10q10k10q10k.net
Karat Packaging Inc.

Karat Packaging Inc.KRTEarnings & Financial Report

Nasdaq · Materials · Plastics Products, NEC

Karat Packaging Inc. is a specialty manufacturer and distributor of disposable foodservice packaging products. Its offerings include paper and plastic cups, food containers, cutlery, lids, and custom branded solutions, serving restaurant chains, cafes, catering operators, and retail foodservice clients primarily across North America.

What changed in Karat Packaging Inc.'s 10-K — 2022 vs 2023

Top changes in Karat Packaging Inc.'s 2023 10-K

298 paragraphs added · 277 removed · 222 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

74 edited+32 added−25 removed57 unchanged
They are easily wind-blown and ultimately end up in parks, forests, beaches, oceans and rivers. In 2008, we established Karat Earth® as an eco-friendly line of foodservice products, including food and take out containers, bags, tableware, cups, lids, cutlery and straws. Our Karat Earth® products are Cedar Grove Certified (CGC) and Biodegradable Products Institute (BPI) certified compostable.
They are easily wind-blown and ultimately end up in parks, forests, beaches, oceans and rivers. 10 In 2008, we established Karat Earth® as an eco-friendly line of foodservice products, including food and take out containers, bags, tableware, cups, lids, cutlery and straws. Our Karat Earth® products are Cedar Grove Certified (CGC) and Biodegradable Products Institute (BPI) certified compostable.
Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position. A liability for environmental remediation and other environmental costs is accrued when we consider it probable that a liability has been incurred and the amount of loss can be reasonably estimated.
Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position. 11 A liability for environmental remediation and other environmental costs is accrued when we consider it probable that a liability has been incurred and the amount of loss can be reasonably estimated.
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. Data from the National Restaurant Association and Technomic shows that operators are increasingly acknowledging the importance of off-premises dining and making it a strategic priority.
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. Data from the National Restaurant Association shows that operators are increasingly acknowledging the importance of off-premises dining and making it a strategic priority.
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.
Considered a pioneer for the bubble tea business in North America, our business grew rapidly from a single Lollicup store in 2000 to more than 60 stores in 2006. In order to ensure consistency across our stores, we expanded our focus in 2004 to include the distribution of supplies for the bubble tea industry.
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.
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. 7 Our Industry The disposable foodservice products industry is large and growing.
We enter into sales contracts with a subset of our national and regional 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.
We enter into sales contracts with a subset of our national and regional chains customers, providing some visibility into future revenue. • Retail : primarily regional bubble tea shops, boutique coffee shops and frozen yogurt shops that often purchase our specialty beverage ingredients and related items. • E-commerce/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.
As our capabilities, product offering and footprint expand, we are also beginning to supply products to national and regional supermarket chains, airlines, sports and entertainment venues and other non-restaurant customers.
As our capabilities, product offering and footprint expand, we are also beginning to supply products to national and regional supermarket chains, airlines, entertainment venues and other non-restaurant customers.
We have generated significant growth through the continued expansion of our customer base and increasing penetration into existing customers across all channels. In addition, we have been able to grow our wallet share with many customers, in particular our national and regional chains, by supplying them a broader range of our foodservice disposables and related products.
With our customer-centric approach, we have generated significant growth through the continued expansion of our customer base and increasing penetration into existing customers across all channels. In addition, we have been able to grow our wallet share with many customers, in particular our national and regional chains, by supplying them a broader range of our foodservice disposables and related products.
As a business founded by representatives from a minority group in the United States, diversity and inclusion is engrained in our corporate history. We believe that a diverse workforce is essential to its long-term success and strives to foster a diverse, equitable, and inclusive culture where all voices are heard, valued, and included.
As a business founded by representatives from a minority group in the United States, diversity and inclusion is engrained in our corporate history. We believe that a diverse workforce is essential to its long-term success and strive to foster a diverse, equitable, and inclusive culture where all voices are heard, valued, and included.
In 2013, we sold the retail bubble tea business to certain of 12 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.
In 2013, we sold the retail bubble tea business to certain of 13 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.
Intellectual Property Our intellectual property portfolio includes 15 active trademarks, including Lollicup, Karat, Karat Earth® and Total Clean, and five registered copyrights. Environmental, Social and Governance (ESG) At Karat Packaging, we are committed to pursuing initiatives that positively impact our products, our people, our customers and our planet.
Intellectual Property Our intellectual property portfolio includes 12 active trademarks, including Lollicup, Karat, Karat Earth® and Total Clean, and five registered copyrights. Environmental, Social and Governance (ESG) At Karat Packaging, we are committed to pursuing initiatives that positively impact our products, our people, our customers and our planet.
We continue to invest in research and development for our Karat Earth® line to expand our product offering to meet the needs of our customers and the evolving regulatory landscape. Our Distribution and Logistics Network We sell and distribute our products to customers across the United States.
We continue to invest in research and development for our Karat Earth® line to expand our product offering to meet the needs of our customers and the evolving regulatory landscape. Our Distribution and Logistics Network We sell and distribute our products to customers across the United States through our growing distribution network.
We classify our customers into four categories: distributors, national and regional 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 and regional chains : typically fast casual and fast food restaurants with locations across multiple states to which we supply specified products.
We classify our customers into four categories: distributors, national and regional chains, retail and e-commerce/online. • Distributors : national and regional distributors across the U.S. that purchase our products and provide a channel to offer our products to restaurants, offices, schools, government entities and other end users. 4 • National and regional chains : typically fast casual and fast food restaurants with locations across multiple states to which we supply specified products.
In addition to regularly scheduled delivery intervals, our customers can order and schedule delivery of products via telephone, facsimile, email or through our online e-commerce platform and our storefronts on Amazon.com and Walmart.com. Our regional warehouses and distribution centers allow us to deliver products on a timely basis to key population centers across the United States.
In addition to regularly scheduled delivery intervals, our customers can order and schedule delivery of products via telephone, facsimile, email or through our online e-commerce platform and our online storefronts on Amazon, Walmart, eBay, and TikTok. Our regional warehouses and distribution centers allow us to deliver products on a timely basis to key population centers across the United States.
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 and takeout and at-home dining remain a constant even as the pandemic started to recede.
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, and takeout and at-home dining remain a constant even after the pandemic.
Our California, Texas and Hawaii facilities have a portion of operational capacity dedicated to manufacturing capabilities. For the year ended December 31, 2022, approximately 26% of our revenues were generated from the sale of products manufactured in-house. We view distribution as our primary focus and growth driver while utilizing our manufacturing capabilities as a complement to the base distribution business.
Our California, Texas and Hawaii facilities have a portion of operational capacity dedicated to manufacturing capabilities. For the year ended December 31, 2023, approximately 20% of our revenues were generated from the sale of products manufactured in-house. We view distribution as our primary focus and growth driver while utilizing our manufacturing capabilities as a complement to the base distribution business.
We have significantly grown our inventory sourcing network from only a handful of vendors initially to over 70 active vendors by the end of 2022. Key offerings include food and take-out containers, bags, tableware, cups, lids, cutlery and straws primarily sourced through our diverse supplier base.
We have significantly grown our inventory sourcing network from only a handful of vendors initially to over 133 active vendors by the end of 2023. Key offerings include food and take-out containers, bags, tableware, cups, lids, cutlery and straws primarily sourced through our diverse supplier base.
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 5 customer retention rates as a result of our dedication to our customers and our hands-on approach.
Offering a larger range of products, coupled with our ability to provide custom specifications and configurations to existing products, allows 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.
Additionally, the SEC maintains a website located at www.sec.gov that contains the information we file or furnish electronically with the SEC. 13
Additionally, the SEC maintains a website located at www.sec.gov that contains the information we file or furnish electronically with the SEC. 14
In addition to product sales, we also generate revenue from logistics services which is the transportation and delivery of shipping containers from ports to customers, primarily to retail customers.
In addition to product sales, we also generate a small amount of revenue from logistics services which is the transportation and delivery of shipping containers from ports to customers, primarily to retail customers.
For the years ended December 31, 2022 and December 31, 2021, no single customer represented more than 10% of our revenue. We are an omni-channel provider and have recently made significant investments in e-commerce, technology, supply chain, distribution center layout remodels, and customer initiatives, such as online ordering and same day pickup.
For the years ended December 31, 2023 and December 31, 2022, no single customer represented more than 10% of our revenue. We are an omni-channel provider and have recently made significant investments in e-commerce, technology, supply chain, distribution network, and customer initiatives, such as online ordering and same day pickup.
We recognize the importance of environmental, social and governance ("ESG") issues for all of our stakeholders and we are committed to incorporating ESG principles into our business strategies and organizational culture. By undertaking such measures, we hope to make our workforce more inclusive, our business more sustainable, and our communities more engaged.
We recognize the importance of environmental, social and governance ("ESG") issues for all of our stakeholders and we are committed to incorporating ESG principles into our business strategies and organizational culture. By undertaking such measures, we are working towards making our workforce more inclusive, our business more sustainable, and our communities more engaged.
The reason behind such a decision was that Styrofoam products are non-biodegradable and therefore take up permanent space in landfills resulting in a constant leach of harmful chemicals into the environment. Styrofoam products are also very difficult to clean up as they often escape waste collection systems due to their low density.
Styrofoam products are non-biodegradable and therefore take up permanent space in landfills resulting in a constant leach of harmful chemicals into the environment. Styrofoam products are also very difficult to clean up as they often escape waste collection systems due to their low density.
For the year ended December 31, 2022, our major customer retention rate, defined as year over year retention of our top 100 customers, was 100%.
For the year ended December 31, 2023, our major customer retention rate, defined as year over year retention of our top 100 customers, was 99%.
