Karat Packaging Inc. 10-K

ITEM 1. BUSINESS As used in this Annual Report on Form 10-K, “we”, “us”, “our”, “Karat”, “the Company” or “our Company” refer to Karat Packaging Inc., a Delaware corporation, and, unless the context requires otherwise, our operating subsidiaries. References to “Global Wells” or “our variable interest entity” refer to Global Wells Investment Group LLC, a Texas limited liability company and our consolidated variable interest entity, in which the Company has an equity interest and which is controlled by one of our stockholders. References to “Lollicup” refer to Lollicup USA Inc., a California corporation, our wholly-owned subsidiary. Our Company We are a rapidly-growing and nimble distributor and manufacturer of disposable foodservice products and related items, including food and take-out containers, bags, boxes, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, gloves, janitorial supplies, and other products. Our products are available in plastic, paper, biopolymer-based, and other compostable forms. We are a leader in product innovation, offering a growing line of environmentally-friendly products to our customers, who are increasingly focused on sustainability. We also offer customized solutions to our customers, including new product development, design, printing and logistics services. We operate our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses. We believe we have established ourselves as a differentiated provider of high-quality products relative to our competitors. Our operating model entails generating the majority of our revenue from the distribution of products sourced from a diversified global network of over 140 vendors, complemented by select manufacturing capabilities in the U.S., which allows us to provide customers with broad product choices and customized offerings with short lead times. This model provides us with the flexibility to adjust the mix of our product offering from import and manufacturing in evolving economic environments to drive operating efficiency and sustained margin expansion. Starting in 2023 and continuing into 2024, in light of the rising domestic labor and other operating costs and dropping ocean freight rates, we executed a strategy to pivot into a more asset-light model by increasing imports and scaling back domestic manufacturing. At the same time, we have expanded our vendor network by prioritizing strong partnerships with reliable and cost-efficient sources. This has enabled us to diversify our supplier base, minimize reliance on individual suppliers, enhance the resilience of our supply chain, expand our margin and improve our operating cash flows. While we largely maintained our manufacturing infrastructure, we disposed of certain production machinery and related raw materials and reduced our production workforce. Although we expect manufacturing to remain a relatively small portion of our sales mix going forward, we plan to keep manufacturing capabilities domestically to retain our nimble business model. For the year ended December 31, 2024, manufacturing accounted for approximately 11% of our net sales, down from 20% in the prior year. Our customers include a wide variety of national and regional distributors, restaurant and supermarket chains, retail establishments and online customers. Our products are well suited to address our customers’ needs towards take-out and food delivery orders. Our diverse and growing blue chip customer base includes well-known fast casual chains such as Applebee’s Neighborhood Grill + Bar, Chili’s Grill & Bar, PF Chang's China Bistro, Chipotle Mexican Grill, and Corner Bakery Cafe, and fast food chains such as The Coffee Bean & Tea Leaf, El Pollo Loco, In-N-Out Burger, Jack in the Box, Panda Express, and Raising Cane’s Chicken Fingers. Additionally, in 2024, we initiated a strategic emphasis on expanding into the supermarket segment. We have gained prominent grocery chain customers such as Albertsons and H-E-B, and we expect this sector to be one of the most significant growth drivers for our business. As our capabilities, product offering and footprint expand, we aim to broaden our reach to national and regional airlines, entertainment venues, and other non-restaurant customers. Our increasingly strong brand recognition in the foodservice industry, nimble operations and scaled distribution position us strongly for new customer acquisition and continued wallet share expansion with existing customers. For the years ended December 31, 2024 and 2023, no single customer represented more than 10% of our revenue. We are an omni-channel provider and have made significant investments in e-commerce, distribution network, technology, supply chain, and customer initiatives, such as online ordering and same day pickup. We operate our e-commerce channel through our company storefront at www.lollicupstore.com and through our mobile app, available for download on both Apple and Android platforms, as well as third-party storefronts on Amazon, Walmart, eBay, and TikTok. Our e-commerce platforms allow us to offer our entire range of products for online procurement and cross market other products to our customers. These platforms also provide us with the opportunity to continue our expansion into the business-to-consumer ("B2C") market in addition to the business-to-business ("B2B") small retailer customers that we have traditionally served. We have elevated our focus on servicing the B2C market by sourcing products tailored for and geared toward these end-users. We 3 have continued to invest in expanding our e-commerce team and improving and scaling our online marketing efforts. Our e-commerce channel, which typically carries a higher margin, significantly outperformed all other channels in year-over-year revenue growth in 2024, and we believe the e-commerce channel will continue to be a key growth driver in our business. We classify our customers into four categories: distributors, national and regional chains, retail and e-commerce/online. • Distributors : national and regional distributors across the U.S. that purchase our products and provide a channel to offer our products to restaurants, offices, schools, government entities and other end users. • National and regional chains : typically fast casual, fast food restaurants, and supermarket chains with locations across multiple states to which we supply specified products. We enter into floor stocking agreements with a subset of our national and regional chains customers, providing some visibility into future revenue. • Retail : primarily regional bubble tea shops, boutique coffee shops, frozen yogurt shops and small