# Vita Coco Company, Inc. (COCO) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Vita Coco Company, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1482981/000148298124000012/coco-20231231.htm
Accession: 0001482981-24-000012
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/COCO/
All MD&A years: /company/COCO/mda/
Previous year: /company/COCO/mda/fy2022/ (FY 2022)
Next year: /company/COCO/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this 10-K filing. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” or in other parts of this Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Except as otherwise noted, all references to 2023 refer to the year ended December 31, 2023, all references to 2022 refer to the year ended December 31, 2022 and all references to 2021, refer to the year ended December 31, 2021.

This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2023 and 2022 and year-over-year comparisons between the years ended December 31, 2023 and 2022. Discussions of the periods prior to the year ended December 31, 2022 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 and the discussion therein for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Overview

The Vita Coco Company is a leading platform for brands in the functional beverage category. We pioneered packaged coconut water in 2004 and have extended our business into other categories. Our mission is to deliver great tasting, natural and nutritious products that we believe are better for consumers and better for the world. We are one of the largest brands globally in the coconut and other plant waters category, and a large supplier of private label coconut water.

Our branded portfolio is led by our Vita Coco brand, which is the leader in the coconut water category in the United States, and also includes coconut oil, juice, and milk offerings. Our other brands include Ever & Ever, a sustainably packaged water, and PWR LIFT, a protein-infused fitness drink. We also offered Runa, a plant-based energy drink inspired by the guayusa plant native to Ecuador, which we ceased selling in December 2023. We supply private label products to key retailers in both the coconut water and coconut oil categories. Additionally, we generate revenue from bulk product sales to beverage and food companies.

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We source our coconut water from a diversified global network of 14 factories across six countries supported by thousands of coconut farmers. As we do not own any of these factories, our supply chain is a fixed asset-lite model designed to better react to changes in the market or consumer preferences. We also work with co-packers in America and Europe to support local packaging and repacking of our products and to better service our customers’ needs.

Vita Coco is available in over 30 countries, with our primary markets in North America, the United Kingdom, and China. Our primary markets for private label are North America and Europe. Our products are distributed primarily through club, food, drug, mass, convenience, e-commerce, and foodservice channels. Our products are also available in a variety of on-premise locations such as corporate offices, fitness clubs, airports, and educational institutions.

Key Factors Affecting Our Performance

We believe that the growth of our business and our future success are dependent upon many factors, including the key trends and uncertainties highlighted below:

Risks Associated with our Supply Chain and Shipping

    Our global asset lite supply chain model has been an integral part of our ability to efficiently scale our business and compete in the marketplace, and to support our private label business. This asset-lite model allows us to effectively manage total delivery costs and afford greater ability to shift volume between our suppliers to optimize our supply chain, and better manage our supply levels. In addition, our scale of sourcing has allowed us to add capacity as needed and service retailers more reliably, and we believe that our global position as one of the largest and highest quality coconut water procurers in the world protects our customer and supplier relationships.

However, in order to make our supply chain model successful and efficient, we source a large amount of our finished goods from international countries, which exposes us to international supply chain inflation, particularly ocean freight. Uncertainty in the macroeconomic environment resulting from geopolitical and economic instability (including the effects of current wars and other international conflicts) and variability in interest rates, foreign exchange rates and inflationary cost environments may affect our global supply chain. Inflation rates and foreign exchange rate movements varies by country and relevant period, and can impact our expenses significantly.

We experienced significant inflation on transportation costs over the past three years, which affected our costs and margins significantly. Although we saw these transportation costs return to near pre-pandemic levels during 2023, we expect instability in pricing to continue in 2024 caused by recent geopolitical disruption of shipping lanes due to ocean carriers avoiding the Gulf due primarily to concerns that Houthi forces, based in Yemen, may attack freighters. We experienced spot cost increases for ocean freight routes from Asia, and then more significant cost increases when carriers began to route away from the Suez Canal. The changes in shipping container prices and service levels and cost increases in shipping and port congestion related costs have materially impacted our financial results in recent years. Due to the price sensitivity of our products, we may not be able to pass such increases on to our customers without impacting our volume, revenue, margins, and operating results and we have no certainty when these pressures may lessen. The Company is continuing to monitor the situation carefully to understand any future potential impact on its people and business.

