Vita Coco Company, Inc. 10-Q

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 Annual Report on Form 10-K, for the fiscal year ended December 31, 2022 and filed with the Securities and Exchange Commission ("SEC") on March 14, 2023 (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” of the Form 10-K and other factors set forth in the Form 10-K and this Quarterly Report on Form 10-Q. 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 healthy hydration 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, hydration mix and milk offerings. Our other brands include Runa , a plant-based energy drink inspired from the Guayusa plant native to Ecuador, Ever & Ever , a sustainably packaged water, and 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 also conduct other revenue transactions such as bulk product sales to beverage and food companies. 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 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 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. Based on recent negotiations with one of our major customers disclosed in Note 7, Commitments and Contingencies, a joint decision was made to start to discontinue the private label supply relationship as the terms required to retain the business were contrary to the Company's long term margin targets. While there is some uncertainty about the timing of this transition, we expect a significant decline in our private label net sales over the next 12 months with potential impact beginning as early as the fourth quarter of 2023. We do not expect this change to impact our branded business with this customer. There is no certainty about the expected decline in net sales for 2024, however, based on current assumptions, the loss of private label business could result in a mid-single digit percentage decrease in net sales as compared to net sales in 2023 as our brand growth initiatives are not expected to fully offset the loss of this private label business . Other than this change in business and the changes noted below in "Impact of COVID-19 and the Current Geopolitical and Economic Instability," 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.” Those factors also pose risks and challenges, including those discussed in Part I, Item 1A. “Risk Factors” of the Form 10-K. Impact of Global Events Causing Macroeconomic Uncertainty Uncertainty in the macroeconomic environment resulting from current geopolitical and economic instability (including the effects of the conflict between Ukraine and Russia) and the high interest rate and inflationary cost environment may affect our business. It is not currently possible to ascertain the overall impact of these macroeconomic uncertainties on the Company’s business, results of operations, financial condition or liquidity. Future events and effects related to these macroeconomic uncertainties cannot be determined with precision and actual results could significantly differ from estimates or forecasts. For a further discussion of the risks and challenges posed by these events, please see Part I, Item 1A. “Risk Factors” in our Form 10-K. 25 Table of Contents 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, warehouse costs, 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 ("SG&A") 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. We expect SG&A to increase in absolute dollars and to vary from period to period as a percentage of net sales for the foreseeable future. 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 on derivative instruments consists of gains or losses on such foreign currency exchange contracts which are unsettled as of period end. See Part I, Item 3 “Quantitative and Qualitative 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 “—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Exchange Risk ” for further information. 26 Table of Contents 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 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, 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. 