NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share amounts)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Vita Coco Company, Inc. and subsidiaries (formerly known as All Market Inc.) (the “Company”) develop, market, and distribute various coconut water products under the brand name Vita Coco and for retailers' own brands, predominantly in the United States. Other products include coconut milk, natural energy drinks (under the brand name Runa), coconut oil, water (under the brand name Ever & Ever), protein infused fitness drinks (under the brand name PWR LIFT) and coconut as a commodity.
The Company was incorporated in Delaware on January 17, 2007. In 2018, the Company purchased certain assets and liabilities of Runa, which is marketed and distributed primarily in the United States. Effective as of September 9, 2021, the name of the Company was changed from All Market Inc. to The Vita Coco Company, Inc.
We are a public benefit corporation under Section 362 of the Delaware General Corporation Law. As a public benefit corporation, our Board of Directors is required by the Delaware General Corporation Law to manage or direct our business and affairs in a manner that balances the pecuniary interests of our stockholders, the best interests of those materially affected by our conduct and the specific public benefits identified in our certificate of incorporation.
The Company has nine wholly-owned subsidiaries including four wholly-owned Asian subsidiaries established between fiscal year 2012 and 2015, one North American subsidiary established in 2015, as well as All Market Europe, Ltd. ("AME") in the United Kingdom. AME was established in fiscal year 2009 and has 100% ownership in two European subsidiaries established in 2015. The non-controlling interest in AME represented minority stockholders’ proportionate share of the equity in AME during fiscal year 2021, which was fully acquired by the Company as of December 31, 2021. One of the wholly-owned Asian subsidiaries, All Market Singapore Pte Ltd ("AMS"), has 100% ownership in one subsidiary established in fiscal year 2018 in Ecuador.
Initial Public Offering
The Company’s registration statement on Form S-1, as amended, was declared effective by the Securities and Exchange Commission ("SEC") on October 20, 2021 and related to the initial public offering ("IPO") of its common stock in the prospectus dated October 20, 2021, filed with the SEC in accordance with Rule 424(b)(4) of the Securities Act on October 22, 2021 (the “Prospectus”). On October 21, 2021, the Company’s shares began trading on the NASDAQ under the ticker symbol “COCO”. On October 25, 2021, we completed our IPO by issuing 2,500,000 shares of our common stock, $0.01 par value per share, at a price to the public of $15 per share, resulting in net proceeds to us of approximately $30,000, after deducting the underwriting discount and commissions of approximately $2,000 and offering expenses of approximately $5,000. Additionally, certain selling stockholders sold an aggregate of 9,000,000 shares. On October, 27, 2021, the Company used the net proceeds from the IPO to repay the outstanding balance on the 2021 Term Loan.
Concurrent with the IPO, various agreements were amended or newly effective, which are further described in our Prospectus, which include:
•The Registration Rights agreement;
•The Investor Rights agreement;
•Amendments to the employment agreements for the then co-CEOs, Mike Kirban and Martin Roper;
•Adoption of the 2021 Stock Incentive Award Plan and grants of awards to employees and directors, and
•Adoption of the 2021 Employee Stock Purchase Plan.
Impact of the COVID-19 Pandemic and Current Geopolitical Instability
Disruptions in the worldwide economy may affect our business, and the macroeconomic environment continues to be affected by the COVID-19 pandemic and the current geopolitical instability (including the effects of the conflict between Ukraine and Russia). As a result, the Company has seen significant cost inflation to domestic and international shipping costs and some inflationary pressures on other cost elements; only some of which have been covered by pricing actions to date. The Company is continuing to monitor the situation carefully to understand any future potential impact on
its people and business. As a result, it is not currently possible to ascertain the overall impact of COVID-19 or the ongoing geopolitical instability on the Company’s business, results of operations, financial condition or liquidity. Future events and effects related to COVID-19 or the ongoing geopolitical instability cannot be determined with precision and actual results could significantly differ from estimates or forecasts. The Company has also seen greater volatility on foreign exchange rates. A strong dollar generally benefits the Company's supply chain activities while negatively impacting our reported international revenues.
Unaudited interim financial information
The Company’s condensed consolidated interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Article 10 of Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s financial information for the interim period presented. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other interim period or for any other future year. The condensed consolidated balance sheet as of September 30, 2022 is unaudited and should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2021.
During the nine months ended September 30, 2022, there were no significant changes to the Company’s significant accounting policies as described in the Company’s audited consolidated financial statement as of and for the year ended December 31, 2021, except for the adoption of the new lease standard described in "Recently Adopted Accounting Pronouncements" in the Summary of Significant Accounting Policies (Note 2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements are presented in accordance with U.S. GAAP.
Principles of Consolidation
The condensed consolidated financial statements include all the accounts of the wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The non-controlling interest in consolidated subsidiaries presented in the accompanying condensed consolidated financial statements for periods prior to December 31, 2021 represents the portion of AME stockholders’ equity, which was not directly owned by the Company.
