# Vita Coco Company, Inc.: Form 10-Q for the period ended Mar 31, 2022

- Company: [Vita Coco Company, Inc.](/companies/coco.md) (CIK 1482981)
- Form: 10-Q
- Filed: 2022-05-13
- Accepted by EDGAR: May 12, 2022, 18:15 ET
- Period: 2022-03-31
- Accession: 0001482981-22-000044
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1482981/000148298122000044/coco-20220331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1482981/000148298122000044/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $96.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $77.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $19.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $24.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | −$5.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-01-01 to 2022-03-31 | $27.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $620.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $2.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 55,700,388 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | −$22.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $244.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2022-01-01 to 2022-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-03-31 | $18.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $170.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $198.3m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $57.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $70.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | $127.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,876 characters.

*You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Form 10-K, for the fiscal year ended December 31, 2021 and filed with the Securities and Exchange Commission ("SEC") on March 14,2022 (the “Form 10-K”). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors” and other factors set forth in the Form 10-K.*

### Overview

The Vita Coco Company is a leading platform for brands in the functional beverage category. We pioneered packaged coconut water in 2004 and extended our business into other healthy hydration categories. Our mission is to deliver great tasting, natural and nutritious products that are better for consumers and better for the world. Today we believe that we are the largest brand globally in the coconut and other plant waters category, and one of the largest suppliers of private label coconut water.

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

We source our coconut water from a diversified global network of 15 factories across seven countries supported by thousands of coconut farmers. As we do not own any of the coconut water factories, our supply chain is a fixed asset-lite model designed to better react to changes in the market or consumer preferences. We also work with co-packers in America and Europe to support local packing and repacking of our products and to better service our customers’ needs.

*Vita Coco* is available in over 30 countries, with our primary markets in North America, the United Kingdom, and China. Our primary markets for private label are North America and Europe. Our products are distributed primarily through club, food, drug, mass, convenience, e-commerce, and foodservice channels. We are also available in a variety of on-premise locations such as corporate offices, fitness clubs, airports, cruise lines, and educational institutions.

### Key Factors Affecting Our Performance

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

### Impact of COVID-19 and the Russia-Ukraine War

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

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

The Company is continuing to monitor the situation carefully to understand any future potential impact on its people and business. As a result, it is not currently possible to ascertain the overall impact of COVID-19 or the Russia-Ukraine war on the business, results of operations, financial condition or liquidity. Future events and effects related to COVID-19 or the Russia-Ukraine war 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.

### Components of Our Results of Operations

### Net Sales

We generate revenue through the sale of our *Vita Coco* branded coconut water, Private Label and Other products in the Americas and International segments. Our sales are predominantly made to distributors or to retailers for final sale to consumers through retail channels, which includes sales to traditional brick and mortar retailers, who may also resell our products through their own online platforms. Our revenue is recognized net of allowances for returns, discounts, credits, and any taxes collected from consumers.

### Cost of Goods Sold

Cost of goods sold includes the costs of the products sold to customers, inbound and outbound shipping and handling costs, freight and duties, shipping and packaging supplies, and warehouse fulfillment costs.

### Gross Profit and Gross Margin

Gross profit is net sales less cost of goods sold, and gross margin is gross profit as a percentage of net sales. Gross profit has been, and will continue to be, affected by various factors, including the mix of products we sell, the channels through which we sell our products, the promotional environment in the marketplace, manufacturing costs, commodity prices, and transportation rates. We expect that our gross margin will fluctuate from period to period depending on the interplay of these variables.

Management believes gross margin provides investors with useful information related to the profitability of our business prior to considering the operating costs incurred. Management uses gross profit and gross margin as key measures in making financial, operating, and planning decisions and in evaluating our performance.

