☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| Delaware | 83-2237832 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
6185 Kimball Avenue, Chino, CA | 91708 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
| (626) 965-8882 | ||||||||
| (Registrant’s telephone number, including area code) | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value | KRT | The | ||||||||||||
☐
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||||||||
| Emerging growth company | ☒ | |||||||||||||||||||
TABLE OF CONTENTS
Page
| Page | ||||||||
i
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents (including $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | $ | 961,000 | $ | 448,000 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $0.3 million at March 31, 2021 and December 31, 2020 | 25,579,000 | 23,838,000 | ||||||
| Inventories | 46,065,000 | 48,961,000 | ||||||
| Prepaid expenses and other current assets (including $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | 3,422,000 | 6,530,000 | ||||||
| Total current assets | 76,027,000 | 79,777,000 | ||||||
| Property and equipment, net (including $47.5 million and $47.8 million associated with variable interest entity at March 31, 2021 and December 31, 2020, respectively) | 93,865,000 | 95,533,000 | ||||||
| Deposits | 2,845,000 | 2,456,000 | ||||||
| Goodwill | 3,510,000 | 3,113,000 | ||||||
| Intangible assets, net | 400,000 | - | ||||||
| Deferred tax asset | 64,000 | 64,000 | ||||||
| Other assets (including $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | 159,000 | 161,000 | ||||||
| Total assets | $ | 176,870,000 | $ | 181,104,000 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable (including $0 and $0.6 million associated with variable interest entity at March 31, 2021 and December 31, 2020, respectively) | $ | 17,186,000 | $ | 20,069,000 | ||||
| Accrued expenses (including $0.2 million and $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020, respectively) | 5,510,000 | 4,959,000 | ||||||
| Related party payable | 3,420,000 | 5,038,000 | ||||||
| Credit cards payable | 634,000 | 794,000 | ||||||
| Income taxes payable | - | 41,000 | ||||||
| Customer deposits (including $0.1 and $0 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | 635,000 | 551,000 | ||||||
| Capital leases, current portion | 325,000 | 321,000 | ||||||
| Debt, current portion (including $0.7 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | 11,841,000 | 11,364,000 | ||||||
| Total current liabilities | 39,551,000 | 43,137,000 | ||||||
| Deferred tax liability | 6,181,000 | 6,181,000 | ||||||
| Line of credit | 33,239,000 | 33,169,000 | ||||||
| Long-term debt, net of current portion (including $36.5 million and $36.7 million associated with variable interest entity at March 31, 2021 and December 31, 2020, respectively, and debt discount of $0.1 million associated with variable interest entity at March 31, 2021 and December 31, 2020) | 51,048,000 | 53,410,000 | ||||||
| Capital leases, net of current portion | 207,000 | 290,000 | ||||||
| Other liabilities (including $2.6 million and $3.9 million associated with variable interest entity at March 31, 2021 and December 31, 2020, respectively) | 3,726,000 | 5,049,000 | ||||||
| Total liabilities | 133,952,000 | 141,236,000 | ||||||
| Commitments and Contingencies (Note 13) | ||||||||
| Karat Packaging Inc. stockholders’ equity | ||||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, 15,190,000 shares issued, 15,167,000 shares outstanding at March 31, 2021 and December 31, 2020 | 15,000 | 15,000 | ||||||
| Additional paid in capital | 13,981,000 | 13,981,000 | ||||||
| Treasury stock, $0.001 par value, 23,000 shares on March 31, 2021 and December 31, 2020 | (248,000 | ) | (248,000 | ) | ||||
| Retained earnings | 20,436,000 | 18,656,000 | ||||||
| Total Karat Packaging Inc. stockholders’ equity | 34,184,000 | 32,404,000 | ||||||
| Noncontrolling interest | 8,734,000 | 7,464,000 | ||||||
| Total stockholders’ equity | 42,918,000 | 39,868,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 176,870,000 | $ | 181,104,000 | ||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents (including $0.7 million and $0.1 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | $ | 1,679 | $ | 448 | |||||||
| Accounts receivable, net of allowance for doubtful accounts of $0.3 million and $0.3 million at September 30, 2021 and December 31, 2020, respectively (including $0.0 and $0.0 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | 33,276 | 23,838 | |||||||||
| Inventories | 60,207 | 48,961 | |||||||||
| Prepaid expenses and other current assets (including $0.1 million and $0.1 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | 5,690 | 6,530 | |||||||||
| Total current assets | 100,852 | 79,777 | |||||||||
| Property and equipment, net (including $46.9 million and $47.8 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively) | 94,041 | 95,533 | |||||||||
| Deposits | 4,237 | 2,456 | |||||||||
| Goodwill | 3,510 | 3,113 | |||||||||
| Intangible assets, net | 387 | — | |||||||||
| Deferred tax asset | 64 | 64 | |||||||||
| Other assets (including $0.0 million and $0.1 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | 399 | 161 | |||||||||
| Total assets | $ | 203,490 | $ | 181,104 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable (including $0.0 million and $0.6 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively) | $ | 19,028 | $ | 20,069 | |||||||
| Accrued expenses (including $0.4 million and $0.1 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively) | 8,161 | 4,959 | |||||||||
| Related party payable | 2,611 | 5,038 | |||||||||
| Credit cards payable | 131 | 794 | |||||||||
| Income taxes payable | 106 | 41 | |||||||||
| Customer deposits (including $0.1 million and $0 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | 1,125 | 551 | |||||||||
| Capital leases, current portion | 186 | 321 | |||||||||
| Debt, current portion (including $1.2 million and $0.7 million associated with variable interest entity at September 30, 2021 and December 31, 2020) | 1,166 | 11,364 | |||||||||
| Total current liabilities | 32,514 | 43,137 | |||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Deferred tax liability | 6,181 | 6,181 | |||||||||
| Line of credit | — | 33,169 | |||||||||
| Long-term debt, net of current portion and debt discount of $0.2 million and $0.1 million at September 30, 2021 and December 31, 2020, respectively (including $35.6 million and $36.7 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively, and debt discount of $0.2 million and $0.1 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively) | 35,629 | 53,410 | |||||||||
| Capital leases, net of current portion | 106 | 290 | |||||||||
| Other liabilities (including $2.9 million and $3.9 million associated with variable interest entity at September 30, 2021 and December 31, 2020, respectively) | 4,051 | 5,049 | |||||||||
| Total liabilities | 78,481 | 141,236 | |||||||||
| Commitments and Contingencies (Note 13) | — | — | |||||||||
| Karat Packaging Inc. stockholders’ equity | |||||||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, 19,737,500 and 19,714,500 shares issued and outstanding, respectively, at September 30, 2021; 15,190,000 and 15,167,000 shares issued and outstanding, respectively, at December 31, 2020 | 20 | 15 | |||||||||
| Additional paid in capital | 82,656 | 13,981 | |||||||||
| Treasury stock, $0.001 par value, 23,000 and 23,000 shares on September 30, 2021 and December 31, 2020, respectively | (248) | (248) | |||||||||
| Retained earnings | 33,805 | 18,656 | |||||||||
| Total Karat Packaging Inc. stockholders’ equity | 116,233 | 32,404 | |||||||||
| Noncontrolling interest | 8,776 | 7,464 | |||||||||
| Total stockholders’ equity | 125,009 | 39,868 | |||||||||
| Total liabilities and stockholders’ equity | $ | 203,490 | $ | 181,104 | |||||||
2
| Three months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net sales | $ | 75,673,000 | $ | 64,083,000 | ||||
| Cost of goods sold | 54,047,000 | 46,192,000 | ||||||
| Gross profit | 21,626,000 | 17,891,000 | ||||||
| Operating expenses: | ||||||||
| Selling expense | 6,400,000 | 4,701,000 | ||||||
| General and administrative expense (including $0.6 million and $0.1 million associated with variable interest entity for the three-months ended March 31, 2021 and 2020, respectively) | 11,455,000 | 9,102,000 | ||||||
| Total operating expenses | 17,855,000 | 13,803,000 | ||||||
| Operating income | 3,771,000 | 4,088,000 | ||||||
| Other income (expense) | ||||||||
| Rental income (including $0.2 million and $0 associated with variable interest entity for the three-months ended March 31, 2021 and 2020, respectively) | 246,000 | - | ||||||
| Other income | 106,000 | 26,000 | ||||||
| Loss on foreign currency transactions | (165,000 | ) | (41,000 | ) | ||||
| Interest income (expense) (including $0.8 million interest income and $2.4 million interest expense associated with variable interest entity for the three-months ended March 31, 2021 and 2020, respectively) | 278,000 | (3,306,000 | ) | |||||
| Total other income (expense) | 465,000 | (3,321,000 | ) | |||||
| Income before provision for income tax | 4,236,000 | 767,000 | ||||||