mom-and-pop restaurants that often purchase our specialty beverage ingredients and related items. This channel also includes a small amount of revenue generated from logistic and transportation services provided to customers. • E-commerce/Online : small businesses, often with only one or two locations, as well as customers who purchase for personal use. The diversity of our customer types allows us to maintain a broad product offering while providing us with the ability to source products efficiently, as we are able to sell many products across multiple customer segments. We expect a large proportion of our future growth to come from national and regional chains and distributors, as well as our higher margin online customers. We believe that the current industry environment and regulatory landscape has accelerated the shift in consumer preferences towards take-out orders, food delivery, and eco-friendly sustainable products, which we expect to continue in the foreseeable future. As we broaden our reach and expand into new geographic areas, we have taken significant steps to strengthen our sales force and to scale our distribution network. We have added new sales representatives and regional managers to ensure localized expertise and better customer engagement in key markets. Additionally, we recognize the value of internal growth and development within our organization, exemplified by the promotion of our inaugural Chief Revenue Officer in 2023 as well as regional sales directors. These strategic appointments underscore our commitment to fostering leadership from within and aligning our sales strategy with long-term growth objectives. Together, these efforts position us to drive sales performance and deepen our market presence. We continued to significantly expand our distribution network, which we view as one of the key growth drivers of our business. We currently operate manufacturing facilities and distribution centers in Chino, California, Rockwall, Texas and Kapolei, Hawaii. In addition, we have distribution centers located in Branchburg, New Jersey; Puyallup, Washington; Summerville, South Carolina; Kapolei, Hawaii; Sugar Land, Texas; Aurora, Illinois; and Mesa, Arizona. In the past 24 months, we opened new warehouses in Mesa, Arizona, Sugar Land, Texas and Aurora, Illinois, adding over 232,000 square feet of distribution space. Further, as described in Note 22 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on March 3, 2025, we entered into a lease agreement for an additional 187,000 square foot distribution center in Chino, California, to support our anticipated growth. We are currently in the process of setting up this location to be fully operational by the second quarter of 2025. Additionally, we also racked up more areas in existing warehouses, with over 50,000 square feet of new racked space added in 2024 and 2023 combined. Our distribution and fulfillment centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Chicago, Phoenix, Dallas, Houston, Seattle, Atlanta and Honolulu metro areas. Competitive Strengths We believe the following strengths fundamentally differentiate us from our competitors and drive our success: Extensive portfolio of disposable foodservice products We leverage our diversified global supplier network and domestic production capabilities to offer customers a wide selection of single-use disposable foodservice products and specialty food and beverage products with over 6,900 SKUs across a broad range of product categories. Key offerings include food and take-out containers, bags, boxes, tableware, cups, lids, 4 cutlery and straws, boba tea supplies and coffee drinks. Our strong relationships with our suppliers allow us to offer customers products that preserve the high food quality and meet the unique needs of their business. Furthermore, these supplier relationships allow us to offer custom-branded and custom-designed products with fast turnaround times and at competitive prices, providing them with both breadth of products and flexibility. Pioneering the way for sustainability with a growing focus on eco-friendly products Our commitment to pursuing environmental sustainability is exhibited in many aspects of our business. We believe we are amongst the leading companies in the supply of eco-friendly disposal foodservice products in the United States. Since our inception, we have made the conscious choice to never use Styrofoam in any of our products. In 2008, we established Karat Earth® as an eco-friendly line of foodservice products, including food and take-out containers, bags, boxes, tableware, cups, lids, cutlery and straws. This special catalog of products are largely made from renewable resources that are commercially compostable. Karat Earth® supplements our eco-friendly offerings within our other product lines. We intend to invest further in research and development for our Karat Earth® line to significantly expand our product offering to meet the needs of our customers and the evolving regulatory landscape. We have seen continued growth in our eco-friendly product line, with sales from these products increasing to 33.6% of our total sales for the year ended December 31, 2024, compared to 32.7% in the previous year. Growing blue-chip customer base across various channels We sell and distribute our products to a variety of customers nationwide including national and regional distributors, restaurant and supermarket chains, retail establishments and online customers. We have a successful track record of winning new customers and significantly growing wallet shares with our customers. Our diverse and growing blue chip customer base includes well-known fast casual chains such as Applebee’s Neighborhood Grill + Bar, Chili’s Grill & Bar, PF Chang's China Bistro, Chipotle Mexican Grill, and Corner Bakery Cafe, fast food chains such as The Coffee Bean & Tea Leaf, El Pollo Loco, In-N-Out Burger, Jack in the Box, Panda Express, and Raising Cane’s Chicken Fingers. Compared to 2020 prior to our IPO, we have grown our chain accounts by more than 10 folds with revenue up 33%. We have also recently added certain prominent supermarket chains such as Albertsons and H-E-B in our customer base, as our efforts to expand into this section started to come to fruition. As our capabilities, product offering and footprint expand, we aim to continue to focus on the growth in the supermarket sector and broaden our reach to national and regional airlines, entertainment venues, and other non-restaurant customers. Scaled distribution with diversified global sourcing and flexible domestic production capabilities We leverage our diversified global