### Operating Expenses

### Selling, General and Administrative Expenses

Selling, general and administrative expenses include marketing expenses, sales promotion expenses, and general and administrative expenses. Marketing and sales promotion expenses consist primarily of costs incurred promoting and marketing our products and are primarily driven by investments to grow our business and retain customers. In the long-term, we generally expect selling and marketing expenses to increase in absolute dollars and to vary from period to period as a percentage of net sales. General and administrative expenses include payroll, employee benefits, stock-based compensation, broker commissions and other headcount-related expenses associated with supply chain & operations, finance, information technology, human resources and other administrative-related personnel, as well as general overhead costs of the business, including research and development for new innovations, rent and related facilities and maintenance costs, depreciation and amortization, and legal, accounting, and professional fees. We expense all selling, general and administrative expenses as incurred. We expect selling, general and administrative expenses to increase in absolute dollars to support business growth and, in the near term, our transition to a public company.

### Change in Fair Value of Contingent Consideration

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

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

### Other Income (Expense), Net

### Unrealized Gain/(Loss) on Derivative Instruments

We are subject to foreign currency risks as a result of our inventory purchases and intercompany transactions. In order to mitigate the foreign currency risks, we and our subsidiaries enter into foreign currency exchange contracts which are recorded at fair value. Unrealized gain on derivative instruments consists of gains or losses on such foreign currency exchange contracts which are unsettled as of period end. See “—Qualitative and Quantitative Disclosures about Market Risk—Foreign Currency Exchange Risk” for further information.

### Foreign Currency Gain/(Loss)

Our reporting currency is the U.S. dollar. We maintain the financial statements of each entity within the group in its local currency, which is also the entity’s functional currency. Foreign currency gain/(loss) represents the transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency. See “—Qualitative and Quantitative Disclosures about Market Risk—Foreign Currency Exchange Risk” for further information.

### Interest Income

Interest income consists of interest income earned on our cash and cash equivalents, and money market funds, as well as interest received as part of an interest rate swap which was terminated in May 2020.

### Interest Expense

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

### Income Tax Expense

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

### Operating Segments

We operate in two reporting segments:

- ***Americas—***The Americas segment is comprised of our operations in the Americas region, primarily in the United States and Canada.
- ***International—***The International segment is comprised of our operations primarily in Europe, the Middle East, and the Asia Pacific regions.

Each segment derives its revenues from the following product categories:

- ***Vita Coco Coconut Water—***This product category consists of all branded coconut water product offerings under the *Vita Coco* labels, where the majority ingredient is coconut water. For these products, control is transferred upon customer receipt, at which point the Company recognizes the transaction price for the product as revenue.
- ***Private Label —***This product category consists of all private label product offerings, which includes coconut water and oil. The Company determined the production and distribution of private label products represents a distinct performance obligation. Since there is no alternative use for these products and the Company has the right to payment for performance completed to date, the Company recognizes the revenue for the production of these private label products over time as the production for open purchase orders occurs, which may be prior to any shipment.
- ***Other—***This product category consists of all other products, which includes *Runa, Ever & Ever* and *PWR LIFT* product offerings, *Vita Coco* product extensions beyond coconut water, such as *Vita Coco Sparkling*, coconut milk products, and other revenue transactions (e.g., bulk product sales). For these products, control is transferred upon customer receipt, at which point the Company recognizes the transaction price for the product as revenue.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021, respectively:

*(in thousands)*

| 2022 | Three Months Ended March 31, 2021 |  |
| --- | ---: | ---: |
| Net sales | $96,448 | $75,450 |
| Cost of goods sold | 77,385 | 51,366 |
| Gross profit | 19,063 | 24,084 |
| Operating expenses |  |  |
| Selling, general, and administrative | 24,801 | 19,778 |
| Income (loss) from operations | (5,738) | 4,306 |
| Other income (expense) |  |  |
| Unrealized gain/(loss) on derivative instrument | 8,706 | (1,355) |
| Foreign currency gain/(loss) | (101) | (600) |
| Interest income | 7 | 35 |
| Interest expense | (27) | (79) |
| Total other income (expense) | 8,585 | (1,999) |
| Income before income taxes | 2,847 | 2,307 |
| Income tax expense | (620) | (667) |
| Net income | $2,227 | $1,640 |

