What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-16 compared with 2022-03-31 · 328 added, 424 removed, 566 unchanged (57% of the section changed)

15 unchanged sentences

We have audited the accompanying consolidated balance sheets of Karat Packaging Inc.

and subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended, the related notes (collectively referred to as the “consolidated financial statements”).

and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Method Related to Leases

As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has changed its method for accounting for leases effective January 1, 2022 due to the adoption of Accounting Standards Codification 842 - Leases.

Basis for Opinion

22 unchanged sentences

Current assets

Cash and cash equivalents (including $ 1.2 million and $ 0.1 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Cash and cash equivalents (including $ 2,022 and $ 1,163 associated with variable interest entity at December 31, 2022 and 2021, respectively)

$ 16,041 $ 6,483

Accounts receivable, net of allowance for doubtful accounts of $ 0.3 million at both December 31, 2021 and 2020

Accounts receivable, net of allowance for bad debt of $ 1,260 and $ 250 at December 31, 2022 and 2021, respectively (including $ 6 and $ 24 associated with variable interest entity at December 31, 2022 and 2021, respectively)

29,912 32,776

Inventories 71,206 58,472

Prepaid expenses and other current assets (including $ 0.1 million associated with variable interest entity at both December 31, 2021 and 2020)

Prepaid expenses and other current assets (including $ 191 and $ 63 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Total current assets 123,800 102,872

Property and equipment, net (including $ 46.6 million and $ 47.8 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Property and equipment, net (including $ 45,399 and $ 46,612 associated with variable interest entity at December 31, 2022 and 2021, respectively)

95,568 93,475

2 unchanged sentences

Intangible assets, net 353 380

Deferred tax asset — 64

Other assets (including $ 0.1 million associated with variable interest entity at both December 31, 2021 and 2020)

Operating right-of-use assets 15,713 —

Other assets (including $ 38 and $ 65 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Total assets $ 252,175 $ 207,599

1 unchanged sentence

Current liabilities

Accounts payable (including $ 0.1 million and $ 0.6 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Accounts payable (including $ 2 and $ 136 associated with variable interest entity at December 31, 2022 and 2021, respectively)

$ 18,559 $ 18,470

Accrued expenses (including $ 0.1 million associated with variable interest entity at both December 31, 2021 and 2020)

Accrued expenses (including $ 625 and $ 68 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Related party payable 4,940 2,003

Credit cards payable — 794

Income taxes payable 85 41

Customer deposits (including $ 0.1 million and $ 0.0 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Capital leases, current portion — 321

Debt, current portion (including $ 1.2 million and $ 0.7 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Income taxes payable (including $ 0 and $ 9 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Customer deposits (including $ 165 and $ 88 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Debt, current portion (including $ 957 and $ 1,178 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Operating lease liabilities, current portion 4,511 —

Total current liabilities 39,253 30,764

December 31, 2022 December 31, 2021

Deferred tax liability 5,156 5,634

Line of credit — 33,169

Long-term debt, net of current portion and debt discount of $ 0.2 million and $ 0.1 million at December 31, 2021 and December 31, 2020, respectively (including $ 35.3 million and $ 36.7 million associated with variable interest entity at December 31, 2021 and 2020, respectively, and debt discount of $ 0.2 million and $ 0.1 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Long-term debt, net of current portion and debt discount of $ 216 and $ 200 at December 31, 2022 and December 31, 2021, respectively (including $ 41,558 and $ 35,339 associated with variable interest entity at December 31, 2022 and 2021, respectively, and debt discount of $ 216 and $ 200 associated with variable interest entity at December 31, 2022 and 2021, respectively)

41,558 35,339

Capital leases, net of current portion — 290

Other liabilities (including $ 2.6 million and $ 3.9 million associated with variable interest entity at December 31, 2021 and 2020, respectively)

Operating lease liabilities, net of current portion 11,623 —

Other liabilities (including $ 1,302 and $ 2,637 associated with variable interest entity at December 31, 2022 and 2021, respectively)

Total liabilities 100,242 75,574

Commitments and Contingencies (Note 18)

December 31, 2021 December 31, 2020

Karat Packaging Inc.

stockholders’ equity

Preferred stock, $ 0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding, as of December 31, 2022 and 2021

Common stock, $ 0.001 par value, 100,000,000 shares authorized, 19,908,005 and 19,885,005 shares issued and outstanding, respectively, as of December 31, 2022 and 19,827,417 and 19,804,417 shares issued and outstanding, respectively, as of December 31, 2021

19 unchanged sentences

Selling expenses 35,844 32,261

General and administrative expenses (including $ 2.5 million and $ 2.0 million associated with variable interest entity for the years ended December 31, 2021 and 2020, respectively)

General and administrative expenses (including $ 2,775 and $ 2,550 associated with variable interest entity for the years ended December 31, 2022 and 2021, respectively)

66,227 52,421

2 unchanged sentences

Other income (expenses)

Rental income (including $ 0.9 million and $ 0.3 million associated with variable interest entity for the years ended December 31, 2021 and 2020, respectively)

Other income 259 72

Loss on foreign currency transactions ( 412 ) ( 688 )

Gain on sale of asset — 16

Interest expense, net (including $ 0.5 million and $ 2.9 million associated with variable interest entity for the years ended December 31, 2021 and 2020, respectively)

Rental income (including $ 949 and $ 931 associated with variable interest entity for the years ended December 31, 2022 and 2021, respectively)

Other (expense) income (including $ 0 and $ 9 other income associated with variable interest entity for the years ended December 31, 2022 and 2021, respectively)

Gain (loss) on foreign currency transactions 1,568 ( 412 )

Interest income (including $ 2,171 and $ 1,270 associated with variable interest entity for the years ended December 31, 2022 and 2021, respectively)

Interest expense (including $ 1,821 and $ 1,781 associated with variable interest entity for the years ended December 31, 2022 and 2021, respectively)

( 2,017 ) ( 2,907 )

Gain on forgiveness of debt — 5,000

Total other income (expenses) 4,383 ( 5,770 )

Total other income, net 2,498 4,383

Income before provision for income taxes 32,513 27,528

1 unchanged sentence

Net income 25,837 22,439

Net income (loss) attributable to noncontrolling interest 1,661 ( 849 )

Net income attributable to noncontrolling interest 2,189 1,661

Net income attributable to Karat Packaging Inc.

18 unchanged sentences

15,190,000 $ 15 ( 23,000 ) $ ( 248 ) $ 13,981 $ 18,656 $ 32,404 $ 7,464 $ 39,868

Treasury stock purchases — — ( 23,000 ) ( 248 ) — — ( 248 ) — ( 248 )

Dividends paid to stockholders ( 0.04 per share)

— — — — — ( 606 ) ( 606 ) — ( 606 )

Net income (loss) — — — — — 17,517 17,517 ( 849 ) 16,668

Balance, December 31, 2020

15,190,000 $ 15 ( 23,000 ) $ ( 248 ) $ 13,981 $ 18,656 $ 32,404 $ 7,464 $ 39,868

Issuance of common stock in connection with

8 unchanged sentences

19,827,417 $ 20 ( 23,000 ) $ ( 248 ) $ 83,694 $ 39,434 $ 122,900 $ 9,125 $ 132,025

Cash dividends declared ($ 0.35 per share)

— — — — ( 6,964 ) ( 6,964 ) — ( 6,964 )

Issuance of common stock upon vesting of restricted stock units 75,588 — — — — — — — —

Stock-based compensation — — — — 2,047 — 2,047 — 2,047

Exercise of stock options 5,000 — — — 51 — 51 — 51

Noncontrolling interest tax withholding — — — — — — ( 1,063 ) ( 1,063 )

Net income — — — — — 23,648 23,648 2,189 25,837

Balance, December 31, 2022

19,908,005 $ 20 ( 23,000 ) $ ( 248 ) $ 85,792 $ 56,118 $ 141,682 $ 10,251 $ 151,933

The accompanying notes to the consolidated financial statements are an integral part of these statements.

8 unchanged sentences

Depreciation and amortization 10,405 10,044

Provision for bad debt — 149

Reserve for inventory obsolescence 68 321

Adjustments to allowance for bad debt 1,010 —

Adjustments to inventory reserve 6 68

Write-off of inventory 3,470 1,424

Gain on sale of asset ( 32 ) —

4 unchanged sentences

Gain on forgiveness of debt — ( 5,000 )

Amortization of operating right-of-use assets 3,822 —

Impairment of deposit 465 —

(Increase) decrease in operating assets

2 unchanged sentences

Prepaid expenses and other current assets ( 1,514 ) 1,389

Due from affiliated companies — ( 840 )

Deposits ( 145 ) ( 64 )

4 unchanged sentences

Related party payable 2,937 ( 3,035 )

Credit cards payable ( 794 ) ( 280 )

Income taxes payable ( 85 ) 44

Customer deposits 66 664

Operating lease liability ( 3,780 ) —

Other liabilities 149 300

Other payable — ( 794 )

Net cash provided by operating activities $ 29,474 $ 8,679

1 unchanged sentence

Purchases of property and equipment ( 2,657 ) ( 4,175 )

Proceeds on disposal of property and equipment — 24

Proceeds from disposal of property and equipment 77 —

Deposits paid for property and equipment ( 12,090 ) ( 8,206 )

Effect on initial consolidation of Lollicup Franchising Inc, net of cash acquired — ( 893 )

Deposits paid for joint venture investment ( 5,876 ) —

Deposits refunded from joint venture investment 1,876 —

Proceeds from settlement of interest rate swap 825 —

Acquisition of Pacific Cup, Inc., net of cash acquired — ( 900 )

10 unchanged sentences

Payments on capital lease obligations — ( 611 )

Treasury stock acquired — ( 248 )

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

Net increase (decrease) in cash and cash equivalents 6,035 ( 354 )

Payments of noncontrolling interest tax withholding ( 1,063 ) —

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

Net increase in cash and cash equivalents 9,558 6,035

Cash and cash equivalents

2 unchanged sentences

Supplemental disclosures of non-cash investing and financing activities:

Capital expenditures funded by capital lease borrowings $ — $ 23

Transfers from deposit to property and equipment $ 9,859 $ 4,981

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(“Karat Packaging”) was incorporated on September 26, 2018 as a Delaware corporation and became the holding company for Lollicup (collectively, the “Company”) through a share exchange with the shareholders of Lollicup.

