What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-16 · 356 added, 289 removed, 605 unchanged (52% of the section changed)

3 unchanged sentences

Audited Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Report of Independent Registered Public Accounting Firm (BDO USA, LLP, Los Angeles, California, PCAOB ID No.

5 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Karat Packaging Inc.

Opinion on the Financial Statements

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

and its subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of income, of stockholders’ equity and of cash flows for the year then ended, including 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 as of December 31, 2023, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

March 15, 2024

We have served as the Company’s auditor since 2023.

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

2 unchanged sentences

Opinion on the Consolidated Financial Statements

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

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.

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

and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for the year 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 the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Method Related to Leases

2 unchanged sentences

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We believe that our audit provides a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2016.

Los Angeles, California

March 16, 2023

We served as the Company’s auditor from 2016 through 2023.

KARAT PACKAGING INC.

6 unchanged sentences

$ 23,076 $ 16,041

Short-term investments 26,343 —

Accounts receivable, net of allowance for bad debt of $ 392 and $ 1,260 at December 31, 2023 and 2022, respectively (including $ 0 and $ 6 associated with variable interest entity at December 31, 2023 and 2022, respectively)

17 unchanged sentences

Related party payable 5,306 4,940

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

Customer deposits (including $ 116 and $ 165 associated with variable interest entity at December 31, 2023 and 2022, respectively)

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

Long-term debt, current portion (including $ 1,122 and $ 957 associated with variable interest entity at December 31, 2023 and 2022, respectively)

Operating lease liabilities, current portion 4,800 4,511

Other payables (including $ 1,302 and $ 0 associated with variable interest entity at December 31, 2023 and 2022, respectively)

Total current liabilities 44,401 39,253

33 unchanged sentences

66,952 66,259

Impairment expense and loss (gain), net, on disposal of machinery

Total operating expenses 110,967 102,071

2 unchanged sentences

Rental income (including $ 981 and $ 949 associated with variable interest entity for the years ended December 31, 2023 and 2022, 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 )

Other expense, net

( 45 ) ( 228 )

Gain on foreign currency transactions 103 1,568

Interest income (including $ 606 and $ 2,171 associated with variable interest entity for the years ended December 31, 2023 and 2022, respectively)

1 unchanged sentence

( 2,043 ) ( 2,017 )

Gain on forgiveness of debt — 5,000

Total other income, net 908 2,498

23 unchanged sentences

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

Issuance of common stock in connection with

our initial public offering, net of issuance costs

Cash dividends declared ($ 0.35 per share)

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

3 unchanged sentences

5,000 — — — 51 — 51 — 51

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

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

6 unchanged sentences

Exercise of stock options 6,860 — — — 123 — 123 — 123

Distributions to shareholders, net of tax withholding

— — — — — — — ( 2,295 ) ( 2,295 )

Noncontrolling interest tax withholding — — — — — — ( 94 ) ( 94 )

11 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 10,405 10,044

Depreciation and amortization (including $ 1,214 associated with variable interest entity for both the year ended December 31, 2023 and 2022)

10,783 10,405

Adjustments to allowance for bad debt ( 711 ) 1,010

1 unchanged sentence

Write-off of inventory 3,897 3,470

Gain on sale of asset ( 32 ) —

Change in fair value of interest rate swap ( 2,159 ) ( 1,512 )

Amortization of loan fees 40 18

Deferred income taxes ( 478 ) ( 483 )

Impairment of deposits 549 465

Write-off of vendor prepayment 1,124 —

Loss (gain), net, on disposal of machinery and equipment 2,002 ( 32 )

Change in fair value of interest rate swap (including $ 0 and $ 2,159 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Amortization of loan fees (including $ 57 and $ 40 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Accrued interest on certificates of deposit ( 155 ) —

Stock-based compensation 770 2,047

Gain on forgiveness of debt — ( 5,000 )

Amortization of operating right-of-use assets 4,969 3,822

Impairment of deposit 465 —

Deferred income taxes ( 959 ) ( 478 )

(Increase) decrease in operating assets

Accounts receivable 1,854 ( 8,938 )

Accounts receivable (including $ 6 and $ 18 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Inventories ( 3,820 ) ( 16,210 )

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

Deposits ( 145 ) ( 64 )

Other assets 109 ( 316 )

Prepaid expenses and other current assets (including $ 109 and $ 75 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

( 466 ) ( 1,514 )

Other assets (including $ 14 and $ 27 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Increase (decrease) in operating liabilities

Accounts payable 89 ( 1,599 )

Accrued expenses 1,571 2,854

Accounts payable (including $ 60 and $ 495 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Accrued expenses (including $ 34 and $ 402 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Related party payable 366 2,937

Income taxes payable — ( 85 )

Customer deposits 66 664

Customer deposits (including $ 49 and $ 77 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Operating lease liability ( 4,642 ) ( 3,780 )

Other liabilities 149 300

Other payable — ( 794 )

Other liabilities (including $ 0 and $ 1 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Net cash provided by operating activities $ 53,379 $ 29,474

Year Ended December 31,

Cash flows from investing activities

Purchases of property and equipment ( 2,835 ) ( 2,657 )

