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 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, toZevia LLC , and (2) after the consummation of the Reorganization Transactions, toZevia PBC and its consolidated subsidiaries unless the context indicates otherwise. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are a high-growth beverage company that is disrupting the liquid refreshment beverage industry through delicious and refreshing, zero calorie, zero sugar, naturally sweetened beverages that are all Non-GMO Project Verified. We are a pioneering beverage brand, offering a platform of products that include a broad variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, Kidz drinks and Sparkling Water. All of our beverages are made with only a handful of plant-based ingredients that most consumers can easily pronounce. Our products are distributed across theU.S. andCanada through a diverse network of major retailers in the food, drug, warehouse club, mass, natural and e-commerce channels. We believe that consumers increasingly select beverage products based on taste and ingredients and fit with today's consumer preferences, which has benefited the Zevia® brand and resulted in over one billion cans of Zevia sold to date. Consumers can purchase our products in both brick-and-mortar and e-commerce channels. Zevia was initially distributed in 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, warehouse club and mass retailers. In the first quarter of 2022, Zevia was the highest selling carbonated soft drink brand on Amazon according to Stackline, which we believe is representative of an online product discovery and education-oriented purchasing process that is gaining traction among shoppers.
IPO and Reorganization Transaction
OnJuly 26, 2021 , we completed our IPO of Class A common stock, in which we sold 10,700,000 shares to the Underwriters. Shares of Class A common stock began trading on 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 . Immediately following the closing of the IPO onJuly 26, 2021 ,Zevia LLC became the predecessor ofZevia PBC for financial reporting purposes.Zevia PBC is a holding company, and its sole material asset is its controlling equity interest inZevia LLC . As the sole managing member ofZevia LLC ,Zevia PBC operates and controls all of the business and affairs ofZevia LLC . This reorganization is accounted for as a reorganization of entities under common control. As a result, the condensed consolidated financial statements of the Company will recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical financial statements ofZevia LLC .Zevia PBC has consolidatedZevia LLC in its financial statements and record a noncontrolling interest related to the Class B units held by the Class B stockholders on its condensed consolidated balance sheet and statement of operations. As ofMarch 31, 2022 ,Zevia PBC holds an economic interest of 58.0% inZevia LLC and the remaining 42.0% represents the non-controlling interest.
Factors Affecting the Comparability of Our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
Impact of the Reorganization Transaction
The Company is a corporation forU.S. federal and state income tax purposes. Our accounting predecessor,Zevia LLC , was and is treated as a flow-through entity forU.S. federal and most applicable state and local income tax purposes. As an entity classified as a partnership for tax purposes,Zevia LLC is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated byZevia LLC is passed through to its members, including the Company.Zevia PBC is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated fromZevia LLC based on the Company's economic ownership interest inZevia LLC , which was 58.0% as ofMarch 31, 2022 . Accordingly, the historical results of operations and other financial information set forth in this Quarterly Report do not include a provision forU.S. federal income taxes. 17 -------------------------------------------------------------------------------- Following the completion of the Reorganization Transactions, the Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated fromZevia LLC based on the Company's 58.0% economic interest inZevia LLC .Zevia LLC is the predecessor of the Company for financial reporting purposes. As a result, the condensed consolidated financial statements of the Company recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical condensed consolidated financial statements ofZevia LLC , the accounting predecessor. In addition, in connection with the Reorganization Transactions and the IPO, we entered into the tax receivable agreements described in Note 16 - Income Taxes and Tax Receivable Agreement in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
Initial Public Offering
InJuly 2021 , the Company completed its IPO which significantly impacted our cash, debt, and equity balances. Concurrent with the IPO, the Company also terminated its previous credit facility which reduced our outstanding debt to zero, and our interest expense was significantly reduced in the second half of 2021 and in 2022 relative to historical results.