27 Table of Contents Results of Operations Comparison of the Three and Six Months Ended June 30, 2023 and 2022 The following table summarizes our results of operations for the three and six months ended June 30, 2023 and 2022, respectively: (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net sales $ 139,645 $ 115,305 $ 249,404 $ 211,753 Cost of goods sold 88,551 86,016 164,649 163,401 Gross profit 51,094 29,289 84,755 48,352 Operating expenses Selling, general, and administrative 30,249 24,257 57,206 49,058 Income (loss) from operations 20,845 5,032 27,549 (706) Other income (expense) Unrealized gain/(loss) on derivative instrument 988 (3,242) 2,201 5,464 Foreign currency gain/(loss) 170 (43) 781 (144) Interest income 268 3 281 10 Interest expense (15) (56) (30) (83) Total other income (expense) 1,411 (3,338) 3,233 5,247 Income before income taxes 22,256 1,694 30,782 4,541 Income tax expense (4,269) (555) (6,090) (1,175) Net income $ 17,987 $ 1,139 $ 24,692 $ 3,366 Net Sales The following table provides a comparative summary of net sales by operating segment and product category: (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Americas segment Vita Coco Coconut Water $ 95,004 $ 76,436 $ 18,568 24.3 % $ 164,142 $ 135,291 $ 28,851 21.3 % Private Label 24,059 20,547 3,512 17.1 % 49,109 43,627 5,481 12.6 % Other 2,200 3,510 (1,310) (37.3 %) 4,784 6,186 (1,402) (22.7 %) Subtotal 121,263 100,493 20,770 20.7 % 218,035 185,104 32,931 17.8 % International segment Vita Coco Coconut Water 12,720 11,124 $ 1,596 14.3 % 22,278 19,473 $ 2,805 14.4 % Private Label 5,053 2,946 2,107 71.5 % 7,719 5,711 2,008 35.2 % Other 609 742 (132) (17.8) % 1,372 1,465 (93) (6.3) % Subtotal $ 18,382 $ 14,812 $ 3,570 24.1 % $ 31,369 $ 26,649 $ 4,720 17.7 % Total net sales $ 139,645 $ 115,305 $ 24,340 21.1 % $ 249,404 $ 211,753 $ 37,651 17.8 % For the three and six months ended June 30, 2023, the primary driver of the consolidated net sales increase of 21.1% and 17.8%, respectively, was increased case equivalents ("CE") volume growth of 17.4% and 13.2%, respectively, coupled with some benefits from net pricing actions on branded net sales, partially offset by some price decreases on private label products. 28 Table of Contents Volume in Case Equivalent The following table provides a comparative summary of our volume in CE, by operating segment and product category: (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Americas segment Vita Coco Coconut Water 10,056 8,304 1,752 21.1 % 17,277 14,599 2,678 18.3 % Private Label 2,609 2,137 472 22.1 % 5,269 4,867 402 8.3 % Other 210 526 (316) (60.1) % 449 892 (443) (49.7) % Subtotal 12,875 10,967 1,908 17.4 % 22,995 20,358 2,637 13.0 % International segment* Vita Coco Coconut Water 1,761 1,625 136 8.4 % 3,161 2,831 330 11.7 % Private Label 647 421 226 53.7 % 1,041 834 207 24.8 % Other 16 13 3 24.0 % 36 26 10 39.1 % Subtotal 2,424 2,059 365 17.7 % 4,238 3,691 547 14.8 % Total volume (CE) 15,299 13,026 2,273 17.4 % 27,233 24,049 3,184 13.2 % 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 20.7%, to $121.3 million for the three months ended June 30, 2023 from $100.5 million for the three months ended June 30, 2022. The increase is primarily driven by CE volume growth of 17.4%, impacted by an additional promotional period at a key retailer for Vita Coco Coconut Water products, as well as benefits from branded net pricing actions. Americas net sales increased by $32.9 million, or 17.8%, to $218.0 million for the six months ended June 30, 2023 from $185.1 million for the six months ended June 30, 2022. The increase is primarily driven by CE volume growth of 13.0%, benefiting from an additional promotional period at a key retailer for Vita Coco Coconut Water products, along with benefits from branded pricing actions. Vita Coco Coconut Water net sales increased by $18.6 million, or 24.3%, to $95.0 million for the three months ended June 30, 2023, from $76.4 million for the three months ended June 30, 2022. The increase was primarily driven by CE volume growth of 21.1%, which benefited from an additional promotional period at a key retailer, alongside benefits from pricing actions. Vita Coco Coconut Water net sales increased by $28.9 million, or 21.3%, to $164.1 million for the six months ended June 30, 2023, from $135.3 million for the six months ended June 30, 2022. The increase was primarily driven by CE volume growth of 18.3%, which included an additional promotional period at a key retailer, with pricing actions also contributing to growth. Private Label net sales increased $3.5 million, or 17.1%, to $24.1 million for the three months ended June 30, 2023, from $20.5 million for the three months ended June 30, 2022, mostly driven by CE volume growth of 22.1% in addition to price decreases conceded due to the reduction of transportation costs. Private Label net sales increased $5.5 million, or 12.6%, to $49.1 million for the six months ended June 30, 2023, from $43.6 million for the six months ended June 30, 2022, mostly driven by CE volume growth of 8.0% coupled with benefits from pricing actions also contributing to growth. Net sales from Other products decreased by $1.3 million, or 37.3%, to $2.2 million for the three months ended June 30, 2023 from $3.5 million for the three months ended June 30, 2022. Net sales from Other products decreased by $1.4 million, or 22.7%, to $4.8 million for the six months ended June 30, 2023 from $6.2 million for the six months ended June 30, 2022. The decrease in both periods is primarily due to volume decline. 