Use of Estimates
Preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management considers many factors in selecting appropriate financial accounting policies and controls in developing the estimates and assumptions that are used in the preparation of these condensed consolidated financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. The most significant estimates in the condensed consolidated financial statements relate to share-based compensation, assessing long-lived assets for impairment, estimating the net realizable value of inventories, the determination of allowance for uncollectible accounts, assessing goodwill for impairment, the determination of the value of trade promotions, and assessing the realizability of deferred income taxes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company’s cash and accounts receivable are subject to concentrations of credit risk. The Company’s cash balances are primarily on deposit with banks in the U.S. which are guaranteed by the Federal Deposit Insurance
Corporation ("FDIC") up to $250. At times, such cash may be in excess of the FDIC insurance limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions and any excess cash above a certain minimum balance may be invested in overnight money market treasury deposits in widely diversified accounts. Substantially all of the Company’s customers are either wholesalers or retailers of beverages. A material default in payment, a material reduction in purchases from these or any large customers, or the loss of a large customer or customer groups could have a material adverse impact on the Company’s financial condition, results of operations and liquidity. The Company is exposed to concentration of credit risk from its major customers for which two customers in aggregate represented 55% of total net sales for both the nine months ended September 30, 2022 and 2021. In addition, the two customers in aggregate also accounted for 49% and 37% of total accounts receivable as of September 30, 2022 and December 31, 2021, respectively. The Company has not experienced credit issues with these customers.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC 842, ASU 2016-02, Leases (Topic 842), which was amended by subsequent Accounting Standard Updates ("ASUs"), to enhance the comparability and usefulness of financial reporting around leasing activity. The new standard supersedes the existing authoritative literature for lease accounting under ASC 840, with a focus on applying a “right-of-use model.” The guidance for leases under ASC 842 results in a right-of-use asset (“ROU asset”) and lease liability being reported on the balance sheet for leases with a lease term greater than twelve months. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for certain entities, which deferred the effective date of ASU 2016-02 for certain entities. ASC 842 is effective for the Company, as an Emerging Growth Company (“EGC”), for annual reporting periods beginning after December 15, 2021 and for interim periods beginning after December 15, 2022. The Company adopted the standard on January 1, 2022 using the alternative modified retrospective transition approach in accordance with ASU 2018-11, Leases (Topic 842): Targeted Improvements, where the adoption date represents the initial date of application.
As part of its adoption, the Company elected to apply the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases. Additionally, the Company elected the practical expedient that permits the exclusion of leases considered to be short-term.
Under the alternative modified retrospective transition approach, the reported results for 2022 reflect the application of ASC 842 guidance, whereas comparative periods and the respective disclosures prior to the adoption of ASC 842 are presented using the legacy guidance of ASC 840. As a result of adopting the new standard, the Company recognized right-of-use assets and lease liabilities of $1,866 and $2,097, respectively, on the Company’s consolidated balance sheet as of January 1, 2022. The difference of $231 between the operating lease right-of-use assets and operating lease liabilities represents reclassification of deferred rent liability from other liabilities to operating lease right-to-use assets at the adoption date. The adoption of the standard did not have a material impact on the Company’s consolidated statements of operations, or consolidated statements of cash flows.
In June 2022, the Company extended its lease agreement for the New York office to April 30, 2025 and remeasured the lease liability and right-of-use asset as of June 30, 2022.
Recently Issued Accounting Pronouncements
As a company with less than $1.07 billion of revenue during the last fiscal year, the Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act. This classification allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.
Leases
Prior to adopting ASC 842 on January 1, 2022 as described in "Recently Adopted Accounting Pronouncements" within this Note, the Company applied the lease accounting guidance as issued in ASC 840. Under ASC 840, the Company classified its leases as operating or capital based on the evaluation of certain criteria that served to indicate whether the risks and rewards of ownership of the underlying asset had been transferred to the lessee. For leases that contained rent
escalations or rent holidays, the Company recorded the total rent expense on a straight-line basis over the lease term and recorded the difference between the rent paid and the straight-line rent expense as deferred rent on the balance sheet. Any tenant incentives received from the lessor were recorded as a reduction to rent expense over the lease term.
Under ASC 842, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement, including which party controls the use of identified assets. The Company classifies leases with a term greater than one year as either operating or finance leases at the commencement date and records a right-of-use asset and current and non-current lease liabilities, as applicable on the balance sheet. The Company has elected not to recognize on the balance sheet leases with terms of one year or less, but payments are recognized as expense on a straight-line basis over the lease term. If a lease includes options to extend the lease term, the Company does not assume the option will be exercised unless there is reasonable certainty that the Company will renew based on an assessment of economic factors present at the lease commencement date.
