GlobeNewswire Inc | May 27, 2021 04:05PM EDT

May 27, 2021

CHINO, Calif., May 27, 2021 (GLOBE NEWSWIRE) -- Karat Packaging Inc. (Nasdaq: KRT), a specialty distributor and manufacturer of environmentally friendly, disposable foodservice products and related items,today announced financial results for its 2021 first quarter ended March 31, 2021.

First Quarter 2021 Highlights

-- Net sales of $75.7 million, up 18.1 percent from $64.1 million for the same period last year -- Gross profit of $21.6 million, up 20.9 percent from $17.9 million for the same period last year -- Gross margin of 28.6 percent, up 70 basis points from 27.9 percent for the same period last year -- Acquired Pacific Cup, Inc., adding the companys sixth distribution center and third manufacturing plant

Alan Yu, chief executive officer, said, Results for the 2021 first quarter reflected strong customer demand, particularly for the companys environmentally friendly products, and demonstrated our ability to deliver customized solutions to a diverse and expanding customer base. Sales grew at a rapid pace in our distributor and online channels, based, in part, on favorable market trends as more restaurants and foodservice outlets began to open. The increase was partially offset by temporary supply chain disruptions and higher freight costs, and a severe winter storm in February. However, sales rebounded in March, and the positive trend is continuing into the second quarter.

We took action in the first quarter to pass on higher costs to customers through a series of targeted price increases that are continuing into the second quarter. We are experiencing solid growth in sales and profitability, as our strong brand recognition, nimble operations and the rapidly increasing size and scope of our distribution network provide us with significant advantages in the foodservice market, Mr. Yu added.

First Quarter 2021 Financial Results

Net sales for the first quarter of 2021 increased 18.1 percent to $75.7 million, from $64.1 million in the same period last year. The increase primarily was driven by greater product penetration with existing customers, new customers added in the quarter, an increase in direct-to-consumer sales through the companys online channel and higher logistic service and shipping revenue.

Gross profit for the 2021 first quarter increased 20.9 percent to $21.6 million, from $17.9 million in the same period last year, primarily reflecting higher-margin sales through the companys online channel, partially offset by an increase in freight costs.

Operating expenses for the 2021 first quarter totaled $17.9 million, a 29.4 percent increase from $13.8 million in last years first quarter. The increase was primarily due to higher shipping costs, payroll expenses associated with workforce expansion, an increase in facility costs and higher professional fees.

Operating income in the first quarter of 2021 was $3.8 million, or 5.0 percent of net sales, compared with $4.1 million, or 6.4 percent of net sales, in the same period last year.

Other income was $465,000 in the 2021 first quarter, compared with other expense of $3.3 million in the same period last year. The change primarily reflected a decrease in interest expense as a result of changes in the fair value of interest rate swap positions.

Net income was $3.1 million in the 2021 first quarter, compared with $567,000 in the same period last year. Net income margin was 4.0 percent in the first quarter, compared with 0.9 percent in the same period last year. The increase in net income attributable to noncontrolling interests in the 2021 first quarter compared to the same period last year is due to changes in the fair value of interest rate swap positions held by Global Wells, the companys variable interest entity used to manage certain facilities. Net income attributable to Karat Packaging was $1.8 million, or $0.12 per diluted share, compared with $2.5 million, or $0.16 per diluted share.

Adjusted EBITDA amounted to $6.8 million in the 2021 first quarter, compared with $6.0 million in the same period last year. Adjusted EBITDA margin was 9.0 percent of net sales, compared with 9.3 percent in the same period last year. Adjusted EBITDAand Adjusted EBITDA margin are non-GAAP financial measures. Reconciliations of GAAP to non-GAAP results are provided in the tables following this press release.

Net cash provided by operating activities rose to $4.5 million in the 2021 first quarter, from $1.5 million in the same period last year. The increase primarily reflects improvements in working capital.

In the 2021 first quarter, Karat Packaging completed the acquisition of Pacific Cup, Inc., including its manufacturing and distributing facility in Hawaii. The acquisition increases the companys network to six distribution centers and three manufacturing plants.