Consumer Demand and Relationships with Key Customers

Coconut water accounted for approximately 92% of our revenue for the year ended December 31, 2023 and we believe that sales of coconut water will continue to be a significant portion of our business in the foreseeable future. The coconut water category has been growing steadily in recent years and our Vita Coco brand has successfully gained over 50% market share in the US and over 80% market share in the UK in this category. We are also a significant supplier of private label coconut water and coconut oil products in the US and in Europe. Any material negative change to consumer demand for our products or coconut water generally, or failure to grow the coconut water category, could adversely affect our business. Consumer demand between branded products and private label may vary over time. In order to meet this consumer demand for our products, we also are subject to the risk of overly relying upon our largest customers for both our branded and private label business. In 2023, we announced changes to our supply relationship with a significant private label customer with the expected loss of a significant private label coconut oil business. Any loss of business or changes in our relationships with our key customers can impact our operating results in future periods, as may changes in consumer demand for private label versus branded products.

Ability to Generate Growth Through Product Innovation

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The beverage industry is subject to shifting consumer preferences which present opportunities for new beverage occasions, tastes and functional benefits. Our future success is therefore partially dependent on our ability to identify these trends and develop products and brands that effectively meet those needs. We also invest in sales and marketing and execute our sales strategy to develop and deepen consumers’ connection to our brand and new products and to create category growth and increase our branded share. Our innovation efforts focus on developing and marketing product extensions, improving upon the quality and taste profiles of existing products, and introducing new products or brands to meet evolving consumer needs. For example, we introduced Vita Coco juice as our first broad based offering of coconut juice with pulp in cans. In 2023, we expanded distribution of Vita Coco juice, with a focus on convenience stores and, in 2024, we intend to continue to gain distribution in convenience, while expanding to select mass and food retailers.

We maintain in-house research and development capabilities as well as strong third-party relationships with flavor development houses, and we monitor the latest advancements to support continued innovation and learning. Our ability to successfully improve existing products, or develop, market and sell new products or brands, or our ability to grow the category or gain branded share, depends on our commitment and continued investment in sales execution, marketing, innovation, and our willingness to try and fail and learn from our experiences.

Ability to Successfully Execute Both In-Store and Online

To aid the growth of our business, we intend to continue improving our operational efficiency and leverage our brand position across channels, and therefore have a balanced approach to investment and development of capabilities in retail and e-commerce execution. Our DSD network is an important asset in executing physical retail programs and ensuring product availability and visibility in the United States. In 2023, we offered more multi-packs in coconut water in US retail to increase consumption with core consumers, and increased distribution of our other product offerings. Managing our DSD network requires relationship building and communication as to plans, and alignment of goals and interests, and we are not always a top priority for our DSD network. We also continue to expand our business in e-commerce, including our DTC business, and look to adapt our approaches as consumer and retail behavior changes to ensure we remain competitive and visible regardless of channel.

Components of Our Results of Operations

Net Sales

We generate revenue through the sale of our Vita Coco branded coconut water, Private Label and Other products in the Americas and International segments. Our sales are predominantly made to distributors or to retailers for final sale to consumers through retail channels, which includes sales to traditional brick and mortar retailers, who may also resell our products through their own online platforms. Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers.

Cost of Goods Sold

Cost of goods sold includes the costs of the products sold to customers, inbound and outbound shipping and handling costs, freight and duties, shipping and packaging supplies, and warehouse fulfillment costs.

Gross Profit and Gross Margin

Gross profit is net sales less cost of goods sold, and gross margin is gross profit as a percentage of net sales. Gross profit has been, and will continue to be, affected by various factors, including the mix of products we sell, the channel through which we sell our products, the promotional environment in the marketplace, manufacturing costs, exchange rates, commodity prices and transportation rates. We expect that our gross margin will fluctuate from period to period depending on the interplay of these variables.

Management believes gross margin provides investors with useful information related to the profitability of our business prior to considering all of the operating costs incurred. Management uses gross profit and gross margin as key measures in making financial, operating and planning decisions and in evaluating our performance.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") include marketing expenses, promotional expenses, and general and administrative expenses. Marketing and promotional expenses consist primarily of costs incurred promoting

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and marketing our products and are primarily driven by investments to grow our business and retain customers. General and administrative expenses include payroll, employee benefits, stock-based compensation, broker commissions and other headcount-related expenses associated with supply chain & operations, finance, information technology, human resources and other administrative-related personnel, as well as general overhead costs of the business, including research and development for new innovations, rent and related facilities and maintenance costs, depreciation and amortization, and legal, accounting, and professional fees. We expense all SG&A as incurred.

