# Karat Packaging Inc. (KRT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Karat Packaging Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1758021/000162828022007993/krt-20211231.htm
Accession: 0001628280-22-007993
Filing date: 2022-03-31
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/KRT/
All MD&A years: /company/KRT/mda/
Next year: /company/KRT/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Part I, Item 1A. “Risk Factors.” and elsewhere in this Annual Report on Form 10-K. See “Forward Looking Statements” above for further explanation.

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 majority of our revenue is generated from the distribution of our vendors’ products, we have select manufacturing capabilities in the U.S., which allows us to provide customers broad product choices and customized offerings with short lead times. 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, an approximately 300,000 square foot distribution center in Chino, California, and an approximately 76,000 square foot distribution center located in Kapolei, Hawaii. We have selected manufacturing capabilities in all of these facilities. In addition, we operate four other distribution centers located in Sumner, Washington, Summerville, South Carolina, Branchburg, New Jersey and Kapolei, Hawaii. Our New Jersey location is an approximately 108,000 square foot facility that opened in July 2020 and was fully operational in June 2021. In October 2021, we moved into our new 63,000 square-foot facility in South Carolina. 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.

2021 Business Highlights and Trends

•We recorded revenues of $364.2 million during 2021, which represents an increase of 23% compared to 2020, despite the decrease in net sales related to personal protective equipment (PPE) products from the peak of $38.1 million for the year ended December 31, 2020 to $2.7 million for the year ended December 31, 2021.

•We recorded net income of $22.4 million during 2021, which represents an increase of 35% compared to 2020, despite challenges posed by the commodity input cost inflation, supply chain disruption, and higher labor costs.

•We completed our initial public offering on April 15, 2021, and raised net proceeds of approximately $67.6 million.

•We acquired over 27,000 new customers, which consisted of customers through wholesale distribution and e-commerce direct-to-consumer channels.

•We added a new manufacturing and distribution facility in Hawaii through our acquisition of Pacific Cup Inc.

•We paid off all our existing debt and capital lease obligations, except for debt obligations that remain outstanding from our consolidated variable interest entity, Global Wells.

•We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $37.0 million for the year, representing an increase of 3% from 2020.

•We invested $12.4 million in our logistics and manufacturing infrastructure to enhance our operation efficiency and position the business for future growth.

27

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 and other countries. 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.

COVID-19 Update

Information regarding COVID-19 update is contained in Note 18 — COVID-19 Update in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates those estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. We believe the following critical accounting estimates and policies have the most significant impact on our consolidated financial statements:

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. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that the future trend will be similar to what we have experienced in the past. As of December 31, 2021 and 2020, we had an inventory reserve of $743,000 and $675,000, respectively. A significant change in the demand or sales price could result in additional reserve and materially affect our future financial results.

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

28

uncollectible. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates we have in the past. As of both December 31, 2021 and 2020, we had an allowance for doubtful accounts of $250,000. A significant change in the liquidity or financial position of our customers could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect our future financial results.

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 restricted stock unit awards is determined based on the closing price of our common stock on the trading day immediately prior to the grant date. The fair value of stock options 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.

The risk-free interest rate assumption for options granted under the Plan, as defined in Note 12 - Stock Based Compensation in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, is based upon observed interest rates on the United States government securities appropriate for the expected term of the stock options.

The expected term of employee stock options under the Plan represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is calculated based on the “simplified method,” which estimates the expected term based on the average of the vesting period and contractual term of the stock option. Our expected term of stock options is 6.25 years.

We determine the expected volatility assumption using the frequency of daily historical prices of comparable public company’s common stock for a period equal to the expected term of the options.

The dividend yield assumption for options granted under the Plan is based on the Company’s history and expectation of dividend payouts.

We review the underlying assumptions related to stock-based compensation at least annually or more frequently if we believe triggering events exist. If facts and circumstances change and we employ different assumptions in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period. Stock-based compensation expense for the years ended December 31, 2021 and 2020 was $2,026,000 and $0, respectively.

