krt-20230930

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 September 30, 2023


☐			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 November 6, 2023 was 19,964,413 shares.

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	19

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30

Item 4.	Controls and Procedures	30

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

SIGNATURES		35

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

PART I - FINANCIAL INFORMATION


	September 30, 2023		December 31, 2022
Assets
Current assets
Cash and cash equivalents (including $7,770 and $2,022 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	$	28,162	$	16,041
Short-term investments (including $8,000 and $0 associated with variable interest entity at September 30, 2023, and December 31, 2022, respectively)	18,063		—
Accounts receivable, net of allowance for doubtful accounts of $430 and $1,260 at September 30, 2023 and December 31, 2022, respectively (including $0 and $6 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	33,984		29,912
Inventories	71,657		71,206
Prepaid expenses and other current assets (including $25 and $191 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	6,823		6,641
Total current assets	158,689		123,800
Property and equipment, net (including $44,489 and $45,399 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	96,690		95,568
Deposits	1,672		12,413
Goodwill	3,510		3,510
Intangible assets, net	333		353
Operating right-of-use assets	17,068		15,713
Other assets (including $55 and $38 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	2,002		818
Total assets	$	279,964	$	252,175
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable (including $60 and $2 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	$	19,384	$	18,559
Accrued expenses (including $461 and $625 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	8,858		9,005
Related party payable	2,555		4,940
Income taxes payable	8,010		—
Customer deposits (including $116 and $165 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	803		1,281
Long-term debt, current portion (including $1,111 and $957 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	1,111		957
Operating lease liabilities, current portion	4,927		4,511
Other payables	49		—
Total current liabilities	45,697		39,253


	September 30, 2023		December 31, 2022
Deferred tax liability	5,156		5,156
Long-term debt, net of current portion and debt discount of $219 and $216 at September 30, 2023 and December 31, 2022, respectively (including $48,668 and $41,558 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively, and debt discount of $219 and $216 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	48,668		41,558
Operating lease liabilities, net of current portion	12,866		11,623
Other liabilities (including $1,302 associated with variable interest entity at both September 30, 2023 and December 31, 2022)	2,824		2,652
Total liabilities	115,211		100,242
Commitments and Contingencies (Note 17)
Karat Packaging Inc. stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding, at both September 30, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value, 100,000,000 shares authorized, 19,916,839 and 19,893,839 shares issued and outstanding, respectively, as of September 30, 2023 and 19,908,005 and 19,885,005 shares issued and outstanding, respectively, as of December 31, 2022	20		20
Additional paid in capital	86,620		85,792
Treasury stock, $0.001 par value, 23,000 shares at both September 30, 2023 and December 31, 2022	(248)		(248)
Retained earnings	67,773		56,118
Total Karat Packaging Inc. stockholders’ equity	154,165		141,682
Noncontrolling interest	10,588		10,251
Total stockholders’ equity	164,753		151,933
Total liabilities and stockholders’ equity	$	279,964	$	252,175

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

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	105,528	$	109,996	$	310,069	$	330,290
Cost of goods sold	66,584		75,828		191,120		227,869
Gross profit	38,944		34,168		118,949		102,421
Operating expenses
Selling expense	8,004		9,413		25,500		28,218
General and administrative expense (including $702 and $665 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; $2,020 and $1,899 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	19,870		16,861		53,767		49,033
Impairment expense and (gain) loss, net, on disposal of machinery	(310)		(16)		2,231		(33)
Total operating expenses	27,564		26,258		81,498		77,218
Operating income	11,380		7,910		37,451		25,203
Other income (expense)
Rental income (including $235 and $239 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $721 and $715 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	259		239		781		715
Other income (expense), net	32		28		(58)		(235)
Gain on foreign currency transactions	455		369		350		1,352
Interest income (including $80 and $0 interest income associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $278 and $2,160 interest income associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	454		—		1,040		2,160
Interest expense (including $528 and $470 interest expense associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $1,499 and $1,379 interest expense associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(536)		(493)		(1,516)		(1,576)
Total other income, net	664		143		597		2,416
Income before provision for income taxes	12,044		8,053		38,048		27,619
Provision for income taxes	2,904		1,900		9,045		6,323
Net income	9,140		6,153		29,003		21,296
Net income attributable to noncontrolling interest	75		57		431		2,189
Net income attributable to Karat Packaging Inc.	$	9,065	$	6,096	$	28,572	$	19,107
Basic and diluted earnings per share:
Basic	$	0.46	$	0.31	$	1.44	$	0.96
Diluted	$	0.45	$	0.31	$	1.43	$	0.96
Weighted average common shares outstanding, basic	19,890,646		19,809,417		19,888,244		19,808,813
Weighted average common shares outstanding, diluted	19,994,648		19,938,042		19,962,999		19,922,047

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

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, 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
Stock-based compensation	—	—		—	—		565		—		565		—		565
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(487)		(487)
Net income	—	—		—	—		—		6,344		6,344		856		7,200
Balance, June 30, 2022	19,832,417	$	20	(23,000)	$	(248)	$	84,921	$	52,445	$	137,138	$	10,383	$	147,521
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	—	—		—	—		598		—		598		—		598
Stock-based compensation	—	—		—	—		—		—		—		(190)		(190)
Net income	—	—		—	—		—		6,096		6,096		57		6,153
Balance, September 30, 2022	19,832,417	$	20	(23,000)	$	(248)	$	85,519	$	58,541	$	143,832	$	10,250	$	154,082

	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, 2023	19,908,005	$	20	(23,000)	$	(248)	$	85,792	$	56,118	$	141,682	$	10,251	$	151,933
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	2,452	—		—	—		(14)		—		(14)		—		(14)
Stock-based compensation	—	—		—	—		277		—		277		—		277
Net income	—	—		—	—		—		9,005		9,005		181		9,186
Balance, March 31, 2023	19,910,457	$	20	(23,000)	$	(248)	$	86,055	$	65,123	$	150,950	$	10,432	$	161,382
Cash dividends declared ($0.35 per share)	—	—		—	—		—		(6,965)		(6,965)		—		(6,965)
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	582	—		—	—		(4)		—		(4)		—		(4)
Stock-based compensation	—	—		—	—		216		—		216		—		216
Net income	—	—		—	—		—		10,502		10,502		175		10,677
Balance, June 30, 2023	19,911,039	$	20	(23,000)	$	(248)	$	86,267	$	68,660	$	154,699	$	10,607	$	165,306
Cash dividends declared ($0.50 per share)	—	—		—	—		—		(9,952)		(9,952)		—		(9,952)
Stock-based compensation	—	—		—	—		250				250		—		250
Exercise of stock options	5,800	—		—	—		103		—		103		—		103
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(94)		(94)
Net income	—	—		—	—		—		9,065		9,065		75		9,140
Balance, September 30, 2023	19,916,839	$	20	(23,000)	$	(248)	$	86,620	$	67,773	$	154,165	$	10,588	$	164,753

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

KARAT PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net income	$	29,003	$	21,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including $910 associated with variable interest entity for both the nine months ended September 30, 2023 and 2022)	8,058		7,752
Adjustments to allowance for doubtful accounts	(673)		1,112
Adjustments to inventory reserve	(27)		441
Write-off of inventory	3,225		—
Impairment of deposits	523		—
Loss (gain), net, on disposal of machinery and equipment	1,708		(33)
Change in fair value of interest rate swap (including $0 and $2,159 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	—

SEC Form 10-Q filed by Karat Packaging Inc.