Karat Packaging Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020. Karat distributes and manufactures disposable foodservice products, including environmentally friendly products, and also sells personal protective equipment (PPE). It completed the acquisition of Hawaii-based paper cup maker Pacific Cup on March 1, 2021.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $75.7 million | $64.1 million | +18% |
| Gross profit / margin | $21.6 million / 28.6% | $17.9 million / 27.9% | Margin +0.7 percentage points |
| Operating income / margin | $3.8 million / 5.0% | $4.1 million / 6.4% | Income -8% |
| Net income, consolidated | $3.1 million | $0.6 million | Increased |
| Net income attributable to Karat / diluted EPS | $1.8 million / $0.12 | $2.5 million / $0.16 | Attributable income and EPS decreased |
| Adjusted EBITDA | $6.8 million | $6.0 million | +14%; non-GAAP |
| Operating cash flow | $4.5 million | $1.5 million | Increased |
Gross margin improved, with management citing stronger online, direct-to-consumer sales. However, operating expenses rose 29% to $17.9 million, exceeding gross-profit growth; higher delivery costs, payroll, rent, and professional fees contributed. Consolidated net income rose substantially mainly because other income improved by $3.8 million, including a favorable interest-rate-swap fair-value change versus a loss in Q1 2020. This did not translate into higher income attributable to Karat shareholders.
At March 31, cash was $1.0 million, working capital was $36.5 million, and current assets and liabilities were $76.0 million and $39.6 million, respectively. Operating cash flow was partly offset by $2.1 million of investing outflows and $1.9 million of financing outflows; quarter-end cash increased $0.5 million. Debt included $33.2 million drawn on the line of credit and $63.0 million of long-term debt, including current maturities. The company reported compliance with its financial covenants and $6.8 million of available line-of-credit capacity.
Changes, outlook, and risks
- Sales growth reflected increased purchases from existing customers, more than 6,300 new customers, online-channel growth, and higher logistics and shipping revenue. PPE had fallen to less than 1% of Q1 2021 sales after peaking in April 2020.
- Following quarter-end, the April 2021 IPO and overallotment generated $72.7 million in gross proceeds. The company reported using approximately $50.2 million to repay debt, including $30.0 million on its line of credit and repayment of several term loans. These are subsequent events, not Q1 balance-sheet amounts.
- Management anticipated funding the next twelve months with cash, operating cash flow, available credit, and IPO proceeds, and expected capital expenditures of up to $5.1 million. It provided no specific revenue or earnings guidance.
- Management identified demand for takeout and delivery and eco-friendly products as potential growth drivers. Freight and duty costs, raw-material prices, tariffs, supply disruptions, and competition could affect results. The filing says COVID-19’s future impact remains uncertain and could materially affect results, liquidity, or financial position, despite management’s view that it did not expect an adverse effect.
- The $5.0 million PPP loan remained outstanding at quarter-end; the company had applied for forgiveness, but forgiveness was not assured. Other notable exposures include $37.9 million in future operating lease obligations and guarantees associated with Global Wells debt. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the final post-IPO debt balances and the effect of repayments on interest expense and liquidity.
- Check the PPP loan forgiveness outcome and any related repayment obligation.
- Monitor gross-margin performance against freight, duty, and raw-material cost pressures, as well as the pace of operating-expense growth.
- Review the final purchase-price allocation and subsequent performance of Pacific Cup; its acquisition accounting was provisional at quarter-end.
- Assess dilution and share count following the IPO: the filing reported 19,709,500 shares outstanding on May 27, 2021, versus 15,167,000 at March 31.