The Company is a manufacturer and distributor of environmentally friendly, single-use disposable products used in a variety of restaurant and foodservice settings.

The Company supplies a wide range of products for the foodservice industry, including food containers, tableware, cups, lids, cutlery, and straws.

On April 15, 2021, the Company completed an initial public offering of shares of its common stock.

The shares are listed on the NASDAQ Global Market under the symbol "KRT".

The Company is a manufacturer and distributor of single-use disposable products used in a variety of restaurant and foodservice settings.

The Company supplies a wide range of products such as food containers, tableware, cups, lids, cutlery, and straws.

The products are available in plastic, paper, biopolymer-based and other compostable forms.

In 2020, the Company began to supply personal protective equipment related products to its customers such as face shields and face masks.

In addition to manufacturing and distribution, the Company offers customized solutions to the customers, including new product development, design, printing, and logistics services.

The Company also supplies products to smaller chains and businesses including boutique coffeehouses, bubble tea cafes, pizza parlors and frozen yogurt shops.

The Company is also beginning to supply products to national and regional supermarkets as well as convenience stores.

The Company currently operates manufacturing facilities and distribution and fulfillment center in Chino, California Rockwall, Texas, and Kapolei, Hawaii.

In addition, the Company operates four other distribution centers located in Branchburg, New Jersey, Summer, Washington, Summerville, South Carolina and Kapolei, Hawaii.

In addition to manufacturing and distribution, the Company offers customized solutions to customers, including new product development, design, printing, and logistics services, and distributes certain specialty food and beverages products, such as boba and coffee drinks.

The Company supplies products to national and regional distributors, supermarkets, restaurants, and convenience stores as well as to smaller chains and businesses including boutique coffee houses, bubble tea cafes, pizza parlors and frozen yogurt shops.

The Company currently operates manufacturing facilities and distribution and fulfillment centers in Chino, California;

Rockwall, Texas and Kapolei, Hawaii.

In addition, the Company operates six other distribution centers located in Branchburg, New Jersey;

Sumner, Washington;

Summerville, South Carolina;

Kapolei, Hawaii and City of Industry, California.

Summary of Significant Accounting Policies

2 unchanged sentences

Principles of Consolidation:

The consolidated financial statements include the accounts of the Karat Packaging and its wholly owned and controlled operating subsidiaries Lollicup and Lollicup Franchising, LLC (“Lollicup Franchising”) (effective September 1, 2020, refer to Note 3) and Global Wells Investment Group LLC (“Global Wells”), a variable interest entity wherein the Company is the primary beneficiary.

The consolidated financial statements include the accounts of Karat Packaging and its wholly-owned and controlled operating subsidiaries, Lollicup, Lollicup Franchising, LLC (“Lollicup Franchising”) and Global Wells, a variable interest entity wherein the Company is the primary beneficiary.

All intercompany accounts and transactions have been eliminated.

1 unchanged sentence

The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary.

The Company became the primary beneficiary of Global Wells on March 23, 2018 upon execution of an operating lease agreement allowing the Company to lease Global Wells’ facility.

Noncontrolling interests represent third-party equity ownership interests in Global Wells.

The Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the Company’s stockholders’ equity.

The amount of net income (loss) attributable to noncontrolling interests is disclosed in the consolidated statements of income.

The amount of net income attributable to noncontrolling interests is disclosed in the consolidated statements of income.

Tax payments made by the Company on behalf of the noncontrolling interests are deducted from their equity balances, as shown in the consolidated statements of stockholders’ equity.

Estimates and Assumptions:

6 unchanged sentences

This segment consists of manufacturing and supply of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, foam, post-consumer recycled content and renewable materials.

It also consists of the distribution of personal protective equipment related products such as face shields and face masks.

It also consists of the distribution of certain specialty food and beverage products, such as boba and coffee drinks, and certain restaurant and warehouse supplies.

The Company’s long-lived assets are all located in the United States, and its revenues are all generated in the United States.

2 unchanged sentences

Diluted earnings per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive shares.

Out-of-period adjustment:

During the the year ended December 31, 2022, the Company recorded a $ 3,500,000 write off of certain inventory items out of which $ 879,000 was determined to be out-of-period and was recorded to correct immaterial errors in its previously issued quarterly and annual financial statements.

The impact of the inventory out-of-period adjustment was a decrease to inventory, operating income and income before provision for income taxes of $ 879,000 , an increase to cost of goods sold of $ 879,000 , and a decrease to net income of $ 664,000 for the year ended December 31, 2022.

Reclassification:

Certain prior period amounts have been reclassified to conform to the current period presentation.

These reclassifications had no effect on previously reported totals for assets and liabilities, shareholders' equity, cash flows or net income.

Cash and cash equivalents:

1 unchanged sentence

At December 31, 2022 and 2021, cash and cash equivalents were comprised of cash held in money markets, cash on hand and cash deposited with banks.

Accounts Receivable and Allowance for Doubtful Accounts:

Accounts Receivable and Allowances:

Accounts receivable consists primarily of amounts due from customers.

1 unchanged sentence

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.

The Company also maintains a sales allowance primarily related to potential billing adjustments due to situations such as product returns and damages.

The amount of the sales allowance is determined based on a historical transaction analysis and any additions to the sales allowance are recorded as a reduction to net revenue.

Inventories consist of raw materials, work-in-process, and finished goods.

Inventory cost is determined using the first-in, first-out (FIFO) method and valued at lower of cost or net realizable value.

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

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.

Property and Equipment:

3 unchanged sentences

The estimated useful life of property and equipment are as follows:

Machinery and equipment 5 to 10 years

Machinery and equipment 5 years to 15 years

Leasehold improvements Lesser of useful life or lease term

1 unchanged sentence

Furniture and fixtures 7 years

Building 28 to 40 years

Property held under capital leases 3 to 5 years

Building and building improvements 10 years to 40 years

Property held under capital leases 3 years to 5 years

Computer hardware and software 3 years

4 unchanged sentences

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

The impairment test comprises two steps.

If such events or circumstances exist, an impairment test is performed which comprises of two steps.

The first step compares the carrying amount of the asset to the sum of expected undiscounted future cash flows.

If the sum of expected undiscounted future cash flows exceeds the carrying amount of the asset, no impairment is taken.

If the sum of expected undiscounted future cash

flows exceeds the carrying amount of the asset, no impairment is taken.

If the sum of expected undiscounted future cash flows is less than the carrying amount of the asset, a second step is warranted and an impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash flows.

8 unchanged sentences

The Company performs an impairment test of goodwill annually or whenever events and circumstances indicate that the carrying amount of goodwill may exceed its fair value.

The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the

Company as a whole.

The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

During the years ended December 31, 2022 and 2021, the Company determined no impairments have occurred.

8 unchanged sentences

Government grants are not recognized unless there is reasonable assurance that the Company and Global Wells will comply with the grants’ conditions and that the grants will be received.

As of December 31, 2021, the Company and Global Wells received cumulative grants of $ 1,200,000 and $ 1,302,000 , respectively.

As of December 31, 2020, the Company and Global Wells received cumulative grants of $ 900,000 and $ 1,302,000 , respectively.

As of December 31, 2022 and 2021, the Company received cumulative grants of $ 1,350,000 and $ 1,200,000 , respectively.

As of both December 31, 2022 and 2021, Global Wells received cumulative grants of $ 1,302,000 .

These grants are reported as deferred income within other liabilities in the accompanying consolidated balance sheets as there are conditions attached to the grants that the Company and Global Wells have not met.

These conditions include requiring its facility in Rockwall, Texas to maintain a certain minimum tax value for the next five calendar years through 2023 (the “Required Period”), continue operations in the facility for the Required Period, have a minimum number of full time equivalent employees with a minimum average annual gross wage employed in the operation of the facility in the Required Period, and promise to not engage in a pattern or practice of unlawful employment of aliens during the Required Period.

These conditions include requiring the facility in Rockwall, Texas to maintain a certain minimum tax value for 5 years calendar years through 2024 (the “Required Period”), continue operations in the facility for the Required Period, have a minimum number of full time equivalent employees with a minimum average annual gross wage employed in the operation of the facility in the Required Period, and promise to not engage in a pattern or practice of unlawful employment of aliens during the Required Period.

Derivative Instruments:

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic No.

815, Derivatives and Hedging , requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value.

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging , requires companies to recognize all of its derivative instruments as either assets or liabilities in the balance sheet at fair value.

The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.

For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statements of income during the current period.

For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of income during the current period.

The Company and Global Wells entered into certain interest rate swaps to manage the interest rate risk, and accounted for such interest rate swaps as a derivative instrument under ASC 815.