| Provision for income tax | 1,186,000 | 200,000 | ||||||
| Net income | 3,050,000 | 567,000 | ||||||
| Net income (loss) attributable to noncontrolling interest | 1,270,000 | (1,884,000 | ) | |||||
| Net income attributable to Karat Packaging Inc. | $ | 1,780,000 | $ | 2,451,000 | ||||
| Basic and diluted earnings per share: | ||||||||
| Basic | $ | 0.12 | $ | 0.16 | ||||
| Diluted | $ | 0.12 | $ | 0.16 | ||||
| Weighted average common shares outstanding, basic | 15,167,000 | 15,190,000 | ||||||
| Weighted average common shares outstanding, diluted | 15,403,000 | 15,461,000 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 102,711 | $ | 76,317 | $ | 272,910 | $ | 225,137 | |||||||||||||||
| Cost of goods sold | 72,918 | 53,286 | 193,393 | 155,308 | |||||||||||||||||||
| Gross profit | 29,793 | 23,031 | 79,517 | 69,829 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling expense | 9,855 | 6,112 | 24,026 | 16,241 | |||||||||||||||||||
| General and administrative expense (including $0.7 million and $0.8 million associated with variable interest entity for the three months ended September 30, 2021 and 2020, respectively; and $2.0 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively, associated with variable interest entity) | 14,573 | 9,877 | 39,485 | 27,948 | |||||||||||||||||||
| Total operating expenses | 24,428 | 15,989 | 63,511 | 44,189 | |||||||||||||||||||
| Operating income | 5,365 | 7,042 | 16,006 | 25,640 | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Rental income (including $0.2 million and $0.0 associated with variable interest entity for the three months ended September 30, 2021 and 2020, respectively; and $0.7 million and $0.0 for the nine months ended September 30, 2021 and 2020, respectively, associated with variable interest entity) | 246 | 66 | 738 | 66 | |||||||||||||||||||
| Other income | 101 | 24 | 223 | 86 | |||||||||||||||||||
| Loss on foreign currency transactions | (63) | (268) | (347) | (377) | |||||||||||||||||||
| Interest expense (including $0.3 million and $0.3 million associated with variable interest entity for the three months ended September 30, 2021 and 2020, respectively; and $0.3 million and $2.9 million for the nine months ended September 30, 2021 and 2020, respectively, associated with variable interest entity) | (308) | (847) | (1,158) | (4,858) | |||||||||||||||||||
| Gain on forgiveness of debt | — | — | 5,000 | — | |||||||||||||||||||
| Total other income (expense) | (24) | (1,025) | 4,456 | (5,083) | |||||||||||||||||||
| Income before provision for income tax | 5,341 | 6,017 | 20,462 | 20,557 | |||||||||||||||||||
| Provision for income tax | 1,268 | 1,451 | 4,001 | 5,483 | |||||||||||||||||||
| Net income | $ | 4,073 | $ | 4,566 | $ | 16,461 | $ | 15,074 | |||||||||||||||
| Net income (loss) attributable to noncontrolling interest | $ | 287 | $ | 494 | $ | 1,312 | $ | (1,521) | |||||||||||||||
| Net income attributable to Karat Packaging Inc. | $ | 3,786 | $ | 4,072 | $ | 15,149 | $ | 16,595 | |||||||||||||||
| Basic and diluted earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.19 | $ | 0.27 | $ | 0.84 | $ | 1.09 | |||||||||||||||
| Diluted | $ | 0.19 | $ | 0.26 | $ | 0.84 | $ | 1.07 | |||||||||||||||
| Weighted average common shares outstanding, basic | 19,710,043 | 15,180,879 | 17,945,205 | 15,185,440 | |||||||||||||||||||
| Weighted average common shares outstanding, diluted | 19,881,295 | 15,451,879 | 18,110,127 | 15,456,440 | |||||||||||||||||||
3
| Total | ||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||
| Additional | Equity attributable | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Paid-in | Retained | to Karat | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Packaging Inc. | Interest | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 15,190,000 | $ | 15,000 | - | $ | - | $ | 13,981,000 | $ | 1,745,000 | $ | 15,741,000 | $ | 8,313,000 | $ | 24,054,000 | ||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | 2,451,000 | 2,451,000 | (1,884,000 | ) | 567,000 | ||||||||||||||||||||||||||
| Balance, March 31, 2020 | 15,190,000 | $ | 15,000 | - | $ | - | 13,981,000 | $ | 4,196,000 | $ | 18,192,000 | $ | 6,429,000 | $ | 24,621,000 | |||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||
| Additional | Equity attributable | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Paid-in | Retained | to Karat | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Packaging Inc. | Interest | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 15,190,000 | $ | 15,000 | (23,000 | ) | $ | (248,000 | ) | $ | 13,981,000 | $ | 18,656,000 | $ | 32,404,000 | $ | 7,464,000 | $ | 39,868,000 | ||||||||||||||||||
| Net income | - | - | - | - | - | 1,780,000 | 1,780,000 | 1,270,000 | 3,050,000 | |||||||||||||||||||||||||||
| Balance, March 31, 2021 | 15,190,000 | $ | 15,000 | (23,000 | ) | $ | (248,000 | ) | 13,981,000 | $ | 20,436,000 | $ | 34,184,000 | $ | 8,734,000 | $ | 42,918,000 | |||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity attributable to Karat Packaging Inc. | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 15,190,000 | $ | 15 | — | $ | — | $ | 13,981 | $ | 1,745 | $ | 15,741 | $ | 8,313 | $ | 24,054 | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 2,451 | 2,451 | (1,884) | 567 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 15,190,000 | $ | 15 | $ | — | $ | — | $ | 13,981 | $ | 4,196 | $ | 18,192 | $ | 6,429 | $ | 24,621 | ||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | — | — | (10,000) | (107) | — | — | (107) | — | (107) | ||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | — | (607) | (607) | — | (607) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 10,072 | 10,072 | (131) | 9,941 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 15,190,000 | $ | 15 | (10,000) | $ | (107) | $ | 13,981 | $ | 13,661 | $ | 27,550 | $ | 6,298 | $ | 33,848 | |||||||||||||||||||||||||||||||||||||
| Treasury stock acquired | — | — | (13,000) | (141) | — | — | (141) | — | (141) | ||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 4,072 | 4,072 | 494 | 4,566 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 15,190,000 | $ | 15 | (23,000) | $ | (248) | $ | 13,981 | $ | 17,733 | $ | 31,481 | $ | 6,792 | $ | 38,273 | |||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity attributable to Karat Packaging Inc. | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2021 | 15,190,000 | $ | 15 | (23,000) | $ | (248) | $ | 13,981 | $ | 18,656 | $ | 32,404 | $ | 7,464 | $ | 39,868 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 1,780 | 1,780 | 1,270 | 3,050 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 15,190,000 | $ | 15 | (23,000) | $ | (248) | $ | 13,981 | $ | 20,436 | $ | 34,184 | $ | 8,734 | $ | 42,918 | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with our initial public offering, net of issuance costs of $5,088 | 4,542,500 | 5 | — | — | 67,587 | — | 67,592 | — | 67,592 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 240 | — | 240 | — | 240 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 9,583 | 9,583 | (245) | 9,338 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 19,732,500 | $ | 20 | (23,000) | $ | (248) | $ | 81,808 | $ | 30,019 | $ | 111,599 | $ | 8,489 | $ | 120,088 | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 848 | — | 848 | — | 848 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | 5,000 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 3,786 | 3,786 | 287 | 4,073 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 19,737,500 | $ | 20 | (23,000) | $ | (248) | $ | 82,656 | $ | 33,805 | $ | 116,233 | $ | 8,776 | $ | 125,009 | |||||||||||||||||||||||||||||||||||||
4
| Three months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 3,050,000 | $ | 567,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,464,000 | 1,892,000 | ||||||
| Provision for bad debt | - | 38,000 | ||||||
| Change in fair value of interest rate swap | (1,323,000 | ) | 2,415,000 | |||||
| Amortization of loan fees | 3,000 | 3,000 | ||||||
| (Increase) decrease in operating assets | ||||||||
| Accounts receivable | (1,741,000 | ) | (2,006,000 | ) | ||||
| Inventories | 3,049,000 | (1,187,000 | ) | |||||
| Prepaid expenses and other current assets | 3,108,000 | (452,000 | ) | |||||
| Due from affiliated companies | - | (14,000 | ) | |||||
| Deposits | (41,000 | ) | (2,272,000 | ) | ||||
| Other assets | 2,000 | 1,000 | ||||||
| Increase (decrease) in operating liabilities | ||||||||
| Accounts payable | (2,883,000 | ) | 1,899,000 | |||||
| Accrued expenses | 551,000 | 581,000 | ||||||
| Related party payable | (1,618,000 | ) | 469,000 | |||||
| Credit cards payable | (160,000 | ) | (285,000 | ) | ||||
| Income taxes payable | (41,000 | ) | - | |||||
| Customer deposits | 84,000 | (148,000 | ) | |||||
| Net cash provided by operating activities | $ | 4,504,000 | $ | 1,501,000 | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (273,000 | ) | (2,252,000 | ) | ||||
| Deposits paid for property and equipment | (921,000 | ) | (759,000 | ) | ||||
| Acquisition of Pacific Cup, Inc. | (900,000 | ) | - | |||||
| Net cash used in investing activities | $ | (2,094,000 | ) | $ | (3,011,000 | ) | ||