Proceeds from disposal of property and equipment 77 —

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

Proceeds on disposal of property and equipment 841 77

Payments for costs incurred from sale of machinery and equipment ( 186 ) —

Deposits paid for joint venture investment ( 2,900 ) ( 5,876 )

Deposits refunded from joint venture investment 6,900 1,876

Proceeds from settlement of interest rate swap 825 —

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

Deposits refunded from cancelled machinery orders 503 —

Deposits paid for property and equipment ( 6,309 ) ( 12,090 )

Proceeds from settlement of interest rate swap (including $ 0 and $ 825 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Purchase of short-term investments (including $ 8,000 and $ 0 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Redemption of short-term investments (including $ 8,000 and $ 0 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Net cash used in investing activities $ ( 30,174 ) $ ( 17,845 )

Year Ended December 31,

Cash flows from financing activities

1 unchanged sentence

Payments on line of credit — ( 21,100 )

Proceeds from long-term debt 27,477 15,997

Payments on long-term debt ( 21,572 ) ( 39,272 )

Proceeds from issuance of common stock in connection with initial public offering, net of issuance costs — 67,592

Proceeds from exercise of stock options 51 100

Proceeds from long-term debt (including $ 8,000 and $ 27,477 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Payments for lender fees ( 61 ) —

Payments on long-term debt (including $ 1,010 and $ 21,572 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

( 1,010 ) ( 21,572 )

Tax withholding on vesting of restricted stock units ( 18 ) —

Proceeds from exercise of common stock options 123 51

Dividends paid to shareholders ( 20,909 ) ( 6,964 )

Payments on capital lease obligations — ( 611 )

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

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

Distributions to shareholders, net of tax withholding (including $ 2,295 and $ 0 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Payments of noncontrolling interest tax withholding (including $ 0 and $ 1,063 associated with variable interest entity for the year ended December 31, 2023 and 2022, respectively)

Net cash used in financing activities $ ( 16,170 ) $ ( 2,071 )

Net increase in cash and cash equivalents 7,035 9,558

4 unchanged sentences

Transfers from deposit to property and equipment $ 10,463 $ 9,859

Acquisition price of Pacific Cup, Inc.

included within deposits — 100

Gain on forgiveness of debt — 5,000

Non-cash purchases of property and equipment 148 196

Supplemental disclosures of cash flow information:

14 unchanged sentences

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 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;

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

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

The Company currently operates manufacturing facilities and distribution 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;

In addition, the Company operates eight other distribution centers located in Puyallup, Washington;

Summerville, South Carolina;

Kapolei, Hawaii and City of Industry, California.

Branchburg, New Jersey;

Kapolei, Hawaii;

City of Industry, California, Aurora, Illinois;

and Sugar Land, Texas .

As described in Note 22 — Subsequent Events , the Company entered into a lease agreement on February 12, 2024 for an additional distribution center in Mesa, Arizona.

Summary of Significant Accounting Policies

2 unchanged sentences

Principles of Consolidation:

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.

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.

9 unchanged sentences

Actual results could differ materially from the estimates that were assumed in preparing the consolidated financial statements.

Estimates that are significant to the consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for slow-moving and obsolete inventory.

Estimates that are significant to the consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for excess and obsolete inventory.

Reporting Segments:

The Company manages and evaluates its operations in one reportable segment.

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 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.

This segment consists of manufacturing and distribution of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, bagasse, biopolymer-based, and other compostable forms .

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

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

Earnings per share:

Basic earnings per common share is calculated by dividing net income attributable to Karat Packaging, Inc by the weighted average number of common shares outstanding during the related period.

Basic earnings per common share is calculated by dividing net income attributable to Karat Packaging, Inc.

by the weighted average number of common shares outstanding during the related period.

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.

During the quarter ended December 31, 2023, the Company recorded an out-of-period adjustment to write-off a vendor prepayment of $ 1,124,000 due to the resolution of a legal contingency that should have been reflected in its quarterly financial statements for the quarter ended September 30, 2023.

The Company evaluated the error and determined it was immaterial to both impacted periods.

Although the full year financial statements for the year ended December 31, 2023 are not affected, the impact of the adjustment for the quarter ended December 31, 2023 was a decrease to other assets and an increase in general and administrative expenses of $ 1,124,000 and a tax-effected decrease to net income of $ 847,000 .

See Note 20 — Commitments and Contingencies for further discussion about this litigation.

During the quarter ended December 31, 2023, the Company also recorded the following misclassification adjustments for the full year amounts within the consolidated statement of income with no impact on net income:

(i) $ 6,440,000 of online sales third-party platform fees from net sales to selling expense, including $ 4,764,000 deemed to be out-of-period, (ii) $ 3,947,000 of certain production expenses primarily related to machinery repair and maintenance from general and administrative expenses to cost of goods sold, including $ 3,392,000 deemed to be out-of-period, and (iii) $ 2,147,000 of payroll and employee-related costs for the Company's sales team within operating expenses from general and administrative expenses to selling expenses, including $ 1,529,000 deemed to be out-of-period.

