UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2025
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______________ to ______________
Commission file number 001-40336
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
( | ||||||||
(Registrant’s telephone number, including area code) | ||||||||
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Common Stock, $0.001 par value, outstanding on May 7, 2025 was 20,059,505 shares.
Table of Contents
| Page | ||||||||
1
KARAT PACKAGING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
PART I - FINANCIAL INFORMATION
| March 31, 2025 | December 31, 2024 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
Cash and cash equivalents (including $ | $ | $ | |||||||||
Short-term investments (including $ | |||||||||||
Accounts receivable, net of allowance for bad debt of $ | |||||||||||
| Inventories | |||||||||||
Prepaid expenses and other current assets (including $ | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net (including $ | |||||||||||
| Deposits | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating right-of-use assets | |||||||||||
Deferred tax asset | |||||||||||
Other non-current assets (including $ | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
Accounts payable (including $ | $ | $ | |||||||||
Accrued expenses (including $ | |||||||||||
| Related party payable | |||||||||||
Income taxes payable (including $ | |||||||||||
Deferred revenue | |||||||||||
Long-term debt, current portion (including $ | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
Other current liabilities (including $ | |||||||||||
| Total current liabilities | |||||||||||
2
| March 31, 2025 | December 31, 2024 | ||||||||||
| Deferred tax liability | |||||||||||
Long-term debt, net of current portion and debt discount of $ | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
Other non-current liabilities (including $ | |||||||||||
| Total liabilities | |||||||||||
Commitments and Contingencies (Note 14) | |||||||||||
| Karat Packaging Inc. stockholders’ equity | |||||||||||
Preferred stock, | |||||||||||
Common stock, | |||||||||||
| Additional paid in capital | |||||||||||
Treasury stock, | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total Karat Packaging Inc. stockholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
KARAT PACKAGING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share data)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
Operating expenses | |||||||||||
| Selling expenses | |||||||||||
General and administrative expenses (including $ | |||||||||||
Impairment expense and (gain) loss, net, on disposal of property and equipment | ( | ||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Other income (expenses) | |||||||||||
Rental income (including $ | |||||||||||
Other income, net | |||||||||||
Gain on foreign currency transactions | |||||||||||
Interest income (including $ | |||||||||||
Interest expense (including $ | ( | ( | |||||||||
Total other income, net | |||||||||||
| Income before provision for income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | |||||||||||
| Net income attributable to noncontrolling interest | |||||||||||
| Net income attributable to Karat Packaging Inc. | $ | $ | |||||||||
| Basic and diluted earnings per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average common shares outstanding, basic | |||||||||||
| Weighted average common shares outstanding, diluted | |||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
KARAT PACKAGING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except share and per share data)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity Attributable to Karat Packaging Inc. | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2024 | $ | ( | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Global Wells noncontrolling membership interest redemption | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | ( | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total Stockholders’ Equity Attributable to Karat Packaging Inc. | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2025 | $ | ( | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Global Wells noncontrolling-interest tax withholding | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2025 | $ | ( | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
KARAT PACKAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization (including $ | |||||||||||
Adjustments to allowance for bad debt | ( | ||||||||||
| Adjustments to inventory reserve | |||||||||||
(Recovery) write-off of inventory | ( | ||||||||||
Impairment of operating right-of-use asset | |||||||||||
(Gain) loss, net, on disposal of property and equipment | ( | ||||||||||
Amortization of loan fees (including $ | |||||||||||
Accrued interest on certificates of deposit (including $ | ( | ( | |||||||||
Unrealized loss from investment in publicly-traded equity securities | |||||||||||
| Stock-based compensation | |||||||||||
| Amortization of operating right-of-use assets | |||||||||||
Government grant income (including $ | ( | ||||||||||
| (Increase) decrease in operating assets | |||||||||||
Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
Prepaid expenses and other current assets (including $ | |||||||||||
Other non-current assets (including $ | ( | ( | |||||||||
| Increase (decrease) in operating liabilities | |||||||||||
Accounts payable (including $ | |||||||||||
Accrued expenses (including $ | |||||||||||
| Related party payable | ( | ||||||||||
Income taxes payable (including $ | |||||||||||
Deferred revenue | ( | ||||||||||
Operating lease liabilities | ( | ( | |||||||||
Other liabilities (including $ | |||||||||||
Net cash provided by operating activities | $ | $ | |||||||||
6
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
Proceeds from disposal of property and equipment | |||||||||||
| Deposits paid for property and equipment | ( | ( | |||||||||
Purchases of publicly-traded equity securities | ( | ||||||||||
Proceeds from disposal of publicly-traded equity securities | |||||||||||
Purchases of short-term investments (including $ | ( | ( | |||||||||
Redemption of short-term investments (including $ | |||||||||||
| Net cash provided by (used in) investing activities | $ | $ | ( | ||||||||
| Cash flows from financing activities | |||||||||||
Payment of long-term debt (including $ | ( | ( | |||||||||
| Payments for lender fees | ( | ||||||||||
| Proceeds from exercise of common stock options | |||||||||||
| Dividends paid to shareholders | ( | ( | |||||||||
Payment of Global Wells noncontrolling-interest tax withholding (including $ | ( | ||||||||||
Payment of Global Wells noncontrolling membership interest redemption (including $ | ( | ||||||||||
Payment of Global Wells noncontrolling membership interest redemption gain tax withholding (including $ | ( | ||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | $ | ( | ||||||||
| Cash and cash equivalents | |||||||||||
Beginning of period | $ | $ | |||||||||
End of period | $ | $ | |||||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
Transfers from deposits to property and equipment | $ | $ | |||||||||
| Non-cash purchases of property and equipment | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
Income tax refund | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
7
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Lollicup USA Inc. (“Lollicup”) was incorporated in 2001 in California. Karat Packaging Inc. (“Karat Packaging”) was incorporated in 2018 in Delaware and became the holding company for Lollicup (collectively, the “Company”) through a share exchange with the shareholders of Lollicup. The Company's shares are listed on the NASDAQ Global Market under the symbol "KRT".
The Company is a manufacturer and distributor of single-use disposable products used in a variety of restaurant and foodservice settings. The Company supplies a wide range of products such as food and take-out containers, bags, boxes, 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 design and development, custom printing, distribution of specialty food and beverages products, such as syrups, boba, and coffee drinks, as well as logistics services.
The Company supplies products to national and regional distributors, restaurant chains, supermarkets, as well as to small businesses including convenience stores, mom-and-pop restaurants, 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 seven other distribution centers located in Puyallup, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; Aurora, Illinois; Mesa, Arizona; and Sugar Land, Texas. The Company entered into a lease agreement on March 3, 2025 for an additional distribution center in Chino, California, which is expected to be fully operational by end of May 2025.