| Cash flows from financing activities | ||||||||
| Net proceeds from line of credit | 70,000 | 2,790,000 | ||||||
| Proceeds from long-term debt, net of issuance cost | - | 2,000,000 | ||||||
| Payments on long-term debt | (1,888,000 | ) | (1,738,000 | ) | ||||
| Payments on capital lease obligations | (79,000 | ) | (78,000 | ) | ||||
| Net cash (used in) provided by financing activities | $ | (1,897,000 | ) | $ | 2,974,000 | |||
| Net increase in cash and cash equivalents | 513,000 | 1,464,000 | ||||||
| Cash and cash equivalents | ||||||||
| Beginning of year | $ | 448,000 | $ | 802,000 | ||||
| End of year | $ | 961,000 | $ | 2,266,000 | ||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Capital expenditures funded by capital lease borrowings | $ | - | $ | 23,000 | ||||
| Transfers from deposit to property and equipment | $ | 473,000 | $ | 1,012,000 | ||||
| Acquisition of Pacific Cup, Inc. included within deposits | $ | 100,000 | $ | - | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income tax | $ | - | $ | - | ||||
| Cash paid for interest | $ | 1,088,000 | $ | 941,000 | ||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 16,461 | $ | 15,074 | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | 7,477 | 6,103 | |||||||||
| Provision for bad debt | — | 98 | |||||||||
| Reserve for inventory obsolescence | 133 | — | |||||||||
| Gain on sales of asset | — | (19) | |||||||||
| Change in fair value of interest rate swap | (1,298) | 2,028 | |||||||||
| Amortization of loan fees | 9 | 9 | |||||||||
| Stock-based compensation | 1,088 | — | |||||||||
| Gain on forgiveness of PPP loan | (5,000) | — | |||||||||
| (Increase) decrease in operating assets | |||||||||||
| Accounts receivable | (9,438) | (2,458) | |||||||||
| Inventories | (11,226) | (13,187) | |||||||||
| Prepaid expenses and other current assets | 840 | (2,332) | |||||||||
| Due from affiliated companies | — | (840) | |||||||||
| Deposits | (64) | 1,739 | |||||||||
| Other assets | (238) | — | |||||||||
| Increase (decrease) in operating liabilities | |||||||||||
| Accounts payable | (1,041) | 801 | |||||||||
| Accrued expenses | 3,202 | 1,069 | |||||||||
| Related party payable | (2,427) | 1,170 | |||||||||
| Credit cards payable | (663) | (317) | |||||||||
| Income taxes payable | 65 | 3,088 | |||||||||
| Customer deposits | 574 | (11) | |||||||||
| Other liabilities | 300 | 285 | |||||||||
| Net cash (used in) provided by operating activities | $ | (1,246) | $ | 12,300 | |||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | (3,947) | (27,621) | |||||||||
| Proceeds on disposal of property and equipment | — | 24 | |||||||||
| Deposits paid for property and equipment | (3,792) | (5,640) | |||||||||
| Effect on initial consolidation of Lollicup Franchising Inc, net of cash acquired | — | (893) | |||||||||
| Acquisition of Pacific Cup, Inc., net of cash acquired | (900) | — | |||||||||
| Net cash used in investing activities | $ | (8,639) | $ | (34,130) | |||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from line of credit | 1,470 | 5,190 | |||||||||
| Payments on line of credit | (34,639) | — | |||||||||
| Proceeds from long-term debt, net of issuance cost | 15,997 | 24,542 | |||||||||
| Payments on long-term debt | (38,985) | (5,497) | |||||||||
| Issuance of common stock in connection with initial public offering, net of issuance costs | 67,592 | — | |||||||||
| Dividends paid to shareholders | — | (607) | |||||||||
| Payments on capital lease obligations | (319) | (285) | |||||||||
| Treasury stock acquired | — | (248) | |||||||||
| Net cash provided by financing activities | $ | 11,116 | $ | 23,095 | |||||||
| Net increase in cash and cash equivalents | 1,231 | 1,265 | |||||||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash and cash equivalents | |||||||||||
| Beginning of year | $ | 448 | $ | 802 | |||||||
| End of year | $ | 1,679 | $ | 2,067 | |||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
| Capital expenditures funded by capital lease borrowings | $ | — | $ | 23 | |||||||
| Transfers from deposit to property and equipment | $ | 3,215 | $ | 15,749 | |||||||
| Acquisition of Pacific Cup, Inc. included within deposits | $ | 100 | $ | — | |||||||
| Forgiveness of PPP loan | $ | 5,000 | $ | — | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for income tax | $ | 3,324 | $ | 2,395 | |||||||
| Cash paid for interest | $ | 2,472 | $ | 2,869 | |||||||
5
6
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from Company’s stockholders’ equity. The amount of net income (loss) attributable to noncontrolling interests is disclosed in the condensed consolidated statements of income.
equipment, with effects of changes could result in future impairments of goodwill, intangibles, and long-lived assets.
| Machinery and equipment | 5 years to 10 years | |||||||
| Leasehold improvements | Lower of useful life or lease term | |||||||
| Vehicles | ||||||||
| Furniture and fixtures | 7 years | |||||||
| Building | 28 years to 40 years | |||||||
| Property held under capital leases | ||||||||
| Computer hardware and software | 3 years | |||||||
7
| Gross carrying amount | |||||
| Balance at December 31, 2020 | $ | 3,113,000 | |||
| Acquired through business combination | 397,000 | ||||
| Balance at September 30, 2021 | 3,510,000 | ||||
| Accumulated impairment | |||||
| Balance at December 31, 2020 | — | ||||
| Impairment loss recognized | — | ||||
| Balance at September 30, 2021 | — | ||||
| Carrying amount at September 30, 2021 | $ | 3,510,000 | |||
8
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Derivative Instruments: Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic No. 815, Derivatives and Hedging, requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period.
9
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following financial information includes assets and liabilities of Global Wells and are included in the accompanying condensed consolidated balance sheets, except for those that eliminate upon consolidation:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Cash | $ | 65,000 | $ | 81,000 | ||||
| Accounts receivable | - | 343,000 | ||||||
| Prepaid expenses and other current assets | 99,000 | 98,000 | ||||||
| Property and equipment, net | 47,523,000 | 47,826,000 | ||||||
| Other assets | 5,170,000 | 5,260,000 | ||||||
| Total assets | $ | 52,857,000 | $ | 53,608,000 | ||||
| Accounts payable | $ | - | $ | 564,000 | ||||
| Accrued expenses | 219,000 | 128,000 | ||||||
| Customer deposits | 72,000 | - | ||||||
| Due to Lollicup USA Inc. | 2,622,000 | 2,990,000 | ||||||
| Long-term debt, current portion | 702,000 | 694,000 | ||||||
| Long-term debt, net of current portion | 36,519,000 | 36,697,000 | ||||||
| Other liabilities | 2,625,000 | 3,906,000 | ||||||
| Total liabilities | $ | 42,759,000 | $ | 44,979,000 | ||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash | $ | 689,000 | $ | 81,000 | |||||||
| Accounts receivable | 396,000 | 343,000 | |||||||||
| Prepaid expenses and other current assets | 87,000 | 98,000 | |||||||||
| Property and equipment, net | 46,916,000 | 47,826,000 | |||||||||
| Other assets | 4,882,000 | 5,260,000 | |||||||||
| Total assets | $ | 52,970,000 | $ | 53,608,000 | |||||||
| Accounts payable | $ | 29,000 | $ | 564,000 | |||||||
| Accrued expenses | 447,000 | 128,000 | |||||||||
| Customer deposits | 82,000 | — | |||||||||
| Due to Lollicup USA Inc. | 2,620,000 | 2,990,000 | |||||||||
| Long-term debt, current portion | 1,166,000 | 694,000 | |||||||||
| Long-term debt, net of current portion | 35,629,000 | 36,697,000 | |||||||||
| Other liabilities | 2,851,000 | 3,906,000 | |||||||||
| Total liabilities | $ | 42,824,000 | $ | 44,979,000 | |||||||
10
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Stockholder’s Equity: The Company’s Certificate of Incorporation authorizes both common and preferred stock. The total number of shares of all classes of stock authorized for issuance is 110,000,000 shares, par value of $0.001, with 10,000,000 designed as preferred stock and 100,000,000 designated as common stock. Each holder of common stock and preferred stock shall be entitled to one1 vote per share held.
| Three-months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| National | $ | 18,289,000 | $ | 15,498,000 | ||||
| Distributors | 40,010,000 | 33,934,000 | ||||||
| Online | 11,443,000 | 6,286,000 | ||||||
| Retail | 5,931,000 | 8,365,000 | ||||||
| $ | 75,673,000 | $ | 64,083,000 | |||||
11
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| National | $ | 22,894,000 | $ | 18,426,000 | $ | 63,493,000 | $ | 50,092,000 | |||||||||||||||
| Distributors | 57,317,000 | 39,862,000 | 148,294,000 | 118,322,000 | |||||||||||||||||||
| Online | 14,644,000 | 8,928,000 | 39,790,000 | 26,472,000 | |||||||||||||||||||
| Retail | 7,856,000 | 9,101,000 | 21,333,000 | 30,251,000 | |||||||||||||||||||
| Total Revenue | $ | 102,711,000 | $ | 76,317,000 | $ | 272,910,000 | $ | 225,137,000 | |||||||||||||||
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Shipping and handling costs included within selling expenses in the condensed consolidated statements of income for the nine months ended September 30, 2021 and 2020 were $21,285,000 and $13,164,000, respectively.