The Company measures its lease liability for each leased asset as the present value of lease payments, as defined in ASC 842, discounted using a discount rate specific to the terms of the underlying lease. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company estimated its incremental borrowing rate for each leased asset based on the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. The Company’s right-of-use assets are equal to the lease liability, adjusted for prepaid rent, initial direct costs and incentives, as applicable. After lease commencement and the establishment of a right-to-use asset and operating lease liability, lease expense is recorded on a straight-line basis over the lease term.
In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, consumables, etc.) and non-components (e.g. property taxes, insurance, etc.). The fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated to the lease components and non-lease components based on their relative fair values. The Company elected the accounting policy available under ASC 842 to not separate lease and non-lease components for its real estate and equipment leases. Therefore, each lease component and the related non-lease components and non-components are accounted for together as a single component. Variable costs associated with the lease, such as maintenance and utilities, are not included in the measurement of right-to-use assets and lease liabilities but rather expensed when the events determining the amount of variable consideration to be paid have occurred.
3. REVENUE RECOGNITION
Revenues are accounted for in accordance with ASC 606. The Company disaggregates revenue into 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. The Company determined that the sale of the products represents a distinct performance obligation as customers can benefit from purchasing the products on their own or together with other resources that are readily available to the customers. 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 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 and 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.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
Disaggregation of Revenue
The following table disaggregates net revenue by product type and reportable segment:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Americas | | International | | Consolidated |
Vita Coco Coconut Water | $ | 82,643 | | | $ | 10,637 | | | $ | 93,280 | |
Private Label | 24,786 | | 3,810 | | 28,596 | |
Other | 1,367 | | 800 | | 2,167 | |
Total | $ | 108,796 | | | $ | 15,247 | | | $ | 124,043 | |
| | | | | |
| Three Months Ended September 30, 2021 |
| Americas | | International | | Consolidated |
Vita Coco Coconut Water | $ | 71,825 | | | $ | 10,093 | | | $ | 81,918 | |
Private Label | 25,973 | | 4,117 | | 30,090 | |
Other | 3,135 | | 526 | | 3,661 | |
Total | $ | 100,933 | | | $ | 14,736 | | | $ | 115,669 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Americas | | International | | Consolidated |
Vita Coco Coconut Water | $ | 217,934 | | | $ | 30,110 | | | $ | 248,044 | |
Private Label | 68,413 | | | 9,521 | | | 77,934 | |
Other | 7,553 | | | 2,265 | | | 9,818 | |
Total | $ | 293,900 | | | $ | 41,896 | | | $ | 335,796 | |
| | | | | |
| Nine Months Ended September 30, 2021 |
| Americas | | International | | Consolidated |
Vita Coco Coconut Water | $ | 176,229 | | | $ | 26,445 | | | $ | 202,674 | |
Private Label | 66,457 | | 9,648 | | 76,105 | |
Other | 8,246 | | 5,904 | | 14,150 | |
Total | $ | 250,932 | | | $ | 41,997 | | | $ | 292,929 | |
4. INVENTORY
Inventory consists of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials and packaging | $ | 6,076 | | | $ | 4,868 | |
Finished goods | 68,383 | | | 70,492 | |
Inventory | $ | 74,459 | | | $ | 75,360 | |
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible Assets, net consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Goodwill | $ | 7,791 | | | $ | 7,791 | |
The goodwill is allocated to the Americas reporting unit and is tax deductible.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Intangible assets, net | | | | | | | | | | | |
Trade names | $ | 6,200 | | | $ | (2,652) | | | $ | 3,548 | | | $ | 6,200 | | | $ | (2,187) | | | $ | 4,013 | |
Distributor relationships | 6,000 | | | (2,567) | | | 3,433 | | | 6,000 | | | (2,117) | | | 3,883 | |
Other | 38 | | | — | | | 38 | | | 38 | | | — | | | 38 | |
Total intangible assets subject to amortization | $ | 12,238 | | | $ | (5,219) | | | $ | 7,019 | | | $ | 12,238 | | | $ | (4,304) | | | $ | 7,934 | |
All the intangible assets, net as of September 30, 2022 and December 31, 2021 were associated with the acquisition of Runa, which was acquired in June 2018.
Amortization expense of $915 associated with intangible assets was recorded for both the nine months ended September 30, 2022 and 2021, which were included in selling, general and administrative expenses on the condensed consolidated statements of operations. For both the three months ended September 30, 2022 and 2021, the Company recorded $305 of amortization expense related to these intangible assets.