All of the three out-of-period adjustments were recorded to correct immaterial errors in the Company's previously issued quarterly financial statements for the quarters ended March 31, June 30 and September 30, 2023.

The aggregate impact of these out-of-period adjustments for the quarter ended December 31, 2023 was an increase in net sales of $ 4,764,000 , an increase in cost of goods sold of $ 3,392,000 , an increase in selling expenses of $ 6,293,000 , and a decrease in general and administrative expenses of $ 4,921,000 .

These misclassification adjustments had no effect on totals for assets and liabilities, shareholders' equity, cash flows or net income for either the quarter ended December 31, 2023 or any of the previously reported quarters.

Reclassification:

3 unchanged sentences

The Company considers all highly liquid investments purchased with an original maturity at the date of purchase of three months or less to be cash equivalents.

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.

At December 31, 2023 and 2022, cash and cash equivalents were comprised of cash on hand, cash deposited with banks, and cash held in certain money market fund.

Accounts Receivable and Allowances:

1 unchanged sentence

Accounts receivable are carried at their estimated collectible amounts and are periodically evaluated for collectability based on past credit history.

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, risk profiles associated with different customer types, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

The Company recognizes an allowance for doubtful accounts on accounts receivable in an amount equal to the estimated expected losses net of recoveries.

The Company estimates this allowance based on knowledge of the customers' financial condition, review of historical receivable and reserve trends, and other pertinent information.

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 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.

The amount of the sales allowance is determined based on a historical transaction analysis.

Any additions to the sales allowance are recorded as a reduction to net revenue.

Inventories consist of raw materials, semi-finished goods, and finished goods.

Inventory cost is determined using the weighted-average method and valued at lower of cost or net realizable value.

The Company maintains a reserve for excess and obsolete inventory, taking into account various factors including historic usage, expected demand, anticipated sales price, and product expiration and obsolescence.

Property and Equipment:

11 unchanged sentences

Normal repairs and maintenance are expensed as incurred, whereas significant changes that materially increase values or extend useful lives are capitalized and depreciated over the estimated useful lives of the related assets.

Deposits are payments made for machinery and equipment, and construction and improvement for the Company’s facilities.

Deposits are payments made for machinery and equipment as well as construction and improvement for the Company’s facilities.

Included in deposits are also payments made to lessors of leased properties as security for the full and faithful observance of contracts, which will be refunded to the Company upon expiration or termination of the contract.

3 unchanged sentences

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.

For the years ended December 31, 2022 and 2021, management concluded that an impairment write-down was not required.

For the years ended December 31, 2023 and 2022, management concluded that an impairment of long-lived assets was not required.

Business Combination and Goodwill:

7 unchanged sentences

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.

The following table summarizes the activity in the Company's goodwill from December 31, 2020 to December 31, 2022:

(in thousands)

Balance at December 31, 2020

Goodwill acquired 397

Balance at December 31, 2021

Goodwill acquired —

Balance at December 31, 2022

During the years ended December 31, 2023 and 2022, the Company determined no goodwill impairment has occurred.

Government Grants:

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

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

As of December 31, 2023 and 2022, Lollicup received cumulative grants of $ 1,500,000 and $ 1,350,000 , respectively.

As of both December 31, 2023 and 2022, 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 grants are reported as deferred income within other payable in the accompanying consolidated balance sheet as of December 31, 2023, and within other liabilities in the accompanying consolidated balance sheet as of December 31, 2022, as Lollicup and Global Wells have not fully met all conditions attached to the grants.

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.

2 unchanged sentences

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.

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 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 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.

In June 2019, Global Wells entered into an interest rate swap to manage interest rate risk, and accounted for such interest rate swap as a derivative instrument under ASC 815.

In June 2022, Global Wells terminated this interest rate swap.

The interest rate swap was not designated for hedge accounting and as such, changes in the fair value of the interest rate swap were recognized as interest income during the year ended December 31, 2022.

See Note 11 — Interest Rate Swap for additional information on the interest rate swap and the related termination.

Variable Interest Entities:

2 unchanged sentences

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

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

manufacturing facility.

The purpose of this entity is to own, construct, and manage warehouses and manufacturing facilities.

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 .

3 unchanged sentences

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.

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, the ability to receive significant benefits, and 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 810, for the period from March 23, 2018.

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

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

Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets.

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.

rather they represent claims against the specific assets of Global Wells.

See Note 10 — Long Term Debt for a description of the two term loans that Global Wells had with financial institutions as of December 31, 2023.

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:

December 31, 2022 December 31, 2021

(in thousands)

Cash $ 2,022 $ 1,163

Accounts receivable 53 384

Prepaid expenses and other current assets 191 63

Due from Lollicup USA Inc.

Property and equipment, net 45,399 46,612

Other assets 4,262 4,762

Total assets 56,627 52,984

Accounts payable $ 2 $ 497

Accrued expenses 626 68

Income tax payable — 9

Customer deposits 165 88

Due to Lollicup USA Inc.

Long-term debt, current portion 957 1,178

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

Other liabilities 1,302 2,636

Total liabilities $ 44,610 $ 42,435

Revenue Recognition:

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 generates revenues from product sales to customers that include national chains.

regional chains, distributors, small local restaurants, and those that purchase for individual consumption primarily through our online stores.

