krt-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-40336

Karat Packaging Inc.

(Exact name of registrant as specified in its charter)


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)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

KRT

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of Common Stock, $0.001 par value, outstanding on May 4, 2022 was 19,809,424 shares.

Table of Contents

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	33

Item 4.	Controls and Procedures	33

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

Table of Contents

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

PART I - FINANCIAL INFORMATION


	March 31, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents (including $5.2 million and $1.2 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	$	6,820	$	6,483
Accounts receivable, net of allowance for doubtful accounts of $0.8 million and $0.3 million at March 31, 2022 and December 31, 2021, respectively	43,337		32,776
Inventories	77,337		58,472
Prepaid expenses and other current assets (including $0.2 million and $0.1 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	6,036		5,141
Total current assets	133,530		102,872
Property and equipment, net (including $46.3 million and $46.6 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	92,138		93,475
Deposits	10,440		6,885
Goodwill	3,510		3,510
Intangible assets, net	373		380
Other assets (including $0.1 million associated with variable interest entity at both March 31, 2022 and December 31, 2021)	389		477
Total assets	$	240,380	$	207,599

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable (including $0.2 million and $0.1 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	$	24,073	$	18,470
Accrued expenses (including $0.2 million and $0.1 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	8,343		7,813
Related party payable	1,260		2,003
Income taxes payable	1,977		85
Customer deposits (including $0.1 million associated with variable interest entity as of both March 31, 2022 and December 31, 2021)	1,448		1,215
Debt, current portion (including $1.2 million associated with variable interest entity as of both March 31, 2022 and December 31, 2021)	1,190		1,178
Other payable	1,534		—
Total current liabilities	39,825		30,764

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	March 31, 2022		December 31, 2021
Deferred tax liability	5,634		5,634
Line of credit	10,200		—
Long-term debt, net of current portion and debt discount of $0.2 million as of both March 31, 2022 and December 31, 2021 (including $42.0 million and $35.3 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively, and debt discount of $0.2 million associated with variable interest entity as of both March 31, 2022 and December 31, 2021)	41,954		35,339
Other liabilities (including $1.3 million and $2.6 million associated with variable interest entity at March 31, 2022 and December 31, 2021, respectively)	2,524		3,837
Total liabilities	100,137		75,574

Commitments and Contingencies (Note 12)	—		—

Karat Packaging Inc. stockholders’ equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 19,832,417 and 19,809,417 shares issued and outstanding, respectively, at March 31, 2022; 19,827,417 and 19,804,417 shares issued and outstanding, respectively, at December 31, 2021	20		20
Additional paid in capital	84,356		83,694
Treasury stock, $0.001 par value, 23,000 shares at both March 31, 2022 and December 31, 2021	(248)		(248)
Retained earnings	46,101		39,434
Total Karat Packaging Inc. stockholders’ equity	130,229		122,900
Noncontrolling interest	10,014		9,125
Total stockholders’ equity	140,243		132,025
Total liabilities and stockholders’ equity	$	240,380	$	207,599

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended March 31,
	2022		2021
Net sales	$	105,413	$	75,673
Cost of goods sold	71,124		54,047
Gross profit	34,289		21,626
Operating expenses:
Selling expense	9,337		6,400
General and administrative expense (including $0.6 million associated with variable interest entity for both the three months ended March 31, 2022 and 2021)	15,461		11,455
Total operating expenses	24,798		17,855
Operating income	9,491		3,771
Other income (expense)
Rental income (including $0.2 million associated with variable interest entity for both the three months ended March 31, 2022 and 2021)	238		246
Other (expense) income	(82)		106
Gain (loss) on foreign currency transactions	133		(165)
Interest income, net (including $0.9 million and $0.8 million associated with variable interest entity for the three months ended March 31, 2022 and 2021, respectively)	840		278
Total other income	1,129		465
Income before provision for income taxes	10,620		4,236
Provision for income taxes	2,677		1,186
Net income	$	7,943	$	3,050
Net income attributable to noncontrolling interest	$	1,276	$	1,270
Net income attributable to Karat Packaging Inc.	$	6,667	$	1,780
Basic and diluted earnings per share:
Basic	$	0.34	$	0.12
Diluted	$	0.34	$	0.12
Weighted average common shares outstanding, basic	19,807,584		15,167,000
Weighted average common shares outstanding, diluted	19,901,384		15,403,000