As of September 30, 2022, the estimated future expense for amortizable intangible assets is as follows:
| | | | | |
Fiscal Years | |
2022 (excluding the nine months ended September 30, 2022) | $ | 305 | |
2023 | 1,220 | |
2024 | 1,220 | |
2025 | 1,220 | |
2026 | 1,220 | |
Thereafter | 1,834 | |
| $ | 7,019 | |
6. DEBT
The table below details the outstanding balances on the Company’s credit facility and notes payable as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
2020 Credit facility | $ | 9,500 | | | $ | — | |
| | | |
Notes payable | | | |
| | | |
Vehicle loans | 54 | | | 76 | |
| $ | 54 | | | $ | 76 | |
Current | 24 | | | 28 | |
Non-current | $ | 30 | | | 48 | |
2020 Credit Facility
As of December 31, 2021, the Company had no outstanding borrowings under its 2020 Credit Facility. As of September 30, 2022, $9,500 was outstanding, and $50,500 undrawn and available under its 2020 Credit Facility. The 2020 Credit Facility is collateralized by substantially all of the Company’s assets. Borrowings under the 2020 Credit Facility bear interest at a rate per annum equal to, at our option, either (a) adjusted LIBOR (or current LIBOR replacement rate),
which shall not be less than 0.0%, plus the applicable rate or (b) base rate (determined by reference to the greatest of the prime rate published by Wells Fargo, the federal funds effective rate plus 1.5% and one-month LIBOR (or current LIBOR replacement) plus 1.5%). The applicable rate for LIBOR borrowings under the 2020 Credit Facility is subject to step-downs based on our total net leverage ratio (as defined in the credit agreement) for the immediately preceding fiscal quarter. In addition, the Company is currently subject to an unused commitment fee ranging from 0.05% 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 maturity date on the 2020 Credit Facility is May 12, 2026.
Interest expense and unused commitment fee for the 2020 Credit Facility amounted to $140 and $44 for the three months ended September 30, 2022 and 2021, respectively. Interest expense and unused commitment fee for the 2020 Credit Facility amounted to $249 and $197 for the nine months ended September 30, 2022 and 2021, respectively.
The 2020 Credit Facility contains certain affirmative and negative covenants that, among other things, limit the Company’s ability to, subject to various exceptions and qualifications: (i) incur liens; (ii) incur additional debt; (iii) sell, transfer or dispose of assets; (iv) merge with or acquire other companies; (v) make loans, advances or guarantees; (vi) make investments; (vii) make dividends and distributions on, or repurchases of, equity; and (viii) enter into certain transactions with affiliates. The 2020 Credit Facility also requires the Company to maintain certain financial covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum asset coverage ratio. As of September 30, 2022, the Company was compliant with all financial covenants.
7. COMMITMENTS AND CONTINGENCIES
Contingencies:
Litigation—The Company may engage in various litigation matters in the ordinary course of business. The Company intends to vigorously defend itself in such matters, based upon the advice of legal counsel, and is of the opinion that the resolution of these matters will not have a material effect on the condensed consolidated financial statements. Reserves are recorded for specific legal proceedings when the Company determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of September 30, 2022 and December 31, 2021, the Company has not recorded any liabilities relating to legal settlements.
Business Risk—The Company imports finished goods predominantly from manufacturers located in South America and Southeast Asian countries. The Company may be subject to certain business risks due to potential instability in these regions.
Major Customers—The Company’s customers that accounted for 10% or more of total net sales and total accounts receivable were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | Accounts receivable |
| Nine Months Ended September 30, | | September 30, 2022 | | December 31, 2021 |
| 2022 | | 2021 | | |
Customer A | 31 | % | | 33 | % | | 28 | % | | 18 | % |
Customer B | 24 | % | | 22 | % | | 21 | % | | 19 | % |
One of the customers acquired less than 5% ownership in the Company upon consummation of the IPO.
Major Suppliers—The Company’s suppliers that accounted for 10% or more of the Company’s purchases were as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Supplier A | 16 | % | | 19 | % |
Supplier B | 13 | % | | 14 | % |
8. DERIVATIVE INSTRUMENTS
The Company accounts for derivative instruments in accordance with the ASC Topic 815, Derivatives and Hedging ("ASC 815"). These principles require that all derivative instruments be recognized at fair value on each balance sheet date unless they qualify for a scope exclusion as a normal purchase or sales transaction, which is accounted for under the accrual method of accounting. In addition, these principles permit derivative instruments that qualify for hedge accounting to reflect the changes in the fair value of the derivative instruments through earnings or stockholders’ equity as other comprehensive income on a net basis until the hedged item is settled and recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The ineffective portion of a derivative instrument’s change in fair value is immediately recognized in earnings. As of September 30, 2022 and December 31, 2021, the Company did not have any derivative instruments that it had designated as fair value or cash flow hedges.
The Company is subject to the following currency risks:
Inventory Purchases from Brazilian, Malaysian and Thai Manufacturers—In order to mitigate the currency risk on inventory purchases from its Brazilian, Malaysian and Thai manufacturers, which are settled in Brazilian Real ("BRL"), Malaysian Ringgit ("MYR") and Thai Baht ("THB"), the AMS subsidiary enters a series of forward currency swaps to buy BRL, MYR and THB.