Other Income (Expense), Net

Unrealized Gain/(Loss) on Derivative Instruments

We are subject to foreign currency risks as a result of our inventory purchases and intercompany transactions. In order to mitigate the foreign currency risks, we and our subsidiaries enter into foreign currency exchange contracts which are recorded at fair value. Unrealized gain/(loss) on derivative instruments consists of gains or losses on such foreign currency exchange contracts which are unsettled as of period end. See “—Qualitative and Quantitative Disclosures about Market Risk—Foreign Currency Exchange Risk” for further information.

Foreign Currency Gain/(Loss)

Our reporting currency is the U.S. dollar. We maintain the financial statements of each entity within the group in its local currency, which is also the entity’s functional currency. Foreign currency gain/(loss) represents the transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency. See “—Qualitative and Quantitative Disclosures about Market Risk—Foreign Currency Exchange Risk” for further information.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents, and money market funds.

Interest Expense

Interest expense consists of interest payable on our credit facilities and vehicle loans.

Income Tax Expense

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Operating Segments

We operate in two reporting segments:

•Americas—The Americas segment is comprised of our operations in the Americas region, primarily in the United States and Canada.

•International—The International segment is comprised of our operations primarily in Europe, the Middle East, and the Asia Pacific regions.

Each segment derives its revenues from the following product categories:

•Vita Coco Coconut Water—This product category consists of all branded coconut water product offerings under the Vita Coco labels, where the majority ingredient is coconut water. For these products, control is transferred upon customer receipt, at which point the Company recognizes the transaction price for the product as revenue.

•Private Label —This product category consists of all private label product offerings, which includes coconut water and coconut oil. The Company determined the production and distribution of private label products represents a distinct performance obligation. Since there is no alternative use for these products and the Company has the right to payment for performance completed to date, the Company recognizes the revenue for

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the production of these private label products over time as the production for open purchase orders occurs, which may be prior to any shipment.

•Other—This product category consists of all other products, which includes Runa (until we ceased selling it in December 2023), Ever & Ever and PWR LIFT product offerings, Vita Coco product extensions beyond coconut water, coconut milk products, and other revenue transactions (e.g., bulk product sales). For these products, control is transferred upon customer receipt, at which point the Company recognizes the transaction price for the product as revenue.

Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022, respectively:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Net sales","$","493,612","","","$","427,787","","","","","$","65,825","","","15.4","%"],["Cost of goods sold","312,883","","","324,426","","","","","(11,543)","","","(3.6","%)"],["Gross profit","180,729","","","103,361","","","","","77,368","","","74.9","%"],["Operating expenses"],["Selling, general and administrative","124,236","","","100,306","","","","","23,930","","","23.9","%"],["Total operating expenses","124,236","","","100,306","","","","","23,930","","","23.9","%"],["Income from operations","56,493","","","3,055","","","","","53,438","","","n/m"],["Other income (expense)"],["Unrealized gain (loss) on derivative instrument","(872)","","6,606","","","","(7,478)","","","(113.2","%)"],["Foreign currency gain (loss)","(251)","","1,387","","","","(1,638)","","","(118.1","%)"],["Interest income","2,581","","51","","","","2,530","","","n/m"],["Interest expense","(31)","","(258)","","","","227","","","(88.0","%)"],["Total other (expense)","1,427","","","7,786","","","","","(6,359)","","","(81.7","%)"],["Income before income taxes","57,920","","","10,841","","","","","47,079","","","434.3","%"],["Provision for income taxes","(11,291)","","","(3,027)","","","","","(8,264)","","","273.0","%"],["Net income","$","46,629","","","$","7,814","","","","","$","38,815","","","496.7","%"]]
[[/GREPCENT_TABLE]]

n/m—represents percentage calculated not being meaningful

Net Sales

The following table provides a comparative summary of the Company’s net sales by operating segment and product category:

