What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-31 · 136 added, 110 removed, 119 unchanged (67% of the section changed)

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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 our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses.

We believe our ability to source products quickly on a cost-effective basis via a diversified global supplier network, complemented by our manufacturing capabilities for select products, has established us as a differentiated provider of high-quality products relative to our competitors and supported a superior margin profile.

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.

In addition, we operate five other distribution centers located in Sumner, Washington;

Summerville, South Carolina;

Branchburg, New Jersey;

Kapolei, Hawaii;

and City of Industry, California.

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.

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2022 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.

• We recorded revenues of $423.0 million for the year ended December 31, 2022, which represents an increase of 16.1% compared to 2021.

• We continued to drive significant margin expansion, achieving a record gross margin of 31.2% for the year ended December 31, 2022 despite a $3.5 million writeoff of certain inventory items, out of which $0.9 million was determined to be out-of-period.

The impact from the out-of-period adjustment was a decrease of gross margin of 20 basis points.

The gross margin achieved in 2022 represented an increase of 160 basis points from the year ended December 31, 2021, and an increase of 100 basis points from the year ended December 31, 2020 when gross margin was boosted by significant sales from higher-margin personal protective equipment (PPE) products.

• We recorded net income of $25.8 million for the year ended December 31, 2022, which represents an increase of 15.1% compared to 2021.

• We generated record net cash provided by operating activities of $29.5 million for the year ended December 31, 2022.

• During the year ended December 31, 2022, we refinanced our $21.6 million variable interest rate term loan with a new fixed interest term loan ahead of multiple interest rate hikes in the United States.

The original loan was set to mature in May 2029 with a variable interest rate of prime less 0.25%.

Our new $28.7 million term loan matures in July 2027 with interest accruing at a fixed rate of 4.375%.

• We had financial liquidity of $63.0 million as of December 31, 2022, and declared and paid a special cash dividend of $0.35 per share on our common stock in November 2022.

• We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $45.6 million for the year ended December 31, 2022, representing an increase of $8.6 million, or 23.2% compared the year ended December 31, 2021.

• During the year ended December 31, 2022, we further invested in the enhancement of our distribution infrastructure, adding two distribution centers in the City of Industry, California and Kapolei, Hawaii.

• During the year ended December 31, 2022, we continued our efforts and commitment to sustainability by investing, under a joint venture agreement, $4.0 million into establishing Bio Earth, a new Taiwanese corporation for the manufacturing of compostable foodservice products from bagasse.

As of December 31, 2022, the incorporation and registration of Bio Earth had not been completed.

Trends in Our Business

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• 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.

We believe this trend will have a positive long-lasting impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.

• Most of our products are sourced from vendors abroad and as a result we incur freight costs from these overseas import shipments.

We believe fluctuations in freight cost can have either a positive or a negative impact on our results of operations, depending on whether such freight costs increase or decrease.

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.

administration and whether the previously imposed tariffs are removed.

• The cost of raw materials used to manufacture our products, including polyethylene terephthalate, or PET, plastic resin, aluminum and paper boards may continue to fluctuate.

Since negotiated sales contracts and the market largely determine the pricing for our products, we are, at times, limited in our ability to raise prices and pass through any impacts of inflation to our costs.

There can also be lags between cost inflation and the implementation of price increases, which could negatively impact our gross margin.

We believe price fluctuations will have either a positive or a negative impact on our results of operations in the future, depending on whether raw material costs increase or decrease and whether we can successfully implement price increases to offset the impacts of inflation.

• Supplier chain disruptions could have a long-lasting impact on our operations and financial results.

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 navigate the challenging environment and adjust our operating models effectively, including the accurate forecast of demand, the successful procurement of raw materials and products and the effective management of our inventory, production and distribution.

• Fluctuations in foreign currency exchange rates could impact either positively or negatively various aspects of our business activities, including but not limited to our purchasing power and capacity to source inventory.

Critical Accounting Estimates

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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

uncollectible.