26

### Net Sales

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

*(in thousands)*

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

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

#### Volume in Case Equivalent

The following table provides a comparative summary of our volume in CE, by operating segment and product category:

*(in thousands)*

| 2022 Americas segment | Three Months Ended March 31, 2021 | Amount | Change Percentage |  |
| --- | ---: | ---: | ---: | ---: |
| Vita Coco Coconut Water | 6,295 | 4,661 | 1,634 | 35.1% |
| Private Label | 2,730 | 2,260 | 470 | 20.8% |
| Other | 366 | 255 | 111 | 43.6% |
| Subtotal | 9,391 | 7,176 | 2,215 | 30.9% |
| **International segment\*** |  |  |  |  |
| Vita Coco Coconut Water | 1,206 | 998 | 208 | 20.8% |
| Private Label | 413 | 388 | 25 | 6.4% |
| Other | 13 | 113 | (100) | (88.8%) |
| Subtotal | 1,632 | 1,499 | 133 | 8.9% |
| Total volume (CE) | 11,023 | 8,675 | 2,348 | 27.1% |

*Note: A CE is a standard volume measure used by management which is defined as a case of 12 bottles of 330ml liquid beverages or the same liter volume of oil.*

\* International Other excludes minor volume that is treated as zero CE.

#### Americas Segment

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

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

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

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

#### International Segment

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

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

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

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

### Gross Profit

*(in thousands)*

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

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

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

### Operating Expenses

*(in thousands)*

| 2022 | Three Months Ended March 31, 2021 | Amount | Change Percentage |  |
| --- | ---: | ---: | ---: | ---: |
| Selling, general, and administrative | $24,801 | $19,778 | $5,023 | 25.4% |

#### Selling, General and Administrative Expenses

During the three months ended March 31, 2022, selling, general and administrative, or SG&A, expense increased by $5.0 million, or 25.4% versus the prior year comparable period. The increase was primarily driven by the incremental ongoing costs related to operating a public company, with higher spending in professional fees and personnel related expenses for the three months ended March 31, 2022 versus the prior year comparable period.

#### Other Income (Expense), Net

*(in thousands)*

| 2022 | Three Months Ended March 31, 2021 | Amount | Change Percentage |  |
| --- | ---: | ---: | ---: | ---: |
| Unrealized gain/(loss) on derivative instruments | $8,706 | $(1,355) | $10,061 | 742.5% |
| Foreign currency gain/(loss) | (101) | (600) | 499 | 83.2% |
| Interest income | 7 | 35 | (28) | (80.0%) |
| Interest expense | (27) | (79) | 52 | 65.8% |
|  | $8,585 | $(1,999) | $10,584 | 529.5% |

#### Unrealized Gain/(Loss) on Derivative Instruments

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

#### Foreign Currency Gain/(Loss)

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

#### Interest Income

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

#### Interest Expense

Interest expense decreased an immaterial amount for the three months ended March 31, 2022 compared to the same period in the prior year.

#### Income Tax Expense

*(in thousands)*

| 2022 | Three Months Ended March 31, 2021 | Amount | Change Percentage |  |
| --- | ---: | ---: | ---: | ---: |
| Income tax expense | (620) | (667) | $47 | 7.0% |
| Tax rate | 21.8% | 28.9% |  |  |

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 three months ended March 31, 2022 and March 31, 2021, our effective tax rate was 21.8% and 28.9%, 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.