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share and per share data)


	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


	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, 2022	19,827,417	$	20	(23,000)	$	(248)	$	83,694	$	39,434	$	122,900	$	9,125	$	132,025
Stock-based compensation	—	—		—	—		611		—		611		—		611
Exercise of common stock options	5,000	—		—	—		51		—		51		—		51
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(387)		(387)
Net income	—	—		—	—		—		6,667		6,667		1,276		7,943
Balance, March 31, 2022	19,832,417	$	20	(23,000)	$	(248)	$	84,356	$	46,101	$	130,229	$	10,014	$	140,243

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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KARAT PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net income	$	7,943	$	3,050
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	2,584		2,464
Provision for bad debt	500		—
Reserve for inventory obsolescence	476		—
Change in fair value of interest rate swap	(1,313)		(1,323)
Amortization of loan fees	9		3
Stock-based compensation	611		—
(Increase) decrease in operating assets
Accounts receivable	(11,061)		(1,741)
Inventories	(19,341)		3,049
Prepaid expenses and other current assets	(895)		3,108
Deposits	—		(41)
Other assets	88		2
Increase (decrease) in operating liabilities
Accounts payable	5,526		(2,883)
Accrued expenses	530		551
Related party payable	(743)		(1,618)
Income taxes payable	1,892		(41)
Customer deposits	233		84
Other payable	1,534		(160)
Net cash (used in) provided by operating activities	$	(11,427)	$	4,504
Cash flows from investing activities
Purchases of property and equipment	(824)		(273)
Deposits paid for property and equipment	(3,971)		(921)
Acquisition of Pacific Cup, Inc., net of cash acquired	—		(900)

Net cash used in investing activities	$	(4,795)	$	(2,094)
Cash flows from financing activities
Proceeds from line of credit	10,200		70
Proceeds from long-term debt	6,885		—
Payments on long-term debt	(267)		(1,888)
Proceeds from exercise of stock options	51		—
Payments on capital lease obligations	—		(79)
Payments of noncontrolling interest tax withholding	(310)		—
Net cash provided by (used in) financing activities	$	16,559	$	(1,897)

Net increase in cash and cash equivalents	337		513
Cash and cash equivalents
Beginning of year	$	6,483	448
End of year	$	6,820	$	961
Supplemental disclosures of non-cash investing and financing activities:
Transfers from deposit to property and equipment	$	416	$	473
Acquisition of Pacific Cup, Inc. included within deposits	$	—	$	100
Supplemental disclosures of cash flow information:
Cash paid for income tax	$	200	$	—
Cash paid for interest	$	440	$	1,088

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Nature of Operations

Lollicup USA Inc. (“Lollicup”) was incorporated on January 21, 2001 under the laws of the State of California as an S-corporation. Effective January 1, 2018, Lollicup elected to convert from an S-Corporation to a C-Corporation. Karat Packaging Inc. (“Karat Packaging”) was incorporated on September 26, 2018 as a Delaware corporation and became the holding company for Lollicup (collectively, the “Company”) through a share exchange with the shareholders of Lollicup.

The Company is a manufacturer and distributor of environmentally friendly, single-use disposable products used in a variety of restaurant and foodservice settings. The Company supplies a wide range of products for the foodservice industry, including food containers, tableware, cups, lids, cutlery, and straws. The products are available in plastic, paper, biopolymer-based and other compostable forms. In addition to manufacturing and distribution, the Company offers customized solutions to the customers, including new product development, design, printing, and logistics services, and distributes certain specialty food and beverages products, such as boba and coffee drinks.

The Company supplies products to smaller chains and businesses including boutique coffee houses, bubble tea cafes, pizza parlors and frozen yogurt shops, as well as to distributors and national and regional supermarkets, restaurants and convenience stores.

The Company currently operates manufacturing facilities and distribution and fulfillment centers in Chino, California; Rockwall, Texas and Kapolei, Hawaii. In addition, the Company operates four other distribution centers located in Branchburg, New Jersey; Summer, Washington; Summerville, South Carolina and Kapolei, Hawaii.

SEC Form 10-Q filed by Karat Packaging Inc.