supplier network to offer customers a wide selection of single-use disposable foodservice products. These supplier relationships allow us to offer custom-branded and custom-designed products with fast turnaround times and at competitive prices. Over time, we have strategically reduced our reliance on suppliers in China for imported goods to approximately 20% of our global purchases, diversifying our sourcing to countries with more favorable trade conditions and minimal tariffs, such as Taiwan, which accounted for more than 50% of our global sourcing for the year ended December 31, 2024. This approach has allowed us to improve the cost-efficiency in our supply chain. We have significantly grown our inventory sourcing network from only a handful of vendors initially to over 140 active vendors by the end of 2024. Domestically, our California, Texas and Hawaii facilities have a portion of operational capacity dedicated to manufacturing capabilities. For the year ended December 31, 2024, approximately 11% of our revenues were generated from the sale of products manufactured in-house. We view distribution as our primary focus and growth driver while our manufacturing capabilities as a complement to the base distribution business. This approach allows us to procure products at competitive prices, maintain disciplined cost management, and enhance supply chain resilience. We consider our increasingly sophisticated logistics capabilities and expanded distribution network to be an important core competency and key differentiator from our competitors. Among the total of ten distribution centers, three were newly opened in the past 24 months located in Mesa, Arizona, Sugar Land, Texas, and Aurora, Illinois. We are also in the process of setting up an additional warehouse in Chino, California to be fully operational by the second quarter of 2025, as described in Note 22 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Further, we racked up over 50,000 square feet of additional space within existing warehouses over the past two years to allow for better management and fulfillment of products. We own a fleet of 41 trucks (including some that are refrigerated to transport frozen food item), 44 trailers, 13 bobtails, and 47 chassis, and as of December 31, 2024, employed 40 drivers in our logistics division. Our national distribution and logistics capacity allows us to provide efficient and cost- 5 effective distribution to customers and reduce reliance on third-party logistics providers. We intend to continue to enhance our distribution capabilities via opening of additional distribution centers in strategic locations across the U.S. and expanding our distribution fleet and workforce. Experienced and highly-driven management team with the focus on achieving attractive financial profile We have assembled a strong executive management team to lead our company in its next phase of growth, supported by a deep bench of functional area leads across the organization. Our co-founders Alan Yu and Marvin Cheng, have worked together for over 20 years to aggressively drive growth across the business. Daniel Quire joined us in 2018 and was appointed Chief Revenue Officer in 2023, helping to provide leadership to our sales term, lead our customer acquisition and engagement initiatives, and expand our market presence. Our Chief Financial Officer, Jian Guo, joined us in 2022, bringing years of public company experience to bolster our finance and accounting functions. Under the leadership of our highly-driven management team, the Company has navigated various operational challenges in a dynamic global business environment and has demonstrated the ability to deliver industry-leading financial performance in recent periods, highlighted by strong gross margin expansion and robust cash flow generation. Growth Strategy Our goal is to become a leading provider to a broad set of customers for all of their disposable foodservice products and related needs. We plan to continue to grow our business and increase our profitability through the following key initiatives: Disrupt the traditional foodservice supply chain The traditional foodservice supply chain consists of manufacturers selling through a multi-layer distribution and logistics network before the product reaches the end customer. As a full service distributor ourselves, we provide products directly to the end user, eliminating the need for the traditional multi-layer supply chain. In recent years, we have committed to enhancing our operational efficiency and customer satisfaction by strategically opening new distribution centers near key metropolitan areas in the United States. This initiative aims to optimize inventory distribution, reduce lead times for inter-warehouse transfers, expedite order fulfillment, and improved service reliability, all of which strengthen our competitive advantage. Continue to build our e-commerce distribution channel We believe there is an opportunity to continue to significantly grow our higher margin e-commerce business and we intend to do so by continuing to make investments in people, distribution capabilities, marketing, and technology. In 2023, we upgraded our company e-commerce platform, which not only enabled us to improve our storefront from an operational standpoint, but also allowed for the integration of multiple applications and extensions to enhance user experience. In 2024, we expanded our online presence to TikTok, adding to our existing list of third-party storefronts which already included Amazon, Walmart, and eBay. Our e-commerce platforms allow us to offer our entire range of products for online procurement and enable us to cross market other products to our customers. These platforms also provide us with the opportunity to continue our expansion into the B2C market in addition to the B2B small retailer customers that we have traditionally served. We have elevated our focus on servicing B2C market by sourcing products tailored for and geared toward these end users. We also further expanded our e-commerce team and improved and scaled our online marketing efforts. All of these initiatives allowed us to increase the number of online orders by approximately 48% in 2024 compared to prior year. Our e-commerce channel also significantly outperformed all other channels in year-over-year revenue growth in 2024, and we believe the e-commerce channel will continue to be a key growth driver in our business. Grow our base business with incremental revenue from existing customers We have historically achieved tremendous success in gaining wallet-share with existing accounts once we won new customers. We intend to continue to drive growth by increasing penetration within our existing customer base. We believe there is an opportunity to offer additional product lines allowing us to become a true “one-stop” supplier. Our reputation of being a reliable supplier with strong customer service and competitive prices has led to consistent requests for proposals from our existing customers as they look for new and innovative products and diversify their supplier base. We have historically experienced consistently high customer retention rates as a result of our product offerings and dedication to our customers. For the year ended December 31, 2024, revenue from our top 10 customers, as measured by the amount of revenue in the current year, increased 6.6% year-over-year, as we continued to expand wallet share with existing customers. Our major customer retention rate, defined as year-over-year retention of our top 100 customers, was 100%. 