Competitive Strengths We believe the following strengths fundamentally differentiate us from our competitors and drive our success: One-stop shop with a diverse product offering for the foodservice market and highly nimble sourcing capabilities We leverage our diversified global supplier network and offer customers a wide selection of single-use disposable foodservice products, with over 8,600 SKUs across a broad range of product categories.
Competitive Strengths We believe the following strengths fundamentally differentiate us from our competitors and drive our success: One-stop shop with a diverse product offering for the foodservice market and highly nimble sourcing capabilities We leverage our diversified global supplier network and offer customers a wide selection of single-use disposable foodservice products, with over 6,400 active SKUs (defined as active products available for purchase) across a broad range of product categories.
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 3 across multiple customer segments. We expect a large proportion of our growth to come from national and regional chains and our higher margin online customers.
The diversity of our customer types allows us to maintain a broad product offering while providing us with the ability to source products efficiently, as we are able to sell many products across multiple customer segments. We expect a large proportion of our future growth to come from national and regional chains as well as our higher margin online customers.
These capabilities make us a key partner to our customers. 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.
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.
This is evidenced by the fact that we promoted 112 and 114 employees during the years ended December 31, 2022, and 2021, respectively. Other Information As of December 31, 2022, we had employed approximately 805 employees, out of which 781 were full-time employees. None of our employees are currently covered by a collective bargaining agreement.
This is evidenced by the fact that we promoted 166 and 112 employees during the years ended December 31, 2023, and 2022, respectively. Other Information As of December 31, 2023, we had employed approximately 806 employees, out of which 778 were full-time employees. None of our employees are currently covered by a collective bargaining agreement.
Individual cities such as Los Angeles, San Diego and Honolulu have also passed their own complimentary ordinances to limit single-use plastic products. As more governments enact regulations to prevent and reduce waste that is harmful to the environment, and more consumers are actively taking steps towards being more sustainable, the demand for eco-friendly disposable products is on the rise.
A variety of individual cities have also passed their own complimentary ordinances to limit single-use plastic products. As more governments enact regulations to prevent and reduce waste that is harmful to the environment, and more consumers are actively taking steps towards being more sustainable, the demand for eco-friendly disposable products is on the rise.
As of December 31, 2022, we have the following gender and ethnicity breakout for our employees, C-suite executives, and board of directors members: 11 Full-Time employees C-Suite Executives Board of Directors Total count 781 3 5 Gender Male 64% 33% 60% Female 35% 67% 40% Non-binary/Did not self-identify 1% — — Ethnicity Hispanic 42% — — Asian 18% 100% 100% White 17% — — Black 16% — — Other/Did not self-identify 7% — — Compensation and Benefits Consistent with our core values, we take care of our people by offering competitive compensation and comprehensive benefits programs.
As of December 31, 2023, we have the following gender and ethnicity breakout for our employees, C-suite executives, and Board of Directors members: 12 Full-Time employees C-Suite Executives Board of Directors Total count 778 3 5 Gender Male 66% 67% 60% Female 33% 33% 40% Non-binary/Did not self-identify 1% — — Ethnicity Hispanic 45% — — Asian 16% 67% 100% White 16% 33% — Black 18% — — Other/Did not self-identify 5% — — Compensation and Benefits Consistent with our core values, we take care of our people by offering competitive compensation and comprehensive benefits programs.
We 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 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, specifically the South, Midwest, and Pacific Northwest regions of the U.S. We work closely with our customers to develop an optimal logistics and supply chain solution customized to their businesses.
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 9 plant sugars. Due to its material composition, Ingeo PLA is non-volatile, non-toxic and odorless if incinerated.
Our Karat Earth® products are Cedar Grove Certified (CGC) 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 work in close collaboration with our customers to develop products to meet the needs unique to their individual businesses. This includes developing containers and food storage items that are both visually appealing and that deliver the best possible food quality and freshness.
Our Products We offer a wide selection of high-quality, cost effective food packaging products and disposables. 8 We work in close collaboration with our customers to develop products to meet the needs unique to their individual businesses. This includes developing containers and food storage items that are both visually appealing and that deliver the best possible food quality and freshness.
Even in products that do require the use of plastic, we ensure that the resin we source is both BPA (or bisphenol A) and PFA (or perfluoroalkyl and polyfluoroalkyl) free. These substances are known for their extreme persistence in the environment upon discharge. Our warehouse departments also have certain sustainability practices implemented.
Even in products that do require the use of plastic, we ensure that the resin we source is both BPA (or bisphenol A) and PFA (or perfluoroalkyl and polyfluoroalkyl) free. These substances are known for their extreme persistence in the environment upon discharge. Our commitment to sustainability is also demonstrated in our focus on recycling and reusing.
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.
We intend to further expand our customer base by selling our products to non-traditional foodservice customers, including regional and national supermarket chains, airlines, entertainment venues and other non-restaurant customers. Progress towards such expansion and diversification of our customer base is already underway.
We believe that the current industry environment and regulatory landscape has accelerated the shift in consumer preferences towards food delivery, take-out ordering and eco-friendly sustainable products, which we expect to continue in the foreseeable future. We currently operate manufacturing facilities and distribution and fulfillment centers in Chino, California, Rockwall, Texas and Kapolei, Hawaii.
We believe that the current industry environment and regulatory landscape has accelerated the shift in consumer preferences towards food delivery, take-out ordering and eco-friendly sustainable products, which we expect to continue in the foreseeable future.
We are amongst the leading companies in the supply of eco-friendly disposal foodservice products in the United States. Since our inception, we have made the conscious choice to never use Styrofoam in any of our products.
Leader in eco-friendly products to address sustainability Our commitment to pursuing environmental sustainability is exhibited in every aspect of our business. We believe we are amongst the leading companies in the supply of eco-friendly disposal foodservice products in the United States. Since our inception, we have made the conscious choice to never use Styrofoam in any of our products.
This approach allows us to procure products at competitive prices by being able to compare procurement costs versus domestic manufacturing costs to help determine whether it is more efficient to produce ourselves versus relying on suppliers.
This approach allows us to procure products at competitive prices by being able to compare procurement costs versus domestic manufacturing costs to help determine the more efficient option.
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.
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.
We have consistently grown eco-friendly products as a percentage of our total product sales, and continued to invest in research and development to expand our eco-friendly product line to meet the needs of our customers and the evolving regulatory landscape.
We continue to invest in research and development to expand our offering of sustainable products to meet the needs of our customers and the evolving regulatory landscape. These efforts have allowed us to consistently grow our sales from eco-friendly products as a percentage of our total sales.
In order to better position ourselves for this change in the industry landscape, we have significantly expanded our eco-friendly product offerings. As of December 31, 2022, we have over 400 SKUs of eco-friendly products that our customers can choose from.
In order to better position ourselves for this change in the industry landscape, we have significantly expanded our sourcing of eco-friendly products and increased the number of related product offerings. As of December 31, 2023, we had over 500 SKUs of eco-friendly products that our customers could choose from, up from approximately 400 as of the prior year end.
In addition, we have continuously evaluated and expanded 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.
In addition, we are continuously evaluating and expanding our product and service offerings to respond to customer demand and penetrate into new markets, including supermarket chains, airlines, entertainment venues, and other non-traditional foodservice markets.
To that end, 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 operate our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses. We believe we have established ourselves as a differentiated provider of high-quality products relative to our competitors.
For the year ended December 31, 2022, distribution accounted for approximately 74% of our net sales, while manufacturing accounted for approximately 26% of our net sales.
For the year ended December 31, 2023, distribution accounted for approximately 80% of our net sales, up from 74% in the prior year, while manufacturing accounted for approximately 20% of our net sales, down from 26% in the prior year.
Under the direction of our Chief Executive Officer and the board of directors, we are driving continuous improvements in bringing innovative eco-friendly products that meet the needs of our customers and our plant and enhancing our energy and waste management infrastructure in our sustainability journey. 10 Human Capital Management Our Culture At Karat, it is our people – our greatest asset – that give us our strong reputation and stand at the heart of our growth.
Under the direction of our Chief Executive Officer and the board of directors, we are driving continuous improvements in bringing innovative eco-friendly products that meet the needs of our customers and our plant and enhancing our energy and waste management infrastructure in our sustainability journey.
These challenges can be highly disruptive to a customer’s business and as a result, the customers often seek out other stable and more reliable channels for product sourcing. Our Products We offer a wide selection of high-quality, cost effective food packaging products and disposables.
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.
While a majority of our revenue is generated from the distribution of our vendors’ products, we have select manufacturing capabilities in the U.S., which allows us to provide customers with broad product choices and customized offerings with short lead times.
Our operating model entails generating the majority of our revenue from the distribution of our vendors' products, complemented by select manufacturing capabilities in the U.S., which allows us to provide customers with broad product choices and customized offerings with short lead times even during global supply chain disruptions.
A total of 2,000,000 shares of common stock has been authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards. Employees, directors, and consultants are eligible to receive stock options and stock awards under the Plan.
A total of 2,000,000 shares of common stock has been authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards. As of December 31, 2023, a total of 649,316 shares of common stock were awarded under the Plan.
For example, during the hot weather of summer and fall months, we see an increase in the level of sales for items such as cold drink cups and boba products.
For example, during the hot weather of summer and fall months, we see an increase in the level of sales for items such as cold 9 drink cups and boba products. Generally, we expect relatively more of our earnings and cash flows to be generated in the second and third quarter of the fiscal year.
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.
We see significant opportunity specifically with supermarkets to gain wallet share by providing fruit trays, vegetable containers, pizza boxes, compostable meat trays and other related items, all of which are higher margin products than some of our other products. Our online platforms have provided us with the opportunity to continue our expansion into the business-to-consumer B2C market.
Generally, we expect relatively more of our earnings and cash flows to be generated in the second and third quarter of the fiscal year. 8 Our Corporate Structure Set forth below is an organizational chart which identifies the Company and its consolidated entities as: Please see Note 2 — Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of the agreements between our variable interest entity and us.
Our Corporate Structure Set forth below is an organizational chart which identifies the Company and its consolidated entities as of December 31, 2023: Please see Note 2 — Summary of Significant Accounting Policies and Note 22 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of the agreements between Global Wells and us as well as the change in our ownership percentage in Global Wells subsequent to December 31, 2023 resulting from one Global Wells' member's redemption of its membership interest.
We plan to continue to grow our business and increase our profitability through the following key initiatives: Continue to build our e-commerce distribution channel We believe there is an opportunity to significantly grow our higher margin e-commerce business to a more meaningful percent of revenue by continuing our investments in people, software and technology.
We plan to continue to grow our business and increase our profitability through the following key initiatives: Continue to build our e-commerce distribution channel We believe there is an opportunity to continue to significantly grow our higher margin e-commerce business to a more meaningful percent of revenue by continuing our investments in people, distribution capabilities. marketing and technology. 6 During 2023, we updated our company e-commerce platform, which not only enabled us to improve our storefront from an operational standpoint, but also allowed for the integration of multiple apps and extensions to enhance user experience.
Our safety culture empowers every member of the workforce to exercise stop-work authority without repercussion to address any potential unsafe work conditions. We develop and administer company-wide safety policies to ensure the well-being of each team member and compliance with Occupational Safety and Health Administration standards. This includes periodic safety training and assessments as well as annual safety audits.
We develop and administer company-wide safety policies to ensure the well-being of each team member and compliance with Occupational Safety and Health Administration standards. This includes periodic safety training and assessments as well as annual safety audits. We require all employees and contractors at our warehouse and manufacturing facilities to understand and follow these safety policies.
Learning and Development We believe that high performance is an outcome of a person’s ability to change, adapt, and grow their capabilities throughout their career.
We cover approximately 60% of total eligible healthcare costs for part and full-time employees for our approximately 225 participating employees as of December 31, 2023. Learning and Development We believe that high performance is an outcome of a person’s ability to change, adapt, and grow their capabilities throughout their career.
Many cities, states 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. We expect this trend to continue on a national scale as foodservice establishments are looking to source alternative products made from biodegradable materials and other environmentally-friendly options.
We expect this trend to continue on a national scale as foodservice establishments are looking to source alternative products made from biodegradable materials and other environmentally-friendly options.
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.
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 especially after 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.
Additionally, the firm makes annual contributions to support the retirement goals of each employee through a matching contribution to 401(k) retirement accounts. We also offer our employees’ healthcare, wellness, paid sick leave, flexible paid time off, and other benefits to support their quality of life and enable them to thrive in the workplace.
We also offer our employees’ healthcare, wellness, paid sick leave, flexible paid time off, and other benefits to support their quality of life and enable them to thrive in the workplace. All eligible full-time and part-time employees and their eligible dependents receive competitive health benefits.
We 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 partner with foodservice establishments of every size, with our customers ranging from large multi-national restaurant chains to regional and smaller-chain establishments.
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, Jian Guo, joined us in 2022, bringing years of public company experience to further bolster our finance and accounting functions.
Daniel Quire joined us in 2018 and was appointed Chief Revenue Officer in 2023, helping to provide leadership to our sales term, lead our customer acquisition and engagement initiatives, and expand our market presence. Our Chief Financial Officer, Jian Guo, joined us in 2022, bringing years of public company experience to further bolster our finance and accounting functions.
By reusing paper cardboard boxes as well as wooden pallets for inventory storage and shipments, we are able to further reduce our carbon footprint. We are regulated by certain federal, state and international environmental laws governing our use, transport and disposal of production materials and control of emissions.
Through these various efforts, we play our part to reduce our carbon footprint and will continue to look into and implement further sustainable practices. We are regulated by certain federal, state and international environmental laws governing our use, transport and disposal of production materials and control of emissions.
Our success depends on the talent, dedication, and well-being of our people. As we grow, we strive to recruit, retain, develop, and provide advancement opportunities for our team members. We continually work to make Karat an inclusive, equitable, and growth-focused workplace where all team members have the opportunity to flourish.
Human Capital Management Our Culture At Karat, it is our people – our greatest asset – that give us our strong reputation and stand at the heart of our growth. Our success depends on the talent, dedication, and well-being of our people. As we grow, we strive to recruit, retain, develop, and provide advancement opportunities for our team members.
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 sources of supply.
Disrupt the traditional foodservice supply chain The traditional foodservice supply chain consists of manufacturers selling through a multi-layer distribution and logistics network before the product reaches the end customer. As a full service distributor ourselves, we are able to provide products directly to the end user, eliminating the need for the traditional multi-layer supply chain.
Our Karat Earth® products are Cedar Grove Certified (CGC) 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.
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. Karat Earth® supplements our eco-friendly offerings within our other product lines.
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 have made solid strides towards expanding our distribution footprint and capabilities in the United States by adding two distribution centers in 2022, and intend to continue our expansion efforts.
We plan to continue to add new experienced sales team members to broaden our reach, expand into new geographic areas, and continue to focus on customer engagement. We also promoted from within our inaugural Chief Revenue Officer in 2023. We have made solid strides towards expanding our distribution footprint and capabilities in the United States.
The new plant is expected to produce approximately 7,500 tons of products annually, with the first shipment of products to customers expected in June 2023. A recent peer-reviewed global study conducted by the American Association for the Advancement of Sciences found that less than 10 percent of plastics is recycled.
A recent peer-reviewed global study conducted by the American Association for the Advancement of Sciences found that less than 10 percent of plastics is recycled. Other studies indicated approximately 23% of landfill waste in the United States is comprised of plastic containers and food ware.
Safety One of our most important corporate values is the safeguarding of our people and fostering a culture of care that promotes the well-being of our employees, contractors and business partners. We protect our people, projects and reputation by striving for zero employee injuries and illnesses, while operating and delivering our work responsibly and sustainably.
We continually work to make Karat an inclusive, equitable, and growth-focused workplace where all team members have the opportunity to flourish. Safety One of our most important corporate values is the safeguarding of our people and fostering a culture of care that promotes the well-being of our employees, contractors and business partners.
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. E-Commerce In 2004, we established our Company store website at www.lollicupstore.com, to provide an additional channel for our customers to purchase our products.
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. Seasonality Our business does not experience high seasonality though certain food and food related products are moderately seasonal.
In addition, we operate other distribution centers located in Rockwall, Texas, Branchburg, New Jersey, Sumner, Washington, Summerville, South Carolina, Kapolei, Hawaii and City of Industry, California. The distribution and fulfillment centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Seattle, Atlanta and Honolulu metro areas.
We currently operate manufacturing facilities and distribution centers in Chino, California, Rockwall, Texas and Kapolei, Hawaii. In addition, we have distribution centers located in Branchburg, New Jersey; Puyallup, Washington; Summerville, South Carolina; Kapolei, Hawaii; City of Industry, California; Sugar Land, Texas; and Aurora, Illinois.
In 2008, we established Karat Earth® as an eco-friendly line of foodservice products, including food and takeout containers, bags, tableware, cups, lids, cutlery and straws. In April 2022, we announced a definitive joint venture agreement to establish a new corporation to build a factory in Taiwan for the production of compostable bagasse foodservice products which have a low carbon footprint.
In 2008, we established Karat Earth® as an eco-friendly line of foodservice products, including food and takeout containers, bags, tableware, cups, lids, cutlery and straws. Karat Earth® supplements our eco-friendly offerings within our other product lines.
For example, California passed the Plastic Pollution Prevention and Packaging Producer Responsibility Act also known as SB 54 in June 2022, requiring all packaging in the state to be recyclable or compostable by 2032. In October 2021, the state of Washington adopted a statewide ban on certain carryout bags.
Such striking statistics have prompted many state and city governments to enact regulations to cut down on plastic pollution. For example, California passed Bill 54 in June 2022, requiring all packaging in the state to be recyclable or compostable by 2032.
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, which allows us to react rapidly to customers’ changes in demand.
Our nimble operating model can serve customers more quickly than the traditional supply chain, which 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.
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. 6 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.
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. Many cities, states 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.
The website offers our entire range of products for online procurement, and we believe it will continue to be a key growth driver for our business, as it enables us to cross market products to potential customers. We have also added third-party storefronts on Amazon and Walmart to complement our Company store website.
In addition, we also operate third-party storefronts on Amazon, Walmart, eBay, and recently expanded to TikTok. Our e-commerce platforms allow us to offer our entire range of products for online procurement and enable us to cross market other products to our customers.
We continue to invest in research and development to expand the product offering in our Karat Earth® line. During the year ended December 31, 2022, net sales of our Karat Earth® products increased by 36% as compared to the year ended December 31, 2021. Fiscal year 2022 marked an important milestone in our continued efforts and commitment to sustainability.
We continue to invest in research and development to expand our offering of sustainable products to meet the needs of our customers and the evolving regulatory landscape. Our eco-friendly products made up 33% of total sales during the year ended December 31, 2023 compared to 27% during the prior year.
Removed
We expect manufacturing to remain a relatively small portion of our sales mix in fiscal year 2023, but believe it provides us with the flexibility to provide customized products with short lead times to complement our global sourcing capabilities.
Added
This model provides us with the flexibility to adjust the mix of our product offering from import and manufacturing in evolving economic environment to drive operating efficiency and sustained margin expansion.
Removed
We believe our ability to source products quickly on a cost-effective basis via a global supplier network, complemented by our own manufacturing capabilities for select products, has established us as a differentiated provider of high-quality products relative to our competitors. Our customers include a wide variety of national and regional distributors, restaurant chains, retail establishments and online customers.
Added
During 2023, in light of the rising domestic labor and other operating costs and dropping ocean freight rates, we executed a strategy to pivot into a more asset-light model by increasing imports and scaling back manufacturing in certain locations.
Removed
We operate our e-commerce channel through our company website, www.lollicupstore.com, and also through third-party storefronts such as Amazon and Walmart. Our e-commerce channel offers the entire range of our products for online procurement, and we believe it will continue to be a key growth driver for our business going forward.
Added
While we largely maintained our manufacturing infrastructure, we disposed of certain production machinery and related raw materials and reduced our production workforce.

… 51 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

70 edited+10 added−7 removed168 unchanged
We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, Texas or Hawaii or other locations where we have operations or store significant inventory.
We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, Texas, Hawaii or other locations where we have operations or store significant inventory.
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.
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, results of operations, financial condition and cash flows.
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; 24 • 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.
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.
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 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).
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 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 26 of Delaware).
If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports and the price of our common stock may decline.
If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial 21 results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports and the price of our common stock may decline.
In addition, international conflict could result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and 22 solutions; inflation, which could result in increases in the cost of manufacturing products and solutions, reduced customer purchasing power, decreased consumer demand, increased price pressure, and reduced or cancelled orders; increased risk of cyber-attacks; and market instability, which could adversely impact our overall business results.
In addition, international conflict could result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions; inflation, which could result in increases in the cost of manufacturing products and solutions, reduced customer purchasing power, decreased consumer demand, increased price pressure, and reduced or cancelled orders; increased risk of cyber-attacks; and market instability, which could adversely impact our overall business results.
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 quarterly 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.
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 intend to pay quarterly 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.
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.
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 25 past, stockholders of other public companies have instituted securities class action litigation following periods of market volatility.
Failure to comply 19 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.
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.
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.
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, 23 to reduce the effects of the tariffs.
The terms of one or 25 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.
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.
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’, 21 manufacturers’, and logistics providers’ businesses or the economy as a whole.
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.
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 14 extent to which we are able to convince customers and consumers to accept our new products.
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.
If we fail to successfully 15 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.
We have only a limited history operating our business at its current scale. 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.
We have only a limited history operating our 20 business at its current scale. 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.
If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any. 26 We depend on cash generated from outside sources of funding to support our growth.
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.
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 27 more time consuming.
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.
In addition, these stockholders, acting together or in some cases individually, have the ability 23 to control the management and affairs of our company.
In addition, these stockholders, acting together or in some cases individually, have the ability to control the management and affairs of our company.
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.
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, financial condition or cash flows.
Similarly, if our competitors lower their prices and expand their promotional activities, we may be forced to lower our prices as well and our operational results could be negatively impacted. 15 Changes in tax laws or changes in our geographic mix of earnings could have a material impact on our financial condition and results of operation.
Similarly, if our competitors lower their prices and expand their promotional activities, we may be forced to lower our prices as well and our operational results could be negatively impacted. 16 Changes in tax laws or changes in our geographic mix of earnings could have a material impact on our financial condition and results of operation.
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. 16 We may not have adequate insurance coverage. We may not have adequate insurance coverage.
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. 17 We may not have adequate insurance coverage. We may not have adequate insurance coverage.
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.
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, results of operations or cash flows.
Such disruptions could harm 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.
Such disruptions could harm our business, financial condition, results of operations or cash flows. 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.
If we do not adapt to or comply with new regulations, or fail to meet the needs of the evolving investor, industry, or stakeholder expectations and standards, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, customers and consumers may choose to stop purchasing our products or purchase products from another company or a competitor, and our reputation, business, results of operations, and financial condition may be adversely affected.
If we do not adapt to or comply with new regulations, or fail to meet the needs of the evolving investor, industry, or stakeholder expectations and standards, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, customers and consumers may choose to stop purchasing our products or purchase products from another company or a competitor, and our reputation, business and consolidated financial statements may be adversely affected.
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. Outstanding indebtedness may reduce our available funds. We have approximately $42.5 million in outstanding indebtedness as of December 31, 2022.
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. 27 Outstanding indebtedness may reduce our available funds. We have approximately $49.5 million in outstanding indebtedness as of December 31, 2023.
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.
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 results of operations, financial condition or cash flows may be harmed.
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. Any failure to comply could significantly harm our brand, reputation, business, and results of operations. We are subject to credit risk.
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. Any failure to comply could significantly harm our brand, reputation, business, results of operations, financial condition or cash flows. We are subject to credit risk.
If a material number of our customers were not able to meet their payment obligations, our results of operations could be harmed. Security incidents and attacks on our information technology systems could lead to significant costs and disruptions that could harm our business, financial results, and reputation.
If a material number of our customers were not able to meet their payment obligations, our business, results of operations, financial condition or cash flows may be harmed. Security incidents and attacks on our information technology systems could lead to significant costs and disruptions that could harm our business, financial results, and reputation.
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, results of operations, financial condition and cash flows.
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, results of operations, financial condition and cash flows. 24 Foreign exchange rate fluctuations could affect our 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 U.S. Dollars, including payments made in New Taiwan Dollars. Any fluctuations in foreign exchange rates against the U.S.
Our third-party manufacturers are located in international markets, and we make payment to certain of these manufacturers in currency other than U.S. Dollars, including payments made in New Taiwan Dollars. Any fluctuations in foreign exchange rates against the U.S.
For our online sales, as well as for sales to our offline customers, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, and electronic payment systems.
We are subject to payment-related risks. For our online sales, as well as for sales to our offline customers, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, and electronic payment systems.
Such purchases and investments could affect our ability to service our existing debt obligations or limit our ability to respond to business opportunities, pursue acquisitions or otherwise restrict our continued growth and expansion.
Such cash outlays could affect our ability to service our existing debt obligations or limit our ability to respond to business opportunities, pursue acquisitions or otherwise restrict our continued growth and expansion.
Additionally, upon the expiration of our facility leases, we may not be able to renew these leases on terms acceptable to us, if at all. If this occurs, it could have a material adverse impact on our financial conditions and results of operations.
Additionally, upon the expiration of our facility leases, we may not be able to renew these leases on terms acceptable to us, if at all. If this occurs, it could have a material adverse impact on our business, results of operations, financial condition or cash flows.
As of March 1, 2023, our directors, executive officers, and other holders of more than 5% of our common stock, together with their affiliates, own, in the aggregate 71.4% of our outstanding common stock.
As of March 1, 2024, our directors, executive officers, and other holders of more than 5% of our common stock, together with their affiliates, own, in the aggregate 65.5% of our outstanding common stock.
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.
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; (f) the imposition of tariffs on components and products that we import into the United States or other markets, and; (g) the impact of currency exchange fluctuations, trade regulations, import duties, logistics costs, delays, and other related risks resulting in increased costs or liabilities.
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.
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, business, financial condition, results of operations or cash flows.
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. We are subject to payment-related risks.
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, results of operations, financial condition or cash flows. Any pending or future legal or regulatory proceedings and audits could harm our business, results of operations, financial condition or cash flows.
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.
Restaurant dining and food delivery services are generally discretionary items for end-consumers. Therefore, the success of our business depends significantly on broader economic factors and trends in consumer spending.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances or sales of our shares will have on the market price of such shares. In addition, as of December 31, 2022, we had 420,000 stock options and 82,146 unvested restricted stock units outstanding.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances or sales of our shares will have on the market price of such shares. In addition, as of December 31, 2023, we had 386,473 stock options and 5,345 unvested restricted stock units outstanding.
Climate change and sustainability initiatives may result in significant operational changes and expenditures and adversely affect our business. Continuing political and social attention to carbon emissions and sustainability may result in the imposition of additional regulations or restrictions to which we may become subject.
For a description of our cybersecurity program, see Part I, Item 1C. "Cybersecurity". Climate change and sustainability initiatives may result in significant operational changes and expenditures and adversely affect our business. Continuing political and social attention to carbon emissions and sustainability may result in the imposition of additional regulations or restrictions to which we may become subject.
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 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.
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.
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, pandemics, political turmoil, natural catastrophes, warfare, and terrorist attacks could cause a decrease in demand for our products and negatively affect the growth of our business.
If we are unable to quickly adapt to changes in consumer preferences and subsequent legislation, our business, financial condition, results of operations or cash flows could be adversely affected. Supply chain disruptions could interrupt product manufacturing and increase product costs.
If we are unable to quickly adapt to changes in consumer preferences and subsequent legislation, our business, financial condition, results of operations or cash flows could be adversely affected. Supply chain disruptions could interrupt product manufacturing and increase product costs. Our operating model entails generating the majority of our revenue from the import and distribution of our vendors' products.
If we are not successful, our business, results of operations, financial condition and cash flows may be harmed. 17 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 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 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 $1.235 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 our IPO prospectus occurs.
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 $1.235 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) December 31, 2026, which represents the end of the fiscal year in which the fifth anniversary of the date of our IPO prospectus occurs. 28 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.
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. 18 Many of our operating costs and expenses are fixed and will not decline if our revenues decline.
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.
Risks Related to Societal and Environmental Factors The continuing effects of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on our business, operations and our future financial performance.
Risks Related to Societal and Environmental Factors The effects of a pandemic are highly unpredictable and could be significant, and may have an adverse effect on our business, operations and our future financial performance. A pandemic, similar to COVID-19, would adversely impact our business, results of operations, financial condition and cash flows.
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.
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.
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.
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, our business may not grow at similar rates, if at all.
Additionally, we are expanding our sales and marketing efforts to further penetrate additional geographies across the United States, and 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 especially our eco-friendly line.
Additionally, we are expanding our sales and marketing efforts to further penetrate additional geographies across the United States, and we may encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand.
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.
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, results of operations, financial condition or cash flows. 19 We incur significant expenses to maintain our manufacturing equipment and any interruption in the operations of our facilities may harm our operating performance.
However, due to the lag between the sourcing or the manufacturing of our products and sales to our customers, margin could be negatively impacted in periods of rising raw materials until price actions are in place.
Historically, we have been able to mitigate the impact of higher costs by increasing our selling prices. However, due to the lag between the sourcing or the manufacturing of our products and sales to our customers, margin could be negatively impacted in periods of rising raw materials until price actions are in place.
In addition, although we are investing in sales and marketing activities such as upgrading our e-commerce platform and presence to further penetrate newer regions and customers, we cannot provide assurances that these efforts will be successful.
We continue to evaluate marketing efforts and other strategies to expand the customer base for our products especially our eco-friendly 18 line. In addition, although we are investing in sales and marketing activities such as upgrading our e-commerce platform and presence to further penetrate newer regions and customers, we cannot provide assurances that these efforts will be successful.
International political instability and terrorist activities could result in market instability, which could negatively impact our business results. Terrorist activities and armed conflicts, including recent escalation in regional conflicts, including the Russian invasion of Ukraine and increasing tensions between China and Taiwan, could result in economic sanctions that could impact our operational and financial results.
International political instability and terrorist activities could result in market instability, which could negatively impact our business results. Terrorist activities and armed conflicts, including recent escalations in regional conflicts, could result in economic sanctions that could impact our operational and financial results.
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.
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.
Exposure to various types of cyber-attacks such as malware, computer viruses, worms or other malicious acts, as well as human error, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services. We have identified material weaknesses in our internal control over financial reporting.
Exposure to various types of cyber-attacks such as malware, computer viruses, worms or other malicious acts, as well as human error, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services. For a description of our cybersecurity program, see Part I, Item 1C. "Cybersecurity".
Periods of significant or prolonged deflation may negatively impact our results of operations and overall profitability. If the industry we operate in experiences a prolonged period of price decreases resulting from stabilizing ocean freight costs and decreased raw material input costs, we could see a reduction in our sales, gross margin and overall profitability.
If the industry we operate in experiences a prolonged period of price decreases resulting from lower raw material, product, and ocean freight costs as well as prolonged customer destocking, we could see a reduction in our sales, gross margin and overall profitability.
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.
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 our business, financial condition, results of operations or cash flows. Periods of significant or prolonged deflation may negatively impact our results of operations and overall profitability.
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. 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.
If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, results of operations, financial condition or cash flows may be harmed.
Raw material inflation or shortage of available materials could harm our financial condition and results of operations. Raw materials are subject to price fluctuations and availability, which could result from external factors, such as the nationwide inflation, weather-related events, or other supply chain challenges, that are beyond our control.
Raw materials are subject to price fluctuations and availability, which could result from external factors, such as inflation, weather-related events, or other supply chain challenges, that are beyond our control. We typically do not enter into long-term fixed price contracts with our suppliers, and our suppliers could pass on raw material price increases to us.
Furthermore, the impacts of potential worsening of global economic conditions, inflation pressures and continued disruptions to and volatility in the financial markets remain unknown. 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.
Even after a pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting supply chain disruptions and economic conditions. 22 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.
Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all. We may continue to incur significant capital expenditures which could affect our ability to meet our obligations and may otherwise restrict our growth.
We may continue to incur significant capital expenditures which could affect our ability to meet our obligations and may otherwise restrict our growth.
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.
Consumers have broad discretion as to where to spend their disposable income and may choose to reduce their restaurant and foodservice spending in times of inflation, high interest and unemployment rates which would negatively impact our customers and then in turn our results of operations.
We may also experience additional operating costs due to increased challenges with our workforce (including as a result of labor shortages, illness, absenteeism or government orders), and access to supplies and capital. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting supply chain disruptions and economic conditions.
Depending on the scale of the pandemic, our financial performance may differ significantly from historical rates, and our future operating results may also start to fall below expectations. We may also experience additional operating costs due to increased challenges with our workforce (including as a result of labor shortages, illness, absenteeism or government orders), and access to supplies and capital.
Significantly higher freight costs and demurrage can dampen our margin. Failure to adequately source and timely ship our products to customers could lead to lost potential revenue, failure to meet customer demand, strained relationships with customers, and diminished brand loyalty.
Additionally, failure to adequately source and timely ship our products to the U.S. and then onwards to customers could lead to lost potential revenue, failure to meet customer demand, strained relationships with customers, and diminished brand loyalty. Raw material inflation or shortage of available materials could harm our financial condition and results of operations.
For a description of the identified material weaknesses, see Part II, Item 9A, “Controls and Procedures.” As further described in Item 9A “Controls and Procedures,” we have undertaken steps to improve our internal control over financial reporting. We expect that we will need to improve existing procedures and controls, and implement new 20 ones, to remediate the material weaknesses.
For the unremediated material weaknesses, we have undertaken steps to implement remedial actions. We expect that we will need to improve existing procedures and controls, and implement new ones, to remediate the material weaknesses.
The loss of a substantial number of these employees and our inability to hire and replace our workforce could disrupt our business and result in significant losses. Our growth depends, in part, on expanding into additional foodservice and geographic markets, and we may not be successful in doing so.
As a result, there can be no assurance we will be able to recruit, train, assimilate, motivate and retain employees in the future. The loss of a substantial number of these employees and our inability to hire and replace our workforce could disrupt our business and result in significant losses.
Although we declared and paid a special cash dividend of $0.35 per share in November 2022, we do not currently intend to pay quarterly dividends and may not declare any special dividend in the foreseeable future.
Although our Board of Directors declared a quarterly cash dividend in 2023 and intend to pay regular quarterly dividends for the foreseeable future, we may not be able to sustain our current quarterly dividend payouts.
While we have taken measures to diversify and expand our supplier network, we continue to rely on third-party manufacturers outside the U.S. to produce most of our products. Global industry-wide logistics challenges have negatively impacted us during these past several years when international shipping to the U.S. was disrupted and delayed due to congestion at ports on the west coast.
While we have taken measures to diversify and expand our supplier network, our reliance on third-party manufacturers outside the U.S. to produce most of our products could negatively impact our operations and financial results during global supply chain disruptions.
Labor is subject to cost inflation and availability, due to external factors, such as the continuing impacts of the COVID-19 pandemic and workforce participation rates, that are beyond our control. As a result, there can be no assurance we will be able to recruit, train, assimilate, motivate and retain employees in the future.
Labor is subject to cost inflation and availability, due to external factors, such as increases in minimum wage, higher cost of living, workforce participation rates, and employee preference for remote or hybrid work schedules, that are all beyond our control.
Removed
Although the global supply chain challenges have started to subside and Asia to the U.S. ocean freight rates have started to stabilize in the later part of 2022, our business, financial condition, results of operations or cash flows could be adversely affected if the global industry-wide logistics worsen.
Added
Further international conflicts, such as the recent ones in the Middle East and Asia, could impact important trade routes, resulting in increased lead times for shipments and elevated freight costs, and suppressed margin.
Removed
We typically do not enter into long-term fixed price contracts with our suppliers, and our suppliers could pass on raw material price increases to us. Historically, we have been able to mitigate the impact of higher costs by increasing our selling prices.
Added
Similarly, if we fail to attract and retain customers for our current and future products, we will be unable to increase our net sales and market share. All of these factors could materially adversely affect our business, financial condition, results of operations or cash flows.
Removed
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.
Added
These lower costs could also reduce the barrier to entry within the foodservice industry thereby increasing competition and potentially affecting our results of operations.
Removed
As we continue to grow our businesses, we may continue to incur significant capital expenditures, including the leasing of additional warehouse space, the purchase of manufacturing equipment and trucks and trailers to support our distribution and logistics capabilities and the investment in our e-commerce platform.
Added
Although we have recently shifted towards an asset light model by increasing import and scaling back production and reducing capital expenditure, changes in economic and political conditions may result in us incurring significant capital expenditures again to expand manufacturing. We may also make significant investments to lease additional warehouse space, expand our truck fleet, and upgrade our e-commerce platform.
Removed
Since COVID-19 was declared a global pandemic by the World Health Organization, our business, operations and financial performance have been, and may continue to be, affected by the macroeconomic impacts resulting from the efforts to control the spread of COVID-19.
Added
In January 2024, California passed Bill 1228 which increases the minimum-wage of fast food restaurant workers to $20 per hour beginning April 1, 2024. This could force us to increase compensation for new and existing employees in order to attract and retain talent thereby negatively impacting our labor costs and results of operations.

… 7 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed3 unchanged
We also lease and operate (i) an approximately 46,000 square foot warehouse storage and distribution facility in Sumner, Washington, (ii) an approximately 76,000 square foot manufacturing, warehouse storage and distribution facility in Kapolei, Hawaii, (iii) an approximately 23,000 square foot distribution facility in Kapolei, Hawaii, (iv) an approximately 6,800 square foot distribution facility in Kapolei, Hawaii, and (v) an approximately 70,000 square foot warehouse storage and distribution facility in City of Industry, California.