The allowance is based on an analysis of historical bad debt write-offs, current past due customers in the aging, risk profiles associated with different customer types, as well as an assessment of specific identifiable customer accounts considered at risk or 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.

As of December 31, 2022, and 2021, we had a total allowance for doubtful accounts of $1.3 million and $0.3 million, respectively.

Inventory Reserve

The Company maintains a reserve for excess and obsolete inventory and carries its inventory at net realizable value, taking into account 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.

A significant change in the demand or sales price could result in additional reserve and materially affect our future financial results.

We had an inventory reserve of $0.7 million as of both December 31, 2022, and 2021.

Stock-Based Compensation

Stock-based compensation expense related to employee stock options is accounted for in accordance with ASC 718, Compensation — Stock Compensation .

Stock-based compensation expense related to employee stock options is accounted for in accordance with Accounting Standard Codification ("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.

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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.

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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.

Stock-based compensation expense for both the years ended December 31, 2022 and 2021 was $2.0 million.

Results of Operations

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Operating income 30,015 23,145

Other income/(expense) 4,383 (5,770)

Provision for income tax expense 5,089 5,259

Other income, net 2,498 4,383

Provision for income taxes 6,676 5,089

Net income $ 25,837 $ 22,439

Net sales were $423.0 million for the year ended December 31, 2022 compared to $364.2 million for the year ended December 31, 2021, an increase of $58.7 million, or 16%.

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

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.

N et 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 .

The increase was attributable to an increase of $48.3 million in net sales to our existing customers and incremental net sales of $10.4 million from more than 15,000 new customers acquired during the year ended December 31, 2022.

Of the total net sales increase of $58.7 million compared to the prior year, $43.7 million was attributable to favorable pricing primarily during the first half of the current year, $13.3 million was related to increase in volume and change in product mix, and $1.7 million was due to higher logistic services and shipping revenue.

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 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%.

F reight 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.

Cost of goods sold was $290.9 million for the year ended December 31, 2022 compared to $256.4 million for the year ended December 31, 2021, an increase of $34.5 million, or 13%.

The increase was primarily due to an increase of $19.4 million in freight and duty costs to acquire inventory from overseas as ocean freight rates remained elevated for the majority of 2022, and an increase of $11.6 million in product costs driven by the general increase in raw materials and labor costs.

Additionally, cost of goods sold for the year ended December 31, 2022 included a $3.5 million writeoff of certain inventory items, out of which $0.9 million was determined to be out-of-period and was recorded to correct immaterial errors in the quarterly and annual financial statements previously issued.

These increases were partially offset by efficiencies and productivity improvements realized and the favorable foreign currency exchange rate impact from the strengthening of the United States Dollar against Taiwan New Dollar.

Gross profit was $132.1 million for the year ended December 31, 2022 compared to 107.8 million for the year ended December 31, 2021, an increase of $24.3 million, or 22%.

Gross margin was 31.2% for the year ended December 31, 2022 compared to 29.6% for the year ended December 31, 2021.

Despite higher freight and duty costs and the unfavorable impact from the out-of-period inventory write-off, the gross margin increased primarily due to margin expanding factors including a shift to higher margin items such as eco-friendly products, price increases implemented during the first half of the current year to partially offset higher ocean freight, product and labor costs, favorable foreign currency exchange rate from the strengthening of the United States Dollar against Taiwan New Dollar and improved operating efficiencies and productivity improvements.

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 expenses were $102.1 million for the year ended December 31, 2022 compared to $84.7 million for the year ended December 31, 2021, an increase of $17.4 million, or 21%.

The increase was primarily due to an increase of $6.0 million in payroll-related costs due to workforce expansion, an increase of $5.4 million in shipping and transportation costs to transfer inventory between our warehouses and to deliver products to our customers amidst rising fuel prices, an increase of $2.4 million in rental expense primarily due to additional properties leased, an increase of $2.1 million in production expense resulting from higher repair and maintenance costs incurred, an increase of $0.6 million in bad debt

expense associated with higher sales, and an impairment of deposit of $0.5 million due to management's decision to abandon a capital expenditure project, partially offset by a decrease of $0.6 million in professional services expense.