6 Expand our customer base via new capabilities, geographies, products, services and end markets We believe our addressable market is substantial in size and continues to grow as food delivery businesses like Grubhub, Uber Eats, DoorDash and others expand the demand for take-out and at-home disposable foodservice products. We plan to continue to add new experienced sales team members to broaden our reach, expand into new geographic areas, and continue to focus on customer engagement. We are committed to continuously evaluating and expanding our product and service offerings to meet evolving customer needs and enter new markets. For example, our strategic focus on penetrating the supermarket segment in 2024 yielded significant results, with the win of new supermarket business from customers such as Albertsons and H-E-B, which not only expanded our market reach but also provided valuable exposure to a large consumer base actively seeking convenient, sustainable, and often single-use food packaging solutions for use in their deli counters, prepared foods sections, bakery, and on-premise dining areas. This success validates our capabilities and highlights the immense growth opportunity within supermarkets. As we continue to build on this momentum, the supermarket segment will remain a key area of focus for ongoing expansion and development in the coming years. We are also actively exploring opportunities to broaden our reach in additional sectors, including airlines, entertainment venues, and other non-traditional foodservice sectors. These markets present significant potential to grow our business through the introduction of new products such as fruit and vegetable trays, food and snack containers, and other related items. Expand distribution network to support growth We have made solid strides towards expanding our distribution footprint and capabilities in the United States, which has enhanced our inventory management, improved customer service and positioned us for continued market penetration and growth. In the past 24 months, we invested in the significant expansion of our distribution capabilities by adding over 232,000 square feet of distribution space through the opening of three new warehouses; Mesa, Arizona in 2024 and Sugar Land, Texas and Aurora, Illinois in 2023. Further, as described in Note 22 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on March 3, 2025, we entered into a lease agreement for an additional 187,000 square foot distribution center in Chino, California, to support our anticipated growth. We are currently in the process of setting up this location to be fully operational by the second quarter of 2025. Additionally, we racked up additional areas in existing warehouses, with over 50,000 square feet of new racked space added in 2024 and 2023 combined. We look to continue the expansion of our distribution footprint and capabilities to strategically support our planned growth across the United States. Continue to develop new, innovative eco-friendly products As part of our growth strategy, we are focused on significantly increasing our eco-friendly product sales in the years ahead. Environmental sustainability is a top priority as we strengthen our position as a leading supplier of eco-friendly disposable foodservice products in the United States. Our Karat Earth® line features products primarily made from renewable resources that are commercially compostable. We are dedicated to continuous investment in research and development to broaden and enhance this product line. As of December 31, 2024, our portfolio of eco-friendly products has grown to over 550 SKUs, up from approximately 500 the previous year. Looking forward, we remain focused on further expanding this segment, including the upcoming launch of a new line of recycled PET cups and lids, made with more than 25% recycled resin material. Additionally, we have also seen continued growth in our eco-friendly product sales, which now represent 33.6% of total sales for the year ended December 31, 2024, up from 32.7% the previous year. Through these initiatives, we aim to support our customers’ sustainability goals while continuing to drive growth in our eco-friendly product offerings, making this an essential focus for us in the coming years. Pursue strategic acquisitions We evaluate and consider potential business acquisitions in order to expand the breadth of our existing infrastructure, product offerings, expertise, supply chain network, and operating efficiencies. Management is constantly assessing and identifying businesses that align with our strategic goals, seeking opportunities to acquire companies that bring complementary technologies, innovative capabilities, or niche market expertise. Additionally, the potential to acquire existing and new suppliers, particularly in the U.S., may further reduce our reliance on the Asian supply chain, creating more diversified sourcing options for our customers. By acquiring businesses with scalable models, we aim to enhance our competitive position, drive long-term growth, and unlock synergies that benefit all stakeholders. 