### 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:

*(in thousands)*

|  | Three Months Ended March 31, 2022 | 2021 |
| --- | ---: | ---: |
| Net income | 2,227 | 1,640 |
| Depreciation and amortization | 470 | 525 |
| Interest income | (7) | (35) |
| Interest expense | 27 | 79 |
| Income tax expense | 620 | 667 |
| **EBITDA** | 3,337 | 2,876 |
| Stock-based compensation (a) | 2,386 | 487 |
| Unrealized (gain)/loss on derivative instruments (b) | (8,706) | 1,355 |
| Foreign currency (gain)/loss (b) | 101 | 600 |
| Other adjustments (c) | — | 504 |
| **Adjusted EBITDA** | $(2,882) | $5,822 |

(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.

### 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 $18.0 million and $28.7 million of cash and cash equivalents as of March 31, 2022 and December 31, 2021, respectively. We supplemented our liquidity needs with incremental borrowing capacity under the 2020 Credit Facility.

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 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.

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 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:

*(in thousands)*

| Cash flows provided by (used in): | Three Months Ended March 31, 2021 | 2020 | Change Amount | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Operating activities | $(22,548) | $(15,841) | $(6,707) | (42.3%) |
| Investing activities | (244) | (51) | (193) | (378.4%) |
| Financing activities | 12,144 | (42,955) | 55,099 | 128.3% |
| Effects of exchange rate changes on cash and cash equivalents | (56) | 53 | (109) | n/m |
| Net (decrease)/increase in cash and cash equivalents | $(10,704) | $(58,794) | $48,090 | 81.8% |

n/m—represents percentage calculated not being meaningful

### 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 three months ended March 31, 2022, $6.7 million more net cash was used in operating activities compared to the three months ended March 31, 2021. The change was driven by the decrease in net income after adjusting for non-cash items, primarily reflecting elevated transportation costs and increased SG&A expenses to further expand our capabilities as a public company.

### Investing Activities

During the three months ended March 31, 2022 as compared to three months ended March 31, 2021, cash used in investing activities increased driven by cash paid for property and equipment.

### Financing Activities

During the three months ended March 31, 2022 compared to the three months ended March 31, 2021, net cash provided by financing activities was $55 million, resulting from $50.0 million paid in the three months ended March 31, 2021 to repurchase 5,192,005 shares of treasury stock from RWVC S.a.r.l, a principal stockholder. This item was partially offset by increased cash proceeds of $5 million borrowed under the 2020 Credit Facility period over period. For further discussion of the stock repurchase, see Note 10, Stockholder’s Equity, and Note 14, Related-Party Transactions, respectively, in the condensed consolidated financial statements.

### Debt

We had debt outstanding of $12.1 million as of March 31, 2022, compared to $0.1 million as of December 31, 2021. The outstanding balance as of March 31, 2022 related to borrowings under the 2020 Credit Facility and vehicle loans. The outstanding balance as of December 31, 2021 related to vehicle loans.

### 2020 Credit Facility

In May 2020, we entered into a five-year credit facility ("2020 Credit Facility") with Wells Fargo consisting of a revolving line of credit, which provided for committed borrowings of $50.0 million and a $10.0 million non-committed accordion feature. The 2020 Credit Facility was further amended in May 2021 and October 2021, and currently provides for committed borrowings of $60 million. We may repay outstanding balances under the 2020 Credit Facility at any time without premium or penalty. Borrowings under the 2020 Credit Facility bear interest at a rate per annum equal to, at our option, either (a) adjusted LIBOR (or current LIBOR replacement rate), which shall not be less than 0.0%, plus the applicable rate or (b) base rate (determined by reference to the greatest of the prime rate published by Wells Fargo, the federal funds effective rate plus 1.5% and one-month LIBOR (or current LIBOR replacement) plus 1.5%). The applicable rate for LIBOR borrowings under the 2020 Credit Facility is subject to step-downs based on our total net leverage ratio (as defined in the credit agreement) for the immediately preceding fiscal quarter. In addition, the Company is currently subject to an unused commitment fee ranging from 0.05% and 0.20% on the unused amount of the line of credit, with the rate being based on the Company’s leverage ratio (as defined in the credit agreement). The maturity date on the 2020 Credit Facility is May 12, 2026.