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Americas segment"],["Vita Coco Coconut Water","$","317,221","","","$","275,964","","","$","41,257","","","15.0","%"],["Private Label","103,166","","","88,173","","","14,993","","","17.0","%"],["Other","9,858","","","9,485","","","373","","","3.9","%"],["Subtotal","$","430,245","","","$","373,622","","","$","56,623","","","15.2","%"],["International segment"],["Vita Coco Coconut Water","$","41,829","","","$","38,570","","","$","3,259","","","8.4","%"],["Private Label","18,713","","","12,855","","","5,858","","","45.6","%"],["Other","2,825","","","2,740","","","85","","","3.1","%"],["Subtotal","$","63,367","","","$","54,165","","","$","9,202","","","17.0","%"],["Total net sales","$","493,612","","","$","427,787","","","$","65,825","","","15.4","%"]]
[[/GREPCENT_TABLE]]

The primary driver of the consolidated net sales increase of 15.4% was increased case equivalents ("CE") volume growth of 13.4%. Net sales also benefited from branded pricing, which was partially offset by decreased price/mix of private label products.

Volume in Case Equivalent

The following table provides a comparative summary of our volume in CE, by operating segment and product category:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Americas segment"],["Vita Coco Coconut Water","33,021","","","29,458","","","3,563","","","12.1","%"],["Private Label","11,298","","9,063","","2,235","","24.7","%"],["Other","923","","1,248","","(325)","","(26.0)","%"],["Subtotal","45,242","","39,769","","5,473","","13.8","%"],["International segment*"],["Vita Coco Coconut Water","5,783","","","5,628","","","155","","","2.8","%"],["Private Label","2,481","","1,783","","698","","39.1","%"],["Other","62","","46","","16","","34.8","%"],["Subtotal","8,326","","","7,457","","","869","","","11.7","%"],["Total volume (CE)","53,568","","","47,226","","","6,342","","","13.4","%"]]
[[/GREPCENT_TABLE]]

Note: A CE is a standard volume measure used by management which is defined as a case of 12 bottles of 330ml liquid beverages or the same liter volume of oil.

*International Other excludes minor volume that is treated as zero CE.

Americas Segment

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Americas net sales increased by $56.6 million, or 15.2%, to $430.2 million for the year ended December 31, 2023, from $373.6 million for the year ended December 31, 2022, primarily driven by CE volume growth of 13.8% with additional benefit from branded pricing, partially offset by private label price/mix.

Vita Coco Coconut Water net sales increased by $41.3 million, or 15.0%, to $317.2 million for the year ended December 31, 2023, from $276 million for the year ended December 31, 2022. The increase was primarily driven by a combination of increased CE volume growth and benefits from pricing actions.

Private Label net sales increased by $15.0 million, or 17.0%, to $103.2 million for the year ended December 31, 2023, from $88.2 million for the year ended December 31, 2022. The increase was driven by significant CE volume growth of 24.7%, which was partly offset by product price/mix.

Net Sales for Other products increased by $0.4 million, or 3.9%, to $9.9 million for the year ended December 31, 2023, from $9.5 million for the year ended December 31, 2022.

International Segment

International net sales increased by $9.2 million, or 17.0%, to $63.4 million for the year ended December 31, 2023 from $54.2 million for the year ended December 31, 2022. The increase was driven by CE volume growth of 11.7%, with notable growth in the Europe, the Middle East and Africa ("EMEA") region, in addition to benefits from net pricing actions.

Vita Coco Coconut Water net sales increased by $3.3 million, or 8.4%, to $41.8 million for the year ended December 31, 2023, from $38.6 million for the year ended December 31, 2022. The increase was driven by higher CE volume, primarily in the European region, which was partially offset by volume decreases in Asia, in addition to benefits from net pricing actions..

Private Label net sales increased by $5.9 million, or 45.6%, to $18.7 million for the year ended December 31, 2023, as compared to $12.9 million for the year ended December 31, 2022, which was driven by CE volume growth in both EMEA and the Asia Pacific regions.

Net Sales for Other products increased by $0.1 million, or 3.1%, to $2.8 million for the year ended December 31, 2023, from $2.7 million for the year ended December 31, 2022, driven primarily by CE volume growth in the EMEA region.