Intercompany Transactions Between AME and AMS—In order to mitigate the currency risk on intercompany transactions between AME and AMS, AMS enters into foreign currency swaps to sell British Pounds ("GBP").
Intercompany Transactions with Canadian Customer and Vendors—In order to mitigate the currency risk on transactions with Canadian customer and vendors, the Company enters into foreign currency swaps to sell Canadian Dollars ("CAD").
The notional amount and fair value of all outstanding derivative instruments in the condensed consolidated balance sheets consist of the following at:
| | | | | | | | | | | | | | | | | | | | |
September 30, 2022 |
Derivatives not designated as hedging instruments under ASC 815-20 | | Notional Amount | | Fair Value | | Balance Sheet Location |
Assets | | | | | | |
Foreign currency exchange contracts | | | | | | |
Receive USD/pay GBP | | $ | 26,041 | | | $ | 3,502 | | | Derivative assets |
Receive BRL/sell USD | | 41,515 | | | 1,275 | | | Derivative assets |
Receive USD/pay CAD | | 4,633 | | | 303 | | | Derivative assets |
Liabilities | | | | | | |
Foreign currency exchange contracts | | | | | | |
Receive THB/sell USD | | 17,786 | | | (1,735) | | | Derivative liabilities |
| | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Derivatives not designated as hedging instruments under ASC 815-20 | | Notional Amount | | Fair Value | | Balance Sheet Location |
Assets | | | | | | |
Foreign currency exchange contracts | | | | | | |
Receive USD/pay GBP | | $ | 22,323 | | | $ | 125 | | | Derivative assets |
Receive MYR/sell USD | | 392 | | | 1 | | | Derivative assets |
Liabilities | | | | | | |
Foreign currency exchange contracts | | | | | | |
Receive BRL/sell USD | | $ | 43,174 | | | $ | (2,389) | | | Derivative liabilities |
Receive USD/pay CAD | | 4,731 | | | (57) | | | Derivative liabilities |
Receive THB/sell USD | | 18,488 | | | (751) | | | Derivative liabilities |
The amount and location of realized and unrealized gains and losses of the derivative instruments in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
Unrealized gain/(loss) on derivative instruments | | $ | 952 | | | $ | (1,964) | |
Location | | Unrealized gain/(loss) on derivative instruments | | Unrealized gain/(loss) on derivative instruments |
Foreign currency gain / (loss) | | $ | 881 | | | $ | (483) | |
Location | | Foreign currency gain/(loss) | | Foreign currency gain/(loss) |
| | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Unrealized gain/(loss) on derivative instruments | | $ | 6,416 | | | $ | 1,250 | |
Location | | Unrealized gain/(loss) on derivative instruments | | Unrealized gain/(loss) on derivative instruments |
Foreign currency gain / (loss) | | $ | 1,839 | | | $ | (2,013) | |
Location | | Foreign currency gain/(loss) | | Foreign currency gain/(loss) |
The Company applies recurring fair value measurements to its derivative instruments in accordance with ASC Topic 820, Fair Value Measurements ("ASC 820"). In determining fair value, the Company used a market approach and incorporated the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable internally developed inputs.
9. FAIR VALUE MEASUREMENTS
ASC 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observability of the inputs used in valuation techniques, the Company’s assets and liabilities are classified as follows:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes internally developed models and methodologies utilizing significant unobservable inputs.
Forward Currency Swap Contracts—The Company’s valuation methodology for forward currency swap contracts is based upon third-party institution data.
Contingent Consideration Liability—The Company utilized a probability weighted scenario-based model to determine the fair value of the contingent consideration.
The Company’s fair value hierarchy for those assets (liabilities) measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | Forward Currency Swaps/Contracts | | Contingent consideration liability | | |
September 30, 2022 | $ | — | | | $ | 3,345 | | | $ | — | | | $ | 3,345 | |
December 31, 2021 | $ | — | | | $ | (3,071) | | | $ | — | | | $ | (3,071) | |
In connection with the Company’s acquisition of the entity currently known as AMI Runa USA LLC (“Runa”), the Company is obligated 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. Per the acquisition agreement, the contingent payment cannot exceed $51,500. If a certain revenue growth rate is not achieved, the Company is not required to pay any contingent payment.
The fair value of contingent consideration of $15,700 determined on the acquisition date in 2019 was initially recognized as a liability and then subsequently remeasured to fair value at each reporting date with changes in fair value recognized as a component of operating income/expenses in the accompanying condensed consolidated statements of operations.
The contingent consideration liability related to the acquisition of Runa was considered a Level 3 liability, as the fair value was determined based on significant inputs not observable in the market, and recorded within other long-term liabilities in the accompanying condensed consolidated balance sheets. The Company estimated the fair value of the contingent consideration liability based on a probability-weighted present value of various future cash payment outcomes. The technique considered the following unobservable inputs as of each valuation date:
•The probability and timing of achieving the specified milestones;
•Revenue performance expectations; and
•Market-based discount rates.