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 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 .

Operating income was $30.0 million for the year ended December 31, 2022 compared to $23.1 million for the year ended December 31, 2021, an increase of $6.9 million, or 30%.

The increase was primarily due to an increase in gross profit of $24.3 million partially offset by an increase in operating expenses of $17.4 million, as discussed above.

Other income, net

Other income, net was $2.5 million for the year ended December 31, 2022 compared to $4.4 million for the year ended December 31, 2021, a decrease of $1.9 million, or 43%.

The $2.5 million other income for the year ended December 31, 2022 consisted primarily of interest income of $2.2 million from the gain associated with the interest rate swap, a gain on foreign currency transactions of $1.6 million, and rental income of $0.9 million, partially offset by interest expense on the line of credit and term loans totaling $2.0 million.

The $4.4 million other income for the year ended December 31, 2021 consisted primarily of gain on forgiveness of debt of $5.0 million, interest income of $1.5 million due to the change in the fair value of the interest rate swap, and rental income of $0.9 million, partially offset by interest expense incurred primarily on the line of credit and term loans totaling $2.9 million.

Provision for income taxes

Provision for income taxes was $6.7 million for the year ended December 31, 2022 compared to $5.1 million for the year ended December 31, 2021, an increase of $1.6 million, or 31%.

The Company’s effective tax rate was 20.5% for the year ended December 31, 2022 compared to 18.5% for the year ended December 31, 2021.

The effective tax rate was lower for the year ended December 31, 2021, primarily due to the gain on forgiveness of debt of $5.0 million, which was a discrete item not presented for the year ended December 31, 2022.

Net income was $25.8 million for the year ended December 31, 2022 compared to $22.4 million for the year ended December 31, 2021, an increase of $3.4 million, or 15%.

The increase was primarily driven by an increase in operating income of $6.9 million partially offset by a decrease in other income, net of $1.9 million and an increase in the provision for income taxes of approximately $1.6 million, as discussed above.

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;

We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with US GAAP.

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.

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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.

Adjusted EBITDA is a financial measure is calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) IPO related expenses, (vi) stock-based compensation expense, (vii) gain on forgiveness of debt, and (viii) out-of-period adjustment.

Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.

We present Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our financial performance.

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Reconciliation of Adjusted EBITDA (unaudited):

(in thousands)

Amount % of Revenue Amount % of Revenue

(in thousands, except percentages)

Amount % of Net Sales Amount % of Net Sales

$ 25,837 6.1 % $ 22,439 6.2 %

Add (deduct):

Interest income (2,226) (0.5) (1,512) (0.4)

Interest expense 2,017 0.5 2,907 0.8

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Depreciation and amortization 10,405 2.4 10,044 2.8

IPO related expenses

1,055 0.3 — —

Gain on forgiveness of debt

(5,000) (1.4) — —

Stock-based compensation expense

2,047 0.5 2,026 0.5

Other non-GAAP financial data:

IPO related expenses — — 1,055 0.3

Out-of-period adjustment (1) 879 0.2 — —

Gain on forgiveness of debt — — (5,000) (1.4)

Adjusted EBITDA $ 45,635 10.8 % $ 37,048 10.2 %

(1) The out-of-period adjustment represented an inventory write-off recorded during the year ended December 31, 2022, which management believes was not representative of our underlying operating performance.

The adjustment was to correct immaterial errors in the accounting for certain inventory items in our previously issued quarterly and annual financial statements.

The impact of the inventory write-off was an increase to cost of goods sold of $0.9 million for the year ended December 31, 2022.

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

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.

Our primary sources of liquidity are cash provided by operations, borrowings under our line of credit with the Hanmi Bank (the “Line of Credit”) and promissory notes, and during the year ended December 31, 2021, net proceeds of our IPO offering totaling $67.6 million.

On an annual basis, we have typically generated positive cash flows from operations.

Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on global economic conditions and our ability to navigate challenging macro environment at times.

As described in Note 7 — Line of Credit to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, the Line of Credit is available for working capital and general corporate purposes, and is secured by our assets.

It consists of a $40.0 million revolving loan facility and a standby letter of credit sublimit.

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.

On October 6, 2021, we amended the Line of Credit.

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.

requirement, and (5) added a minimum fixed charge coverage ratio in the financial covenant requirement.

On August 18, 2022, we amended the Line of Credit again which increased the standby letter of credit sublimit to $2.0 million.

As of December 31, 2022, the amount issued under the standby letter of credit was $1.1 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $38.9 million.

As described in Note 19 — Subsequent Events , on March 14, 2023, we amended the Line of Credit again, which among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any line of credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.

As described in Note 9 — Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the “2027 Term Loan”).

The 2027 Term Loan has an initial balance of $20.7 million and an option to request for additional advances up to a maximum of $8.0 million through June 2023, which we have not exercised as of December 31, 2022.

Interest accrues at a fixed rate of 4.375% per annum.

Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity.

The 2027 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by 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.

Proceeds from the 2027 Term Loan were used to pay down an existing term loan with the same lender, which was set to mature in May 2029 with interest accruing at prime rate less 0.25%, and had an outstanding balance of $20.6 million as of the repayment date.

Additionally, as of December 31, 2022, we have a $23.0 million term loan that matures in September 30, 2026 (the “2026 Term Loan”).

The 2026 Term Loan had an initial balance of $16.1 million and an option to request for additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022.

Interest accrues at a fixed rate of 3.50% per annum.

Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity.

The 2026 Term 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, 2022, 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.

As of December 31, 2022, we had $0.0 million in outstanding balance on the Line of Credit bearing an interest per annum of prime rate less 0.25% (7.25% as of December 31, 2022), $20.6 million in outstanding balance under the 2027 Term Loan, and $22.2 million in outstanding balance under the 2026 Term Loan.

Additionally, our board of directors declared a special cash dividend of $0.35 per common share, which was paid on November 30, 2022 totaling $7.0 million to shareholders of record at the close of business on November 21, 2022.

As described in Note 4 — Joint Venture in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, our joint venture agreement (the "JV Agreement") to establish a new corporation, Bio Earth, to build a factory in Taiwan requires significant investment.

As of December 31, 2022, we made net payments totaling $4.0 million as stipulated in the JV Agreement and expect to make the remaining net investment payments totaling $2.5 million under the JV Agreement during the year ended December 31, 2023.

As of December 31, 2022, the incorporation and registration of Bio Earth had not been completed.

In addition to the committed investment payments under the JV agreement to be made in 2023, we also have certain contractual obligations, such as operating lease obligations and purchase obligations.

At December 31, 2022, 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 2031.

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.

As described further in Note 14 — Leases 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 $16.1 million of operating lease liabilities as of the year ended December 31, 2022 with minimum lease payments ranging from approximately $1.1 million to $5.2 million on an annual basis over the next five years.

We had purchase obligations of $6.9 million outstanding as of the year ended December 31, 2022, all of which are due in 2023.

Such purchase obligations are primarily related to the purchase of machinery and equipment.

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.

As of December 31, 2022, we had $1.1 million of letters of credits issued and outstanding under our Line of Credit.

In February 2023, management committed to a plan to sell certain manufacturing equipment to an unrelated third-party vendor in Taiwan, as we started to pivot into a more asset-light growth model by increasing import and scaling back manufacturing in California.

We expect to receive approximately $2.6 million in cash proceeds from the sale of the equipment in the next 12 to 24 months.

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.

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.

In addition, we may consider making strategic acquisitions and investments and increasing our investment in Bio Earth, which could require significant liquidity.

The rapidly changing macroeconomic and geopolitical dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects beyond 2022.

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 operating infrastructure and e-commerce platform for at least the next 12 months.

We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value.

The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders.

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Working capital $ 84,547 $ 72,108 $ 12,439

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.