Advertising costs included in operating expenses in the condensed consolidated statements of income were $1,843,000 and $1,126,000 fo
r the nine months ended September 30, 2021 and 2020, respectively.12
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company applies ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
| Three-months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Keary Global Ltd. ("Keary Global") and its affiliate, Keary International, Ltd.- related parties | * | 14 | % | |||||
*purchases represented less than 10%
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Keary Global Ltd. ("Keary Global") and its affiliate, Keary International, Ltd.- related parties | 13.7 | % | 13.3 | % | 14.3 | % | 11 | % | |||||||||||||||
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Keary Global and its affiliate, Keary International - related parties | 13 | % | 18 | % | ||||
| Taizhou Fuling Plastics Co.,Ltd | 14 | % | 11 | % | ||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Keary Global and its affiliate, Keary International - related parties | * | 18 | % | ||||||||
| Taizhou Fuling Plastics Co., Ltd | * | 11 | % | ||||||||
| Fuling Technology Co., Ltd. | 24 | % | * | ||||||||
| Wen Ho Industrial Co. | 12 | % | * | ||||||||
13
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
| Level 1 | Level 2 | Level 3 | ||||||||||
| Cash equivalents | $ | 56,000 | $ | - | $ | - | ||||||
| Interest rate swaps | - | (1,523,000 | ) | - | ||||||||
| Fair value, March 31, 2021 | $ | 56,000 | $ | (1,523,000 | ) | $ | - | |||||
14
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Cash equivalents | $ | 699,000 | $ | — | $ | — | |||||||||||
| Interest rate swaps | — | (1,549,000) | * | — | |||||||||||||
| Fair value, September 30, 2021 | $ | 699,000 | $ | (1,549,000) | $ | — | |||||||||||
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Level 1 | Level 2 | Level 3 | ||||||||||
| Cash equivalents | $ | 448,000 | $ | - | $ | - | ||||||
| Interest rate swaps | - | (2,847,000 | ) | - | ||||||||
| Fair value, December 31, 2020 | $ | 448,000 | $ | (2,847,000 | ) | $ | - | |||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Cash equivalents | $ | 448,000 | $ | — | $ | — | |||||||||||
| Interest rate swaps | — | (2,847,000) | — | ||||||||||||||
| Fair value, December 31, 2020 | $ | 448,000 | $ | (2,847,000) | $ | — | |||||||||||
The Company recorded a loss on foreign currency transactions of $347,000 and $377,000 for the nine months ended September 30, 2021 and 2020, respectively.
15
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If the Company had made different assumptions, its stock-based compensation expense, and its net loss could have been significantly different.
16
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820) Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance in this ASU eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. Certain provisions are applied prospectively while others are applied retrospectively. This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted this ASU as of January 1, 2020 and adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow.
17
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The goodwill recognized in this transaction was derived from expected opportunities to leverage Pacific Cup’s customer base, manufacturing facility, and sales force to expand the Company’s footprint. Goodwill recognized as a result of this acquisition is deductible for income tax purposes, and subject to annual impairment testing, which may give rise to deferred taxes in future periods.
| Inventories | $ | 153,000 | ||
| Property and equipment | 50,000 | |||
| Customer relationships | 400,000 | |||
| Goodwill | 397,000 | |||
| Total purchase consideration | $ | 1,000,000 |
Lollicup Franchising, LLC
On September 1, 2020, Lollicup entered into a membership interest purchase agreement (“the Franchising Agreement”) with Lollicup Franchising, LLC (“Lollicup Franchising”), a provider of specialty tea and coffee to consumers through operating retail stores within the United States. Pursuant to the Franchising Agreement, Lollicup paid cash consideration of $900,000 for the 100% membership interest of Lollicup Franchising. Prior to closing
| Inventories | $ | 153,000 | |||
| Property and equipment | 50,000 | ||||
| Customer relationships | 400,000 | ||||
| Goodwill | 397,000 | ||||
| Total assets acquired | $ | 1,000,000 | |||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Raw materials | $ | 17,092,000 | $ | 4,251,000 | |||||||
| Work in progress | — | 133,000 | |||||||||
| Finished goods | 43,790,000 | 45,252,000 | |||||||||
| Subtotal | 60,882,000 | 49,636,000 | |||||||||
| Less inventory reserve | (675,000) | (675,000) | |||||||||
| Total inventories | $ | 60,207,000 | $ | 48,961,000 | |||||||
The following table summarizes the assets acquired
| Cash | $ | 7,000 | ||
| Accounts receivable | 103,000 | |||
| Inventories | 21,000 | |||
| Property and equipment | 257,000 | |||
| Accounts payable | (42,000 | ) | ||
| Accrued expenses | (104,000 | ) | ||
| Related party payable | (2,455,000 | ) | ||
| Goodwill | 3,113,000 | |||
| Total purchase consideration | $ | 900,000 | ||
| Less: cash acquired | (7,000 | ) | ||
| Total purchase consideration, net of cash acquired | $ | 893,000 |
The results of operations of the Pacific Cup and Lollicup Franchising acquisitions have been included in the Company’s condensed consolidated financial statements beginning on their respective acquisition dates. All intercompany transactions were eliminated upon consolidation. The amounts of revenue and earnings of the acquirees since the acquisition date are included in the condensed consolidated statements of income for the reporting period, which is not significant from January 1, 2021 through March 31, 2021.
Inventories consist of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | 4,336,000 | $ | 4,251,000 | ||||
| Work in progress | 132,000 | 133,000 | ||||||
| Finished goods | 42,272,000 | 45,252,000 | ||||||
| Subtotal | 46,740,000 | 49,636,000 | ||||||
| Less inventory reserve | (675,000 | ) | (675,000 | ) | ||||
| Total inventories | $ | 46,065,000 | $ | 48,961,000 | ||||
19
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Property and equipment, net consist of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Machinery and equipment | $ | 56,278,000 | $ | 55,528,000 | ||||
| Leasehold improvements | 17,874,000 | 17,832,000 | ||||||
| Vehicles | 3,447,000 | 3,447,000 | ||||||
| Furniture and fixtures | 855,000 | 851,000 | ||||||
| Building | 34,134,000 | 34,134,000 | ||||||
| Land | 11,907,000 | 11,907,000 | ||||||
| Property held under capital leases | 1,607,000 | 1,607,000 | ||||||
| Computer hardware and software | 546,000 | 546,000 | ||||||
| 126,648,000 | 125,852,000 | |||||||
| Less accumulated depreciation | (32,783,000 | ) | (30,319,000 | ) | ||||
| Total property and equipment, net | $ | 93,865,000 | $ | 95,533,000 | ||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Machinery and equipment | $ | 59,975,000 | $ | 55,528,000 | |||||||
| Leasehold improvements | 17,955,000 | 17,832,000 | |||||||||
| Vehicles | 4,471,000 | 3,447,000 | |||||||||
| Furniture and fixtures | 903,000 | 851,000 | |||||||||
| Building | 35,237,000 | 34,134,000 | |||||||||
| Land | 11,907,000 | 11,907,000 | |||||||||
| Property held under capital leases | 828,000 | 1,607,000 | |||||||||
| Computer hardware and software | 548,000 | 546,000 | |||||||||
| 131,824,000 | 125,852,000 | ||||||||||
| Less accumulated depreciation | (37,783,000) | (30,319,000) | |||||||||
| Total property and equipment, net | $ | 94,041,000 | $ | 95,533,000 | |||||||
20
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued expenses | $ | 1,987,000 | $ | 2,085,000 | ||||
| Accrued interest | 209,000 | 199,000 | ||||||
| Accrued payroll | 1,339,000 | 1,253,000 | ||||||
| Accrued vacation and sick pay | 631,000 | 496,000 | ||||||
| Accrued shipping expenses | 478,000 | 433,000 | ||||||
| Accrued legal fees | 541,000 | 192,000 | ||||||
| Deferred rent liability | 325,000 | 301,000 | ||||||
| Total accrued expenses | $ | 5,510,000 | $ | 4,959,000 | ||||
21
| September 30, 2021 | December 31, 2020 | ||||||||||
| Accrued expenses | $ | 3,171,000 | $ | 1,796,000 | |||||||
| Accrued interest | 40,000 | 199,000 | |||||||||
| Accrued payroll | 1,371,000 | 1,253,000 | |||||||||
| Accrued vacation and sick pay | 630,000 | 496,000 | |||||||||
| Accrued shipping expenses | 1,859,000 | 433,000 | |||||||||
| Accrued professional services fees | 724,000 | 481,000 | |||||||||
| Deferred rent liability | 366,000 | 301,000 | |||||||||
| Total accrued expenses | $ | 8,161,000 | $ | 4,959,000 | |||||||
8.Long-Term Debt Long-Term |
Long-term debt consists of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| A promissory note that allowed for advances up to $5,000,000 through March 2018, at which point it converted to a term loan. Outstanding principal balance of $4,814,677 was converted in March 2018, maturing in March 2023. Principal and interest payment of $90,815 due monthly at the fixed rate of 4.98%. The loan is secured by certain machinery and equipment. In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum fixed charge coverage ratio and net income. | $ | 2,078,000 | $ | 2,322,000 | ||||
| An equipment loan with a draw down period ending August 28, 2019 for up to $10,000,000, at which point the entire principal outstanding is due, unless extended. Outstanding principal balance of $9,476,000 was converted to a term loan in June 2019, maturing in July 2024. Principal and interest payment of $192,572 due monthly starting August 2019 at the fixed rate of 5.75%. The loan is secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | 6,977,000 | 7,450,000 | ||||||
| A $2,130,000 term loan that expires April 30, 2021. Principal and interest payment of $53,539 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on prime rate (3.25% as of March 31, 2021 and December 31, 2020). The loan is secured by the company’s assets and guaranteed by the company’s stockholders. In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | 53,000 | 212,000 | ||||||
