# Karat Packaging Inc.: Form 10-Q for the period ended Mar 31, 2021

- Company: [Karat Packaging Inc.](/companies/krt.md) (CIK 1758021)
- Form: 10-Q
- Filed: 2021-05-28
- Accepted by EDGAR: May 27, 2021, 20:35 ET
- Period: 2021-03-31
- Accession: 0001104659-21-073492
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1758021/000110465921073492/tm2116340d1_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1758021/000110465921073492/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $75.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-01-01 to 2021-03-31 | $54.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-01-01 to 2021-03-31 | $21.6m | us-gaap:GrossProfit |
| Operating income | 3 months, 2021-01-01 to 2021-03-31 | $3.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $1.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-01-01 to 2021-03-31 | 15,403,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $4.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-01-01 to 2021-03-31 | $273.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-03-31 | $961.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-03-31 | $76.0m | us-gaap:AssetsCurrent |
| Total assets | at 2021-03-31 | $176.9m | us-gaap:Assets |
| Current liabilities | at 2021-03-31 | $39.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-03-31 | $134.0m | us-gaap:Liabilities |
| Current portion of debt | at 2021-03-31 | $11.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2021-03-31 | $34.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,106 characters.

*Unless the context requires otherwise, references in this report to “Karat,” the “Company,” “we,” “us,” and “our” refer to Karat Packaging and its consolidated subsidiaries.*

Forward-Looking and Cautionary Statements

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “ongoing,” “contemplate,” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

- fluctuations in the demand for our products in light of changes in laws and regulations applicable to food and beverages and changes in consumer preferences;
- our ability to compete successfully in our industry;
- fluctuations in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations;
- the effects of COVID-19 or other public health crises;
- the impact of earthquakes, fire, power outages, floods, pandemics and other catastrophic events, as well as the impact of any interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems;
- our ability to accurately forecast demand for our products or our results of operations;
- our ability to source raw materials at reasonable prices;
- the impact of problems relating to delays or disruptions in the shipment of our goods through operational ports;
- our ability to expand into additional foodservice and geographic markets;
- our ability to successfully design and develop new products;
- our ability to attract and retain skilled personnel and senior management; and
- other risks and uncertainties described in “Risk Factors.”

We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

See the “Risk Factors” section and elsewhere in this Form 10-Q and previously disclosed in our Registration Statement on Form S-1, (Registration No. 333-253270), as filed with the SEC on April 6, 2021, as amended on March 30, 2021 and April 7, 2021, for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties we face that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

### Overview

We are a rapidly-growing specialty distributor and select manufacturer of environmentally-friendly disposable foodservice products and related items. We are a nimble supplier of a wide range of products for the foodservice industry, including food and take out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. Our Karat Earth® line provides environmentally friendly options to our customers, who are increasingly focused on sustainability. We offer customized solutions to our customers, including new product development, design, printing and logistics services. While a substantial majority of our revenue is generated from the distribution of our vendors’ products, we do manufacture product ourselves. Our goal is to be the single-source provider to our customers for all of their disposable foodservice products and related needs.

We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, and an approximately 300,000 square foot distribution center in Chino, California. We have selected manufacturing capabilities in both of these facilities as well. In addition, we operate three other distribution centers located in Sumner, Washington, Summerville, South Carolina, Branchburg, New Jersey. Our New Jersey location is an approximately 108,000 square foot facility that recently opened in July 2020 and was fully operational in March 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. During the first half of 2021, we intend to add an additional distribution facility and manufacture certain of our Karat Earth 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.

We manage and evaluate our operations in one reportable segment.

### Results of Operations

### Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

*(in thousands)*

|  | Three-months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| 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 |
| Net income | 3,050 | 567 |
| **Other non-GAAP financial data (unaudited):** |  |  |
| Adjusted EBITDA | $6,818 | $5,965 |

32

#### Net Sales

Net sales were $75.7 million for the three months ended March 31, 2021 compared to $64.1 million for the three months ended March 31, 2020, an increase of $11.6 million, or 18%. The increase in net sales was primarily driven by an increase of $9.3 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 6,300 new customers in the first quarter of 2021, increase in direct-to-consumer sales through our online channel, and an increase of $1.6 million in logistic service and shipping revenue. Since it’s peak in April 2020, personal protective equipment related products have declined to approximately under 1% of net sales for the first quarter of 2021.