29 Table of Contents International Segment International net sales increased by $3.6 million, or 24.1%, to $18.4 million for the three months ended June 30, 2023, from $14.8 million for the three months ended June 30, 2022. The increase is primarily driven by CE volume growth of 17.7% coupled with some benefits from pricing actions. International net sales increased by $4.7 million, or 17.7%, to $31.4 million for the six months ended June 30, 2023, from $26.6 million for the six months ended June 30, 2022. The increase is primarily driven by higher CE volume growth of 14.8% with some benefits from pricing actions. Vita Coco Coconut Water net sales increased by $1.6 million, or 14.3%, to $12.7 million for the three months ended June 30, 2023, from $11.1 million for the three months ended June 30, 2022. The increase was driven by CE volume growth of 8.4%, primarily in the European region. Vita Coco Coconut Water net sales increased by $2.8 million, or 14.4%, to $22.3 million for the six months ended June 30, 2023, from $19.5 million for the six months ended June 30, 2022. The increase was due to CE volume growth of 11.7%, primarily driven by the European region. Private Label net sales increased by $2.1 million, or 71.5%, to $5.1 million for the three months ended June 30, 2023 from $2.9 million for the three months ended June 30, 2022. The increase was driven primarily by CE volume growth in Europe. Private Label net sales increased by $2.0 million or 35.2%, to $7.7 million for the six months ended June 30, 2023, from $5.7 million for the six months ended June 30, 2022. The increase was driven primarily by CE volume growth in Europe. Net sales from Other products was relatively flat on a dollar basis for the three and six months ended June 30, 2023 compared to the prior year periods. Gross Profit (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Cost of goods sold Americas segment $ 76,155 $ 73,784 $ 2,371 3.2 % $ 143,777 $ 142,099 $ 1,678 1.2 % International segment 12,396 12,232 164 1.3 % 20,872 21,302 (430) (2.0) % Total cost of goods sold $ 88,551 $ 86,016 $ 2,535 2.9 % $ 164,649 $ 163,401 $ 1,248 0.8 % Gross profit Americas segment $ 45,109 $ 26,710 $ 18,399 68.9 % $ 74,258 $ 43,006 $ 31,252 72.7 % International segment 5,985 2,579 3,406 132.1 % 10,497 5,346 5,151 96.4 % Total gross profit $ 51,094 $ 29,289 $ 21,805 74.4 % $ 84,755 $ 48,352 $ 36,403 75.3 % Gross margin Americas segment 37.2 % 26.6 % 10.6 % 34.1 % 23.2 % 10.9 % International segment 32.6 % 17.4 % 15.2 % 33.5 % 20.1 % 13.4 % Consolidated 36.6 % 25.4 % 11.2 % 34.0 % 22.8 % 11.2 % On a consolidated basis, cost of goods sold increased $2.5 million, or 2.9%, to $88.6 million for the three months ended June 30, 2023, from $86.0 million for the three months ended June 30, 2022. Cost of goods sold increased $1.2 million, or 0.8%, to $164.6 million for the six months ended June 30, 2023, from $163.4 million for the six months ended June 30, 2022. On a consolidated and segment basis, the increases in both periods were primarily driven by higher CE volume offset by lower transportation costs. On a consolidated basis, gross profit increased $21.8 million, or 74.4%, to $51.1 million for the three months ended June 30, 2023, from $29.3 million for the three months ended June 30, 2022. Gross profit increased $36.4 million, or 75.3%, to $84.8 million for the six months ended June 30, 2023, from $48.4 million for the six months ended June 30, 2022. This was a result of strong CE volume growth, benefits from pricing actions and decreased transportation costs. As a result, gross margin increased approximately 11 percentage points to 36.6% for the three months ended June 30, 2023, as compared to 25.4% for the three months ended June 30, 2022, and increased by approximately 11 percentage points to 34.0% for the six months ended June 30, 2023, as compared to 22.8% for the six months ended June 30, 2022. 