2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. The financial information as of March 31, 2025 and for the three months ended March 31, 2025 and 2024 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2025.
The condensed consolidated balance sheet at December 31, 2024 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2024, as included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2025.
Estimates and Assumptions: Management uses estimates and assumptions in preparing financial statements in accordance with US GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ materially from the estimates that were assumed in preparing the condensed consolidated financial statements.
8
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Variable Interest Entities: The Company has a variable interest in Global Wells located in Rockwall, Texas. In 2017, Lollicup along with three other unrelated parties formed Global Wells, of which Lollicup received a 13.5 % ownership interest and a 25 % voting interest. 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 , subject to tax withholding. Subsequent to the redemption, the ownership interests and voting power of the remaining members of Global Wells were adjusted proportionally, with Lollicup's ownership interest increasing to 15.1 % and voting interest increasing to 33.3 %. During the year ended December 31, 2024, a total cash payment of $2,325,000 , net of tax withholding, was made to the Selling Member in full consideration of the redemption.
The purpose of Global Wells is to own, construct, and manage warehouses and manufacturing facilities. Global Wells’ operating agreement may require its members to make additional contributions upon the unanimous decision of the members or when the cash in Global Wells’ bank account falls below $50,000 . In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000 .
Global Wells was determined to be a variable interest entity in accordance with ASC Topic 810, Consolidations, however, at the time the investment was made, it was determined that Lollicup was not the primary beneficiary. In 2018, Lollicup entered into an operating lease with Global Wells (the “Texas Lease”). In 2020, the Company entered into another operating lease with Global Wells (the “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, 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 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; rather they represent claims against the specific assets of Global Wells. See Note 8 — Long-Term Debt for a description of the two term loans that Global Wells had with financial institutions as of March 31, 2025.
Noncontrolling Interests: The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the Company’s stockholders’ equity. The amount of net income attributable to noncontrolling interests is disclosed in the condensed consolidated statements of income. Tax payments made by the Company on behalf of the noncontrolling interests are deducted from their equity balances, as shown in the condensed consolidated statements of stockholders’ equity.
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
(in thousands) | |||||||||||
| Chains and distributors | |||||||||||
| Online | |||||||||||
| Retail | |||||||||||
| $ | $ | ||||||||||
9
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
•Chains and distributors revenue: National and regional chains revenue is derived from chain restaurants, supermarkets, and other businesses with multiple locations. Distributors revenue is derived from distributors across the U.S. that purchase the Company’s products for resale and distribution to restaurants, supermarkets, and other businesses. Chain accounts often order through their distribution partners. Revenue from transactions with chains and distributors is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer.
•Online revenue: Online revenue is derived from the Company's online storefront on www.lollicupstore.com, and through the Company's mobile app, as well as other e-commerce platforms with customers largely consisting of small businesses such as small mom-and-pop 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. Transfer of control typically occurs when the title and risk of loss passes to the customer. 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 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 and local restaurants, small mom-and-pop 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. Transfer of control typically occurs when the title and risk of loss passes to the customer.
For all of the Company's revenue streams, shipping terms generally indicate when the title and risk of loss have passed, which is generally when products are delivered to 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. During the three months ended March 31, 2025 and 2024, the Company recognized logistics services revenue of $1,273,000 and $1,239,000 , respectively.
The Company’s contract liabilities consist primarily of rebates, sales incentives, cooperative advertising, and deferred revenue. As of March 31, 2025 and December 31, 2024, the Company had accrued $414,000 and $377,000 , respectively, related to rebates, sales incentives and cooperative advertising, included in accrued expenses in the condensed consolidated balance sheets. During the three months ended March 31, 2025 and 2024, the Company recognized revenue of $517,000 and $739,000 , respectively, related to previously deferred revenue at the beginning of each respective period.
Fair Value Measurements: The Company has financial instruments classified within the fair value hierarchy, which consist of the following:
•At both March 31, 2025 and December 31, 2024, the Company had money market accounts and investments in publicly-traded equity securities classified as Level 1 and certificates of deposit classified as Level 2 within the fair value hierarchy.
The short-term investments comprise of certificates of deposits with an original maturity of longer than 3 months and are reported at their carrying value as current assets on the condensed consolidated balance sheets. The carrying value of these short-term investments approximates fair value as they were purchased near or on the respective balance sheet dates.
The following table summarizes the Company’s fair value measurements by level at March 31, 2025 for the assets measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cash equivalents | $ | $ | $ | ||||||||||||||
| Short-term investments | |||||||||||||||||
| Publicly-traded equity securities | |||||||||||||||||
| Fair value, March 31, 2025 | $ | $ | $ | ||||||||||||||
10
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarize the Company’s fair value measurements by level at December 31, 2024 for the assets measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Cash equivalents | $ | $ | $ | ||||||||||||||
| Short-term investments | |||||||||||||||||
| Publicly-traded equity securities | |||||||||||||||||
| Fair value, December 31, 2024 | $ | $ | $ | ||||||||||||||
The Company has not elected the fair value option as presented by ASC 825, Fair Value Option for Financial Assets and Financial Liabilities, for the financial assets and liabilities that are not otherwise required to be carried at fair value. Under ASC 820, material financial assets and liabilities not carried at fair value, including accounts receivable, accounts payable, related-party payable, accrued expenses, other payables and borrowings under promissory notes and Line of Credit (as defined below), are reported at their carrying value.
| March 31, 2025 | |||||||||||
| Carrying Amount | Estimated Fair Value | ||||||||||
| (in thousands) | |||||||||||
| 2026 Term Loan | $ | $ | |||||||||
| 2027 Term Loan | |||||||||||
| $ | $ | ||||||||||
| December 31, 2024 | |||||||||||
| Carrying Amount | Estimated Fair Value | ||||||||||
| (in thousands) | |||||||||||
| 2026 Term Loan | $ | $ | |||||||||
| 2027 Term Loan | |||||||||||
| $ | $ | ||||||||||
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 long-lived assets that are determined to be impaired. The Company recorded an impairment against its operating ROU assets of $1,993,000 during the three months ended March 31, 2024. See Note 11 — Leases for further information about this impairment charge. For the three months ended March 31, 2025, management concluded that an impairment of long-lived assets was not required. With the exception of the ROU impairment, the Company did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition as of March 31, 2025 or December 31, 2024.
New and Recently Adopted Accounting Standards: The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and as such, the Company has elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.
11
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Company adopted this new standard for its annual period beginning January 1, 2024 and its interim period beginning January 1, 2025. The adoption of this new standard resulted in additional required disclosures, described further in Note 15 — Segment Report.
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.