7 Our Industry The disposable foodservice products industry is substantial in size and rapidly growing. The primary categories of disposable foodservice products include food and take-out containers, bags, boxes, tableware, cups, lids, cutlery and straws. The large breadth and scope of products is reflected in the diverse nature of the industry participants, which range from large international conglomerates to smaller regional and niche businesses. As a result, the industry is represented by a large number of companies and remains highly fragmented. Similarly, end customers of the disposable foodservice products industry are equally diverse in composition. The primary purchasers of our products include fast casual restaurants, fast food chains, family dining restaurants, specialty drink establishments like bubble tea and coffee shops, convenience stores, and supermarkets. In recent years, the industry has experienced several key trends, including the growing market for food delivery and take-out dining, new local and state regulations in light of an increasingly environmentally-conscious public, and growing consolidation within the disposable foodservice products industry. We believe that our growth strategies, as discussed above, will position us to achieve accelerated growth as such market trends continue. Food delivery and take-out In recent years, the surge in at-home dining and mobility-focused e-commerce has fueled rapid growth in food delivery and takeout services, transforming the foodservice landscape. As consumer preferences have evolved, foodservice establishments have realized that the at-home dining experience hinges not just on food quality but also on the packaging that ensures freshness, presentation, and convenience. Packaging plays an essential role in preserving the dining experience, with high-quality takeout containers, insulated bags, and other disposable products contributing significantly to customer satisfaction. Data from the National Restaurant Association shows that operators are increasingly acknowledging the importance of off-premises dining and making it a strategic priority. According to studies done by International Market Analysis Research and Consulting Group, the United States online food delivery market is expected to reach $68.6 billion by 2032. Foodservice establishments are increasingly prioritizing innovative, sustainable, and customized packaging solutions, aimed to replicate the in-restaurant dining experience at home while meeting rising consumer expectations for convenience, presentation, and environmental responsibility. Governmental regulations Environmental concerns regarding disposable products have resulted in a number of significant changes to the foodservice industry, impacting a wide range of our customers. Many cities, states and local governments have enacted or are actively working towards legislation that require businesses to manage the lifecycle of their products and packaging with the goal to incentivize companies to shift toward recyclable, compostable, or reusable materials. We expect this trend to continue on a national scale as foodservice establishments look to source alternative products that are considered more environmentally-friendly. We believe we are well positioned to benefit from increasing government regulation and green-initiative concerns, given our strong portfolio of sustainable products, including our Karat Earth® line and our continued commitment towards and investment in expanding such product offerings in the United States. Industry consolidation In the U.S. food packaging industry, mergers and acquisitions have been prominent, both in distribution and manufacturing. Larger companies typically broaden their product portfolio through the acquisition of established companies, rather than building out new product categories organically. As consolidation occurs, existing customers often find themselves facing challenges of changing product availability, discontinuations, increasing prices, support staff turnover and other potential transition-related challenges. These challenges can be highly disruptive to a customer’s business and as a result, the customers often seek out other stable and more reliable channels for product sourcing. Our Products Our scaled distribution with diversified global sourcing capabilities complemented by select domestic productions allow us to offer a wide selection of high-quality disposable foodservice products at competitive prices. We work in close collaboration with our customers to develop products to meet the needs unique to their individual businesses. This includes developing containers and food storage items that are both visually appealing and that deliver the best possible food quality and freshness. Additionally, we are able to custom print or label many of our products, to help our customers brand the at home dining experience of their customers. Our range of products include but are not limited to: 8 • food and take-out containers; • bags; • boxes; • tableware; • cups; • lids, • cutlery, • straws, • specialty beverage ingredients; • gloves; • utensils; • janitorial and warehouse supplies; and • boba tea supplies and coffee drinks. Karat Earth® Our Karat Earth® product line represents a key component of our commitment to environmental sustainability and innovation. This specialty line features environmentally-friendly foodservice packaging solutions, with most products being plant or bio-based. These materials often align with stricter regulations and safety standards, minimizing chemical migration into food products and avoiding toxic substances like Bisphenol A (BPA) or phthalates, offering safer options for food contact. The product offerings under Karat Earth® are largely Biodegradable Products Institute (BPI) certified, ensuring alignment with recognized industry standards for commercial compostability. Many of the line’s plastic products are also made from polylactic acid (PLA), a biopolymer derived from plant sugars that is non-petroleum-based, non-volatile, non-toxic, and odorless upon incineration. These attributes make Karat Earth® an effective option for customers seeking to demonstrate their dedication to environmental and social responsibility. We continue to invest in research and development for our Karat Earth® line to expand our product offering to meet the needs of our customers and the evolving regulatory landscape. Our Distribution and Logistics Network We effectively serve our customers across the United States through our growing distribution network. Our customers range from large multi-national restaurant chains to regional and smaller establishments. We also sell through restaurant supply companies that distribute products to a wide range of food-service establishments. We collaborate closely with both our vendors and customers to create an optimized logistics and supply chain network tailored to meet the unique needs of our customers' businesses. We have established a scaled and flexible distribution and logistics system, with distribution centers strategically located throughout the United States. We offer multiple ordering channels, including telephone, email, electronic data interchange, Lollicup e-commerce store website and app, and