Equity-Based Compensation
InMarch 2021 ,Zevia LLC modified certain outstanding RSU awards originally granted inAugust 2020 to provide for vesting as follows: (i) in the event of a change of control, the RSUs shall vest effective as of such change of control, or (ii) in the event of an IPO, the RSUs shall vest in equal monthly installments over a 36-month period following the termination of any lockup period and shall be subject to the participant's continued employment through such vesting date. InJuly 2021 , Zevia modified all outstanding restricted phantom unit awards to permit settlement into shares, eliminating the existing cash-settlement provision. These modifications resulted in the revaluation of the awards in accordance with US GAAP. No equity-based compensation had been recognized for all of the RSU and phantom awards as the qualifying vesting event (i.e., the IPO) was not probable. Upon completion of the IPO throughMarch 31, 2022 , the Company recognized$86.2 million of compensation expense attributable to these RSUs and restricted phantom unit awards, as well as other outstanding RSUs. The remaining unamortized fair value of the RSUs awards will be recognized as equity-based compensation over the remaining service period of the awards, which vest over a 36-month period following the termination of the lockup period. Refer to Note 11 - Equity-based Compensation in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for unamortized equity-based compensation costs related to each type of equity-based incentive award.
Other Factors Affecting Our Performance
COVID-19 UPDATE
The ongoing COVID-19 pandemic and its resulting impacts on the global economy, including supply chain challenges and labor shortages, have led to broad-based inflation in input costs, logistics, manufacturing and labor costs. During the three months endedMarch 31, 2022 , we have experienced supply chain disruptions and a significant inflationary impact compared to the prior year. These challenges intensified due to the surge in cases resulting from the Omicron variant of COVID-19. These impacts have created headwinds for our products that we expect to continue in 2022. These inflationary pressures could impact our margins and operating results. We, along with our competitors, have increased pricing on a number of products in response to widespread inflation. These pricing increases may result in future reductions in volume.
The following summarizes the components of our results of operations for the
three months ended
Components of Our Results of Operations
We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, Kidz beverages and Sparkling Water, to our customers, which include grocery distributors, national retailers, natural products retailers, warehouse club and e-commerce channels, in 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 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 also expect expansion of distribution into new channels to be a key driver of our future sales growth. We expect that our sales directly to retailers will increase as a percentage of our net sales over time.
We sell our products in the
through distributors. We do not have short- or long- term sales commitments with
our customers.
Cost of Goods Sold
Cost of goods sold consists of all costs to acquire and manufacture our
products, including the cost of ingredients, packaging, in-bound freight and
logistics and third-party production fees. Our cost of goods sold is subject to
price fluctuations in the marketplace, particularly in the price of aluminum
18
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and other raw materials, as well as in the cost of production, packaging,
in-bound freight and logistics. Our cost of goods sold is generally higher for
products sold through our e-commerce and warehouse club channels than through
our retail store channel due to additional packaging requirements. Our results
of operations depend on our ability to arrange for the purchase of raw materials
and the production of our products in sufficient quantities at competitive
prices. We have long- term contracts with certain suppliers of stevia and
aluminum cans. We expect over the long term that, as the scale of our business
increases, we will purchase a greater percentage of our aluminum cans directly
rather than through third-party manufacturers. We have long- term contracts with
certain manufacturers governing pricing and other terms and minimum commitments
on our part, but these contracts generally do not guarantee any minimum
production volumes on the part of the manufacturers.
We expect our cost of goods sold to increase in absolute dollars as our volume
increases.
We elected to classify shipping and handling costs for salable product outside
of cost of goods sold, in selling and marketing expenses in our condensed
consolidated 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.
Gross Profit
Gross profit consists of our net sales less costs of goods sold. Our gross profit and gross margin are affected by the mix of distribution channels of our net sales in each period, as well as the level of discounts and promotions offered during the period. Gross profit may be favorably impacted by leveraging our asset-light business model and through increased distribution direct to retailers, the increased scale of our business and our continued focus on cost improvements, particularly in our supply chain. Despite the recent decline in margin as a result of inflationary factors, we anticipate gross margin to improve in future quarters benefitting from recent and future pricing actions.
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of warehousing and distribution costs and advertising and marketing expenses. Warehousing and distribution costs include storage, transfer and out-bound freight and delivery charges. Advertising and marketing expenses consist of variable costs associated with production and media buying of marketing programs and trade events. Selling and marketing expenses also includes the incremental costs of obtaining contracts, such as sales commissions. Our selling and marketing expenses are expected to increase in absolute dollars, both as a result of the increased warehousing and distribution costs resulting from increased net sales, which we expect to be partially offset by our continued focus on cost improvements in our supply chain, and as a result of increased focus on marketing.
