THE VITA COCO COMPANY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our prospectus, datedOctober 20, 2021 , filed with theSecurities and Exchange Commission ("SEC") in accordance with Rule 424(b)(4) of the Securities Act onOctober 22, 2021 (the "Prospectus") in connection with our initial public offering ("IPO"). 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 Item II, Part 1A, "Risk Factors" and other factors set forth in other parts of this Quarterly Report on Form 10-Q. 3 3 -------------------------------------------------------------------------------- Table of Contents Overview TheVita Coco Company is a leading fast-growing, plant-based functional hydration platform, which pioneered packaged coconut water in 2004, and recently began extending into other healthy hydration categories including non-plant based offerings. Our brand portfolio is led byVita Coco , which is the leader in the global coconut water category with additional coconut oil and coconut milk offerings, and includes Runa, a leading plant-based energy drink inspired from the Guayusa plant native toEcuador , Ever & Ever, a sustainably packaged water, and the recently launched PWR LIFT, a flavored protein-infused water. We also offer private label products in Coconut Water and Coconut Oil for select retailers, and some coconut and Guayusa commodities. Our products are primarily distributed across theU.S. ,Canada , and theUnited Kingdom , with emerging presences inChina and additional European markets. We serve retailers and consumers through a combination of Distributors, Broadliners, Direct toRetailer Warehouse and E-commerce channels. We support this distribution with our own sales force and marketing activities such as sampling, digital media and social channels and traditional promotional and sampling activities. In addition to being focused on the benefits we deliver to our consumers through our products, we also believe that we have a responsibility to grow our business with our environmental and social impact in mind. We use a responsibly designed, asset-lite supply chain which we believe has a positive impact our communities and mitigates our impact on the planet. As part of our coconut water production process, we provide our production partners the partnership, investments and training that they need to not only reduce waste and environmental impact, but also to turn their coconut water into a shelf- stable product with commercial viability benefiting their economics and their community. In 2014, we created theVita Coco Project to support and empower our coconut farming communities through innovative farming practices, improving education resources, and scaling our business to promote economic prosperity-through all of which we hope to positively impact the lives of over one million people. Additionally, we seek to partner with other third-party organizations that share and advance our ideals including fair trade, accessible nutrition and wellness, and environmental responsibility. InApril 2021 , we became aDelaware Public Benefit Corporation , with the public benefit purpose identified as harnessing, while protecting, nature's resources for the betterment of the world and its habitants by creating ethical, sustainable, better-for-you beverages and consumer products that not only uplift our communities, but that do right by our planet. When managing our business and executing our growth strategies, we aim to exercise strong financial discipline to maximize long term value for all of our stakeholders, including investors, consumers, customers, and employees, with a long-term horizon. 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 Prospectus under the heading "Key Factors Affecting our Performance" other than the changes noted below in Impact of COVID-19. Those factors also pose risks and challenges, including those discussed in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2021 . Impact of COVID-19 The COVID-19 pandemic has caused general business disruption worldwide beginning inJanuary 2020 . The full extent to which the COVID-19 pandemic will directly or indirectly impact our cash flow, business, financial condition, results of operations and prospects will depend on future developments that are uncertain. From the beginning of this pandemic, our top priority has been the health, safety and well-being of our employees. Early inMarch 2020 , we implemented global travel restrictions and