VITA COCO COMPANY, INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)

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, dated October 20, 2021, filed with the Securities
and Exchange Commission ("SEC") in accordance with Rule 424(b)(4) of the
Securities Act on October 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.

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Overview
The Vita 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 by Vita 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 to Ecuador, 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 the U.S., Canada, and the United
Kingdom, with emerging presences in China and additional European markets. We
serve retailers and consumers through a combination of Distributors,
Broadliners, Direct to Retailer 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 the Vita 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. In April 2021, we became a Delaware 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 ended September 30, 2021.
Impact of
COVID-19
The
COVID-19
pandemic has caused general business disruption worldwide beginning in January
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 in
March 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.

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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 ended
September 30, 2021 and 10% for the three months ended September 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
On October 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 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 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.


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Change in Fair Value of Contingent Consideration
In connection with our acquisition of Runa, we agreed to pay contingent payments
to Runa's former shareholders only if a certain revenue growth rate is achieved.
Assuming the revenue growth is achieved, the former shareholders could elect for
payment to be calculated based on quarterly data available between December 2021
and December 2022, as follows: 49% of the product of (a) the net revenue for the
trailing 12 calendar months and (b) a specified multiple, which is contingent on
the revenue growth achieved since December 31, 2017. The contingent
consideration payout cannot exceed $51.5 million. If a certain revenue growth
rate is not achieved, the Company is not required to pay any contingent payment.
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 the
Americas operations, and therefore the goodwill was assigned and tested at the
Americas 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 the Americas reporting
unit. In 2020, we did elect to perform the quantitative assessment. At the
Americas 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 of September 30, 2021, the contingent consideration
was zero. The contingent consideration will continue to be remeasured until
payout in December 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 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
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 in May 2020.
Interest Expense
Interest expense consists of interests on our credit facilities and term loans.
Income Tax Expense
We are subject to federal and state income taxes in the United States and taxes
in foreign jurisdictions in which we operate. We recognize deferred tax assets
and liabilities based on temporary differences between the financial reporting
and income tax bases of assets and liabilities using statutory rates. We
regularly assess the need to record a valuation allowance against net deferred
tax assets if, based upon the available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
Operating Segments
We operate in two reporting segments:

Americas

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



         •   International
             -The International segment is comprised of our operations

mainly in

             Europe, the Middle East and the Asia Pacific regions.



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Each segment derives its revenues from the following product categories:

• Vita Coco coconut water

             r-This product category consists of all branded coconut water 

product

             offerings under the Vita Coco labels, where the majority 

the 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

some 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

recognize the

             revenue for the production of these private label products 

overtime

             as the production for open purchase orders occurs, which may 

be before

             to any shipment.



         •   Other
             -This product category consists of all other products, which

understand

             Runa, Ever & Ever and PWR LIFT product offerings, Vita Coco 

product

             extensions beyond coconut water, such as Vita Coco Sparkling, 

coconut

             milk products, and other revenue transactions (e.g., bulk 

product

             sales). For these products, control is transferred upon

customer

             receipt, at which point the Company recognizes the transaction price
             for the product as revenue.


Results of Operations
Comparison of the Three 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




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Net Sales
The following table provides a comparative summary of net sales by operating
segment and product category:

                                     Three Months Ended                                             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           $   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 ended September 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.

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Americas Segment
Americas net sales increased by $26.4 million, or 35.4%, to $100.9 million for
the three months ended September 30, 2021 from $74.5 million for the three
months ended September 30, 2020. Americas net sales increased by $46.3 million,
or 22.6%, to $250.9 million for the nine months ended September 30, 2021 from
$204.6 million for the nine months ended September 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 ended September 30, 2021, from $50.9 million
for the three months ended September 30, 2020. Vita Coco Coconut Water net sales
increased by $45.3 million, or 34.6%, to $176.2 million for the nine months
ended September 30, 2021, from $131.0 million for the nine months ended
September 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 ended September 30, 2021, from $20.2 million for the three
months ended September 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
ended September 30, 2021, from $62.4 million for the nine months ended
September 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 ended September 30, 2021 from $3.4 million for the three
months ended September 30, 2020. Net sales for Other products decreased by
$3.0 million, or 26.9%, to $8.2 million for the nine months ended September 30,
2021 from $11.3 million for the nine months ended September 30, 2020 primarily
driven by a decrease in bulk sales and Vita Coco oil.
International Segment
International net sales increased by $1.9 million, or 15.1%, to $14.7 million
for the three months ended September 30, 2021, from $12.8 million for the three
months ended September 30, 2020. International net sales increased by
$5.5 million, or 15.0%, to $42.0 million for the nine months ended September 30,
2021, from $36.5 million for the nine months ended September 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 ended September 30, 2021 compared
to the same periods ended September 30, 2020, the growth was driven by Vita 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 ended September 30, 2021, from $8.0 million
for the three months ended September 30, 2020. Vita Coco Coconut Water net sales
increased by $5.1 million, or 23.6%, to $26.4 million for the nine months ended
September 30, 2021, from $21.4 million for the nine months ended September 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 in Europe, for the three months ended September 30, 2021
compared to September 30, 2020. For the nine months ended September 30, 2021,
the net sales increases for Private Label and Other products in the
International segment compared to the nine months ended September 30, 2020 were
immaterial relative to the growth in Vita Coco Coconut Water.

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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 ended September 30, 2021, from
$57.9 million for the three months ended September 30, 2020. Cost of goods sold
increased $42.6 million, or 26.8%, to $201.4 million for the nine months ended
September 30, 2021, from $158.8 million for the nine months ended September 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 ended September 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 ended September 30, 2021, from
$29.4 million for the three months ended September 30, 2020. On a consolidated
basis, gross profit dollars increased $9.2 million, or 11.2%, to $91.6 million
for the nine months ended September 30, 2021, from $82.3 million for the nine
months ended September 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 ended
September 30, 2021, as compared to 33.6% for the three months ended
September 30, 2020. Gross margin was 31.3% for the nine months ended
September 30, 2021, as compared to 34.1% for the nine months ended September 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%




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Selling, General and Administrative Expenses
During the three and nine months ended September 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 ended September 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.

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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

stock-based compensation expenses, which vary from period to period

depending on the volume and the time of vesting of the grants. We have adjusted for these

fee to facilitate comparison from period to period.

(b) Unrealized gains or losses on derivative instruments and currencies

gains or losses are not taken into account in our assessment of our

performance.

(c) Reflects other fees, including legal and other fees

    non-recurring
    expenses mostly related to our public company readiness preparation.



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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 of September 30, 2021 and December 31, 2020,
respectively. We supplemented our liquidity needs with incremental borrowing
capacity under the Term Facility and the Revolving Facility, which we amended in
May 2021. On October 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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