In November 2024, the FASB issued ASU 2024-03 Income Statement Expenses (Topic 220): Disaggregation of Income Statement Expenses. The new guidance requires enhanced disclosure of disaggregated information about specific expense categories in the notes to financial statements on an annual and interim basis. The new guidance is effective for all public companies for annual reporting periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company will adopt the new standard in annual reporting period beginning after December 15, 2026. The application of this new guidance is not expected to have a material impact on the Company’s consolidated balance sheets, statements of income or cash flows, as the guidance pertains to disclosures only.
3. Inventories
Inventories consist of the following:
| March 31, 2025 | December 31, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Raw materials | $ | $ | |||||||||
| Semi-finished goods | |||||||||||
| Finished goods | |||||||||||
| Subtotal | |||||||||||
| Less: inventory reserve | ( | ( | |||||||||
| Total inventories | $ | $ | |||||||||
4. Property and Equipment
| March 31, 2025 | December 31, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Machinery and equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Vehicles | |||||||||||
| Furniture and fixtures | |||||||||||
| Building | |||||||||||
| Land | |||||||||||
| Computer hardware and software | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
12
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 condensed consolidated statements of income.
5. Goodwill
The following table summarizes the activity in the Company's goodwill from December 31, 2024 to March 31, 2025:
| (in thousands) | |||||
| Balance at December 31, 2024 | $ | ||||
| Goodwill acquired | |||||
| Balance at March 31, 2025 | $ | ||||
6. Line of Credit
Pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the “Loan Agreement”), the Company has a line of credit with a maximum borrowing capacity of $20,000,000 (the “Line of Credit”) secured by the Company’s assets. 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. 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 3, 2025, the Company amended the Line of Credit. Prior to March 3, 2025, the revolving loan facility had a maximum borrowing capacity of $40,000,000 and interest accrued at an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50 %, with a SOFR floor of 1.00 %. The amendment on March 3, 2025, among other things, (1) extended the maturity date to March 14, 2027, (2) reduced the maximum borrowing capacity of the revolving loan facility to $20,000,000 , and (3) revised the interest on any Line of Credit borrowings to an annual rate of one month term SOFR plus 2.25 %, with a SOFR floor of 1.00 %. The Company further amended the Line of Credit on March 17, 2025, increasing the standby letter of credit sub-limit from $5,000,000 to $7,500,000 .
The Company had no 5,813,000 and $3,813,000 as of March 31, 2025 and December 31, 2024, respectively. As of March 31, 2025, the maximum remaining amount that could be borrowed under the Line of Credit was $14,187,000 . As of both March 31, 2025 and December 31, 2024, the Company was in compliance with the financial covenants under the Line of Credit.
7. Accrued Expenses
The following table summarizes information related to accrued expense liabilities:
13
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| March 31, 2025 | December 31, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Accrued miscellaneous expenses | $ | $ | |||||||||
| Accrued payroll | |||||||||||
| Accrued ocean freight and other import costs | |||||||||||
| Accrued sale and use taxes | |||||||||||
| Accrued professional services fees | |||||||||||
| Accrued vacation and sick pay | |||||||||||
| Accrued property tax | |||||||||||
| Accrued shipping expenses | |||||||||||
| Accrued sales discount expense | |||||||||||
| Accrued interest expense | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
8. Long-Term Debt
Long-term debt consists of the following:
| March 31, 2025 | December 31, 2024 | ||||||||||
| (in thousands) | |||||||||||
The 2026 Term Loan, with an initial balance of $ | $ | $ | |||||||||
The 2027 Term Loan, with an initial balance of $ | |||||||||||
| Long-term debt | |||||||||||
| Less: unamortized loan fees | ( | ( | |||||||||
| Less: current portion | ( | ( | |||||||||
| Long-term debt, net of current portion | $ | $ | |||||||||
At March 31, 2025, future maturities are:
| (in thousands) | |||||
| 2025 (remainder) | $ | ||||
| 2026 | |||||
| 2027 | |||||
| $ | |||||
The Company was in compliance with all of its financial covenants as of both March 31, 2025 and December 31, 2024.
9. Stock-Based Compensation
In January 2019, the Company’s board of directors adopted the 2019 Stock Incentive Plan (the “Plan”). As of March 31, 2025, a total of 1,287,017 shares of common stock were available for further award grants under the Plan. For
14
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the three months ended March 31, 2025 and 2024, the Company recognized a total of $346,000 and $375,000 in stock-based compensation expense, respectively. The Company recognizes stock-based compensation over the vesting period, which is generally within three years
Stock Options
A summary of the Company’s stock option activity under the Plan for the three months ended March 31, 2025 is as follows:
Number of Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contract Life | Aggregate Intrinsic Value | ||||||||||||||||||||
(in years) | (in thousands) | ||||||||||||||||||||||
| Outstanding at December 31, 2024 | $ | $ | |||||||||||||||||||||
| Outstanding at March 31, 2025 | $ | $ | |||||||||||||||||||||
| Vested and expected to vest at March 31, 2025 | $ | $ | |||||||||||||||||||||
| Exercisable at March 31, 2025 | $ | $ | |||||||||||||||||||||
There were no
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 March 31, 2025, multiplied by the number of shares per each option.
Restricted Stock Units
A summary of the Company’s unvested restricted stock units activity under the Plan for the three months ended March 31, 2025 is as follows:
Number of Shares Outstanding | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2024 | $ | ||||||||||
| Unvested at March 31, 2025 | $ | ||||||||||
There were no restricted stock units granted or vested during the three months ended March 31, 2025. At March 31, 2025, total remaining stock-based compensation cost for unvested restricted stock units was approximately $631,000 . The cost is expected to be recognized over a weighted-average period of 1.0 year.
10. Earnings Per Share
(a)Basic
Basic earnings per share is calculated by dividing the net income attributable to equity holders of the Company for the period by the weighted average number of common shares outstanding during the period.
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands, except per share data) | |||||||||||
| Net income attributable to Karat Packaging Inc. | $ | $ | |||||||||
| Weighted average number of common shares in issue | |||||||||||
| Basic earnings per share | $ | $ | |||||||||
(b)Diluted
15
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.
The following table summarizes the calculation of diluted earnings per share:
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands, except per share data) | |||||||||||
| Net income attributable to Karat Packaging Inc. | $ | $ | |||||||||
| Weighted average number of common shares in issue | |||||||||||
| Dilutive shares | |||||||||||
| Stock options and restricted stock units | |||||||||||
| Adjusted weighted average number of common shares | |||||||||||
| Diluted earnings per share | $ | $ | |||||||||
For the three months ended March 31, 2025 and 2024, a total of 0 and 19,000 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.