Based on updated revenue performance expectations during the earn-out period for Runa, the Company measured the contingent consideration as zero for the periods ended September 30, 2022 and December 31, 2021.
There were no transfers between any levels of the fair value hierarchy for any of the Company’s fair value measurements.
10. STOCKHOLDERS’ EQUITY
Common and Treasury Stock—Each share of common stock entitles its holder to one vote on matters required to be voted on by the stockholders of the Company and to receive dividends, when and if declared by the Company’s Board of Directors.
As of September 30, 2022 and December 31, 2021, the Company held 6,206,200 shares in treasury stock. As of September 30, 2022 and December 31, 2021, the Company had 4,542,480 and 3,431,312 shares, respectively, of common stock available for issuance upon the conversion of outstanding warrants and stock options under the 2021 Incentive Award Plan, of which 2,892,361 and 2,170,975, respectively, were reserved for future issuance. In January 2021, the Company entered into a Stock Purchase Agreement with RW VC S.a.r.l, f/k/a Vita Coco S.a.r.l (the “Seller”). The Company repurchased 5,192,005 shares of its own common stock from the Seller at a purchase price of $9.63 per share, or an aggregate purchase price of approximately $50,000. The purchase price per share approximated the most recent third-party common stock valuation prepared in conjunction with the accounting of stock-based compensation discussed within this Note.
Non-controlling Interest—On December 31, 2021, the Company purchased the remaining outstanding AME shares directly from minority stockholders, resulting in a zero non-controlling interest as of December 31, 2021 and September 30, 2022.
Warrants—All service and exit warrants expired as of December 31, 2021. As such, there was no warrant activity for the nine months ended September 30, 2022.
Stock Options—The stockholders of the Company approved the adoption of the Company’s 2014 Stock Option and Restricted Stock Plan (the “Stock Option Plan”). The Stock Option Plan allowed for a maximum of 8% of the sum of the Available Equity defined as the sum of (i) the total then outstanding shares of common shares and (ii) all available stock options (i.e., granted and outstanding stock options and stock options not yet granted). Under the terms of the Stock Option Plan, the Company could grant employees, directors and consultants stock options and restricted stock awards and had the authority to establish the specific terms of each award, including exercise price, expiration and vesting. Generally, stock options issued pursuant to the Stock Option Plan contained exercise prices no less than the fair value of the Company’s common stock on the date of grant and have a ten-year contractual term.
The stockholders of the Company approved the adoption of the 2021 Incentive Award Plan, which was effective after the closing of the IPO discussed in Note 1. On and after closing of the offering and the effectiveness of the 2021 Incentive Award Plan, no further grants will be made under the Stock Option Plan.
The Company recognized stock-based compensation expense of $1,142 and $629 for the three months ended September 30, 2022 and 2021, respectively, in selling, general and administrative expenses. Additionally, the stock compensation expense of $4,722 and $1,641 was recognized for the nine months ended September 30, 2022 and 2021, respectively, in selling, general and administrative expenses. For the restricted stock units ("RSUs") previously granted to a major customer, $315 and $935 was recognized for the three and nine months ended September 30, 2022, respectively, as stock-based sales incentive based on guidance in ASC 606 and reflected as a reduction in the transaction price revenue.
Awards with Service-based Vesting Conditions
Most of the stock option awards granted under the Stock Option Plan vest based on continuous service. Generally, 50% of the stock options granted vest two years after the grant date and 50% of the stock options granted vest four years after the grant date. For options granted under the 2021 Incentive Award Plan, 25% of the stock options granted vest annually in each of the four years after the grant date. There were 128,940 new service-based stock option awards granted during the nine months ended September 30, 2022. Exercises of stock options during the nine months ended September 30, 2022 are disclosed in the Condensed Consolidated Statements of Non-controlling Interests and Stockholders' Equity.
Awards with Performance and Market-based Vesting Conditions
During the nine months ended September 30, 2022, certain awards that contained performance-based vesting condition were modified. The modification adjusted the performance condition to allow for 50% of the performance awards to meet the criteria to vest, and no other terms were modified. Since it did not affect any terms that would affect the fair value, and only the number of awards, it is considered an improbable-to-probable modification. The impact of the modification was not material.
Restricted Stock and Restricted Stock Unit Awards
Restricted stock and RSUs were granted under the 2021 Incentive Award Plan and primarily vest based on continuous service. Currently, there are no restricted stock or RSUs that contain any performance or market conditions. The RSUs awarded to the employees have differing vesting schedules as specified in each grant agreement. The RSUs granted to non-employee directors vest in full on the earlier of (i) the day immediately preceding the date of the first Annual Shareholders Meeting following the date of grant and (ii) the first anniversary of the date of grant.
During the nine months ended September 30, 2022, there were 339,153 RSUs granted, which had an aggregate grant date fair value of $4,408.