work-from-home policies for employees who are able to work remotely. For those employees who are unable to work remotely, safety precautions have been instituted, which were developed and adopted in line with guidance from public health authorities and professional consultants. Currently, certain of our offices have been partially reopened, our quality lab continues to operate under strict protocols, and generally, our field sales teams are working with our distributors and retailers subject to local safety protocols. During the COVID-19 pandemic, we have taken a number of steps to support our employees, including increasing employee communications, including topics such as mental health and family welfare; creating wellness hotlines and enhancing employee assistance programs; and conducting employee surveys to evaluate employee morale. We are incredibly proud of the teamwork exhibited by our employees, co-packers and distributors around the world who are ensuring the integrity of our supply chain. Associated with COVID-19 changes in consumer spending and employment economics, we have seen significant changes to global ocean shipping capacity and availability and pricing of containers, lengthening transit times, increased domestic transportation costs and some payroll inflationary effects among other impacts. Since COVID-19 emerged we have experienced negative impacts on our inventory availability and delivery capacity which have affected, at times, our ability to fully service our customers' demand. We have also experienced limited temporary partner facility shutdowns and delayed pickup of orders by certain customers. We have taken measures to bolster key aspects of our supply chain and we continue to work with our supply chain partners to try to ensure our ability to service our customers and their demand. 34 -------------------------------------------------------------------------------- Table of Contents Late last year, we started to experience cost inflation to global shipping costs and some inflationary pressures on other cost elements, and the size of these cost increases has increased sequentially throughout the year. Starting in the second quarter 2021, we took pricing actions such as delaying promotions, reducing discounting and sharing cost increases with private label customers as we were able, which collectively partially covered the cost pressures we have experienced. We have experienced significant cost inflation with our cost of goods rate per case equivalents ("CE") increasing 8% for the nine months endedSeptember 30, 2021 and 10% for the three months endedSeptember 30, 2021 versus the comparable periods in the prior year, primarily relating to cost increases across ocean freight, fulfillment, and shipping expenses as a result of global supply chain disruptions caused by the COVID-19 pandemic, which was only partially offset by pricing actions to date. We expect to see ongoing cost pressures, potentially sequentially worse than prior quarters, and will evaluate appropriate mitigation measures to protect our business including taking pricing actions and cost reduction measures. We do not believe these costs year to date are fully representative of our costs of goods sold in a normal supply chain environment. Initial Public Offering OnOctober 25, 2021 , we completed our initial public offering ("IPO") by issuing 2,500,000 shares of our common stock at a price to the public of$15 per share, resulting in net proceeds to us of approximately$30 million , after deducting the underwriting discount and commissions of approximately$2 million and offering expenses of approximately$5 million . Additionally, certain selling stockholders sold an aggregate of 9,000,000 shares. Post the IPO, we had approximately 55 million shares outstanding. Components of Our Results of OperationsNet Sales We generate revenue through the sale of ourVita Coco branded coconut water, Private Label and Other products in theAmericas 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 incurred in operating and staffing warehouses. Gross Profit and Gross Margin Gross profit is net sales less cost of goods sold, and gross margin is gross profit as a percentage of net sales. Gross profit has been, and will continue to be, affected by various factors, including the mix of products we sell, the channel through which we sell our products, the promotional environment in the marketplace, manufacturing costs, commodity