storefronts on marketplaces such as Amazon, Walmart, eBay, and TikTok. Our delivery options to customers range from courier package services to same-day delivery on our own fleet. Our scaled and nimble logistics network has enabled our customers to place and receive orders based on their real-time business needs and effectively reduce inventory level and working capital requirements. Seasonality Our business does not experience high seasonality though certain food and food related products are moderately seasonal. For example, during the hot weather of summer and fall months, we see an increase in the level of sales for items such as cold drink cups and boba products. Generally, we expect relatively more of our earnings and cash flows to be generated in the second and third quarter of the fiscal year. 9 Our Corporate Structure Set forth below is an organizational chart for the Company and its consolidated entities as of December 31, 2024: Please see Note 2 — Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of the agreements between Global Wells and us. Intellectual Property Our intellectual property portfolio includes 12 active trademarks, including Lollicup, Karat, Karat Earth® and Total Clean, and five registered copyrights. Environmental, Social and Governance (ESG) At Karat Packaging, we are committed to pursuing initiatives that positively impact our products, our people, our customers and our planet. We recognize the importance of environmental, social and governance ("ESG") issues for all of our stakeholders and we are committed to incorporating ESG principles into our business strategies and organizational culture. By undertaking such measures, we are working towards making our workforce more inclusive, our business more sustainable, and our communities more engaged. Our commitment to practicing environmental sustainability is exhibited in almost every aspect of our business. Our Products We are a pioneer and leader in the supply of eco-friendly disposal foodservice products in the United States. Since our inception, we made the conscious choice to never use Styrofoam in any of our products. Styrofoam products are non-biodegradable and therefore take up permanent space in landfills resulting in a constant leach of harmful chemicals into the environment. Styrofoam products are also very difficult to clean up as they often escape waste collection systems due to their low density. They are easily wind-blown and ultimately end up in parks, forests, beaches, oceans and rivers. A recent peer-reviewed global study conducted by the American Association for the Advancement of Sciences found that less than 10 percent of plastics is recycled, meaning the vast majority of plastic waste ends up in landfills or the environment. Other studies indicated a large percentage of landfill waste in the United States is comprised of plastic containers and food-ware. Such striking statistics have prompted many state and city governments to enact regulations to cut down on plastic pollution. For example, in 2024, New Jersey introduced regulations focusing on increasing post-consumer recycled (PCR) content in packaging. These mandates include gradual increases in PCR content for various materials, such as plastic beverage 10 bottles and rigid plastic containers, aligning with long-term sustainability goals. In 2023, both Rhode Island and Delaware passed bills that prohibited food service establishments from using polystyrene foam in their food packaging. In 2022, California passed legislation banning styrofoam starting January 1, 2025 and requiring all packaging in the state to be recyclable or compostable by 2032. A variety of individual cities have also passed their own complimentary ordinances to limit single-use plastic products. While more governments enact regulations to prevent and reduce waste that is harmful to the environment, more consumers are also actively taking steps towards being more sustainable, accelerating the demand for eco-friendly disposable products. We have long prided ourselves in our commitment to environmental sustainability and innovation. As early as 2008, we established Karat Earth®, which is a specialty line featuring environmentally-friendly foodservice packaging solutions, with most products being plant or bio-based. These materials often align with stricter regulations and safety standards, minimizing chemical migration into food products and avoiding toxic substances like Bisphenol A (BPA) or phthalates, offering safer options for food contact. The product offerings under Karat Earth® are largely BPI certified, ensuring alignment with recognized industry standards for commercial compostability. Many of the line’s plastic products are also made from PLA, a biopolymer derived from plant sugars that is non-petroleum-based, non-volatile, non-toxic, and odorless upon incineration. We continue to invest in research and development to expand our Karat Earth® product line and meet the growing demand for sustainable packaging solutions. As part of our broader sustainability initiatives, Karat Earth® supplements our other environmentally-friendly product lines, including paper items, strengthening our ability to deliver innovative, compliant, and market-responsive solutions. Through these efforts, we aim to support waste reduction, reduce reliance on non-renewable resources, and help customers achieve their sustainability goals while addressing broader environmental challenges. Our eco-friendly products made up 33.6% of total sales during the year ended December 31, 2024 compared to 32.7% during the prior year. As of December 31, 2024, we had over 550 SKUs of eco-friendly products that our customers could choose from, up from approximately 500 as of the prior year end. We are actively working on launching a new line of recycled PET cups and lids, which are made with more than 25% of recycled resin material. Our Operations In our manufacturing facilities in the United States, the production process involves intake of water, dischargement and recycling of waste as well as other disposal activities. As a Company, we place strong emphasis on water conservation and reducing water pollution. Outside of the required cooling of manufacturing machines and equipment after production cycles, our manufacturing process does not require large quantities of water. We ensure appropriate drainage and disposal of contaminated water, grease oil, and other chemicals discharged from our production activities in order to limit the pollution of valuable water sources. Reclamation is also a key consideration for us. Waste products from our production process are thoroughly