Gross Profit

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Cost of goods sold"],["Americas segment","$","267,983","","","$","278,130","","","$","(10,147)","","","(3.6","%)"],["International segment","44,900","","","46,296","","","$","(1,396)","","","(3.0","%)"],["Total cost of goods sold","$","312,883","","","$","324,426","","","$","(11,543)","","","(3.6","%)"],["Gross profit"],["Americas segment","$","162,262","","","$","95,492","","","$","66,770","","","69.9","%"],["International segment","18,467","","","7,869","","","10,598","","","134.7","%"],["Total gross profit","$","180,729","","","$","103,361","","","$","77,368","","","74.9","%"],["Gross margin (percentage of net sales)"],["Americas segment","37.7","%","","25.6","%","","","","12.1","%"],["International segment","29.1","%","","14.5","%","","","","14.6","%"],["Consolidated","36.6","%","","24.2","%","","","","12.4","%"]]
[[/GREPCENT_TABLE]]

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On a consolidated basis, cost of goods sold decreased $11.5 million, or 3.6%, to $312.9 million for the year ended December 31, 2023, from $324.4 million for the year ended December 31, 2022. On a consolidated and segment basis, the decrease was primarily driven by significantly lower transportation costs, relating to ocean freight and domestic logistics, which were partly offset by higher CE volume.

On a consolidated basis, gross profit increased by $77.4 million, or 74.9%, to $180.7 million for the year ended December 31, 2023, from $103.4 million for the year ended December 31, 2022. This was a result of decreased transportation cost, strong CE volume growth and benefits from branded pricing actions, which was partially offset by price/mix effects within private label products. As a result, gross margin increased approximately 12.4% percentage points to 36.6% for the year ended December 31, 2023, as compared to 24.2% for the year ended December 31, 2022.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Selling, general, and administrative","124,236","","","100,306","","","$","23,930","","","23.9","%"]]
[[/GREPCENT_TABLE]]

Selling, General and Administrative Expenses

SG&A expense increased by $23.9 million, or 23.9%, to $124.2 million for the year ended December 31, 2023, from $100.3 million for the year ended December 31, 2022. The increase was primarily driven by a $13.3 million increase in marketing expenses, a $13.3 million increase in personnel related expenses and $1.5 million of costs associated with the secondary share offerings in May 2023 and in November 2023, partially offset by a non-recurring intangible asset impairment charge of $6.7 million in 2022.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Unrealized gain/(loss) on derivative instruments","$","(872)","","","$","6,606","","","$","(7,478)","","","(113.2","%)"],["Foreign currency gain/(loss)","(251)","","","1,387","","","(1,638)","","","(118.1","%)"],["Interest income","2,581","","","51","","","2,530","","","n/m"],["Interest expense","(31)","","","(258)","","","227","","","(88.0","%)"],["Other Income (Expense), Net","$","1,427","","","$","7,786","","","$","(6,359)","","","(81.7","%)"]]
[[/GREPCENT_TABLE]]

n/m—represents percentage calculated not being meaningful

Unrealized Gain/(Loss) on Derivative Instruments

During the year ended December 31, 2023, we recorded an unrealized loss of $0.9 million relating to outstanding derivative instruments for forward foreign currency exchange contracts, with the largest loss for the year ended December 31, 2023 related to the contracts hedging the British pound and the Brazilian real. During the year ended December 31, 2022, we recorded an unrealized gain of $6.6 million relating to outstanding derivative instruments for forward foreign currency exchange contracts. All forward foreign currency exchange contracts were entered to hedge some of our exposures to the British pound, Canadian dollar, Brazilian real, Malaysian ringgit, European Union euro, and Thai baht.

Foreign Currency Gain/(Loss)

Foreign currency loss was $0.3 million for the year ended December 31, 2023, as compared to a $1.4 million gain for the year ended December 31, 2022. The change in both years was a result of movements in various foreign currency exchange rates related to transactions denominated in currencies other than the functional currency.

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Interest Income

The increase in interest income for the year ended December 31, 2023 compared to the same prior year period was related to interest income on cash invested with financial institutions, reflecting improved cash balances and higher interest rates versus prior periods.

Interest Expense

The decrease in interest expense for the year ended December 31, 2023 compared to the same prior year period was driven by decreased borrowings on the 2020 Credit Facility.

Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["","2023","","2022","","Amount","","Percentage"],["","(in thousands)","","(in thousands)"],["Income tax expense","$","(11,291)","","","$","(3,027)","","","$","(8,264)","","","273.0","%"],["Tax Rate","19.5","%","","27.9","%"]]
[[/GREPCENT_TABLE]]

Income tax expense was $11.3 million for the year ended December 31, 2023, as compared to $3.0 million for the year ended December 31, 2022. The effective combined federal, state and foreign tax rate decreased to 19.5% from 27.9% for the years ended December 31, 2023, and 2022, respectively.

The effective tax rate for the current period is lower than the U.S. statutory rate of 21% primarily as a result of lower statutory tax rates in countries outside the U.S. that the Company operates in and the corresponding credits available from those taxing jurisdictions to offset U.S. income tax. The effective tax rate for the same period in the prior year is higher than the U.S. statutory rate of 21% primarily as a result of state income taxes for the U.S. operations of the Company and other nondeductible expenses for tax purposes, and is partially offset by lower statutory tax rates in countries outside the U.S. that the Company operates in. The change in effective tax rates between the periods is primarily driven by the jurisdictional mix of the Company’s pre-tax profits and the relative impact of other nondeductible expense in relation to the pre-tax profits.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors and lenders. These non-GAAP measures should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

These non-GAAP measures are key metrics used by management and our board of directors, to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company.

We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA with adjustments to eliminate the impact of certain items, including certain non-cash and other items, that we do not consider representative of our ongoing operating performance.

A reconciliation from net income to EBITDA and Adjusted EBITDA is set forth below:

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["","(in thousands)"],["Net income","$","46,629","","","$","7,814"],["Depreciation and amortization","660","","","1,901"],["Interest income","(2,581)","","","(51)"],["Interest expense","31","","","258"],["Income tax expense","11,291","","","3,027"],["EBITDA","56,030","","","12,949"],["Stock-based compensation (a)","9,128","","","7,384"],["Unrealized (gain)/loss on derivative instruments (b)","872","","","(6,606)"],["Foreign currency (gain)/loss (b)","251","","","(1,387)"],["Secondary Offering Costs (c)","1,525","","","\u2014"],["Impairment of intangible assets (d)","\u2014","","","6,714"],["Other adjustments (e)","$","363","","","$","1,240"],["Adjusted EBITDA","$","68,169","","","$","20,294"]]
[[/GREPCENT_TABLE]]

(a)Non-cash charges related to stock-based compensation, which vary from period to period depending on volume and vesting timing of awards and forfeitures. We adjusted for these charges to facilitate comparison from period to period.

(b)Unrealized gains or losses on derivative instruments and foreign currency gains or losses are not considered in our evaluation of our ongoing performance.

(c)Reflects other non-recurring expenses related to costs associated with two secondary offerings in which Verlinvest Beverages SA sold shares of the Company. The shares were sold in an underwritten public offering, which closed on May 26, 2023 and a block trade that was executed on November 9, 2023. The Company did not receive any proceeds from the sale of the shares.

(d)Non-cash intangible asset impairment charge related to the Runa trademarks and distributor relationships.

(e)Reflects other charges primarily related to the impairment loss related to assets held for sale in both periods and other non-recurring expenses.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through cash generated from our business operations and proceeds on borrowings through our credit facilities and term loans. We had $132.5 million and $19.6 million of cash and cash equivalents as of December 31, 2023 and 2022, respectively.

Considering recent market conditions and our business assumptions, we have reevaluated our operating cash flows and cash requirements and believe that current cash, cash equivalents, future cash flows from operating activities and cash available under our 2020 Credit Facility will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the condensed consolidated financial statements included herein and the foreseeable future.

Our future capital requirements will depend on many factors, including our revenue growth rate, our working capital needs primarily for inventory build, our global footprint, the expansion of our marketing activities, the timing and extent of spending to support product development efforts, the introduction of new and enhanced products and the continued market consumption of our products, as well as any shareholder distribution either through equity buybacks or dividends. Our asset-lite operating model has historically provided us with a low cost nimble, and scalable supply chain, which allows us to adapt to changes in the market or consumer preferences while also efficiently introducing new products across our platform. We may seek additional equity or debt financing in the future in order to acquire or invest in complementary businesses, products and/or new IT infrastructures. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

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Cash Flows

The following tables summarize our sources and uses of cash:

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Operating Activities

Our main source of operating cash is payments received from our customers. Our primary use of cash in operating activities are for cost of goods sold and SG&A expenses.