prices and transportation rates. We expect that our gross margin will fluctuate from period to period depending on the interplay of these variables. Gross margin is a ratio calculated by dividing gross profit by net sales. Management believes gross margin provides investors with useful information related to the profitability of our business prior to considering all of the operating costs incurred. Management uses gross profit and gross margin as key measures in making financial, operating and planning decisions and in evaluating our performance. Operating Expenses Selling, General and Administrative Expenses Selling, general and administrative expenses 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 selling and marketing expenses 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 expense 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 expense as incurred. We expect selling, general and administrative expenses to increase in absolute dollars to support business growth and as a result of operating as a public company. 35 -------------------------------------------------------------------------------- Table of Contents 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 betweenDecember 2021 andDecember 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 sinceDecember 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. 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. Therefore, the contingent payment reduction, by itself, was not considered a triggering event as it measures against growth targets that must be achieved during a limited period, whereas projections used for intangible and goodwill impairment testing consider a longer period of time. Additionally, the Runa brand has been integrated into theAmericas operations, and therefore the goodwill was assigned and tested at theAmericas reporting unit level. As such, since the goodwill is tested at this higher reporting unit level, changes in the individual Runa brand projections are not indicative of a triggering event for goodwill since Runa sales are an insignificant portion of the overall financial results of theAmericas reporting unit. In 2020, we did elect to perform the quantitative assessment. At theAmericas reporting unit level, there was significant cushion between the fair value of the reporting unit and the carrying value, and therefore, no goodwill impairment was recorded. As ofSeptember 30, 2021 , the contingent consideration was zero. The contingent consideration will continue to be remeasured until payout inDecember 2022 . Other Income (Expense), Net Unrealized Gain/(Loss) on Derivative Instruments We are subject to foreign currency risks as a result of its 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. "Qualitative and Quantitative Disclosures About Market Risk-Foreign Currency Exchange Risk" in this Quarterly Report on Form 10-Q for further information. Foreign Currency Gain/(Loss) Our reporting currency is theU.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 Part I, Item 3. "Qualitative and Quantitative Disclosures About Market Risk-Foreign Currency Exchange Risk" in this Quarterly Report on Form 10-Q 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 inMay 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 inthe 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:
•
- 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 operationsprimarily in
Europe , theMiddle East and theAsia Pacific regions. 36
-------------------------------------------------------------------------------- Table of Contents Each segment derives its revenues from the following product categories:
• Vita Coco Coconut Wate
r-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 labelproducts
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 Companyrecognizes 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, whichincludes
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 uponcustomer
receipt, at which point the Company recognizes the transaction price
for the product as revenue.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the three and nine
months ended September 30, 2021 and 2020, respectively:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net sales $ 115,669 $ 87,321 $ 292,929 $ 241,127
Cost of goods sold 77,168 57,941 201,368 158,813
Gross profit 38,501 29,380 91,561 82,314
Operating expenses
Selling, general, and administrative 20,675 19,060 61,897 55,462
Income from operations 17,826 10,320 29,664 26,852
Other income (expense)
Unrealized gain/(loss) on derivative instrument (1,964 ) 167 1,250 (7,229 )
Foreign currency gain/(loss) (483 ) 756 (2,013 ) 1,118
Interest income 31 61 104 244
Interest expense (127 ) (24 ) (319 ) (776 )
Total other income (expense) (2,543 ) 960 (978 ) (6,643 )
Income before income taxes 15,283 11,280 28,686 20,209
Income tax expense (2,296 ) (2,263 ) (6,277 ) (4,615 )
Net income $ 12,987 $ 9,017 $ 22,409 $ 15,594
37-------------------------------------------------------------------------------- Table of ContentsNet Sales The following table provides a comparative summary of net sales by operating segment and product category: Three Months Ended Nine Months Ended September 30, Change September 30, Change (in thousands) 2021 2020 Amount Percentage 2021 2020 Amount PercentageAmericas segment Vita Coco Coconut Water$ 71,825 $ 50,891 $ 20,934 41.1 %$ 176,229 $ 130,953 $ 45,276 34.6 % Private Label 25,973 20,227 5,746 28.4 % 66,457 62,391 4,066 6.5 % Other 3,135 3,404 (269 ) -7.9 % 8,246 11,277 (3,031 ) (26.9 %) Subtotal 100,933 74,522 26,411 35.4 % 250,932 204,621 46,311 22.6 % International segment Vita Coco Coconut Water$ 10,093 $ 8,024 $ 2,069 25.8 %$ 26,445 $ 21,387 $ 5,058 23.6 % Private Label 4,117 3,093 1,024 33.1 % 9,648 9,472 176 1.9 % Other 526$ 1,682 (1,156 ) -68.7 % 5,904 5,647 257 4.6 % Subtotal$ 14,736 $ 12,799 $ 1,937 15.1 %$ 41,997 $ 36,506 $ 5,491 15.0 % Total net sales$ 115,669 $ 87,321 $ 28,348 32.5 %$ 292,929 $ 241,127 $ 51,802 21.5 % For the three months and the nine months endedSeptember 30, 2021 , the primary driver of the consolidated net sales increase of 33% and 22%, respectively, was increased CE volume with some benefits from pricing actions including reduced promotional support. Volume in Case Equivalent The following table provides a comparative summary of our volume in case equivalents, by operating segment and product category: Three Months Ended Nine Months Ended September 30, Change September 30, Change (in thousands) 2021 2020 Amount Percentage 2021 2020 Amount Percentage Americas segment Vita Coco Coconut Water 7,605 6,147 1,458 23.7 % 19,482 15,176 4,306 28.4 % Private Label 2,934 2,391 543 22.7 % 7,643 7,000 643 9.2 % Other 326 325 1 0.3 % 831 1,269 (438 ) (34.5 %) Subtotal 10,865 8,863 2,002 22.6 % 27,956 23,445 4,511 19.2 % International segment* Vita Coco Coconut Water 1,463 1,242 221 17.8 % 3,890 3,278 612 18.7 % Private Label 540 448 92 20.5 % 1,327 1,302 25 1.9 % Other 7 119 (112 ) (94.1 %) 213 481 (268 ) (55.7 %) Subtotal 2,010 1,809 201 11.1 % 5,430 5,061 369 7.3 % Total volume (CE) 12,875 10,672 2,203 20.6 % 33,386 28,506 4,880 17.1 % 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. 38 -------------------------------------------------------------------------------- Table of Contents Americas SegmentAmericas net sales increased by$26.4 million , or 35.4%, to$100.9 million for the three months endedSeptember 30, 2021 from$74.5 million for the three months endedSeptember 30, 2020 .Americas net sales increased by$46.3 million , or 22.6%, to$250.9 million for the nine months endedSeptember 30, 2021 from$204.6 million for the nine months endedSeptember 30, 2020 . The increase in both periods is primarily driven by a CE volume increase and a reduction of branded promotional activities that was implemented in the second quarter and had a larger impact in the third quarter. Vita Coco Coconut Water net sales increased by$20.9 million , or 41.1%, to$71.8 million for the three months endedSeptember 30, 2021 , from$50.9 million for the three months endedSeptember 30, 2020 . Vita Coco Coconut Water net sales increased by$45.3 million , or 34.6%, to$176.2 million for the nine months endedSeptember 30, 2021 , from$131.0 million for the nine months endedSeptember 30, 2020 . The increase in both periods was primarily driven by a combination of increased consumer demand, retail execution, and pricing actions to reduce price promotions, with sales being the strongest within our direct-store-delivery channel. Private Label net sales increased$5.7 million , or 28.4%, to$26.0 million for the three months endedSeptember 30, 2021 , from$20.2 million for the three months endedSeptember 30, 2020 , mostly driven by better inventory availabilities and associated timing of revenue recognition. Private Label net sales increased$4.1 million , or 6.5%, to$66.5 million for the nine months endedSeptember 30, 2021 , from$62.4 million for the nine months endedSeptember 30, 2020 . For both periods, although the overall CE volume increased period over period, there was a mix shift from coconut oil towards coconut water, which has lower net sales per CE. Net sales for Other products decreased by$0.3 million , or 7.9%, to$3.1 million for the three months endedSeptember 30, 2021 from$3.4 million for the three months endedSeptember 30, 2020 . Net sales for Other products decreased by$3.0 million , or 26.9%, to$8.2 million for the nine months endedSeptember 30, 2021 from$11.3 million for the nine months endedSeptember 30, 2020 primarily driven by a decrease in bulk sales andVita Coco oil. International Segment International net sales increased by$1.9 million , or 15.1%, to$14.7 million for the three months endedSeptember 30, 2021 , from$12.8 million for the three months endedSeptember 30, 2020 . International net sales increased by$5.5 million , or 15.0%, to$42.0 million for the nine months endedSeptember 30, 2021 , from$36.5 million for the nine months endedSeptember 30, 2020 . The increase in both periods is primarily driven by increased sales in our European region, which includes a favorable impact related to foreign currency translation. For the three and the nine months endedSeptember 30, 2021 compared to the same periods endedSeptember 30, 2020 , the growth was driven byVita Coco Coconut Water and Private Label, offset by lower sales from Other products. Vita Coco Coconut Water net sales increased by$2.1 million , or 25.8%, to$10.1 million for the three months endedSeptember 30, 2021 , from$8.0 million for the three months endedSeptember 30, 2020 . Vita Coco Coconut Water net sales increased by$5.1 million , or 23.6%, to$26.4 million for the nine months endedSeptember 30, 2021 , from$21.4 million for the nine months endedSeptember 30, 2020 . The changes for both periods were driven by the movement in CE volume, primarily in the European region which also benefited from favorable impact related to foreign currency translation. Increases in net sales from Private Label of$1.0 million , which were driven by increased CE volume across regions and favorable impact related to foreign currency translation inEurope , for the three months endedSeptember 30, 2021 compared toSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the net sales increases for Private Label and Other products in the International segment compared to the nine months endedSeptember 30, 2020 were immaterial relative to the growth in Vita Coco Coconut Water. 39 -------------------------------------------------------------------------------- Table of Contents Gross Profit Three Months Ended Nine Months Ended September 30, Change September 30, Change (in thousands) 2021 2020 Amount Percentage 2021 2020 Amount Percentage Cost of goods sold Americas segment$ 66,254 $ 49,431 $ 16,823 34.0 %$ 169,430 $ 133,545 $ 35,885 26.9 % International segment 10,914 8,510 2,404 28.2 % 31,938 25,268 6,670 26.4 % Total cost of goods sold$ 77,168 $ 57,941 $ 19,227 33.2 %$ 201,368 $ 158,813 $ 42,555 26.8 % Gross profit Americas segment$ 34,679 $ 25,091 $ 9,588 38.2 %$ 81,502 $ 71,076 $ 10,426 14.7 % International segment 3,822 4,289 (467 ) (10.9 %) 10,059 11,238 (1,179 ) (10.5 %) Total gross profit$ 38,501 $ 29,380 $ 9,121 31.0 %$ 91,561 $ 82,314 $ 9,247 11.2 % On a consolidated basis, cost of goods sold increased$19.2 million , or 33.2%, to$77.2 million for the three months endedSeptember 30, 2021 , from$57.9 million for the three months endedSeptember 30, 2020 . Cost of goods sold increased$42.6 million , or 26.8%, to$201.4 million for the nine months endedSeptember 30, 2021 , from$158.8 million for the nine months endedSeptember 30, 2020 . On a consolidated and segment basis, the increases in both periods were primarily driven by CE volume and significant transportation costs inflation that built sequentially over the last nine months, specifically related to ocean freight costs due to shipping and port constraints related to the COVID-19 pandemic and other logistics cost inflation. On a consolidated basis, this resulted in cost of goods per CE rate increasing 8% and 10% respectively for the nine and three months endedSeptember 30, 2021 as compared to prior periods. On a consolidated basis, gross profit dollars increased$9.1 million , or 31.0%, to$38.5 million for the three months endedSeptember 30, 2021 , from$29.4 million for the three months endedSeptember 