The interest rate swaps was not designated for hedge accounting and as such, the change in the fair value of interest rate swaps is recognized as interest income/expense in the accompanying consolidated statements of income.

The interest rate swaps were not designated for hedge accounting and as such, the change in the fair value of interest rate swaps was recognized as interest income (expense) in the accompanying consolidated statements of income.

Variable Interest Entities:

The Company has a variable interest in two entities, Global Wells and Lollicup Franchising, LLC (prior to September 1, 2020, the acquisition date, see Note 3).

The Company has a variable interest in Global Wells.

In 2017, Lollicup along with three other unrelated parties formed Global Wells.

Lollicup has a 13.5 % ownership interest and a 25 % voting interest in Global Wells, located in Rockwall, Texas.

The purpose of this new entity is to own, construct, and manage a warehouse and manufacturing facility.

The purpose of this entity is to own, construct, and manage a warehouse and a

manufacturing facility.

Global Wells’ operating agreement may require its members to make additional contributions only upon the unanimous decision of the members or where the cash in Global Wells’ bank account falls below $ 50,000 .

In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $ 25,000 .

Global Wells was determined to be a variable interest entity in accordance with ASC Topic 810, Consolidations.

However, at the time the investment was made, it was determined that Lollicup was not the primary beneficiary .

Global Wells was determined to be a variable interest entity in accordance with ASC Topic 810, Consolidations, however, at the time the investment was made, it was determined that Lollicup was not the primary beneficiary.

In 2018, Lollicup entered into an operating lease with Global Wells (“Texas Lease”).

In June 2020, the Company entered into another operating lease with Global Wells (“New Jersey Lease”).

In 2020, the Company entered into another operating lease with Global Wells (“New Jersey Lease”).

Upon entering into the Texas Lease with Lollicup on March 23, 2018, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in Global Wells.

As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC Topic 810, for the period from March 23, 2018.

As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC 810, for the period from March 23, 2018.

The monthly lease payments for the Texas Lease and New Jersey Lease are eliminated upon consolidation.

1 unchanged sentence

Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets;

they represent claims against the specific assets of Global Wells, except for the Company’s guarantee of Global Wells’ term loans.

Global Wells has a term loan with a financial institution, which provides for advances up to $ 21,580,000 and expires May 2029 (the “2029 Term Loan ” ).

The 2029 Term Loan is collateralized by substantially all of the Company’s and Global Well’s assets and is guaranteed by the Company and certain of its shareholders.

Additionally, in June 2020, Global Wells entered into a $ 16,540,000 term loan with a financial institution that matured September 2021 to purchase land and building in Branchburg, New Jersey (the “2021 Term Loan ” ).

The 2021 Term Loan was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and certain of its shareholders.

In September 2021, Global Wells refinanced the 2021 Term Loan by entering into a $ 23,000,000 term loan that matures September 30, 2026 (the “2026 Term Loan ” ).

The 2026 Term Loan provides an initial balance of $ 16,115,000 and an option to request for additional advances up to a maximum of $ 6,885,000 .

The 2026 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s shareholders.

As of December 31, 2021 and 2020, total loan guaranteed by the Company related to Global Wells amounted to $ 36,517,000 and $ 37,491,000 , respectively.

they represent claims against the specific assets of Global Wells.

See Note 9 — Long Term Debt for a description of the two term loans that Global Wells had with financial institutions as of December 31, 2022.

The following financial information includes assets and liabilities of Global Wells and are included in the accompanying consolidated balance sheets, except for those that eliminate upon consolidation:

4 unchanged sentences

Prepaid expenses and other current assets 191 63

Due from Lollicup USA Inc.

Property and equipment, net 45,399 46,612

10 unchanged sentences

Total liabilities $ 44,610 $ 42,435

Lollicup Franchising, LLC

Prior to the acquisition on September 1, 2020 (see Note 3 — Acquisitions ), the Company’s two major shareholders shared common ownership with Lollicup Franchising, LLC (“Lollicup Franchising”).

Lollicup Franchising owns and operates two stores and also licenses its name to third party store owners and operators.

The Company sells inventory to Lollicup Franchising and to the licensed third-party stores.

In connection with the sales to third-party stores, the Company had an incentive program with Lollicup Franchising where a certain percentage of the sales to the third-party stores were paid to Lollicup Franchising prior the acquisition on September 1, 2020.

The Company incurred incentive program expenses of $ 79,000 for the period from January 1, 2020 through August 31, 2020, which was reported as a contra to net sales in the accompanying consolidated statement of income.

The Company determined that the Company held a variable

interest in Lollicup Franchising, however, it was determined that the Company was not the primary beneficiary.

The Company did not have any explicit arrangements and implicit variable interest where the Company was required to provide financial support to Lollicup Franchising.

The Company determined that the maximum exposure to loss as a result of its involvement with Lollicup Franchising is zero .

Revenue Recognition:

The Company generates revenues from sale of products to customers that include national distributors, fast food restaurants with multiple locations, small businesses, and those that purchase for individual consumption.

The Company generates revenues from product sales to customers that include national and regional chains and distributors, fast food restaurants with multiple locations, small businesses, and those that purchase for individual consumption.

The Company considers revenue disaggregated by customer type to most accurately reflect the nature and uncertainty of its revenue and cash flows that are affected by economic factors.

7 unchanged sentences

$ 422,957 $ 364,244

• National and regional chains revenue:

National and regional chains revenue is derived from chain restaurants and supermarkets with locations across multiple states.

Revenue from transactions with national and regional chains is recognized at a point in time upon transfer of control of promised products to customers.

Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from the Company’s facility to the customers.

• Distributors revenue:

1 unchanged sentence

that purchase the Company’s products for restaurants, offices, schools, and government entities.

Revenue from national distributions is recognized at a point in time upon transfer of control of promised products to customers.

Revenue from distributions is recognized at a point in time upon transfer of control of promised products to customers.

Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers.

• National and regional chains revenue:

National and regional chains revenue is derived from restaurants and supermarkets with locations across multiple states.

Revenue from transactions with national and regional chains is recognized at a point in time upon transfer of control of promised products to customers.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from the Company’s facility to the customers.

• Online revenue:

Online revenue is derived from small businesses such as small restaurants, bubble tea shops, coffee shops, juice bars and smoothie shops.

Revenue from online transactions is recognized at a point in time upon transfer of control of promised products to customers.

Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from the Company’s facility to the customers.

• Retail revenue:

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Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers.

• Online revenue:

Online revenue is derived from small businesses such as small restaurants, bubble tea shops, coffee shops, juice bars and smoothie shops.

Revenue from online transactions is recognized at a point in time upon transfer of control of promised products to customers.

Transfer of control typically occurs when the title and risk of loss passes to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers.

The transaction price is the amount of consideration to which the Company expects to be entitled to in exchange for transferring goods or services to the customer.

Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from the Company’s facility to the customers.

In addition to product sales, the Company also generates revenue from logistics services which is the transportation and delivery of shipping containers from ports to customers, primarily to retail customers.

Logistics services revenue is recognized over time due to the continuous transfer of control to the customer.

As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

Logistics services revenue was $ 6,150,000 and $ 2,779,000 for the years ended December 31, 2022, and 2021, respectively.

The transaction price is the amount of consideration to which the Company expects to be entitled to in exchange for transferring goods to the customer.

Revenue is recorded based on the total estimated transaction price, which includes fixed consideration and estimates of variable consideration.

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The performance obligations are generally satisfied shortly after manufacturing and shipment as purchases made by the Company’s customers are manufactured and shipped with minimal lead time.

The Company’s contract liabilities consist primarily of rebates and other sales incentives, consideration payable to customers for cooperative advertising and other program incentives, and sales return.

As of December 31, 2021 and 2020, the contract liabilities were not considered significant to the financial statements.

The Company’s contract liabilities consist primarily of rebates, sales incentives, customer deposits and consideration payable to customers for cooperative advertising.

As of December 31, 2022 and 2021, the rebates, sales incentives and cooperative advertising were not significant to the financial statements.

Customer deposits are included in the current liabilities in the consolidated balance sheets.

Shipping and handling fees billed to a customer are recorded within net sales, with corresponding shipping and handling costs recorded in selling expense on the accompanying consolidated statements of income.

Shipping and handling fees billed to a customer are not deemed to be separate performance obligations for all of the Company’s product sales as these activities occur before the customer receives the products.

Shipping and handling fees billed to a customer are not deemed to be separate performance obligations for product sales, as these activities occur before the customer receives the products.

Shipping and handling costs included within selling expenses in the consolidated statements of income for the years ended December 31, 2022 and 2021 were $ 32,508,000 and $ 28,525,000 , respectively.

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The Company expenses costs of print production, trade show, online marketing, and other advertisements in the period in which the expenditure is incurred.

Advertising costs included in the line item general and administrative expenses in the consolidated statements of income were $ 2,488,000 and $ 1,516,000 for the years ended December 31, 2021 and 2020, respectively.

Advertising costs included in operating expenses in the consolidated statements of income were $ 2,418,000 and $ 2,488,000 for the years ended December 31, 2022 and 2021, respectively.

Income Taxes:

The Company applies the asset and liability approach for financial accounting and reporting for income taxes.

Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws.

In addition, a deferred tax asset can be generated by net operating loss carryforwards.

If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

The Company applies ASC 740, Income Taxes , which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Company recognizes potential interest and/or penalties related to income tax matters as income tax expense in the accompanying consolidated statements of income.

Accrued interest and penalties are included on the related tax liability in the consolidated balance sheets.

The Company had no uncertain tax positions as of December 31, 2021 and 2020.

