Karat Packaging Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, and the information described below in this Item 9A, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at December 31, 2021 due to the material weaknesses described below. Material Weaknesses in Internal Control over Financial Reporting We identified material weaknesses in our internal control over financial reporting at December 31, 2021 as set forth below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. Management has determined that the Company has the following material weaknesses in its internal control over financial reporting at December 31, 2021: • Control Environment, Risk Assessment Management did not maintain appropriately designed entity-level controls impacting the control environment and risk assessment procedures to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to: (i) lack of structure and responsibility, insufficient number of qualified resources and inadequate oversight and accountability over the performance of controls, including retention of control evidence, and (ii) ineffective identification and assessment of risks impacting internal control over financial reporting. • Control Activities and Information and Communication These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment: ◦ Management did not design and maintain effective general controls over information systems that support the financial reporting process. Specifically, management did not design and maintain effective logical user access controls, including user access reviews, to ensure appropriate segregation of duties and adequate restrictions of users, including those with privileged access. ◦ Management did not design and implement controls over the completeness and accuracy of underlying data used in the operation of certain controls within its financial reporting process. ◦ Management did not design and implement review controls at a sufficient precision level to detect a material misstatement in financial statement areas including income taxes, valuation of accounts receivable, and valuation of inventory. Plan of Remediation of Material Weakness in Internal Control Over Financial Reporting Following the identification and communication of the material weaknesses, management commenced remediation actions relating to the material weaknesses beginning in the first quarter of fiscal year 2022. These remediation actions include: a. We performed a thorough review of users’ access rights to our significant information technology systems and implemented restrictions to user access to allow for appropriate segregation of duties. b. We hired our new Chief Financial Officer in February 2022, who brings a strong background in accounting, financial reporting and business operations in the public company marketplace. 66 Additionally, we are in the process of implementing the below changes to our processes to improve our internal control over financial reporting and to remediate the control deficiencies that gave rise to the material weaknesses: a. Under the supervision of our Audit Committee, Chief Executive Officer and Chief Financial Officer, we are initiating an internal project to implement a Sarbanes-Oxley compliance program under the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its 2013 Internal Control – Integrated Framework. We are in the process of conducting an enterprise risk assessment and establishing reporting objectives. b. We are reviewing and assessing our entity-level controls and IT general controls, documenting and evaluating existing significant processes and internal controls, and identifying potential gaps in our existing control structure. c. We are in the process of identifying third-party service providers to assist with the design and preparation of the implementation plan and perform testing of the effectiveness of internal controls. d. We are in the process of recruiting a number of key positions with our finance, operations and other support functions that can further enhance financial reporting capabilities, allow for appropriate segregation of duties, and provide appropriate oversight and reviews. Management is committed to remediating the material weaknesses in a timely fashion and to making continuous improvements of our internal control over financial reporting. Management will continually assess the effectiveness of the remediation efforts and may determine to take additional measures to address control deficiencies or modify the remediation plan described above. Management’s Annual Report on Internal Control Over Financial Reporting and Auditor Attestation This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described above. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 67 Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item will be contained in our definitive proxy statement, or Proxy Statement, to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders. Our Proxy Statement for the 2022 Annual Meeting of Stockholders is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated into this report by this reference. We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, and to all of our other officers, directors, employees and agents. The code of ethics is available on our website at www.karatpackaging.com. We intend to disclose future amendments to, or waivers from, certain provisions of our code of ethics on the above website within five business days following the date of such amendment or waiver. ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by this reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item will be set forth in the Proxy Statement and is incorporated into this report by this reference. 68 Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) We have filed the following documents as part of this Annual Report on Form 10-K: 1. The financial statements listed in the "Index to Financial Statements" on page F-1 are filed as part of this report. 2. Financial statement schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto. 3. Exhibits included or incorporated herein: See below. Exhibit No. Description 3.1* Certificate of Incorporation of Karat Packaging Inc. 3.2* Bylaws of Karat Packaging Inc. 4.1* Form of Common Stock Certificate 10.1*+ Karat Packaging Inc. 2019 Stock Incentive Plan 10.2*+ Form of Restricted Stock Unit Award Agreement Pursuant to the Karat Packaging Inc. 2019 Stock Incentive Plan 10.3*+ Form of Karat Packaging Inc. 2019 Stock Incentive Plan Stock Option Agreement 10.4* Amended and Restated Lease Agreement, by and between the Company and Global Wells Investment Group LLC for the Texas facility 10.5* Standard Industrial/Commercial Single-Tenant Lease-Gross, dated February 6, 2013, by and between First Industrial, LP, a Delaware limited partnership and Lollicup USA Inc. 10.6* First Amendment to Standard Industrial/Commercial Single-Tenant Lease-Gross, dated November 14, 2018, by and between First Industrial, LP, a Delaware limited partnership and Lollicup USA Inc. 10.7* Lease Agreement dated July 16, 2020, by and between Lollicup USA Inc. and Global Wells Investment Group LLC for the New Jersey facility 10.8* Share Exchange Agreement and Plan of Reorganization, dated as of September 27, 2018, entered into by the Company, Lollicup USA Inc., and each of Alan Yu, Marvin Cheng, Karat Global Group, LTD. (now known as Keary Global Group, LTD.) and Plutus Investment Holding Company 10.9* Assignment and Assumption of Grants, by and between Lollicup USA Inc. and Global Wells Investment Group LLC effective as of July 1, 2018 10.10* Form of Indemnification Agreement 10.11* Purchase and Sale Agreement dated April 9, 2019 by and between Global Wells Investment Group LLC and Atosa Catering Equipment, Inc. 10.12* Business Loan Agreement dated February 23, 2018 by and between Lollicup USA Inc. and Hanmi Bank 10.13* Business Loan Agreement dated March 17, 2020 by and between Lollicup USA Inc. and Hanmi Bank 10.14* Note dated April 16, 2020 by and between Lollicup USA Inc. and Hanmi Bank 10.15* Commercial Security Agreement dated June 30, 2020 by and between Global Wells Investment Group LLC and Hanmi Bank 10.16*+ Form of Employment Agreement by and between the Company and Alan Yu 10.17*+ Form of Employment Agreement by and between the Company and Marvin Cheng 10.18*+ Form of Employment Agreement by and between the Company and Joanne Wang 10.19*+ Form of Amended and Restated Employment Agreement by and between the Company and Ann Sabahat 10.20 Business Loan Agreement dated October 6, 2021 by and between Lollicup USA Inc. and Hanmi Bank 10.21***+ Employment Agreement , dated February 1, 2022, by and between the Company and Jian Guo 21.1* List of Subsidiaries 23.1 Consent of BDO USA, LLP, independent registered public ac counting firm 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act 69 32.1** Certification pursuant to Section 906 of the Sarbanes-Oxley Act 32.2** Certification pursuant to Section 906 of the Sarbanes-Oxley Act 101.INS XBRL Instance Document. 101.SCG XBRL Taxonomy Extension Schema. 101.CAL XBRL Taxonomy Extension Calculation Linkbase. 101.DEF XBRL Taxonomy Extension Definition Linkbase. 101.LAB XBRL Taxonomy Extension Label Linkbase. 101.PRE XBRL Taxonomy Extension Presentation Linkbase. * Incorporated by reference from the registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on February 18, 2021 and declared effective on April 14, 2021. ** Furnished herewith. *** Incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2022 + Indicates management compensatory agreement ITEM 16. FORM 10-K SUMMARY None. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: March 31, 2022 KARAT PACKAGING INC. By: /s/ Alan Yu Alan Yu Chief Executive Officer (Principal Executive Officer) By: /s/ Jian Guo Jian Guo Chief Financial Officer (Principal Financial Officer Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Alan Yu Chairman and Chief Executive Officer March 31, 2022 Alan Yu /s/ Jian Guo Chief Financial Officer March 31, 2022 Jian Guo /s/ Joanne Wang Director and Chief Operating Officer March 31, 2022 Joanne Wang /s/ Eric Chen Director March 31, 2022 Eric Chen /s/ Paul Chen Director March 31, 2022 Paul Chen /s/ Eve Yen Director March 31, 2022 Eve Yen 71