectus, we elected to classify shipping and
handling costs for salable product outside of cost of goods sold, in selling and
marketing expenses in the accompanying condensed statements of operations and
comprehensive income (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.
Operating Expenses
Selling and Marketing Expenses
For the Three Months Ended
June 30, Change
(in thousands) 2021 2020 Amount Percentage
Selling and marketing expenses $ 10,703 $ 5,717 $ 4,986 87 %
Selling and marketing expenses were $10.7 million for the three months ended
June 30, 2021 as compared to $5.7 million for the three months ended June 30,
2020 . The increase of $5.0 million or 87%, was primarily due to higher freight
costs and overall net sales growth and $2.0 million of increased marketing spend
as 2020 spend was reduced largely associated with the
COVID-19
pandemic.
General and Administrative Expenses
For the Three Months Ended
June 30, Change
(in thousands) 2021 2020 Amount Percentage
General and administrative expenses $ 6,014 $ 4,643 $ 1,371 30 %
27-------------------------------------------------------------------------------- Table of Contents General and administrative expenses were$6.0 million for the three months endedJune 30, 2021 and$4.6 million for the three months endedJune 30, 2020 . The increase of$1.4 million , or 30%, was primarily driven by$0.6 million in employee-related costs due to an overall increase in employee headcount to support our growth and in preparation to become a public company and a$0.5 million increase in accounting and tax fees, legal and other professional fees and expenses. 28 -------------------------------------------------------------------------------- Table of Contents First Six Months EndedJune 30, 2021 Compared to First Six Months EndJune 30, 2020 Net sales For the Six Months Ended June 30, Change (in thousands) 2021 2020 Amount Percentage Net sales$ 65,046 $ 50,167 $ 14,879 30 % Net sales were$65.0 million for the six months endedJune 30, 2021 as compared to$50.2 million for the six months endedJune 30, 2020 . Net sales increased due to a 26% increase in the number of equivalized cases sold and a 3% increase in net average price per equivalized case. We define an equivalized case as a 288 fluid ounce case. Cost of Goods Sold For the Six Months Ended June 30, Change (in thousands) 2021 2020 Amount Percentage Cost of goods sold$ 34,618 $ 27,300 $ 7,318 27 % Cost of goods sold was$34.6 million for the six months endedJune 30, 2021 as compared to$27.3 million for the six months endedJune 30, 2020 . The increase of$7.3 million or 27% was primarily due to volume increases as cost of goods sold was essentially flat on a per case basis compared to the prior period. Gross Profit and Gross Margin For the Six Months Ended June 30, Change (in thousands) 2021 2020 Amount Percentage Gross profit$ 30,428 $ 22,867 $ 7,561 33 % Gross margin 47 % 46 % Gross profit was$30.4 million for the six months endedJune 30, 2021 as compared to$22.9 million for the six months endedJune 30, 2020 . The increase in gross profit of$7.6 million , or 33% was primarily driven by higher net revenue. Gross margin in the six months endedJune 30, 2021 increased to 47% from 46% in the prior-year period. The increase was due to a price realization and a shift in product mix toward higher margin product lines, partially offset by increases in the cost of goods sold. As disclosed in Note 2, Basis Of Presentation And Summary Of Significant Accounting Policies , in the Notes to Audited Financial Statements for the years endedDecember 31, 2020 and 2019 included in the Prospectus, we elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in the accompanying condensed statements of operations and comprehensive income (loss). As a result, our gross profit and profit margin may not be comparable to other entities that present shipping and handling costs as a component of cost of goods sold. 29 -------------------------------------------------------------------------------- Table of Contents Selling and Marketing Expenses For the Six Months Ended June 30, Change (in thousands) 2021 2020 Amount Percentage Selling and marketing expenses$ 18,691 $ 12,638 $ 6,053 48 % Selling and marketing expenses were$18.7 million for the six months endedJune 30, 2021 as compared to$12.6 million for the six months endedJune 30, 2020 . The increase of$6.1 million or 48%, was primarily due to higher freight costs and overall net sales growth and$2.0 million of increased marketing spend as 2020 spend was reduced largely associated with the COVID-19 pandemic. General and Administrative Expenses For the Six Months Ended June 30, Change (in thousands) 2021 2020 Amount Percentage General and administrative expenses$ 11,727 $ 8,976 $ 2,751 31 % General and administrative expenses were$11.7 million for the six months endedJune 30, 2021 and$9.0 million for the six months endedJune 30, 2020 . The increase of$2.8 million , or 31%, was primarily driven by$1.5 million in employee-related costs driven by an overall increase in employee headcount to support our growth and in preparation to become a public company and a$0.5 million increase in accounting and tax fees, legal and other professional fees and expenses. Seasonality Generally, we experience greater demand for our products during the second and third fiscal quarters, which correspond to the warmer months of the year in our major markets. As our business continues to grow, we expect to see continued seasonality effects, with net sales tending to be greater in the second and third quarters of the year. 30
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Liquidity and Capital Resources
Liquidity and Capital Resources
Our primary cash needs are for operating expenses, working capital and capital
expenditures to support the growth in our business. Prior to our IPO, we have
financed our operations through private sales of equity securities and through
sales of our products. In connection with our IPO, which was completed on July
26, 2021 , we sold an aggregate of 10,700,000 shares of our Class A common stock
at an IPO price of $14.00 per share and retained approximately $90.1 million in
net proceeds, after deducting underwriting discounts and commissions and giving
effect to the use of proceeds thereto.