As of December 31, 2022, we had working capital of $84.5 million compared to working capital of $72.1 million as of December 31, 2021, representing an increase of $12.4 million, or 17%.

The improvement in working capital was driven by an increase of $20.9 million in current assets partially offset by an increase of $8.5 million in current liabilities.

The increase in current assets was primarily driven by an increase in inventory of $12.7 million to support higher sales volume and an increase in cash and cash equivalents of $9.6 million mainly due to strong cash flows from operating activities.

The increase in current liabilities was primarily driven by an increase in operating lease liability due within twelve months of $4.5 million, as we adopted ASU 2016-02 (Topic 842), “ Leases ” on January 1, 2022, and an increase in accounts payable and related party payable of $3.0 million.

For additional information on financing entered into subsequent to December 31, 2022, 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.

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

The following table summarizes cash flow for the years ended December 31, 2022 and 2021:

Year Ended December 31,

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Net cash used in investing activities (17,845) (13,281)

Net cash provided by financing activities 10,637 22,450

Net cash (used in) provided by financing activities (2,071) 10,637

Net change in cash and cash equivalents $ 9,558 $ 6,035

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.

Net cash provided by operating activities was $29.5 million for the year ended December 31, 2022, primarily the result of net income of $25.8 million, adjusted for certain non-cash items totaling $18.6 million, consisting mainly of depreciation and amortization, stock-based compensation, adjustments to accounts receivable and inventory reserves, changes in fair value of interest rate swap, deferred income taxes and asset impairment.

In addition, cash decreased $15.0 million, primarily as a result of changes in working capital, which included an increase of $16.2 million in inventory buildup to accommodate higher sales volume, an increase of $1.5 million in prepaid expenses and other current assets, and a decrease of $3.8 million in operating lease liability due within twelve months, partially offset by a decrease of $1.9 million in accounts receivable due to changes in the timing of collections, an increase of $3.0 million in accounts payable and related party payable, and an increase of $1.6 million in accrued expenses.

Net cash provided by operating activities was $8.7 million for the year ended December 31, 2021, primarily the result of net income of $22.4 million, adjusted for certain non-cash items totaling $6.6 million, consisting mainly of depreciation and amortization, stock-based compensation, changes in fair value of interest rate swap, and gain on forgiveness of debt.

In addition, cash decreased $20.3 million, primarily as a result of changes in working capital, which included an increase of $10.9 million in inventory buildup to accommodate higher sales volume, an increase of $8.9 million in account receivable due to changes in the timing of collections, a decrease of $4.6 million in accounts payable and related party payable, partially offset by a $1.4 million decrease in prepaid expenses and other current assets, and an increase of $2.9 million in accrued expenses.

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.

Net cash used in investing activities was $17.8 million for year ended December 31, 2022, which primarily included $12.1 million of deposits paid for additional property and equipment, $4.0 million of net investment pursuant to the JV Agreement, $2.7 million paid to purchase property and equipment, partially offset by $0.8 million received from the settlement of the interest rate swap.

Net cash used in investing activities was $13.3 million for year ended December 31, 2021, which included $8.2 million of deposits paid for additional property and equipment, $4.2 million paid to purchase property and equipment, and $0.9 million for our acquisition of Pacific Cup, Inc.

Cash flows (used in) provided by financing activities .

Net cash used in financing activities was $2.1 million for the year ended December 31, 2022, which primarily included $21.6 million of payments made towards the term loans, $21.1 million of payments on the Line of Credit, and $7.0 million of dividend payments to shareholders, partially offset by $21.1 million of borrowings under the Line of Credit, and $27.5 million of borrowings under the term loans.

Net cash provided by financing activities was $10.6 million for the year ended December 31, 2021 which primarily included $67.6 million of proceeds from the issuance of common stock in connection with our initial public offering, and $16.0 million of borrowings under the term loans, partially offset by $39.3 million of payments made towards the term loans, and $34.6 million of payments on the Line of Credit.

For additional information on financing entered into subsequent to December 31, 2022, 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis