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May 13, 2022, 6:05 a.m. EDT

10-Q: VITA COCO COMPANY, INC.

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(EDGAR Online via COMTEX) -- Item 2. 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 condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Form 10-K, for the fiscal year ended December 31, 2021 and filed with the Securities and Exchange Commission ("SEC") on March 14,2022 (the "Form 10-K"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving 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 in Part I, Item 1A, "Risk Factors" and other factors set forth in the Form 10-K.

Overview

Our branded portfolio is led by our Vita Coco brand, which is the leader in the global coconut water category, and also includes coconut oil and coconut milk offerings. Our other brands include Runa, a leading plant-based energy drink inspired from the guayusa plant native to Ecuador, Ever & Ever, a sustainably packaged water, and the recently launched PWR LIFT, a protein-infused fitness drink. We also supply private label products to key retailers in both the coconut water and coconut oil categories.

We source our coconut water from a diversified global network of 15 factories across seven countries supported by thousands of coconut farmers. As we do not own any of the coconut water 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 packing 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. We are also available in a variety of on-premise locations such as corporate offices, fitness clubs, airports, cruise lines, and educational institutions.

Key Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us. There have been no material changes to such factors from those described in the Form 10-K under the heading "Key Factors Affecting our Performance" other than the changes noted below in "Impact of COVID-19 and the Russia-Ukraine War." Those factors also pose risks and challenges, including those discussed in Part I, Item 1A. "Risk Factors" of the Form 10-K.

Impact of COVID-19 and the Russia-Ukraine War

The global macroeconomic environment continues to be affected by the COVID-19 pandemic and the Russia-Ukraine war. In fiscal year 2021 and continuing in the first quarter ended March 31, 2022, the Company saw significant changes to global ocean shipping availability and pricing of containers, lengthening transit times, increased domestic transportation costs and some payroll inflationary effects among other impacts. Starting in the second quarter of 2021, we took pricing actions such as delaying promotional activities until later in the year, reducing discounting and sharing cost increases with private label customers, in order to partially offset the inflationary costs of goods effects we were experiencing.

For the three months ended March 31, 2022, we estimate that our gross profit absorbed incremental costs of goods on a rate/mix basis compared to the prior year quarter of approximately $12 million, mostly driven by transportation cost increases across both ocean freight and domestic logistics as a result of global supply chain disruptions caused by these global events. We do not believe the current costs of goods inflated by the current economic and supply chain pressures are fully representative of our future costs of goods in a normal supply chain environment.

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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 channels through which we sell our products, the promotional environment in the marketplace, manufacturing costs, 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 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 include marketing expenses, sales promotion expenses, and general and administrative expenses. Marketing and sales promotion expenses consist primarily of costs incurred promoting and marketing our products and are primarily driven by investments to grow our business and retain customers. In the long-term, we generally expect selling and marketing expenses to increase in absolute dollars and to vary from period to period as a percentage of net sales. 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 selling, general and administrative expenses as incurred. We expect selling, general and administrative expenses to increase in absolute dollars to support business growth and, in the near term, our transition to a public company.

Change in Fair Value of Contingent Consideration

In connection with our acquisition of Runa, we agreed to pay contingent payments to Runa's former shareholders only if a certain revenue growth rate is achieved. Assuming the revenue growth is achieved, the former shareholders could elect for payment to be calculated based on quarterly data available between December 2021 and December 2022, as follows: 49% of the product of (a) the net revenue for the trailing 12 calendar months and (b) a specified multiple, which is contingent on the revenue growth achieved since December 31, 2017. The contingent consideration payout cannot exceed $51.5 million. If a certain revenue growth rate is not achieved, the Company is not required to pay any contingent payment.







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The contingent consideration payable to Runa's former shareholders was re-measured at fair value, which reflects estimates, assumptions, and expectations on Runa's revenue and revenue growth as of the valuation date. A key factor in the contingent consideration calculation is whether the growth levels specified in the contract can be met within the four year time period immediately following the acquisition. The design of the payout is to reward for high growth in the initial years following the acquisition. As of March 31, 2022, we expect the contingent consideration to be zero. The contingent consideration will continue to be remeasured until the term of the agreement ends in December 2022. However, we do not believe that the Runa business will achieve the growth targets required and thus we expect that the contingent consideration will be zero at December 2022.

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 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, as well as interest received as part of an interest rate swap which was terminated in May 2020.