| A $935,000 term loan that expires December 31, 2021. Principal and interest payment of $19,834 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues at a fixed rate of 3.50%. The loan is secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | 176,000 | 234,000 | ||||||
| Subtotal, continue on following page | $ | 9,284,000 | $ | 10,218,000 | ||||
22
| September 30, 2021 | December 31, 2020 | ||||||||||
| A promissory note that allowed for advances up to $5,000,000 through March 2018, at which point it converted to a term loan. Outstanding principal balance of $4,814,677 was converted in March 2018, maturing in March 2023. Principal and interest payment of $90,815 due monthly at the fixed rate of 4.98%. The loan was secured by certain machinery and equipment. In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum fixed charge coverage ratio and net income. | $ | — | $ | 2,322,000 | |||||||
| An equipment loan with a draw down period ending August 28, 2019 for up to $10,000,000, at which point the entire principal outstanding was due, unless extended. Outstanding principal balance of $9,476,000 was converted to a term loan in June 2019, maturing in July 2024. Principal and interest payment of $192,572 due monthly starting August 2019 at the fixed rate of 5.75%. The loan was secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | — | 7,450,000 | |||||||||
| A $2,130,000 term loan that expired April 30, 2021. Principal and interest payment of $55,539 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on prime rate (3.25% as of December 31, 2020). The loan was secured by the company’s assets and guaranteed by the company’s stockholders. In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | — | 212,000 | |||||||||
| A $935,000 term loan that expires December 31, 2021. Principal and interest payment of $19,834 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues at a fixed rate of 3.50%. The loan was secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | — | 234,000 | |||||||||
| Subtotal, continue on following page | $ | — | $ | 10,218,000 | |||||||
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Subtotal from previous page | $ | 9,284,000 | $ | 10,218,000 | ||||
| An equipment loan with a draw down period ended May 31, 2019 for up to $10,000,000. After the draw period, the outstanding principal balance is converted to a term loan payable, maturing on May 31, 2024. The first principal and interest payment commenced in July 2019. Interest accrued based on prime rate (3.25% at March 31, 2021 and December 31, 2020). The loan is secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company must comply with certain fixed financial covenants, including a fixed charge coverage ratio and a minimum tangible net worth. | 6,500,000 | 7,000,000 | ||||||
| A $3,000,000 term loan that expires December 2024. Interest only payment due for the first six months. Principal and interest payment of $57,769 due monthly beginning January 2020 with the remaining principal and unpaid interest due at maturity. Interest accrues at prime rate plus 0.25% (3.50% March 31, 2021 and December 31, 2020).The loan is secured the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, debt service charge ratio, and debt to EBITDA rolling ratio. | 2,301,000 | 2,444,000 | ||||||
| A $21,580,000 term loan that matures in May 2029. Interest accrues at prime rate less 0.25% (3.00% at March 31, 2021 and December 31, 2020) and principal payments ranging from $24,356 to $39,581 along with interest are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of the Company’s and Global Well’s assets and is guaranteed by the Company and its stockholders. The Company incurred debt issuance costs of approximately $119,000, which is reported as a reduction of the carrying value of debt on the accompanying consolidated balance sheet. | 21,052,000 | 21,130,000 | ||||||
| A $3,000,000 term loan that expires June 17, 2025. Principal and interest payment of $54,623 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on prime rate plus margin of 0.25% (3.50% as of March 31, 2021 and December 31, 2020). The loan is secured by the company’s assets and guaranteed by the company’s stockholders. In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | 2,583,000 | 2,723,000 | ||||||
| A $5,000,000 Paycheck Protection Program loan that expires April 16, 2022. Interest accrues at 1.00%. | 5,000,000 | 5,000,000 | ||||||
| Subtotal, continue on following page | $ | 46,720,000 | $ | 48,515,000 | ||||
23
| September 30, 2021 | December 31, 2020 | ||||||||||
| Subtotal from previous page | $ | — | $ | 10,218,000 | |||||||
| An equipment loan with a draw down period ended May 31, 2019 for up to $10,000,000. After the draw period, the outstanding principal balance is converted to a term loan payable, maturing on May 31, 2024. The first principal and interest payment commenced in July 2019. Interest accrued based on prime rate (3.25% at December 31, 2020). The loan was secured by the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company was required to comply with certain fixed financial covenants, including a fixed charge coverage ratio and a minimum tangible net worth. | — | 7,000,000 | |||||||||
| A $3,000,000 term loan that expires December 2024. Interest only payment due for the first six months. Principal and interest payment of $57,769 due monthly beginning January 2020 with the remaining principal and unpaid interest due at maturity. Interest accrued at prime rate plus 0.25% (3.50% at December 31, 2020).The loan was secured the Company’s assets and guaranteed by the Company’s stockholders. In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, debt service charge ratio, and debt to EBITDA rolling ratio. | — | 2,444,000 | |||||||||
| A $21,580,000 term loan that matures in May 2029. Interest accrues at prime rate less 0.25% (3.00% at December 31, 2020) and principal payments ranging from $24,356 to $39,581 along with interest are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and its stockholders. The Company incurred debt issuance costs of approximately $119,000, which is reported as a reduction of the carrying value of debt on the accompanying consolidated balance sheet. | 20,890,000 | 21,130,000 | |||||||||
| A $3,000,000 term loan that expires June 17, 2025. Principal and interest payment of $54,623 due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on prime rate plus margin of 0.25% (3.50% as of December 31, 2020). The loan was secured by the company’s assets and guaranteed by the company’s stockholders. In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio. | — | 2,723,000 | |||||||||
| A $5,000,000 Paycheck Protection Program loan that expires April 16, 2022. Interest accrues at 1.0%. | — | 5,000,000 | |||||||||
| Subtotal, continue on following page | $ | 20,890,000 | $ | 48,515,000 | |||||||
| March 31, 2021 | December 31, 2020 | |||||||
| Subtotal from previous page | $ | 46,720,000 | $ | 48,515,000 | ||||
| A $16,540,000 term loan that matures June 30, 2025. Interest accrues at 4.5% fixed and principal payments ranging from $30,524 to $37,720 along with interest are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of the Company’s and Global Well’s assets and is guaranteed by the Company and its stockholders. | 16,267,000 | 16,361,000 | ||||||
| Long-term debt | 62,987,000 | 64,876,000 | ||||||
| Less: unamortized loan fees | (98,000 | ) | (102,000 | ) | ||||
| Less: current portion | (11,841,000 | ) | (11,364,000 | ) | ||||
| Long-term debt, net of current portion | $ | 51,048,000 | $ | 53,410,000 | ||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Subtotal from previous page | $ | 20,890,000 | $ | 48,515,000 | |||||||
| A $16,540,000 term loan that matures June 30, 2025. Interest accrues at 4.5% fixed and principal payments ranging from $30,524 to $37,720 along with interest are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of the Company’s and Global Well’s assets and is guaranteed by the Company and its stockholders. This loan was refinanced in September 2021 (see below). | — | 16,361,000 | |||||||||
| A $23,000,000 term loan that matures September 30, 2026, with the initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022. Interest accrues at a fixed rate of 3.5%. Principal and interest payments of $115,766 are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells' assets and is guaranteed by Global Wells and one of the Company's stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio. | 16,115,000 | — | |||||||||
| Long-term debt | 37,005,000 | 64,876,000 | |||||||||
| Less: unamortized loan fees | (210,000) | (102,000) | |||||||||
| Less: current portion | (1,166,000) | (11,364,000) | |||||||||
| Long-term debt, net of current portion | $ | 35,629,000 | $ | 53,410,000 | |||||||
| 2021 (remainder) | $ | 9,479,000 | ||
| 2022 | 7,854,000 | |||
| 2023 | 6,431,000 | |||
| 2024 | 4,399,000 | |||
| 2025 | 15,495,000 | |||
| Thereafter | 19,329,000 | |||
| $ | 62,987,000 |
| 2021 (remainder) | $ | 288,000 | |||
| 2022 | 1,178,000 | ||||
| 2023 | 1,224,000 | ||||
| 2024 | 1,276,000 | ||||
| 2025 | 1,333,000 | ||||
| Thereafter | 31,706,000 | ||||
| Total | $ | 37,005,000 | |||
24
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the nine months ended September 30, 2021 and 2020, the Company recognized approximately $47,000 as interest income and $153,000 as interest expense, respectively, related to change in fair value of this interest rate swap.
In April 2021, the Company terminated the interest rate swap with a notional amount of $10,000,000, recognizing $196,200 in swap termination fee, which was included in the net interest income recognized in the condensed consolidated statements of income for the nine months ended September 30, 2021.expenses of the condensed consolidated statements of income.
25
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The term of each incentive and nonqualified option is based upon such conditions as determined by the option agreement; however, the term can be no more than ten years from the date of the grant. In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the term of the option will be such shorter term as may be provided in the option agreement, but not more than five years from the date of the grant.