As of June 30, 2021 , we had $6.4 million in cash. We believe that our cash and
cash equivalents as of June 30, 2021 , together with cash provided by our
operating activities, and proceeds from our IPO, will provide adequate liquidity
for ongoing operations, planned capital expenditures and other investments for
at least the next 12 months.
Future capital requirements will depend on many factors, including our rate of
revenue growth, gross margin and the level of expenditures in all areas of the
Company. To the extent that existing capital resources and sales growth are not
sufficient to fund future activities, we will need to raise capital through
additional equity or debt financing. Additional funds may not be available on
terms favorable to us or at all. In addition, the COVID-19 pandemic continues to
rapidly evolve and has already resulted in a significant disruption of global
financial markets. If the disruption persists and deepens, we could experience
an inability to access additional capital, which could in the future negatively
affect our operations. Failure to raise additional capital, if and when needed,
could have a material adverse effect on our financial position, results of
operations, and cash flows.
Upon consummation of the IPO, the Company became a holding company with no
operations of its own. Accordingly, the Company will be dependent on
distributions from Zevia LLC to pay its taxes, its obligations under the Tax
Receivable Agreement and other expenses. Any future credit facilities may
impose, limitations on the ability of Zevia LLC to pay dividends to the Company.
In connection with the IPO and the Reorganization, the Direct Zevia Stockholders
and certain continuing members of Zevia LLC received the right to receive future
payments pursuant to the Tax Receivable Agreement. The amount payable under the
Tax Receivable Agreement will be based on an annual calculation of the reduction
in our U.S. federal, state and local taxes resulting from the utilization of
certain pre-IPO tax attributes and tax benefits resulting from sales and
exchanges by continuing members of Zevia LLC . See "
Certain Relationships and Related Party Transactions-Tax Receivable Agreement
" included in the Company's Prospectus filed with the SEC on July 23, 2021 . We
expect that the payments that we may be required to make under the Tax
Receivable Agreement may be substantial. Assuming no material changes in the
relevant tax law and that we earn sufficient taxable income to realize all tax
benefits that are subject to the Tax Receivable Agreement, we expect that the
reduction in tax payments for us associated with the federal, state and local
tax benefits described above would aggregate to approximately $75.5 million
through 2036. Under such scenario we would be required to pay the Direct Zevia
Stockholders and certain continuing members of Zevia LLC 85% of such amount, or
$64.2 million through 2036.
The actual amounts may materially differ from these hypothetical amounts, as
potential future reductions in tax payments for us and tax receivable agreement
payments by us will be calculated using prevailing tax rates applicable to us
over the life of the Tax Receivable Agreements and will be dependent on us
generating sufficient future taxable income to realize the benefit.
We cannot reasonably estimate future annual payments under the Tax Receivable
Agreement given the difficulty in determining those estimates as they are
dependent on a number of factors, including the extent of exchanges by
continuing Zevia LLC unitholders, the associated fair value of the underlying
Zevia LLC units at the time of those exchanges, the tax rates applicable, our
future income, and the associated tax benefits that might be realized that would
trigger a Tax Receivable Agreement payment requirement.
31
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However, a significant portion of any potential future payments under the Tax
Receivable Agreement is anticipated to be payable over 15 years, consistent with
the period over which the associated tax deductions would be realized by the
Company, assuming Zevia LLC generates sufficient income to utilize the
deductions. If sufficient income is not generated by Zevia LLC , the associated
taxable income of the Company will be impacted and the associated tax benefits
to be realized will be limited, thereby similarly reducing the associated Tax
Receivable Agreement payments to be made. Given the length of time over which
payments would be payable, the impact to liquidity in any single year is greatly
reduced.
Although the timing and extent of future payments could vary significantly under
the Tax Receivable Agreement for the factors discussed above, we anticipate
funding payments from the Tax Receivable Agreement from cash flows generated
from operations.
Credit Facility
Credit Facility
In 2019, Zevia LLC entered into a loan agreement providing for a $9.0 million
revolving line of credit (the "Credit Facility") with Stonegate, with a maturity
date in April 2022 . Borrowings under the revolving line are secured by accounts
receivable and inventory. In June 2020 , Zevia LLC amended the Credit Facility
and increased it to $12.0 million . As of June 30, 2021 and December 31, 2020 ,
the revolving line interest rate was 7.5% annual percentage rate and there was
no outstanding balance. On June 1, 2021 , Zevia LLC extended the Credit Facility
through April 2023 and there were no other modifications made to the terms and
conditions. In July 2021 and subsequent to the IPO, Zevia LLC terminated the
Credit Facility. There were no material early-termination fees or any other
penalties associated with the termination of the Credit Facility.