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.

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• National and regional chains revenue:

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

National and regional chains revenue is derived from chain restaurants and businesses 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.

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Distributors revenues are derived from national and regional distributors across the U.S.

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

that purchase the Company’s products for resale and distribution to other businesses such as restaurants, supermarkets, offices, and schools.

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

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• Online revenue:

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

Online revenue is derived from the Company's online storefront on www.lollicupstore.com, and other e-commerce platforms including Amazon, Walmart, eBay, and TikTok with customers largely consisting of small businesses such as small restaurants, coffee houses, bubble tea cafes, pizza parlors, and frozen yogurt shops .

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

1 unchanged sentence

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.

For online sales on third-party e-commerce platforms, the Company is the principal in the three-party arrangement and control of the products remains with the Company at all times until transferring to the end customer or upon return from the end customer.

Online platform fees are recognized as selling expenses.

• Retail revenue:

Retail revenue is derived primarily from regional bubble tea shops, boutique coffee shops and frozen yogurt shops.

Retail revenue is derived primarily from regional and local restaurants, coffee houses, bubble tea cafes, pizza parlors, and frozen yogurt shops.

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

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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.

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 local 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.

Logistics services revenue was $ 4,382,000 and $ 6,150,000 for the year ended December 31, 2023, and 2022, 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.

The transaction price is allocated to each performance obligation based on the standalone or contractual selling price.

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

Variable consideration includes estimates of rebates and other sales incentives, cash discounts for prompt payment, consideration payable to customers for cooperative advertising and other program incentives, and sales returns.

Variable consideration includes estimates of returns, restocking fees, and consideration payable to customers for rebates, sales incentives, and cooperative advertisement.

The Company estimates its variable consideration based on contract terms and historical experience of actual results using the expected value method.

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, sales incentives, customer deposits and consideration payable to customers for cooperative advertising.

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

As of December 31, 2023 and 2022, 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.

During the year ended December 31, 2023, and 2022, the Company recognized revenue of $ 1,077,000 and $ 1,104,000 , respectively, related to customer deposits received as of the beginning of each respective year.

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 product sales, as these activities occur before the customer receives the products.

Shipping and handling fees billed to customers are not deemed to be separate performance obligations for product sales.

Shipping and handling costs included within selling expenses in the consolidated statements of income for the years ended December 31, 2023 and 2022 were $ 28,040,000 and $ 32,508,000 , respectively.

Sales taxes collected concurrently with revenue-producing activities and remitted to governmental authorities are excluded from revenue.

Sales commissions are expensed as incurred due to the amortization period being less than one year and are recorded in selling expense on the accompanying consolidated statements of income.

Advertising Costs:

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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 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 .

• At December 31, 2023, the Company had money market accounts and certificates of deposit classified as Level 1 and Level 2, respectively, within the fair value hierarchy.

The short-term investments comprise of certificates of deposits with an original maturity of longer than 90 days and are reported at their carrying value as current assets on the consolidated balance sheet.

The carrying value of these short-term investments approximates fair value as they were purchased near or on December 31, 2023.

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

The following table summarizes the Company’s fair value measurements by level at December 31, 2023 for the assets measured at fair value on a recurring basis:

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Cash equivalents $ 5,956 $ 10,000 $ —

Short-term investments

Fair value, December 31, 2023

$ 5,956 $ 36,343 $ —

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 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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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:

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related party payable, accrued expenses, and other payable at December 31, 2023 and 2022, approximated fair value because of the short maturity of these instruments.

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 (the "2026 Term Loan" and "2027 Term Loan," respectively):

December 31, 2023

1 unchanged sentence

(in thousands)

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

2026 Term Loan

$ 21,490 $ 19,999

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

2027 Term Loan

28,028 27,810

$ 49,518 $ 47,809

December 31, 2022

Carrying Amount Estimated Fair Value

(in thousands)

2026 Term Loan

$ 22,168 $ 20,115

2027 Term Loan

20,563 18,918

$ 42,731 $ 39,033

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

Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment.

These non-financial assets and liabilities may include assets acquired in a business combination or property and equipment that are determined to be impaired.

As of December 31, 2023 and 2022, the Company did not have any material non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition.

Foreign Currency:

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

The Company recorded a foreign currency gain of $ 103,000 and $ 1,568,000 for the years ended December 31, 2023 and 2022, respectively.

Stock-Based Compensation:

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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 .

The Company determines if an arrangement is a lease at inception.

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.

Certain lease agreements contain both lease and non-lease components.

Fixed payments for non-lease components are combined with

lease payments and accounted for together as a single lease component which increases the amount of the lease assets and liabilities.

Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities.

Right-of-use ("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.

ROU assets and corresponding operating leases liabilities are recognized for all leases with an initial term greater than 12 months.

New and Recently Adopted Accounting Standards:

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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 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):

Measurement of Credit Losses on Financial Instruments" , which adds to U.S.

GAAP an impairment model known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

The ASU is also intended to reduce the complexity of U.S.

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

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

Securities and Exchange Commission (SEC) filers.

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

For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.

Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years.