On April 15, 2021, Karat Packaging completed an initial public offering (IPO) of its common stock, which resulted in the issuance and sale of 3,950,000 shares at a public offering price of $16.00 per share. On April 23, 2021, the companys lead underwriter exercised an overallotment option of 592,500 shares at the IPO price of $16.00 per share. Gross proceeds in the IPO totaled approximately $72.7 million. In connection with the IPO, the company used a portion of the proceeds to pay down an aggregate of $50.2 million in principal balance of its loan obligations.

Investor Conference Call

The Company will host an investor conference call today, May 27, 2021, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time).

Phone: 877-270-2148 (domestic); 412-902-6510 (international)Replay: Accessible through June 3, 2021; 877-344-7529 (domestic); 412-317-0088 (international); replay access code 10156716Webcast: Accessible at http://investor.karatpackaging.com/; archive available for approximately one year

About Karat Packaging Inc.

Karat Packaging Inc. is a specialty distributor and manufacturer of a wide range of environmentally friendly, disposable foodservice products and related items, primarily used by national and regional restaurants and in foodservice settings throughout the United States. Its products include food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. The companys eco-friendly Karat Earth line offers quality, sustainably focused products that are made from renewable resources. Karat Packaging also offers customized solutions, including new product development and design, printing, and logistics services. To learn more about Karat Packaging, please visit the companys website at www.karatpackaging.com.

Caution Concerning Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the companys registration statement for the initial public offering filed with the SEC on April 14, 2021. Copies are available on the SECs website at www.sec.gov. Karat Packaging undertakes no obligation to update these statements for revisions or changes after the date of this release, except as required by law.

Investor Relations and Media Contacts:

PondelWilkinson Inc.Judy Lin Sfetcu/Jeff Misakian/Roger Pondel310-279-5980karat@pondel.com

(tables below)

KARAT PACKAGING INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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 $0.1million associated with variable 11,455,000 9,102,000 interest entity for the three-monthsended March 31, 2021 and 2020,respectively)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 millionand $0 associated with variableinterest entity for the three-months 246,000 - ended March 31, 2021 and 2020,respectively)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 $2.4million interest expense associated 278,000 (3,306,000 )with variable interest entity for thethree-months ended March 31, 2021 and2020, respectively)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 1,270,000 (1,884,000 )noncontrolling interest Net income attributable to Karat $ 1,780,000 $ 2,451,000 Packaging Inc. Basic and diluted earnings per share: Basic $ 0.12 $ 0.16 Diluted $ 0.12 $ 0.16 Weighted average common shares 15,167,000 15,190,000 outstanding, basicWeighted average common shares 15,403,000 15,461,000 outstanding, diluted

KARAT PACKAGING INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31, December 31, 2021 2020 Assets Current assets Cash and cash equivalents (including $0.1million associated with variable interest $ 961,000 $ 448,000 entity at March 31, 2021 and December 31,2020)Accounts receivable, net of allowance fordoubtful accounts of $0.3 million at March 25,579,000 23,838,000 31, 2021 and December 31, 2020Inventories 46,065,000 48,961,000 Prepaid expenses and other current assets(including $0.1 million associated with 3,422,000 6,530,000 variable interest entity at March 31, 2021and December 31, 2020)Total current assets 76,027,000 79,777,000 Property and equipment, net (including$47.5 million and $47.8 million associated 93,865,000 95,533,000 with variable interest entity at March 31,2021 and December 31, 2020, respectively)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 millionassociated with variable interest entity at 159,000 161,000 March 31, 2021 and December 31, 2020)Total assets $ 176,870,000 $ 181,104,000 Liabilities and Stockholders? Equity Current liabilities Accounts payable (including $0 and $0.6million associated with variable interest $ 17,186,000 $ 20,069,000 entity at March 31, 2021 and December 31,2020, respectively)Accrued expenses (including $0.2 millionand $0.1 million associated with variable 5,510,000 4,959,000 interest entity at March 31, 2021 andDecember 31, 2020, respectively)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 $0million associated with variable interest 635,000 551,000 entity at March 31, 2021 and December 31,2020)Capital leases, current portion 325,000 321,000 Long-term debt, current portion (including$0.7 million associated with variable 11,841,000 11,364,000 interest entity at March 31, 2021 andDecember 31, 2020, respectively)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 millionassociated with variable interest entity atMarch 31, 2021 and December 31, 2020, 51,048,000 53,410,000 respectively, and debt discount of $0.1million associated with variable interestentity at March 31, 2021 and December 31,2020)Capital leases, net of current portion 207,000 290,000 Other liabilities (including $2.6 millionand $3.9 million associated with variable 3,726,000 5,049,000 interest entity at March 31, 2021 andDecember 31, 2020, respectively)Total liabilities 133,952,000 141,236,000 Karat Packaging Inc. stockholders? equity Common stock, $0.001 par value, 100,000,000shares authorized, 15,190,000 shares 15,000 15,000 issued, 15,167,000 shares outstanding atMarch 31, 2021 and December 31, 2020Additional paid in capital 13,981,000 13,981,000 Treasury stock, $0.001 par value, 23,000shares on March 31, 2021 and December 31, (248,000 ) (248,000 )2020Retained earnings 20,436,000 18,656,000 Total Karat Packaging Inc. stockholders? 34,184,000 32,404,000 equityNoncontrolling 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