11. Leases
The Company primarily leases manufacturing facilities, distribution centers, and office spaces with lease terms expiring through 2031. The Company recognized the following lease costs in the accompanying condensed consolidated statement of income:
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Operating lease expense | $ | $ | |||||||||
| Short-term lease expense | |||||||||||
| Variable lease expense | |||||||||||
| Total lease expense | $ | $ | |||||||||
For the three months ended March 31, 2025 and 2024, rent expense included in operating expenses was $3,190,000 and $1,931,000 , respectively, and rent expense included in cost of goods sold was $820,000 and $271,000 , respectively.
The following table presents supplemental information related to operating leases:
| March 31, 2025 | December 31, 2024 | ||||||||||
| Weighted average remaining lease term | |||||||||||
| Weighted average discount rate | % | % | |||||||||
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | |||||||||
| Cash paid for amounts included in measurement of lease obligations: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
As of March 31, 2025, future lease payments under operating leases were as follows:
16
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| (in thousands) | ||||||||
| 2025 (remainder) | $ | |||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | |||||||
| Total lease liability balance | $ | |||||||
During the three months ended March 31, 2024, the Company recorded a non-cash impairment of a ROU asset of $1,993,000 resulting from the sublease of its City of Industry warehouse in California.
Global Wells has been the landlord under an operating lease agreement with an unrelated party since September 2020. On February 28, 2025, the lease agreement between Global Wells and the tenant was terminated and effective March 1, 2025, Global Wells entered into a new six-year operating lease agreement ending on February 28, 2031 with a different unrelated party that generates monthly rental payments from $87,000 to $101,000 . The expected rental income is $846,000 for the remaining nine months of the year ending December 31, 2025, and $1,128,000 per annum over the next five years.
12. Related Party Transactions
Keary Global Ltd. ("Keary Global") owns 250,004 shares of the Company's common stock as of March 31, 2025, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018. In addition to being a stockholder, Keary Global and Keary International, Ltd. ("Keary International") are inventory suppliers and purchasing agents for the Company overseas. The Company has entered into ongoing purchase and supply agreements with Keary Global. At March 31, 2025 and December 31, 2024, the Company has accounts payable due to Keary Global and Keary International of $5,057,000 and $3,130,000 , respectively. Purchases for the three months ended March 31, 2025 and 2024 from this related party were $10,340,000 and $12,693,000 , respectively.
13. Income Taxes
For the three months ended March 31, 2025 and 2024, the Company's income tax expense was $2,121,000 and $1,975,000 , respectively, with an effective tax rate of 23.7 % and 23.4 %, respectively. For both the three months ended March 31, 2025 and 2024, the Company's effective tax rate differed from the United States federal statutory rate of 21% primarily due to state taxes and noncontrolling interest income.
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 March 31, 2025, the Company did not record any valuation allowance.
14. Commitments and Contingencies
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
17
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. On March 19, 2024, the Company initiated an appeal process by submitting a request for an administrative review of the initial determination issued by CBP. On June 11, 2024, CBP completed the administrative review and upheld its initial conclusion. In February 2025, the Company started to receive bills related to certain of its thermal paper shipments. The Company is in the process of protesting the received bills with CBP, and is also evaluating other appeal options. Payments on bills received will be due upon the resolution of the protests, currently expected to occur within the next 12 months. The Company maintains a liability reserve representing the total estimated probable loss from the investigation plus accrued interest. As of March 31, 2025, and December 31, 2024, the Company had a total reserve of $3,101,000 and $3,051,000 , respectively. The amount of the final payments could vary significantly from the estimated liability reserve.
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. 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.
15. Segment Report
The Company operates and evaluates its business as a single reportable segment. The following is the summary of the financial information for the Company’s reportable segment:
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net sales | $ | $ | |||||||||
| Less: | |||||||||||
| Cost of goods sold | |||||||||||
| Shipping and transportation | |||||||||||
| Salaries and benefits | |||||||||||
| Professional services | |||||||||||
| Depreciation and amortization | |||||||||||
| Rent expense | |||||||||||
| Marketing expense | |||||||||||
| Online platform fees | |||||||||||
| Warehouse expense | |||||||||||
| Stock-based compensation | |||||||||||
ROU asset impairment expense | |||||||||||
| Interest expense | |||||||||||
| Provision for income taxes | |||||||||||
| Other segment expenses* | |||||||||||
| Add: | |||||||||||
| Interest income | |||||||||||
| Other income, net | |||||||||||
| Segment net income | |||||||||||
| Reconciliation of segment net income to consolidated net income | |||||||||||
| Adjustments and reconciling items | |||||||||||
| Consolidated net income | $ | $ | |||||||||
* Other segment expenses includes property taxes, insurance expenses, office expenses, and utilities.
There are no changes in the basis of segmentation or measurement of segment profit or loss since December 31, 2024. The Company’s long-lived assets are all located in the United States, and its revenues are almost entirely generated in the
18
KARAT PACKAGING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
United States. Additionally, the segment assets are the same as the assets reported on the condensed consolidated balance sheets.
16. Subsequent Events
On May 6, 2025, the Company's Board of Directors declared a quarterly cash dividend of $0.45 per share on the Company's common stock, which will be paid on or about May 23, 2025 to shareholders of record at the close of business on May 16, 2025.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to expectations concerning matters that are not historical facts. For example, statements discussing, among other things, business strategies, growth strategies and initiatives, future revenues and future performance and expected costs and liabilities are forward-looking statements. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “remain,” “should,” or “will” or the negative of these terms or other comparable terminology. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause those actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:
•fluctuations in the demand for our products in light of changes in laws and regulations applicable to food and beverages and changes in consumer preferences;
•supply chain disruptions that could interrupt product manufacturing and increase product costs;
•our ability to source raw materials and navigate a shortage of available materials;
•our ability to compete successfully in our industry;
•the impact of earthquakes, fire, power outages, floods, pandemics and other catastrophic events, as well as the impact of any interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems;
•our ability to accurately forecast demand for our products or our results of operations;
•the impact of problems relating to delays or disruptions in the shipment of our goods through operational ports;
•our ability to expand into additional foodservice and geographic markets;
•our ability to successfully design and develop new products;
•fluctuations in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations;
•the effects of public health crises including pandemics;
•our ability to attract and retain skilled personnel and senior management; and
•other risks and uncertainties described in “Risk Factors" as set forth in Item I, Part 1A, “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2024 as filed with the Securities and Exchange Commission (the "SEC") on March 14, 2025 (the "2024 Form 10-K").
As used in this Quarterly Report on Form 10-Q, “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.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide, and percentages may not precisely reflect the absolute figures.
20
Overview
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 design and development, custom printing, distribution of specialty food and beverage products, 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 our vendors' products 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 environment to drive operating efficiency and sustained margin expansion. We are focusing on strengthening our supply chain resilience and efficiency by prioritizing strong partnerships with reliable and cost-efficient sources and diversifying sourcing to countries with more favorable trade conditions and minimal tariffs. This has enabled us to expand our supplier base, minimize reliance on individual suppliers, enhance the resilience of our supply chain, expand our margin and improve our operating cash flows.