The Company applies the provision of ASC 740, Income Taxes .

Under ASC 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Deferred tax assets are evaluated for recoverability each reporting period by assessing all positive and negative evidence available in order to assess the need for a valuation allowance.

A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that such deferred tax assets will not be realized.

The Company accounts for uncertainties in income tax in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes .

ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated statement of income.

Accrued interest and penalties are included in the income taxes payable in the consolidated balance sheet.

Concentration of Credit Risk:

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Keary Global and its affiliate, Keary International – related parties 21 % 10 %

Taizhou Fuling Plastics Co.,Ltd * 11 %

Fuling Technology Co., Ltd.

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Fair Value Measurements:

The Company follows ASC 820, Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures

about fair value measurements.

Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace.

Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.

Observable inputs reflect market data obtained from sources independent of the reporting entity and

unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.

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The three levels of inputs are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities that the Center has the ability to access as of the measurement date.

Level 1 — Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2 — Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

At December 31, 2021 and 2020, the Company has financial instruments classified within the fair value hierarchy, which consist of the following:

• Interest rate swaps that meet the definition of a derivative, classified as Level 2 within the fair value hierarchy, and reported as an asset or liability on the consolidated balance sheets depending on its fair value.

The fair value of interest rate swaps is calculated using pricing models that will use volatility to quantify the probability of changes around interest rate trends.

• Money market account, classified as Level 1 within the fair value hierarchy, and reported as a current asset on the consolidated balance sheets.

The following table summarize the Company’s fair value measurements by level at December 31, 2021 for the assets and liabilities measured at fair value on a recurring basis:

The Company has financial instruments classified within the fair value hierarchy, which consist of the following:

• At December 31, 2022 and 2021, the Company had a money market account, classified as Level 1 within the fair value hierarchy, and reported as a current asset on the consolidated balance sheets.

• At December 31, 2021, the Company had an interest rate swap that met the definition of a derivative, classified as Level 2 within the fair value hierarchy, and reported as other liabilities on the consolidated balance sheet.

The fair value of interest rate swap was calculated from pricing models that used volatility to quantify the probability of changes around interest rate trends.

This interest rate swap was terminated in June 2022, as further discussed in Note 10 — Interest Rate Swaps .

The following table summarizes the Company’s fair value measurements by level at December 31, 2022 for the assets measured at fair value on a recurring basis:

Level 1 Level 2 Level 3

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Cash equivalents $ 10,609 $ — $ —

Interest rate swap — ( 1,334 ) —

Fair value, December 31, 2022

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Cash equivalents $ 2,000 $ — $ —

Interest rate swaps — ( 2,847 ) —

Interest rate swap — ( 1,334 ) —

Fair value, December 31, 2021

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The Company has not elected the fair value option as presented by ASC 825, Fair Value Option for Financial Assets and Financial Liabilities , for the financial assets and liabilities that are not otherwise required to be carried at fair value.

Under ASC 820, material financial assets and liabilities not carried at fair value, including accounts receivable, accounts payable, accrued and other liabilities, and borrowings under promissory notes and line of credit, are reported at their carrying value.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities approximate fair value because of the short maturity of these instruments.

The carrying amounts of long-term debt and line of credit at December 31, 2021 and 2020 approximates fair value because the interest rate approximates the current market interest rate.

Under ASC 820, material financial assets and liabilities not carried at fair value, including accounts receivable, accounts payable, related-party payable, accrued and other liabilities, other payable and borrowings under promissory notes and Line of Credit (as defined below), are reported at their carrying value.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related-party payable, accrued and other liabilities and other payable at December 31, 2022 and 2021, approximated fair value because of the short maturity of these instruments.

The carrying amount of the Company's Line of Credit approximates fair value because the interest rate is variable in nature.

For the $ 21,580,000 term loan that the Company refinanced in June 2022, the carrying amount as of December 31, 2021 approximated fair value because the interest rate was variable in nature.

The following is a summary of the carrying amount and estimated fair value of the $ 23,000,000 and $ 28,700,000 term loans that mature in September 2026 and July 2027, respectively:

December 31, 2022

Carrying Amount Estimated Fair Value

(in thousands)

$ 23,000,000 term loan maturing in September 2026

$ 22,168 $ 20,115

$ 28,700,000 term loan maturing in July 2027

20,563 18,918

$ 42,731 $ 39,033

The fair value of these financial instruments was determined using Level 2 inputs.

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The Company includes gains or losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, in the consolidated statements of income.

The Company recorded a loss on foreign currency transactions of $ 412,000 and $ 688,000 for the years ended December 31, 2021 and 2020, respectively.

The Company recorded a foreign currency gain of $ 1,568,000 and a loss of $ 412,000 for the years ended December 31, 2022 and 2021, respectively.

Stock-Based Compensation:

The Company recognizes stock-based compensation expense related to shared-based payment awards, including stock options and restricted stock units, in accordance with ASC 718, Compensation — Stock Compensation .

The Company recognizes stock-based compensation expense related to employee stock options and restricted stock units in accordance with ASC 718, Compensation — Stock Compensation .

This standard requires the Company to record compensation expense equal to the fair value of awards granted to employees and non-employees.

The fair value of share-based payment awards on the date of grant is estimated using the Black-Scholes option pricing model for stock options, and the closing price of the Company's common stock on the trading day immediately prior to the grant date for restricted stock units.

The fair value of share-based payment awards is estimated on the grant-date using the Black-Scholes option pricing model for stock options, and the closing price of the Company's common stock on the trading day immediately prior to the grant date for restricted stock units.

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 is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company’s stock options.

The risk-free interest rate assumption for options granted under the 2019 Stock Incentive Plan (the "Plan") is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company’s 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.

The Company determined 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 Company determines 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.

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If the Company had made different assumptions, its stock-based compensation expense, and its net income could have been significantly different.

The Company adopted ASU 2016-02, Leases (Topic 842) , as of January 1, 2022 which requires the recognition of the right-of-use ("ROU") assets and related operating and finance lease liabilities on the balance sheet and the disclosure of key information about certain leasing arrangements.

The Company adopted this ASU and related amendments under the modified retrospective method with no recast of the comparative period presented in the Company's consolidated financial statements.

There was no cumulative adjustment to retained earnings upon adoption.

The Company elected certain practical expedients permitted under the transition guidance, including to exclude leases with an initial term of 12 months or less at lease commencement, combine non-lease components together with lease components as a single lease component, and to retain the historical lease classification as well as relief from reviewing expired or existing contracts to determine if they contain leases.

The Company determines if an arrangement is a lease at commencement date .

Leases are classified as either finance leases or operating leases.

The Company has lease agreements for the use of facilities and vehicles, and its lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term using a discount rate based on similarly secured borrowings available to the Company.

ROU assets include any prepaid lease amounts and excludes lease incentives.

New and Recently Adopted Accounting Standards:

The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, the Company has elected to take advantage of certain reduced public company reporting requirements.

In addition, Section 107 of the JOBS Act provides

that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.

The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and as such, the Company have elected to take advantage of certain reduced public company reporting requirements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.

In February 2016, the FASB issued ASU 2016-02 (Topic 842), " Leases ".

This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments.

This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.

The FASB subsequently issued ASU 2018-11 (Topic 842), “ Leases:

Targeted Improvements ” which amends ASC 842 in two important areas, including (i) allowing lessors to combine lease and associated nonlease components by class of underlying asset in contracts that meet certain criteria and, (ii) provides entities with an optional method for adopting the new leasing guidance by recognizing a cumulative-effect adjustment to the opening balance of the retained earnings, and not to restate the comparative periods presented at the adoption date.

The effective date for ASC 842 for public business entities is annual reporting periods beginning after December 15, 2018.

The effective date for all other entities is annual reporting periods beginning after December 15, 2021.

The Company will adopt the new standard in annual reporting periods beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.

This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a ROU asset and corresponding lease liability, measured at the present value of the lease payments.

The Company adopted the ASU and the related amendments as of January 1, 2022 under the modified retrospective method with no recast of the comparative period presented in the Company's consolidated financial statements.

The Company recorded a ROU asset of $ 8,800,000 and an operating lease liability of $ 9,200,000 upon adoption.

See Note 14 — Leases for more information.

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments — Credit Losses (Topic 326):

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GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities that are SEC filers.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities that are U.S.

Securities and Exchange Commission (SEC) filers.

For all other public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

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For calendar-year end companies that are eligible for the deferral, the effective date is January 1, 2023.

The Company will adopt the new standard in annual reporting period beginning after January 1, 2023, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 (Topic 718), “ Compensation — Stock Compensation:

Improvements to Non-employee Share based Payment Accounting ”, which supersedes Subtopic 505-50 and expands the scope of ASC Topic 718 to include share-based payments issued to nonemployees for goods and services.

The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606.

The FASB subsequently issued ASU 2019-08 (Topic 718), “ Compensation — Stock Compensation ” which clarifies guidance in Topic 718 on measurement and classification of share-based payments to customers.

The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.

For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606.

The Company adopted this ASU as of January 1, 2020 and adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow.

In August 2018, the FASB issued ASU 2018-13 “ Fair Value Measurement (Topic 820) Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement ”.

The guidance in this ASU eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements.

Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

Certain provisions are applied prospectively while others are applied retrospectively.

This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted.

The Company adopted this ASU as of January 1, 2020 and adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow.

In December 2019, the FASB issued ASU 2019-12 “ Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes ”.

The guidance in this ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods.

The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.

For public entities, the amendments in this Update are effective for fiscal years, beginning after December 15, 2020.