During the year ended December 31, 2023, cash from operating activities increased $118 million as compared to the year ended December 31, 2022. The higher cash generation was driven by the increase in net income after adjusting for non-cash items and improvements in working capital.

Investing Activities

During the year ended December 31, 2023 as compared to the year ended December 31, 2022, cash used in investing activities decreased $0.4 million, driven by less expenditures for property and equipment.

Financing Activities

During the year ended December 31, 2023 compared to the year ended December 31, 2022, net cash provided by financing activities was $3.3 million higher, primarily driven by increased proceeds from the exercise of stock options.

Debt

We had an immaterial amount of outstanding debt as of December 31, 2023 and December 31, 2022 related to vehicle loans.

Revolving Credit Facility

In May 2020, the Company entered into the five-year credit facility (the "2020 Credit Facility") with Wells Fargo Bank, National Association consisting of a revolving line of credit, which currently provides for committed borrowings of $60 million. The maturity date on the 2020 Credit Facility is May 12, 2026.

Starting in December 2022, borrowings on the 2020 Credit Facility bear interest at rates based on either: 1) a fluctuating rate per annum determined to be the sum of Daily Simple Secured Overnight Financing Rate ("SOFR") plus a spread defined in the credit agreement (the "Spread"); or 2) a fixed rate per annum determined to be the sum of the Term SOFR plus the Spread. The Spread ranges from 1.00% to 1.75%, which is based on the Company’s leverage ratio (as defined in the credit agreement) for the immediately preceding fiscal quarter as defined in the credit agreement. In addition, the Company is currently subject to an unused commitment fee ranging from 0.10% and 0.20% on the unused amount of the line of credit, with the rate being based on the Company’s leverage ratio (as defined in the credit agreement).

The borrowings made before December 2022 bore interest at rates based on either: 1) London Interbank Offered Rate ("LIBOR"); or 2) a specified base rate (determined by reference to the greatest of the prime rate published by Wells

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Fargo, the federal funds effective rate plus 1.5% and one-month LIBOR plus 1.50%), as selected periodically by the Company. The LIBOR-based loans bore interest at LIBOR plus the Spread. The unused commitment fee prior to the December 2022 amendment was the same.

The outstanding balance on the Revolving Facility was zero as of December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, we were compliant with all financial covenants.

Term Loan Facility

In May 2021, we entered into a Term Commitment Note, or the Term Facility with Wells Fargo pursuant to the terms of the Credit Agreement entered into in connection with the 2020 Credit Facility. The Term Facility provided us with term loans of up to $30.0 million, or the Term Loans. Borrowings under the Term Facility bear interest at the same rate as the Revolving Facility. We were required to repay the principal on the Term Loans in quarterly installments, commencing on October 1, 2021, through maturity date of May 21, 2026. On October 27, 2021, the Company repaid the outstanding balance on the 2021 Term Loan using the net proceeds from the IPO.

Vehicle Loans

We periodically enter into vehicle loans. Interest rate on these vehicle loans range from 4.56% to 5.68%. The outstanding balance on the vehicle loans as of December 31, 2023 was less than $0.1 million.

For additional information, see Note 10, Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangement

We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations and Commitments

We have contractual obligations to repay indebtedness and required interest payments and unused commitment fees under our Revolving Facility and vehicle loans. As of December 31, 2023, we had no outstanding balance on the Revolving Facility. Any future outstanding balances on the Revolving Facility will be required to be repaid by May 2026.

We lease certain assets under noncancelable operating leases, which expire through 2025. The leases relate primarily to office space in addition to machinery and equipment. Future minimum commitments under these leases are $1.7 million as of December 31, 2023.

As of December 31, 2023, we also have inventory purchase commitments, which include any raw material or packaging commitments with our suppliers to secure our needs for future orders, which are generally due to be paid within one year. We also have production purchase commitments from our manufacturers based on our production plans, forecasts and contracts, that might result in costs if we were to reduce our purchases significantly in 2024 or for some relationships, in future years. We have other contractual payments related to information technology service agreements, sponsorship and marketing agreements, and minimum contractual third-party warehouse commitments, which are not individually material.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

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While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing within this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). ASC 606 defines a five-step model that requires entities exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying the performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Revenue is recognized when control of the promised good is transferred to the customer in an amount that reflects the consideration to which the Company is expected to be entitled to receive in exchange for those products. Each contract includes a single performance obligation to transfer control of the product to the customer. Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers.