The FASB subsequently issued ASU 2019-10 (Topic 326), “ Financial Instruments-Credit Losses:

Effective Dates ” which amends the effective date for SEC filers that are eligible to be ‘smaller reporting companies’, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans.

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

The Company 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 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.

On March 1, 2021, Lollicup entered into an asset purchase agreement (“the Pacific Cup Agreement”) with Pacific Cup, Inc.

(“Pacific Cup”), a manufacturer and distributor of disposable products operating in Kapolei, Hawaii.

Pursuant to the Pacific Cup Agreement, Lollicup paid cash consideration of $ 1,000,000 to acquire certain assets of Pacific Cup.

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 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.

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 final valuation of assets acquired as a result of this acquisition:

In November 2023, the FASB issued ASU 2023-07 Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures .

The new guidance requires enhanced disclosure of significant expenses that are regularly reported to the chief operating decision maker and the nature of segment expense information used to manage operations.

The new guidance is effective for all public companies for annual reporting periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

The Company will adopt the new standard in annual reporting period beginning after December 15, 2023 and is currently evaluating the impacts of the new guidance on its disclosure within the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) :

Improvements to Income Tax Disclosures .

The new guidance requires disaggregated information about the effective tax rate reconciliation and additional information on taxes paid that meet a quantitative threshold.

The new guidance is effective for public companies for annual reporting periods beginning after December 15, 2024, and for non-public companies for annual reporting periods beginning after December 15, 2025, with early adoption permitted for both.

The Company will adopt the new standard in annual reporting period beginning after December 15, 2025 and is currently evaluating the impacts of the new guidance on its disclosures within the consolidated financial statements.

December 31, 2023 December 31, 2022

(in thousands)

Inventories $ 153

Property and equipment 50

Customer relationships 400

Total assets acquired $ 1,000

Cash $ 13,566 $ 2,022

Accounts receivable — 53

Prepaid expenses and other current assets 558 191

Due from Lollicup USA Inc.

Property and equipment, net 44,185 45,399

Other assets 3,240 4,262

Total assets 61,549 56,627

Accounts payable $ 63 $ 2

Accrued expenses 591 626

Customer deposits 116 165

Due to Lollicup USA Inc.

Other payable

Long-term debt, current portion 1,122 957

Long-term debt, net of current portion 48,396 41,558

Other liabilities — 1,302

Total liabilities $ 51,604 $ 44,610

During the year ended December 31, 2023, Global Wells made a pro rata distribution of its earnings of $ 3,956,000 , net of all applicable withholding taxes, to its four members.

Lollicup received $ 504,000 , net of applicable withholding taxes, which is eliminated in the consolidated financial statements.

See Note 22 — Subsequent Events for discussion about one of Global Well's members redemption of its ownership interest in this entity.

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.

On April 6, 2022, the Company entered into a joint venture agreement (the "JV Agreement") to establish a new corporation, Bio Earth, to build a bagasse factory in Taiwan.

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.

During the year ended December 31, 2022, the Company made payments of $ 5,876,000 and received a refund of $ 1,876,000 under the JV agreement.

During the three months ended March 31, 2023, the Company made additional payments of $ 2,900,000 and received a refund of $ 900,000 under the JV Agreement.

On May 8 2023, the Company entered into a Share Transfer Agreement (the "Share Transfer Agreement"), with approval of the Board of Directors, to sell all of its equity interest in Bio Earth to Keary Global for a total consideration of approximately $ 6,100,000 (the "Share Transfer"), representing the total net deposits made by the Company of $ 6,000,000 under the JV Agreement as discussed above and interest accruing at 5 % per annum.

Keary Global and its affiliate, Keary International are both owned or controlled by Jeff Yu, brother of the Company's Chief Executive Officer, Alan Yu.

Concurrent with the Share Transfer Agreement, the Company also entered into an agreement with Keary Global, Bio Earth and Happiness Moon Co., Ltd.

(“Happiness Moon”) pursuant to which (i) Lollicup agreed to transfer all Bio Earth shares, as well as its rights and obligations under the JV Agreement to Keary Global, (ii) Happiness Moon and Bio Earth agree to foregoing and (iii) Bio Earth shall manage the regulatory and registration requirements related to the Share Transfer.

As of the end of the second quarter of 2023, the Company had completed the Share Transfer to Keary Global and received the total consideration of $ 6,100,000 in full.

See Note 17 — Related Party Transactions for further discussion on the Company's business activities with Keary Global.

Inventories consist of the following:

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Subtotal 71,878 71,955

Less inventory reserve ( 749 ) ( 743 )

inventory reserve

( 350 ) ( 749 )

Total inventories $ 71,528 $ 71,206

During the year ended December 31, 2023, the Company recorded $ 3,897,000 of adjustments and write-off related to certain inventory items, including a $ 1,710,000 write-off of raw materials, as the Company disposed of certain machinery and equipment in executing the strategy to scale back production in certain locations.

See Note 16 — Impairment Expense and Loss (Gain), Net, on Disposal of Machinery for further discussion about the disposal of machinery.

During the year ended December 31, 2022, the Company recorded a $ 3,470,000 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.