The outstanding balance on the 2020 Credit Facility was $12.0 million and zero as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022, 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 March 31, 2022 was less than $0.1 million.

For additional information, see Note 6, *Debt*, to our condensed consolidated financial statements included in this 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 three months ended March 31, 2022, there were no material changes to our critical accounting policies from those discussed in our 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. We adopted ASC 842, *Leases*, as of January 1, 2022 as described in Note 2.

## Market risk

As filed, 3,621 characters.

### Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities.

As of March 31, 2022, the outstanding amounts of $12 million under our 2020 Credit Facility incurs interest fees at variable interest rates and are affected by changes in the general level of market interest rates. To quantify our exposure to interest rate risk, a 100 basis point increase or decrease to the applicable variable rates of interest would change our annual interest expense by approximately $0.1 million per year based on the borrowings as of March 31, 2022 under the 2020 Credit Facility.

### Foreign Currency Exchange Risk

We transact business globally in multiple currencies and hence have foreign currency risks related to our net sales, cost of goods sold, and operating expenses. We use derivative financial instruments to reduce our net exposure to foreign currency fluctuations. Our objective in managing exposure to foreign currency fluctuations is to reduce the volatility caused by foreign exchange rate changes on the earnings, cash flows, and financial position of our international operations. We generally target to hedge a majority of our forecasted yearly foreign currency exchange exposure through a 24-month rolling layered approach and leave a portion of our currency forecast floating at spot rate. Our currency forecast and hedge positions are reviewed quarterly. The gains and losses on the forward contracts associated with our balance sheet positions are recorded in ‘‘Other income (expense), net” in the condensed consolidated statements of operations.

The total notional values of our forward exchange contracts were $89.8 million and $89.1 million as of March 31, 2022 and December 31, 2021, respectively. The derivatives on the forward exchange contracts resulted in an unrealized gain of $8.7 million for the three months ended March 31, 2022, and we estimate that a 10 percent strengthening or weakening of the U.S. dollar would have resulted in a approximately $6.7 million gain or loss.

A portion our cash and cash equivalents are denominated in foreign currencies. As of March 31, 2022, a 1% change in the value of the U.S. dollar compared to foreign currencies would have caused our cash and cash equivalents to decrease or increase by $0.1 million. As of December 31, 2021, a 1% change in the value of the U.S. dollar compared to foreign currencies would have caused our cash and cash equivalents to decrease or increase by $0.1 million.

### Inflation Risk

Inflation generally affects us by increasing our cost of transportation, labor and manufacturing costs. In the three months ended March 31, 2022, we have seen significant inflation caused by COVID-19 related global supply chain disruptions which put pressure on our costs and margins. More specifically, there was a significant escalation of transportation costs, primarily ocean freight costs due to shipping and ports constraints and in domestic logistics.

### Credit Risk

We are exposed to concentration of credit risk from our major customers. In the three months ended March 31, 2022, sales to two customers represented approximately 56% of our consolidated net sales. We have not experienced credit issues with these customers. We maintain provisions for potential credit losses and evaluate the solvency of our customers on an ongoing basis to determine if additional allowances for doubtful accounts and customer credits need to be recorded. Significant economic disruptions or a slowdown in the economy could result in significant additional charges.

## Controls and procedures

As filed, 1,520 characters.

### Limitations on effectiveness of controls and procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

### Evaluation of disclosure controls and procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 351 characters.

Please refer to Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for a description of certain significant risks and uncertainties to which our business, financial condition, and results of operations are subject. There have been no material changes to these risk factors as of March 31, 2022.

Filed May 13, 2022.
Source: SEC EDGAR, the filing index for accession 0001482981-22-000044. Last ingested by Listed: Nov 5, 2026, 16:46 ET. No prices; not investment advice.