Results of Operations

Year ended December 31, 2021 Compared to the Year ended December 31, 2020

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","(in thousands)"],["Net sales","$","364,244","","$","295,518"],["Cost of goods sold","256,417","","206,393"],["Gross profit","107,827","","89,125"],["Operating expenses","84,682","","61,428"],["Operating income","23,145","","27,697"],["Other income/(expense)","4,383","","(5,770)"],["Provision for income tax expense","5,089","","5,259"],["Net income","$","22,439","","$","16,668"]]
[[/GREPCENT_TABLE]]

Net sales

Net sales were $364.2 million for the year ended December 31, 2021 compared to $295.5 million for the year ended December 31, 2020, an increase of $68.7 million, or 23.3%. The increase in net sales was primarily driven by an increase of $55.2 million in net sales to our existing customers as we continue to grow wallet share with existing customers and an incremental net sales of $13.6 million from over 27,000 new customers in 2021. Out of the total net sales increase of $68.7

29

million compared to 2020, approximately $32.9 million was attributable to price increases due to the pass through of inflation, $12.6 million was incremental sales from new SKUs, $15.0 million was primarily associated with the sales volume increase and $8.2 million represented an increase in logistic services and shipping revenue. Net sales related to PPE products declined from the peak of $38.1 million for the year ended December 31, 2020 to $2.7 million for the year ended December 31, 2021.

Cost of goods sold

Cost of goods sold increased by $50.0 million, or 24.2% to $256.4 million for the year ended December 31, 2021 compared to $206.4 million for the year ended December 31, 2020. The increase in cost of goods sold was primarily due to an increase of $30.6 million in product costs driven by higher volumes and cost inflation and an increase of $24.1 million in freight and duty costs to acquire inventory from overseas primarily due to elevated ocean freight rates. These unfavorable factors were partially offset by efficiencies and productivity improvements realized.

Gross profit

Gross profit increased $18.7 million, or 21.0%, to $107.8 million for the year ended December 31, 2021 compared to $89.1 million for the year ended December 31, 2020. Gross margin was 29.6% for the year ended December 31, 2021 compared to 30.2% for the year ended December 31, 2020, a decrease of 0.6%. Freight and duty costs as a percentage of net sales increased from 6.8% in 2020 to 12.1% in 2021 primarily due to elevated ocean freight rates. This unfavorable impact on the gross margin was partially offset by higher gross profit margins driven by our direct-to-consumer sales through our online channel and several price increases that the Company implemented in 2021 to pass through the increased product costs.

Operating expenses

Operating expenses for the year ended December 31, 2021 were $84.7 million compared to $61.4 million for the year ended December 31, 2020, an increase of $23.3 million, or 37.9%. This was primarily driven by the following increases: (1) $12.0 million in shipping and transportation costs due to higher volume of products transferred and shipped to our customers combined with higher fuel costs, (2) $5.1 million in payroll-related costs due to workforce expansion, (3) $2.0 million in stock-based compensation expense, (4) $1.2 million in on-line marketing expense, and (5) $1.1 million in professional services fees.

Operating income

Operating income for the year ended December 31, 2021 was $23.1 million compared to $27.7 million for the year ended December 31, 2020, a decrease of $4.6 million, or 16.4%. The decrease was due to an increase in gross profit of $18.7 million offset by an increase in operating expenses of $23.3 million.

Other income (expense)

Other income for the year ended December 31, 2021 was $4.4 million, compared to an other expense of $5.8 million for the year ended December 31, 2020, an improvement of $10.2 million, or 176.0%. The improvement was driven by the gain on the PPP loan debt forgiveness of $5.0 million received in 2021 and a decrease in net interest expense of $4.1 million primarily due to the payoff of certain borrowings and the change in the fair value of the interest rate swap(s), which resulted in interest income of $1.5 million for the year ended December 31, 2021 and interest expense of $1.6 million for the year ended December 31, 2020.

Net income

Net income for the year ended December 31, 2021 was $22.4 million compared to $16.7 million for the year ended December 31, 2020, an increase of $5.8 million, or 34.6%. The increase was primarily driven by an increase in other income of $10.2 million partially offset by a decrease in operating income of $4.6 million, as discussed above. Provision for income taxes was $5.1 million and $5.3 million for the years ended December 31, 2021 and 2020, respectively. The Company’s effective tax rate for the years ended December 31, 2021 and 2020 was 18.5% and 24.0% respectively. The decrease in the effective tax rate was primarily driven by the impact from the PPP loan debt forgiveness of $5.0 million included in the effective tax rate for the year ended December 31, 2021 that was not present for the year ended December 31, 2020.

30

Non-GAAP Financial Measure

We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with GAAP. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the Consolidated Statements of Income; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a financial measure equal to net income excluding (i) interest expense, (ii) provision for income taxes, (iii) depreciation and amortization, (iv) IPO related expenses, (v) gain on forgiveness of debt, and (vi) stock-based compensation expense. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue.

We present Adjusted EBITDA and adjusted EBITDA margin as supplemental measures of our financial performance. Adjusted EBITDA and adjusted EBITDA margin assist management in assessing our core operating performance. We also believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period.

Adjusted EBITDA and adjusted EBITDA margin should not be considered in isolation or as alternatives to net income or cash flows from operating activities and net income margin 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.

Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to adjusted EBITDA margin.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Reconciliation of Adjusted EBITDA (unaudited):","2021","2020"],["","(in thousands)"],["","Amount","","% of Revenue","Amount","","% of Revenue"],["Net income:","$","22,439","","","6.2","%","$","16,668","","5.6","%"],["Add (deduct):"],["Interest expense","1,395","","0.4","5,492","","1.9"],["Provision for income taxes","5,089","","1.4","5,259","","1.8"],["Depreciation and amortization","10,044","","2.8","8,569","","2.9"],["IPO related expenses","1,055","","0.3","\u2014","","\u2014"],["Gain on forgiveness of debt","(5,000)","","(1.4)","\u2014","","\u2014"],["Stock-based compensation expense","2,026","","0.5","\u2014","","\u2014"],["Other non-GAAP financial data:"],["Adjusted EBITDA","$","37,048","","10.2","%","$","35,988","","","12.2","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Sources and Uses of Funds

Our primary sources of liquidity is cash provided by operations, borrowings under our line of credit and promissory notes, and during the year ended December 31, 2021, proceeds of our IPO offering totaling $67.6 million. We have generated positive cash flow from operations for both of the years ended December 31, 2021 and 2020. As described in Note 6 — Line of Credit, pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the “Loan Agreement”), we have a line of credit with a

31

maximum borrowing capacity of $40.0 million (the “Line of Credit”). The Line of Credit also includes a standby letter of credit sublimit. The loan was secured by the our assets and guaranteed by our stockholders. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly.

On July 9, 2020, we amended the Line of Credit to extend the maturity date to May 23, 2022. On October 6, 2021, we amended the Loan Agreement again. Prior to October 6, 2021, interest accrued at an annual rate of prime less 0.25% with a minimum floor of 3.75%, and the amount that could be borrowed was subject to a borrowing base that was calculated as a percentage of the accounts receivable and inventory balances measured monthly. Additionally, the Company was required to 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.

The amendment on October 6, 2021, among other things, (1) extended the maturity date to October 6, 2023, (2) revised the interest on any line of credit borrowings to an annual rate of prime less 0.25%, with a minimum floor of 3.25%, (3) removed the requirement for the maximum amount of borrowings to be subject to a borrowing base requirement that was calculated as a percentage of accounts receivable and inventory balances, (4) removed the minimum tangible net worth and minimum debt service coverage ratio from the financial covenant requirement, and (5) added a minimum fixed charge coverage ratio in the financial covenant requirement.

Additionally, as described in Note 8 — Long-term Debt, as of December 31, 2021, we have a $21,580,000 term loan that matures in May 2029 (the “2029 Term Loan”) and a $23,000,000 term loan that matures September 30, 2026 (the “2026 Term Loan”). The 2029 Term Loan provides for an annual interest at prime rate less 0.25% and principal payments ranging from $24,000 to $40,000 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 our and Global Well’s assets and is guaranteed by us and our stockholders. The 2026 Term Loan had an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022, which we exercised in February 2022. Interest accrues at a fixed rate of 3.5%. Principal and interest payments of $116,000 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 Global Wells’ assets and is guaranteed by Global Wells and one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.

As of December 31, 2021, we were in compliance with the financial covenants under all of our loan agreements, and do not expect material uncertainties in our continued ability to be in compliance with all financial covenants through the remaining term of all of our loan agreements. As of December 31, 2021, we had no balance outstanding on our Line of Credit, $20.8 million in outstanding balance under the 2029 Term Loan, and $15.9 million in outstanding balance under the 2026 Term Loan.

We also have certain contractual obligations, such as operating lease obligations and purchase obligations. At December 31, 2021, we had operating leases, primarily for manufacturing and distribution facilities, and purchase obligations primarily for machinery and equipment and constructions in certain of our facilities, expiring at various dates through 2024. As described further in Note 14 – Commitments and Contingencies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we had a total of $10.3 million of minimum operating lease obligations. These minimum lease payments range from approximately $0.4 million to $3.1 million on an annual basis over the next five years. At December 31, 2021, we had purchase obligations of $10.9 million outstanding, including $8.2 million and $1.8 million and $0.9 million expiring in 2022, 2023 and 2024, respectively. Such purchase obligations are primarily related to the purchase of machinery and equipment, as we continue to invest in our manufacturing and distribution capabilities. Other than these contractual obligations, our off-balance sheet arrangements primarily consists of letters of credits issued under our Line of Credit. As of December 31, 2021, no letters of credits were outstanding under our Line of Credit.