Interest Expense

Interest expense consists of interests on our credit facilities and term 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. Table of Contents

Private Label -This product category consists of all private label product offerings, which includes coconut water and 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 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, Ever & Ever and PWR LIFT product offerings, Vita Coco product extensions beyond coconut water, such as Vita Coco Sparkling, 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 Three Months Ended March 31, 2022 and 2021
        The following table summarizes our results of operations for the three months
        ended March 31, 2022 and 2021, respectively:
                                                                  Three Months Ended
                                                                      March 31,
        (in thousands)                                            2022           2021
        Net sales                                             $   96,448      $ 75,450
        Cost of goods sold                                        77,385        51,366
        Gross profit                                              19,063        24,084
        Operating expenses
        Selling, general, and administrative                      24,801        19,778
        Income (loss) from operations                             (5,738)        4,306
        Other income (expense)
        Unrealized gain/(loss) on derivative instrument            8,706        (1,355)
        Foreign currency gain/(loss)                                (101)         (600)
        Interest income                                                7            35
        Interest expense                                             (27)          (79)
        Total other income (expense)                               8,585        (1,999)
        Income before income taxes                                 2,847         2,307
        Income tax expense                                          (620)         (667)
        Net income                                            $    2,227      $  1,640
        


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        Net Sales
        The following table provides a comparative summary of net sales by operating
        segment and product category:
                                        Three Months Ended
                                            March 31,                       Change
        (in thousands)                  2022           2021         Amount       Percentage
        Americas segment
        Vita Coco Coconut Water     $   58,855      $ 42,189      $ 16,666           39.5  %
        Private Label                     23,080        19,208       3,871           20.2  %
        Other                              2,676         2,454         222            9.1  %
        Subtotal                        84,611        63,851        20,760           32.5  %
        International segment
        Vita Coco Coconut Water            8,349         6,489    $  1,860           28.7  %
        Private Label                      2,765         2,922        (157)          (5.4) %
        Other                                723         2,188      (1,465)         (67.0) %
        Subtotal                    $   11,837      $ 11,599      $    238            2.1  %
        Total net sales             $   96,448      $ 75,450      $ 20,998           27.8  %
        


For the three months ended March 31, 2022, the primary driver of the consolidated net sales increase of 28% was increased case equivalents ("CE") volume coupled with some benefits from net pricing actions.







        Volume in Case Equivalent
        The following table provides a comparative summary of our volume in CE, by
        operating segment and product category:
                                          Three Months Ended
                                               March 31,                        Change
        (in thousands)                 2022                 2021        Amount      Percentage
        Americas segment
        Vita Coco Coconut Water           6,295               4,661     1,634          35.1   %
        Private Label                     2,730               2,260       470          20.8   %
        Other                               366                 255       111          43.6   %
        Subtotal                      9,391               7,176         2,215          30.9   %
        International segment*
        Vita Coco Coconut Water           1,206                 998       208          20.8   %
        Private Label                       413                 388        25           6.4   %
        Other                                13                 113      (100)        (88.8  %)
        Subtotal                      1,632               1,499           133           8.9   %
        Total volume (CE)            11,023               8,675         2,348          27.1   %
        


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

Americas net sales increased by $20.8 million, or 32.5%, to $84.6 million for the three months ended March 31, 2022 from $63.9 million for the three months ended March 31, 2021. The increase is primarily driven by a CE volume increase and some benefits from net pricing actions.







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Vita Coco Coconut Water net sales increased by $16.7 million, or 39.5%, to $58.9 million for the three months ended March 31, 2022, from $42.2 million for the three months ended March 31, 2021. The increase was primarily driven by higher CE volume.

Private Label net sales increased $3.9 million, or 20.2%, to $23.1 million for the three months ended March 31, 2022, from $19.2 million for the three months ended March 31, 2021, mostly driven by an increase in the number of orders and ample inventory on hand.

Net sales for Other products increased by $0.2 million, or 9.1%, to $2.7 million for the three months ended March 31, 2022 from $2.5 million for the three months ended March 31, 2021.

International Segment

International net sales increased by $0.2 million, or 2.1%, to $11.8 million for the three months ended March 31, 2022, from $11.6 million for the three months ended March 31, 2021. The increase is primarily driven by higher CE volume in our European region, partially offset by lower volume in our Asia Pacific markets. For the three months ended March 31, 2022 compared to the same period ended March 31, 2021, the growth was driven by Vita Coco Coconut Water, offset by lower sales from Private Label and Other products.

Vita Coco Coconut Water net sales increased by $1.9 million, or 28.7%, to $8.3 million for the three months ended March 31, 2022, from $6.5 million for the three months ended March 31, 2021. The increase was driven by higher CE volume, primarily in the European region, which was partially offset by an unfavorable impact related to foreign currency.

Decreases in net sales from Private Label of $0.2 million were driven by an unfavorable impact related to foreign currency translation in Europe, which was offset by the increased CE volume across the regions for the three months ended March 31, 2022 compared to March 31, 2021.

Decreases in net sales from Other products of $1.5 million were driven by decreased CE volume across regions related to lower opportunistic commodity sales, and an unfavorable impact related to foreign currency in Europe for the three months ended March 31, 2022 compared to March 31, 2021.