We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, an approximately 300,000 square foot distribution center in Chino, California, and an approximately 76,000 square foot distribution center located in Kapolei, Hawaii. We have selected manufacturing capabilities in all of these facilities. In addition, we operate seven other warehouse spaces and distribution centers located in Puyallup, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; Aurora, Illinois; Mesa, Arizona; and Sugar Land, Texas. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Chicago, Dallas, Houston, Seattle, Phoenix, Atlanta, and Honolulu metro areas. On March 3, 2025, we entered into a lease agreement for an additional distribution center of approximately 187,000 square foot in Chino, California and are currently in the process of setting up this location to be fully operational by end of May 2025.
We manage and evaluate our operations in one reportable segment.
Business Highlights and Trends
•We continued to strengthen our supply chain resilience ahead of the tariff uncertainty, by further reducing reliance on China, negotiating additional vendor support, expanding sourcing outside China, and ramping up domestic production for certain categories. Import from China as a percentage of total sourcing decreased to 18.4 percent for the three months ended March 31, 2025.
•We recorded net sales of $103.6 million for the three months ended March 31, 2025, an increase of 8.4% in amount and 10.9% in volume, compared to the three months ended March 31, 2024.
•We achieved gross margin of 39.3% for the three months ended March 31, 2025, consistent with the three months ended March 31, 2024.
•We recorded net income of $6.8 million for the three months ended March 31, 2025, an increase of 5.2% compared to the three months ended March 31, 2024.
•Our net income margin was 6.6% for the three months ended March 31, 2025, a decrease of 20 basis points from the three months ended March 31, 2024.
•We generated $7.7 million in net cash from operating activities for the three months ended March 31, 2025, an increase of 17.8% compared to the three months ended March 31, 2024.
•We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $11.9 million for the three months ended March 31, 2025, a decrease of 12.0% from the three months ended March 31, 2024.
21
•Our Adjusted EBITDA margin, a non-GAAP measure defined below, was 11.5% for the three months ended March 31, 2025, a decrease of 270 basis points from the three months ended March 31, 2024.
•We had financial liquidity of $46.7 million and additional short-term investments of $23.8 million as of March 31, 2025.
•On May 6, 2025, our Board of Directors declared another quarterly cash dividend of $0.45 per share on our common stock, which will be paid on or about May 23, 2025 to shareholders of record at the close of business on May 16, 2025.
Trends in Our Business
The following trends have contributed to the results of our operations, and we anticipate that they will continue to affect our future results:
•A significant trend in the restaurant industry is the changing perception of food delivery and take-out compared to traditional on-premise dining. There is a clear growing preference for delivery and take-out, and we expect this trend to continue positively influencing our operating results, as more customers will need packaging and containers to support the rising demand from food delivery and take-out consumers.
•Environmental concerns regarding disposable products, broadly, have resulted in a number of significant changes to the food-service industry, including regulations applicable to our customers. We believe this trend will have a positive long-lasting impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.
•Most of our products are sourced from vendors abroad and as a result we incur freight costs from these overseas import shipments, which could be a significant component of our cost of goods sold. Elevated ocean freight rates could pressure our gross margin, and if we raise our price, dampen the demand for our products. Steady or dropping ocean freight could yield significant opportunities for us to expand our margin. However, it could also reduce the barrier of entry, intensifying the competition.
•The recent introduction of baseline and reciprocal tariffs by the new federal administration in April 2025, particularly targeting nations with significant trade deficits like China, has injected considerable uncertainty into the global trade landscape. Broader macroeconomic repercussions of these tariffs—including higher inflation, reduced growth, or altered consumer behavior—could influence demand for our products. We believe our strategic and proactive measures taken over the past few years ahead of the tariff announcements to enhance our supply chain resilience and diversify our sourcing beyond China have solidified our standing as a dependable industry partner, positioning us to capitalize on growth opportunities despite challenging external conditions. Complementing these multi-year efforts, our robust domestic manufacturing scalability allows for swift responses to market changes. Furthermore, we have implemented targeted price adjustments to mitigate potential cost pressures. Whether the U.S. can successfully negotiate favorable trade terms and whether we can continue to effectively strengthen our supply chain would have a significant impact on our operations and financial results, and our ability to continue to gain market share.
•The cost of raw materials used to manufacture our products, including polyethylene terephthalate, or PET, plastic resin, aluminum, and paper boards, may continue to fluctuate. Since negotiated sales contracts and the market largely determine the pricing for our products, we are, at times, limited in our ability to raise prices and pass through any impacts of inflation to our costs. There can also be lags between cost inflation and the implementation of price increases, which could negatively impact our gross margin. Conversely, periods of deflation, where raw material costs decrease, may create pricing pressure and start price wars, potentially requiring us to lower prices, which could also affect our gross margin. We believe price fluctuations will have either a positive or a negative impact on our results of operations in the future, depending on whether raw material costs increase or decrease and whether we can successfully implement price adjustments to maintain gross margin.
•Supplier chain effectiveness could have a long-lasting impact on our operations and financial results. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to manage our global supply chain effectively, including the accurate forecast of demand, the successful procurement and transportation of raw materials and products, and the effective management of our inventory, production and distribution.
22
•Fluctuations in foreign currency exchange rates could impact either positively or negatively various aspects of our business activities, including but not limited to our purchasing power and capacity to source inventory.
•Since early 2023 and throughout 2024, we have pivoted into a more asset-light growth model by increasing imports and scaling back manufacturing in the U.S. In light of the recently announced tariffs as discussed above, we have started to ramp up domestic production on certain selected categories to mitigate potential cost pressures from imports and ensure continued supply to our customers. We will continue to evaluate the mix between import and domestic manufacturing under our nimble operations and flexible supply chain model in the dynamic global trade environment.
Critical Accounting Estimates
The following discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments.
There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading “Critical Accounting Estimates” in Item 7 of Part II of our 2024 Form 10-K.
Results of Operations
The amount and percentage changes calculated in the discussion below were based on numbers rounded to the nearest thousands.