General and Administrative Expenses
Administrative expenses include all salary and other personnel expenses (other
than equity-based compensation expense) for our employees, including employees
related to management, marketing, sales, product development, quality control,
accounting, information technology ("IT") and other functions. Our general and
administrative expenses are expected to increase in absolute dollars over time
as we increase our headcount to support our growth and as we increase personnel
in legal, accounting, IT and compliance-related expenses to support our
obligations as a public company.
Equity-Based Compensation Expense
Equity-based compensation expense consists of the recorded expense of equity-based compensation for our employees and for certain consultants and service providers who are non-employees. We record equity-based compensation expense for employee grants using grant date fair value for RSUs or a Black-Scholes-Merton option pricing model to calculate the fair value of stock options by date granted. Equity-based compensation cost for RSU awards is measured based on the closing fair market value of the Zevia LLC Class B unit or the Zevia PBC Class A common stock, as applicable, on the date of grant. We expect our equity-based compensation expense to decrease after the end of expiration of the lockup period inJanuary 2022 , which coincides with the end of the vesting period for the majority of the awards.
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 represents 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 theU.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 (gains) losses.
19 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth selected items in our condensed consolidated
statements of operations and comprehensive income (loss) for the periods
presented:
Three Months Ended March 31,
2022 2021
(in thousands, except per share amounts)
Net sales $ 38,034 $ 30,694
Cost of goods sold 23,413 16,506
Gross profit 14,621 14,188
Operating expenses:
Selling and marketing 12,795 7,988
General and administrative 10,129 5,676
Equity-based compensation 8,901 37
Depreciation and amortization 351 244
Total operating expenses 32,176 13,945
Income (loss) from operations (17,555 ) 243
Other income, net 82 4
Income (loss) before income taxes (17,473 ) 247
Provision for income taxes (12 ) -
Income (loss) and comprehensive income (loss) (17,485 ) 247
Loss (income) attributable to noncontrolling interest 6,587 (247 )
Net loss attributable to Zevia PBC $ (10,898 ) $ -
Net loss per share attributable to common stockholders
Basic $ (0.30 ) N/A
Diluted $ (0.30 ) N/A
The following table presents selected items in our condensed consolidated
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:
Three Months Ended March 31,
2022 2021
Net sales 100 % 100 %
Cost of goods sold 62 % 54 %
Gross profit 38 % 46 %
Operating expenses:
Selling and marketing 34 % 26 %
General and administrative 27 % 18 %
Equity-based compensation 23 % 0 %
Depreciation and amortization 1 % 1 %
Total operating expenses 85 % 45 %
Income (loss) from operations (46 )% 1 %
Other income, net 0 % 0 %
Income (loss) before income taxes (46 )% 1 %
Provision for income taxes (0 )% -
Income (loss) and comprehensive income (loss) (46 )% 1 %
Loss (income) attributable to noncontrolling interest 17 % (0 )
Net loss attributable to Zevia PBC (29 )% -
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Net sales
Three Months Ended March 31, Change
(in thousands) 2022 2021 Amount Percentage
Net sales $ 38,034 $ 30,694 $ 7,340 24 %
Net sales were $38.0 million for the three months ended March 31, 2022 as
compared to $30.7 million for the three months ended March 31, 2021 . Net sales
increased due to an approximately 21% increase in the number of equivalized
cases sold driven by increased distribution and consumer demand, and optimizing
promotional investments. This occurred despite ordering disruptions that
temporarily impacted our e-commerce sales. We define an equivalized case as a
288 fluid ounce case.
20
--------------------------------------------------------------------------------
Cost of Goods Sold
Three Months Ended March 31, Change
(in thousands) 2022 2021 Amount Percentage
Cost of goods sold $ 23,413 $ 16,506 $ 6,907 42 %
Cost of goods sold was $23.4 million for the three months ended March 31, 2022
as compared to $16.5 million for the three months ended March 31, 2021 . The
increase of $6.9 million or 42% was primarily due to an increase in equivalized
cases shipped of 21%, higher cost of goods sold as a result of broad-based
inflation of 12%, and product mix.
Gross Profit and Gross Margin
Three Months Ended March 31, Change
(in thousands) 2022 2021 Amount Percentage
Gross profit $ 14,621 $ 14,188 $ 433 3 %
Gross margin 38 % 46 %
Gross profit was
compared to
increase in gross profit of
net sales, offset by higher cost of goods sold.
Gross margin in the three months endedMarch 31, 2022 declined to 38% from 46% in the prior-year period. The decline was primarily due to higher cost of goods sold as a result of broad-based inflation and product mix.