#### Cost of goods sold

Cost of goods sold increased by $7.8 million, or 17% to $54.0 million for the three months ended March 31, 2021 compared to $46.2 million for the for the three months ended March 31, 2020. The increase in cost of goods sold was primarily due to an increase of $4.9 million in product costs driven by the general increase in costs in line with the increase in product sales, an increase of $2.8 million in freight and duty costs to acquire inventory from overseas, and in increase of $0.3 million in depreciation expense related to depreciation of our manufacturing equipment.

#### Gross profit

Gross profit increased $3.7 million, or 21%, to $21.6 million for the three months ended March 31, 2021 compared to $17.9 million for the three months ended March 31, 2020. The increase in gross profit was primarily driven by the increase in product sales as well as an increase in profit margin. Gross profit margin was 29% for the three months ended March 31, 2021 compared to 28% for the three months ended March 31, 2020, an increase of 1%. The increase in gross profit margin was driven primarily by the increase in product sales, and higher profit margins driven by our direct-to-consumer sales through our online channel.

#### Operating expenses

Operating expenses for the three months ended March 31, 2021, were $17.9 million compared to $13.8 million for the three months ended March 31, 2020, an increase of $4.1 million, or 29%. The increase was primarily due to an increase of $1.7 million in shipping costs to deliver products to our customers, $0.7 million increase in payroll-related costs due to workforce expansion, $0.6 million increase in rent driven by our New Jersey and Hawaii facilities, and $0.3 million increase in professional services fees.

#### Operating income

Operating income for the three months ended March 31, 2021 was $3.8 million compared to $4.1 million the three months ended March 31, 2020, a decrease of $0.3 million, or 8%. The decrease was primarily due to an increase in gross profit of $3.7 million resulting from increase in sales and improvements in gross profit margin offset by the increase in operating expenses of $4.1 million.

#### Other income (expenses)

Other income for the three months ended March 31, 2021 was $0.5 million, compared to other expenses of $3.3 million for the three months ended March 31, 2020, an increase of $3.8 million, or 114%. The increase was driven by a decrease in interest expense of $3.6 million primarily due to a gain recorded in the current period of $1.3 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.

#### Net income

Net income for the three months ended March 31, 2021 was $3.1 million compared to $0.6 million for the three months ended March 31, 2020, an increase of $2.5 million, or 438%. The increase was primarily driven by an increase in other income of $3.8 million as discussed above partially offset by a decrease in operating income of $0.3 million and an increase in income tax expense of approximately $1.0 million. Provision for income taxes was $1.2 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. The Company’s effective tax rate for the three months ended March 31, 2021 and 2020 was 28% and 26%, respectively.

#### Adjusted EBITDA

Adjusted EBITDA for the three months ended March 31, 2021 was $6.8 million, compared to $6.0 million for the three months ended March 31, 2020, an increase of $0.8 million, or 14%. The increase was primarily driven by an increase in net income of $2.5 million as discussed above, a decrease in interest expense add-back of $3.6 million, an increase in provision for income taxes of $1.0 million, and an increase in depreciation and amortization of $0.6 million, and an increase of IPO related expenses of $.4 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.

### Three Months Ended March 31,

*(in thousands)*

| Reconciliation of Adjusted EBITDA (unaudited): | 2021 | 2020 |
| --- | ---: | ---: |
| 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 |

### Liquidity and Capital Resources

#### Trends in Our Business

The following trends have contributed to the results of our operations, and we anticipate that they will continue to affect our future results:

- There is a growing trend towards at home dining and mobility-oriented e-commerce, food delivery and take-out dining. We believe this trend will have a positive impact on our results of operations, as more of our customers will require packaging and containers to meet the demands of their increased food delivery and take-out dining consumers.
- Environmental concerns regarding disposable products broadly have resulted in a number of significant changes that are specific to the food-service industry, including regulations applicable to our customers. We believe this trend will have a positive impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.
- Changes in freight carrier costs related to the shipment of our products, especially relating to overseas shipments. We believe this trend can have either a positive or a negative impact on our results of operations, depending on whether such freight costs increase or decrease.
- U.S foreign trade policy continues to evolve, such as the imposition of tariffs on a number of imported food-service disposable products, including those imported from China. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to source our raw materials or manufactured products from countries where tariffs have not been imposed by the current U.S. administration.
- The cost of the raw materials used to manufacture our products, in particular polyethylene terephthalate, or PET, plastic resin, will continue to fluctuate. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether PET plastic resin costs increase or decrease.

With 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.

The following table summarizes total current assets, liabilities and working capital at March 31, 2021 compared to March 31, 2020:

*(in thousands)*

|  | March 31, 2021 | December 31, 2020 | Decrease |
| --- | ---: | ---: | ---: |
| Current assets | $76,027 | $79,777 | $(3,750) |
| Current liabilities | 39,551 | 43,137 | (3,586) |
| Working capital | $36,476 | $36,640 | $(164) |

As of March 31, 2021, we had a working capital of $36.5 million as compared to working capital of $36.6 million at December 31, 2020, representing a decrease in working capital of $0.1 million, or 0.4%. Working capital is consistent with prior year as there have been no significant changes to customer payment terms, inventory, or current maturities of long-term debt.

We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, availability under lines of credit of $6.8 million as of March 31, 2021 with existing financial institutions and proceeds from our initial public offering that occurred in April 2021.

As of March 31, 2021, we had cash and cash equivalents of approximately $1.0 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 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.

### Cash Flows

The following table summarizes cash flow for the three months ended March 31, 2021 and 2020:

*(in thousands)*

| Cash flows data: | Three Months Ended March 31, 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 |

35

*Cash flows provided by operating activities.* For the three months ended March 31, 2021, net cash provided by operating activities was $4.5 million, primarily the result of net income of $3.1 million, adjusted for certain non-cash items totaling $1.1 million, consisting of depreciation and amortization and changes in fair value of interest rate swaps. In addition, cash increased $0.3 million, primarily as a result of changes in working capital. For the three months ended March 31, 2020, net cash provided by operating activities was $1.5 million, primarily due to a decrease in cash of $3.4 million due to changes in working capital which was partially offset by net income of $0.6 million, adjusted for certain non-cash items of an aggregate $4.3 million consisting of depreciation and amortization, provision for bad debt, and changes in fair value of interest rate swaps.

*Cash flows used in investing activities.* Net cash used in investing activities for three months ended March 31, 2021 was $2.1 million, which was driven by the purchase of manufacturing equipment for our Texas facility totaling $0.3 million, deposits paid for additional manufacturing equipment of $0.9 million, and cash paid of $0.9 million for our acquisition of Pacific Cup, Inc. Net cash used in investing activities for three months ended March 31, 2020 was $3.0 million, which was driven by the purchase of manufacturing equipment and construction of the facility in New Jersey totaling $2.3 million and deposits paid for additional manufacturing equipment of $0.8 million.

At March 31, 2021, the Company has commitments for capital expenditures, which the Company does not anticipate to exceed $5.1 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.

*Cash flows (used in) provided by financing activities.* Net cash used in financing activities for the three months ended March 31, 2021 was $1.9 million, which was a result of payments on long-term debt. Net cash provided by financing activities for the three months ended March 31, 2020 was $3.0 million, which was a result of proceeds from issuance of debt. During the three months ended March 31, 2021 and 2020, we made debt payments of $1.9 million and $1.8 million, respectively. We did not make any cash distributions during the three months ended March 31, 2021 and 2020.

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.

### Financing Arrangements

#### Business Loan Agreements

On March 17, 2020, one of our subsidiaries, as the borrower, Alan Yu, Marvin Cheng, and the company, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and related promissory note for a $3.0 million term loan that expires June 17, 2025. Principal and interest payments of $54,623 are due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on the prime rate plus margin of 0.25% (3.50% as of March 31, 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, the Company paid off this term loan with proceeds from its initial public offering.