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Early adoption of the amendment is permitted.

The Company adopted the new standard as of January 1, 2021, and the adoption of this guidance did not have a material impact on the Company’s financial position, results of operations and cash flow.

In March 2020, the FASB issued ASU 2020-03 “ Codification Improvements to Financial Instruments ”.

The guidance in this ASU clarifies the requirement for all entities to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s ASC.

The Company will adopt the new standard in annual reporting period beginning after January 1, 2023.

The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-3, “ Codification Improvements to Financial Instruments ”, which clarifies the requirement for all entities to provide the fair value option disclosures in paragraphs ASC 825-10-50-24 through 50-32.

The guidance also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “ Leases ”, should be the contractual term used to measure expected credit losses under ASC 326, “ Financial Instruments — Credit Losses ”.

This ASU is effective upon adoption of the amendments in ASU 2016-13.

Early adoption is not permitted before an entity’s adoption of ASU 2016-13.

This ASU was effective upon adoption of the amendments in ASU 2016-13.

The adoption of this ASU did not have a material impact on the consolidated financial statements.

Pacific Cup, Inc.

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Acquisition-related costs were immaterial.

The amounts of revenue and earnings of the acquiree since the acquisition date is included in the consolidated statement of income for the reporting period, which is not significant from March 1, 2021 through December 31, 2021.

The amounts of revenue and earnings of the acquiree since the acquisition date is included in the consolidated statement of income for the reporting period, which is immaterial from March 1, 2021 through December 31, 2021 and for the year ended December 31, 2022.

The goodwill recognized in this transaction was derived from expected opportunities to leverage Pacific Cup’s customer base, manufacturing facility, and sales force to expand the Company’s footprint.

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Total assets acquired $ 1,000

Lollicup Franchising, LLC

On September 1, 2020, Lollicup entered into a membership interest purchase agreement (the Agreement) with Lollicup Franchising, LLC (Lollicup Franchising), a provider of specialty tea and coffee to consumers through operating retail stores within the United States.

Pursuant to the Agreement, Lollicup paid cash consideration of $ 900,000 for the 100 % membership interest of Lollicup Franchising.

Prior to closing of the Agreement, the majority shareholders of the Company were also the majority shareholders of Lollicup Franchising.

Acquisition-related costs were insignificant.

The goodwill recognized in this transaction was derived from expected benefits from new management strategy and cost synergies.

Goodwill recognized as a result of this acquisition is deductible for income tax purposes, and subject to annual impairment testing, which may give rise to deferred taxes in future periods.

The following table summarizes the assets acquired and liabilities assumed as a result of this acquisition:

(in thousands)

Accounts receivable 103

Inventories 21

Property and equipment 257

Goodwill 3,113

Accounts payable ( 42 )

Accrued expenses ( 104 )

Related party payable ( 2,455 )

Total assets acquired and liabilities assumed $ 900

cash acquired ( 7 )

Total purchase consideration, net of cash acquired $ 893

The results of operations of this acquisition have been included in the Company’s consolidated financial statements beginning on the acquisition date.

All intercompany transactions were eliminated upon consolidation.

The amounts of revenue and earnings of the acquiree since the acquisition date is included in the consolidated statements of income for the reporting period, which is not significant from September 1, 2020 through December 31, 2021.

Joint Venture

On April 6, 2022, Lollicup entered into a definitive joint venture agreement (the “JV Agreement”) with Happiness Moon Co., Ltd., a Taiwanese company, to jointly establish Bio Earth Technology (“Bio Earth”), a new Taiwanese corporation, for the manufacturing of compostable foodservice products from bagasse.

The JV Agreement stipulated an investment by the Company of approximately $ 6,500,000 for a 49 % interest in Bio Earth.

Lollicup had invested a total of $ 4,000,000 pursuant to the JV Agreement as of December 31, 2022, which is included in deposits in the accompanying consolidated balance sheet.

This total investment comprised of three payments of $ 2,000,000 in April 2022, another $ 2,000,000 in June 2022, and $ 1,876,000 in November 2022, net of a refund of $ 1,876,000 received in December 2022.

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

See Note 19 — Subsequent Events for subsequent investments made under the JV Agreement.

Inventories consist of the following:

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Raw materials $ 18,061 $ 12,543

Work in progress — 133

Semi-finished goods 1,850 1,532

Finished goods 52,044 45,140

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Total inventories $ 71,206 $ 58,472

During the year ended December 31, 2022, the Company recorded a $ 3,500,000 write-off of certain inventory items, out of which $ 879,000 was determined to be out-of-period and was recorded to correct immaterial errors in its previously issued quarterly and annual financial statements.

Property and Equipment

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Land 11,907 11,907

Property held under capital leases — 1,607

Computer hardware and software 593 553

146,137 133,757

Less accumulated depreciation and amortization ( 40,282 ) ( 30,319 )

accumulated depreciation and amortization ( 50,569 ) ( 40,282 )

Total property and equipment, net $ 95,568 $ 93,475

On July 7, 2021, the Company purchased a warehouse building located in Summerville, South Carolina for a purchase price of $ 1,252,750 .

The facility commenced operations on September 1, 2021 as an additional distribution facility.

Depreciation and amortization expense on property and equipment was $ 10,378,000 and $ 10,024,000 for the years ended December 31, 2022 and 2021, respectively.

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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”), the Company has a line of credit with a maximum borrowing capacity of $ 40,000,000 (the “Line of Credit”).

The Line of Credit also includes a standby letter of credit sublimit.

The Line of Credit was secured by the Company’s assets and guaranteed by the Company’s stockholders.

The Line of Credit also includes a standby letter of credit sublimit, which was amended and increased to $ 2,000,000 on August 18, 2022.

The Company is 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, the Company amended the Line of Credit to extend the maturity date to May 23, 2022.

On October 6, 2021, the Company amended the Loan Agreement again.

On October 6, 2021, the Company amended the Loan Agreement.

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.

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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.

As of December 31, 2021, the maximum amount that could be borrowed was $ 40,000,000 .

The Company had $ 0 and $ 33,169,000 of borrowings outstanding under the Line of Credit as of December 31, 2021 and 2020, respectively.

As of December 31, 2022, the maximum remaining amount that could be borrowed under the Line of Credit was $ 38,930,000 .

The Company had $ 0 of borrowings outstanding under the Line of Credit as of both December 31, 2022 and 2021.

The amount issued under the standby letter of credit was $ 1,070,000 and $ 0 as of December 31, 2022 and 2021, respectively.

As of both December 31, 2022 and 2021, the Company was in compliance with the financial covenants under the Line of Credit.

The Company amended the Line of Credit again in March 2023.

See Note 19 — Subsequent Events for further discussion.

Accrued Expenses

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(in thousands)

Accrued expenses $ 1,991 $ 1,796

Accrued miscellaneous expenses $ 2,094 $ 1,054

Accrued interest 108 68

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Deferred rent liability — 372

Accrued property tax 1,164 10

Accrued sale taxes and use taxes 992 927

Total accrued expenses $ 9,005 $ 7,813

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(in thousands)

A promissory note that allowed for advances up to $ 5,000,000 through March 2018, at which point it converted to a term loan.

Outstanding principal balance of $ 4,815,000 was converted in March 2018, set to mature in March 2023.

Principal and interest payment of $ 91,000 due monthly at the fixed rate of 4.98 %.

The loan was secured by certain machinery and equipment.

In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum fixed charge coverage ratio and net income.

The loan was paid off in 2021.

An equipment loan with a draw down period ending August 28, 2019 for up to $ 10,000,000 , at which point the entire principal outstanding was due, unless extended.

Outstanding principal balance of $ 9,476,000 was converted to a term loan in June 2019, set to mature in July 2024.

Principal and interest payment of $ 193,000 due monthly starting August 2019 at the fixed rate of 5.75 %.

The loan was secured by the Company’s assets and guaranteed by certain of the Company’s shareholders.

In accordance with loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio.

The loan was paid off in 2021.

A $ 2,130,000 term loan that expired April 30, 2021.

Principal and interest payment of $ 56,000 due monthly with the remaining principal and unpaid interest due at maturity.

Interest accrued based on prime rate.

The loan was secured by the company’s assets and guaranteed by certain of the Company’s shareholders.

In accordance with the loan agreement, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum effective tangible net-worth, maximum debt to effective tangible net worth, and minimum debt coverage ratio.

A $ 935,000 term loan that expired December 31, 2021.

Principal and interest payment of $ 20,000 due monthly with the remaining principal and unpaid interest due at maturity.

Interest accrued at a fixed rate of 3.50 %.

The loan was secured by the Company’s assets and guaranteed by certain of the Company’s shareholders.

Subtotal, continue on following page $ — $ 10,218

December 31, 2021 December 31, 2020

(in thousands)

Subtotal from previous page $ — $ 10,218

An equipment loan with a draw down period ended May 31, 2019 for up to $ 10,000,000 .

After the draw period, the outstanding principal balance is converted to a term loan payable, set to mature on May 31, 2024.

The first principal and interest payment commenced in July 2019.

Interest accrued based on prime rate.

The loan was secured by the Company’s assets and guaranteed by certain of the Company’s shareholders.

In accordance with the loan agreement, the Company was required to comply with certain fixed financial covenants, including a fixed charge coverage ratio and a minimum tangible net worth.

The loan was paid off in 2021.

A $ 3,000,000 term loan that was set to expire December 2024.

Interest only payment due for the first six months.

Principal and interest payment of $ 58,000 due monthly beginning January 2020 with the remaining principal and unpaid interest due at maturity.

