S-1/A 1 tm2029131-10_s1a.htm S-1/A tm2029131-10_s1a - block - 21.1719996s
As filed with the Securities and Exchange Commission on March 30, 2021.
Registration No. 333-253270
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Karat Packaging Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3089
(Primary Standard Industrial
Classification Code Number)
83-2237832
(I.R.S. Employer
Identification Number)
6185 Kimball Avenue
Chino, CA 91708
Telephone: (626) 965-8882
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Alan Yu
Chief Executive Officer
6185 Kimball Avenue
Chino, CA 91708
Telephone: (626) 965-8882
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Mark Y. Liu
Christina C. Russo
Akerman LLP
601 W. 5th Street, 3rd Floor
Los Angeles, CA 90071
Stephen Older
Rakesh Gopalan
McGuireWoods LLP
1251 Avenue of the Americas, 20th Floor
New York, NY 10020
Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
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 the 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
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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering
Price(1)(2)
Amount of
Registration Fee(3)
Common stock, par value $0.001 per share
$75,000,000
$8,182.50
Total
$75,000,000
$8,182.50
(1)
Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
(2)
Includes common stock that the underwriters have the option to purchase to cover over-allotments, if any.
(3)
Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated MARCH 30, 2021
Preliminary Prospectus
        Shares
[MISSING IMAGE: lg_karat-4clr.jpg]
Karat Packaging Inc.
Common Stock
This is the initial public offering of shares of common stock of Karat Packaging Inc. All of the shares included in this offering are being sold by us.
We currently estimate that the initial public offering price will be between $      and $       per share. Prior to this offering, no public market exists for our shares. We have applied for the listing of our common stock on The Nasdaq Global Market under the symbol “KRT.”
We are an “emerging growth company” under the federal securities laws and, as such, we have elected to be subject to reduced public company reporting requirements for this and future filings. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”
The offering is being underwritten on a firm commitment basis. We have granted the underwriters an option to buy up to an additional          shares of common stock from us to cover over-allotments, if any. The underwriters may exercise this option at any time and from time to time during the 30-day period from the date of this prospectus.
Investing in our common stock involves risk. See “Risk Factors” beginning on page 16 to read about factors you should consider before buying shares of our common stock.
Per Share
Total
Initial public offering price $         $        
Underwriting discounts and commissions(1) $ $
Proceeds to us, before expenses $ $
(1)
See “Underwriting” on page 90 of this prospectus for a description of the compensation payable to the underwriters.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock on or about April    , 2021.
Stifel
William Blair
Truist Securities
National Securities Corporation
D.A. Davidson & Co.
The date of this prospectus is            , 2021.

Table of Contents
1
13
14
16
34
35
36
36
38
40
45
58
69
75
78
79
81
84
86
90
96
96
97
F-1
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us that we have referred to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with additional, different, or inconsistent information, you should not rely on it. Offers to sell, and solicitations of offers to buy, shares of our common stock are being made only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, operating results, and prospects may have changed since such date.
Through and including            , 2021 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
For investors outside the United States: No action is being taken by us or the underwriters to permit a public offering of our common stock or the possession or distribution of this prospectus in any jurisdiction outside the United States. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.
i

Certain Trademarks, Trade Names, and Service Marks
This prospectus contains trademarks, trade names and service marks that we use in our business. Each one of these trademarks, trade names and service marks is either (i) our registered trademark, trade name or service mark, (ii) a trademark, trade name or service mark for which we have a pending application, (iii) a trademark, trade name or service mark for which we claim common law rights or (iv) a trademark, trade name or service mark that is owned by a third party and used by us under license. All other trademarks, trade names or service marks appearing in this prospectus belong to their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
ii

PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and related notes thereto included elsewhere in this prospectus and the information in “Risk Factors”, “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
As used in this prospectus, “we”, “us”, “our”, “Karat”, “the Company” or “our Company” refer to Karat Packaging Inc., a Delaware corporation, and, unless the context requires otherwise, our operating subsidiaries. References to “Global Wells” or “our variable interest entity” refer to Global Wells Investment Group LLC, a Texas limited liability company and our consolidated variable interest entity, in which the Company has an equity interest and which is controlled by one of our stockholders. References to “Lollicup” refer to Lollicup USA Inc., a California corporation, our wholly-owned subsidiary.
Our Company
We are a rapidly-growing specialty distributor and select manufacturer of environmentally-friendly disposable foodservice products and related items. We are a nimble supplier of a wide range of products for the foodservice industry, including food and take out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. Our Karat Earth® line provides environmentally friendly options to our customers, who are increasingly focused on sustainability. We offer customized solutions to our customers, including new product development, design, printing and logistics services. While a substantial majority of our revenue is generated from the distribution of our vendors’ products, we do manufacture products ourselves. Our goal is to be the single-source provider to our customers for all of their disposable foodservice products and related needs.
[MISSING IMAGE: tm2029131d3-fc_products4clr.jpg]
Our customers include a wide variety of national and regional distributors, restaurant chains, retail establishments and online customers. Our products are well suited to address our customers’ increased focus
1

on take out and delivery capabilities. Our blue chip customer base includes well-known fast casual chains such as Applebee’s Neighborhood Grill + Bar, Chili’s Grill & Bar, Chipotle Mexican Grill, Corner Bakery Cafe and TGI Fridays, as well as fast food chains including The Coffee Bean & Tea Leaf, El Pollo Loco, In-N-Out Burger, Jack in The Box, Panda Express, Raising Cane’s Chicken Fingers and Torchy’s Tacos. As our capabilities, product offering and footprint expand, we are also beginning to supply products to regional and national supermarket chains, airlines, sports and entertainment venues and other non-restaurant customers. Our strong brand recognition in the foodservice industry, nimble operations and rapidly increasing size and scope of our distribution network provide us with a significant advantage that enables us to acquire new customers as well as increase our business with existing customers. For the years ended December 31, 2020 and 2019, no single customer represented more than 10% of our revenue.
We have grown net sales at a compound annual growth rate of 26.2% over the past nine years. This historical growth is largely due to our continued expansion into new end markets and product categories, as well as our growing position as a strategically important supply chain partner to our customers. For the year ended December 31, 2020, net sales of our traditional foodservice products grew 14% compared to the year ended December 31, 2019. When the COVID-19 pandemic began to impact the U.S. last year, we were able to act quickly and source a significant amount of COVID-19 related products via our extensive global supplier relationships when competitors could not. As a result, we realized a collective 31.4% net sales increase across the business for the year ended December 31, 2020 compared to the year ended December 31, 2019. While COVID-19 related products are not a key area of our growth strategy, being able to offer these products at the outset of the pandemic demonstrated our nimble sourcing capabilities and our importance as a value added supply chain partner for many of our new and existing customers. Our performance through the pandemic further enhanced our reputation in the market.
[MISSING IMAGE: tm2029131d10-bc_salescagr4c.jpg]
[MISSING IMAGE: tm2029131d10-bc_salesgrow4c.jpg]
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 our ability to source products quickly on a cost effective basis via a global supplier network, complemented by our manufacturing capabilities for select products, has established us as a differentiated provider of high-quality products relative to our competitors. We have recently made significant investments to establish and grow our online distribution channel www.lollicupstore.com. This channel, utilized primarily by small- and medium-sized businesses, served over 45,000 customers during the year ended December 31, 2020, with our online net sales growing by 65.7% compared to the year ended December 31, 2019. We primarily attribute this growth to increased sales of take out containers, bags and related products tied to amplified take out and delivery activity during 2020 as the U.S. adapted to restrictions imposed during the COVID-19 pandemic. We view this as part of a broader acceleration in the shift in consumer preferences towards food delivery and “to go” ordering, which we expect to continue in the foreseeable
2

future. Our online channel offers the entire range of our products for online procurement, and we believe it will continue to remain key to our business going forward. Additionally, the online channel enables us to cross market other products to our customers that they may be purchasing from competitors.
We classify our customers into four categories: distributors, national chains, retail and online.

Distributors: national and regional distributors across the U.S. that purchase our products and provide a channel to offer our products to restaurants, offices, schools, government entities and other end users.

National chains: typically fast casual and fast food restaurants with locations across multiple states to which we supply specified products. We enter into sales contracts with a subset of our national chains customers, providing visibility into future revenue.

Retail: primarily regional bubble tea shops, boutique coffee shops and frozen yogurt shops that often purchase our specialty beverage ingredients and related items.

Online: small businesses, often with less than two locations, such as small restaurants, bubble tea shops, coffee shops, juice bars, smoothie shops and some customers who purchase for personal use.
The diversity of our customer types provides us with the ability to source products efficiently while maintaining a broad product offering, as we are able to sell many products across multiple customer segments. We expect a large proportion of our growth to come from national chains and our higher margin online customers.
The following graphics illustrate our net sales mix and net sales by customer type for the year ended December 31, 2020. Distribution accounted for 86% of net sales during this period, while manufacturing accounted for 14% of net sales. We expect manufacturing will remain a relatively small portion of our sales mix going forward, but believe it provides us with the flexibility to provide customized products with short lead times to complement our global sourcing capabilities. Also shown below is our net sales by customer type for the same period.
[MISSING IMAGE: tm2029131d10-pc_netsales4c.jpg]
The disposable foodservice products industry is large and growing. Based on data from Coherent Market Insights, we estimate the global disposable foodservice products market to be approximately $64 billion. They estimate the market will grow to $78 billion by 2025, representing a 4.1% compound annual growth rate. Our industry is benefitting from shifting consumer preferences towards both food delivery and “to go” ordering, a trend that pre-dated the COVID-19 pandemic. As consumer preferences
3

have evolved, foodservice establishments have realized that the at-home dining experience is closely linked to the quality of the packaging utilized. Rapidly growing demand for quality take out packaging solutions has also contributed to significant capacity constraints and product shortages within the industry.
During the COVID-19 pandemic, our ability to source products quickly and efficiently via our global supply chain has allowed us to serve new and existing customers. We were able to augment our broad product offering and source high-demand items such as face masks and shields, gloves and hand sanitizer to help build our reputation as a nimble and dependable supplier. We have increased our total customers from approximately 20,000 in 2019 to over 50,000 through December 31, 2020. In addition, we have been able to grow our wallet share with many customers, in particular our national chains, by supplying them a broader range of our foodservice disposables and related products. We believe that the current environment has accelerated the shift in consumer preferences towards food delivery and “to go” ordering, which we expect to continue in the foreseeable future.
For the year ended December 31, 2020, we sold approximately $38.1 million of COVID-19 related products, including $17 million and $9 million in the months of April and May, respectively. Since its peak in April 2020, COVID-19 related products have declined to under 2% of net sales in each of October 2020, November 2020 and December 2020.
We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, and an approximately 300,000 square foot distribution center in Chino, California. We have select manufacturing capabilities in both of these facilities as well. In addition, we operate three other distribution centers located in Sumner, Washington, Summerville, South Carolina, and Branchburg, New Jersey. Our New Jersey location is an approximately 108,000 square foot facility that recently opened in July 2020 and was fully operational in March 2021. We also intend to double the capacity of our current distribution center in South Carolina to better service customers in the Southeast region.Also, on March 1, 2021, we completed the acquisition of the assets of Pacific Cup Inc., a paper cup manufacturer based in Kapolei, Hawaii. During the first half of 2021, we intend to add an additional distribution facility and manufacture certain of our Karat Earth products, including paper straws, at the Pacific Cup location in Hawaii. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, Dallas, New York, Seattle, Atlanta and Honolulu metro areas.
[MISSING IMAGE: tm2029131d10-map_distrv2.jpg]
We were founded in 2000 by Alan Yu and Marvin Cheng in San Gabriel, California as Lollicup USA Inc., a California corporation. Initially our business was focused on the establishment, franchising and
4

licensing of bubble tea stores nationwide. Considered a pioneer for the bubble tea business in North America, our business grew rapidly from a single Lollicup Tea Café store in 2000 to more than 60 stores in 2006. In order to ensure consistency across our stores, we expanded our focus in 2004 to include the distribution of supplies for the bubble tea industry. In 2013, we sold the retail bubble tea business to certain of Lollicup’s shareholders. In 2014, as a result of a growing demand across the foodservice industry for our packaging goods, we began distributing and manufacturing products under our Karat brand in our California facility. Karat Packaging Inc. was incorporated in September 2018 as the holding company for Lollicup.
Competitive Strengths
We believe the following strengths fundamentally differentiate us from our competitors and drive our success:
One-stop shop with broadest product offering for the foodservice market and highly nimble sourcing capabilities
We offer customers a wide selection of single-use disposable foodservice products, with over 6,000 SKUs across a broad range of product categories. Key offerings include food and take out containers, bags, tableware, cups, lids, cutlery and straws primarily sourced through our diverse supplier base. Our strong relationships with our suppliers allow us to offer customers products that both preserve the highest possible food quality and meet the unique needs of their business. Furthermore, these supplier relationships allow us to offer custom-branded and custom-designed products with fast turnaround times and at competitive prices. Our Karat Earth® specialty line of environmentally-friendly products are made from renewable resources that are ethically sourced. Also, we have never used Styrofoam in any of our Karat products. The Karat Earth® line includes food and take out containers, bags, tableware, cups, lids, cutlery and straws. Customers can order products that are plain or custom printed to feature their brand. We intend to invest further in research and development for our Karat Earth® line to significantly expand our product offering to meet the needs of our customers and the evolving regulatory landscape.
We often are a key supply chain partner integral to the daily operations of our customers. Our ability to quickly provide premium products at competitive prices has typically allowed us to become a trusted supplier to our customers. Through an ongoing feedback loop, as customer demand varies and new needs emerge, we are able to act nimbly and qualify new suppliers quickly to augment our product offering. These capabilities made us a key partner to our customers as the COVID-19 pandemic began to unfold, as we were able to rapidly source both key foodservice and COVID-19 related products that our competitors could not.
Focus on distribution and advanced logistics network, complemented by flexible manufacturing capabilities
We consider our increasingly sophisticated distribution capabilities and related strength in logistics to be an important core competency and key differentiator from our competitors. As of March 2021, we owned a fleet of 26 trucks, 28 trailers, 10 bobtails and 21 chassis, and employed 29 drivers in our logistics division. This model has resulted in more efficient distribution to customers, reducing the need for reliance on third-party logistics providers such as FedEx and United Parcel Service. Our strategically located facilities give us a strong national footprint, which positions us well to serve regions across the U.S. in a timely fashion. We intend to continue to add to our capabilities via further distribution center openings and expansions, the purchase of additional vehicles, the hiring of additional drivers and additional logistics service offerings.
Our California and Texas facilities have a portion of operational capacity dedicated to manufacturing capabilities as well. For the year ended December 31, 2020, approximately 14% of our revenues were generated from the sale of products manufactured in-house. We view distribution as our primary focus and growth driver, but utilize our manufacturing capabilities as a complement to the base distribution business. This approach allows us to source products at competitive prices, as we are able to compare supplier procurement costs versus domestic manufacturing costs to determine the most efficient path to fulfilling customer orders.
5

Diverse and growing blue-chip customer base
We sell and distribute a broad portfolio of single-use disposable foodservice products to more than 50,000 customers nationwide including leading chain restaurants, distributors, convenience stores, retail establishments and online customers. Our blue-chip customers include leading fast casual chains such as Chili’s Grill & Bar and Chipotle Mexican Grill, as well as fast food chains El Pollo Loco and Panda Express, among others. We intend to further expand our customer base by selling our products to non-traditional foodservice customers, including regional and national supermarket chains, airlines, sports and entertainment venues and other non-restaurant customers. Plans for such expansion are already underway and beginning to yield positive results and a diversification of our customer base.
Significant financial momentum
We continue to achieve strong revenue growth, and have made significant strides in improving our margin profile. Our revenue grew at a compound annual growth rate of 30.1% from 2018 to 2020. Gross profit margins increased from 27.1% for the year ended December 31, 2019 to 30.2% for the year ended December 31, 2020. The margin increase can be attributed primarily to a shift in product mix to higher margin products (i.e. take out containers, films, foils and bags), reduced reliance on Chinese suppliers, mitigating the effect of tariffs. We are also steadily increasing the percentage of our sales to retail and online customers, which are our higher margin sales channels.
Experienced and growth oriented management team
We have assembled a strong executive management team to lead our company in its next phase of growth, supported by a deep bench of functional area leads across the organization. Our co-founders Alan Yu and Marvin Cheng have worked together over the last 20 years to aggressively drive growth across the business. Joanne Wang joined us in 2003 and was appointed Chief Operating Officer in 2018, helping to drive our pricing structure and sales training programs and overseeing general operational functions. Our Chief Financial Officer, Ann Sabahat, joined us in 2020, bringing years of public company experience and 22 years as a CPA to further bolster our finance and accounting functions.
Growth Strategy
Our goal is to become a leading single-source provider to a broad set of customers for all of their disposable foodservice products and related needs. We plan to continue to grow our business and increase our profitability through the following key initiatives:
Continue to build our online distribution channel
We believe there is an opportunity to significantly grow our higher margin online business to a more meaningful percent of revenue by continuing our investments in people, software and technology. By committing additional resources and upgrading our website and online advertising efforts, we expect to enhance our online experience to better support the needs of our customers. Our online retail channel is our highest margin channel of distribution. By offering our entire range of products online and bolstering our logistics capabilities, our customers can conveniently order products themselves on an ad hoc basis. While we expanded our online business from approximately 9% of sales for the year ended December 31, 2019 to 11% for the year ended December 31, 2020, we believe that offering free shipping could result in significant increases to our online revenue. We are evaluating introducing a subscription model similar to Amazon Prime to drive additional growth in this area.
Disrupt the traditional foodservice supply chain
The traditional foodservice supply chain consists of manufacturers selling through a multi-layer distribution network before the product reaches the end customer. As a full service distributor ourselves, we are able to provide products directly to the end user, eliminating the need for the traditional multi-layer supply chain. Environmental pressure on single-use disposable plastics is already causing a need for new
6

sources of supply. The Karat Earth® brand is a plant-based line of compostable products that meets the growing demand for renewable and ethically-sourced products. Our nimble operating model can serve customers more quickly than the traditional supply chain, and allows us to react rapidly to customers’ changes in demand.
Grow our base business with incremental revenue from existing customers
We intend to continue to increase penetration within our existing customer base. We believe there is an opportunity to offer additional product lines allowing us to become a true “one-stop” supplier. Our unique ability to serve customers as a reliable supplier with strong customer service at competitive prices has positioned us to be a frequent recipient of requests for proposals from our existing customers as they look for new sources of supply. For the year ended December 31, 2020, our national chains net sales grew 110% over the year ended December 31, 2019 as we grew our business with existing customers and added new customers. Offering a larger range of products, coupled with our ability to provide custom specifications and configurations to existing products, will allow us to better serve the needs of our customers and increase retention further. We have historically experienced consistently high customer retention rates as a result of our dedication to our customers and our hands-on approach. For the year ended December 31, 2020, our major customer retention rate, defined as year over year retention of our top 200 customers, was 99%. The net sales from our top 100 customers for the year ended December 31, 2020 exceeded net sales from the same customers for the year ended December 31, 2019.
Expand our customer base via new capabilities, geographies, products, services and end markets
We believe our addressable market continues to grow as emerging businesses like Grubhub, Uber Eats, DoorDash and others expand the need for foodservice disposable products. We plan to continue to add new experienced sales team members to broaden our reach and more efficiently provide customer service as we grow. We also intend to add to our distribution capabilities by expanding our existing distribution centers in South Carolina and Washington and by adding additional distribution centers, including in Hawaii. We see distribution facility expansion opportunities on the East Coast and in the Midwest, and anticipate hiring additional drivers and placing sales team members in those regions as well. We intend to double the capacity of our current distribution center in South Carolina to better serve customers in the Southeast region, and the recent opening of our New Jersey facility in July 2020 increased our presence and capabilities in the Northeast to better serve that region going forward. We plan to continuously evaluate and expand our product and service offerings to respond to customer demand and enter new end markets, including sports venues, supermarket chains, airlines and other non-traditional foodservice markets. We see substantial opportunity to further expand our customer base with many individual customers through our select food and drink offerings (i.e. bubble tea, coffee, sauces and syrups) available via our online channel. In addition, we see significant opportunity with supermarket chains to gain wallet share by providing fruit trays, vegetable containers, compostable meat trays and other related items, all of which are higher margin products than some of our other products.
Execute on operational initiatives to drive margin expansion
Significant investments in technology in recent years have bolstered our capabilities, including the installation of our own proprietary Warehouse Management System (WMS), which is expected to incrementally lower general and administrative expenses on a go-forward basis. In 2020, we were able to reduce selling, general and administrative expenses as a percent of net sales by 375 basis points versus 2019 as we made improvements in reducing excess production and labor costs from our manufacturing operations as well as reducing professional fees from outside sales representatives and brokers who historically have been less efficient than our growing internal sales force. In 2020, we expanded our in-house sales team by 18%, and now have 13 sales people spread across the country focused on driving sales of our higher margin product lines. We will continue to pursue similar cost and margin initiatives as needed.
Pursue strategic acquisitions
We have the opportunity to capitalize on our existing infrastructure and expertise by continuing to selectively pursue opportunistic acquisitions in order to expand the breadth of our distribution network, increase our operating efficiency and add additional products and capabilities. For example, in March 2021,
7

we completed the acquisition of a paper cup manufacturer based in Kapolei, Hawaii, and we intend to add an additional distribution facility and manufacture certain of our Karat Earth products, including paper straws, at that location. Although we do not have current plans to pursue a specific acquisition target, we are considering a group of potential targets, many of which we may explore in the next 12 months. We see certain acquisition opportunities on the East Coast and in the Midwest that we expect would enhance our national footprint. Additionally, the potential to acquire existing and new suppliers, particularly in the U.S., may further reduce our reliance on the Asian supply chain, creating more diversified sourcing options for our customers.
Our Industry
The disposable foodservice products industry is large and growing. According to Coherent Market Insights, the global market for disposable foodservice products is expected to be $64 billion in 2020. They estimate the market will grow to $78 billion by 2025, representing 4.1% compounded annual growth between 2020 and 2025. The primary categories of disposable foodservice products include food packaging, containers, tableware, cups, lids, cutlery, straws, napkins and bags. The large breadth and scope of products is reflected in the diverse nature of the industry participants, which range from large international conglomerates to smaller regional and niche companies. As a result, the industry is represented by a large number of companies and remains highly fragmented. Similarly, end customers of the disposable foodservice products industry are equally diverse in composition. The restaurant and foodservice categories that are the primary purchasers of our products include quick service restaurants (QSRs), fast casual, convenience stores, specialty drink establishments, casual dining and increasingly, premium casual and family dining restaurants. We estimate our growth to significantly outpace the industry average given our increase in sales of high demand items like take out containers and bags, our ability to continuously augment our product offering to address customer needs and our avoidance of product categories in decline, including Styrofoam and other materials in the process of being banned under various governmental regulations.
[MISSING IMAGE: tm2029131d3-bc_market4c.jpg]
The industry is currently experiencing a period of both growth and transition as a result of several key factors that have emerged in recent years and have accelerated during the COVID-19 pandemic. These include the growing market for food delivery and take out dining; new governmental regulations primarily resulting from an increasingly environmentally-conscious public; and growing consolidation within the disposable foodservice products industry. We believe that we will benefit from a continuation of these market trends due to our diverse product offering, customer-centric approach, commitment to environmentally-friendly products and the flexibility of our business model.
Food delivery and take out
With the growing trend towards at home dining and mobility-oriented e-commerce, food delivery and take out dining are currently experiencing rapid growth. Data from the National Restaurant Association and Technomic shows that operators are increasingly acknowledging the importance of off-premises dining,
8

with 78% of operators saying off-premises programs are a strategic priority. UBS Research estimates that the US online food delivery total addressable market was $14 billion in 2018 and will grow at a compound annual growth rate of 36.7% to $125 billion in 2025. This implies that US online food delivery is expected to grow from 1% of total food and beverage spend (ex-alcohol) in 2018 to 8% in 2025. Overall off-premises spend (includes delivery, drive-through and other take out/pickup) is expected to reach approximately 24% of total food and beverage spend by 2025 as well. This growth is expected to be driven in large part by e-commerce companies such as Grubhub, Uber Eats, DoorDash and others.
Positive population penetration and order frequency expectations further support the total addressable market growth estimates through 2025. UBS Research expects consumer penetration to reach 40% of the U.S. population aged 15+ by 2025 (109 million active users) on food delivery platforms, up from 16% penetration in 2019. Ordering frequency per individual per year is expected to increase from 19x in 2019 (or 1.6x per month) to 30x in 2025 (or 2.5x per month). In order to benefit from this growing trend, foodservice establishments are actively trying to provide a high quality at-home dining customer experience that is comparable to the in-restaurant experience. Central to this effort is food quality and overall presentation where take out containers and related products play a critical role. Restaurants are seeking to develop high quality, customized disposables that not only provide the freshest and best possible food experience, but also provide a premium, branded at-home dining experience.
U.S. Online Food Delivery Market
($ in billions)
[MISSING IMAGE: tm2029131d10-bc_online4c.jpg]
Governmental regulations
Environmental concerns regarding disposable products broadly have resulted in a number of significant changes that are specific to the foodservice industry, including regulations applicable to our customers. State and local governments have been actively enacting legislation that prohibits certain types of end-products as well as the use of certain raw materials used in manufacturing. In September 2018, the state of California effected legislation that severely restricts the use of plastic straws in full service restaurants beginning January 1, 2019. Similar legislation has been enacted by local governments and municipalities throughout the country. In addition to plastic straws, in July 2018, the city of Seattle banned the use of plastic utensils at all foodservice businesses. Additionally, numerous local legislative prohibitions on the use of single use Styrofoam products have been implemented. This includes New York City, where a ban on single use Styrofoam became effective in January 2019 and a state-wide ban on single-use plastic carryout bags became effective in March 2020. In addition, the State of New Jersey banned single-use plastic and paper bags, as well as disposable polystyrene food containers and cups, in its stores and food service establishments effective May 2022. As a result of these changes, which are expected to increase in scope and geography, foodservice establishments are looking to source alternative products made from biodegradable materials and other environmentally-friendly options. We believe we are well positioned to benefit from increasing government regulation and environmental concerns given our strong portfolio of sustainable products, including our Karat Earth® line.
9

Additionally, evolving foreign trade policy by the U.S. federal government has resulted in the imposition of tariffs on a number of imported foodservice disposable products, including those imported from China. To avoid the resulting higher product costs, many domestic purchasers may seek to establish alternative distribution channels and source products from U.S. based manufacturers or from other, non-tariffed countries.
Industry consolidation
Over the last several years, there has been significant consolidation within the industry, both in distribution and manufacturing. This is due in part to larger and more established companies seeking to generate growth and maintain profitability through the expansion of their product offering. As is common in the disposable foodservice products industry, larger companies typically broaden their product portfolio through the acquisition of established companies, rather than building out new product categories organically. As consolidation occurs, existing customers often find themselves facing challenges of changing product availability, discontinuations, increasing prices, support staff turnover and other potential transition-related challenges. These challenges can be highly disruptive to a customer’s business and as a result, the customers often seek out other stable and more reliable channels for product sourcing.
Use of Proceeds
We intend to use the net proceeds of this offering for the repayment of approximately $30 million of our existing indebtedness as set forth in detail in “Use of Proceeds,” as well as other general corporate purposes, including possible facility expansion and acquisitions. This expected use of proceeds represents our intentions based on current plans and business conditions.
Risk Factors Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include the following:

The COVID-19 pandemic is having a widespread impact on the global economy, and on our business, operations, and the markets and communities in which we or our customers operate;

Demand for our products could be affected by changes in laws and regulations applicable to food and beverages and changes in consumer preferences;

Changes in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations;

We operate in a highly competitive environment and may not be able to compete successfully.

We rely on a combination of purchase orders and supply contracts with our suppliers and manufacturers. Some of these relationships are not exclusive, which means that these suppliers and manufacturers could produce similar products for our competitors.

Our net sales and profits depend on the level of customer spending for our products, which is sensitive to general economic conditions and other factors.

Our business is subject to the risk of earthquakes, fire, power outages, floods, pandemics, and other catastrophic events, and to interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems. In the event of a catastrophic loss of one of our key manufacturing facilities, our business would be adversely affected;

If additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed;

If we fail to timely and effectively obtain shipments of products from our overseas manufacturers, our business and results of operations could be harmed;
10


Our business could be harmed if we are unable to accurately forecast demand for our products or our results of operations;

Our business is dependent on our ability to source raw materials at reasonable prices;

We may encounter difficulties restructuring operations or with closing or opening facilities;

If we are unable to maintain effective internal controls, our business, financial position and results of operations could be adversely affected; and

Acquisitions could result in operating difficulties and may materially adversely affect our business, financial condition, results of operations and growth prospects.
Recent Developments
On March 1, 2021, we completed the acquisition of the assets of Pacific Cup Inc., a paper cup manufacturer based in Kapolei, Hawaii, for an aggregate purchase price of $1.0 million. During the first half of 2021, we intend to add an additional distribution facility and manufacture certain of our Karat Earth products, including paper straws, at the Pacific Cup location in Hawaii.
Implications of Being an Emerging Growth Company
As a company with less than $1.07 billion in revenue during our last completed fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

An exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

An exemption from compliance with any requirement that the Public Company Accounting Oversight Board, or PCAOB, may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

Reduced disclosure about our executive compensation arrangements;

An exemption from the requirements to obtain a non-binding advisory vote on executive compensation or any golden parachute arrangements;

Extended transition periods for complying with new or revised accounting standards; and

The ability to present more limited financial data, including presenting only two years of audited financial statements and only two years of selected financial data (and management’s discussion and analysis of financial condition and results of operations disclosure) in this registration statement, of which this prospectus is a part.
We will remain an emerging growth company until the earliest to occur of: (i) the end of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (ii) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) the end of the fiscal year during which the fifth anniversary of this offering occurs.
We currently intend to take advantage of all of the exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you invest.
Corporate Information
In September 2018, we incorporated Karat Packaging Inc. in Delaware, and the Company, Lollicup, and Messrs. Yu and Cheng and the other shareholders of Lollicup (together, the “Lollicup Shareholders”) entered into a share exchange agreement and plan of reorganization whereby the Lollicup Shareholders
11

exchanged their shares of common stock in Lollicup for an equal number of shares of common stock of the Company, resulting in Lollicup becoming a wholly-owned subsidiary of the Company.
Our principal executive and administrative offices are located at 6185 Kimball Avenue, Chino, CA 91708, and our telephone number is (626) 965-8882. Our website address is www.karatpackaging.com. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this prospectus.
12

THE OFFERING
Issuer
Karat Packaging Inc.
Common stock offered by us
        shares (        shares if the underwriters exercise in full their option to purchase additional shares of common stock)
Common stock to be outstanding immediately after this offering(1)
        shares. If the underwriters’ over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be          .
Over-allotment option
We have granted a 30-day option to the underwriters to purchase up to        additional shares of common stock to cover over-allotments, if any.
Use of proceeds
We estimate that the net proceeds from the sale of shares of common stock in this offering will be approximately $     million, or approximately $     million if the underwriters’ over-allotment option is exercised in full, based on an assumed initial public offering price of $     per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of this offering for the repayment of approximately $30 million of our existing indebtedness as set forth in detail in “Use of Proceeds,” as well as other general corporate purposes, including possible facility expansion and acquisitions. This expected use of proceeds represents our intentions based on current plans and business conditions.
Risk factors
Investing in our shares of common stock involves a high degree of risk. See “Risk Factors” for a discussion of factors you should consider before making a decision to invest in our common stock.
Proposed Nasdaq symbol
KRT
(1)
The number of shares of common stock to be outstanding immediately after this offering as shown above is based on          shares of common stock outstanding as of March   , 2021. This number of shares excludes, as of March   , 2021, 2,000,000 shares of our common stock authorized for issuance under the Company’s Stock Incentive Plan, including       shares underlying outstanding restricted stock units and options. Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their option to purchase up to an additional       shares of our common stock.
13

SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial data for the periods and at the dates indicated. The summary consolidated financial data as of and for the fiscal years ended December 31, 2020 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be achieved in any future period, and results for any interim period are not necessarily indicative of the results to be expected for the full year.
The following information should be read in conjunction with “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus. For additional information regarding the consolidation of our variable interest entity, see page 42.
Year Ended December 31,
2020
2019
(in thousands, except share and per share amounts)
Net sales
$ 295,518 $ 224,910
Cost of goods sold
206,393 163,891
Gross profit
89,125 61,019
Operating expenses
61,428 55,183
Operating income
27,697 5,836
Other expenses
(5,770) (2,891)
Provision for income tax expense
5,259 781
Net Income
16,668 2,164
Basic and diluted earnings per share
Basic
$ 1.15 $ 0.11
Diluted
$ 1.13 $ 0.11
Basic and diluted earnings per share – proforma (unaudited)(1)
Basic – proforma
Diluted – proforma
Weighted average common shares outstanding:
Basic
15,176,809 15,190,000
Diluted
15,447,809 15,190,000
Weighted average common shares outstanding – 
proforma (unaudited)(1)
Basic – proforma
Diluted – proforma
December 31,
2020
December 31,
2019
(in thousands)
Balance sheet data:
Cash and cash equivalents
$ 448 $ 802
Total current assets
79,777 61,027
Total assets
181,104 133,353
Total current liabilities
43,137 35,928
Total liabilities
141,236 109,299
Total Karat Packaging Inc. stockholders’ equity
32,404 15,741
Total noncontrolling interest equity
7,464 8,313
Total stockholders’ equity . .
39,868 24,054
Total liabilities and stockholders’ equity
181,104 133,353
14

Year Ended December 31,
2020
2019
(in thousands)
Other non-GAAP financial data (unaudited):
Adjusted EBITDA(2)
$ 35,988 $ 11,281
(1)
Pro forma earnings per share gives effect to our issuance of       common stock at an assumed offering price of $      per share (representing the mid-point of the price range set forth on the cover of this prospectus), reflecting the portion of the shares of common stock sold and, the proceeds of which are being used for debt repayment. Interest expense, net of tax at an assumed rate of    %, of $     and $     for the years ended December 31, 2020 and 2019, respectively, has been removed from this calculation.
(2)
In addition to net income presented in accordance with GAAP, we use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP.
Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.
Adjusted EBITDA is a financial measure equal to net income (loss) excluding (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) gain on sale of asset. We present Adjusted EBITDA as a supplemental measure of our financial performance. Management and our board of directors have begun to use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes items that may not be reflective of, or are unrelated to, our core operating performance, and may assist investors with comparisons to prior periods and assessing trends in our underlying businesses. We have begun to reference Adjusted EBITDA in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, we have based certain of our forward-looking estimates and budgets on Adjusted EBITDA. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation of or as a substitute for analyzing our results as reported under GAAP.
Year Ended December 31,
Reconciliation of non-GAAP financial data (unaudited):
2020
2019
(in thousands)
Net Income
$ 16,668 $ 2,164
Add:
Interest expense
5,492 4,752
Income tax expense
5,259 781
Depreciation and amortization
8,569 5,953
Gain on sale of asset(1)
(2,369)
Adjusted EBITDA
$ 35,988 $ 11,281
(1)
During the year ended December 31, 2019, our variable interest entity recognized a gain on the sale of a portion of the Texas facility sold of approximately $2.4 million.
15

RISK FACTORS
Risks Related to Our Industry
Demand for our products could be affected by changes in laws and regulations applicable to food and beverages and changes in consumer preferences.
We manufacture and distribute single-use disposable products made of plastic, paper, biopolymer and other compostable products. Our products are primarily used in restaurant and foodservice settings, and therefore they come into direct contact with food and other consumable products. Accordingly, our products must comply with various laws and regulations for food and beverage service applicable to our customers. Changes in such laws and regulations could negatively impact our customers’ demand for our products as they comply with such changes and/or require us to make changes to our products. Additionally, because our products are used to package consumer goods, we are subject to a variety of risks that could influence consumer behavior and negatively impact demand for our products, including changes in consumer preferences driven by various health and environmental-related concerns and perceptions.
Furthermore, we are subject to social and cultural changes, which could impact demand for certain products. For example, the banning of plastic straws was triggered by a social media backlash, which caused corresponding legislative changes within a short time period, resulting in the ban of plastic straws in certain jurisdictions, and a movement toward eco-friendly packaging. If we are unable to quickly adapt to changes in consumer preferences and subsequent legislation, our financial condition and results of operations could be adversely affected.
We operate in a highly competitive environment and may not be able to compete successfully.
The single-use disposable foodservice products industry is extremely competitive and highly fragmented. Many of the companies that compete in our industry are significantly larger with greater resources, have greater brand recognition and have a larger product offering. We may be unsuccessful in our efforts to compete against such large and established companies. In addition, our current or potential competitors may offer products at a lower price, or products and services that are superior to ours. Our success depends upon successful research, development and engineering efforts to utilize emerging and legislatively mandated raw materials, our ability to expand or modify our manufacturing capacity, and the extent to which we are able to convince customers and consumers to accept our new products. If we fail to successfully innovate, introduce, market, and manufacture differentiated and price-competitive products relative to those of our competitors, our ability to maintain or expand our net sales and to maintain or enhance our industry position or profit margins could be adversely affected. This, in turn, could materially adversely affect our business, financial condition, results of operations or cash flows.
Unfavorable conditions in our industry or the global economy could limit our ability to grow our business and negatively affect our results of operations.
Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers and potential customers. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, international trade relations, pandemic (such as the COVID-19 pandemic), political turmoil, natural catastrophes, warfare, and terrorist attacks on the United States, Europe, the Asia Pacific region, Japan, or elsewhere, could cause a decrease in demand for our products and negatively affect the growth of our business. Competitors, many of whom are larger and have greater financial resources than we do, may respond to challenging market conditions by lowering prices in an attempt to attract our customers. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or within any particular industry.
Changes in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations.
We rely upon third-party ocean freight, air freight and land-based carriers for product shipments to our customers. Any failure to obtain sufficient freight capacity on a timely basis or at favorable shipping rates will result in our inability to receive products from suppliers or deliver products to our customers in a
16

timely and cost-effective manner, which will result in a material adverse impact on our business, financial condition, results of operations or cash flows.
Our net sales and profits depend on the level of customer spending for our products, which is sensitive to general economic conditions and other factors.
Restaurant dining and food delivery services are generally considered discretionary items for end-consumers. Therefore, the success of our business depends significantly on broader economic factors and trends in consumer spending, especially those that relate to consumer dining preferences and spending patterns. There are a number of factors that influence dining-related consumer spending, including actual and perceived economic conditions, consumer confidence, disposable consumer income, consumer credit availability and unemployment rates. Consumers have broad discretion as to where to spend their disposable income and may choose to reduce their restaurant and foodservice spending which would negatively impact our customers. As global economic conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to declines. Any of these factors could harm discretionary consumer spending, resulting in a reduction in demand for our products, decreased prices, and harm to our business and results of operations.
Recently enacted tax reform legislation could have an adverse impact on us.
Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including a reduction in the corporate income tax rate, a limitation on deductibility of interest expense, the allowance of immediate expensing of capital expenditures, and deemed repatriation of foreign earnings. We expect this legislation to have significant effects on us, some of which may be adverse. The magnitude of the impact on future years remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the IRS. We continue to work with our tax advisors to determine the full impact that this legislation will have on our business.
We rely on a combination of purchase orders and supply contracts with our suppliers and manufacturers. Some of these relationships are not exclusive, which means that these suppliers and manufacturers could produce similar products for our competitors.
We rely on a combination of purchase orders and supply contracts with our suppliers and manufacturers. With all of our suppliers and manufacturers, we face the risk that they may fail to produce and deliver supplies or our products on a timely basis, or at all. Furthermore, the products they manufacture for us may not comply with our quality standards. In addition, our suppliers and manufacturers may raise prices in the future, which would increase our costs and harm our margins. Even those suppliers and manufacturers with whom we have supply contracts may breach these agreements, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. As a result, we cannot predict with certainty our ability to obtain supplies and finished products in adequate quantities, of required quality and at acceptable prices from our suppliers and manufacturers in the future. Any one of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our customers, and increase our product costs thereby reducing our margins.
In addition, our arrangements with our manufacturers and suppliers are not exclusive. As a result, our suppliers or manufacturers could produce similar products for our competitors, some of which could potentially purchase products in significantly greater volume. Furthermore, while certain of our long-term contracts stipulate contractual exclusivity, those suppliers or manufacturers could choose to breach our agreements and work with our competitors. Our competitors could enter into restrictive or exclusive arrangements with our manufacturers or suppliers that could impair or eliminate our access to manufacturing capacity or supplies. Our manufacturers or suppliers could also be acquired by our competitors, and may become our direct competitors, thus limiting or eliminating our access to supplies or manufacturing capacity.
17

Competitors have attempted and will likely continue to attempt to imitate our products. If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.
As our business and brand recognition continues to expand, our competitors have imitated, and will likely continue to imitate, our product designs and branding, which could harm our business and results of operations. We rely significantly on trade secrets, trademarks, trade dress, and the strength of our brand, which we regard as critical to our success. We also rely on trade secret protection and confidentiality agreements with our employees, consultants, suppliers, manufacturers, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights against infringement or other violation may be inadequate and we may experience difficulty in effectively limiting the unauthorized use of our patents, trademarks, trade dress, and other intellectual property and proprietary rights worldwide. Because a significant portion of our products are manufactured overseas in countries where counterfeiting is more prevalent, we may experience increased counterfeiting of our products. Unauthorized use or invalidation of our patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to our brand and harm our results of operations.
While we actively develop and protect our intellectual property rights, there can be no assurance that we will be adequately protected in all countries in which we conduct our business or that we will prevail when defending our patent, trademark, and proprietary rights. Additionally, we could incur significant costs and management distraction in pursuing claims to enforce our intellectual property rights through litigation, and defending any alleged counterclaims. If we are unable to protect or preserve the value of our patents, trade dress, trademarks, copyrights, or other intellectual property rights for any reason, or if we fail to maintain our brand image due to actual or perceived product or service quality issues, adverse publicity, governmental investigations or litigation, or other reasons, our brand and reputation could be damaged and our business may be harmed.
If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations would be harmed.
Our reputation and our customers’ willingness to purchase our products depend in part on our suppliers’ and manufacturers’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers and manufacturers and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers or manufacturers fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed and we could be exposed to litigation and additional costs that would harm our business, reputation, and results of operations.
Risks Related to Our Business
The COVID-19 pandemic is having a widespread impact on the global economy, and on our business, operations, and the markets and communities in which we or our customers operate.
This COVID-19 pandemic is having widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. COVID-19 has affected us, our customers, employees, contractors, suppliers and business partners, who have been prevented from conducting business activities as usual, including due to the many and varying health and safety measures in response to COVID-19, including travel restrictions, quarantines, curfews, shelter in place and safer-at-home orders, and business shutdowns, as well as multi-step reopening policies.
The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The ultimate impact of COVID-19 on our business, operations and financial results remains unknown and will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope and severity of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our customers and customer demand for
18

our services and our solutions; our ability to sell and provide our services and solutions, including as a result of travel restrictions and people working from home; the ability of our customers to pay for our services and solutions; any closures of our and our customers’ offices and facilities, and any additional preventative or protective actions that we, our clients, and governments may implement that may result in a period of continued business interruption.
Certain jurisdictions have begun re-opening but have returned to restrictions in the face of increases in new COVID-19 cases. There is considerable uncertainty regarding how current and future health and safety measures implemented in response to the pandemic will impact our business, including whether they will result in further changes in demand from our customers for our services and solutions, further increases in operating costs (whether as a result of changes to our supply chain or increases in employee costs, operating costs or otherwise), how they will further impact our supply chain. The restrictions posed by COVID-19 may reduce our employees’ efficiency and productivity, which may cause delays in service delivery, disrupt employee relations, hamper innovation and may have other unforeseen adverse effects on our business. For those employees who are permitted to come onsite, while we have implemented personal safety measures at all such locations, any actions we take with respect to our workforce may not be sufficient to mitigate the risk of infection by COVID-19 and further disruption to our business.
In addition, the effects of COVID-19 could affect our business in many ways, including, but not limited to, the following factors:

The impact of the pandemic on the economies and financial markets of the countries and regions in which we operate, including a potential global recession, a decline in customer confidence and spending;

Our customer prospects and our existing customers may experience slowdowns in their businesses, which in turn may result in reduced demand for our platform, lengthening of sales cycles, loss of customers, and difficulties in collections;

We may continue to experience disruptions to our growth planning, such as for facilities and domestic expansion;

Remote work solutions may be limited in their ability to replicate the operational oversight and security controls of our office environments and we may suffer operational and information security failures as a result of the changed controls;

An impact to our workforce could impact our ability to deliver our services to our customers and make it more difficult to meet our expectations and obligations;

We anticipate incurring workplace-related costs, including changes to space planning, food service, and amenities;

We may be subject to legal liability for safe workplace claims;

Our critical vendors could go out of business;

Our in-person marketing events, including customer user conferences, have been cancelled and we may continue to experience prolonged delays in our ability to reschedule or conduct in-person marketing events and other sales and marketing activities; and

Our marketing, sales, professional services, and support organizations are accustomed to extensive face-to-face customer and partner interactions, and conducting business virtually is unproven.
Any of the foregoing could have a material adverse impact on affect our business, financial condition, and results of operations.
Our business is subject to the risk of earthquakes, fire, power outages, floods, pandemics, and other catastrophic events, and to interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems.
As we rely heavily on our manufacturing facilities, our business is particularly vulnerable to damage or interruption from earthquakes, fires, floods, pandemics, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, criminal acts, and similar events. For example, a significant natural
19

disaster, such as an earthquake, fire, or flood, could harm our business, results of operations, and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices, distribution centers, and manufacturing facilities are located in California, a state that frequently experiences earthquakes and wildfires, and Texas, a state that frequently experiences floods and storms. In addition, the facilities of our suppliers and where our manufacturers produce our products are located in parts of Asia that frequently experience typhoons and earthquakes. Acts of terrorism could also cause disruptions in our or our suppliers’, manufacturers’, and logistics providers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California or Texas or other locations where we have operations or store significant inventory. Our servers may also be vulnerable to computer viruses, criminal acts, denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, or loss of critical data. As we rely heavily on our information technology and communications systems and the internet to conduct our business and provide high-quality customer service, these disruptions could harm our ability to run our business and either directly or indirectly disrupt our suppliers’ or manufacturers’ businesses, which could harm our business, results of operations, and financial condition.
We may not have adequate insurance coverage.
We may not have adequate insurance coverage. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.
Our business could be harmed if we are unable to accurately forecast demand for our products or our results of operations.
To ensure adequate inventory supply, we forecast inventory needs and often place orders with our manufacturers before we receive firm orders from our customers. If we fail to accurately forecast demand, we may experience excess inventory levels or a shortage of product to deliver to our customers.
If we underestimate the demand for our products, we, or our manufacturers, may not be able to scale to meet our demand, and this could result in delays in the shipment of our products and our failure to satisfy demand, as well as damage to our reputation and customer relationships. If we overestimate the demand for our products, we could face inventory levels in excess of demand, which could result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would harm our gross margins. In addition, failures to accurately predict the level of demand for our products could cause a decline in sales and harm our results of operations and financial condition.
In addition, we may not be able to accurately forecast our results of operations and growth rate. Forecasts may be particularly challenging as we expand into new markets and geographies and develop and market new products. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.
Failure to accurately forecast our results of operations and growth rate could cause us to make poor operating decisions and we may not be able to adjust in a timely manner. Consequently, actual results could be materially lower than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all.
Our business is dependent on our ability to source raw materials at reasonable prices.
Our business is dependent on our ability and the ability of our suppliers to source raw materials at reasonable prices. Our raw materials, especially polyethylene terephthalate, or PET, plastic resin, are subject to price fluctuations and potential price increases that are dependent on numerous factors, including global demand, availability and other market conditions. We, or our manufacturers, may not be able to obtain sufficient supply of raw materials at reasonable prices, which could result in increased costs and delays in
20

deliveries of our products by us or our manufacturers. Any shortage or increase in prices of raw materials could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries, or reductions in our prices and margins, any of which could harm our financial performance, reputation, and results of operations.
We may encounter difficulties restructuring operations or with the closing or opening of facilities.
We are continuously seeking the most cost-effective means and structure to serve our customers and to respond to changes in our markets. Accordingly, from time to time, we may close certain of our facilities, open or construct new facilities, and otherwise restructure operations in an effort to reduce our costs and improve profitability. As a result, restructuring and divestiture costs have been, and are expected to be, a recurring component of our operating costs, the magnitude of which could vary significantly from year to year depending on the scope of such activities. Divestitures and restructuring may also result in significant financial charges for the write-off or impairment of assets, including goodwill and other intangible assets. Furthermore, such activities may divert the attention of management, disrupt our ordinary operations, or result in a reduction or increase in the volume of products produced, stored, or sold. There is no guarantee that any such activities will achieve our goals, and if we cannot successfully manage the associated risks, our financial position and results of operations could be adversely affected.
We may experience delays or disruptions in the shipment of our goods through operational ports.
We rely on the timely and free flow of goods through open and operational ports, both domestic and international, from our suppliers and manufacturers. Labor disputes or disruptions at ports, our common carriers, or our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during periods of significant importing or manufacturing, potentially resulting in delayed or cancelled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition.
Accordingly, we are subject to risks, including labor disputes, union organizing activity, inclement weather, and increased transportation costs, associated with our third-party contract manufacturers’ and carriers’ ability to provide products and services to meet our requirements. In addition, if the cost of fuel rises, the cost to deliver products may rise, which could harm our profitability.
Our growth depends, in part, on expanding into additional foodservice and geographic markets, and we may not be successful in doing so.
We believe that our future growth depends not only on continuing to reach our current customer base and demographic, but also continuing to expand our business into other foodservice markets and geographies. The growth of our business will depend, in part, on our ability to continue to expand into additional foodservice markets including grocery stores, entertainment venues, airlines and other non-traditional foodservice venues. Additionally, we are expanding our sales and marketing efforts to further penetrate additional geographies, particularly in the Midwest and Eastern United States. In these markets, we may encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand. We continue to evaluate marketing efforts and other strategies to expand the customer base for our products. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we cannot assure you that we will be successful. If we are not successful, our business and results of operations may be harmed.
Because we have entered into a significant number of related party transactions through the course of our routine business operations, there is a risk of conflicts of interest involving our management, and that such transactions may not reflect terms that would be available from unaffiliated third parties.
In the course of our normal business, we have purchased products, raw materials and supplies from our related parties, including an entity owned by our CEO Alan Yu’s brother, Jeff Yu, who is also employed as an account manager for our national sales team. In addition, our Texas facility and our New Jersey facility are each owned and leased to us by our variable interest entity, wherein we are the primary beneficiary and
21

in which we have an equity interest and which is controlled by one of our stockholders. In all related party transactions, there is a risk that even if the Company personnel negotiating on behalf of the Company with the related party are striving to ensure that the terms of the transaction are arms-length, the related party’s influence may be such that the transaction terms could be viewed as favorable to that related party. Our financial statements and disclosures, specifically Note 2 of the consolidated financial statements as of and for the year ended December 31, 2019 and the financial statements as of and for the period ended December 31, 2020, and under “Certain Relationships and Related Party Transactions” on page 79, in this prospectus provide specific information about our prior related party transactions. We may engage in additional related party transactions in the future, which will be subject to review and approval by our nominating and corporate governance committee pursuant to the Company’s related party transactions policy.
We rely on third-party contract manufacturers and conflicts with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.
Certain of our products are produced by third-party contract manufacturers. We face the risk that these third-party contract manufacturers may not produce and deliver our products on a timely basis, or at all. We may also experience the inability of our third-party contract manufacturers to meet the increased demand of our customers. These difficulties include reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, failure to achieve our product quality standards, increases in costs of materials, and manufacturing or other business interruptions. The ability of our manufacturers to effectively satisfy our production requirements could also be impacted by manufacturer financial difficulty or damage to their operations caused by fire, terrorist attack, natural disaster, or other events. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. If we experience significantly increased demand, or if we need to replace an existing manufacturer due to lack of performance, we may be unable to supplement or replace their manufacturing capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a significant amount of time to identify and qualify a manufacturer that has the capability and resources to produce our products to our specifications in sufficient volume and satisfy our service and quality control standards.
If we are unable to successfully design and develop new products, our business may be harmed.
To maintain and increase sales we must continue to introduce new products and improve or enhance our existing products. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products is costly and we typically have several products in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand, business, financial condition, and results of operations.
We may be subject to liability if we infringe upon the intellectual property rights of third parties.
Third parties have sued, and may sue us in the future for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation, even if the claims are meritless and even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to modify or discontinue our products, pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a result of such infringement, could harm our reputation and financial results.
22

Our current and future products may experience quality problems from time to time that can result in product returns, negative publicity, litigation, product recalls, and warranty claims, which could result in decreased sales and operating margin, and harm to our brand.
Although we extensively and rigorously test new and enhanced products, there can be no assurance we will be able to detect, prevent, or fix all defects. Defects in materials or components can unexpectedly interfere with the products’ intended use and safety and damage our reputation. Failure to detect, prevent, or fix defects could result in a variety of consequences, including a greater number of product returns than expected from customers, litigation, product recalls, and credit claims, among others, which could harm our sales and results of operations. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to product recalls, warranty, or other claims. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also harm our brand and decrease demand for our products.
We incur significant expenses to maintain our manufacturing equipment and any interruption in the operations of our facilities may harm our operating performance.
We regularly incur significant expenses to maintain our manufacturing equipment and facilities. The machines and equipment that we use to produce our products are complex, have many parts and some are run on a continuous basis. We must perform routine maintenance on our equipment and will have to periodically replace a variety of parts such as motors, pumps, pipes and electrical parts. In addition, our facilities may require periodic shutdowns to perform major maintenance. These scheduled shutdowns of facilities may result in decreased sales and increased costs in the periods in which they occur and could result in unexpected operational issues in future periods as a result of changes to equipment and operational and mechanical processes made during shutdown periods.
Many of our operating costs and expenses are fixed and will not decline if our revenues decline.
Our results of operations depend, in large part, on our level of revenues, operating costs and expenses. The expense of owning and operating our business is not necessarily reduced when circumstances such as market factors and competition cause a reduction in revenue from the business. As a result, if revenues decline, we may not be able to reduce our expenses to keep pace with the corresponding reductions in revenues. Many of the costs associated with our business and operations, such as insurance, loan payments and maintenance, generally will not be reduced if circumstances cause our revenues to decrease, which could have a material adverse effect on us, including our financial condition, results of operations, cash flow, cash available for distribution and our ability to service our debt obligations.
Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customer and business partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.
We depend on our information technology systems, as well as those of third parties, to design and develop new products, operate our website, host and manage our services, store data, process transactions, respond to user inquiries, manage inventory and our supply chain as well as to conduct and manage other activities. Any material disruption or slowdown of our systems or those of third parties that we depend upon, including a disruption or slowdown caused by our failure to successfully manage significant increases in user volume or successfully upgrade systems, system failures, viruses, ransomware, security breaches, or other causes, could cause information, including data related to orders, to be lost or delayed, which could result in delays in the delivery of products to retailers and customers or lost sales, which could reduce demand for our products, harm our brand and reputation, and cause our sales to decline. If changes in technology cause our information systems, or those of third parties that we depend upon, to become obsolete, or information systems are inadequate to handle our growth, particularly as we increase sales through our online sales channel, we could damage our customer and business partner relationships and our business and results of operations could be harmed.
23

Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management. In addition, our management team has limited experience managing a public company.
We depend on the talents and continued efforts of our senior management and key employees. The loss of members of our management or key employees may disrupt our business and harm our results of operations. Furthermore, our ability to manage further expansion will require us to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and we may not be successful in attracting, integrating, and retaining the personnel required to grow and operate our business effectively. There can be no assurance that our current management team, or any new members of our management team, will be able to successfully execute our business and operating strategies.
Most of our management and other personnel have little experience managing a public company and preparing public filings. In addition, we expect that our management and other personnel will need to divert attention from other business matters to devote substantial time to the reporting and other requirements of being a public company. In particular, we expect to incur significant expense and devote substantial management effort to complying with SEC reporting requirements. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. These factors could cause adverse effects on our business and results of operations.
We may not be able to effectively manage our growth.
As we grow our business, slower growth or reduced demand for our products, increased competition, a decrease in the growth rate of our overall market, failure to develop and successfully market new products, or the maturation of our business or market could harm our business. We expect to make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products, and enhance our existing products. In addition, in connection with operating as a public company, we will incur significant additional legal, accounting, and other expenses that we did not incur as a private company. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.
We have expanded our operations rapidly since our inception. Our employee headcount and the scope and complexity of our business have increased substantially over the past several years. We have only a limited history operating our business at its current scale. Our management team does not have substantial tenure working together. Consequently, if our operations continue to grow at a rapid pace, we may experience difficulties in managing this growth and building the appropriate processes and controls. Continued growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.
We may become involved in legal or regulatory proceedings and audits.
Our business requires compliance with many laws and regulations, including labor and employment, sales and other taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and sale of merchandise, and the operation of stores and warehouse facilities. Failure to comply with these laws and regulations could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines, and penalties. We may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort, and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, harming our business, financial condition, and results of operations. Any pending or future legal or regulatory proceedings and audits could harm our business, financial condition, and results of operations.
24

We are subject to payment-related risks.
For our online sales, as well as for sales to our customers, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, electronic payment systems, and gift cards. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our customers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, and results of operations.
We are subject to credit risk.
We are exposed to credit risk primarily on our accounts receivable. We provide credit to our customers in the ordinary course of our business and perform ongoing credit evaluations. While we believe that our exposure to concentrations of credit risk with respect to trade receivables is mitigated by our large retail partner base, and we make allowances for doubtful accounts, we nevertheless run the risk of our customers not being able to meet their payment obligations, particularly in a future economic downturn. If a material number of our customers were not able to meet their payment obligations, our results of operations could be harmed.
Risks Related to the International Nature of Our Operations
If additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed.
The Trump administration had put into place tariffs and other trade restrictions between the United States and China, the European Union, Canada, and Mexico, among others, including limiting trade and/or imposing tariffs on imports from such countries. In addition, China, the European Union, Canada, and Mexico, among others, have either threatened or put into place retaliatory tariffs of their own. While the current administration has not yet clearly determined its policies regarding international trade, if additional tariffs or other restrictions are placed on foreign imports, including on any of our products manufactured overseas for sale in the United States, or any related counter-measures are taken by other countries, our business and results of operations may be materially harmed.
These tariffs have the potential to significantly raise the cost of our products. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers, negatively impact our results of operations, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our results of operations, or otherwise harm our business.
If we fail to timely and effectively obtain shipments of products from our overseas manufacturers, our business and results of operations could be harmed.
Our overseas third-party contract manufacturers ship most of our products to our primary facility in California, which are then shipped to our customers and to our distribution facilities in Texas, Washington, New Jersey and South Carolina. Because we import many of our products, we are vulnerable to risks
25

associated with products manufactured abroad, including, among other things: (a) risks of damage, destruction, or confiscation of products while in transit to our distribution centers; and (b) transportation and other delays in shipments, including as a result of heightened security screening, port congestion, and inspection processes or other port-of-entry limitations or restrictions in the United States. In order to meet demand for a product, we have chosen in the past, and may choose in the future, to arrange for additional quantities of the product, if available, to be delivered through air freight, which is significantly more expensive than standard shipping by sea and, consequently, could harm our gross margins. Failure to procure our products from our third-party contract manufacturers and deliver merchandise to our customers in a timely, effective, and economically viable manner could reduce our sales and gross margins, damage our brand, and harm our business.
Many of our products are manufactured by third parties outside of the United States, and our business may be harmed by legal, regulatory, economic, and political risks associated with international trade and those markets.
Many of our products are manufactured outside the United States. Our reliance on suppliers and manufacturers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including: (a) the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions and laws relating to the importation and taxation of goods; (b) weaker protection for intellectual property and other legal rights than in the United States, and practical difficulties in enforcing intellectual property and other rights outside of the United States; (c) compliance with U.S. and foreign laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act, or FCPA, the UK Bribery Act 2010, or the Bribery Act, regulations of the U.S. Office of Foreign Assets Controls, or OFAC, and U.S. anti-money laundering regulations, which prohibit U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business, operating in certain countries, as well as engaging in other corrupt and illegal practices; (d) economic and political instability and acts of terrorism in the countries where our suppliers are located; (e) transportation interruptions or increases in transportation costs; and (f) the imposition of tariffs on components and products that we import into the United States or other markets. We cannot assure you that our directors, officers, employees, representatives, manufacturers, or suppliers have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our manufacturers, suppliers, or other business partners have not engaged and will not engage in conduct that could materially harm their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the Bribery Act, OFAC restrictions, or other export control, anti-corruption, anti-money laundering, and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be subject to other related liabilities, which could harm our business, financial condition, cash flows, and results of operations.
Foreign exchange rate fluctuations could affect our results of operations.
Our third-party manufacturers are located in international markets, and we make payment to certain of these manufacturers in currency other than US Dollars, including payments made in New Taiwan Dollars. Any fluctuations in foreign exchange rates against the U.S. Dollar, and in particular the exchange rates of the New Taiwan Dollar, could increase our costs, and have a material adverse impact on our business, financial condition, cash flows and results of operations.
Risks Related to Ownership of Our Common Stock and this Offering
There has been no prior market for our common stock and an active market may not develop or be sustained. Investors may not be able to resell their shares at or above the initial public offering price.
There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us, and may vary substantially from the market price of our common stock following this offering. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, may not be sustained. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price.
26

Our directors, executive officers, and significant stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.
Upon completion of this offering, our directors, executive officers, and other holders of more than 5% of our common stock, together with their affiliates, will own, in the aggregate          % of our outstanding common stock (assuming                    shares of common stock are outstanding after this offering). As a result, these stockholders, acting together or in some cases individually, have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these stockholders, acting together or in some cases individually, have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might decrease the market price of our common stock by:

delaying, deferring, or preventing a change in control of the company;

impeding a merger, consolidation, takeover, or other business combination involving us; or

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company.
Our stock price may be volatile or may decline, including due to factors beyond our control, resulting in substantial losses for investors purchasing shares in this offering.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

actual or anticipated fluctuations in our results of operations;

the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;

failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

ratings changes by any securities analysts who follow our company;

sales or potential sales of shares by our stockholders, or the filing of a registration statement for these sales;

adverse market reaction to any indebtedness we may incur or equity we may issue in the future;

announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

publication of adverse research reports about us, our industry, or individual companies within our industry;

publicity related to problems in our manufacturing or the real or perceived quality of our products, as well as the failure to timely launch new products that gain market acceptance;

changes in operating performance and stock market valuations of our competitors;

price and volume fluctuations in the overall stock market, including as a result of trends in the United States or global economy;

any major change in our board of directors or management;

lawsuits threatened or filed against us or negative results of any lawsuits;

security breaches or cyberattacks;

legislation or regulation of our business;

loss of key personnel;
27


new products introduced by us or our competitors;

the perceived or real impact of events that harm our direct competitors;

developments with respect to our trademarks, patents, or proprietary rights;

general market conditions; and

other events or factors, including those resulting from war, incidents of terrorism, or responses to these events, which could be unrelated to us or outside of our control.
In addition, stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry, as well as those of newly public companies. In the past, stockholders of other public companies have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and harm our business, results of operations, financial condition, reputation, and cash flows. As a result, you may be unable to resell your shares of common stock at or above the initial public offering price.
Acquisitions could result in operating difficulties and may materially adversely affect our business, financial condition, results of operations and growth prospects.
We have evaluated, and expect to continue evaluating, potential strategic transactions, and we may pursue one or more transactions, including acquisitions. We have limited experience executing acquisitions. Any transaction could be material to our business, financial condition, results of operations and growth prospects. Integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures. Acquisition-related risks include:

diverting management time and focus from operating our business to acquisition integration;

customers moving to new suppliers as a result of the acquisition;

inability to retain employees from the business we acquire;

challenges associated with integrating employees from the acquired company into our organization;

difficulties integrating accounting, management information, human resource and other administrative systems to permit effective management of the business we acquire and realize efficiencies;

potential requirements for remediating controls, procedures and policies appropriate for a public company in the acquired business that prior to the acquisition lacked these controls, procedures and policies;

potential liability for past or present environmental, hazardous substance, or contamination concerns associated with the acquired business or its predecessors;

possible write-offs or impairment charges resulting from the acquisition; and

unanticipated or unknown liabilities relating to the acquired business.
Also, the anticipated benefit of any acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, debt incurrence, contingent liabilities or amortization expenses or goodwill write-offs, any of which could materially adversely affect our business, financial condition, results of operations and growth prospects. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.
28

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.
We intend to use the net proceeds of this offering for the repayment of approximately $30 million of our existing indebtedness as set forth in detail in “Use of Proceeds,” as well as other general corporate purposes, including possible facility expansion and acquisitions. This expected use of proceeds represents our intentions based on current plans and business conditions. Our management team will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds will be used appropriately or to influence our decisions regarding the use of proceeds. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from the intended uses described in this prospectus. The net proceeds may be used for purposes that do not result in an increase in the value of our business, which could cause our stock price to decline.
Substantial future sales, or the perception or anticipation of future sales, of shares of our common stock could cause our stock price to decline.
Our stock price could decline as a result of substantial sales of our common stock, or the perception or anticipation that such sales could occur, particularly sales by our directors, executive officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. After this offering, we will have              shares of our common stock outstanding, or              shares if the underwriters exercise their option to purchase additional shares. This includes the              shares included in this offering, or              shares if the underwriters exercise their option to purchase additional shares, which may be resold in the public market immediately unless purchased by our affiliates. Substantially all of the remaining shares are currently restricted as a result of the 180-day lock-up agreements. The representatives of the underwriters may, in their sole discretion, permit our officers, directors, and holders of 5% or more of our common stock who are subject to the 180-day contractual lock-up to sell shares prior to the expiration of the lock-up agreements. See “Underwriting.”
We will register 2,000,000 shares of common stock that we may issue under our Stock Incentive Plan, and they will be eligible to be sold freely in the public market upon issuance, subject to volume limitations applicable to affiliates and the existing lock-up agreements.
Purchasers in this offering will experience immediate and substantial dilution.
The initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate dilution of $    per share, or $    per share if the underwriters exercise their over-allotment option in full, representing the difference between our pro forma net tangible book value per share after giving effect to the sale of common stock in this offering at an assumed offering price of $   , the midpoint of the range set forth on the cover page of this prospectus. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. See “Dilution.” In addition, if we issue additional equity securities or common stock upon conversion of restricted stock units, you will experience additional dilution.
Our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain actions, which could limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company and its directors, officers, or other employees and may discourage lawsuits with respect to such claims.
Unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought against or on behalf of the Company, (ii) any action asserting a claim of breach of a duty owed by any current or former director, officer, other employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, (iv) any action as to which the Delaware General Corporation Law confers jurisdiction upon the Court of Chancery in the State
29

of Delaware, or (v) any action asserting a claim governed by the internal affairs doctrine, shall, to the fullest extent permitted by law, be the Court of Chancery in the State of Delaware (or, only if the Court of Chancery in the State of Delaware declines to accept jurisdiction over a particular matter, any state or federal court located within the State of Delaware). However, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and as such, the exclusive jurisdiction clauses set forth above would not apply to such suits. Furthermore, Section 22 of the Securities Act provides for concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, and as such, the exclusive jurisdiction clauses set forth above would not apply to such suits.
Although we believe the exclusive forum provision benefits us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, this provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company and its directors, officers, or other employees and may discourage lawsuits with respect to such claims.
We may issue preferred stock, the terms of which could adversely affect the voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.
We do not intend to pay dividends for the foreseeable future. If our stock price does not appreciate after you purchase our shares, you may lose some or all of your investment.
We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Karat Packaging Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
As a holding company, our principal source of cash flow will be distributions from Lollicup, our wholly-owned subsidiary. Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, in the future will depend on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, or otherwise. The ability of our subsidiaries to distribute cash to us will also be subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt, and pay dividends, if any, could be harmed.
30

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease to regularly cover us or fail to publish reports, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
Risks Related to Our Capital Structure
Outstanding indebtedness may reduce our available funds.
We have approximately $98.6 million in total long-term debt and line of credit as of December 31, 2020. The loans are held at multiple banks and are secured by the Company’s property and equipment as the collateral for the debt. There can be no guarantee that we will be able to pay all amounts when due or to refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or unable to refinance such amounts, our key equipment could be repossessed, our property could be foreclosed and our business could be negatively affected.
The terms of the debt agreements impose significant operating and financial restrictions on us. These restrictions could also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions, including but not limited to: incurring or guaranteeing additional debt financing; transferring or selling assets currently held by us; and transferring ownership interests in certain of our subsidiaries. The failure to comply with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any.
We depend on cash generated from outside sources of funding to support our growth.
We primarily rely on outside sources of equity and debt capital to fund our current operations and growth initiatives. As we expand our business, we will need significant cash resources to fund operations to purchase inventory, increase our product development, expand our manufacturer and supplier relationships, pay personnel, pay for the increased costs associated with operating as a public company, expand internationally, and to further invest in our sales and marketing efforts. If we are unable to secure additional outside funding or if our business does not generate sufficient cash flow from operations to fund these activities and sufficient funds are not otherwise available, our business will be negatively impacted and restricted. If such outside financing is not available to us on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be harmed. Moreover, if we raise additional capital by issuing equity securities or securities convertible into equity securities, your ownership may be diluted. Any indebtedness we incur may subject us to covenants that restrict our operations and will require interest and principal payments that would create additional cash demands and financial risk for us.
If our goodwill, other intangible assets, or our property and equipment become impaired, we may be required to record a charge to our earnings.
We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value. Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for future sales growth rates, gross profit performance, and other assumptions used to estimate fair value could cause us to record material non-cash impairment charges, which could harm our results of operations and financial condition.
31

If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, and related notes included elsewhere in this prospectus. These estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of sales and expenses that are not readily apparent from other sources. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, and could result in a decline in our stock price.
General Risk Factors
We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised financial accounting standards until such time as those standards apply to private companies. We intend to take advantage of the extended transition period for adopting new or revised financial statements under the JOBS Act as an emerging growth company.
For as long as we continue to be an emerging growth company, we intend to take advantage of other exemptions from certain reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended or the Sarbanes-Oxley Act, exemption from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute arrangements, and reduced financial reporting requirements. Investors may find our common stock less attractive because we will rely on these exemptions, which could result in a less active trading market for our common stock, increased price fluctuation, and a decrease in the trading price of our common stock.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) the end of the fiscal year in which the fifth anniversary of the date of this prospectus occurs.
The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.
As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Nasdaq listing standards and other applicable securities laws, rules, and regulations. Compliance with these laws, rules, and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures, and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other
32

business concerns and our costs and expenses will increase, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we will need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from sales-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal, administrative, or other proceedings against us and our business may be harmed.
If we are unable to maintain effective internal controls, our business, financial position and results of operations could be adversely affected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The rules governing the standards that must be met for management to determine that our internal control over financial reporting is effective are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management may identify material weaknesses or deficiencies which may not be remedied quickly or at all. Any failure to maintain effective internal controls could have an adverse effect on our business, financial position and results of operations.
33

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements” that involve substantial risks and uncertainties. All statements other than statements of historical or current fact included in this prospectus are forward looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance, and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “assume,” “believe,” “can have,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, and growth rates, our plans and objectives for future operations, growth, or initiatives, or strategies are forward-looking statements. 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;

our ability to compete successfully in our industry;

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 COVID-19 or other public health crises;

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;

our ability to source raw materials at reasonable prices;

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;

our ability to attract and retain skilled personnel and senior management; and

other risks and uncertainties described in “Risk Factors.”
We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
See the “Risk Factors” section and elsewhere in this prospectus for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties we face that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
34

We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock offered hereby will be approximately $       million, or approximately $       million if the underwriters’ option to purchase additional shares is exercised in full, based upon an assumed initial public offering price of $       per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public offering price of $       per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $       million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $       million, assuming that the assumed initial offering price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial price to the public or the number of shares by these amounts would have a material effect on the uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.
We intend to use approximately $30 million of the net proceeds of this offering to discharge the following indebtedness:

Term debt with an original principal of $4,814,677, with an outstanding principal balance of approximately $2,322,000 as of December 31, 2020, with a fixed interest rate of 4.98% and a maturity date of March 2023;

Term debt with an original principal of $9,476,000, with an outstanding principal balance of approximately $7,450,000 as of December 31, 2020, with a fixed interest rate of 5.75% and a maturity date of July 2024; and

Payment of $20,000,000 on our existing line of credit with an interest rate of prime less 0.25%, subject to a minimum rate of 3.75%, with an outstanding balance of approximately $33,169,000 as of December 31, 2020.
We intend to use the balance of the net proceeds for other general corporate purposes, including possible facility expansion and acquisitions.
This expected use of proceeds represents our intentions based on current plans and business conditions. However, we will retain broad discretion over the use of the net proceeds of this offering. Thus, as of the date of this prospectus and except as explicitly set forth herein, we cannot specify with certainty all of the particular uses of the net proceeds from this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending application of the net proceeds as described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.
From time to time, we engage in preliminary discussions and negotiations with various businesses in order to explore the possibility of an acquisition or investment. However, as of the date of this prospectus, we have not entered into any agreements or arrangements which would make an acquisition or investment probable under Rule 3-05(a) of Regulation S-X.
35

DIVIDEND POLICY
We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are currently no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by Delaware law. However, any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.
DILUTION
If you purchase our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the price per share paid by purchasers in this offering and the pro forma as adjusted net tangible book value per share of our common stock after the closing of this offering.
Our historical net tangible book value as of December 31, 2020 was approximately $36,755,000, or $2.42 per share. Net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the number of shares of our common stock outstanding as of December 31, 2020. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
After giving effect to the sale of          shares of our common stock in this offering at an assumed public offering price of $     per share, the midpoint of the range set forth on the cover page of this prospectus, deducting of assumed underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been approximately $        , or $     per share. This represents an immediate increase in net tangible book value of $     per share to existing stockholders and an immediate dilution of $     per share to investors purchasing our common stock in this offering at the public offering price. The following table illustrates this dilution on a per share basis to new investors:
Assumed initial public offering price per share
$     
Net tangible book per share as of December 31, 2020
$ 2.42
Increase pro forma net tangible book value per share attributable to new investors in this offering
$    
Pro forma as adjusted net tangible book value per share after giving effect to this
offering
$    
Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering
$     
The pro forma as adjusted dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share by $     per share and the dilution per share to new investors participating in this offering by $     per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $     and decrease the dilution per share to investors participating in this offering by $    , assuming the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A 1,000,000 share
36

decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $     and increase the dilution per share to new investors participating in this offering by $    , assuming the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters’ option to purchase up to an additional          shares of our common stock is exercised in full at the assumed initial public offering price of $     per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, the as adjusted net tangible book value after this offering would be $     per share, representing an increase in net tangible book value of $     per share to existing stockholders and immediate dilution in net tangible book value of $     per share to investors participating in this offering at the public offering price.
The following table summarizes as of December 31, 2020, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Shares Purchased
Total Consideration
Weighted
Average Price
Per Share
#
%
$
%
Existing stockholders
        
    % $              % $     
New investors purchasing common stock
        
    % $              % $     
Total
        
    % $              % $     
The number of shares of common stock to be outstanding immediately after this offering as shown above is based on          shares of common stock outstanding as of December 31, 2020. This number of shares excludes, as of December 31, 2020, an aggregate of up to 2,000,000 shares of common stock reserved for future issuance under our Stock Incentive Plan.
New investors will experience further dilution if any of our outstanding options are exercised, new options are issued and exercised or we issue additional shares of common stock, other equity securities or convertible debt securities in the future.
37

CAPITALIZATION
The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2020:

on an actual basis; and

on an as-adjusted basis to give effect to (i) the sale by us pursuant to this offering of         shares of our common stock, at an assumed initial offering price per share of $    , which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the repayment of approximately $30 million of our existing indebtedness under our credit facility and other indebtedness.
You should read this information in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, and related notes included elsewhere in this prospectus.
As of December 31, 2020
Actual
As adjusted(1)
(in thousands)
(in thousands)
Cash and cash equivalents
$ 448
Long-term debt, current portion
11,685
       
Long-term debt, net of current portion
53,700
Line of credit
33,169
Total long-term debt and line of credit
98,554
Stockholders’ equity:
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 15,190,000 shares issued and 15,167,000 outstanding, actual;        shares issued and outstanding, as adjusted(2)
15
       
Additional paid-in capital
13,981
Treasury stock
(248)
       
Retained earnings
18,656
       
Non-controlling interest
7,464
       
Total stockholders’ equity
39,868
       
Total capitalization
138,422
       
(1)
The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $     per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $    million, assuming that the assumed initial offering price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase up to an additional shares of our common stock is exercised in full, (i) an additional       shares of common stock would be issued and we would receive approximately $    million in additional net proceeds, based on an assumed initial
38

offering price per share of $   , which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (ii) cash and cash equivalents, total stockholders’ equity and total capitalization would each also increase by approximately $    million.
(2)
The number of shares of common stock to be outstanding after this offering is based on         shares of common stock outstanding as of December 31, 2020, and excludes, in each case as of December 31, 2020, an aggregate of up to 2,000,000 shares of common stock reserved for future issuance under our Stock Incentive Plan.
39

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected consolidated financial and operating data for the periods and at the dates indicated. The selected consolidated financial data as of and for the fiscal years ended December 31, 2020 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be achieved in any future period, and results for any interim period are not necessarily indicative of the results to be expected for the full year.
The following information should be read in conjunction with “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus.
Year Ended December 31,
2020
2019
(in thousands, except share and per share amounts)
Net sales
$ 295,518 $ 224,910
Cost of goods sold
206,393 163,891
Gross profit
89,125 61,019
Operating expenses
61,428 55,183
Operating income
27,697 5,836
Other expenses
(5,770) (2,891)
Provision for income tax expense
5,259 781
Net Income (loss)
16,668 2,164
Basic and diluted earnings per share
Basic
$ 1.15 $ 0.11
Diluted
$ 1.13 $ 0.11
Basic and diluted earnings per share – proforma (unaudited)(1)
Basic – proforma
Diluted – proforma
Weighted average common shares outstanding:
Basic
15,176,809 15,190,000
Diluted
15,447,809 15,190,000
Weighted average common shares outstanding – 
proforma (unaudited)(1)
Basic – proforma
Diluted – proforma
Year Ended December 31,
Balance sheet data:
2020
2019
(in thousands)
Cash and cash equivalents
$ 448 $ 802
Total current assets
79,777 61,027
Total assets
181,104 133,353
Total current liabilities
43,137 35,928
Total liabilities
141,236 109,299
Total Karat Packaging Inc. stockholders’ equity .
32,404 15,741
Total noncontrolling interest equity
7,464 8,313
Total stockholders’ equity . .
39,868 24,054
Total liabilities and stockholders’ equity
181,104 133,353
Adjusted EBITDA (unaudited)(2)
$ 35,988 $ 11,281
40

(1)
Pro forma earnings per share gives effect to our issuance of      common stock at an assumed offering price of $     per share (representing the mid-point of the price range set forth on the cover of this prospectus), reflecting the portion of the shares of common stock sold, the proceeds of which are being used for debt repayment. Interest expense, net of tax at an assumed rate of    %, of $    and $    for the years ended December 31, 2020 and 2019, respectively, has been removed from this calculation.
(2)
In addition to net income presented in accordance with GAAP, we use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP.
Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.
Adjusted EBITDA is a financial measure equal to net income (loss) excluding (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) gain on sale of asset. We present Adjusted EBITDA as a supplemental measure of our financial performance. Management and our board of directors have begun to use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes items that may not be reflective of, or are unrelated to, our core operating performance, and may assist investors with comparisons to prior periods and assessing trends in our underlying businesses. We have begun to reference Adjusted EBITDA in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, we have based certain of our forward-looking estimates and budgets on Adjusted EBITDA. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP.
Year Ended December 31,
Reconciliation of non-GAAP financial data (unaudited):
2020
2019
(in thousands)
Net income (loss):
$ 16,668 $ 2,164
Add:
Interest expense
5,492 4,752
Income tax expense
5,259 781
Depreciation and amortization
8,569 5,953
Gain on sale of asset(1)
(2,369)
Adjusted EBITDA
$ 35,988 $ 11,281
(1)
During the year ended December 31, 2019, our variable interest entity recognized a gain on the sale of a portion of the Texas facility sold of approximately $2.4 million.
41

The following tables summarize the consolidation of our variable interest entity, Global Wells, in our results of operations for years ended December 31, 2020 and 2019.
Year ended December 31, 2020
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Net sales
295,518 295,518
Cost of goods sold
206,393 206,393
Gross profit
89,125 89,125
Operating expenses
63,064 1,973 (3,609) 61,428
Operating income
26,061 (1,973) 3,609 27,697
Rental income
3,907 3,585 322
Other income (expense)
(3,285) (2,915) 108 (6,092)
Income (loss) before provision for income taxes
22,776 (981) 132 21,927
Provision for income tax expense
5,259 5,259
Net income (loss)
17,517 (981) 132 16,668
Net income (loss) attributable to noncontrolling interest
(849) (849)
Net income (loss) attributable to controlling
interest .
17,517 (132) 132 17,517
Other non-GAAP financial data (unaudited):
Adjusted EBITDA(1)
33,059 2,797 132 35,988
Year ended December 31, 2019
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Net sales
224,910 224,910
Cost of goods sold
163,891 163,891
Gross profit
61,019 61,019
Operating expenses
55,248 1,565 (1,630) 55,183
Operating income
5,771 (1,565) 1,630 5,836
Rental income
1,588 (1,588)
Other income (expense)
(3,266) 486 (111) (2,891)
Income (loss) before provision for income taxes
2,505 509 (69) 2,945
Provision for income tax expense
781 781
Net income (loss)
1,724 509 (69) 2,164
Net income (loss) attributable to noncontrolling interest
440 440
Net income (loss) attributable to controlling interest .
1,724 69 (69) 1,724
Other non-GAAP financial data (unaudited):
Adjusted EBITDA(1)
10,574 776 (69) 11,281
(1)
In addition to net income presented in accordance with GAAP, we use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP.
Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.
Adjusted EBITDA is a financial measure equal to net income (loss) excluding (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) gain on sale of asset. We present
42

Adjusted EBITDA as a supplemental measure of our financial performance. Management and our board of directors have begun to use Adjusted EBITDA to assess our financial performance and believe it is helpful in highlighting trends because it excludes items that may not be reflective of, or are unrelated to, our core operating performance, and may assist investors with comparisons to prior periods and assessing trends in our underlying businesses. We have begun to reference Adjusted EBITDA in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, we have based certain of our forward-looking estimates and budgets on Adjusted EBITDA. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP.
Reconciliation of non-GAAP financial data — Year ended December 31, 2020 (unaudited)
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Net income (loss)
17,517 (981) 132 16,668
Add:
Interest
2,577 2,915 5,492
Income tax expense
5,259 5,259
Depreciation and amortization
7,706 863 8,569
Adjusted EBITDA
33,059 2,797 132 35,988
Reconciliation of non-GAAP financial data — Year ended December 31, 2019 (unaudited)
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Net income (loss)
1,724 509 (69) 2,164
Add:
Gain on sale of asset
(2,369) (2,369)
Interest
2,868 1,884 4,752
Income tax expense
781 781
Depreciation and amortization
5,201 752 5,953
Adjusted EBITDA
10,574 776 (69) 11,281
43

The following tables summarize the consolidation of our variable interest entity, Global Wells, in our balance sheet as of December 31, 2020 and December 31, 2019.
As of December 31, 2020
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Total assets
137,146 50,617 (6,659) 181,104
Long term debt, current portion
10,670 694 11,364
Long term debt, net of current portion.
16,713 36,697 53,410
Line of credit
33,169 33,169
Other liabilities
44,190 4,597 (5,494) 43,293
Total liabilities
104,742 41,988 (5,494) 141,236
Total stockholders’ equity
32,404 756 (756) 32,404
Total noncontrolling interest equity
7,873 (409) 7,464
Total liabilities and stockholders’ equity
137,146 50,617 (6,659) 181,104
As of December 31, 2019
Karat
Packaging, Inc.
Global Wells
Investment
Group
Eliminations
Consolidated
(in thousands)
Total assets
102,104 33,938 (2,689) 133,353
Long term debt, current portion
6,587 304 6,891
Long term debt, net of current portion.
19,678 21,017 40,695
Line of credit
26,679 26,679
Other liabilities
33,419 3,007 (1,392) 35,034
Total liabilities
86,363 24,328 (1,392) 109,299
Total stockholders’ equity
15,741 1,737 (1,737) 15,741
Total noncontrolling interest equity
7,873 440 8,313
Total liabilities and stockholders’ equity
102,104 33,938 (2,689) 133,353
44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Special Note Regarding Forward-Looking Statements” and “Risk Factors” and those included elsewhere in this prospectus. The consolidated financial data as of and for the fiscal years ended December 31, 2020 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.
Overview
We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the years ended December 31, 2020 and 2019 included elsewhere in this prospectus.
We are a rapidly-growing specialty distributor and select manufacturer of environmentally-friendly disposable foodservice products and related items. We are a nimble supplier of a wide range of products for the foodservice industry, including food and take out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. Our Karat Earth® line provides environmentally friendly options to our customers, who are increasingly focused on sustainability. We offer customized solutions to our customers, including new product development, design, printing and logistics services. While a substantial majority of our revenue is generated from the distribution of our vendors’ products, we do manufacture product ourselves. Our goal is to be the single-source provider to our customers for all of their disposable foodservice products and related needs.
We operate an approximately 300,000 square foot manufacturing facility, and distribution center in California. Due to capacity constraints resulting from continuously growing demand, in the first quarter of 2019, we opened a second, approximately 500,000 square foot manufacturing facility and distribution center located in Texas. This expansion significantly increased our manufacturing capacity, reduced shipping costs and expanded our geographic footprint. The Texas facility commenced operations on March 31, 2019 and was fully operational as of the second fiscal quarter of 2020. In July 2020, we opened an approximately 108,000 square foot distribution center located in New Jersey. The New Jersey facility commenced operations in July 2020 and it was fully operational as of March 2021.
We manage and evaluate our operations in one reportable segment.
45

Results of Operations
Year ended December 31, 2020 Compared to the Year Ended December 31, 2019
Year Ended December 31,
2020
2019
(in thousands)
Net sales
$ 295,518 $ 224,910
Cost of goods sold
206,393 163,891
Gross profit
89,125 61,019
Operating expenses
61,428 55,183
Operating income
27,697 5,836
Other expenses
(5,770) (2,891)
Provision for income tax expense
5,259 781
Net income
16,668 2,164
Other non-GAAP financial data (unaudited):
Adjusted EBITDA
$ 35,988 $ 11,281
Net sales
Net sales were $295.5 million for the year ended December 31, 2020 compared to $224.9 million for the year ended December 31, 2019, an increase of $70.6 million, or 31%. The increase in net sales was primarily driven by an increase of $67.8 million in product sales to our existing customers as we continue to increase the number of products used by our customers, acquisition of over 25,000 new customers in 2020, and from direct-to-consumer sales through our online channel. Sales to existing and new customers was also positively impacted by our introduction of personal protective equipment related products such as masks, gloves, and face shields of approximately $38.1 million for the year ended December 31, 2020.
Cost of goods sold
Cost of goods sold increased by $42.5 million, or 26% to $206.4 million for the year ended December 31, 2020 compared to $163.9 million for the year ended December 31, 2019. The increase in cost of goods sold was primarily due to an increase of $33.9 million in product costs driven by the general increase in costs in line with the increase in product sales, an increase of $4.8 million in freight and duty costs to acquire inventory from overseas, and in increase of $2.1 million in depreciation expense related to depreciation of our manufacturing equipment.
Gross profit
Gross profit increased $28.1 million, or 46%, to $89.1 million for the year ended December 31, 2020 compared to $61.0 million for the year ended December 31, 2019. The increase in gross profit was primarily driven by the increase in product sales as well as an increase in profit margin. Gross profit margin was 30% for the year ended December 31, 2020 compared to 27% for the year ended December 31, 2019, an increase of 300 basis points. The increase in gross profit margin was driven primarily by the increase in product sales, higher profit margins driven by our direct-to-consumer sales through our online channel, as well as by our pivot to selling personal protective equipment products which have higher profit margins.
Operating expenses
Operating expenses for the year ended December 31, 2020, were $61.4 million compared to $55.2 million for the year ended December 31, 2019, an increase of $6.2 million, or 11%. The increase was primarily due to an increase of $5.0 million in shipping costs to deliver products to our customers.
Operating income
Operating income for the year ended December 31, 2020 was $27.7 million compared to $5.8 million for the year ended December 31, 2019, an increase of $21.9 million, or 375%. The increase was primarily
46

due to an increase in gross profit of $28.1 million resulting from increase in sales and improvements in gross profit margin offset by the increase in operating expenses of $6.2 million.
Other expenses
Other expenses for the year ended December 31, 2020 was $5.8 million, compared to $2.9 million for the year ended December 31, 2019, an increase of $2.9 million, or 100%. On April 9, 2019, our variable interest entity entered into a sales agreement to sell approximately 160,000 square feet of its newly constructed approximately 650,000 square foot facility in Texas to an unrelated third party for an aggregate cash sales price of approximately $10 million. The Company and our variable interest entity do not have any continuing obligations with respect to the portion of the Texas facility sold. For the year ended December 31, 2019, the Company recorded a $2.4 million gain on sale of the asset, which other income was netted against other expenses. This transaction did not recur for the year ended December 31, 2020, which resulted in an increase in other expenses. The increase was also driven by an increase in interest expense of $0.7 million due to additional debt and a loss recorded for changes in interest swap fair value, an increase of $0.4 million driven by fluctuations in foreign exchange rates between the U.S. Dollar and the New Taiwan Dollar as the Company primarily sources raw materials from overseas which are transacted in foreign currency, and an offset of $0.3 million increase in rental income.
Net income
Net income for the year ended December 31, 2020 was $16.7 million compared to $2.2 million for the year ended December 31, 2019, an increase of $14.5 million, or 669%. The increase was primarily driven by an increase in operating income of $21.9 million as discussed above partially offset by an increase in other expenses of $2.9 million and an increase in income tax expense of approximately $4.5 million. Provision for income taxes was $5.3 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively. The Company’s effective tax rate for the years ended December 31, 2020 and 2019 was 24% and 27%, respectively. The decrease in the effective tax rate was primarily driven by certain discrete items included in the calculation for the year ended December 31, 2019 that did not recur for the year ended December 31, 2020. Discrete items include significant items that may occur in any given year but are not consistent from year to year.
Adjusted EBITDA
Adjusted EBITDA for the year ended December 31, 2020 was $36.0 million, compared to $11.3 million for the year ended December 31, 2019, an increase of $24.7 million, or 219%. The increase was primarily driven by an increase in net income of $14.5 million as discussed above, an increase in interest expense add-back of $0.7 million, an increase in provision for income taxes of $4.5 million, an increase in depreciation and amortization of $2.6 million, and an increase of $2.4 million due to the gain on sale of asset that was recorded for the year ended December 31, 2019 that did not recur in 2020. We use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows from operating activities or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies.
47

Year Ended December 31,
Reconciliation of Adjusted EBITDA (unaudited):
2020
2019
(in thousands)
Net income:
$ 16,668 $ 2,164
Add (deduct):
Interest expense
5,492 4,752
Income tax expense
5,259 781
Depreciation and amortization
8,569 5,953
Gain on sale of asset
(2,369)
Other non-GAAP financial data:
Adjusted EBITDA
$ 35,988 $ 11,281
Liquidity and Capital Resources
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:

There is a growing trend towards at home dining and mobility-oriented e-commerce, food delivery and take-out dining. We believe this trend will have a positive impact on our results of operations, as more of our customers will require packaging and containers to meet the demands of their increased food delivery and take-out dining consumers.

Environmental concerns regarding disposable products broadly have resulted in a number of significant changes that are specific to the food-service industry, including regulations applicable to our customers. We believe this trend will have a positive impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.

Changes in freight carrier costs related to the shipment of our products, especially relating to overseas shipments. We believe this trend can have either a positive or a negative impact on our results of operations, depending on whether such freight costs increase or decrease.

U.S foreign trade policy continues to evolve, such as the imposition of tariffs on a number of imported food-service disposable products, including those imported from China. 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 source our raw materials or manufactured products from countries where tariffs have not been imposed by the current U.S. administration.

The cost of the raw materials used to manufacture our products, in particular polyethylene terephthalate, or PET, plastic resin, will continue to fluctuate. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether PET plastic resin costs increase or decrease.
With the onset of the COVID-19 global pandemic, we began to supply personal protective equipment related products to our customers. We anticipate that this growing trend of personal protective equipment related products will continue to have a positive impact on our results of operations as more of our customers will require personal protective equipment to meet the safety requirements of their employees and consumers; however, we believe that our sale of such products will constitute a decreasing percentage of our net sales and gross profit moving forward. Since its peak in April 2020, personal protective equipment related products have declined to approximately under 2% of net sales in each of October 2020, November 2020 and December 2020.
The following table summarizes total current assets, liabilities and working capital at December 31, 2020 compared to December 31, 2019:
48

December 31,
2020
December 31,
2019
Increase
(in thousands)
Current assets
$ 79,777 $ 61,027 $ 18,750
Current liabilities
43,137 35,928 7,209
Working capital
$ 36,640 $ 25,099 $ 11,541
As of December 31, 2020, we had a working capital of $36.6 million as compared to working capital of $25.1 million at December 31, 2019, representing an increase in working capital of $11.5 million, or 46%. The change in working capital was primarily attributable to an increase in accounts receivable due to higher sales, an increase in inventories in anticipation of higher sales volume for the next quarter, offset by an increase in current maturities of long-term debt.
We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, availability under lines of credit with existing financial institutions and proceeds from this offering.
As of December 31, 2020, we had cash and cash equivalents of approximately $0.4 million. Based on projections of growth in revenue and operating results in the coming year, the available cash held by us and availability under existing lines of credit, we believe that we will have sufficient cash resources to finance our operations, service any maturing debt and lease obligations, and expected capital expenditures for at least the next twelve months. Depending on our growth and results of operations, we may have to raise capital through the issuance of additional equity and/or debt, which, if we are able to obtain, could have the effect of diluting stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to us. As our debt or credit facilities become due, we need to repay, extend or replace such indebtedness. Our ability to do so will be subject to future economic, financial, business, and other factors, many of which are beyond our control.
For additional information on financing entered into subsequent to December 31, 2020, see Note 18 of the consolidated financial statements included in this report.
Cash Flows
The following table summarizes cash flow for the year ended December 31, 2020 and 2019:
Year Ended December 31,
Cash flows data:
2020
2019
(in thousands)
Net cash provided by (used in) operating activities
$ 14,547 $ (32)
Net cash used in investing activities
(37,351) (24,756)
Net cash provided by financing activities
22,450 24,625
Net change in cash and cash equivalents
(354) (163)
Cash flows provided by (used in) operating activities.   For the year ended December 31, 2020, net cash provided by operating activities was $14.5 million, primarily the result of net income of $17.5 million, adjusted for certain non-cash items totaling $14.5 million, consisting of depreciation and amortization, provision for bad debts, changes in fair value of interest rate swaps, and deferred income taxes. In addition, cash decreased $17.4 million, primarily as a result of changes in working capital. For the year ended December 31, 2019, net cash used by operating activities was $0.03 million, primarily due to a decrease in cash of $7.7 million due to changes in working capital which was partially offset by net income of $2.2 million, adjusted for certain non-cash items of an aggregate $5.5 million consisting of depreciation and amortization, changes in fair value of interest rate swaps, and gain on sale of asset.
Cash flows used in investing activities.   Net cash used in investing activities for the year ended December 31, 2020 was $37.3 million, which was driven by the purchase of manufacturing equipment and construction of our New Jersey warehouse totaling $29.5 million and deposits paid for additional manufacturing equipment of $6.9 million. Net cash used in investing activities for the year ended
49

December 31, 2019 was $24.8 million, which was driven by the purchase of manufacturing equipment and construction of the manufacturing facility in Texas totaling $32.5 million, deposits paid for additional manufacturing equipment of $2.3 million, offset by proceeds from sale of asset of $10.1 million.
At December 31, 2020, the Company has commitments for capital expenditures, which the Company does not anticipate to exceed $4.8 million, primarily related to the purchase of manufacturing equipment for the Texas facility. The Company believes that cash-on-hand and access to unused borrowing capacity combined with cash flow from operations will be sufficient to fund the Company’s commitments.
Cash flows provided by financing activities.   Net cash provided by financing activities for the year ended December 31, 2020 was $22.5 million, which was a result of proceeds from issuance of debt. Net cash provided by financing activities for the year ended December 31, 2019 was $24.6 million, which was a result of proceeds from issuance of debt. During the year ended December 31, 2020 and 2019, we made debt payments of $7.4 million and $25.9 million, respectively. We made $0.6 million and $0 cash distributions during the years ended December 31, 2020 and 2019, respectively.
For additional information on financing entered into subsequent to December 31, 2020, see Note 18 of the consolidated financial statements included in this report.
Financing Arrangements
Business Loan Agreements
On March 17, 2020, one of our subsidiaries, as the borrower, Alan Yu, Marvin Cheng, and the company, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and related promissory note for a $3.0 million term loan that expires June 17, 2025. Principal and interest payments of $54,623 are due monthly with the remaining principal and unpaid interest due at maturity. Interest accrues based on the prime rate plus margin of 0.25% (3.50% as of December 31, 2020). The loan is secured by the borrower’s assets. In accordance with the business loan agreement, the borrower must comply with certain financial reporting requirements and financial covenants, including maintaining a minimum debt service coverage ratio (as defined in the business loan agreement) of not less than 1.20 to1.00 at all times, tested annually.
On June 30, 2020, our variable interest entity, as the borrower, Mr. Yu, Mr. Cheng, and one of our subsidiaries, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and related promissory note for a $16.5 million term loan that matures on June 30, 2025. Interest accrues at a fixed rate of 4.5%. Principal payments ranging from $30,524 to $37,720 along with interest are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of the assets of one of our subsidiaries and our variable interest entity. In accordance with the business loan agreement, the borrower must comply with certain financial reporting requirements and financial covenants, including the borrower must maintain a minimum debt service coverage ratio (as defined in the business loan agreement) of not less than 1.25 to 1.00 at all times, tested semi-annually.
As of December 31, 2020, we were in compliance with the covenants included in the business loan agreements described above.
Line of Credit
One of our subsidiaries, as the borrower, and Hanmi Bank, in its capacity as lender, previously entered into a business loan agreement and associated documents. The loan was evidenced by a promissory note executed by the borrower. The line of credit had an initial maturity date of February 23, 2019. The agreement was amended prior to maturity to extend the maturity date to May 2019. In May 2019, the line of credit was amended again to extend the maturity date to May 2021 and increased the maximum borrowing from $25 million to $30 million. Interest accrues at an annual rate of prime less 0.25% subject to a minimum of 3.75% (3.75% at December 31, 2020 and 5.25% December 31, 2019) and is payable monthly. In September 2019, the maximum borrowing was further increased from $30 million to $40 million. On July 9, 2020, one of our subsidiaries, as the borrower, Mr. Yu, Mr. Cheng, and the company, each as guarantors, and Hanmi Bank, in its capacity as lender, entered into a business loan agreement and
50

associated documents to change the terms of the existing indebtedness under the line of credit. The line of credit was amended again to extend the maturity date to May 2022. Approximately $33.2 million and $26.7 million of borrowings were outstanding as of December 31, 2020 and 2019, respectively, under the line of credit. The amount that can be borrowed is subject to a borrowing base that is calculated as a percentage of the borrower’s accounts receivable and inventory balances measured monthly. The loan is secured by the borrower’s assets. In accordance with the line of credit agreement, the borrower must comply with certain financial covenants, including a minimum current ratio, minimum tangible net worth, minimum debt service coverage ratio, and minimum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio (each as defined in the line of credit). The line of credit also includes certain standby letter of credit sublimits. The amounts issued under the standby letter of credit was $900,000 and $800,000 as of December 31, 2020 and December 31, 2019, respectively.
In accordance with the change in terms agreement dated July 9, 2020, the borrower must comply with certain financial reporting requirements, financial covenants and other covenants. The financial covenants include (i) the borrower must maintain a minimum current ratio (as defined in the line of credit) of not less than 1.50 to 1.00 on a quarterly basis from each period end; (ii) the borrower must maintain effective tangible net worth (as defined in the line of credit) of not less than $20.0 million on a quarterly basis from each period end; (iii) the borrower must maintain a minimum debt service coverage ratio (as defined in the line of credit) of not less than 1.20 to 1.00; and (iv) the borrower’s funded debt of bank financing (including capital leases) over rolling four quarter EBITDA shall be no more than 4.00 to 1.00 from each period end. The other covenants include (i) subordination of accounts payable to Keary Global (to be monitored on a quarterly basis) of not less than $3.0 million; and (ii) the borrower shall maintain a minimum gross profit margin of 25% on a quarterly basis.
As of December 31, 2020, we were in compliance with the covenants included in the line of credit described above.
PPP Loan
On April 16, 2020, one of our subsidiaries received loan proceeds in the amount of approximately $5.0 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are potentially forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. We intend to use the proceeds for purposes consistent with the PPP. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of the loan, we are assessing all preventable actions that could cause us to be ineligible for forgiveness of the loan, in whole or in part. While the Company intends to apply for the forgiveness of the loan, there is no assurance that the Company will obtain forgiveness of the loan in whole or in part.
For additional information on our financing arrangement see Notes 8 and 18 of our consolidated financial statements for the year ended December 31, 2020 and 2019 included elsewhere in this report.
Commitments and Contractual Obligation
The table below sets forth our enforceable and legally binding obligations as of December 31, 2020, for the categories described below. Some of the amounts included in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below.
51

Payments Due by Period
Total
Less than
1 year
1 – 3 years
3 – 5 years
More than
5 years
(in thousands)
Long-term debt(1)
$ 64,876 $ 11,364 $ 14,285 $ 19,894 $ 19,333
Line of credit
33,169 33,169
Interest on long-term debt and line of credit(1)
15,498 4,081 5,030 3,126 3,261
Operating leases(2)
36,683 6,242 12,599 8,671 9,171
Capital lease obligations including interest
655 346 276 33
Capital expenditures(3)
34,425 5,100 12,615 16,710
Total
$ 185,306 $ 27,133 $ 77,974 $ 48,434 $ 31,765
(1)
These amounts represent estimated future principal payments related to our long-term debt. Interest represents estimated future interest payments as of December 31, 2020, assuming our long-term debt and line of credit is held to maturity. Future interest payments could differ materially from amounts indicated in the table due to future operational and financing needs, market factors and other currently unanticipated events.
(2)
We enter into operating leases in the normal course of business under various operating lease agreements with various terms and conditions, expiring at various dates through 2028. We lease some of our operating facilities, as well as other property and equipment, under operating leases. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our operating lease obligations would change if we exercised these renewal options and/or if we entered into additional operating lease agreements. These amounts do not include month-to-month leases. These amounts include lease payments to our variable interest entity of $3.5 million, $7.2 million, $7.1 million, and $8.7 million for the respective payments due by period above. Although we are contractually obligated to make these payments to our variable interest entity, as a result of consolidating our variable interest entity due to it being the primary beneficiary, these payments will be eliminated upon consolidation and will not have an impact on our consolidated financial statements.
(3)
These amounts represent estimated future capital expenditures and do not represent any commitment by the Company as of December 31, 2020 except for a maximum of $4.8 million primarily related to the purchase of manufacturing equipment for the Texas facility. Future capital expenditures could differ materially from the amounts forecasted due to future operational and financing needs, market factors and other currently unanticipated events
Related Party Transactions
Keary Global Group, Ltd.
As a minority stockholder of the Company, Keary Global Group, Ltd., formerly known as Karat Global Group, Ltd., or Keary Global, owns 250,004 shares of the Company’s common stock as of December 31, 2020, 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 its affiliate, Keary International, Ltd., formerly known as Karat International, Ltd., or Keary International, are inventory suppliers and purchasing agents for us overseas. Keary Global and Keary International are owned by our CEO Alan Yu’s brother, Jeff Yu, who is also employed as an account manager for our national sales team.
We have made ongoing purchases with Keary Global through the use of purchase orders. For the years ended December 31, 2020 and 2019, we made purchases in the aggregate amount of $28.0 million and $25.1 million, respectively, from Keary Global and Keary International. As of December 31, 2020 and 2019, we had payables in the aggregate amount of $5.0 million and $5.1 million respectively, to Keary Global and Keary International.
52

Purchase orders between us and Keary Global and Keary International will continue to be made on an arms-length basis, and subject to the review and approval of our nominating and corporate governance committee pursuant to the Company’s related party transactions policy (see “Certain Relationships and Related Party Transactions”).
Plutus Investment Holding Company
Another minority stockholder of the Company, Plutus Investment Holding Company, or Plutus, owns 25,000 shares of the Company’s common stock as of December 31, 2020, which Plutus acquired upon conversion of a convertible note during the third quarter of 2018. Plutus is also an equity holder of Global Wells.
Global Wells Investment Group (Variable Interest Entity)
In 2017, we made an investment of $1,251,000 along with Plutus and two unrelated parties in a newly formed entity, Global Wells. The purpose of this new entity was to own, construct, and manage a warehouse and manufacturing facility in Texas. We hold a 13.5% ownership interest and a 25% voting interest in the entity. Global Wells’ operating agreement may require its members to make additional contributions only upon the unanimous decision of the members or where the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000.
In March 2018, we entered into a 10-year commercial lease agreement with Global Wells. The lease agreement was subsequently amended for the lease term to begin on December 1, 2018 and requires us to make monthly lease payments of $196,000 to Global Wells, with six months of free rent from May 1, 2019 through October 31, 2019. In June 2020, the Company entered into another 10-year commercial lease agreement with Global Wells. The lease term commenced on July 1, 2020 and requires us to make monthly lease payments of $90,128 to Global Wells. Subsequent to entering into an operating lease agreement, and because we hold current and potential rights that give us the power to direct activities of Global Wells that significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, we were deemed to have a controlling financial interest in Global Wells and therefore, the primary beneficiary of the entity. As a result, Global Wells was consolidated into our financial statements for the period from March 23, 2018 under the risk and reward model of ASC Topic 810, Consolidation.
Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against our general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of our general assets, they represent claims against the specific assets of Global Wells, except for the Company’s guarantee of Global Wells’ term loan. The Company was a guarantor for Global Wells’ construction loan, which provided for advances up to $21,640,000 and expired in May 2019. In May 2019, Global Wells refinanced with a new lender which provides for a term loan of $21,580,000 and used the proceeds from the new term loan to pay off the construction loan. In June 2020, Global Wells entered into a new term loan which provides advances up to $16,540,000 to fund the purchase of the building in New Jersey. The loan is guaranteed by the Company. As of December 31, 2020, the total loan guaranteed by the Company related to Global Wells amounted to $37,491,000. The new term loan is also guaranteed by certain of the Company’s existing stockholders.
In July 2019, we entered into an Assignment and Assumption of Grants with Global Wells, whereby Global Wells assigned to us certain ongoing site development and tax based incentive grants (the “Incentive Grants”) effective as of July 1, 2018. These Incentive Grants were paid to us by the Rockwall Economic Development Corporation, a Texas non-profit corporation, or REDC, in connection with Global Wells’ purchase of the Texas facility.
53

Lollicup Franchising LLC
Effective May 20, 2020, Lollicup Franchising LLC, or Lollicup Franchising, purchased all of the membership interests held by SunTop, which held 60% of the membership interests in Lollicup Franchising, for cash consideration of $800,000. Subsequent to this transaction, Alan Yu and Marvin Cheng each held 50% of the membership interests in Lollicup Franchising.
Effective September 1, 2020, we purchased all of the membership interests in Lollicup Franchising from Alan Yu and Marvin Cheng for cash consideration of $900,000. Lollicup Franchising owns and operates four bubble tea cafes and also licenses its name to third party store owners and operators. We sell inventory to Lollicup Franchising and to the licensed third-party stores. In connection with the sales to third-party stores, we have an incentive program with Lollicup Franchising where a certain percentage of the sales to the third-party stores are paid to Lollicup Franchising. Prior to the purchase transaction, we had determined that we held a variable interest in Lollicup Franchising, however, we were not considered the primary beneficiary, as the primary beneficiary was determined to be another party. From January 1, 2020 to August 31, 2020, we incurred incentive program expenses of $0.08 million. For the year ended December 31, 2019, we incurred incentive program expenses of $0.16 million. For the period from January 1, 2020 through August 31, 2020 and for the year ended December 31, 2019, sales to Lollicup Franchising were not significant.
As a result of the purchase transaction, Lollicup Franchising is no longer a variable interest entity.
Effect on Inflation
The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to minimize the impact of increased costs by increasing prices for our products and diversifying our purchases from different suppliers, to the extent permitted by contracts and competition.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements and did not have any such arrangements for the years ended December 31, 2020 and 2019. Letters of credits outstanding as of the years ended December 31, 2020 and 2019 were $900,000 and $800,000, respectively.
Critical Accounting Estimates
The following critical accounting policies reflect the significant estimates and judgements used in the preparation of our consolidated financial statements. We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from those estimates. We believe estimates that are significant to our financial statements for the year ended December, 2020 and 2019 include stock-based compensation, allowance for doubtful accounts, reserve for slow-moving and obsolete inventory, deferred taxes, and estimated useful lives of property, plant and equipment. Management determined the useful lives of property and equipment based on the asset category and intended use of the assets purchased.
Inventory Reserve
The Company maintains reserves for excess and obsolete inventory considering various factors including historic usage, expected demand, anticipated sales price, and product obsolescence.
54

Allowance for Doubtful Accounts
The Company recognizes an allowance for bad debt on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt write-offs, current past due customers in the aging as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.
Stock-Based Compensation
Stock-based compensation expense related to employee stock options is accounted for in accordance with ASC 718, Compensation — Stock Compensation. This standard requires the Company to record compensation expense equal to the fair value of awards granted to employees and non-employees. The fair value of share-based payment awards is estimated on the grant-date using the Black-Scholes option pricing model. Key input assumptions used in the Black-Scholes option pricing model to estimate the grant date fair value of stock options include the fair value of the Company’s common stock, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate, and the Company’s expected annual dividend yield.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets, varying from three to 40 years or, when applicable, the life of the lease, whichever is shorter. Impairment charges, if any, are included in operating expenses in the accompanying statements of operations.
Income Taxes
We account for income taxes under Accounting Standard Codification (“ASC”) 740, Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carryforwards. We periodically review the recoverability of deferred tax assets recorded on our consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
55

Revenue Recognition
We recognize sales transactions at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when the title and risk of loss have passed, which is generally when the products are shipped from our manufacturing facility to the customers. The transaction price is the amount of consideration to which we expect to be entitled to in exchange for transferring goods to the customer. Revenue is recorded based on the total estimated transaction price, which includes fixed consideration and estimates of variable consideration. Variable consideration includes estimates of rebates and other sales incentives, cash discounts from prompt payment, consideration payable to customers for cooperative advertising and other program incentives, and sales returns. We estimate the variable considerations based on contract terms and historical experience of actual results using the expected value method.
Recent Accounting Pronouncements
The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, the Company have elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.
In February 2016, the FASB issued ASU 2016-02 (Topic 842), “Leases”. This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The FASB subsequently issued ASU 2018-11 (Topic 842), “Leases:Targeted Improvements” which amends ASC 842 in two important areas, including (i) allowing lessors to combine lease and associated nonlease components by class of underlying asset in contracts that meet certain criteria and, (ii) provides entities with an optional method for adopting the new leasing guidance by recognizing a cumulative-effect adjustment to the opening balance of the retained earnings, and not to restate the comparative periods presented at the adoption date. The effective date for ASC 842 for public business entities is annual reporting periods beginning after December 15, 2018. The effective date for all other entities is annual reporting periods beginning after December 15, 2021. The Company elects to adopt the new standard in annual reporting period beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which adds to U.S. GAAP an impairment model known as the current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for public business entities that are U.S. Securities and Exchange Commission (SEC) filers. For all other public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. The FASB subsequently issued ASU 2019-10 (Topic 326), “Financial Instruments-Credit Losses: Effective Dates” which amends the effective date for SEC filers that are eligible to be ‘smaller reporting companies’, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. For calendar-year end companies that are eligible for the deferral, the effective date is January 1, 2023. The Company elects to adopt the new standard in annual reporting period beginning after January 1, 2023, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.
56

In June 2018, the FASB issued ASU 2018-07 (Topic 718), “Compensation — Stock Compensation: Improvements to Non-employee Share based Payment Accounting”, which supersedes Subtopic 505-50 and expands the scope of ASC Topic 718 to include share-based payments issued to nonemployees for goods and services. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606. The FASB subsequently issued ASU 2019-08 (Topic 718), “Compensation — Stock Compensation” which clarifies guidance in Topic 718 on measurement and classification of share-based payments to customers. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company adopted this ASU as of January 1, 2020 and the adoption of this ASU did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820) Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement”. The guidance in this ASU eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. Certain provisions are applied prospectively while others are applied retrospectively. This ASU is effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted this ASU as of January 1, 2020 and adoption of this ASU did not have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The guidance in this ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public entities, the amendments in this Update are effective for fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendment is permitted. The Company elects to adopt the new standard in annual reporting period beginning after December 15, 2021, and is currently assessing the impact of this standard on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03 “Codification Improvements to Financial Instruments”. The guidance in this ASU clarifies the requirement for all entities to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s ASC. The guidance also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “Leases”, should be the contractual term used to measure expected credit losses under ASC 326, “Financial Instruments — Credit Losses”. This ASU is effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13.
57

BUSINESS
Our Company
We are a rapidly-growing specialty distributor and select manufacturer of environmentally-friendly disposable foodservice products and related items. We are a nimble supplier of a wide range of products for the foodservice industry, including food and take out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. Our Karat Earth® line provides environmentally friendly options to our customers, who are increasingly focused on sustainability. We offer customized solutions to our customers, including new product development, design, printing and logistics services. While a substantial majority of our revenue is generated from the distribution of our vendors’ products, we do manufacture products ourselves. Our goal is to be the single-source provider to our customers for all of their disposable foodservice products and related needs.
Our customers include a wide variety of national and regional distributors, restaurant chains, retail establishments and online customers. Our products are well suited to address our customers’ increased focus on take out and delivery capabilities. Our blue chip customer base includes well-known fast casual chains such as Applebee’s Neighborhood Grill + Bar, Chili’s Grill & Bar, Chipotle Mexican Grill, Corner Bakery Cafe and TGI Fridays, as well as fast food chains including The Coffee Bean & Tea Leaf, El Pollo Loco, In-N-Out Burger, Jack in The Box, Panda Express, Raising Cane’s Chicken Fingers and Torchy’s Tacos. As our capabilities, product offering and footprint expand, we are also beginning to supply products to regional and national supermarket chains, airlines, sports and entertainment venues and other non-restaurant customers. Our strong brand recognition in the foodservice industry, nimble operations and rapidly increasing size and scope of our distribution network provide us with a significant advantage that enables us to acquire new customers as well as increase our business with existing customers. For the years ended December 31, 2020 and December 31, 2019, no single customer represented more than 10% of our revenue.
We have grown net sales at a compound annual growth rate of 26.2% over the past nine years. This historical growth is largely due to our continued expansion into new end markets and product categories, as well as our growing position as a strategically important supply chain partner to our customers. For the year ended December 31, 2020 net sales of our traditional foodservice products grew 14% compared to year ended December 31, 2019. When the COVID-19 pandemic began to impact the U.S. last year, we were able to act quickly and source a significant amount of COVID-19 related products via our extensive global supplier relationships when competitors could not. As a result, we realized a collective 31.4% net sales increase across the business for the year ended December 31, 2020 compared to the year ended December 31, 2019. While COVID-19 related products are not a key area of our growth strategy, being able to offer these products at the outset of the pandemic demonstrated our nimble sourcing capabilities and our importance as a value added supply chain partner for many of our new and existing customers. Our performance through the pandemic further enhanced our reputation in the market.
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 our ability to source products quickly on a cost effective basis via a global supplier network, complemented by our manufacturing capabilities for select products, has established us as a differentiated provider of high-quality products relative to our competitors. We have recently made significant investments to establish and grow our online distribution channel www.lollicupstore.com. This channel, utilized primarily by small- and medium-sized businesses, served over 45,000 customers during the year ended December 31, 2020, with our online net sales growing by 65.7% compared to the year ended December 31, 2019. We primarily attribute this growth to increased sales of take out containers, bags and related products tied to amplified take out and delivery activity during 2020 as the U.S. adapted to restrictions imposed during the COVID-19 pandemic. We view this as part of a broader acceleration in the shift in consumer preferences towards food delivery and “to go” ordering, which we expect to continue in the foreseeable future. Our online channel offers the entire range of our products for online procurement, and we believe it will continue to remain key to our business going forward. Additionally, the online channel enables us to cross market other products to our customers that they may be purchasing from competitors.
58

We classify our customers into four categories: distributors, national chains, retail and online.

Distributors: national and regional distributors across the U.S. that purchase our products and provide a channel to offer our products to restaurants, offices, schools, government entities and other end users.

National chains: typically fast casual and fast food restaurants with locations across multiple states to which we supply specified products. We enter into sales contracts with a subset of our national chains customers, providing visibility into future revenue.

Retail: primarily regional bubble tea shops, boutique coffee shops and frozen yogurt shops that often purchase our specialty beverage ingredients and related items.

Online: small businesses, often with less than two locations, such as small restaurants, bubble tea shops, coffee shops, juice bars, smoothie shops and some customers who purchase for personal use.
The diversity of our customer types provides us with the ability to source products efficiently while maintaining a broad product offering, as we are able to sell many products across multiple customer segments. We expect a large proportion of our growth to come from national chains and our higher margin online customers.
For the year ended December 31, 2020, distribution accounted for 86% of net sales, while manufacturing accounted for 14% of net sales. We expect manufacturing will remain a relatively small portion of our sales mix going forward, but believe it provides us with the flexibility to provide customized products with short lead times to complement our global sourcing capabilities.
The disposable foodservice products industry is large and growing. Based on data from Coherent Market Insights, we estimate the global disposable foodservice products market to be approximately $64 billion. They estimate the market will grow to $78 billion by 2025, representing a 4.1% compound annual growth rate. Our industry is benefitting from shifting consumer preferences towards both food delivery and “to go” ordering, a trend that pre-dated the COVID-19 pandemic. As consumer preferences have evolved, foodservice establishments have realized that the at-home dining experience is closely linked to the quality of the packaging utilized. Rapidly growing demand for quality take out packaging solutions has also contributed to significant capacity constraints and product shortages within the industry.
During the COVID-19 pandemic, our ability to source products quickly and efficiently via our global supply chain has allowed us to serve new and existing customers. We were able to augment our broad product offering and source high-demand items such as face masks and shields, gloves and hand sanitizer to help build our reputation as a nimble and dependable supplier. We have increased our total customers from approximately 20,000 in 2019 to over 50,000 through December 31, 2020. In addition, we have been able to grow our wallet share with many customers, in particular our national chains, by supplying them a broader range of our foodservice disposables and related products. We believe that the current environment has accelerated the shift in consumer preferences towards food delivery and “to go” ordering, which we expect to continue in the foreseeable future.
For the year ended December 31, 2020, we sold approximately $38.1 million of COVID-19 related products, including $17 million and $9 million in the months of April and May, respectively. Since its peak in April 2020, COVID-19 related products have declined to under 2% of net sales in each of October 2020, November 2020 and December 2020.
We operate an approximately 500,000 square foot distribution center located in Texas, and an approximately 300,000 square foot distribution center in California. We have select manufacturing capabilities in both of these facilities as well. In addition, we operate three other distribution centers located in Washington, South Carolina, and New Jersey. Our New Jersey location is an approximately 108,000 square foot facility that recently opened in July 2020. We also intend to double the capacity of our current distribution center in South Carolina to better service customers in the Southeast region. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, Dallas, New York, Seattle and Atlanta metro areas.
59

We were founded in 2000 by Alan Yu and Marvin Cheng in San Gabriel, California as Lollicup USA Inc., a California corporation. Initially our business was focused on the establishment, franchising and licensing of bubble tea stores nationwide. Considered a pioneer for the bubble tea business in North America, our business grew rapidly from a single Lollicup Tea Café store in 2000 to more than 60 stores in 2006. In order to ensure consistency across our stores, we expanded our focus in 2004 to include the distribution of supplies for the bubble tea industry. In 2013, we sold the retail bubble tea business to certain of Lollicup’s shareholders. In 2014, as a result of a growing demand across the foodservice industry for our packaging goods, we began distributing and manufacturing products under our Karat brand in our California facility. Karat Packaging Inc. was incorporated in September 2018 as the holding company for Lollicup.
Competitive Strengths
We believe the following strengths fundamentally differentiate us from our competitors and drive our success:
One-stop shop with broadest product offering for the foodservice market and highly nimble sourcing capabilities
We offer customers a wide selection of single-use disposable foodservice products, with over 6,000 SKUs across a broad range of product categories. Key offerings include food and take out containers, bags, tableware, cups, lids, cutlery and straws primarily sourced through our diverse supplier base. Our strong relationships with our suppliers allow us to offer customers products that both preserve the highest possible food quality and meet the unique needs of their business. Furthermore, these supplier relationships allow us to offer custom-branded and custom-designed products with fast turnaround times and at competitive prices. Our Karat Earth® specialty line of environmentally-friendly products are made from renewable resources that are ethically sourced. Also, we have never used Styrofoam in any of our Karat products. The Karat Earth® line includes food and take out containers, bags, tableware, cups, lids, cutlery and straws. Customers can order products that are plain or custom printed to feature their brand. We intend to invest further in research and development for our Karat Earth® line to significantly expand our product offering to meet the needs of our customers and the evolving regulatory landscape.
We often are a key supply chain partner integral to the daily operations of our customers. Our ability to quickly provide premium products at competitive prices has typically allowed us to become a trusted supplier to our customers. Through an ongoing feedback loop, as customer demand varies and new needs emerge, we are able to act nimbly and qualify new suppliers quickly to augment our product offering. These capabilities made us a key partner to our customers as the COVID-19 pandemic began to unfold, as we were able to rapidly source both key foodservice and COVID-19 related products that our competitors could not.
Focus on distribution and advanced logistics network, complemented by flexible manufacturing capabilities
We consider our increasingly sophisticated distribution capabilities and related strength in logistics to be an important core competency and key differentiator from our competitors. As of March 2021, we owned a fleet of 26 trucks, 28 trailers, 10 bobtails and 21 chassis, and employed 29 drivers in our logistics division. This model has resulted in more efficient distribution to customers, reducing the need for reliance on third-party logistics providers such as FedEx and United Parcel Service. Our strategically located facilities give us a strong national footprint, which positions us well to serve regions across the U.S. in a timely fashion. We intend to continue to add to our capabilities via further distribution center openings and expansions, the purchase of additional vehicles, the hiring of additional drivers and additional logistics service offerings.
Our California and Texas facilities have a portion of operational capacity dedicated to manufacturing capabilities as well. For the year ended December 31, 2020, approximately 14% of our revenues were generated from the sale of products manufactured in-house. We view distribution as our primary focus and growth driver, but utilize our manufacturing capabilities as a complement to the base distribution business. This approach allows us to procure products at competitive prices by being able to compare procurement costs versus domestic manufacturing costs to help determine if it is more efficient to produce ourselves versus relying on suppliers.
60

Diverse and growing blue-chip customer base
We sell and distribute a broad portfolio of single-use disposable foodservice products to more than 50,000 customers nationwide including leading chain restaurants, distributors, convenience stores, retail establishments and online customers. Our blue-chip customers include leading fast casual chains such as Chili’s Grill & Bar and Chipotle Mexican Grill, as well as fast food chains El Pollo Loco and Panda Express, among others. We intend to further expand our customer base by selling our products to non-traditional foodservice customers, including regional and national supermarket chains, airlines, sports and entertainment venues and other non-restaurant customers. Plans for such expansion are already underway and beginning to yield positive results and a diversification of our customer base.
Significant financial momentum
We continue to achieve strong revenue growth, and have made significant strides in improving our margin profile. Our revenue grew at a compound annual growth rate of 30.1% from 2018 to 2020. Gross profit margins increased from 27.1% for the year ended December 31, 2019 to 30.2% for the year ended December 31, 2020. The margin increase can be attributed primarily to an increase in higher margin business-to-business and online sales, a shift in product mix to higher margin products (i.e. take out containers, films, foils and bags), reduced reliance on Chinese suppliers, mitigating the effect of tariffs. We are also steadily increasing the percentage of our sales to retail and online customers, which are our higher margin sales channels.
Experienced and growth oriented management team
We have assembled a strong executive management team to lead our company in its next phase of growth, supported by a deep bench of functional area leads across the organization. Our co-founders Alan Yu and Marvin Cheng have worked together over the last 20 years to aggressively drive growth across the business. Joanne Wang joined us in 2003 and was appointed Chief Operating Officer in 2018, helping to drive our pricing structure and sales training programs and overseeing general operational functions. Our Chief Financial Officer, Ann Sabahat, joined us in 2020, bringing years of public company experience and 22 years as a CPA to further bolster our finance and accounting functions.
Growth Strategy
Our goal is to become a leading single-source provider to a broad set of customers for all of their disposable foodservice products and related needs. We plan to continue to grow our business and increase our profitability through the following key initiatives:
Continue to build our online distribution channel
We believe there is an opportunity to significantly grow our higher margin online business to a more meaningful percent of revenue by continuing our investments in people, software and technology. By committing additional resources and upgrading our website and online advertising efforts, we expect to enhance our online experience to better support the needs of our customers. Our online retail channel is our highest margin channel of distribution. By offering our entire range of products online and bolstering our logistics capabilities, our customers can conveniently order products themselves on an ad hoc basis. While we expanded our online business from approximately 9% of sales for the year ended December 31, 2019 to 11% for the year ended December 31, 2020, we believe that offering free shipping could result in significant increases to our online revenue. We are evaluating introducing a subscription model similar to Amazon Prime to drive additional growth in this area.
Disrupt the traditional foodservice supply chain
The traditional foodservice supply chain consists of manufacturers selling through a multi-layer distribution network before the product reaches the end customer. As a full service distributor ourselves, we are able to provide products directly to the end user, eliminating the need for the traditional multi-layer supply chain. Environmental pressure on single-use disposable plastics is already causing a need for new
61

sources of supply. The Karat Earth® brand is a plant-based line of compostable products that meets the growing demand for renewable and ethically-sourced products. Our nimble operating model can serve customers more quickly than the traditional supply chain, and allows us to react rapidly to customers’ changes in demand.
Grow our base business with incremental revenue from existing customers
We intend to continue to increase penetration within our existing customer base. We believe there is an opportunity to offer additional product lines allowing us to become a true “one-stop” supplier. Our unique ability to serve customers as a reliable supplier with strong customer service at competitive prices has positioned us to be a frequent recipient of requests for proposals from our existing customers as they look for new sources of supply. For the year ended December 31, 2020, our national chains net sales grew 110% over the year ended December 31, 2019 as we grew our business with existing customers and added new customers. Offering a larger range of products, coupled with our ability to provide custom specifications and configurations to existing products, will allow us to better serve the needs of our customers and increase retention further. We have historically experienced consistently high customer retention rates as a result of our dedication to our customers and our hands-on approach. For the year ended December 31, 2020, our major customer retention rate, defined as year over year retention of our top 200 customers, was 99%. The net sales from our top 100 customers for the year ended December 31, 2020 exceeded net sales from the same customers for the year ended December 31, 2019.
Expand our customer base via new capabilities, geographies, products, services and end markets
We believe our addressable market continues to grow as emerging businesses like Grubhub, Uber Eats, DoorDash and others expand the need for foodservice disposable products. We plan to continue to add new experienced sales team members to broaden our reach and more efficiently provide customer service as we grow. We also intend to add to our distribution capabilities by expanding our existing distribution centers inSouth Carolina and Washington and by adding additional distribution centers, including in Hawaii. We see distribution facility expansion opportunities on the East Coast and in the Midwest, and anticipate hiring additional drivers and placing sales team members in those regions as well. We intend to double the capacity of our current distribution center in South Carolina to better serve customers in the Southeast region, and the recent opening of our New Jersey facility in July 2020 increased our presence and capabilities in the Northeast to better serve that region going forward. We plan to continuously evaluate and expand our product and service offerings to respond to customer demand and enter new end markets, including sports venues, supermarket chains, airlines and other non-traditional foodservice markets. We see substantial opportunity to further expand our customer base with many individual customers through our select food and drink offerings (i.e. bubble tea, coffee, sauces and syrups) available via our online channel. In addition, we see significant opportunity with supermarket chains to gain wallet share by providing fruit trays, vegetable containers, compostable meat trays and other related items, all of which are higher margin products than some of our other products.
Execute on operational initiatives to drive margin expansion
Significant investments in technology in recent years have bolstered our capabilities, including the installation of our own proprietary Warehouse Management System (WMS), which is expected to incrementally lower general and administrative expenses on a go-forward basis. In 2020, we were able to reduce selling, general and administrative expenses as a percent of net sales by 375 basis points versus 2019 as we made improvements in reducing excess production and labor costs from our manufacturing operations as well as reducing professional fees from outside sales representatives and brokers who historically have been less efficient than our growing internal sales force. In 2020, we expanded our in-house sales team by 18%, and now have 13 sales people spread across the country focused on driving sales of our higher margin product lines. We will continue to pursue similar cost and margin initiatives as needed.
Pursue strategic acquisitions
We have the opportunity to capitalize on our existing infrastructure and expertise by continuing to selectively pursue opportunistic acquisitions in order to expand the breadth of our distribution network, increase our operating efficiency and add additional products and capabilities. For example, in March 2021,
62

we completed the acquisition of a paper cup manufacturer based in Kapolei, Hawaii, and we intend to add an additional distribution facility and manufacture certain of our Karat Earth products, including paper straws, at that location. Although we do not have current plans to pursue a specific acquisition target, we are considering a group of potential targets, many of which we may explore in the next 12 months. We see certain acquisition opportunities on the East Coast and in the Midwest that we expect would enhance our national footprint. Additionally, the potential to acquire existing and new suppliers, particularly in the U.S., may further reduce our reliance on the Asian supply chain, creating more diversified sourcing options for our customers.
Our Industry
The disposable foodservice products industry is large and growing. According to Coherent Market Insights, the global market for disposable foodservice products is expected to be $64 billion in 2020. They estimate the market will grow to $78 billion by 2025, representing 4.1% compounded annual growth between 2020 and 2025. The primary categories of disposable foodservice products include food packaging, containers, tableware, cups, lids, cutlery, straws, napkins and bags. The large breadth and scope of products is reflected in the diverse nature of the industry participants, which range from large international conglomerates to smaller regional and niche companies. As a result, the industry is represented by a large number of companies and remains highly fragmented. Similarly, end customers of the disposable foodservice products industry are equally diverse in composition. The restaurant and foodservice categories that are the primary purchasers of our products include quick service restaurants (QSRs), fast casual, convenience stores, specialty drink establishments, casual dining and increasingly, premium casual and family dining restaurants. We estimate our growth to significantly outpace the industry average given our increase in sales of high demand items like take out containers and bags, our ability to continuously augment our product offering to address customer needs and our avoidance of product categories in decline, including Styrofoam and other materials in the process of being banned under various governmental regulations.
The industry is currently experiencing a period of both growth and transition as a result of several key factors that have emerged in recent years and have accelerated during the COVID-19 pandemic. These include the growing market for food delivery and take out dining; new governmental regulations primarily resulting from an increasingly environmentally-conscious public; and growing consolidation within the disposable foodservice products industry. We believe that we will benefit from a continuation of these market trends due to our diverse product offering, customer-centric approach, commitment to environmentally-friendly products and the flexibility of our business model.
Food delivery and take out
With the growing trend towards at home dining and mobility-oriented e-commerce, food delivery and take out dining are currently experiencing rapid growth. Data from the National Restaurant Association and Technomic shows that operators are increasingly acknowledging the importance of off-premises dining, with 78% of operators saying off-premises programs are a strategic priority. UBS Research estimates that the US online food delivery total addressable market was $14 billion in 2018 and will grow at a compound annual growth rate of 36.7% to $125 billion in 2025. This implies that US online food delivery is expected to grow from 1% of total food and beverage spend (ex-alcohol) in 2018 to 8% in 2025. Overall off-premises spend (includes delivery, drive-through and other take out/pickup) is expected to reach approximately 24% of total food and beverage spend by 2025 as well. This growth is expected to be driven in large part by e-commerce companies such as Grubhub, Uber Eats, DoorDash and others.
Positive population penetration and order frequency expectations further support the total addressable market growth estimates through 2025. UBS Research expects consumer penetration to reach 40% of the U.S. population aged 15+ by 2025 (109 million active users) on food delivery platforms, up from 16% penetration in 2019. Ordering frequency per individual per year is expected to increase from 19x in 2019 (or 1.6x per month) to 30x in 2025 (or 2.5x per month). In order to benefit from this growing trend, foodservice establishments are actively trying to provide a high quality at-home dining customer experience that is comparable to the in-restaurant experience. Central to this effort is food quality and overall presentation
63

where take out containers and related products play a critical role. Restaurants are seeking to develop high quality, customized disposables that not only provide the freshest and best possible food experience, but also provide a premium, branded at-home dining experience.
Governmental regulations
Environmental concerns regarding disposable products broadly have resulted in a number of significant changes that are specific to the foodservice industry, including regulations applicable to our customers. State and local governments have been actively enacting legislation that prohibits certain types of end-products as well as the use of certain raw materials used in manufacturing. In September 2018, the state of California effected legislation that severely restricts the use of plastic straws in full service restaurants beginning January 1, 2019. Similar legislation has been enacted by local governments and municipalities throughout the country. In addition to plastic straws, in July 2018, the city of Seattle banned the use of plastic utensils at all foodservice businesses. Additionally, numerous local legislative prohibitions on the use of single use Styrofoam products have been implemented. This includes New York City, where a ban on single use Styrofoam became effective in January 2019 and a state-wide ban on single-use plastic carryout bags became effective in March 2020. In addition, the State of New Jersey banned single-use plastic and paper bags, as well as disposable polystyrene food containers and cups, in its stores and food service establishments effective May 2022. As a result of these changes, which are expected to increase in scope and geography, foodservice establishments are looking to source alternative products made from biodegradable materials and other environmentally-friendly options. We believe we are well positioned to benefit from increasing government regulation and environmental concerns given our strong portfolio of sustainable products, including our Karat Earth® line.
Additionally, evolving foreign trade policy by the U.S. federal government has resulted in the imposition of tariffs on a number of imported foodservice disposable products, including those imported from China. To avoid the resulting higher product costs, many domestic purchasers may seek to establish alternative distribution channels and source products from U.S. based manufacturers or from other, non-tariffed countries.
Industry consolidation
Over the last several years, there has been significant consolidation within the industry, both in distribution and manufacturing. This is due in part to larger and more established companies seeking to generate growth and maintain profitability through the expansion of their product offering. As is common in the disposable foodservice products industry, larger companies typically broaden their product portfolio through the acquisition of established companies, rather than building out new product categories organically. As consolidation occurs, existing customers often find themselves facing challenges of changing product availability, discontinuations, increasing prices, support staff turnover and other potential transition-related challenges. These challenges can be highly disruptive to a customer’s business and as a result, the customers often seek out other stable and more reliable channels for product sourcing.
Use of Proceeds
We intend to use the net proceeds of this offering for the repayment of approximately $30 million of our existing indebtedness as set forth in detail in “Use of Proceeds,” as well as other general corporate purposes, including possible facility expansion and acquisitions. This expected use of proceeds represents our intentions based on current plans and business conditions.
From time to time, we engage in preliminary discussions and negotiations with various businesses in order to explore the possibility of an acquisition or investment. However, as of the date of this prospectus, we have not entered into any agreements or arrangements which would make an acquisition or investment probable under Rule 3-05(a) of Regulation S-X.
Our Products
We offer a wide selection of high-quality, cost effective food packaging products and disposables. We work in close collaboration with our customers to develop products to meet the needs unique to their individual businesses. This includes developing containers and food storage items that are both visually
64

appealing and that deliver the best possible food quality and freshness. Additionally, we are able to custom print or label many of our products, to help our customers brand the at home dining experience of their customers. We supply a wide range of products for the foodservice industry, including:

food and take out containers;

bags;

tableware;

cups;

lids,

cutlery,

straws,

specialty beverage ingredients;

equipment; and

gloves.
Karat Earth
Karat Earth ® is our specialty line of environmentally-friendly products that are made from renewable resources that are ethically sourced. We have never used Styrofoam in any of our Karat products. The Karat Earth ® line includes food containers, tableware, cups, lids, utensils and straws. Customers can order products that are plain or custom printed to feature their brand.
Our Karat Earth ® products are Cedar Grove Certified and Biodegradable Products Institute (BPI) Certified Compostable. Karat Earth ® plastic products are made from polylactic acid (PLA) sourced from NatureWorks Ingeo PLA. Ingeo PLA is a non-petroleum based, biopolymer that is manufactured from plant sugars. Due to its material composition, Ingeo PLA is non-volatile, non-toxic and odorless if incinerated.
We intend to invest in research and development for our Karat Earth ® line to significantly expand our product offering to meet the needs of our customers and the evolving regulatory landscape.
Our Facilities
Our headquarters, manufacturing facilities and distribution centers are located near our customers and their restaurant and foodservice locations. Strategically, our facilities are located in proximity to major population centers, including the Los Angeles, Dallas, New York, Seattle and Atlanta metro areas. This allows for quick fulfillment and delivery service for our customers in these higher population areas.
California Headquarters and Facility
We lease our principal executive and administrative offices located at 6185 Kimball Avenue, Chino, CA 91708.
At the same location, we operate an approximately 300,000 square foot manufacturing, warehouse storage and distribution facility. The manufacturing plant operates 24 hours a day, seven days a week and features state of the art machinery including a Reifenhauser extruder and ILLIG thermoforming machines. The facility has four custom printing machines, five thermoforming machines, eight paper cup forming machines, one paper slitting machine and three die cutting machines.
Texas Facility
Due to manufacturing capacity constraints, we recently opened an approximately 500,000 square foot manufacturing, warehouse storage and distribution facility in Texas. We lease the facility from our variable interest entity, as further described in “Certain Relationships and Related Party Transactions” on page 79.
65

The facility was fully operational as of the second fiscal quarter of 2020, and not only significantly increases our manufacturing capabilities but also strengthens our distribution and reach. In addition, the Texas facility features state of the art machinery including two Reifenhauser extruders and ILLIG thermoforming machines, sixteen paper cup forming machines, one paper slitting machine, and a custom printing machine.
Additional Distribution Centers
We also operate an approximately 63,000 square foot warehouse storage and distribution facility in South Carolina, an approximately 46,000 square foot warehouse storage and distribution facility in Washington and an approximately 108,000 square foot warehouse storage and distribution center in New Jersey.
Our Distribution Network
We sell and distribute our products to approximately 50,000 customers across the United States. We partner with foodservice establishments of every size, with our customers ranging from large multi-national restaurant chains to regional and smaller-chain establishments. Our customers benefit from our broad product offering which allows them to streamline their procurement process by purchasing all of their disposable goods from a single-source provider. We also sell our products directly to leading restaurant supply companies that distribute products to a wide range of food-service establishments internationally. Our growing salesforce works closely with our customers to tailor the optimal mix of products to meet the unique needs of their businesses. We intend to continue to hire additional sales personnel nationally to expand our sales reach, geographic footprint and increase our penetration into the different market segments of the foodservice industry.
We work closely with our customers to develop an optimal logistics and supply chain solution customized to their businesses. We have built a flexible distribution system which allows our customers to order and receive products on a timely basis based on the real-time needs of their businesses. In addition to regularly scheduled delivery intervals, our customers can order and schedule delivery of products via telephone, facsimile, email or through our online platform at www.lollicupstore.com. Our regional warehouses and distribution centers allow us to deliver products on a timely basis to key population centers across the United States. Depending on the needs of our customers, final product delivery to their stores or affiliated distribution centers occurs via courier package delivery or through our company-employed delivery drivers.
Online Platform
In 2004, we established our online platform at www.lollicupstore.com, to provide an additional channel for our customers to purchase our products. We have recently made significant investments to establish and grow our online distribution channel. This channel, utilized primarily by small- and medium-sized businesses, served over 45,000 customers during the year ended December 31, 2020, growing net sales by 65.7% compared to the year ended December 31, 2019, We primarily attribute this growth to increased sales of take out containers, bags and related products tied to amplified take out and delivery activity during 2020 as the U.S. adapted to restrictions imposed during the COVID-19 pandemic. We view this as part of a broader acceleration in the shift in consumer preferences towards food delivery and “to go” ordering, which we expect to continue in the foreseeable future. Our online channel offers the entire range of our products for online procurement, and we believe it will continue to remain key to our business going forward. Additionally, the online channel enables us to cross market other products to our customers that they may be purchasing from competitors. We are evaluating introducing a subscription model similar to Amazon Prime to drive additional growth in this area.
66

Our Corporate Structure
Set forth below is an organizational chart which identifies the Company and its consolidated entities:
[MISSING IMAGE: tm2029131d8-fc_ourcrp4c.jpg]
Please see “Principal Stockholders” for the beneficial ownership of our common stock before and after this offering for each 5% or more stockholder, executive officer and director of the Company. Please see “Certain Relationships and Related Party Transactions” on page 79 for a description of the agreements between our variable interest entity and us.
Intellectual Property
Our intellectual property portfolio includes 16 active trademarks, including Lollicup, Karat, Karat Earth ® and Strawless, and five registered copyrights.
Employees
As of March 1, 2021, we had 620 full-time employees and 645 total employees. None of our employees are currently covered by a collective bargaining agreement. We have no labor-related work stoppages and believe our relations with our employees are good.
We are committed to supporting employees’ professional development as well as providing a safe, inclusive workplace. Employee safety remains our top priority. We develop and administer company-wide policies to ensure the safety of each team member and compliance with Occupational Safety and Health Administration (OSHA) standards. This includes periodic safety training and assessments as well as annual safety audits.
We believes a diverse workforce fosters innovation and cultivates an environment filled with unique perspectives. As a result, diversity and inclusion help us meet the needs of customers and consumers. Respect for human rights is fundamental to our business and its commitment to ethical business conduct.
In addition, we measure employee engagement on an ongoing basis, as we believe an engaged workforce leads to a more innovative, productive and profitable company. We obtain feedback from our employees to implement programs and processes designed to keep our employees connected with the Company.
67

Recent Developments
On March 1, 2021, we completed the acquisition of the assets of Pacific Cup Inc., a paper cup manufacturer based in Kapolei, Hawaii, for an aggregate purchase price of $1.0 million. During the first half of 2021, we intend to add an additional distribution facility and manufacture certain of our Karat Earth products, including paper straws, at the Pacific Cup location in Hawaii.
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.
Corporate Information
We were founded in 2000 by Alan Yu and Marvin Cheng in San Gabriel, California and subsequently incorporated as Lollicup USA Inc., a California corporation, or Lollicup. In September 2018, we incorporated Karat Packaging Inc. in Delaware, and the Company, Lollicup, and Messrs. Yu and Cheng and the other shareholders of Lollicup (together, the “Lollicup Shareholders”) entered into a share exchange agreement and plan of reorganization whereby the Lollicup Shareholders exchanged their shares of common stock in Lollicup for an equal number of shares of common stock of the Company, resulting in Lollicup becoming a wholly-owned subsidiary of the Company. Our principal executive and administrative offices are located at 6185 Kimball Avenue, Chino, CA 91708, and our telephone number is (626) 965-8882. Our website address is www.karatpackaging.com. For certain historical information about us, see Note 1 to the Consolidated Financial Statements.
We are a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and have elected to take advantage of certain of the scaled disclosure available for smaller reporting companies.
68

MANAGEMENT
Our Board of Directors and Executive Officers
Executive Officers and Directors
Below is a list of the names, ages, positions and a brief summary of the business experience, as of March   , 2021, of individuals who serve as our executive officers and directors.
Name
Age
Position
Executive Officers
Alan Yu
50
Chief Executive Officer and Chairman of the Board of Directors
Ann T. Sabahat
49
Chief Financial Officer
Marvin Cheng
51
Vice President – Manufacturing, Secretary and Director
Joanne Wang
48
Chief Operating Officer
Independent Directors
Paul Y. Chen
55
Director
Eric Chen
52
Director
Eve Yen
64
Director
Alan Yu co-founded the Company in 2000 and is our Chairman and Chief Executive Officer. Mr. Yu attended the University of California, Los Angeles. We believe that Mr. Yu is qualified to serve on our board of directors due to the perspective and experience he brings as our co-founder, Chairman and Chief Executive Officer, as well as one of our two largest stockholders.
Ann T. Sabahat joined the Company as our Chief Financial Officer in September 2020. Ms. Sabahat is a Certified Public Accountant and has over 25 years of financial management experience. Prior to serving as our CFO, Ms. Sabahat served as financial advisor and Corporate Controller for Western Dental Services, a dental services provider, from 2019 to August 2020, and as Chief Financial Officer for Dental Health Services, a dental insurance carrier, from 2015 to 2018. Ms. Sabahat’s experience also includes roles at Powerdyne, a renewable resource energy company, and Shelly Automotive Group, a high-line automotive group. She has also served as a director of Cardiogenesis (Nasdaq: CGCP) as well as being a member of its audit and corporate governance committees until its sale to Cryolife in 2011. Ms. Sabahat holds a B.S. in Accounting and Finance from the California State University, Fullerton and an M.S. in Taxation from Golden Gate University.
Marvin Cheng co-founded the Company in 2000 and is our Vice President – Manufacturing, Secretary and Director. Mr. Cheng holds a B.S. in Business from California State University, Los Angeles. We believe that Mr. Cheng is qualified to serve on our board of directors due to the perspective and experience he brings as our co-founder and Vice President – Manufacturing and Secretary, as well as one of our two largest stockholders.
Joanne Wang joined the Company in 2003 and was appointed our Chief Operating Officer in December 2018. As Chief Operating Officer, Ms. Wang helps establish our pricing structure and sales training guidance. Before joining the Company, Ms. Wang started her career in telecommunications, and previously served as Vice President of Sales & Marketing at both Premiere Telemedia, Inc. and Pincity.com. Ms. Wang holds a B.A. in graphic design and visual communications from California State University, Los Angeles.
Paul Y. Chen joined our board of directors in January 2019 and serves as our lead independent director. Mr. Chen is a practicing CPA and is the managing partner and CEO of Chen & Fan Accountancy Corporation, specializing in financial audits, advisory, and income tax compliance for U.S. business entities, many of which are affiliated with multi-national groups with core operations in the Pacific Rim. Mr. Chen has over 30 years of experience in public accounting, serving industries including distribution, property management, banking, manufacturing, biotech, and R&D services. Prior to joining Chen & Fan Accountancy Corporation in 1999, Mr. Chen worked as an auditor and tax manager at Deloitte. He is an
69

active participant in a number of community organizations and currently serves on the board of a number of community Chambers of Commerce and nonprofit organizations throughout Southern California, including on the audit and finance committees of Genesis LA Economic Growth Corporation, a Community Development Financial Institution. Mr. Chen received his MBA from the University of Southern California and B.S. from the University of California, Los Angeles. We believe that Mr. Chen is qualified to serve as a member of our board of directors based on his significant experience in public company accounting.
Eric Chen joined our board of directors in January 2019. Mr. Chen is the founder of the Law Offices of Eric K. Chen, which he founded in 1995. Mr. Chen’s professional experience centers on personal injury law, business litigation, and international corporate law. Mr. Chen assists U.S. and Chinese companies in finding joint ventures and mergers and acquisition partnerships. In addition, Mr. Chen has served as legal counsel for the California Acupuncture Medicine Association (CAMA), California Association of Acupuncture and Oriental Medicine (CAAOM), and Council of Acupuncture and Oriental Medicine Association (CAOMA). Mr. Chen is the co-founder and vice president of the Nevada Chinese Professionals and Business Association. Mr. Chen holds a J.D. from the Southwestern University School of Law. We believe that Mr. Chen is qualified to serve as a member of our board of directors based on his experience as a commercial litigator familiar with international transactions.
Eve Yen joined our board of directors in January 2019. Ms. Yen is the founder, co-owner and CEO of Diamond Wipes International, Inc., a manufacturer of wet wipes based in Chino, California, which she founded in 2000. Ms. Yen serves on the board of the 100 Mile Club®, a grass-roots non-profit organization dedicated to helping children and families to achieve a healthy lifestyle through physical activity nationwide. Ms. Yen also served on Asian Pacific Community Fund (APCF)’s board of director, devoted to supporting small organizations and nurturing future leaders from minority communities. Ms. Yen holds an M.S. in Management Information Systems from New York Institute of Technology. We believe that Ms. Yen is qualified to serve as a member of our board of directors based on her perspective and experience as CEO and founder of a California-based manufacturing company.
Board Composition and Risk Oversight
Our board of directors is currently composed of five members. Three of our directors are independent within the meaning of the independent director guidelines of The Nasdaq Global Market. Our certificate of incorporation and bylaws provide that the number of our directors shall be at least one and will be fixed from time to time by resolution of our board of directors. There are no family relationships among any of our directors or executive officers.
We intend to expand the size of our board of directors from five members to seven by adding two additional independent directors. While we have not made a formal determination, we are currently evaluating director candidates who would provide additional public company and industry experience.
Our board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. Our board of directors is responsible for general oversight of risks and regular review of information regarding our risks, including credit risks, liquidity risks and operational risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. Our audit committee is responsible for overseeing the management of our risks relating to accounting matters and financial reporting. Our nominating and corporate governance committee is responsible for overseeing the management of our risks associated with the independence of our board of directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, our entire board of directors is regularly informed through discussions from committee members about such risks. Our board of directors believes its administration of its risk oversight function has not affected our board of directors’ leadership structure.
Director Independence
We have applied to list our common stock on The Nasdaq Global Market under the symbol “KRT.” Under the rules of The Nasdaq Global Market, independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition, the
70

rules of The Nasdaq Global Market require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. Under the rules of The Nasdaq Global Market, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
To be considered independent for purposes of Rule 10A-3, a member of an audit comm