We also lease and operate (i) an approximately 98,000 square foot warehouse storage and distribution facility in Puyallup, Washington, (ii) an approximately 76,000 square foot manufacturing, warehouse storage and distribution facility in Kapolei, Hawaii, (iii) an approximately 23,000 square foot warehouse storage and distribution facility also in Kapolei, Hawaii, (iv) an approximately 70,000 square foot warehouse storage and distribution facility in City of Industry, California, (v) an approximately 83,000 square foot warehouse storage and distribution facility in Sugar Land, Texas, and (vi) an approximately 105,000 square foot warehouse storage and distribution facility in Aurora, Illinois.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed0 unchanged
ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various legal proceedings. Although no assurance can be given, we do not believe that any of our currently pending proceedings will have a material adverse effect on our financial condition, cash flows or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 28 Part II
ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various legal proceedings. Although no assurance can be given, we do not believe that any of our currently pending proceedings will have a material adverse effect on our financial condition, cash flows or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 31 Part II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+0 added−1 removed1 unchanged
(2) This number reflects the weighted-average exercise price of outstanding options and has been calculated exclusive of outstanding restricted stock unit awards issued under the Plan. Sales of Unregistered Securities and Repurchases of Securities During the fourth quarter of fiscal 2022, the Company did not sell any unregistered securities and did not repurchase any securities. ITEM 6. [RESERVED] 29
(2) This number reflects the weighted-average exercise price of outstanding options and has been calculated exclusive of outstanding restricted stock unit awards issued under the Plan. Sales of Unregistered Securities and Repurchases of Securities During the fourth quarter of fiscal 2023, the Company did not sell any unregistered securities and did not repurchase any securities. ITEM 6. [RESERVED] 32
Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2022, with respect to all of our compensation plans under which equity securities are authorized for issuance: Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Equity compensation plans approved by stockholders 502,146 (1) $18.58 (2) 1,322,349 Total 502,146 $18.58 1,322,349 (1) This amount consists of (i) 82,146 shares of our common stock subject to unvested restricted stock units granted under the Plan, and (ii) 420,000 shares subject to stock options granted under the Plan.
Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2023, with respect to all of our compensation plans under which equity securities are authorized for issuance: Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Equity compensation plans approved by stockholders 391,818 (1) $18.58 (2) 1,350,684 Total 391,818 $18.58 1,350,684 (1) This amount consists of (i) 5,345 shares of our common stock subject to unvested restricted stock units granted under the Plan, and (ii) 386,473 shares subject to stock options granted under the Plan.
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.
Continuation of the quarterly dividend will be at the discretion of our board of directors 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.
Therefore, we currently do not anticipate paying any further 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.
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.
Holders of Common Stock As of March 14, 2023, we had approximately 41 stockholders of record of our common stock. Dividends On November 8, 2022, our board of directors declared a cash dividend of $0.35 per share of common stock.
Holders of Common Stock As of March 12, 2024, we had approximately 13 stockholders of record of our common stock. Dividends On August 7, 2023, our Board of Directors approved a quarterly cash dividend policy, which we have paid on a regular basis.
Removed
This dividend was paid on November 30, 2022 to the shareholders of record as of the close of business on November 21, 2022. No dividend was declared for the year ended December 31, 2021. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

71 edited+34 added−22 removed26 unchanged
In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.
In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.
Actual results may differ from these estimates under different assumptions or conditions. 31 Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
As described in Note 9 — Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the “2027 Term Loan”).
As described in Note 10 — Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the “2027 Term Loan”).
Additionally, as of December 31, 2022, we have a $23.0 million term loan that matures in September 30, 2026 (the “2026 Term Loan”). The 2026 Term Loan had an initial balance of $16.1 million and an option to request for additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022.
Additionally, as of December 31, 2023, we have a $23.0 million term loan that matures September 30, 2026 (the “2026 Term Loan”). The 2026 Term Loan had an initial balance of $16.1 million and an option to request for additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022.
As described in Note 7 — Line of Credit to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, the Line of Credit is available for working capital and general corporate purposes, and is secured by our assets.
As described in Note 8 — Line of Credit to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, the Line of Credit is available for working capital and general corporate purposes, and is secured by our assets.
Recent Accounting Pronouncements Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 38
Recent Accounting Pronouncements Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Inventory Reserve The Company maintains a reserve for excess and obsolete inventory and carries its inventory at net realizable value, taking into account various factors including historic usage, expected demand, anticipated sales price, and product obsolescence.
Inventory Reserve The Company maintains a reserve for excess and obsolete inventory and carries its inventory at net realizable value, taking into account various factors including historic usage, expected demand, anticipated sales price, and product expiration and obsolescence.
The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.
The sale of additional equity securities or certain forms of debt financing could result in additional dilution 40 to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.
We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value. Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of the Line of Credit, and raise additional debt.
We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value. Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of the Line of Credit, and acquire additional debt.
We believe price fluctuations will have either a positive or a negative impact on our results of operations in the future, depending on whether raw material costs increase or decrease and whether we can successfully implement price increases to offset the impacts of inflation. • Supplier chain disruptions could have a long-lasting impact on our operations and financial results.
We believe price fluctuations will have either a positive or a negative impact on our results of operations in the future, depending on whether raw material costs increase or decrease and whether we can successfully implement price increases to offset the impacts of inflation. • Supplier chain effectiveness could have a long-lasting impact on our operations and financial results.
We believe the following critical accounting estimates and policies have the most significant impact on our consolidated financial statements: 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.
We believe the following critical accounting estimates and policies have the most significant impact on our consolidated financial statements: Allowance for Doubtful Accounts The Company recognizes an allowance for doubtful accounts on accounts receivable in an amount equal to the estimated probable losses net of recoveries.
As of December 31, 2022, we were in compliance with the financial covenants under all of our loan agreements, and do not expect material uncertainties in our continued ability to be in compliance with all financial covenants through the remaining term of all of our loan agreements.
As of December 31, 2023, we were in compliance with the financial covenants under all of our loan agreements, and do not expect material uncertainties in our continued ability to be in compliance with all financial covenants through the remaining term of all of our loan agreements.
Related Party Transactions For a description of significant related party transactions, see Note 15 — Related Party Transactions in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Related Party Transactions For a description of significant related party transactions, see Note 17 — Related Party Transactions in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
While such losses have historically been within our expectations and the provisions established, we cannot guarantee that the future trend will be similar to what we have experienced in the past. A significant change in the demand or sales price could result in additional reserve and materially affect our future financial results.
While such losses have historically been within our expectations and the provisions established, we cannot guarantee that the future trend will be similar to what we have experienced in the past. A significant change in demand or selling prices could result in additional reserve and materially affect our future financial results.
These additional allowances could materially affect our future financial results. As of December 31, 2022, and 2021, we had a total allowance for doubtful accounts of $1.3 million and $0.3 million, respectively.
These additional allowances could materially affect our future financial results. As of December 31, 2023, and 2022, we had a total allowance for doubtful accounts of $0.4 million and $1.3 million, respectively.
In addition, cash decreased $15.0 million, primarily as a result of changes in working capital, which included an increase of $16.2 million in inventory buildup to accommodate higher sales volume, an increase of $1.5 million in prepaid expenses and other current assets, and a decrease of $3.8 million in operating lease liability due within twelve months, partially offset by a decrease of $1.9 million in accounts receivable due to changes in the timing of collections, an increase of $3.0 million in accounts payable and related party payable, and an increase of $1.6 million in accrued expenses.
In addition, cash decreased $15.0 million, primarily as a result of changes in working capital, which included an increase of $16.2 million to accommodate higher sales volume, an increase of $1.5 million in prepaid expenses and other current assets, and a decrease of $3.8 million in 41 operating lease liability, partially offset by a decrease of $1.9 million in accounts receivable due to changes in the timing of collections, an increase of $3.0 million in accounts payable and related party payable, and an increase of $1.6 million in accrued expenses.
We had an inventory reserve of $0.7 million as of both December 31, 2022, and 2021. Stock-Based Compensation Stock-based compensation expense related to employee stock options is accounted for in accordance with Accounting Standard Codification ("ASC") 718, Compensation — Stock Compensation .
We had an inventory reserve of $0.4 million and $0.7 million as of December 31, 2023, and 2022, respectively. Stock-Based Compensation Stock-based compensation expense related to employee stock options is accounted for in accordance with Accounting Standard Codification ("ASC") 718, Compensation — Stock Compensation .
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.
There now appears to be a growing preference for the former and we believe this trend will continue to 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.
It consists of a $40.0 million revolving loan facility and a standby letter of credit sublimit. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. On October 6, 2021, we amended the Line of Credit.
It consists of a $40.0 million revolving loan facility and a standby letter of credit sublimit. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. On March 14, 2023, we amended the Line of Credit.
As described further in Note 14 — Leases in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we had a total of $16.1 million of operating lease liabilities as of the year ended December 31, 2022 with minimum lease payments ranging from approximately $1.1 million to $5.2 million on an annual basis over the next five years.
As described further in Note 15 — Leases in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we had a total of $21.5 million of operating lease liabilities as of the year ended December 31, 2023 with minimum lease payments ranging from approximately $2.0 million to $6.0 million on an annual basis over the next five years.
We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund for capital expenditures to further enhance our operating infrastructure and e-commerce platform for at least the next 12 months.
We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund capital expenditures for at least the next 12 months.
We had purchase obligations of $6.9 million outstanding as of the year ended December 31, 2022, all of which are due in 2023. Such purchase obligations are primarily related to the purchase of machinery and equipment. Other than these contractual obligations, our off-balance sheet arrangements primarily consists of letters of credits issued under our Line of Credit.
We had purchase obligations of $0.5 million outstanding as of the December 31, 2023, all of which are due in 2024. Such purchase obligations are primarily related to the purchase of machinery and equipment. Other than these contractual obligations, our off-balance sheet arrangements primarily consists of letters of credits issued under our Line of Credit.