Interest accrues at prime rate plus 0.25 %.

The loan was secured by the Company’s assets and guaranteed by certain of the Company’s shareholders.

In accordance with the loan agreement, the Company must comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, debt service charge ratio, and debt to EBITDA rolling ratio.

The loan was paid off in 2021.

A $ 21,580,000 term loan that matures in May 2029.

Interest accrues at prime rate less 0.25 % ( 3.00 % at December 31, 2021 and 2020) 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 was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and certain of its shareholders.

The Company incurred debt issuance costs of approximately $ 119,000 , which is reported as a reduction of the carrying value of debt on the accompanying consolidated balance sheet.

20,808 21,130

A $ 3,000,000 term loan that was set to expire June 17, 2025.

Principal and interest payment of $ 55,000 due monthly with the remaining principal and unpaid interest due at maturity.

Interest accrued based on prime rate plus margin of 0.25 % ( 3.50 % as of December 31, 2020).

The loan was secured by the Company’s assets and guaranteed by the Company’s stockholders.

The loan was paid off in 2021.

A $ 5,000,000 Paycheck Protection Program loan that was set to expire April 16, 2022.

Interest accrued at 1.0 %.

The loan was forgiven in June 2021.

Subtotal, continue on following page $ 20,808 $ 48,515

KARAT PACKAGING INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 December 31, 2020

(in thousands)

Subtotal from previous page $ 20,808 $ 48,515

A $ 16,540,000 term loan that was set to mature June 30, 2025.

Interest accrued at 4.5 % fixed and principal payments ranging from $ 31,000 to $ 0 along with interest due monthly throughout the term of the loan, with the remaining principal balance due at maturity.

The loan was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and certain of its shareholders.

This loan was refinanced in September 2021 (see below).

A $ 23,000,000 term loan that matures September 30, 2026, with the 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.

Interest accrues at a fixed rate of 3.5 %.

A $ 23,000,000 term loan that matures September 30, 2026, with 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 the Company exercised in February 2022.

Interest accrues at a fixed rate of 3.5 % per annum.

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 the Company’s shareholders.

The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s stockholders.

In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.

$ 22,168 $ 15,909

A $ 21,580,000 term loan ("2029 Loan") that was set to mature in May 2029.

Interest accrued at prime rate less 0.25 % ( 3.00 % at December 31, 2021) and principal payments ranging from $ 24,000 to $ 40,000 along with interest were due monthly throughout the term of the loan, with the remaining principal balance due at maturity.

The loan was collateralized by substantially all of the Company’s and Global Well’s assets and was guaranteed by the Company and its stockholders.

The Company incurred debt issuance costs of approximately $ 119,000 , which was reported as a reduction of the carrying value of debt on the accompanying consolidated balance sheet.

This loan was refinanced in June 2022 (see below).

A $ 28,700,000 term loan ("2027 Loan") that matures July 1, 2027, with an initial balance of $ 20,700,000 and an option to request for additional advances up to a maximum of $ 8,000,000 through June 30, 2023.

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

Principal and interest payments of $$ 104,000 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 one of the Company’s stockholders.

In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt coverage ratio.

Long-term debt 42,731 36,717

2 unchanged sentences

Long-term debt, net of current portion $ 41,558 $ 35,339

KARAT PACKAGING INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022, future maturities are:

(in thousands)

Thereafter 18,912

The Company was in compliance with all its financial covenants as of both December 31, 2021 and 2020.

On April 16, 2020, the Company received loan proceeds in the amount of $ 5,000,000 under the Paycheck Protection Program (“PPP”).

The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.

The loans and accrued interest are potentially forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1 % with a deferral of payments for the first six months .

In October 2020, the PPP loan was amended to extend the deferral of payments until September 2021.

The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations.

This certification further required the Company to take into account its current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

The receipt of these funds, and the potential forgiveness of these PPP loan, are dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of

such loan is based on its future adherence to the forgiveness criteria.

If, despite the good faith belief that given the Company’s circumstances all eligibility requirements for the PPP loan were satisfied, it is later determined that the Company is ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety and/or be subject to additional penalties.

The Company applied for the forgiveness of the PPP loan, and on June 10, 2021, the Company was granted loan forgiveness, in whole, by meeting the conditions for use of loan proceeds.

The loan forgiveness of $ 5.0 million was recorded as gain on forgiveness of debt in the accompanying consolidated statements of income.

The Company's refinance of the 2029 Loan with the 2027 Loan in June 2022 was accounted for as a debt modification.

The Company was in compliance with all of its financial covenants as of both December 31, 2022 and 2021.

On April 16, 2020, the Company received a $ 5,000,000 Paycheck Protection Program ("PPP") loan under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act which included, among other terms, an interest rate of 1.00 % per annum.

The PPP loan was subject to events of default and other provisions customary for a loan of this type.

A PPP loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act.

On June 10, 2021, the full amount of the PPP loan was forgiven.

A $ 5,000,000 gain from the forgiveness of the PPP loan was recognized in the consolidated statements of income for the year ended December 31, 2021.

Interest Rate Swaps

In June 2019, Global Wells entered into a ten-year floating-to-fixed interest-rate swap, with an effective date of June 13, 2019, that is based on the prime rate versus a 5.05 % fixed rate.

The notional value was $ 21,580,000 as of Jun 13, 2019.

The payment dates are the fifth day of the month beginning July 5, 2019 to the termination date of May 4, 2029.

As of December 31, 2021 and 2020, the fair value of the interest rate swap was $ 1,334,000 and $ 2,604,000 , respectively, which is reported as other liabilities in the accompanying consolidated balance sheets.

For the years ended December 31, 2021 and 2020, Global Wells recognized approximately $ 1,270,000 as interest income and $ 1,454,000 as interest expense, respectively, related to change in fair value of this interest rate swap.

In June 2022, Global Wells terminated its ten-year floating-to-fixed interest rate swap, and recognized cash proceeds of $ 825,000 as gain on the settlement, which was included in interest income in the accompanying consolidated statements of income.

This interest rate swap had a notional value of $ 21,580,000 as of the effective date of June 13, 2019 based on the prime rate versus a 5.05 % fixed rate.

As of December 31, 2021, the fair value of the interest rate swap was $ 1,334,000 , which is reported as other liabilities in the accompanying consolidated balance sheet.

For the years ended December 31, 2022 and 2021, Global Wells recognized $ 2,159,000 (including the gain on settlement) and $ 1,270,000 as interest income related to change in fair value of this interest rate swap, respectively.

In June 2019, the Company also entered into a five-year floating-to-fixed interest-rate swap, with an effective date of June 3, 2019, that was based on the prime rate versus 5.19 % fixed rate.

The notional was $ 10,000,000 as of June 2019.

The payment dates were the fifth day of the month beginning July 5, 2019 to the termination date of May 31, 2024.

In April 2021, the Company terminated the interest rate swap with a notional amount of $ 10,000,000 , recognizing $ 196,200 in swap termination fee, which was included in the interest expense, net in the consolidated statements of income for the year ended December 31, 2021.

For the years ended December 31, 2021 and 2020, the Company recognized approximately $ 47,000 as interest income and $ 112,000 as interest expense, respectively, related to change in fair value of this interest rate swap.

As of December 31, 2020, the fair value of the interest rate swap was $ 243,000 , which is reported as other liabilities in the accompanying consolidated balance sheet.

Obligations Under Capital Leases

The Company leased certain warehouse vehicles under capital leases that were set to expire in various years through 2024.

The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or fair value of the assets.

The assets are depreciated over their estimated useful lives.

Depreciation of property under capital leases is included in depreciation and amortization expense within the general and administrative operating expenses.

Interest rates on capitalized leases varied from 3.55 % to 6.50 % and were imputed based on the lower of the Company’s incremental borrowing rate at the inception of each lease or the lessor’s implicit rate of return.

The capital leases provided for bargain purchase options and were guaranteed by the stockholders of the Company.

In October 2021, the Company paid off all its existing capital lease obligations with the remaining balance of $ 0.3 million.

Following is a summary of property held under capital leases:

December 31, 2021 December 31, 2020

(in thousands)

Warehouse vehicles $ — $ 1,607

accumulated depreciation — ( 1,026 )

Total property held under capital leases, net $ — $ 581

For the year ended December 31, 2021, the Company recognized approximately $ 47,000 in interest income related to change in fair value of this interest rate swap.

In April 2021, the Company terminated this interest rate swap, recognizing $ 196,000 in swap termination fee, which was included in interest expense in the consolidated statements of income for the year ended December 31, 2021 .

Stockholder’s Equity

The Company’s Certificate of Incorporation authorize both common and preferred stock.

The total number of shares of all classes of stock authorized for issuance is 110,000,000 shares, par value of $ 0.001 , with 10,000,000 designed as

preferred stock and 100,000,000 designated as common stock.

The total number of shares of all classes of stock authorized for issuance is 110,000,000 shares, par value of $ 0.001 , with 10,000,000 designed as preferred stock and 100,000,000 designated as common stock.

Each holder of common stock and preferred stock shall be entitled to one vote per share held.

In June 2020, Company declared a dividend of $ 0.04 per share of the Company's common stock.

In April 2021, the Company completed its initial public offering and issued 4,542,500 shares of its common stock.

The total amount of proceeds received, net of issuance costs, was approximately $ 67,587,000 .

On November 9, 2022, Company declared a dividend of $ 0.35 per share of the Company's common stock.

The Company recorded $ 6,964,000 of cash dividends as of December 31, 2022.