30 Table of Contents Operating Expenses (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Selling, general, and administrative $ 30,249 $ 24,257 $ 5,992 24.7 % 57,206 49,058 8,148 16.6 % Selling, General and Administrative Expenses During the three months ended June 30, 2023, SG&A increased by $6.0 million, or 24.7%, versus the three months ended June 30, 2022. The increase was primarily driven by an increase of $3 million in personnel related expenses and a $3 million increase in marketing expenses, coupled with an increase of $1 million in professional fees due to costs related to the secondary stock offering completed in May 2023. During the six months ended June 30, 2023, SG&A increased by $8.1 million, or 16.6%, versus the six months ended June 30, 2022. The increase was primarily driven by an increase of $4 million in personnel related expenses and an increase of $3 million in marketing expenses, along with an increase of $1 million in professional fees due to costs related to the offering. Other Income (Expense), Net (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Unrealized gain/(loss) on derivative instruments $ 988 $ (3,242) $ 4,230 130.5 % $ 2,201 $ 5,464 $ (3,263) 59.7 % Foreign currency gain/(loss) 170 (43) 213 495.3 % $ 781 (144) 925 642.4 % Interest income 268 3 265 8833.3 % $ 281 10 271 2710.0 % Interest expense (15) (56) 41 73.2 % $ (30) (83) 53 (63.9 %) $ 1,411 $ (3,338) $ 4,749 142.3 % $ 3,233 $ 5,247 $ (2,014) (38.4 %) Unrealized Gain/(Loss) on Derivative Instruments For the three months ended June 30, 2023 and 2022, we recorded gains of $1.0 million and losses of $3.2 million, respectively, for the mark-to-market changes in fair value on the outstanding derivative instruments for forward foreign currency exchange contracts. During the six months ended June 30, 2023 and 2022, we recorded gains of $2.2 million and $5.5 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 six months ended June 30, 2023 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) For the three months ended June 30, 2023, the change in foreign currency gain/(loss) was immaterial. Foreign currency gain was $0.8 million for the six months ended June 30, 2023, as compared to $0.1 million loss for the six months ended June 30, 2022. The change in all 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 increase in interest income for the three and six months ended June 30, 2023 compared to the same prior year period was primarily related to interest income on cash invested with financial institutions, reflecting improved cash balances and interest rates versus prior periods. 31 Table of Contents Interest Expense Interest expense decreased for the three and six months ended June 30, 2023 compared to the same prior year period, which was driven by the decreased borrowings on the 2020 Credit Facility. Income Tax Expense (in thousands) Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 Amount Percentage 2023 2022 Amount Percentage Income tax expense (4,269) (555) $ (3,714) 669.2 % $ (6,090) $ (1,175) $ (4,915) 418.3 % Tax rate 19.2 % 32.7 % 19.8 % 25.9 % Our quarterly income tax provision is based on an estimated annual effective tax rate applied to our consolidated year-to-date pre-tax income or loss. The effective income tax rate is based upon the estimated income for the year, the composition of that income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies. For the six months ended June 30, 2023 and June 30, 2022, our effective tax rate was 19.8% and 25.9%, respectively. The effective tax rate for the period ending June 30, 2023 is lower than the U.S. statutory rate of 21% primarily as a result of the windfall benefit of exercising stock options. The effective tax rate for the period ending June 30, 2022 is higher than the U.S. statutory rate of 21% primarily as a result of state income taxes for the U.S. company and other nondeductible expenses for tax purposes, and is partially offset by lower statutory tax rates in countries outside the U.S. where the Company operates. 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 non-deductible expenses 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 a key metric used by management and our Board of Director 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. 32 Table of Contents A reconciliation from net income to EBITDA and Adjusted EBITDA is set forth below: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in thousands) (in thousands) Net income 17,987 1,139 24,692 3,366 Depreciation and amortization 175 475 340 945 Interest income (268) (3) (281) (10) Interest expense 15 56 30 83 Income tax expense 4,269 555 6,090 1,175 EBITDA 22,178 2,222 30,871 5,559 Stock-based compensation (a) 2,102 1,813 4,264 4,200 Unrealized (gain)/loss on derivative instruments (b) (988) 3,242 (2,201) (5,464) Foreign currency (gain)/loss (b) (170) 43 (781) 144 Secondary Offering Costs (c) 856 — 856 — Adjusted EBITDA $ 23,978 $ 7,320 $ 33,009 $ 4,439 ____________ (a) Non-cash charges related to stock-based compensation, which vary from period to period depending on volume and vesting timing of awards. 