11. INCOME TAXES
For the three months ended September 30, 2022 and 2021, the Company recorded income tax expense of $1,836 and $2,296, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded $3,011 and $6,277, respectively, in income tax expense in its condensed consolidated statements of operations.
In assessing the recoverability of its deferred tax assets, the Company continually evaluates all available positive and negative evidence to assess the amount of deferred tax assets for which it is more likely than not to realize a benefit. For
any deferred tax asset in excess of the amount for which it is more likely than not that the Company will realize a benefit, the Company establishes a valuation allowance.
As of September 30, 2022, the Company had liabilities for uncertain tax positions of $326 which, if recognized, would impact the Company’s tax provision and effective income tax rate. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. The Company does not expect its uncertain tax positions to change significantly over the next twelve months.The Company is subject to income tax examinations by the Internal Revenue Service ("IRS") and various state and location jurisdictions for the open tax years between December 31, 2018 to December 31, 2021.
12. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
| | | | | | | |
Net income attributable to The Vita Coco Company, Inc. | $ | 7,258 | | | $ | 12,990 | | | $ | 10,624 | | | $ | 22,432 | |
Denominator: | | | | | | | |
Weighted-average number of common shares used in earnings per share—basic | 55,785,622 | | | 53,006,746 | | | 55,658,946 | | | 53,266,209 | |
Effect of conversion of stock options | 794,290 | | | 773,314 | | | 370,123 | | | 475,839 | |
Weighted-average number of common shares used in earnings per share—diluted | 56,579,912 | | | 53,780,060 | | | 56,029,069 | | | 53,742,048 | |
Earnings per share—basic | $ | 0.13 | | | $ | 0.25 | | | $ | 0.19 | | | $ | 0.42 | |
Earnings per share—diluted | $ | 0.13 | | | $ | 0.24 | | | $ | 0.19 | | | $ | 0.42 | |
All exit warrants expired as of December 31, 2021. Before expiration, for the nine months ended September 30, 2021, the exit warrants, which expired upon a liquidity event and only vest when proceeds from a liquidity event provide an annual internal rate of return of less than 30%, were not considered in the basic and diluted earnings per share, as the contingency of a liquidity event had not occurred.
The following potentially dilutive securities, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average number of common shares outstanding, as they would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Awards to purchase common stock | 1,123,845 | | | 116,322 | | | 1,954,406 | | | 1,198,005 | |
13. SEGMENT REPORTING
The Company has two operating and reportable segments:
•Americas—Comprised primarily of the U.S. and Canada, and derives its revenues from the marketing and distribution of various coconut water and non-coconut water products (e.g., oil and milk). The Company’s Guayusa leaf products (Runa), aluminum bottle canned water (Ever and Ever), and protein infused fitness drink (PWR LIFT) are marketed only in the Americas segment.
•International—Comprised primarily of Europe, Middle East, and Asia Pacific, which includes the Company’s procurement arm and derives its revenues from the marketing and distribution of various coconut water and non-coconut water products.
Information about the Company’s operations by operating segment as of September 30, 2022 and 2021 and for the three and nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 124,043 | | | $ | 115,669 | | | $ | 335,796 | | | $ | 292,929 | |
Americas | 108,796 | | | 100,933 | | | 293,900 | | | 250,932 | |
International | 15,247 | | | 14,736 | | | 41,896 | | | 41,997 | |
Gross profit | $ | 32,576 | | | $ | 38,501 | | | $ | 80,928 | | | $ | 91,561 | |
Americas | 30,279 | | | 34,679 | | | 73,285 | | | 81,502 | |
International | 2,297 | | | 3,822 | | | 7,643 | | | 10,059 | |
| | | | | | | | | | | |
| As of September 30, | | As of December 31, |
| 2022 | | 2021 |
Total segment assets | $ | 218,378 | | | $ | 197,484 | |
Americas | 171,291 | | | 141,973 | |
International | 47,087 | | | 55,511 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Reconciliation | 2022 | | 2021 | | 2022 | | 2021 |
Total gross profit | $ | 32,576 | | | $ | 38,501 | | | $ | 80,928 | | | $ | 91,561 | |
Less: | | | | | | | |
Selling, general, and administrative expenses | 23,960 | | | 20,675 | | | 73,018 | | | 61,897 | |
Income (loss) from operations | $ | 8,616 | | | $ | 17,826 | | | $ | 7,910 | | | $ | 29,664 | |
Less: | | | | | | | |
Unrealized gain/(loss) on derivative instruments | 952 | | | (1,964) | | | 6,416 | | | 1,250 | |
Foreign currency gain/(loss) | (364) | | | (483) | | | (508) | | | (2,013) | |
Interest income | 20 | | | 31 | | | 30 | | | 104 | |
Interest expense | (130) | | | (127) | | | (213) | | | (319) | |
Income before income taxes | $ | 9,094 | | | $ | 15,283 | | | $ | 13,635 | | | $ | 28,686 | |
Geographic Data:
The following table provides information related to the Company’s net sales by country, which is presented on the basis of the location that revenue from customers is recorded:
| | | | | | | | | | | | | | |
Nine Months Ended September 30, | | 2022 | | 2021 |
United States | | $ | 277,987 | | | $ | 250,933 | |