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net sales | $ | 103,624 | $ | 95,613 | |||||||
| Cost of goods sold | 62,862 | 58,011 | |||||||||
| Gross profit | 40,762 | 37,602 | |||||||||
| Operating expenses | 32,942 | 29,526 | |||||||||
| Operating income | 7,820 | 8,076 | |||||||||
| Other income, net | 1,116 | 375 | |||||||||
| Provision for income taxes | 2,121 | 1,975 | |||||||||
| Net income | $ | 6,815 | $ | 6,476 | |||||||
Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024
Net sales
Net sales were $103.6 million for the three months ended March 31, 2025 compared to $95.6 million for the three months ended March 31, 2024, an increase of $8.0 million, or 8.4%. Net sales for the three months ended March 31, 2024 were understated by $0.7 million, which represented products shipped and recognized as revenue in 2023 but not delivered until 2024. Including this impact, the year-over-year increase in net sales was primarily driven by an increase of $11.7 million in volume and change in product mix, partially offset by a $3.9 million unfavorable year-over-year pricing comparison, as the Company continued to be competitive on the pricing front.
Cost of goods sold
Cost of goods sold was $62.9 million for the three months ended March 31, 2025 compared to $58.0 million for the three months ended March 31, 2024, an increase of $4.9 million, or 8.4%. Cost of goods sold for the three months ended March 31, 2024 was understated by $0.4 million related to products shipped and recognized as cost of goods sold in 2023 but not delivered until 2024, as discussed above. Including this impact, the year-over-year increase in cost of goods sold was primarily driven by an increase in product costs of $3.0 million, as a result of increased sales volume partially
23
offset by more favorable vendor pricing and product mix, and an increase in ocean freight and duty costs of $2.0 million as a result of a 15.5% increase in import volume coupled with 4.3% higher freight container rates.
Gross profit
Gross profit was $40.8 million for the three months ended March 31, 2025 compared to $37.6 million for the three months ended March 31, 2024, an increase of $3.2 million, or 8.4%. Gross profit for the three months ended March 31, 2024 was understated by $0.3 million related to products shipped and recognized as revenue and cost of goods sold in 2023 but not delivered until 2024, as discussed above. Gross margin remained consistent at 39.3% for both the three months ended March 31, 2025 and 2024. Product costs as a percentage of net sales decreased to 49.5% during the three months ended March 31, 2025 from 50.5% during the three months ended March 31, 2024, due to more favorable vendor pricing, increased imports as a percentage of total product mix, and a positive impact from foreign currency due to a stronger United States Dollar compared to New Taiwan Dollar. This improvement in margin was offset by an increase in ocean freight and duty costs, as discussed above, which as a percentage of net sales increased to 8.6% during the three months ended March 31, 2025 from 7.3% during the three months ended March 31, 2024.
Operating expenses
Operating expenses were $32.9 million for the three months ended March 31, 2025 compared to $29.5 million for the three months ended March 31, 2024, an increase of $3.4 million, or 11.6%. The increase in operating expenses for the three months ended March 31, 2025 was driven by higher shipping and transportation costs of $3.4 million as a result of an increase in shipping volume and in online packages as a percentage of total shipments, an increase in rent expense of $0.9 million primarily due to a higher rate on our Chino, California facility lease extension plus the opening of a new Chino distribution center, an increase in marketing expense of $0.4 million as we increased online marketing efforts to grow our e-commerce sales channel, and an increase in professional services expense of $0.3 million. These increases were partially offset by a non-cash impairment of a ROU asset of $2.0 million resulting from the sublease of our City of Industry warehouse in California during the three months ended March 31, 2024.
Operating income
Operating income was $7.8 million for the three months ended March 31, 2025 compared to $8.1 million for the three months ended March 31, 2024, a decrease of $0.3 million, or 3.2%. The decrease was primarily due to an increase in operating expenses of $3.4 million, partially offset by an increase in gross profit of $3.2 million, as discussed above.
Other income, net
Other income, net was $1.1 million for the three months ended March 31, 2025 compared to $0.4 million for the three months ended March 31, 2024, an increase of $0.7 million, or 197.6%. The increase in other income, net for the three months ended March 31, 2025 was primarily driven by an increase in rental income of $0.5 million primarily from our City of Industry warehouse which we began to sublease in April 2024.
Provision for income taxes
Provision for income taxes was $2.1 million for the three months ended March 31, 2025 compared to $2.0 million for the three months ended March 31, 2024, an increase of $0.1 million, or 7.4%. The Company’s effective tax rate was 23.7% for the three months ended March 31, 2025 compared to 23.4% for the three months ended March 31, 2024.
Net income
Net income was $6.8 million for the three months ended March 31, 2025 compared to $6.5 million for the three months ended March 31, 2024, an increase of $0.3 million, or 5.2%. The increase was primarily driven by an increase of $0.7 million in other income, net, partially offset by a decrease of $0.3 million in operating income and an increase of $0.1 million in provision for income taxes, as discussed above.
24
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with U.S. GAAP. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with U.S. GAAP; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure calculated and presented in accordance with U.S. GAAP.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is a financial measure calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation expense, and (vi) operating right-of-use asset impairment. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.
We present Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our financial performance. Adjusted EBITDA and Adjusted EBITDA margin assist management in assessing our core operating performance. We believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as alternatives to net income, net income margin, or other measures determined in accordance with US GAAP. Also, Adjusted EBITDA and Adjusted EBITDA margin are not necessarily comparable to similarly titled measures presented by other companies.
Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.
Reconciliation of Adjusted EBITDA (unaudited) | Three Months Ended March 31, | ||||||||||||||||||||||
| 2025 | 2024 | ||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Amount | % of Net Sales | Amount | % of Net Sales | ||||||||||||||||||||
| Net income | $ | 6,815 | 6.6 | % | $ | 6,476 | 6.8 | % | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Interest income | (566) | (0.5) | (431) | (0.5) | |||||||||||||||||||
| Interest expense | 509 | 0.5 | 524 | 0.6 | |||||||||||||||||||
| Provision for income taxes | 2,121 | 2.0 | 1,975 | 2.1 | |||||||||||||||||||
| Depreciation and amortization | 2,688 | 2.6 | 2,629 | 2.7 | |||||||||||||||||||
| Stock-based compensation expense | 346 | 0.3 | 375 | 0.4 | |||||||||||||||||||
| Operating right-of-use asset impairment | — | — | 1,993 | 2.1 | |||||||||||||||||||
| Adjusted EBITDA | $ | 11,913 | 11.5 | % | $ | 13,541 | 14.2 | % | |||||||||||||||
Free Cash Flow
Free Cash Flow is a financial measure calculated as cash from operating activities less cash used in (i) purchases of property and equipment, and (ii) deposits paid for property and equipment.
We present Free Cash Flow as a supplemental measure of our financial liquidity. Free Cash Flow assists management in assessing our ability to fund growth through generation of additional cash from business operations. We believe this measure also provides investors with an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business.
25
Free Cash Flow should not be considered in isolation or as alternatives to net income or cash flows from operating activities. Also, Free Cash Flow is not necessarily comparable to similarly titled measures presented by other companies.