On June 30, 2020, our variable interest entity, as the borrower, Mr. Yu, Mr. Cheng, and one of our subsidiaries, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and related promissory note for a $16.5 million term loan that matures on June 30, 2025. Interest accrues at a fixed rate of 4.5%. 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 assets of one of our subsidiaries and our variable interest entity. In accordance with the business loan agreement, the borrower must comply with certain financial reporting requirements and financial covenants, including the borrower must maintain a minimum debt service coverage ratio (as defined in the business loan agreement) of not less than 1.25 to 1.00 at all times, tested semi-annually.

As of March 31, 2021, we were in compliance with the covenants included in the business loan agreements described above.

#### Line of Credit

One of our subsidiaries, as the borrower, and Hanmi Bank, in its capacity as lender, previously entered into a business loan agreement and associated documents. The loan was evidenced by a promissory note executed by the borrower. The line of credit had an initial maturity date of February 23, 2019. The agreement was amended prior to maturity to extend the maturity date to May 2019. In May 2019, the line of credit was amended again to extend the maturity date to May 2021 and increased the maximum borrowing from $25 million to $30 million. Interest accrues at an annual rate of prime less 0.25% subject to a minimum of 3.75% (3.75% at March 31, 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 $33.2 million of borrowings were outstanding as of March 31, 2021 and December 31, 2020 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 $900,000 as of March 31, 2021 and December 31, 2020.

In accordance with the change in terms agreement dated July 9, 2020, the borrower must comply with certain financial reporting requirements, financial covenants and other covenants. The financial covenants include (i) the borrower must maintain a minimum current ratio (as defined in the line of credit) of not less than 1.50 to 1.00 on a quarterly basis from each period end; (ii) the borrower must maintain effective tangible net worth (as defined in the line of credit) of not less than $20.0 million on a quarterly basis from each period end; (iii) the borrower must maintain a minimum debt service coverage ratio (as defined in the line of credit) of not less than 1.20 to 1.00; and (iv) the borrower’s funded debt of bank financing (including capital leases) over rolling four quarter EBITDA shall be no more than 4.00 to 1.00 from each period end. The other covenants include (i) subordination of accounts payable to Keary Global (to be monitored on a quarterly basis) of not less than $3.0 million; and (ii) the borrower shall maintain a minimum gross profit margin of 25% on a quarterly basis.

As of March 31, 2021, we were in compliance with the covenants included in the line of credit described above.

#### PPP Loan

On April 16, 2020, one of our subsidiaries received loan proceeds in the amount of approximately $5.0 million under the Paycheck Protection Program (“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.

The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The proceeds were used for purposes consistent with the PPP. 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 the Company applied for the forgiveness of the loan, there is no assurance that the Company will obtain forgiveness of the loan in whole or in part.

For additional information on our financing arrangement see Note 8 of our condensed consolidated financial statements included elsewhere in this report.

### Commitments and Contractual Obligation

The table below sets forth our enforceable and legally binding obligations as of March 31, 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.

### Payments Due by Period

*(in thousands)*

|  | Less than Total | 1 year | More than 1 – 3 years | 3 – 5 years | 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| 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 |

(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 events

### Effect on Inflation

The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to minimize the impact of increased costs by increasing prices for our products and diversifying our purchases from different suppliers, to the extent permitted by contracts and competition.

### Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements and did not have any such arrangements as of March 31, 2021 and December 31, 2020. Letters of credits outstanding as of March 31, 2021 and December 31, 2020 was $900,000.

### Critical Accounting Policies and Estimates

The following critical accounting policies reflect the significant estimates and judgements used in the preparation of our consolidated financial statements. We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

#### Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from those estimates. We believe estimates that are significant to our financial statements for the three months ended March 31, 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.

Management determined the useful lives of property and equipment based on the asset category and intended use of the assets purchased.

#### Inventory Reserve

The Company maintains reserves for excess and obsolete inventory considering various factors including historic usage, expected demand, anticipated sales price, and product obsolescence.