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 the secondary offering in which Verlinvest Beverages SA sold shares of the Company in an underwritten public offering, which closed on May 26, 2023. The Company did not receive any proceeds from the sale of the shares. 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 $48.0 million and $19.6 million of cash and cash equivalents as of June 30, 2023 and December 31, 2022, respectively. From time to time, we supplement our liquidity needs with incremental borrowing capacity under the 2020 Credit Facility. 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. 33 Table of Contents Cash Flows The following tables summarize our sources and uses of cash: Six Months Ended June 30, Change 2023 2022 Amount Percentage (in thousands) Cash flows provided by (used in): Operating activities $ 26,071 $ (33,372) $ 59,443 178.1 % Investing activities (482) (857) 375 43.8 % Financing activities 2,705 22,226 (19,521) (87.8 %) Effects of exchange rate changes on cash and cash equivalents 371 (276) 647 (234.4 %) Net (decrease)/increase in cash and cash equivalents $ 28,665 $ (12,279) $ 40,944 333.4 % 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 six months ended June 30, 2023, $59.4 million more net cash was generated by operating activities compared to the six months ended June 30, 2022. The higher cash generation was driven by the increase in net income after adjusting for non-cash items, primarily reflecting higher sales and improvements in transportation costs, and working capital timing. Investing Activities During the six months ended June 30, 2023 as compared to six months ended June 30, 2022, cash used in investing activities decreased driven by cash paid for property and equipment. Financing Activities During the six months ended June 30, 2023 compared to the six months ended June 30, 2022, net cash provided by financing activities was $20 million lower primarily driven by lower borrowings on the 2020 Credit Facility during 2023 compared to 2022. Debt We had an immaterial amount of debt outstanding as of June 30, 2023 and December 31, 2022, which was related to vehicle loans. 2020 Credit Facility The 2020 Credit Facility currently provides for committed borrowings of $60.0 million. We may repay outstanding balances under the 2020 Credit Facility at any time without premium or penalty. In December 2022, the Company amended the 2020 Credit Facility to transition the interest rate from reference to LIBOR to SOFR. 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 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. The maturity date on the 2020 Credit Facility is May 12, 2026. The borrowings made before the December 2022 amendment bore interest at rates based on either: 1) LIBOR; or 2) a specified base rate (determined by reference to the greatest of the prime rate published by Wells Fargo, the federal funds 34 Table of Contents effective rate plus 1.5% and one-month LIBOR plus 1.5%), as selected periodically by the Company. The LIBOR-based loans bore interest at LIBOR plus the Spread. The unused commitment fee prior to amendment was the same. The outstanding balance on the 2020 Credit Facility was zero as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, we were compliant with all financial covenants. Vehicle Loans We periodically enter into vehicle loans. Interest rates on these vehicle loans range from 4.56% to 5.68%. The outstanding balance on the vehicle loans as of June 30, 2023 was less than $0.1 million. For additional information, see Note 6, Debt , in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Contractual Obligations and Commitments There have been no material changes to our contractual obligations from those described in the Form 10-K. 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. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in the Form 10-K and the notes to the unaudited condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q. During the six months ended June 30, 2023, there were no material changes to our critical accounting policies from those discussed in the Form 10-K. Recent Accounting Pronouncements A description of recently adopted and issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting Policies , to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.