Set forth below is a reconciliation of net cash provided by operating activities to Free Cash Flow:
| Reconciliation of Free Cash Flow (unaudited): | Three Months Ended March 31, | ||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 7,726 | $ | 6,559 | |||||||
Deduct: | |||||||||||
| Purchases of property and equipment | (107) | (163) | |||||||||
| Deposits paid for property and equipment | (989) | (761) | |||||||||
| Free Cash Flow | $ | 6,630 | $ | 5,635 | |||||||
26
Liquidity and Capital Resources
Sources and Uses of Funds
Our primary sources of liquidity are cash provided by operations, borrowings under our line of credit with the Hanmi Bank (the “Line of Credit”), and promissory notes. On an annual basis, we have typically generated positive cash flows from operations. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on global economic conditions and our ability to navigate challenging macro environment at times.
As described in Note 6 — Line of Credit to the condensed consolidated financial statements, the Line of Credit is available for working capital and general corporate purposes, and is secured by our assets. It consists of a revolving loan facility and a standby letter of credit sublimit. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. On March 3, 2025, the Company amended the Line of Credit. Prior to March 3, 2025, the revolving loan facility had a maximum borrowing capacity of $40.0 million and interest accrued at an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.00%. The amendment on March 3, 2025, among other things, (1) extended the maturity date to March 14, 2027, (2) reduced the maximum borrowing capacity of the revolving loan facility to $20.0 million, and (3) revised the interest on any Line of Credit borrowings to an annual rate of one month term SOFR plus 2.25%, with a SOFR floor of 1.00%. On March 17, 2025, the Company entered into another amendment of the Line of Credit, increasing the standby letter of credit sublimit from $5.0 million to $7.5 million. As of March 31, 2025, the amount issued under the standby letter of credit was $5.8 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $14.2 million.
As described in Note 8 — Long-Term Debt to the condensed consolidated financial statements, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the “2027 Term Loan”). The 2027 Term Loan had an initial balance of $20.7 million and an option to request for additional advances up to a maximum of $8.0 million through June 2023, which we exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The 2027 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio. Proceeds from the 2027 Term Loan were used to pay down an existing term loan with the same lender, which was set to mature in May 2029 with interest accruing at prime rate less 0.25%, and had an outstanding balance of $20.6 million as of the repayment date.
Additionally, as of March 31, 2025, we have a $23.0 million term loan that matures September 30, 2026 (the “2026 Term Loan”). The 2026 Term Loan had an initial balance of $16.1 million and an option to request for additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The 2026 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.
As of March 31, 2025, we were in compliance with the financial covenants under all of our loan agreements, and do not expect material uncertainties in our continued ability to be in compliance with all financial covenants through the remaining term of all of our loan agreements. As of March 31, 2025, we had no borrowing on the Line of Credit, $27.5 million in outstanding balance under the 2027 Term Loan, and $20.8 million in outstanding balance under the 2026 Term Loan.
As discussed in Note 14 — Commitments and Contingencies to the condensed consolidated financial statements, on February 5, 2024, we received a Notice of Determination from U.S. Customs and Border Protection ("CBP") related to its investigation to determine whether we have evaded the anti-dumping and countervailing duty on certain imported thermal paper products. On March 19, 2024, we initiated an appeal process by submitting a request for an administrative review of the initial determination issued by CBP. On June 11, 2024, CBP completed the administrative review and upheld its initial conclusion. In February 2025, we started to receive bills related to certain of our thermal paper shipments. We are in the process of protesting the received bills with CBP, and are also evaluating other appeal options. Payments on bills received will be due upon the resolution of the protests, currently expected to occur within the next 12 months. Although we have an import duty liability reserve of $3.1 million as of March 31, 2025, the amount of the final payments could vary significantly from the estimated liability reserve.
27
Additionally, as described in Note 16 — Subsequent Events to the condensed consolidated financial statements, on May 6, 2025 our Board of Directors declared another regular quarterly cash dividend of $0.45 per share on our common stock, which will be paid on or about May 23, 2025 to shareholders of record at the close of business on May 16, 2025. Prior to this, we paid out regular quarterly cash dividends totaling $9.0 million in the current fiscal year. Our ongoing operations and growth strategy may require us to continue to make investments in new markets and products, logistics and manufacturing infrastructure, e-commerce platform, talent, and technology capabilities. In addition, we may consider making strategic acquisitions and investments which could require significant liquidity. The rapidly changing macroeconomic, geopolitical and global trade dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects. We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund capital expenditures for at least the next 12 months. We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value.
Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of the Line of Credit, and acquire additional debt. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business, which could have a material adverse effect on our operations, market position and competitiveness. Notwithstanding the potential liquidity challenges described above, we expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.
Liquidity Position
The following table summarizes total current assets, liabilities and working capital at March 31, 2025 compared to December 31, 2024:
| March 31, 2025 | December 31, 2024 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Current assets | $ | 171,979 | $ | 160,997 | $ | 10,982 | |||||||||||
| Current liabilities | 60,083 | 46,447 | 13,636 | ||||||||||||||
| Working capital | $ | 111,896 | $ | 114,550 | $ | (2,654) | |||||||||||
As of March 31, 2025, we had working capital of $111.9 million compared to $114.6 million as of December 31, 2024, representing a decrease of $2.7 million, or 2.3%. The decrease in working capital was driven by an increase of $13.6 million in current liabilities, partially offset by an increase of $11.0 million in current assets. The increase in current liabilities was primarily driven by an increase in accounts payable and related party payables of $8.6 million, an increase in income tax payable of $2.1 million, an increase in operating lease liabilities, current portion of $2.0 million from a higher rate on our Chino, California facility lease extension plus the opening of a new Chino distribution center, and an increase in accrued expenses of $1.3 million, partially offset by a reduction in other current liabilities of $0.8 million due to the payment of Global Wells noncontrolling membership interest redemption gain tax withholding. The increase in current assets was primarily driven by an increase in inventories of $9.2 million as we stocked up inventory ahead of the summer peak season and the increase in forecast demand, an increase in accounts receivable of $5.7 million as a result of stronger sales in the three months ended March 31, 2025 compared to the three months ended December 31, 2024, partially offset by a decrease in cash and cash equivalents and short-term investments of $3.7 million.