#### Allowance for Doubtful Accounts

The Company recognizes an allowance for bad debt on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt write-offs, current past due customers in the aging as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

#### Stock-Based Compensation

Stock-based compensation expense related to employee stock options is accounted for in accordance with ASC 718, *Compensation — Stock Compensation*. This standard requires the Company to record compensation expense equal to the fair value of awards granted to employees and non-employees. The fair value of share-based payment awards is estimated on the grant-date using the Black-Scholes option pricing model. Key input assumptions used in the Black-Scholes option pricing model to estimate the grant date fair value of stock options include the fair value of the Company’s common stock, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate, and the Company’s expected annual dividend yield.

#### Property and Equipment

Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets, varying from three to 40 years or, when applicable, the life of the lease, whichever is shorter. Impairment charges, if any, are included in operating expenses in the accompanying statements of operations.

#### Income Taxes

We account for income taxes under Accounting Standard Codification (“ASC”) 740, Income Taxes.

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carryforwards. We periodically review the recoverability of deferred tax assets recorded on our consolidated balance sheets and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

#### Revenue Recognition

We recognize sales transactions at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. The transaction price is the amount of consideration to which we expect to be entitled to in exchange for transferring goods to the customer.

Revenue is recorded based on the total estimated transaction price, which includes fixed consideration and estimates of variable consideration. Variable consideration includes estimates of rebates and other sales incentives, cash discounts from prompt payment, consideration payable to customers for cooperative advertising and other program incentives, and sales returns. We estimate the variable considerations based on contract terms and historical experience of actual results using the expected value method.

### Recent Accounting Pronouncements

The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups 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.

In February 2016, the FASB issued ASU 2016-02 (Topic 842), “*Leases”*. This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The FASB subsequently issued ASU 2018-11 (Topic 842), “*Leases:Targeted Improvements”* which amends ASC 842 in two important areas, including (i) allowing lessors to combine lease and associated nonlease components by class of underlying asset in contracts that meet certain criteria and, (ii) provides entities with an optional method for adopting the new leasing guidance by recognizing a cumulative-effect adjustment to the opening balance of the retained earnings, and not to restate the comparative periods presented at the adoption date. The effective date for ASC 842 for public business entities is annual reporting periods beginning after December 15, 2018. The effective date for all other entities is annual reporting periods beginning after December 15, 2021. The Company elects to adopt the new standard in annual reporting period beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 “*Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”* which adds to U.S. GAAP an impairment model known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities that are U.S. Securities and Exchange Commission (SEC) filers. For all other public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. The FASB subsequently issued ASU 2019-10 (Topic 326), “*Financial Instruments-Credit Losses: Effective Dates”* which amends the effective date for SEC filers that are eligible to be ‘smaller reporting 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 to adopt the new standard in annual reporting period beginning after January 1, 2023, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.

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.

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.

In December 2019, the FASB issued ASU 2019-12 “*Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”.* The guidance in this ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public entities, the amendments in this Update are effective for fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendment is permitted. As part of the IPO relief provided to EGC, an EGC may elect to adopt new standards on the timeline afforded a private company. The Company elects to adopt the new standard in annual reporting period beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-03 “Codification Improvements to Financial Instruments”. The guidance in this ASU clarifies the requirement for all entities to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s ASC. The guidance also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “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.

### Subsequent Events

On April 15, 2021, the Company 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 of its loan obligations. These repayments comprised:

- $30,000,000 of the Company’s existing line of credit, maturing in May of 2022, with an interest rate of prime less 0.25% subject to a minimum floor rate of 3.75%, with an outstanding balance 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;
- $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 under the 2019 Stock Incentive Plan, with a 3-year vesting period.

## Controls and procedures

As filed, 2,321 characters.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 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.

Based on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

## Risk factors

As filed, 201 characters.

There have been no material changes to the Risk Factors previously disclosed in our Registration Statement on Form S-1, as amended (Registration No. 333-253270), as filed with the SEC on April 6, 2021.

Filed May 28, 2021.
Source: SEC EDGAR, the filing index for accession 0001104659-21-073492. Last ingested by Listed: Nov 10, 2026, 06:36 ET. No prices; not investment advice.