Net cash used in financing activities was $2.1 million for the year ended December 31, 2022, which primarily included $21.6 million of payments made towards the term loans, $21.1 million of payments on the Line of Credit, and $7.0 million of dividend payments to shareholders, partially offset by $21.1 million of borrowings under the Line of Credit, and $27.5 million of borrowings under the term loans.
Net cash used in financing activities was $2.1 million for the year ended December 31, 2022 which primarily which primarily included $21.6 million of payments made towards the term loans, $21.1 million of payments on the Line of Credit, and $7.0 million of dividend payments to shareholders, partially offset by $21.1 million of borrowings under the Line of Credit, additional borrowing under the 2026 Term Loan of $6.9 million, and borrowings under the 2027 Term Loan of $20.6 million.
The risk-free interest rate assumption for options granted under the Plan, as defined in Note 12 — Stock-Based Compensation in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, is based upon observed interest rates on the United States government securities appropriate for the expected term of the stock options.
The risk-free interest rate assumption for options granted under the Plan, as defined in Note 13 — Stock-Based Compensation in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, is based upon observed interest rates on the United States government securities appropriate for the expected term of the stock options. 35 The expected term of employee stock options under the Plan represents the weighted-average period that the stock options are expected to remain outstanding.
The 2027 Term Loan has an initial balance of $20.7 million and an option to request for additional advances up to a maximum of $8.0 million through June 2023, which we have not exercised as of December 31, 2022. Interest accrues at a fixed rate of 4.375% per annum.
The 2027 Term Loan had an initial balance of $20.7 million and an option to request for additional advances up to a maximum of $8.0 million through June 2023, which we exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum.
The improvement in working capital was driven by an increase of $20.9 million in current assets partially offset by an increase of $8.5 million in current liabilities.
The improvement in working capital was driven by an increase of $31.1 million in current assets, partially offset by an increase of $5.1 million in current liabilities.
As described in Note 19 — Subsequent Events , on March 14, 2023, we amended the Line of Credit again, which among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any line of credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.
The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.
In addition, we operate five other distribution centers located in Sumner, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; and City of Industry, California. 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.
In addition, we operate eight other warehouse spaces and distribution centers located in Puyallup, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; City of Industry, California; Aurora, Illinois; and Sugar Land, Texas. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Chicago, Dallas, Houston, Seattle, Atlanta and Honolulu metro areas.
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.
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.
In addition, cash decreased $20.3 million, primarily as a result of changes in working capital, which included an increase of $10.9 million in inventory buildup to accommodate higher sales volume, an increase of $8.9 million in account receivable due to changes in the timing of collections, a decrease of $4.6 million in accounts payable and related party payable, partially offset by a $1.4 million decrease in prepaid expenses and other current assets, and an increase of $2.9 million in accrued expenses.
In addition, cash decreased $1.8 million, primarily as a result of changes in working capital, which included a decrease of $4.6 million from a reduction in operating lease liabilities, an increase of $3.8 million in inventory to accommodate higher sales volume, and a decrease of $1.6 million in accrued expenses, partially offset by a decrease of $2.9 million in accounts receivable from decreased sales and improved cash collections, a decrease of $1.4 million in other assets, an increase of $1.1 million in accounts payable and related party payable, and an increase of $0.6 million in other liabilities.
Net income Net income was $25.8 million for the year ended December 31, 2022 compared to $22.4 million for the year ended December 31, 2021, an increase of $3.4 million, or 15%.
Net income Net income was $33.2 million for the year ended December 31, 2023 compared to $25.8 million for the year ended December 31, 2022, an increase of $7.3 million, or 28.4% .
We believe this trend will have a positive long-lasting impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products. • Most of our products are sourced from vendors abroad and as a result we incur freight costs from these overseas import shipments.
We believe this trend will have a positive long-lasting impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.
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 operate our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses. We believe we have established ourselves as a differentiated provider of high-quality products relative to our competitors.
The expected term of employee stock options under the Plan represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is calculated based on the “simplified method,” which estimates the expected term based on the average of the vesting period and contractual term of the stock option.
The expected term of options granted is calculated based on the “simplified method,” which estimates the expected term based on the average of the vesting period and contractual term of the stock option.
Cash Flows The following table summarizes cash flow for the years ended December 31, 2022 and 2021: 37 Year Ended December 31, 2022 2021 (in thousands) Net cash provided by operating activities $ 29,474 $ 8,679 Net cash used in investing activities (17,845) (13,281) Net cash (used in) provided by financing activities (2,071) 10,637 Net change in cash and cash equivalents $ 9,558 $ 6,035 Cash flows provided by operating activities .
Cash Flows The following table summarizes cash flow for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 (in thousands) Net cash provided by operating activities $ 53,379 $ 29,474 Net cash used in investing activities (30,174) (17,845) Net cash used in financing activities (16,170) (2,071) Net change in cash and cash equivalents $ 7,035 $ 9,558 Cash flows provided by operating activities .
Operating expenses Operating expenses were $102.1 million for the year ended December 31, 2022 compared to $84.7 million for the year ended December 31, 2021, an increase of $17.4 million, or 21%.
Operating expenses Operating expenses were $111.0 million for the year ended December 31, 2023 compared to $102.1 million for the year ended December 31, 2022, an increase of $8.9 million, or 8.7%.
On August 18, 2022, we amended the Line of Credit again which increased the standby letter of credit sublimit to $2.0 million. As of December 31, 2022, the amount issued under the standby letter of credit was $1.1 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $38.9 million.
On June 20, 2023, we amended the Line of Credit which increased the standby letter of credit sublimit from $2.0 million to $5.0 million. As of December 31, 2023, the amount issued under the standby letter of credit was $3.8 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $36.2 million.
Operating income Operating income was $30.0 million for the year ended December 31, 2022 compared to $23.1 million for the year ended December 31, 2021, an increase of $6.9 million, or 30%. The increase was primarily due to an increase in gross profit of $24.3 million partially offset by an increase in operating expenses of $17.4 million, as discussed above.
The increase was primarily due to an increase in gross profit of $21.0 million partially offset by an increase in operating expenses of $8.9 million, as discussed above. Other income, net Other income, net was $0.9 million for the year ended December 31, 2023 compared to $2.5 million for the year ended December 31, 2022.
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 navigate the challenging environment and adjust our operating models effectively, including the accurate forecast of demand, the successful procurement of raw materials and products and the effective management of our inventory, production and distribution. • Fluctuations in foreign currency exchange rates could impact either positively or negatively various aspects of our business activities, including but not limited to our purchasing power and capacity to source inventory.
We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to manage our global supply chain effectively, including the accurate forecast of demand, the successful procurement of raw materials and products, and the effective management of our inventory, production and distribution. 34 • Fluctuations in foreign currency exchange rates could impact either positively or negatively various aspects of our business activities, including but not limited to our purchasing power and capacity to source inventory. • Beginning the first quarter of 2023, we began to execute a strategic business decision to pivot into a more asset-light growth model by increasing import and scaling back manufacturing in certain locations.
While a majority of our revenue is generated from the distribution of our vendors’ products, we have select manufacturing capabilities in the U.S., which allows us to provide customers broad product choices and customized offerings with short lead times.
Our operating model entails generating the majority of our revenue from the distribution of our vendors' products complemented by select manufacturing capabilities in the U.S., which allows us to provide customers with broad product choices and customized offerings with short lead times even during global supply chain disruptions.
Provision for income taxes Provision for income taxes was $6.7 million for the year ended December 31, 2022 compared to $5.1 million for the year ended December 31, 2021, an increase of $1.6 million, or 31%. The Company’s effective tax rate was 20.5% for the year ended December 31, 2022 compared to 18.5% for the year ended December 31, 2021.
Provision for income taxes Provision for income taxes was $9.8 million for the year ended December 31, 2023 compared to $6.7 million for the year ended December 31, 2022, an increase of $3.1 million, or 46.9% .
Overview 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.
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.
Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA is a financial measure is calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) IPO related expenses, (vi) stock-based compensation expense, (vii) gain on forgiveness of debt, and (viii) out-of-period adjustment.
Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA is a financial measure calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation expense, (vi) out-of-period adjustment, (vii) secondary offering transaction costs, (viii) write-off of certain inventory items outside the normal course of business, and (ix) impairment expense and loss, net, on disposal of machinery outside the normal course of business.
The adjustment was to correct immaterial errors in the accounting for certain inventory items in our previously issued quarterly and annual financial statements. The impact of the inventory write-off was an increase to cost of goods sold of $0.9 million for the year ended December 31, 2022.
(3) The out-of-period adjustment represented an inventory write-off recorded during the year ended December 31, 2022, which management believes was not representative of our underlying operating performance. The adjustment was to correct immaterial errors in the accounting for certain inventory items in our previously issued quarterly and annual financial statements.
In addition, we may consider making strategic acquisitions and investments and increasing our investment in Bio Earth, which could require significant liquidity. The rapidly changing macroeconomic and geopolitical dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects beyond 2022.
The rapidly changing macroeconomic and geopolitical dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects beyond 2023.
Liquidity and Capital Resources Sources and Uses of Funds Our primary sources of liquidity are cash provided by operations, borrowings under our line of credit with the Hanmi Bank (the “Line of Credit”) and promissory notes, and during the year ended December 31, 2021, net proceeds of our IPO offering totaling $67.6 million.
The impact of the inventory write-off was an increase to cost of goods sold of $0.9 million for the year ended December 31, 2022. Liquidity and Capital Resources Sources and Uses of Funds Our primary sources of liquidity are cash provided by operations, borrowings under our line of credit with the Hanmi Bank (the “Line of Credit”), and promissory notes.