Cash Flows
The following table summarizes cash flow for the three months ended March 31, 2025 and 2024:
28
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 7,726 | $ | 6,559 | |||||||
| Net cash provided by (used in) investing activities | 3,533 | (7,947) | |||||||||
| Net cash used in financing activities | (10,370) | (8,544) | |||||||||
| Net change in cash and cash equivalents | $ | 889 | $ | (9,932) | |||||||
Cash flows provided by operating activities. Net cash provided by operating activities was $7.7 million for the three months ended March 31, 2025, primarily the result of net income of $6.8 million, adjusted for certain non-cash items totaling $5.5 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, stock-based compensation, and adjustments to the allowance for doubtful accounts and inventory reserve. In addition, cash decreased by $4.6 million from changes in working capital, which included a decrease of $9.2 million from inventory build-up, a decrease of $5.9 million from an increase in accounts receivable from higher sales, and a decrease of $2.3 million from a reduction in operating lease liabilities. These decreases were partially offset by an increase of $8.7 million from higher accounts and related party payables primarily associated with increased inventory purchases, an increase of $2.1 million from higher income tax payable, and an increase of $1.3 million from higher accrued expenses.
Net cash provided by operating activities was $6.6 million for the three months ended March 31, 2024, primarily the result of net income of $6.5 million, adjusted for certain non-cash items totaling $6.7 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, write-off of inventory, stock-based compensation, ROU asset impairment, and accrued interest on certificates of deposit. In addition, cash decreased $6.6 million from changes in working capital, which included a decrease of $8.1 million from inventory build-up, a decrease of $2.3 million from an increase in accounts receivable, a decrease of $1.5 million from reductions in operating lease liabilities, and a decrease of $0.5 million from less deferred revenue. These decreases were partially offset by an increase of $1.7 million from reductions in prepaid expenses, $3.4 million from higher accounts and related party payables, and $0.7 million from higher accrued expenses.
Cash flows provided by (used in) investing activities. Net cash provided by investing activities was $3.5 million for the three months ended March 31, 2025, which primarily included $12.7 million in redemptions of short-term investments, partially offset by $8.1 million in purchases of short-term investments, and $1.0 million of deposits paid for the purchase of property and equipment.
Net cash used in investing activities was $7.9 million for the three months ended March 31, 2024, which primarily included $12.2 million in purchases of short-term investments, $0.8 million of deposits paid for the purchase of property and equipment, and $0.2 million paid to directly purchase property and equipment, partially offset by $5.1 million in redemptions of short-term investments.
Cash flows used in financing activities. Net cash used in financing activities was $10.4 million for the three months ended March 31, 2025, which primarily included $9.0 million of cash dividends paid to shareholders, $0.9 million of Global Wells membership interest redemption gain tax withholding payment, and $0.3 million of payments towards long-term debt.
Net cash used in financing activities was $8.5 million for the three months ended March 31, 2024, which primarily included $6.0 million of cash dividends paid to shareholders, $2.3 million paid for the redemption of a non-controlling member's interest in Global Wells, and $0.3 million of payments towards long-term debt.
Related Party Transactions
For a description of significant related party transactions, see Note 12 — Related Party Transactions in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
29
Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q, the Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2025. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2025 at the reasonable assurance level.
Remediation of Previously Disclosed Material Weakness
As previously disclosed in Part II, “Item 9A – Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2024, management had identified the following material weakness in our internal control over financial reporting as of December 31, 2024.
Management did not design and maintain effective controls to ensure appropriate segregation of duties related to the creation, approval and subsequent modification of journal entries. This deficiency could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
During the year ended December 31, 2024, management has redesigned its control over the journal entry creation and approval process, remediated gaps in the design of such internal control and performed operating effectiveness testing. However, as of December 31, 2024, additional time was required to demonstrate the control has operated effectively for a sufficient period of time.
During the three months ended March 31, 2025, management has continued to perform the enhanced control over the journal entry creation and approval process. Management has completed the testing necessary to conclude that the enhanced control was appropriately designed, implemented and operating effectively for a sufficient period of time as of March 31, 2025, and that the previously-identified material weakness described above has been remediated.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are involved in various legal proceedings. Although no assurance can be given, we do not believe that any of our currently pending proceedings will have a material adverse effect on our financial condition, cash flows or results of operations.
Item 1A. Risk Factors.
In addition to other information set forth in this report, readers should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" of our 2024 Annual Report on Form 10-K, as updated and supplemented below. Any of the risk factors disclosed in our reports could materially affect our business, financial condition or future results. The risks described here and in our 2024 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. The discussion of the risk factor below updates the corresponding disclosure under the same heading in the 2024 Annual Report on Form 10-K and may contain material changes to the corresponding risk factor discussion in our 2024 Annual Report on Form 10-K.
Recent trade policy shifts, including increased import tariffs and the renegotiation of trade agreements, could have a material adverse impact on our business, financial condition or results of operations.
Both global and domestic economic and geopolitical conditions greatly impact our business. The new federal administration's recent trade policy shifts, including increased import tariffs and the renegotiation of trade agreements, has increased the level of uncertainty in the global trading environment. These tariffs, affecting imports from countries such as China, could substantially increase the cost of our products, including raw materials needed for domestic manufacturing, and/or impact our ability to supply certain products to our customers. We are currently evaluating the potential impact of these tariffs on our business and financial condition, which will ultimately depend on their actual implementation details and any exclusions offered by the administration. Escalating trade tensions pose several risks, including increased manufacturing costs, global supply chain disruptions, limitations on domestic and international sales, and reduced sales volumes and margins, all of which could negatively impact our business. Additionally, the loss of our ability to pass those cost increases through to our customers could also have a materially adverse impact on our business, financial condition or results of operations. Even if we are able to pass increased costs on to customers, higher prices could reduce demand for our products, further negatively affecting our sales and profitability.
In the past, we have identified a material weakness in our internal controls over financial reporting. If we experience additional material weaknesses or deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports and the price of our common stock may decline.
As described in our 2024 Annual Report, we had identified a material weakness in our internal controls over financial reporting as of December 31, 2024. As further described in Part I, Item 4 "Controls and Procedures" of this Quarterly Report on Form 10-Q, the material weakness previously identified was fully remediated in the first quarter of 2025. If, in the future, we again have a material weakness in our internal controls over financial reporting, this could limit our ability to prevent or detect a misstatement of our accounts or disclosures and could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and the prices of our common stock may decline as a result.
Except for the above, there have been no other material changes to the Risk Factors previously disclosed in the 2024 Form 10-K, which is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
31
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Arrangements
During the three months ended March 31, 2025, none of the Company’s directors or officers adopted terminated
Item 6. Exhibits.
| Exhibit No. | Description | |||||||
| 10.1 | Lease Agreement, by and between the Company and G&O Chino Property, a California general partnership, as amended, for the Chino, California distribution center (Incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2025) | |||||||
| 10.2 | ||||||||
10.3* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Labels Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith. ** Furnished herewith. | ||||||||
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: May 9, 2025 | KARAT PACKAGING INC. | |||||||
| By: | /s/ Alan Yu | |||||||
| Alan Yu | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Jian Guo | |||||||
| Jian Guo | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer and | ||||||||
| Principal Accounting Officer) | ||||||||
33