Inventory adjustments and write-offs are included in cost of goods sold on the accompanying consolidated statements of income.

Property and Equipment

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Total property and equipment, net $ 95,226 $ 95,568

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.

Depreciation and amortization expense is reported within general and administrative expense except for depreciation and amortization expense related to manufacturing facilities and equipment, which is included in cost of goods sold on the accompanying consolidated statements of income.

Depreciation and amortization expense on property and equipment reported within general and administrative expense was $ 3,981,000 and $ 4,491,000 for the years ended December 31, 2023 and 2022, respectively.

Depreciation and amortization expense on property and equipment reported within cost of goods sold was $ 6,776,000 and $ 5,887,000 for the years ended December 31, 2023 and 2022, respectively.

The following table summarizes the activity in the Company's goodwill from December 31, 2021 to December 31, 2023:

(in thousands)

Balance at December 31, 2021

Goodwill acquired —

Balance at December 31, 2022

Goodwill acquired —

Balance at December 31, 2023

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”) secured by the Company’s assets.

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 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.

Additionally, the Company was required to comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, minimum debt service coverage ratio, and minimum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio.

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

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 Company is required to comply with certain financial covenants, including a minimum current ratio, minimum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio and a minimum fixed charge coverage ratio.

On March 14, 2023, the Company amended the Line of Credit.

Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25 % with a minimum floor of 3.25 %.

The amendment on March 14, 2023, 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 %.

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 and then to $ 5,000,000 on June 20, 2023.

The Company had no borrowings outstanding under the Line of Credit as of both December 31, 2023 and December 31, 2022.

The amount issued under the standby letter of credit was $ 3,766,000 and $ 1,070,000 as of December 31, 2023 and 2022, respectively.

As of December 31, 2023, and 2022, the maximum remaining amount that could be borrowed under the Line of Credit was $ 36,234,000 and $ 38,930,000 , respectively.

As of both December 31, 2023 and 2022, 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

The following table summarizes information related to accrued expense liabilities:

Accrued expenses consist of the following:

December 31, 2023 December 31, 2022

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Accrued miscellaneous expenses $ 1,271 $ 513

Accrued interest 108 68

Accrued payroll

Accrued vacation and sick pay 543 416

Accrued shipping expenses 1,918 2,868

Accrued ocean freight and other import costs

Accrued sale and use taxes

Accrued professional services fees

Deferred rent liability — 372

Accrued vacation and sick pay

Accrued property tax

Accrued sale taxes and use taxes 992 927

Accrued shipping expenses

Accrued sales discount expense

Accrued interest expense

Total accrued expenses $ 10,576 $ 9,005

3 unchanged sentences

(in thousands)

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.

The 2026 Term Loan, 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.

3 unchanged sentences

$ 21,555 $ 22,168

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.

The 2027 Term Loan, 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, which the Company exercised in March 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.

Prior to August 1, 2023, principal and interest payments of $ 104,000 are due monthly.

Beginning August 1, 2023, monthly principal and interest payments increased to $ 144,000 for the remainder of the loan term, 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.

28,166 20,563

Long-term debt 49,721 42,731

2 unchanged sentences

Long-term debt, net of current portion $ 48,396 $ 41,558

KARAT PACKAGING INC.

AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2023, future maturities are:

(in thousands)

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

The 2027 Loan was a refinance in June 2022 from a previous $ 21,580,000 term loan, and was accounted for as a debt modification.

The Company was in compliance with all of its financial covenants as of both December 31, 2023 and 2022.

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 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.

In June 2022, Global Wells terminated its ten-years 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 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 5.1 % 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.

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 .

For the year ended December 31, 2022, Global Wells recognized $ 2,159,000 (including the gain on settlement) as interest income related to the interest rate swap .

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 designated 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 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.

During the year ended December 31, 2023, the Company paid out special and regular quarterly dividend totaling $ 20,909,000 .

During the year ended December 31, 2022, the Company paid out special dividend totaling $ 6,964,000 .

Additionally, as described in Note 22 — Subsequent Events , on February 7, 2024, the Company's Board of Directors declared a quarterly cash dividend of $ 0.30 per share on the Company's common stock.

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 were 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.

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For the years ended December 31, 2023 and 2022, the Company recognized a total of $ 770,000 and $ 2,047,000 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.

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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

Granted 50,000 16.53

420,000 $ 18.58 8.8 —

Exercised ( 6,860 ) 17.84

1 unchanged sentence

Outstanding at December 31, 2023

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

386,473 $ 18.58 7.8 $ 2,424

Vested and expected to vest at December 31, 2023

386,473 $ 18.58 7.8 $ 2,424

Exercisable at December 31, 2023

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.

249,807 18.73 7.8 $ 1,528

The aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on December 31, 2023, multiplied by the number of shares per each option.

At December 31, 2023, total remaining stock-based compensation cost for unvested stock options under the Plan was approximately $ 183,000 .

The cost is expected to be recognized over a weighted-average period of 0.8 years.

The aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on December 31, 2022, multiplied by the number of shares per each option.

There were no stock options granted during the year ended December 31, 2023.

The weighted-average grant date fair value of stock options granted during the year ended December 31, 2022 was $ 5.18 .