        Gross Profit
                                       Three Months Ended
                                           March 31,                       Change
        (in thousands)                2022           2021          Amount       Percentage
        Cost of goods sold
        Americas segment                68,315         42,734    $ 25,581           59.9  %
        International segment            9,070          8,632         438            5.1  %
        Total cost of goods sold   $ 77,385       $ 51,366       $ 26,019           50.7  %
        Gross profit
        Americas segment                16,296         21,117    $ (4,821)         (22.8) %
        International segment            2,767          2,967        (200)          (6.7) %
        Total gross profit         $ 19,063       $ 24,084       $ (5,021)         (20.8) %
        Gross margin
        Americas segment               19.3  %        33.1  %                      (13.8) %
        International segment          23.4  %        25.6  %                       (2.2) %
        Consolidated                   19.8  %        31.9  %                      (12.2) %
        


On a consolidated basis, cost of goods sold increased $26.0 million, or 50.7%, to $77.4 million for the three months ended March 31, 2022, from $51.4 million for the three months ended March 31, 2021. On a consolidated and segment basis, the increases in both periods were primarily driven by higher CE volume and significant transportation costs across ocean freight and domestic logistics, with the latter being driven by high overages related to detention and demurrage. On a consolidated basis, this resulted in cost of goods per CE rate increasing 19% for the three months ended March 31, 2022 as compared to the prior year periods.







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On a consolidated basis, gross profit dollars decreased $5.0 million, or 20.8%, to $19.1 million for the three months ended March 31, 2022, from $24.1 million for the three months ended March 31, 2021. Although we delivered strong top line growth driven by the continued underlying strength of our Vita Coco brand, gross profit was significantly impacted by by increased transportation costs due to the global shipping environment and ports constraints including very high containers detention and demurrage costs, which were only partially offset by pricing actions. As a result, gross margin declined approximately 12 percentage points to 19.8% for the three months ended March 31, 2022, as compared to 31.9% for the three months ended March 31, 2021.







        Operating Expenses
                                                       Three Months Ended
                                                           March 31,                      Change
            (in thousands)                             2022           2021        Amount       Percentage
        








        Selling, General and Administrative Expenses
        During the three months ended March 31, 2022, selling, general and
        administrative, or SG&A, expense increased by $5.0 million, or 25.4% versus the
        prior year comparable period. The increase was primarily driven by the
        incremental ongoing costs related to operating a public company, with higher
        spending in professional fees and personnel related expenses for the three
        months ended March 31, 2022 versus the prior year comparable period.
        Other Income (Expense), Net
                                                                   Three Months Ended
                                                                        March 31,                                Change
        (in thousands)                                           2022               2021             Amount             Percentage
        Unrealized gain/(loss) on derivative instruments     $    8,706          $ (1,355)         $ 10,061                  742.5  %
        Foreign currency gain/(loss)                               (101)             (600)              499                   83.2  %
        Interest income                                               7                35               (28)                 (80.0  %)
        Interest expense                                            (27)              (79)               52                   65.8  %
                                                             $    8,585          $ (1,999)         $ 10,584                  529.5  %
        


Unrealized Gain/(Loss) on Derivative Instruments

During the three months ended March 31, 2022 and 2021, we recorded gains of $8.7 million and losses of $1.4 million, respectively, for the mark-to-market changes in fair value on the outstanding derivative instruments for forward foreign currency exchange contracts, with the largest gain for the three months ended March 31, 2022 related to the contracts hedging the Brazilian real. All forward foreign currency exchange contracts were entered into to hedge some of our exposures to the British pound, Canadian dollar, Brazilian real, Malaysian ringgit, and Thai baht.

Foreign Currency Gain/(Loss)

Foreign currency loss was $0.1 million for the three months ended March 31, 2022, as compared to $0.6 million loss for the three months ended March 31, 2021. The change in both periods was a result of movements in various foreign currency exchange rates related to transactions denominated in currencies other than the functional currency.

Interest Income

The decrease in interest income for the three months ended March 31, 2022 compared to the same period in the prior year was immaterial. The decrease was primarily driven by the interest of 0.58% on the loan to the CEO described in Note 14, Related-Party Transactions, to our notes to the condensed consolidated financial statements. On September 16, 2021, the CEO of the Company repaid the outstanding principal balance and accrued interest on the promissory note.







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        Interest Expense
        Interest expense decreased an immaterial amount for the three months ended
        March 31, 2022 compared to the same period in the prior year.
        Income Tax Expense
                                              Three Months Ended
                                                   March 31,                        Change
                   (in thousands)              2022              2021       Amount      Percentage
        . . .
        


May 13, 2022

COMTEX_407137111/2041/2022-05-13T06:05:07

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