inspected and checked for the potential of re-use or recyclability. Identified items are repackaged and sold or they are transferred to our local waste management facilities for proper disposal, thereby reducing waste and the use of landfill space. Some of our raw materials are also BPI certified. For over 20 years, the BPI certification has been the defining symbol of commercial compostability due to its rigorous testing standards. The BPI certification is the only third-party verification for compostable products in North America. For products that require use of plastic, we try to ensure that the resin we source is both BPA and PFA (or perfluoroalkyl and polyfluoroalkyl) free as these substances are known for their extreme persistence in the environment upon discharge. Our commitment to sustainability is also demonstrated in our focus on recycling and reusing. For example, we utilize recycled resin material in our manufacturing process to reduce our reliance on virgin plastic. After production, any resin waste is meticulously washed and cleaned to remove contaminants, ensuring the recycled resin meets the required quality standards for reuse in our facilities. By using recycled resin, we reduce plastic waste, lower our carbon footprint, and contribute to the broader shift toward more sustainable solutions. Our warehouse departments have implemented the practice of reusing paper cardboard boxes and wooden pallets for inventory storage and shipments. We offer credits to certain customers that return and reuse wooden pallets. We train our warehouse and janitorial staff to properly dispose of and recycle all types of material including paper, plastic, and scrap metal. The utilization of trash compacting services has allowed us to minimize the frequency of waste pickups and also reduce landfill space. We have installed LED bulbs in light fixtures within both the warehouse and office space that are more efficient than their traditional fluorescent counterparts, often with timers that automatically turn off lights after a period of time if no movement is detected. We have also programmed our HVAC units at some of our locations to run on predetermined schedules to reduce our overall power consumption. We are exploring options to improve the energy efficiency of our warehouses, such as through the installation of solar panels. Additionally, we are transitioning our company fleet from being gas powered to those that run entirely on electricity. To the extent possible, we have also switched over from single use batteries to rechargeable battery packs in our line up of tools and equipment. Our Company as a whole has also made strides to reduce the need for paper and ink by embracing a more digital form of 11 paperwork retention. Through these various efforts, we play our part to reduce our carbon footprint and will continue to look into and implement further sustainable practices. We are regulated by certain federal, state and international environmental laws governing our use, transport and disposal of production materials and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position. A liability for environmental remediation and other environmental costs is accrued when we consider it probable that a liability has been incurred and the amount of loss can be reasonably estimated. Environmental costs and accruals are presently not material to our operations, cash flows or financial position. We are committed to providing consistent and excellent return to our shareholders, all while maintaining a strong sense of good corporate citizenship that places a high value on the welfare of our employees, the communities in which we operate, and the world as a whole. We believe that effectively prioritizing and managing our ESG factors helps create long-term value for our investors. Under the direction of our Chief Executive Officer and the board of directors, we are driving continuous improvements in bringing innovative environmentally-friendly products that meet the needs of our customers and enhancing our energy and waste management infrastructure in our sustainability journey. Human Capital Management Our Culture At Karat, it is our people – our greatest asset – that give us our strong reputation and stand at the heart of our growth. Our success depends on the talent, dedication, and well-being of our people. As we grow, we strive to recruit, retain, develop, and provide advancement opportunities for our team members. We continually work to make Karat an inclusive, equitable, and growth-focused workplace where all team members have the opportunity to flourish. Safety One of our most important corporate values is the safeguarding of our people and fostering a culture of care that promotes the well-being of our employees, contractors and business partners. We protect our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably. Our safety culture empowers every member of the workforce to exercise stop-work authority without repercussion to address any potential unsafe work conditions. We develop and administer company-wide safety policies to ensure the well-being of each team member and compliance with Occupational Safety and Health Administration standards. This includes periodic safety training and assessments as well as annual safety audits. We require all employees and contractors at our warehouse and manufacturing facilities to understand and follow these safety policies. These guidelines have been put into place by management to address three key components of safety: • Identifying the root cause of safety hazards in our operations; • Assessing risks associated with all hazards or conditions identified; and • Mitigating risks associated with known hazards and conditions. Diversity, Equity, and Inclusion (DEI) Diversity, equity and inclusion ("DE&I") are critical underpinnings of our corporate values. DE&I helps foster innovation, cultivate an environment filled with unique perspectives and drive engagement and organizational growth. Our focus to date has been increasing awareness amongst our employees on the importance of DE&I. As a business founded by representatives from a minority group in the United States, diversity and inclusion is engrained in our corporate history. We believe that a diverse workforce is essential to its long-term success and strive to foster a diverse, equitable, and inclusive culture where all voices are heard, valued, and included. Management embraces employees’ differences in race, color, religion, age, sex, sexual orientation, marital status, citizenship, national origin, geographic background, military or veteran status, disability (mental or physical), and