Vita Coco Company, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 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 September 30, 2021, the outstanding amounts of $7.5 million related to our Revolving Facility and $30.0 million related to our Term Loan incur 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 $0.4 million per year based on the borrowings as of September 30, 2021 under the Revolving Facility and Term Loan. Subsequent to September 30, 2021, the Company repaid the outstanding balance on the 2021 Term Loan as discussed in Note 1, Nature of Business and Basis of Presentation, of the condensed consolidated financial statements included elsewhere in this Form 10-Q, using net proceeds received on the closing of the initial public offering. 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. 47 Table of Contents The total notional values of our forward exchange contracts were $84.5 million and $62.4 million as of September 30, 2021 and December 31, 2020, respectively. The derivatives on the forward exchange contracts resulted in an unrealized gain of $1.3 million for the nine months ended September 30, 2021, and we estimate that a 10 percent strengthening or weakening of the U.S. dollar would have resulted in a approximately $1 million gain or loss. Part of our cash and cash equivalents are denominated in foreign currencies. As of September 30, 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. As of December 31, 2020, 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 labor and manufacturing costs. In the nine months ended September 30, 2021, we have seen significant inflation caused by COVID-19 related global supply chain disruptions which put pressure on our costs and margins. More specifically, ocean freight costs went up drastically due to shipping and ports constraints. Credit Risk We are exposed to concentration of credit risk from our major customers. In the nine months ended September 30, 2021, sales to two customers represented approximately 55% 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.