Our ongoing operations and growth strategy may require us to continue to make investments in our logistics and manufacturing infrastructure and our e-commerce platform. In addition, we may consider making strategic acquisitions and investments, which could require significant liquidity. The COVID-19 pandemic created significant uncertainty in the global economy and capital markets for a large part of 2021, and there could be lingering adverse effects into 2022 and beyond. We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund for capital expenditures to further enhance our manufacturing and logistics infrastructure and our e-commerce platform for at least the next 12 months.

32

Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of our Line of Credit, and raise additional debt. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business, which could have a material adverse effect on our operations, market position and competitiveness. Notwithstanding the potential liquidity challenges described above, we expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.

Liquidity Position

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

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020","","Increase/(Decrease)"],["","(in thousands)"],["Current assets","$","102,872","","$","79,777","","$23,095"],["Current liabilities","30,764","","43,137","","(12,373)"],["Working capital","$","72,108","","$","36,640","","$","35,468"]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, we had a working capital of $72.1 million, as compared to working capital of $36.6 million at December 31, 2020, representing an increase in working capital of $35.5 million, or 96.8%. The improvement in working capital from December 31, 2020 was driven by (1) a decrease of $10.2 million in the current portion of long-term debt, as we paid down certain term loans with proceeds from our IPO, (2) a decrease in related party payable of $3.0 million primarily due to the timing of payments, (3) an increase of $8.9 million in accounts receivable primarily resulting from the year-over-year sales growth, (4) an increase of $9.5 million in inventory as a result of higher sales volume, and (5) an increase of $6.0 million in cash and cash equivalents.

For additional information on financing entered into subsequent to December 31, 2021, see Note 19 — Subsequent Events in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Cash Flows

The following table summarizes cash flow for the year ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","(in thousands)"],["Net cash provided by operating activities","$","8,679","","","$","14,547"],["Net cash used in investing activities","(13,281)","","","(37,351)"],["Net cash provided by financing activities","10,637","","22,450"],["Net change in cash and cash equivalents","$","6,035","","","$","(354)"]]
[[/GREPCENT_TABLE]]

Cash flows provided by operating activities. For the year ended December 31, 2021, net cash provided by operating activities was $8.7 million, primarily resulting from net income of $22.4 million, adjusted for certain non-cash items totaling $5.2 million, consisting of depreciation and amortization, changes in fair value of interest rate swaps, stock-based compensation, and gain on forgiveness of debt. In addition, cash decreased $18.9 million, primarily as a result of changes in working capital of 18.9 million including an increase in account receivable and inventory of $8.9 million and $9.4 million, respectively, a decrease in related party payable of $3.0 million, offset by an increase in accrued expenses of $2.9 million. For the year ended December 31, 2020, net cash provided by operating activities was $14.5 million, primarily result of net income of $16.7 million, adjusted for certain non-cash items totaling $14.5 million, consisting of depreciation and amortization, changes in fair value of interest rate swaps, and deferred income taxes, which was partially offset by cash decrease of $16.7 million due to changes in working capital, including an increase in account receivable, inventory, and prepaid expense of $2.9 million, $13.8 million, and $3.4 million, respectively, partially offset by a decrease in deposit of $2.4 million.

33

Cash flows used in investing activities. Net cash used in investing activities for the year ended December 31, 2021 was $13.3 million, which was driven by the purchase of equipment for our California and Texas facility totaling $9.4 million, cash paid of $0.9 million for our acquisition of Pacific Cup, Inc, and cash paid of $3.0 million for the purchase and improvement our new warehouse in South Carolina. Net cash used in investing activities for the year ended December 31, 2020 was $37.4 million, which was driven by the purchase of manufacturing equipment and construction of our New Jersey warehouse totaling $29.5 million and deposits paid for additional manufacturing equipment of $6.9 million.

Cash flows provided by financing activities. Net cash provided by financing activities for the year ended December 31, 2021 was $10.6 million. Cash provided by financing activities primarily consisted of net proceeds from issuance of common stock in connection with our initial public offering of $67.6 million, borrowings under our Line of Credit of $1.5 million, and borrowings under term loans of $16.0 million. Cash used in financing activities primarily included payments on the Line of Credit of $34.6 million and payments under the term loans of $39.3 million. Net cash provided by financing activities for the year ended December 31, 2020 was $22.5 million, which was a result of borrowings under the Line of Credit and term loans totaling $31.0 million. During the year ended December 31, 2020, we made long-term debt and capital lease payments of $7.7 million and cash distributions of $0.6 million.

For additional information on financing entered into subsequent to December 31, 2021, see Note 19 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Related Party Transactions

For a description of significant related party transactions, see Note 15 — Related Party Transactions in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.