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:

Year Ended December 31,

December 31, 2022

Risk-free interest rate 1.70 %

Expected term (years) 6.25 years 6.25 years

Expected term (years) 6.25 years

Volatility 30.0 %

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Restricted Stock Units

The Company issued restricted stock units to its employees.

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

A summary of the Company’s unvested restricted stock units activity under the Plan for the years ended December 31, 2023 and 2022 is as follows:

Number of Shares Outstanding

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Unvested at December 31, 2022 82,146 $ 11.47

Granted 9,900 16.69

Vested ( 75,133 ) 11.13

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Unvested at December 31, 2023 5,346 $ 16.71

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.

The total fair value of restricted stock units, as of their respective vesting date, during the years ended December 31, 2022 and 2021 was $ 1,156,000 and $ 1,884,000 , respectively.

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 during 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 .

At December 31, 2023, total remaining stock-based compensation cost for unvested restricted stock units under the Plan was approximately $ 15,000 .

The cost is expected to be recognized over a weighted-average period of 0.8 years.

There were no restricted stock units granted during the year ended December 31, 2023.

There were 9,900 restricted stock units granted during the year ended December 31, 2022 with a weighted-average grant date fair value of $ 16.69 .

The total fair value of restricted stock units, as of their respective vesting date, during the year ended December 31, 2023, and 2022, was $ 1,612,000 and $ 1,156,000 , respectively.

Earnings Per Share

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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.

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Diluted earnings per share $ 1.63 $ 1.19

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.

For the years ended December 31, 2023 and 2022 a total of 213,599 and 449,223 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their 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:

The following table summarizes the Company's lease costs in the accompanying consolidated statement of income:

Year Ended December 31,

(in thousands)

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Total lease expense $ 7,615 $ 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

For the year ended December 31, 2023 and 2022, total lease expense included in operating expenses was $ 6,541,000 and $ 4,574,000 , respectively, and total lease expense included in cost of goods sold was $ 1,074,000 and $ 1,076,000 , respectively.

The following table presents supplemental information related to operating leases:

December 31, 2023 December 31, 2022

(in thousands, except lease term and discount rate)

Weighted average remaining lease term

4.51 years 4.27 years

Weighted average discount rate

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

$ 9,995 $ 10,727

Cash paid for amounts included in measurement of lease obligations:

Operating cash flows from operating leases

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

$ 5,768 $ 4,481

As of December 31, 2023, future lease payments under operating lease were as follows:

(in thousands)

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Total lease liability balance $ 21,487

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

In September 2020, Global Wells entered into an operating lease agreement with an unrelated party as the landlord for a term of 38 months beginning September 9, 2020.

The lease was extended for a period of two additional years beginning November 1, 2023, and generates monthly rental payments from $ 62,000 to $ 65,000 .

Sublease income for the year ended year ended December 31, 2023 and 2022 was $ 76,000 and $ 0 , respectively.

Sublease income is included in rental income in the accompanying consolidated statements of income.

The expected rental income is $ 786,000 and $ 616,000 for the year ended December 31, 2024, and 2025, respectively.

Impairment Expense and Loss (Gain), Net, on Disposal of Machinery and Equipment

In February 2023, the Company started to execute a strategy to increase imports and scale back manufacturing in certain locations.

The Company subsequently reached an agreement with two unrelated third-party vendors in Taiwan to sell them certain of its manufacturing machinery and equipment.

During the year ended December 31, 2023, the Company also cancelled certain equipment purchase commitments that it had previously paid deposits towards, and disposed of certain machinery and equipment through abandonment.

The Company recognized the following amounts related to impairment expense and loss (gain), net, on disposal of machinery:

Year Ended December 31,

(in thousands)

Thereafter 1,629

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

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.

Loss, net, on disposal of machinery in scaling back manufacturing

Loss (gain), net, on disposal of machinery within normal course of business

Loss (gain), net, on disposal

Impairment of deposits 523 —

Impairment expense and loss (gain), net, on disposal of machinery

$ 2,525 $ ( 32 )

Related Party Transactions

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.

Keary Global ("Keary Global") owns 250,004 shares of the Company's common stock as of December 31, 2023, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018.

Keary Global and its affiliate, Keary International, are owned by one of the Company’s stockholders’ family member.

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Purchases for the years ended December 31, 2023 and 2022 from this related party were $ 39,595,000 and $ 42,978,000 , respectively.

See Note 4 — Joint Venture for discussion on the Share Transfer Agreement with Keary Global.

Employee Benefits

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Reserves 503 825

Accruals & deferred expenses 66 188

Tenant improvement allowance — 1,216

R&D credit 43 44

Accruals and deferred expenses

Research and development credit

Inventory 1,012 1,042

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Net deferred tax liability $ ( 4,197 ) $ ( 5,156 )

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:

Reconciliation of income taxes are as follows from statutory rate of 21% to the effective tax rate for the year ended December 31, 2023 and 2022, respectively:

December 31, 2023 December 31, 2022

3 unchanged sentences

Noncontrolling Interest - Income not subject to tax ( 115 ) ( 460 )

Government forgiveness of debt — ( 1,050 )

Permanent items 42 31

1 unchanged sentence

Research and development credit ( 417 ) ( 455 )

Other ( 280 ) ( 72 )

( 116 ) ( 280 )

Provision for income taxes $ 9,804 $ 6,676

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The Company evaluates its exposures associated with the tax filing positions and, while it believes its positions comply with applicable laws, may record liabilities based upon estimates of the ultimate outcome of these matters and the guidance provided in ASC 740.