any other characteristics that make our employees unique. We ensure that we leverage a diverse slate of candidates for all job vacancies, including senior leadership. Good corporate governance and transparency are fundamental to achieving our vision of becoming a leader in our industry. Our engagement approach involves ongoing communication with our employees. We strive to provide relevant 12 market updates to our team members as well as to share important information regarding our revenue trends, inventory status, and other financial and operating metrics as deemed necessary. At the same time, our employees are expected to act with integrity and objectivity and to always strive to enhance our reputation and performance. We maintain a Code of Business Conduct and Ethics which is attested by every employee and provides our framework for ethical business. As of December 31, 2024, we have the following gender and ethnicity breakout for our employees, C-suite executives, and Board of Directors members: Full-Time employees C-Suite Executives Board of Directors Total count 683 3 5 Gender Male 67% 67% 60% Female 33% 33% 40% Ethnicity Hispanic 53% — — Asian 15% 67% 100% White 14% 33% — Black 15% — — Other/Did not self-identify 3% — — Compensation and Benefits Consistent with our core values, we take care of our people by offering competitive compensation and comprehensive benefits programs. We continuously make wage investments to ensure our compensation packages reflect the evolving circumstances across our markets. One of the goals of our recruitment strategy is to ensure we are aligning roles with compensation levels based on job responsibilities, market competitiveness, geographic location, strategic importance of roles and other relevant factors. Our compensation package includes a base salary and depending on the role, discretionary bonuses and equity compensation programs. In January 2019, the Company’s board of directors adopted the 2019 Stock Incentive Plan (the “Plan”). A total of 2,000,000 shares of common stock has been authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards. As of December 31, 2024, a total of 913,900 shares of common stock were awarded under the Plan. Employees, directors, and consultants are eligible to receive stock options and stock awards under the Plan. Additionally, we make matching contributions to to our employees' 401(k) retirement accounts to support their retirement goals. We also offer our employees’ healthcare, wellness, paid sick leave, flexible paid time off, and other benefits to support their quality of life and enable them to thrive in the workplace. All eligible full-time and part-time employees and their eligible dependents receive competitive health benefits. We cover approximately 65% of total eligible healthcare costs for part and full-time employees for our approximately 329 participating employees as of December 31, 2024. Learning and Development We believe that high performance is an outcome of a person’s ability to change, adapt, and grow their capabilities throughout their career. We emphasize on-the-job learning that enables employees to meet the demands of challenging and changing work and focuses on reinforcing key principles that are designed to support employees' effectiveness in their current job and in their future development. We provide technical and leadership training to employees, specifically our production and sales teams who work closely with our products and services. We continued to enhance our Sarbanes-Oxley (SOX) compliance and cybersecurity awareness training programs to key employees, underscoring our commitment to equipping our workforce with the knowledge to navigate regulatory and digital risks effectively. In particular, our focus on employee development has been structured over the last several years through programs designed to embed essential skills and reinforce strategic goals that are aligned to our culture and business goals. This is evidenced by the fact that we promoted 110 and 166 employees during the years ended December 31, 2024, and 2023, respectively. 13 Other Information As of December 31, 2024, we employed approximately 721 employees, out of which 683 were full-time employees. None of our employees are currently covered by a collective bargaining agreement. We have no labor-related work stoppages and believe our relations with our employees are good. Corporate Information We were founded in 2000 by Alan Yu and Marvin Cheng in San Gabriel, California as Lollicup USA Inc., a California corporation. Initially our business was focused on the establishment, franchising and licensing of bubble tea stores nationwide. Considered a pioneer for the bubble tea business in North America, our business grew rapidly from a single Lollicup store in 2000 to more than 60 stores in 2006. In order to ensure consistency across our stores, we expanded our focus in 2004 to include the distribution of supplies for the bubble tea industry. In 2013, we sold the retail bubble tea business to certain Lollicup’s shareholders. In 2014, due to growing demand across the foodservice industry for our disposable food packaging products, we began distributing and manufacturing under the Karat brand out of our California facility. In September 2018, we incorporated Karat Packaging Inc. in Delaware, and the Company, Lollicup, and Messrs. Yu and Cheng and the other shareholders of Lollicup (together, the “Lollicup Shareholders”) entered into a share exchange agreement and plan of reorganization whereby the Lollicup Shareholders exchanged their shares of common stock in Lollicup for an equal number of shares of common stock of the Company, resulting in Lollicup becoming a wholly-owned subsidiary of the Company. Our principal executive and administrative offices are located at 6185 Kimball Avenue, Chino, CA 91708, and our telephone number is (626) 965-8882. Our corporate website address is www.karatpackaging.com. For additional historical information about us, see Note 1 — Nature of Operations in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. We are a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or (the "Exchange Act"), and have elected to take advantage of certain of the scaled disclosure available for smaller reporting companies. Available Information Our corporate website is www.karatpackaging.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available, free of charge, under the Investor Relations tab of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, the SEC maintains a website located at www.sec.gov that contains the information we file or furnish electronically with the SEC. 14