30, 2020 . On a consolidated basis, gross profit dollars increased$9.2 million , or 11.2%, to$91.6 million for the nine months endedSeptember 30, 2021 , from$82.3 million for the nine months endedSeptember 30, 2020 . Although we delivered strong top line growth driven by continued underlying strength of our Vita Coco brand, our gross profit was significantly impacted by ocean freight and other logistics costs escalation, only partially compensated by pricing actions, including reduced promotional activity. Gross margin was 33.3% for the three months endedSeptember 30, 2021 , as compared to 33.6% for the three months endedSeptember 30, 2020 . Gross margin was 31.3% for the nine months endedSeptember 30, 2021 , as compared to 34.1% for the nine months endedSeptember 30, 2020 . The approximate 40 basis points decline for the three month period and the 290 basis point decline for the nine month period was driven by the cost increases across ocean freight, fulfillment, and shipping expenses as a result of the COVID-19 pandemic, which was partly offset by the positive impact of higher CE volume in both segments. Operating Expenses Three Months Ended Nine Months Ended September 30, Change September 30, Change (in thousands) 2021 2020 Amount Percentage 2021 2020 Amount Percentage Selling, general, and administrative 20,675 19,060 1,615 8.5% 61,897 55,462 6,435 11.6% 40
-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses During the three and nine months endedSeptember 30, 2021 , Selling, general and administrative, or SG&A, expense increased by$1.6 million , or 8.5% and$6.4 million , or 11.6%, respectively, versus the prior year comparable period. The increases were primarily driven by our public company readiness preparation, with increased spending in professional fees and personnel related expenses for the three and nine months endedSeptember 30, 2021 versus the prior year comparable period. Other Income (Expense), Net Three Months Ended Nine Months Ended September 30, Change September 30, Change (in thousands) 2021 2020 Amount Percentage 2021 2020 Amount Percentage Unrealized gain/(loss) on derivative instruments$ (1,964 ) $ 167 $ (2,131 ) n/m$ 1,250 $ (7,229 ) $ 8,479
n/m
Foreign currency gain/(loss) (483 ) 756 (1,239 ) n/m (2,013 ) 1,118 (3,131 ) n/m
Interest income 31 61 (30 ) (49.2 %) 104 244 (140 ) (57.4 %)
Interest expense (127 ) (24 ) (103 ) 429.2 % (319 ) (776 ) 457 (58.9 %)
$ (2,543 ) $ 960 $ (3,503 ) (364.9 %) $ (978 ) $ (6,643 ) $ 5,665 (85.3 %)
n/m-represents percentage calculated not being meaningful
Unrealized Gain/(Loss) on Derivative Instruments
During the three months ended September 30, 2021 and 2020, we recorded losses of
$2.0 million and gains of $0.2 million , respectively, on outstanding derivative
instruments for forward foreign currency exchange contracts. During the nine
months ended September 30, 2021 and 2020, we recorded gains of $1.3 million and
losses of $7.2 million , respectively, on outstanding derivative instruments for
forward foreign currency exchange contracts. All forward foreign currency
exchange contracts were entered to hedge some of our exposures to the British
pound, Canadian dollar, Brazilian real, Malaysian ringgit, and Thai baht.
Foreign Currency Gain/(Loss)
Foreign currency loss was $0.5 million for the three months ended September 30,
2021 , as compared to $0.8 million gain for the three months ended September 30,
2020 . Foreign currency loss was $2.0 million for the nine months ended
September 30, 2021 , as compared to $1.1 million gain for the nine months ended
September 30, 2020 . The change in both years was a result of movements in
various foreign currency exchange rates related to transactions denominated in
currencies other than the functional currency.
Interest Income
The decrease in interest income for the three months ended September 30, 2021
compared to the same period in the prior year was immaterial. Interest income
decreased by $0.1 million , or 57.4%, to $0.1 million for the nine months ended
September 30, 2021 , from $0.2 million for the nine months ended September 30,
2020 . The decrease was primarily driven by an amended interest rate from 1.78%
to 0.58% on the loan to the
co-CEO
described in Note 14,
Related-Party Transactions
, to our notes condensed consolidated financial statements. On September 16,
2021 , the
co-CEO
of the Company, repaid the outstanding principal balance and accrued interest on
the promissory note.