As of December 31, 2023 and 2022, the Company does not have any unrecognized tax benefit.

The Company remains subject to IRS examination for the 2020 through 2022 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 for the 2019 through 2022 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.

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, 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.

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 .

the deferred tax assets in each jurisdiction.

As such, as of December 31, 2023, and 2022, based on the available evidence, the Company did not record any valuation allowance.

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

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however, we will continue to evaluate their impact.

In March 2023, the IRS announced the Winter Storm Relief that allowed for taxpayers in California affected by severe winter storms, flooding, landslides, and mudslides to have until November 15, 2023, to file various individual and business tax returns and make tax payments.

The Company took advantage of this tax relief in the current year.

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.

On October 5, 2023, the Company received a final and binding judgment from the Taiwan Supreme Court, dismissing its claim filed in 2020 against one of its Taiwanese vendors to return a prepayment of $ 1,124,000 due to the vendor's failure to deliver products under the contract.

As a result, the Company recorded a write-off of the prepayment, which is included in general and administrative expense in the consolidated statement of income.

In May 2023, the Company received a Notice of Investigations and Interim Measures stating that U.S.

Customs and Border Protection (“CBP”) had initiated a formal investigation to determine whether the Company had evaded the anti-dumping and countervailing duty orders on lightweight thermal paper from China by transshipping the merchandise through Taiwan.

The period of investigation was from January 2022 through the pendency of the investigation.

On February 5, 2024, CBP issued its Notice of Determination concluding that the manufacturing procedures performed by the manufacturer in Taiwan, which the Company imported certain thermal paper products from, did not constitute substantial transformation.

Based on this, the Company recorded a reserve as of December 31, 2023 and a corresponding increase in cost of goods sold in the consolidated statement of income for the year ended December 31, 2023 for estimated additional probable loss of $ 2,333,000 , representing the total estimated probable loss on all thermal paper imports under the investigation period minus payments already made.

The Company is in the process of evaluating the CBP determination and assessing its appeal options.

The amount of the final payments could differ materially from the Company's current estimate.

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

Secondary Offering

On September 12, 2023, certain selling stockholders completed a secondary public offering of shares of the Company's common stock.

The Company did not receive any of the proceeds from the sale of these shares by the selling stockholders.

The Company incurred offering transaction costs of $ 453,000 , which were recognized in general and administrative expense in the consolidated statement of income .

Subsequent Events

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 %.

On February 7, 2024, the Company's Board of Directors declared a quarterly cash dividend of $ 0.30 per share on the Company's common stock, which was paid on February 29, 2024 to shareholders of record at the close of business on February 21, 2024.

On February 12, 2024, the Company signed a lease agreement for a 44,000 square-foot distribution facility in Mesa, Arizona for a term of 65 months.

The lease term will commence on March 16, 2024 with monthly base lease payments ranging from $ 42,000 to $ 48,000 after an initial rent abatement period.

On February 29, 2024, Global Wells and one of its members (the "Selling Member") entered into a membership interest redemption agreement, under which the Selling Member sold and Global Wells purchased and redeemed all of the Selling Member's 10.8 % ownership interest in Global Wells for a total cash consideration of $ 3,208,000 , net of and tax withholding.

The ownership interests and voting power of the remaining three members of Global Wells, including Lollicup, were adjusted proportionally subsequent to the redemption.

Therefore, Lollicup's ownership interest increased to

15.1 % and voting interest increased to 33.3 %.

On February 16, 2024, Global Wells made an advance cash payment of $ 2,325,000 to the Selling Member, with the remaining balance expected to be paid before December 31, 2024.

On March 12, 2024, the Company's Compensation Committee of the Board of Directors approved a grant totaling 91,000 restricted stock units to certain key employees including the CEO and CFO.

The grant date fair value of these restricted stock units was $ 2,674,000 .

The restricted stock units vest at various times between May 2024 and May 2026.

On March 12, 2024, the Company and Alan Yu, CEO, entered into an amendment to his employment agreement (the “CEO Amendment”), effective as of March 12, 2024.

The CEO Amendment reflects that Mr.

Yu will continue in his role as Chief Executive Officer.

Also pursuant to the CEO Amendment, Mr.

Yu's base salary will increase to $ 300,000 per year.

The CEO Amendment also provides that Mr.

Yu will be granted 24,000 restricted stock units, as discussed above.

Additionally, on March 12, 2024, the Company and Jian Guo, CFO, entered into an amendment to her employment agreement (the “CFO Amendment”), effective as of March 12, 2024.

The CFO Amendment reflects that Ms.

Guo will continue in her role as Chief Financial Officer.

The CFO Amendment also provides that Ms.

Guo will be granted 24,000 restricted stock units, as discussed above.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data