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | |||||||||||||||
| Average | Contract | Aggregate | ||||||||||||||
| Number of | Exercise | Life | Intrinsic | |||||||||||||
| Options | Price | (In Years) | Value | |||||||||||||
| Outstanding at December 31, 2020 | 15,000 | $ | 10.00 | 8.0 | $ | - | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Canceled/forfeited | - | - | ||||||||||||||
| Outstanding at March 31, 2021 | 15,000 | $ | 10.00 | 7.8 | $ | - | ||||||||||
| Expected to vest at March 31, 2021 | 15,000 | $ | 10.00 | 7.8 | $ | - | ||||||||||
| Exercisable at March 31, 2021 | - | $ | - | - | $ | - | ||||||||||
| Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contract Life (In Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding at December 31, 2020 | 15,000 | $10.00 | 8.0 | $ | — | ||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Canceled/forfeited | — | — | |||||||||||||||||||||
| Outstanding at September 30, 2021 | 15,000 | $10.00 | 7.3 | $ | — | ||||||||||||||||||
| Expected to vest at September 30, 2021 | 15,000 | $10.00 | 7.3 | $ | — | ||||||||||||||||||
| Exercisable at September 30, 2021 | — | — | 0.0 | $ | — | ||||||||||||||||||
$12,752.
| Weighted | |||||||||
| Number of | Average | ||||||||
| Shares | Grant Date | ||||||||
| Outstanding | Fair Value | ||||||||
| Unvested at December 31, 2020 | 256,000 | $ | 10.00 | ||||||
| Granted | - | - | |||||||
| Vested | - | - | |||||||
| Forfeited | (35,000 | ) | - | ||||||
| Unvested at March 31, 2021 | 221,000 | $ | 10.00 | ||||||
| Number of Shares Outstanding | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2020 | 256,000 | $ | 10.00 | ||||||||
| Granted | 40,000 | 17.98 | |||||||||
| Vested | (5,000) | 18.56 | |||||||||
| Forfeited | (51,250) | 11.03 | |||||||||
| Unvested at September 30, 2021 | 239,750 | $ | 11.11 | ||||||||
26
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Three-months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income attributable to Karat Packaging Inc. | $ | 1,780,000 | $ | 2,451,000 | ||||
| Weighted average number of common shares in issue | 15,167,000 | 15,190,000 | ||||||
| Basic earnings per share | $ | 0.12 | $ | 0.16 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to Karat Packaging Inc. | $ | 3,786,000 | $ | 4,072,000 | $ | 15,149,000 | $ | 16,595,000 | |||||||||||||||
| Weighted average number of common shares in issue | 19,710,043 | 15,180,879 | 17,945,205 | 15,185,440 | |||||||||||||||||||
| Basic earnings per share | $ | 0.19 | $ | 0.27 | $ | 0.84 | $ | 1.09 | |||||||||||||||
| Three-months ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net income attributable to Karat Packaging Inc. | $ | 1,780,000 | $ | 2,451,000 | ||||
| Weighted average number of common shares in issue | 15,167,000 | 15,190,000 | ||||||
| Dilutive shares | - | |||||||
| Stock options and restricted stock units | 236,000 | 271,000 | ||||||
| Adjusted weighted average number of common shares | 15,403,000 | 15,461,000 | ||||||
| Diluted earnings per share | $ | 0.12 | $ | 0.16 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to Karat Packaging Inc. | $ | 3,786,000 | $ | 4,072,000 | $ | 15,149,000 | $ | 16,595,000 | |||||||||||||||
| Weighted average number of common shares in issue | 19,710,043 | 15,180,879 | 17,945,205 | 15,185,440 | |||||||||||||||||||
| Dilutive shares | |||||||||||||||||||||||
| Stock options and restricted stock units | 171,252 | 271,000 | 164,922 | 271,000 | |||||||||||||||||||
| Adjusted weighted average number of common shares | 19,881,295 | 15,451,879 | 18,110,127 | 15,456,440 | |||||||||||||||||||
| Diluted earnings per share | $ | 0.19 | $ | 0.26 | $ | 0.84 | $ | 1.07 | |||||||||||||||
27
| 2021 (remainder) | $ | 4,890,000 | ||
| 2022 | 6,515,000 | |||
| 2023 | 6,595,000 | |||
| 2024 | 5,470,000 | |||
| 2025 | 3,743,000 | |||
| Thereafter | 10,731,000 | |||
| $ | 37,944,000 |
| 2021 (remainder) | $ | 1,634,000 | |||
| 2022 | 6,603,000 | ||||
| 2023 | 6,696,000 | ||||
| 2024 | 5,513,000 | ||||
| 2025 | 3,743,000 | ||||
| Thereafter | 10,731,000 | ||||
| Total | $ | 34,920,000 | |||
September 30, 2020, respectively.
28
On June 10, 2021, the Company was granted PPP loan forgiveness of $5.0 million, in whole, by meeting the conditions for use of loan proceeds. The Company recorded the loan forgiveness as a gain on forgiveness of debt in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2021. The effective tax rate was lowered by 3.9% from 23.5%, for the nine months ended September 30, 2021.
statements.
29
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On April 15,
On May 18, 2021, the Company granted 35,000 restricted stock units to employees under the 2019 Stock Incentive Plan, with a 3-year vesting period.
Net income Net Sales ocean freight rates which have been steadily increasing throughout 2021. fees, $0.2 million increase in bank fee, and $0.3 million increase in demurrage fees from containers at the port. September 30, 2021 Compared to the Nine Months Ended September 30, 2020 The following table summarizes total current assets, liabilities and working capital at the economy recovers from the pandemic. institutions. $0.6 million. offering in May 2021. Line of Credit 2020, Please see "Subsequent Events" below. income statement for the three months and nine months ended September 30, 2021. Allowance for Doubtful Accounts income. Taxes Revenue Recognition In June 2018, the FASB issued ASU 2018-07 (Topic 718), “Compensation — Stock Compensation: Improvements to Non-employee Share based Payment Accounting”, which supersedes Subtopic 505-50 and expands the scope of ASC Topic 718 to include share-based payments issued to nonemployees for goods and services. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606. The FASB subsequently issued ASU 2019-08 (Topic 718), “Compensation — Stock Compensation” which clarifies guidance in Topic 718 on measurement and classification of share-based payments to customers. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company adopted this ASU as of January 1, 2020 and the adoption of this ASU did not have a material impact on the Company’s financial position, results of operations and cash flow. 31MarchJune 2021. We also intend to double the capacity of our current distribution center in South Carolina to better service customers in the Southeast region. Also, on March 1, 2021, we completed the acquisition of the assets of Pacific Cup Inc., a paper cup manufacturer based in Kapolei, Hawaii. DuringFor the first halfyear of 2021, we intend to add an additional distribution facility and manufacture certain of our Karat EarthEarth® products, including paper straws, at the Pacific Cup location in Hawaii. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, Dallas, New York, Seattle, Atlanta and Honolulu metro areas.Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Net sales $ 102,711 $ 76,317 $ 272,910 $ 225,137 Cost of goods sold 72,918 53,286 193,393 155,308 Gross profit 29,793 23,031 79,517 69,829 Operating expenses 24,428 15,989 63,511 44,189 Operating income 5,365 7,042 16,006 25,640 Other income (expenses) (24) (1,025) 4,456 (5,083) Provision for income tax 1,268 1,451 4,001 5,483 Net income 4,073 4,566 16,461 15,074 Other non-GAAP financial data (unaudited) Adjusted EBITDA 1 $ 8,183 $ 9,098 25,094 31,518 March 31,September 30, 2021 Compared to the Three Months Ended March 31,September 30, 2020 Three-months ended March 31, 2021 2020 (in thousands) Net sales $ 75,673 $ 64,083 Cost of goods sold 54,047 46,192 Gross profit 21,626 17,891 Operating expenses 17,855 13,803 Operating income 3,771 4,088 Other income (expenses). 465 (3,321 ) Provision for income tax expense 1,186 200 3,050 567 Other non-GAAP financial data (unaudited): Adjusted EBITDA $ 6,818 $ 5,965 32$75.7$102.7 million for the three months ended March 31,September 30, 2021 compared to $64.1$76.3 million for the three months ended March 31,September 30, 2020,, an increase of $11.6$26.4 million, or 18%35%. The increase in net sales was primarily driven by an increase of $9.3$10.4 million in product sales to our existing customers as we continue to increase the number of products used by our customers, acquisition of more than 6,3008,000 new customers in the first quarter ofthree months ended September 30, 2021, increase in direct-to-consumer sales through our online channel, and an increase of $1.6$2.3 million in logistic service and shipping revenue. Since it’sits peak in April 2020, personal protective equipment related products have declined to approximately underless than 1% of net sales for the first quarter ofthree months ended September 30, 2021.$7.8$19.6 million, or 17%37% to $54.0$72.9 million for the three months ended March 31,September 30, 2021 compared to $46.2$53.3 million for the for the three months ended March 31, 2020.September 30, 2020. The increase in cost of goods sold was primarily due to an increase of $4.9$10.1 million in product costs driven by the general increase in costs in line with the increase insales, an increase of $2.8 million insales. In addition, freight and duty costs to acquire inventory from overseas and in increase of $0.3increased $10.1 million, in depreciation expense relatedparticularly due to depreciation of our manufacturing equipment.