The Company did no t declare any dividend for the year ended December 31, 2021.

In March 2020, the Company re-acquired 10,000 of its own shares from an existing shareholder.

The total amount paid to acquire the shares was $ 107,000 and has been deducted from shareholders’ equity.

In July 2020, the Company re-acquired 13,000 of its own shares from an existing shareholder.

The total amount paid to acquire the shares was $ 141,000 and has been deducted from shareholders’ equity.

In April 2021, the Company completed its initial public offering and issued 4,542,500 shares of its common stock.

The total amount of proceeds received, net of issuance costs, was approximately $ 67.6 million .

Stock-Based Compensation

In January 2019, the Company’s board of directors adopted the 2019 Stock Incentive Plan (the “Plan”).

A total of 2,000,000 shares of common stock has been authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards.

A total of 2,000,000 shares of common stock were authorized and reserved for issuance under the Plan in the form of incentive or

nonqualified stock options and stock awards.

A committee appointed by the board of directors of the Company determines the terms and conditions of each grant under the Plan.

3 unchanged sentences

The exercise price of incentive stock options granted to individuals that own greater than 10% of the voting stock may not be less than 110 % of the fair market value of the common stock at the date of grant.

The term of each incentive and nonqualified option is based upon such conditions as determined by the option agreement;

The term of each incentive and nonqualified option is based upon conditions as determined by the option agreement;

however, the term can be no more than ten years from the date of the grant.

In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the term of the option will be such shorter term as may be provided in the option agreement, but not more than five years from the date of the grant.

In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the term of the option will be a shorter term as provided in the option agreement, but not more than five years from the date of the grant.

As of December 31, 2022, a total of 1,322,349 shares of common stock was available for further award grants under the Plan.

For the years ended December 31, 2022 and 2021, the Company recognized a total of $ 2,047,000 and $ 2,026,000 in stock-based compensation expense, respectively.

The restricted stock units and stock options granted prior to April 15, 2021 were subjected to vesting conditions contingent upon the closing of an initial public offering of the Company.

Such awards began vesting on April 15, 2021 when the Company completed its initial public offering.

The Company recognizes stock-based compensation over the vesting period, which is generally 3 years for both the restricted stock units and stock options.

The Company recognized a net tax benefit of $ 89,000 and $ 237,000 from compensation expense related to stock options and restricted stock units during the years ended December 31, 2022 and 2021, respectively.

Stock Options

A summary of the Company’s stock option activity under the Plan for the year ended December 31, 2021 is as follows:

A summary of the Company’s stock option activity under the Plan for the years ended December 31, 2022 and 2021 is as follows:

Number of Options

2 unchanged sentences

Aggregate Intrinsic Value

Outstanding at December 31, 2020 15,000 $ 10.00 8 years $ —

Outstanding at December 31, 2020 15,000 $ 10.00 8.0 $ —

Granted 430,000 18.86

Exercised ( 10,000 ) 10.00 $ 116,000

Outstanding at December 31, 2021 435,000 $ 18.76 9.7 years $ 632,000

Expected to vest at December 31, 2021 435,000 $ 18.76 9.7 years $ 632,000

Exercisable at December 31, 2021 5,000 $ 10.00 7 years $ 51,000

The weighted-average grant date fair-value of the stock options granted for the year ended December 31, 2021 was $ 5.74 per share.

At December 31, 2021, total remaining stock-based compensation cost for unvested stock options was approximately $ 2,090,000 .

Outstanding at December 31, 2021 435,000 $ 18.76 9.7 $ 632,000

Granted 50,000 16.53

Exercised ( 5,000 ) 10.00

Forfeited ( 60,000 ) 18.86

Outstanding at December 31, 2022 420,000 $ 18.58 8.8 $ —

Expected to vest at December 31, 2022 420,000 $ 18.58 8.8 $ —

Exercisable at December 31, 2022 123,333 18.86 8.8 $ —

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2022 and 2021 was $ 5.18 and $ 5.74 respectively.

At December 31, 2022, total remaining stock-based compensation cost for unvested stock options under the Plan was approximately $ 792,000 .

The cost is expected to be recognized over a weighted-average period of 1.4 years.

1 unchanged sentence

The assumptions that were used to calculate the grant date fair value of the Company’s stock option grants for the year ended December 31, 2022 were as follows:

December 31, 2021

Year Ended December 31,

Risk-free interest rate 1.70 % 1.22 %

Expected term (years) 6.25 years

Expected term (years) 6.25 years 6.25 years

Volatility 30 % 30 %

Dividend yield 0.40 % 0.40 %

There were no stock options granted for the year ended December 31, 2020.

Restricted Stock Units

The Company issued restricted stock units to its employees.

The following table summarizes the unvested restricted stock units for the period ended December 31, 2021:

The following table summarizes the unvested restricted stock units for the years ended December 31, 2022 and 2021:

Number of Shares Outstanding

5 unchanged sentences

Unvested at December 31, 2021 159,000 $ 11.08

Granted 9,900 16.69

Vested ( 75,588 ) 10.72

Forfeited ( 11,166 ) 15.54

Unvested at December 31, 2022 82,146 $ 11.47

The weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2022 and 2021 was $ 16.69 and $ 17.98 respectively.

1 unchanged sentence

In September 2021, the Company’s board of directors accelerated the vesting of the Company’s restricted stock units, with each tranche of award vesting 6 months earlier than the original vesting date.

The acceleration of the restricted stock units vesting was treated as an award modification under ASC 718, resulting in an additional stock-based compensation expense of approximately $ 719,000 recognized for the year ended December 31, 2021.

At December 31, 2022, total remaining stock-based compensation cost for unvested restricted stock units was approximately $ 327,000 .

The cost is expected to be recognized over a weighted-average period of 0.9 years .

For the years ended December 31, 2021 and 2020, the Company recognize d a total of $ 2,026,000 and $ 0 in stock-based compensation expense, respectively.

The restricted stock units and stock options granted prior to April 15, 2021 were subjected to vesting conditions contingent upon the closing of an initial public offering of the Company.

Such awards began vesting on April 15, 2021 when the Company completed its initial public offering.

The Company recognizes stock-based compensation over the vesting period, which is generally three years for both the restricted stock units and stock options.

The Company recognized a net tax benefit of $ 237,000 and $ 0 from compensation expense related to stock options and restricted stock units during the year ended December 31, 2021 and 2020, respectively.

Earnings Per Share

7 unchanged sentences

Diluted earnings per share is calculated based upon the weighted average number of common shares and common equivalent shares outstanding during the period, calculated using the treasury stock method.

Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost related to stock awards for future services that the Company has not yet recognized.

Under the treasury stock

method, exercise proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost related to stock awards for future services that the Company has not yet recognized.

Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.

9 unchanged sentences

Diluted earnings per share $ 1.19 $ 1.12

For the year ended December 31, 2021 and 2020 a total of 234,072 and 282,000 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to its anti-dilutive impact on earnings per share.

Commitments and Contingencies

Lease Commitments

The Company and Global Wells lease facilities under various operating leases expiring through 2031.

The Company also leases automobiles under various operating leases expiring through 2024.

At December 31, 2021, approximate future minimum lease obligations are:

For the years ended December 31, 2022 and 2021 a total of 449,223 and 234,072 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to its anti-dilutive impact on earnings per share.

The Company primarily leases manufacturing facilities, distribution centers and office spaces with lease terms expiring through 2031.

For the year ended December 31, 2022, the Company recognized the following lease costs in the accompanying consolidated statement of income:

(in thousands)

Operating lease expense $ 4,522

Short-term lease expense 311

Variable lease expense 817

Total lease expense $ 5,650

For the year ended December 31, 2022, total lease expense included in operating expense and cost of goods sold was $ 3,446,000 and $ 1,076,000 , respectively.

Rent expense for the year ended December 31, 2021 was $ 1,783,000 .

The following table presents supplemental information related to operating leases for the year ended December 31, 2022:

Weighted average remaining lease term 4.27 years

Weighted average discount rate 5.32 %

Right-of-use assets obtained in exchange for operating lease liabilities 10,727

Cash paid for amounts included in measurement of lease obligations

Operating cash flows from operating leases 4,481

As of December 31, 2022, future lease payments under operating leases were as follows:

(in thousands)

Thereafter 1,212

Rent expense for the years ended December 31, 2021 and 2020 were approximately $ 1,783,000 and $ 1,212,000 , respectively.

Total future lease payments 17,643

imputed interest ( 1,509 )

Total lease liability balance $ 16,134

As of December 31, 2021, approximate future minimum lease obligations prior to the adoption of Topic 842 were as follows:

(in thousands)

Thereafter 1,629

In September 2020, Global Wells entered into an operating lease with an unrelated party as the landlord.

The lease term is for 38 months beginning September 9, 2020 and generates monthly rental payments from $ 58,000 to $ 61,000 over the lease term.

Rental income for the year ended December 31, 2021 and December 31, 2020 were $ 931,000 and $ 322,000 ,

respectively.

The expected rental income is $ 716,000 and $ 611,000 for the year ended December 31, 2022 and 2023, respectively.

Contingencies

The Company is involved from time to time in certain legal actions and claims arising in the ordinary course of business.

Management believes that the outcome of such litigation and claims, should they arise in the future, is not likely to have a material effect on the Company’s financial position or results of income.

The lease generates monthly rental payments from $ 58,000 to $ 61,000 over the lease term of 38 months beginning September 9, 2020.

Rental income for the years ended December 31, 2022 and December 31, 2021 were $ 949,000 and $ 931,000 , respectively.