Cash Flows
The following table presents the major components of net cash flows from and
used in operating, investing and financing activities for the periods indicated.
For the Six Months Ended
June 30,
2021 2020
Cash (used in) provided by:
Operating activities
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$37,000 for the six months endedJune 30, 2021 was primarily driven by a net loss of$0.5 million and by a net decrease in cash related to changes in operating assets and liabilities of$0.4 million partially offset by non-cash expenses of$0.9 million related to depreciation and amortization. Changes in cash flows related to operating assets and liabilities primarily consisted of a$2.5 million increase in accounts receivable due to increases in net sales, a$1.7 million increase in inventories due to the timing of inventory purchases partially offset by$3.9 million net increase in accounts payable, accrued expenses and other current liabilities. 32 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities of$2.7 million for the six months endedJune 30, 2020 was primarily driven by a net decrease in cash related to changes in operating assets and liabilities of$4.0 million partially offset by a net income of$0.5 million and non-cash expenses of$0.8 million related to depreciation, amortization and loss on sale of equipment. Changes in cash flows related to operating assets and liabilities primarily consisted of a$7.1 million increase in inventories as a precaution to ensure adequate supply in the midst of a pandemic and$2.6 million in accounts receivable due to increases in net sales, partially offset by a$5.7 million increase in accounts payable, accrued expenses and other current liabilities.Net Cash Used in Investing Activities Net cash used in investing activities of$2.0 million for the six months endedJune 30, 2021 was due to the purchase of a warehouse facility used in ongoing operations. Net cash used in investing activities of$0.5 million for the six months endedJune 30, 2020 was due to purchases of software applications and computer equipment used in ongoing operations. Net Cash Provided by (Used in) Financing Activities Net cash used in financing activities of$6.5 million for the six months endedJune 30, 2021 was due to distribution to unitholders for tax payments of$2.7 million and the payment of deferred IPO related costs of$3.8 million . Net cash provided by financing activities of$4.2 million in the six months endedJune 30, 2020 was due to borrowings under the Company's Credit Facility and the Paycheck Protection Program. Non-GAAP Financial Measures We report our financial results in accordance with US GAAP. However, management believes that Adjusted EBITDA and Adjusted Net Income (Loss), non-GAAP financial measures, provide investors with additional useful information in evaluating our performance. We calculate Adjusted EBITDA as net (loss) income adjusted to exclude: (1) income tax expense, (2) depreciation and amortization, (3) other income (expense), net, (4) interest expense, and (5) equity-based compensation expense. Adjusted EBITDA may in the future also be adjusted for amounts impacting net income related to the Tax Receivable Agreement liability and other infrequent and unusual transactions. We calculate Adjusted Net Income (Loss) as net (loss) income adjusted to exclude equity-based compensation expense. Adjusted EBITDA and Adjusted Net Income (Loss) are financial measures that are not required by, or presented in accordance with US GAAP. We believe that Adjusted EBITDA and Adjusted Net Income (Loss), when taken together with our financial results presented in accordance with US GAAP, provide 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 and Adjusted Net Income (Loss) are helpful to our investors as they are measures 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 and Adjusted Net Income (Loss) are presented for supplemental informational purposes only, have limitations as analytical tools 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 expense. Some of the limitations of Adjusted Net Income (Loss) include that it does not consider the impact of equity-based compensation expense, including the potential dilutive impact thereof. In addition, our use of Adjusted EBITDA and Adjusted Net Income (Loss) may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA or Adjusted Net Income (Loss) in the same manner, limiting their usefulness as comparative measures. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA and Adjusted Net Income (Loss) alongside other financial measures, including our net loss or income and other results stated in accordance with US GAAP. 33 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with US GAAP, to adjusted EBITDA for the periods presented: For the Three Months Ended For the Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in
thousands)
Net income (loss) and comprehensive income (loss)$ (749 ) $ 3,107 $ (502 ) $ 513 Income tax expense (benefit) - - - - Depreciation and amortization 230 250 474 473 Other expense, net 42 118 38 267 Equity-based compensation expense 36 29 73 58 Adjusted EBITDA$ (441 ) $ 3,504 $ 83 $ 1,311
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with US GAAP, to adjusted net income (loss) for the periods presented:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(inthousands)
Net income (loss) and comprehensive income (loss)$ (749 ) $ 3,107 $ (502 ) $ 513 Equity-based compensation expense 36 29 73 58 Adjusted net income (loss)$ (713 ) $ 3,136 $ (429 ) $ 571 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements or any holdings in variable interest entities. Commitments There have been no significant changes during the three months endedJune 30, 2021 to the contractual obligations disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Prospectus. 34 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our condensed financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q 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, revenue, 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. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Prospectus and the notes to the audited financial statements appearing elsewhere in the Prospectus. During the three and six months endedJune 30, 2021 , there were no material changes to our critical accounting policies from those discussed in our Prospectus. 35 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements Refer to Note 2 to our condensed financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted. Emerging Growth Company Status We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies." We may take advantage of these exemptions until we are no longer an "emerging growth company." Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three- year period. 36
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