$3.7$6.8 million, or 21%29%, to $21.6 million for the three months ended March 31, 2021 compared to $17.9$29.8 million for the three months ended March 31,September 30, 2021 compared to $23.0 million for the three months ended September 30, 2020. The increase in gross profit was primarily driven by the increase in product sales as well as an increase in profit margin.sales. Gross profit margin was 29% for the three months ended March 31, 2021 compared to 28%29.0% for the three months ended March 31,September 30, 2021 compared to 30.2% for the three months ended September 30, 2020, an increasea decrease of 1%. The increasedecrease in gross profit margin was driven primarily by thean increase in product sales,freight and duty costs, offset to some extent by higher profit margins driven by our direct-to-consumer sales through our online channel.March 31,September 30, 2021,, were $17.9$24.4 million compared to $13.8$16.0 million for the three months ended March 31,September 30, 2020, an increase of $4.1$8.4 million, or 29%53%. The increase was primarily due to an increase of $1.7$3.7 million in shipping costs to deliver products to our customers, $0.7$1.7 million increase in payroll-related costs due to workforce expansion, $0.6$1.1 million increase in rent driven byutilities expense due to business expansion, $0.5 million increase in transportation expense due to increase logistic services to our New Jersey and Hawaii facilities, andcustomers, $0.5 million increase in digital marketing expense, $0.3 million increase in professional services fees.March 31,September 30, 2021 was $3.8$5.4 million compared to $4.1$7.0 million the three months ended March 31,September 30, 2020, a decrease of $0.3$1.6 million, or 8%22%. The decrease was primarily due to an increase in gross profit of $3.7$6.8 million resulting from increase in sales and improvements in gross profit margin offset by the increase in operating expenses of $4.1$8.4 million.incomeexpense for the three months ended March 31,September 30, 2021 was $0.5$0 million, compared to other expenses of $3.3$1.0 million for the three months ended March 31,September 30, 2020, an increasea decrease of $3.8$1.0 million, or 114%98%. The increasedecrease was driven by a decrease in interest expense of $3.6$0.5 million, primarily due to a gain recordeddecrease in the current periodloss on foreign exchange of $1.3$0.2 million, as opposed to a loss recorded in the prior period of $2.4 million for changes in interest swap fair value, and an increase in rental income of $0.2 million.March 31,September 30, 2021 was $3.1$4.1 million compared to $0.6$4.6 million for the three months ended March 31,September 30, 2020, an increasea decrease of $2.5$0.5 million, or 438%11%. The increasedecrease was primarily driven by a decrease in gross profit of $6.8 million, an increase in other incomeoperating expenses of $3.8$8.4 million as discussed above, partially offset by a decrease in operating income tax expense of $0.3approximately $0.2 million and an increase in other income tax expense of approximately $1.0 million. Provision for income taxes was $1.2$1.3 million and $0.2$1.5 million for the three months ended March 31,September 30, 2021 and 2020, respectively. The Company’s effective tax rate for the three months ended March 31,September 30, 2021 and 2020 was 28%23.7% and 26%24.1%, respectively.33the three months ended March 31,September 30, 2021 was $6.8$8.2 million, compared to $6.0$9.1 million for the three months ended March 31,September 30, 2020 an increase, a decrease of $0.8$0.9 million, or 14%10%. The increasedecrease was primarily driven by an increasea decrease in net income of $2.5$0.5 million as discussed above, a decrease in interest expense add-back of $3.6$0.5 million, an increasea decrease in provision for income taxes of $1.0$0.2 million, and an increase in depreciation and amortization of $0.6 million, and an increase of IPO related expenses of $.4$0.3 million. We use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.2021 2020 Reconciliation of Adjusted EBITDA (unaudited): (in thousands) Net income: $ 4,073 $ 4,566 Add (deduct): Interest expense $ 308 $ 847 Income tax expense $ 1,268 $ 1,451 Depreciation and amortization $ 2,534 $ 2,234 Other non-GAAP financial data: $ 8,183 $ 9,098 March 31, 2021 2020 Reconciliation of Adjusted EBITDA (unaudited): (in thousands) Net income: $ 3,050 $ 567 Add (deduct): Interest expense (278 ) 3,306 Income tax expense 1,186 200 Depreciation and amortization 2,464 1,892 IPO related expenses 396 Other non-GAAP financial data: Adjusted EBITDA $ 6,818 $ 5,965 2021 2020 Reconciliation of Adjusted EBITDA (unaudited): (in thousands) Net income: $ 16,461 $ 15,074 Add (deduct): Interest expense 1,158 4,858 Income tax expense 4,001 5,483 Depreciation and amortization 7,477 6,103 IPO related expenses 997 — Gain on forgiveness of debt (5,000) — Other non-GAAP financial data: Adjusted EBITDA3 $ 25,094 $ 31,518 34With the onset of the COVID-19 global pandemic, we began to supply personal protective equipment related products to our customers. We anticipate that this growing trend of personal protective equipment related products will continue to have a positive impact on our results of operations as more of our customers will require personal protective equipment to meet the safety requirements of their employees and consumers; however, we believe that our sale of such products will constitute a decreasing percentage of our net sales and gross profit moving forward. Since its peak in April 2020, personal protective equipment related products have declined to approximately under 1% of net sales for the first fiscal quarter of 2021.March 31,September 30, 2021 compared to MarchDecember 31, 2020: March 31, 2021 December 31, 2020 Decrease (in thousands) Current assets $ 76,027 $ 79,777 $ (3,750 ) Current liabilities 39,551 43,137 (3,586 ) Working capital $ 36,476 $ 36,640 $ (164 ) September 30
2021December 31, 2020 Increase (decrease) (in thousands) Current assets $ 100,852 $ 79,777 $ 21,075 Current liabilities 32,514 43,137 (10,623) Working capital $ 68,338 $ 36,640 $ 31,698 March 31,September 30, 2021, we had a working capital of $36.5$68.3 million as compared to working capital of $36.6 million at December 31, 2020, representing a decreasean increase in working capital of $0.1$31.7 million, or 0.4%87%. Working capital is consistent with prior yearhas improved from December 31, 2020 due to increase in accounts receivable stemming from increase in sale and an increase in inventories to accommodate higher demand as there have been no significant changes to customer payment terms, inventory, or current maturities of long-term debt.$6.8$40 million as of March 31,September 30, 2021 with existing financial institutions and proceeds from our initial public offering that occurred in April 2021.March 31,September 30, 2021, we had cash and cash equivalents of approximately $1.0$1.7 million. Based on projections of growth in revenue and operating results in the coming year, the available cash held by us and availability under existing lines of credit, we believe that we will have sufficient cash resources to finance our operations, service any maturing debt and lease obligations, and expected capital expenditures of $5.1$6.9 million for at least the next twelve months. Depending on our growth and results of operations, we may have to raise capital through the issuance of additional equity and/or debt, which, if we are able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to us. As our debt or credit facilities become due, we need to repay, extend or replace such indebtedness. Our ability to do so will be subject to future economic, financial, business, and other factors, many of which are beyond our control.For additional information on the repayment of indebtedness subsequent to March 31, 2021, see Note 17 of the condensed consolidated financial statements included in this report.threenine months ended March 31,September 30, 2021 and 2020:Cash flows data: Three Months Ended March 31, (in thousands) 2021 2020 Net cash provided by operating activities $ 4,504 $ 1,501 Net cash used in investing activities (2,094 ) (3,011 ) Net cash (used in) provided by financing activities. (1,897 ) 2,974 Net change in cash and cash equivalents 513 1,464 35Cash flows data: Nine Months Ended
September 30,(in thousands) 2021 2020 Net cash (used in) provided by operating activities (1,246) 12,300 Net cash used in investing activities (8,639) (34,130) Net cash provided by financing activities. 11,116 23,095 Net change in cash and cash equivalents 1,231 1,265 threenine months ended March 31,September 30, 2021, net cash provided byused in operating activities was $4.5$1.2 million, primarily the result of net income of $3.1$16.5 million, adjusted for certain non-cash items totaling $1.1$2.4 million, consisting of depreciation and amortization, and changes in fair value of interest rate swaps.swaps, reserve for inventory obsolescence, stock-based compensation, and PPP loan forgiveness. In addition, cash increased $0.3decreased $20.1 million, primarily as a result of changesdue to inventory build up to accommodate higher demand and an increase in working capital.accounts receivable stemming from increase in sales. For the threenine months ended March 31,September 30, 2020, net cash provided by operating activities was $1.5$12.3 million, primarily due to a decrease in cash of $3.4$11.0 million due to changes in working capital which was partially offset by net income of $0.6$15.1 million, adjusted for certain non-cash items of an aggregate $4.3$8.2 million consisting of depreciation and amortization, provision for bad debt, and changes in fair value of interest rate swaps.threenine months ended March 31,September 30, 2021 was $2.1$8.6 million, which was driven by the purchase of manufacturing equipment for our Texas facility totaling $0.3$3.9 million, deposits paid for additional manufacturing equipment of $0.9$3.8 million, and cash paid of $0.9 million for our acquisition of Pacific Cup, Inc.Inc, and cash paid of $2.3 million for purchase of a new warehouse building in South Carolina. Net cash used in investing activities for threenine months ended March 31,September 30, 2020 was $3.0$34.1 million, which was driven by the purchase of manufacturing equipment and construction of the facility in New Jersey totaling $2.3$27.6 million and deposits paid for additional manufacturing equipment of $0.8$5.6 million.March 31,September 30, 2021, the Company has commitments for capital expenditures, which the Company does not anticipate to exceed $5.1$6.9 million, primarily related to the purchase of manufacturing equipment for the Texas facility. The Company believes that cash-on-hand and access to unused borrowing capacity combined with cash flow from operations will be sufficient to fund the Company’s commitments. (used in) provided by financing activities. Net cash usedprovided in financing activities for the threenine months ended March 31,September 30, 2021 was $1.9$11.1 million, which was a result of net proceeds from issuance of common stock in connection with our initial public offering of $67.6 million, offset by net payments on long-term debt.debts of $56.5 million. Net cash provided by financing activities for the threenine months ended March 31,September 30, 2020 was $3.0$23.1 million, which was a result of proceeds from issuance debt of debt.$24.5 million. During the threenine months ended March 31, 2021 andSeptember 30, 2020, we made debt payments of $1.9 million and $1.8 million, respectively. We did not make anypaid cash distributions during the three months ended March 31, 2021 and 2020.For additional information on the repaymentto shareholders of indebtedness subsequent to March 31, 2021, see Note 17 of the condensed consolidated financial statements included in this report.March 31,September 30, 2021 and December 31, 2020). The loan is secured by the borrower’s assets. In accordance with the business loan agreement, the borrower must comply with certain financial reporting requirements and financial covenants, including maintaining a minimum debt service coverage ratio (as defined in the business loan agreement) of not less than 1.20 to 1.00 at all times, tested annually. In April 2021, theThe Company paid off this term loan with proceeds from its initial public offering.March 31,September 30, 2021, we were in compliance with the covenants included in the business loan agreements described above.36March 31,September 30, 2021 and December 31, 2020) and is payable monthly. In September 2019, the maximum borrowing was further increased from $30 million to $40 million. On July 9, 2020, one of our subsidiaries, as the borrower, Mr. Yu, Mr. Cheng, and the company, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and associated documents to change the terms of the existing indebtedness under the line of credit. The line of credit was amended again to extend the maturity date to May 2022. Approximately $0.0 million and $33.2 million of borrowings were outstanding as of March 31,September 30, 2021 and December 31, 2020, respectively, under the line of credit. The amount that can be borrowed is subject to a borrowing base that is calculated as a percentage of the borrower’s accounts receivable and inventory balances measured monthly. The loan is secured by the borrower’s assets. In accordance with the line of credit agreement, the borrower must comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, minimum debt service coverage ratio, and minimum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio (each as defined in the line of credit). The line of credit also includes certain standby letter of credit sublimits. The amounts issued under the standby letter of credit was $0.0 and $900,000 as of March 31,September 30, 2021 and December 31, 2020.March 31,September 30, 2021, we were in compliance with the covenants included in the line of credit described above.Paycheck Protection Program (“PPP”).PPP. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are potentially forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of the loan, we are assessing all preventable actions that could cause us to be ineligible for forgiveness of the loan, in whole or in part. While theThe Company applied for the forgiveness of the loan, there is no assurance thatPPP loan. On June 10, 2021, the Company will obtainwas granted loan forgiveness, in whole, by meeting the conditions for use of loan proceeds. The loan forgiveness of $0 million and $5.0 million was recorded as gain on forgiveness of debt in the loan in whole or in part.37March 31,September 30, 2021, for the categories described below. Some of the amounts included in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Less than More than Total 1 year 1 – 3 years 3 – 5 years 5 years (in thousands) Long-term debt(1) $ 62,992 $ 11,841 $ 13,493 $ 18,425 $ 19,233 Line of credit 33,239 — 33,239 — — Interest on long-term debt and line of credit(1) 14,787 4,008 4,862 2,900 3,017 Operating leases(2) 37,944 6,507 13,094 8,348 9,995 Capital lease obligations including interest 569 346 206 17 — Capital expenditures(3) 34,425 5,100 12,615 16,710 — Total $ 183,956 $ 27,802 $ 77,509 $ 46,400 $ 32,245 Less than More than Total 1 year 1 – 3 years 3 – 5 years 5 years (in thousands) $ 37,005 $ 1,166 $ 2,474 $ 14,345 $ 19,020 10,126 1,617 3,097 2,897 2,515 34,920 6,567 12,837 6,993 8,523 33,090 2,220 13,290 17,580 — Total $ 115,141 $ 11,570 $ 31,698 $ 41,815 $ 30,058 (1)These amounts represent estimated future principal payments related to our long-term debt. Interest represents estimated future interest payments as of March 31, 2021, assuming our long-term debt and line of credit is held to maturity. Future interest payments could differ materially from amounts indicated in the table due to future operational and financing needs, market factors and other currently unanticipated events.(2)We enter into operating leases in the normal course of business under various operating lease agreements with various terms and conditions, expiring at various dates through 2028. We lease some of our operating facilities, as well as other property and equipment, under operating leases. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our operating lease obligations would change if we exercised these renewal options and/or if we entered into additional operating lease agreements. These amounts do not include month-to-month leases. These amounts include lease payments to our variable interest entity of $3.5 million, $7.2 million, $6.8 million, and $8.0 million for the respective payments due by period above. Although we are contractually obligated to make these payments to our variable interest entity, as a result of consolidating our variable interest entity due to it being the primary beneficiary, these payments will be eliminated upon consolidation and will not have an impact on our condensed consolidated financial statements.(3)These amounts represent estimated future capital expenditures and do not represent any commitment by the Company as of March 31, 2021 except for a maximum of $5.1 million primarily related to the purchase of manufacturing equipment for the Texas facility. Future capital expenditures could differ materially from the amounts forecasted due to future operational and financing needs, market factors and other currently unanticipated events38WeMarch 31,September 30, 2021 and December 31, 2020. Letters of credits outstanding as of March 31, 2021 and December 31, 2020 was $900,000.three monthsperiods ended March 31,September 30, 2021 and 2020 include stock-based compensation, allowance for doubtful accounts, reserve for slow-moving and obsolete inventory, deferred taxes, and estimated useful lives of property, plant and equipment.39accompanyingcondensed consolidated statements of operations.Taxes.40Jumpstart Our Business StartupsJOBS Act, of 2012, and as such, the Company have elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.‘smaller“smaller reporting companies’companies”, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. For calendar-year end companies that are eligible for the deferral, the effective date is January 1, 2023. The Company elects to41“Leases”“Leases”, should be the contractual term used to measure expected credit losses under ASC 326, “Financial Instruments — Credit Losses”. This ASU is effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13.On April 15,completed an initial public offering of our common stock (“IPO”). In connection with our IPO, the Company offered 3,950,000 shares of our common stock at the initial public offering price of $16.00 per share, resulting in gross proceeds of $63,200,000. On April 23, 2021, the Company’s lead Underwriter exercised an overallotment of 592,500 shares at the initial public offering price of $16.00 per share, resulting in additional gross proceeds of $9,480,000, totaling $72,680,000 in gross IPO proceeds. In connection with the IPO, the Company used a portion of the proceeds to pay down an aggregate of $50.2 million principal ofrenewed its loan obligations. These repayments comprised:$30,000,000 of the Company’s existing line of credit, maturing in Mayextending the maturity date to October 2023. Interest on any line of 2022, withcredit borrowings accrue at an interestannual rate of prime less 0.25% subject to, with a minimum floor rate of 3.75%,3.25%. In addition, the maximum amount of borrowings permitted under the line of credit arrangement is no longer subjected to a borrowing base requirement that was calculated as a percentage of accounts receivable and inventory balances. As part of the line of credit renewal, the financial covenants the Company must comply with have been modified. The Company is no longer required to comply with a minimum tangible net worth and minimum debt service coverage ratio. A minimum fixed charge coverage ratio was added as one of the financial covenants the Company is subjected to going forward. All other financial covenants remain unchanged from the existing arrangement.outstanding balanceexercise price of approximately $33,239,000 as of March 31, 2021;$6,819,000 of the Company’s term loan, with an interest rate of 5.75%, maturing in July 2024, with an outstanding balance of approximately $6,977,000 as of March 31, 2021, resulting in the extinguishment of the term loan;$2,252,000 of the Company’s term loan, with an interest rate of 3.50%, maturing in December 2024, with an outstanding balance of approximately $2,301,000 as of March 31, 2021, resulting in the extinguishment of the term loan;42$175,000 of the Company’s term loan, with an interest rate of 3.50%, maturing in December 2021, with an outstanding balance of approximately $176,000 as of March 31, 2021, resulting in the extinguishment of the term loan;$53,000 of the Company’s term loan, with an interest rate of 3.25%, maturing in April 2021, with an outstanding balance of approximately $53,000 as of March 31, 2021, resulting in the extinguishment of the term loan;$2,536,000 of the Company’s term loan, with an interest rate of 3.50%, maturing in June 2025, with an outstanding balance of approximately $2,583,000 as of March 31, 2021, resulting in the extinguishment of the term loan;$6,333,000 of the Company’s term loan, with an interest rate of 3.25%, maturing in May 2024, with an outstanding balance of approximately $6,500,000 as of March 31, 2021, resulting in the extinguishment of the term loan; and$1,996,000 of the Company’s term loan, with an interest rate of 5.48%, maturing in March 2023, with an outstanding balance of approximately $2,078,000 as of March 31, 2021, resulting in the extinguishment of the term loan.On May 18, 2021, the Company granted 35,000 restricted stock units to employees$18.80 per share under the 2019 Stock Incentive Plan, with a 3-year vesting period.Item 3.Quantitative and Qualitative Disclosure About Market RiskItem 4.Controls and ProceduresAct)Act of 1934, as amended (the "Exchange Act") as of March 31, 2021. September 30, 2021. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.March 31,September 30, 2021.43Item 1.Legal Proceedings.Item 1A.Risk Factors.There333-253270)333-253270), as filed with the SEC on April 6, 2021.2021, which are incorporated herein by reference.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.Item 3.Defaults Upon Senior Securities.Item 4.Mine Safety Disclosures.Item 5.Other Information.None.Item 6.Exhibits.44* Filed herewith.104* 45Cover Page Interactive File (formatted as inline XBRL and contained in Exhibit 101) KARAT PACKAGING INC. Date: May 27,November 12, 2021By: /s/ Alan Yu Alan Yu Chief Executive Officer (Principal Executive Officer) Date: May 27,November 12, 2021By: /s/ Ann T. SabahatPeter LeeAnn T. SabahatPeter LeeInterim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 46