For our various products in the Vita Coco Coconut Water and Other product categories, control is transferred upon customer receipt, at which point the Company recognizes the transaction price for the product as revenue. The transaction price recognized reflects the consideration the Company expects to receive in exchange for the sale of the product. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that would meet the criteria for a distinct good or service that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent fulfillment costs, which are included in cost of goods sold, rather than revenue.

Additionally, the Company determined the production and distribution of Private Label products represents a distinct performance obligation. Since there is no alternative use for these products and the Company has the right to payment for performance completed to date, the Company recognizes the revenue for the production of these Private Label products over time as the production for open purchase orders is completed, which may be prior to any shipment. The resulting contract assets are recorded in Prepaid expenses and other current assets.

The Company provides trade promotions and sales discounts to its customers and distributors. Since these sales promotions and sales discounts do not meet the criteria for a distinct good or service, they are primarily accounted for as a reduction of revenue and include payments to customers and distributors for performing activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. These consolidated financial statements include accruals for these promotion and discounts. The accruals are made for invoices that have not yet been received as of year-end and are recorded as a reduction of sales, and are based on contract terms and our historical experience with similar programs and require management judgement with respect to estimating customer and consumer participation and performance levels.

Income Taxes

The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes ("ASC 740"), which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax assets and liabilities computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. Interest and penalties related to unrecognized tax positions are included in income tax expense in the consolidated statement of operations and comprehensive income and accrued expenses in the consolidated balance sheets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We must make assumptions and judgments to estimate the amount of valuation allowances to be recorded against our deferred tax assets, which take into account current tax laws and estimates of the amount of future taxable income, if any. Changes to any of the assumptions or judgments could cause our actual income tax obligations to differ from our estimates.

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Goodwill

Goodwill represents the excess of the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination and is measured in accordance with the provisions of ASC 350, Intangibles—Goodwill and Other. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis on December 31, or more frequently if the Company believes indicators of impairment exist.

The Company has determined that there are three reporting units for purposes of testing goodwill for impairment: (i) the Americas reporting unit, (ii) the Europe reporting unit, and (iii) the Asia reporting unit. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. In performing the qualitative assessment, the Company reviews factors both specific to the reporting units and to the Company as a whole, such as financial performance, macroeconomic conditions, industry and market considerations, and the fair value of each reporting unit at the last valuation date. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more likely than not that the carrying value of each of the reporting units exceeds their fair value, the quantitative impairment test is required; otherwise, no further testing is required.

Alternatively, the Company may elect to bypass the qualitative assessment and perform the quantitative impairment test instead, or if the Company reasonably determines that it is more-likely-than-not that the fair value is less than the carrying value, the Company performs its annual, or interim, goodwill impairment test by comparing the fair value of each of the reporting units with their carrying amount. The fair value of each of the reporting units is estimated by blending the results from the income approach and the market multiples approach. These valuation approaches consider a number of factors that include, but are not limited to, expected future cash flows, growth rates, discount rates, and comparable multiples from publicly-traded companies in our industry, and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business. It is our policy to conduct impairment testing based on our most current business plans, projected future revenues and cash flows, which reflect changes we anticipate in the economy and the industry. The cash flows are based on five-year financial forecasts developed internally by management and are discounted to a present value using discount rates that properly account for the risk and nature of the respective reporting unit’s cash flows and the rates of return market participants would require to invest their capital in our reporting unit. The Company will recognize an impairment for the amount by which the carrying amount exceeds a reporting unit’s fair value. For the years ended December 31, 2023 and 2022, there were no impairments recorded.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. Following the IPO, as an emerging growth company, we elected to apply the extended transition period.

Emerging growth company status ceases on the date that is the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the closing of this offering, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Based on the closing share price and the market value of the Company's Common Stock, par value $0.01 per share ("Common Stock"), held by non-affiliates as of June 30, 2023, the Company was deemed a large accelerated public company filer as of December 31, 2023. As a result, beginning with this Annual Report on Form 10-K for the year ending December 31, 2023, the Company will not be able to rely on the extended transition period noted above and will be required to adopt all new accounting pronouncements within the same time periods as public companies.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements elsewhere within this Annual Report on Form 10-K.

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