41
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Interest Expense
Interest expense increased an immaterial amount for the three months ended
September 30, 2021 compared to the comparable period in the prior year. For the
nine months ended September 30, 2021 , the decrease of $0.5 million compared to
the comparable period in the prior year was primarily driven by
non-recurring
interest expense upon the settlement of an interest rate swap in May 2020 which
impacted our interest expense by $0.5 million in the nine months ended
September 30, 2020 , which did not repeat in the nine months ended September 30,
2021 .
Income Tax Expense
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
(in thousands) 2021 2020 Amount Percentage 2021 2020 Amount Percentage
Income tax expense $ (2,296 ) $ (2,263 ) $ (33 ) 1.5 % $ (6,277 ) $ (4,615 ) $ (1,662 ) 36.0 %
Tax Rate 15.0 % 20.1 % 21.9 % 22.8 %
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 nine months ending September 30, 2020 , and September 30, 2021 , our
effective tax rate was 22.8% and 21.9%, respectively. The effective tax rate for
both periods is higher than the US statutory rate of 21% primarily as a result
of state income taxes for the US company and other nondeductible expenses for
tax purposes, and is partially offset by lower statutory tax rates in countries
outside the US that the Company operates in. The change in effective tax rates
between the periods is primarily driven by the jurisdictional mix of the
Company's
pre-tax
profits and the relative impact of other
non-deductible
expense in relation to the
pre-tax
profits.
For the three months ending September 30, 2020 , and September 30, 2021 , our
effective tax rate was 20.1% and 15.1%, respectively. The effective tax rate for
both periods is lower than the US statutory rate of 21% due to changes to the
Company's estimated annual effective tax rate driven by changes in the expected
jurisdictional mix of profits and the relative impacts of Company's foreign
operations in each period. 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
expense in relation to the
pre-tax
profits.
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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 directors, to
assess our financial performance. We present these
non-GAAP
measures because we believe they assist investors in comparing our performance
across reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance and because we believe
it is useful for investors to see the measures that management uses to evaluate
the company.
We define EBITDA as net income before interest, taxes, depreciation, and
amortization. Adjusted EBITDA is defined as EBITDA with adjustments to eliminate
the impact of certain items, including certain
non-cash
and other items, that we do not consider representative of our ongoing operating
performance.
A reconciliation from net income to EBITDA and Adjusted EBITDA is set forth
below:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)Net income$ 12,987 $ 9,017$ 22,409 $ 15,594 Depreciation and amortization 514 531 1,557 1,559 Interest income (31 ) (61 ) (104 ) (244 ) Interest expense 127 24 319 776 Income tax expense 2,296 2,263 6,277 4,615 EBITDA 15,893 11,774 30,458 22,300 Stock-based compensation (a) 629 411 1,641 1,238 Unrealized (gain)/loss on derivative instruments (b) 1,964 (167 ) (1,250 ) 7,229 Foreign currency (gain)/loss (b) 483 (756 ) 2,013 (1,118 ) Other adjustments (c) 1,678 19 3,401 165 Adjusted EBITDA$ 20,647 $ 11,281 $ 36,263 $ 29,814 (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 charges inclusive of legal costs and other
non-recurring
expenses mostly related to our public company readiness preparation.
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Table of Contents 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$35.9 million and 72.2 million of cash and cash equivalents as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. We supplemented our liquidity needs with incremental borrowing capacity under the Term Facility and the Revolving Facility, which we amended inMay 2021 . OnOctober 25, 2021 , we completed our IPO by issuing 2,500,000 shares of our common stock at a price to the public of$15 per share, resulting in net proceeds to us of approximately$30 million , after deducting the underwriting discount and commissions of approximately$2 million and offering expenses of approximately$5 million . Considering recent market conditions and the ongoing COVID-19 pandemic, 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 Revolving Facility, as well as the Term 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. 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 provides us with a low cost, nimble, and scalable supply chain, which allows us to quickly 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 general 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. Cash Flows The following tables summarize our sources and uses of cash:
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