The expected rental income is $ 611,000 for the year ended December 31, 2023.

Related Party Transactions

Lollicup Franchising was determined to be a related party by virtue of common ownership from January 1, 2020 to August 31, 2020.

The Company acquired all of the membership interest of Lollicup Franchising from the Company’s two primary shareholders for $ 900,000 in September 2020.

Lollicup Franchising is a wholly-owned subsidiary of the Company and is eliminated upon consolidation as of September 2020 (see Note 3).

Sales for the period from January 1, 2020 to August 31, 2020 to Lollicup Franchising were not significant.

The Company has incurred incentive program expenses of $ 79,000 for the period from January 1, 2020 to August 31, 2020.

Keary Global owns 250,004 shares of the Company's common stock as of December 31, 2022, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018.

2 unchanged sentences

The Company has entered into ongoing purchase and supply agreements with Keary Global.

As of December 31, 2021 and 2020, the Company has accounts payable due to Keary Global and Keary International, of $ 2,003,000 and $ 5,038,000 , respectively.

At December 31, 2022 and 2021, the Company has accounts payable due to Keary Global and Keary International of $ 4,940,000 and $ 2,003,000 , respectively.

Purchases for the years ended December 31, 2022 and 2021 from this related party were $ 42,978,000 and $ 37,021,000 , respectively.

3 unchanged sentences

The Company’s portion of the contributions is expensed as incurred with a total expense of $ 345,000 and $ 322,000 for the years ended December 31, 2022 and 2021, respectively.

The provision for income taxes for the year ended December 31, 2021 and 2020, respectively, consisted of:

The provision for income taxes for the years ended December 31, 2022 and 2021, respectively, consisted of:

Year Ended December 31,

3 unchanged sentences

Federal ( 502 ) ( 576 )

State 93 ( 234 )

( 478 ) ( 483 )

10 unchanged sentences

R&D credit 43 44

Section 263A 1,196 993

Inventory 1,042 1,196

Government grant 343 311

Stock based compensation 573 267

Capitalized research and development costs 1,043 —

Operating lease liabilities 8,452 —

Total deferred tax assets 12,639 4,016

2 unchanged sentences

Investment in Global Wells Investment Group ( 172 ) ( 132 )

Operating ROU asset ( 7,273 ) —

Total deferred tax liabilities ( 17,795 ) ( 9,650 )

Net deferred tax liability $ ( 5,156 ) $ ( 5,634 )

Reconciliation of income taxes are as follows from statutory rate of 21% to the effective tax rate for the year ended December 31, 2021 and 2020, respectively:

Year Ended December 31,

Reconciliation of income taxes are as follows from statutory rate of 21% to the effective tax rate for the years ended December 31, 2022 and 2021, respectively:

December 31, 2022 December 31, 2021

(in thousands)

4 unchanged sentences

Permanent items 31 201

R&D Credit ( 239 ) ( 295 )

Excess tax benefit from stock based compensation ( 89 ) ( 237 )

Research and development credit ( 455 ) ( 239 )

Other ( 280 ) ( 72 )

Provision for income taxes $ 6,676 $ 5,089

The Company applies the provision of ASC 740, Income Taxes .

ASC 740, Income Taxes , provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not.

In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis.

Based upon the level of historical taxable income, at this time, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not there will be full utilization of the deferred tax assets in each jurisdiction.

As such, as of December 31, 2021, the Company did no t record any valuation allowance.

The Company may be audited by the Internal Revenue Service and various state tax authorities.

2 unchanged sentences

The Company remains subject to IRS examination for the 2016 through 2021 tax years, and has received notice in February 2019 that it is under examination for years 2016 and 2017.

Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions, including California for the 2016 through 2020 tax years and South Carolina for the 2017 through 2020 tax years.

The Company accounts for uncertainties in income tax in accordance with ASC 740-10 — Accounting for Uncertainty in Income Taxes .

ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of income.

Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

As of December 31, 2021, and 2020, the Company did not have any unrecognized tax benefit.

On March 27,2020, the CARES Act was signed into law by the President.

The CARES act provides several favorable tax provisions.

The Company evaluated the impacts of CARES Act and determined it has no material impact to the income tax provision.

The Taxpayer Certainty and Disaster Relief Act of 2020, enacted on December 27, 2020, added a temporary exception to the 50% limit (TCJA) on the amount that businesses may deduct for food or beverages.

Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions for the 2018 through 2021 tax years.

As of December 31, 2022, the Company does not have any unrecognized tax benefit.

ASC 740, Income Taxes , provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not.

As such, as of December 31, 2022, based on the available evidence, the Company did not record any valuation allowance.

The Taxpayer Certainty and Disaster Relief Act of 2020 (the "TCJA"), enacted on December 27, 2020, added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages.

Beginning January 1, 2021, through December 31, 2022, the temporary exception allows a 100% deduction for food or beverages from restaurants.

The Company evaluated the impacts and incorporated such impacts into its income tax provision.

On March 10, 2021, the American Rescue Plan Act of 2021 was signed into law by the president.

The American Rescue Plan Act of 2021 provides several tax provisions.

The Company evaluated the impacts of the American Rescue Plan Act of 2021 and determined it has no material impact to the income tax provision.

COVID-19 Update

Since COVID-19 was declared a global pandemic by the World Health Organization, the Company’s business, operations and financial performance have been, and may continue to be, affected by the macroeconomic impacts resulting from the efforts to control the spread of COVID-19.

The Company has enacted enhanced health and safety protocols, including sanitizing procedure and health checks, at its facilities to ensure the health and safety of the employees.

While PPE related products boosted the Company’s net sales by $ 38.1 million for the year ended December 31, 2020, such sales have declined to approximately $ 2.7 million, or under 1.0 % of net sales for the year ended December 31, 2021.

The raw material and labor shortage and supply chain and transportation disruptions caused by COVID-19 have adversely impacted the Company’s business including, among other things, raw materials inflation, increased freight and shipping costs and longer inventory lead time.

The Company has evolved its operations to navigate such challenges, including the diversification of its supplier network, the adjustment of its inventory purchase pattern, and the continued focus on and investment in automation in its operations and its E-commerce platform,

On April 16, 2020, the Company received PPE loan proceeds in the amount of $ 5.0 million.

The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.

The Company applied for the forgiveness of the PPE loan, and was granted loan forgiveness in whole, by meeting the conditions for use of loan proceeds on June 10, 2021.

The Company recorded loan forgiveness of $ 5.0 million as gain on forgiveness of debt in the accompanying consolidated statement of income.

Additionally, the Company successfully completed its initial public offering in April 2021, raising total proceeds of $ 67.6 million, which strengthened its liquidity and allowed it to repay borrowings under its Line of Credit of $ 34.6 million and certain term loans totaling $ 39.3 million during the year ended December 31, 2021.

The Company continues to focus on working capital management and the strength of its balance sheet.

As of December 31, 2021, the Company had cash and cash equivalents of $ 6.5 million, and additional availability of $ 40.0 million under its Line of Credit and $ 6.9 million under its 2026 Term Loan.

Given its balance sheet and liquidity position, management believes that the Company has the financial flexibility and resources needed to operate in the current uncertain economic environment.

However, if global economic conditions worsen as a result of the pandemic, it could materially impact the Company’s liquidity position and capital needs.

The full extent to which COVID-19 impacts the Company's business and financial results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning

the severity of the virus and the actions to contain its impact, the impacts of new variants of the virus, and the timing, distribution, efficacy and public acceptance of vaccines and other treatments for COVID-19.

As of January 1, 2022, pursuant to the TCJA, research and experimental expenditures incurred in the current period are required to be capitalized and amortized over five or fifteen years, depending on where the research is conducted.

The Company has incorporated such impacts into its provision for income taxes for the year ended December 31, 2022 .

In August 2022, the Inflation Reduction Act of 2022 (the "Act") was signed into law.

The Act, among other things, imposes a nondeductible 1% excise tax on the fair market value of certain stock that is "repurchased" during the taxable year by publicly traded U.S.

corporations or acquired by certain of its subsidiaries.

The taxable amount is reduced by the fair market value of certain issuances of stock throughout the year.

The Act also imposes a 15% corporate minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022.

We do not expect these tax law changes to have a material impact on our consolidated financial statements;

however, we will continue to evaluate their impact.

Commitments and Contingencies

The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business.

Subsequent Events

On February 22, 2022, Global Wells exercised its option to draw the additional $ 6.9 million under its 2026 Term Loan, and immediately repaid $ 2.1 million to settle its intercompany payable to Lollicup with the proceeds.

Global Wells retained the remaining balance for general corporate purposes.

Subsequent to December 31, 2021 through the date the financial statements are issued, the Company drew a total of $ 10.2 million and repaid a total of $ 0.0 million under its Line of Credit.

During this period, the Company also made deposits for constructions and purchase of machinery and equipment totaling $ 3.9 million.

In January and February 2023, Lollicup made two additional investment payments of $ 1,300,000 and $ 1,600,000 , respectively, and received a refund of $ 950,000 in March 2023, pursuant to the JV Agreement as discussed in Note 4 — Joint Venture .

In February 2023, the Company entered into an 88-month lease agreement commencing on April 17, 2023 for a 52,000 square-foot distribution facility in Aurora, Illinois.

The term of the lease expires on July 31, 2030 and requires monthly base lease payments ranging from $ 34,000 to $ 43,000 after an initial rent abatement period.

In March 2023, the Company amended the Line of Credit, 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 %.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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What changed 10-K

Item 8. Financial Statements and Supplementary Data