Selling and Marketing Expenses
Three Months Ended March 31 ,
Change
(in thousands) 2022 2021 Amount Percentage Selling and marketing expenses$ 12,795 $ 7,988 $ 4,807 60 % Selling and marketing expenses were$12.8 million for the three months endedMarch 31, 2022 as compared to$8.0 million for the three months endedMarch 31, 2021 . The increase of$4.8 million or 60%, was primarily due to higher freight and warehousing costs of$3.8 million largely due to increases in equivalized cases produced and sold, inflation and higher freight costs amidst a challenging transportation market in the US andCanada and$0.9 million of increased marketing spend for continued investment in increasing velocity and growing the Zevia® brand.
General and Administrative Expenses
Three Months Ended March 31, Change
(in thousands) 2022 2021 Amount Percentage
General and administrative expenses $ 10,129 $ 5,676 $ 4,453 78 %
General and administrative expenses were $10.1 million for the three months
ended March 31, 2022 and $5.7 million for the three months ended March 31, 2021 .
The increase of $4.5 million , or 78%, was primarily driven by $2.5 million
increase in employee headcount costs to support our growth including employee
salary, and a $1.6 million increase in costs related to being a public company,
including insurance, accounting, and legal and other professional fees.
Equity-Based Compensation Expenses
Three Months Ended March 31, Change
(in thousands) 2022 2021 Amount Percentage
Equity-based compensation $ 8,901 $ 37 $ 8,864 N/M
Equity-based compensation expense was $8.9 million for the three months ended
March 31, 2022 , of which $3.1 million related to restricted stock unit awards
and phantom stock awards that vested as of the expiration of the IPO lock-up
period in January 2022 .
Seasonality
Generally, we experience greater demand for our products during the second and
third fiscal quarters of the year, which correspond to the warmer months of the
year in our major markets. As our business continues to grow, we expect to see
continued seasonality effects, with net sales tending to be greater in the
second and third quarters of the year.
Liquidity and Capital Resources
Liquidity and Capital Resources
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 onJuly 26, 2021 , we sold an aggregate of 10,700,000 shares of our Class A common stock at an IPO price of$14.00 per share and retained approximately$90.1 million in net proceeds, after deducting underwriting discounts and commissions and giving effect to the use of proceeds thereto. In addition, we incurred$8.4 million of offering costs in connection with the IPO. 21 -------------------------------------------------------------------------------- As ofMarch 31, 2022 , we had$28.8 million in cash and cash equivalents, and$30.0 million of short-term investments. We believe that our cash and cash equivalents and short-term investments as ofMarch 31, 2022 , together with our operating activities and available borrowings under the Secured Revolving Line of Credit will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments beyond the next 12 months. Future capital requirements will depend on many factors, including our rate of revenue growth, gross margin and the level of expenditures in all areas of the Company. We expect operating and capital expenditures to increase in the future as we expand business activities and increase headcount to promote growth. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we will need to raise capital through additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Also, we will continue to assess our liquidity needs as the COVID-19 pandemic, inflationary pressures, and the outbreak of war betweenRussia andUkraine continue to evolve and impact the global and national economies and our operations. In addition, the war betweenRussia andUkraine has resulted in a significant disruption of global financial markets. If the 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.
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
other expenses. Any future credit facilities may impose limitations on the
ability of
In connection with the IPO and the Reorganization, the Direct Zevia Stockholders and certain continuing members ofZevia 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 ourU.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 ofZevia LLC . See "Certain Relationships and Related Party Transactions-Tax Receivable Agreement" included in the prospectus datedJuly 21, 2021 and filed with theSEC onJuly 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$58.0 million through 2037. Under such scenario we would be required to pay the Direct Zevia Stockholders and certain continuing members ofZevia LLC 85% of such amount, or$49.3 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 continuingZevia LLC unitholders, the associated fair value of the underlyingZevia 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, assumingZevia LLC generates sufficient income to utilize the deductions. If sufficient income is not generated byZevia 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
OnFebruary 22, 2022 , we obtained a revolving credit facility (the "Secured Revolving Line of Credit") by entering into a Loan and Security Agreement withBank of America, N.A . 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 Line of Credit matures in five years onFebruary 22, 2027 . There have been no amounts drawn from the Secured Revolving Line of Credit. 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. We are required under the Secured Revolving Line of Credit to comply with certain covenants, including, among others, by maintaining Liquidity (as defined therein) of$7 million at all times untilDecember 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. 22 --------------------------------------------------------------------------------
Cash Flows
The following table presents the major components of net cash flows from and
used in operating, investing and financing activities for the periods indicated.
Three Months Ended March 31,
(in thousands) 2022 2021
Cash (used in) provided by:
Operating activities
Investing activities $ (565 )
Financing activities
Our cash flows used in operating activities are primarily influenced by working
capital requirements.
Net cash used in operating activities of$11.4 million for the three months endedMarch 31, 2022 was primarily driven by a net loss of$17.5 million and by a net decrease in cash related to changes in operating assets and liabilities of$3.3 million partially offset by non-cash expenses of$9.4 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities were primarily due to an increase in accounts receivable of$4.4 million due to increases in net sales, and increase in inventories of$0.9 million in anticipation of future sales, offset by a$1.0 million decrease in prepaid expenses and other assets, primarily due to amortization of prepaid insurance policies and a$1.2 million increase in accounts payable and accrued expenses and other current liabilities due to our overall growth. Net cash used in operating activities of$2.3 million for the three months endedMarch 31, 2021 was primarily driven by net income of$0.2 million and by a net decrease in cash related to changes in operating assets and liabilities of$3.0 million partially offset by non-cash expenses of$0.4 million primarily related to depreciation and amortization. Changes in cash flows related to operating assets and liabilities primarily consisted of a$2.4 million increase in accounts receivable due to increase in net sales and a$1.3 million increase in prepaid expenses and other assets, primarily due to costs incurred in connection with the preparation of the IPO, offset by a$0.7 due to higher shipments and a$0.2 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.
Net cash used in investing activities of$0.6 million for the three months endedMarch 31, 2022 was due to purchases of property and equipment of$0.6 million for marketing fixtures, software applications and computer equipment used in ongoing operations.
Net cash used in investing activities of
equipment used in ongoing operations.
Net cash used in financing activities of$2.3 million for the three months endedMarch 31, 2022 was primarily due to minimum tax withholdings paid on behalf of employees for net share settlements of$2.1 million and payment of debt issuance costs of$0.2 million in connection with the Secured Revolving Line of Credit. Net cash provided by financing activities in the three months endedMarch 31, 2021 was primarily driven by proceeds from$29.5 million of borrowings on the revolving line of credit offset by$29.5 million of repayments on the revolving line of credit. Non-GAAP Financial Measures We report our financial results in accordance with US GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance. We calculate Adjusted EBITDA as net income (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 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 (income) expense, foreign currency (gains)/losses and (gains)/losses on disposal of fixed assets. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as comparative measures. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income (loss) or income and other results stated in accordance with US GAAP. 23 --------------------------------------------------------------------------------
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:
Three Months Ended March
31,
(in thousands) 2022
2021
Income (loss) and comprehensive income (loss) $ (17,485 ) $
247 Other income, net* (82 ) (4 ) Provision for income taxes 12 - Depreciation and amortization 351 244 Equity-based compensation 8,901 37 Adjusted EBITDA $ (8,303 )$ 524
* Includes interest (income) expense, foreign currency (gains) losses, and
(gains) losses on disposal of fixed assets.
Commitments
Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space, and vehicles. For a further discussion on our debt and operating lease commitments as ofMarch 31, 2022 , see the sections above as well as Note 7, Debt, and Note 8, Leases, included in the Condensed Consolidated Financial Statements of this Quarterly Report. OnMarch 25, 2022 , the Company entered into an amendment to the lease for our corporate offices to extend the term throughDecember 31, 2023 and expand the total square footage from 17,923 square feet to 20,185 square feet commencing onMay 1, 2022 .
Our inventory purchase commitments are generally short-term in nature and have
ordinary commercial terms. We did not have any material long-term inventory
purchase commitments as of
Critical Accounting Policies and Estimates
Our 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
Condensed Consolidated Financial Statements of this Quarterly Report for a
discussion of recently issued accounting pronouncements not yet adopted.
Emerging Growth Company Status
We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies." We may take advantage of these exemptions until we are no longer an "emerging growth company." Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if any of the following events occur; (i) we have more than$1.07 billion in annual revenue, (ii) 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 (iii) we issue more than$1.0 billion of non-convertible debt securities over a three- year period.
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