KARAT PACKAGING, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2021 2020 Cash flows from operating activities Net income $ 3,050,000 $ 567,000 Adjustments to reconcile net income tonet 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 (1,323,000 ) 2,415,000 swapAmortization 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 3,108,000 (452,000 )assetsDue from affiliated companies - (14,000 )Deposits (41,000 ) (2,272,000 )Other assets 2,000 1,000 Increase (decrease) in operating liabilitiesAccounts 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 $ 4,504,000 $ 1,501,000 activities Cash flows from investing activities Purchases of property and equipment (273,000 ) (2,252,000 )Deposits paid for property and (921,000 ) (759,000 )equipmentAcquisition 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 - 2,000,000 issuance costPayments 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 $ (1,897,000 ) $ 2,974,000 financing activities Net increase in cash and cash 513,000 1,464,000 equivalents Cash and cash equivalents Beginning of year $ 448,000 $ 802,000 End of year $ 961,000 $ 2,266,000

KARAT PACKAGING INC. AND SUBSIDIARIESRECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES(Unaudited)

Three Months Ended March 31, 2021 2020 Reconciliation of Adjusted EBITDA (in thousands) (unaudited):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 ? Adjusted EBITDA $ 6,818 5,965

Reconciliation Three Months Ended March 31, 2021of Adjusted (in thousands) EBITDA by Entity(unaudited): Karat Global Eliminations Consolidated Packaging Wells Net Sales $ 75,673 $ $ ? $ 75,673 ? Net income ) (loss): $ $ $ (199 $ 3,050 1,780 1,469Add (deduct): Interest expense 553 (831 ) ? (278 ) Income tax 1,186 ? ? 1,186 expenseDepreciation and 2,161 303 ? 2,464 amortizationIPO related 396 ? ? 396 expenses ) Adjusted EBITDA $ $ $ (199 $ 6,818 6,076 941Net income 2.4 % 4.0 % marginAdjusted EBITDA 8.0 % 9.0 % margin

Reconciliation of Three Months Ended March 31, 2020Adjusted EBITDA (in thousands) by Entity(unaudited): Karat Global Eliminations Consolidated Packaging WellsNet Sales $ 64,083 $ ? $ ? $ 64,083 Net income $ 2,451 $ (2,178 ) $ 294 $ 567 (loss):Add (deduct): Interest expense 860 2,446 ? 3,306 Income tax 200 ? ? 200 expenseDepreciation and 1,833 59 ? 1,892 amortization Adjusted EBITDA $ 5,344 $ 327 $ 294 $ 5,965 Net income margin 3.8 % 0.9 % Adjusted EBITDA 8.3 % 9.3 % margin

We define net income margin as net income by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.

Note about Non-GAAP Financial Measures

Karat Packaging uses Adjusted EBITDA and Adjusted EBITDA Marginto measure its financial performance. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental non-GAAP financial measures of operating performance and are not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA and Adjusted EBITDA Margin 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 and Adjusted EBITDA Margin are not necessarily comparable to similarly titled measures presented by other companies.

KARAT PACKAGING INC. AND SUBSIDIARIESNET SALES BY CATEGORY(Unaudited)

Three Months Ended March 31, 2021 2020National Distribution $ 18,289,000 $ 15,498,000Distributors 40,010,000 33,934,000Online 11,443,000 6,286,000Retail 5,931,000 8,365,000 $ 75,673,000 $ 64,083,000