All other countries(1) | | 57,809 | | | 41,996 | |
Net sales | | $ | 335,796 | | | $ | 292,929 | |
___________
| | | | | |
(1) | No individual country is greater than 10% of total net sales for the nine months ended September 30, 2022 and 2021. |
The following table provides information related to the Company’s property and equipment, net by country:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
United States | $ | 644 | | | $ | 890 | |
Ecuador | 503 | | | 870 | |
Singapore | 1,261 | | | 536 | |
All other countries(1) | 109 | | | 177 | |
Property and equipment, net | $ | 2,517 | | | $ | 2,473 | |
___________
| | | | | |
(1) | No individual country is greater than 10% of total property and equipment, net as of September 30, 2022 and December 31, 2021. |
14. RELATED-PARTY TRANSACTIONS
Management Fees—The Company was subject to an arrangement with one of its stockholders for as long as such stockholder held at least 5% of the Company’s capital stock. Pursuant to the terms of the amended arrangement, the Company was required to make fixed annual management fee payments of $281. On October 20, 2021, in connection with the IPO discussed in Note 1, the Stockholder’s Agreement was revised and the new Investor Rights Agreement does not provide for payment of a management fee to this stockholder. For the nine months ended September 30, 2021 and the year ended December 31, 2021, the Company had amounts due in accounts payable of $227 for the portion of the year prior to the execution of the new Investor Rights Agreement, which was paid as of September 30, 2022.
Director Nominee Agreements - On May 24, 2022, two members of the Board of Directors appointed as nominees under the Investor Rights Agreement by Verlinvest Beverages SA, a stockholder of the Company, entered into nominee agreements instructing the Company to pay all cash compensation earned in connection with their Board of Director services to Verlinvest Beverages SA. Based on aforementioned nominee agreements, RSUs granted to these two directors, based on the aforementioned nominee agreements, will be held by them as nominees for Verlinvest Beverages SA and, upon vesting of the RSUs, the shares will be transferred to Verlinvest Beverages SA. The nominee agreements are primarily between the directors and Verlinvest Beverages SA. The Company is a party to this arrangement solely to agree to the manner in which it would satisfy the compensation obligations to these directors.
Loan to Employee—On September 18, 2019, the Company extended a five year promissory note of $17,700 to Martin Roper, the current CEO, in order for him to buy 1,739,010 shares of The Vita Coco Company, Inc.’s common stock in conjunction with his employment agreement. The interest on the note accrued annually at a rate of 1.78% with the principal balance due at maturity. The purchase of the Company’s shares occurred simultaneously with the commencement of the loan, as a result, no funds were actually disbursed by the Company. The purchased Company shares were pledged as collateral to the loan until full repayment of the principal balance. On May 18, 2020, the Company amended the interest rate on the note to 0.58%.
On September 16, 2021, Martin Roper repaid the outstanding principal balance and accrued interest in full satisfaction of the promissory note.
Distribution Agreement with Shareholder—On October 1, 2019, the Company entered into a distribution agreement with one of its stockholders. The distribution agreement grants the stockholder the right to sell, resell, and distribute designated products supplied by the Company within a specified territory. The amount of revenue recognized related to this distribution agreement was $1,371 and $1,636 for the three months ended September 30, 2022 and 2021, respectively, and $4,777 and $4,944 for the nine months ended September 30, 2022 and 2021, respectively. The amounts due from the stockholder in Accounts Receivable, net were $408 and $600 as of September 30, 2022 and December 31, 2021, respectively. Related to this distribution arrangement, the Company and the stockholder have a service agreement where the Company shares in the compensation costs of the stockholder’s employee managing the China market. The Company recorded $63 and $39 for the three months ended September 30, 2022 and 2021, respectively, and $160 and $119 for the nine months ended September 30, 2022 and 2021, respectively, in selling, general and administrative expense for this service agreement.
15. ASSET HELD FOR SALE
The asset group held for sale consists of a farm in Ecuador which was the source of Guayusa leaves for our Runa products. Since the Company is able to source Guayusa through alternative means to produce the Runa products, as of September 30, 2022, the Company committed to a plan for disposal through sale. The Company performed a fair value assessment on the asset group held for sale consisting of land, a production plant, equipment and inventory. The Company obtained a valuation of the assets and adjusted the carrying amount down to their fair value less costs to sell, which resulted in a $619 impairment loss recorded in selling, general and administrative expenses. The remaining carrying amount is listed below. Theses assets held for sale do not qualify for discontinued operations reporting.
| | | | | |
Asset held for sale | Amount |
Land | $ | 503 | |