Liquidity Position The following table summarizes total current assets, liabilities and working capital at December 31, 2022 compared to December 31, 2021: December 31, 2022 December 31, 2021 Increase/(Decrease) (in thousands) Current assets $ 123,800 $ 102,872 $20,928 Current liabilities 39,253 30,764 8,489 Working capital $ 84,547 $ 72,108 $ 12,439 As of December 31, 2022, we had working capital of $84.5 million compared to working capital of $72.1 million as of December 31, 2021, representing an increase of $12.4 million, or 17%.
Liquidity Position The following table summarizes total current assets, liabilities and working capital at December 31, 2023 compared to December 31, 2022: December 31, 2023 December 31, 2022 Increase/(Decrease) (in thousands) Current assets $ 154,929 $ 123,800 $ 31,129 Current liabilities 44,401 39,253 5,148 Working capital $ 110,528 $ 84,547 $ 25,981 As of December 31, 2023, we had working capital of $110.5 million, compared with working capital of $84.5 million as of December 31, 2022, representing an increase of $26.0 million, or 30.7% .
At December 31, 2022, we had operating leases, primarily for manufacturing and distribution facilities, and purchase obligations primarily for machinery and equipment and constructions in certain of our facilities, expiring at various dates through 2031.
We have certain contractual obligations, such as operating lease obligations and purchase obligations that require us to make periodic payments. At December 31, 2023, we had operating leases, primarily for manufacturing and distribution facilities, and purchase obligations primarily for machinery and equipment, expiring at various dates through 2031.
Additionally, cost of goods sold for the year ended December 31, 2022 included a $3.5 million writeoff of certain inventory items, out of which $0.9 million was determined to be out-of-period and was recorded to correct immaterial errors in the quarterly and annual financial statements previously issued.
During the year ended December 31, 2022, we recorded $3.5 million in inventory adjustments, out of which $0.9 million related to an out-of-period write-off of certain inventory items to correct immaterial errors in the quarterly and annual financial statements previously issued. 36 Gross profit Gross profit was $153.0 million for the year ended December 31, 2023 compared to $132.1 million for the year ended December 31, 2022, an increase of $21.0 million, or 15.9%.
The increase was primarily driven by an increase in operating income of $6.9 million partially offset by a decrease in other income, net of $1.9 million and an increase in the provision for income taxes of approximately $1.6 million, as discussed above.
The increase was primarily driven by an increase in operating income of $12.1 million partially offset by a decrease in other income, net of $1.6 million and an increase in the provision for income taxes of approximately $3.1 million, as discussed above. 37 Non-GAAP Financial Measures We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with US GAAP.
Also, Adjusted EBITDA and Adjusted EBITDA margin are not necessarily comparable to similarly titled measures presented by other companies. Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.
Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.
As described in Note 4 — Joint Venture in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, our joint venture agreement (the "JV Agreement") to establish a new corporation, Bio Earth, to build a factory in Taiwan requires significant investment.
As of December 31, 2023, we had no borrowing on the Line of Credit, $28.2 million in outstanding balance under the 2027 Term Loan, and $21.6 million in outstanding balance under the 2026 Term Loan. 39 As described in Note 4 — Joint Venture in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we entered into a joint venture agreement (the "JV Agreement") in April 2022 to establish a new corporation, Bio Earth, to build a bagasse factory in Taiwan.
We also believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period. 34 Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as alternatives to net income or cash flows from operating activities and net income margin or other measures determined in accordance with GAAP.
We also believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period.
Stock-based compensation expense for both the years ended December 31, 2022 and 2021 was $2.0 million. 32 Results of Operations Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Year Ended December 31, 2022 2021 (in thousands) Net sales $ 422,957 $ 364,244 Cost of goods sold 290,871 256,417 Gross profit 132,086 107,827 Operating expenses 102,071 84,682 Operating income 30,015 23,145 Other income, net 2,498 4,383 Provision for income taxes 6,676 5,089 Net income $ 25,837 $ 22,439 Net sales Net sales were $423.0 million for the year ended December 31, 2022 compared to $364.2 million for the year ended December 31, 2021, an increase of $58.7 million, or 16%.
Results of Operations Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 Year Ended December 31, 2023 2022 (in thousands) Net sales $ 405,651 $ 422,957 Cost of goods sold 252,608 290,871 Gross profit 153,043 132,086 Operating expenses 110,967 102,071 Operating income 42,076 30,015 Other income, net 908 2,498 Provision for income taxes 9,804 6,676 Net income $ 33,180 $ 25,837 Net sales Net sales were $405.7 million for the year ended December 31, 2023 compared to $423.0 million for the year ended December 31, 2022, a decrease of $17.3 million, or 4.1%.
We believe fluctuations in freight cost 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 and other countries.
However, it could also reduce the barrier of entry, intensifying the competition. • 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 and other countries.
Net cash provided by financing activities was $10.6 million for the year ended December 31, 2021 which primarily included $67.6 million of proceeds from the issuance of common stock in connection with our initial public offering, and $16.0 million of borrowings under the term loans, partially offset by $39.3 million of payments made towards the term loans, and $34.6 million of payments on the Line of Credit.
Net cash used in financing activities was $16.2 million for the year ended December 31, 2023, which primarily included $20.9 million of dividend payments to shareholders, $2.3 million of distributions from our variable interest entity to shareholders, and $1.0 million of payments made towards the term loans, partially offset by $8.0 million of additional borrowings under the 2027 Term Loan.
Year Ended December 31, Reconciliation of Adjusted EBITDA (unaudited): 2022 2021 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales Net income: $ 25,837 6.1 % $ 22,439 6.2 % Add (deduct): Interest income (2,226) (0.5) (1,512) (0.4) Interest expense 2,017 0.5 2,907 0.8 Provision for income taxes 6,676 1.6 5,089 1.4 Depreciation and amortization 10,405 2.4 10,044 2.8 Stock-based compensation expense 2,047 0.5 2,026 0.5 IPO related expenses — — 1,055 0.3 Out-of-period adjustment (1) 879 0.2 — — Gain on forgiveness of debt — — (5,000) (1.4) Adjusted EBITDA $ 45,635 10.8 % $ 37,048 10.2 % (1) The out-of-period adjustment represented an inventory write-off recorded during the year ended December 31, 2022, which management believes was not representative of our underlying operating performance.
Year Ended December 31, Reconciliation of Adjusted EBITDA (unaudited): 2023 2022 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales Net income: $ 33,180 8.2 % $ 25,837 6.1 % Add (deduct): Interest income (1,803) (0.4) (2,226) (0.5) Interest expense 2,043 0.5 2,017 0.5 Provision for income taxes 9,804 2.4 6,676 1.6 Depreciation and amortization 10,783 2.7 10,405 2.4 Stock-based compensation expense 770 0.2 2,047 0.5 Out-of-period adjustment (3) — — 879 0.2 Secondary offering transaction costs (2) 453 0.1 — — Write-off of inventory (1) 1,710 0.4 — — Impairment expense and loss, net, on disposal of machinery (1) 2,132 0.5 — — Adjusted EBITDA $ 59,072 14.6 % $ 45,635 10.8 % (1) The write-off of inventory and impairment expense and loss, net, on disposal of machinery represent costs incurred in connection with the scaling back of production in the U.S.
Other income, net Other income, net was $2.5 million for the year ended December 31, 2022 compared to $4.4 million for the year ended December 31, 2021, a decrease of $1.9 million, or 43%.
Operating income Operating income was $42.1 million for the year ended December 31, 2023 compared to $30.0 million for the year ended December 31, 2022, an increase of $12.1 million, or 40.2% .
The $2.5 million other income for the year ended December 31, 2022 consisted primarily of interest income of $2.2 million from the gain associated with the interest rate swap, a gain on foreign currency transactions of $1.6 million, and rental income of $0.9 million, partially offset by interest expense on the line of credit and term loans totaling $2.0 million.
Interest income was $2.2 million during the year ended December 31, 2022, which was primarily associated with a gain on interest rate swap. Such decreases were partially offset by an increase in other income of $0.2 million.
Gross profit Gross profit was $132.1 million for the year ended December 31, 2022 compared to 107.8 million for the year ended December 31, 2021, an increase of $24.3 million, or 22%. Gross margin was 31.2% for the year ended December 31, 2022 compared to 29.6% for the year ended December 31, 2021.
Gross margin was 37.7% for the year ended December 31, 2023 compared to 31.2% for the year ended December 31, 2022, an increase of 650 basis points.
Net cash provided by operating activities was $8.7 million for the year ended December 31, 2021, primarily the result of net income of $22.4 million, adjusted for certain non-cash items totaling $6.6 million, consisting mainly of depreciation and amortization, stock-based compensation, changes in fair value of interest rate swap, and gain on forgiveness of debt.
Net cash provided by operating activities was $53.4 million for the year ended December 31, 2023, primarily the result of net income of $33.2 million, adjusted for certain non-cash items totaling $22.0 million, consisting mainly of depreciation and amortization of fixed and operating right-of-use assets, write-off of inventory and vendor prepayment, loss, net, on disposal of machinery, stock-based compensation, impairment of deposits, deferred income taxes, and adjustments to the allowance for doubtful accounts and inventory reserve.
Cost of goods sold Cost of goods sold was $290.9 million for the year ended December 31, 2022 compared to $256.4 million for the year ended December 31, 2021, an increase of $34.5 million, or 13%.
Cost of goods sold Cost of goods sold was $252.6 million for the year ended December 31, 2023 compared to $290.9 million for the year ended December 31, 2022, a decrease of $38.3 million, or 13.2%. Ocean freight and import duty costs decreased $31.0 million.
The increase in current liabilities was primarily driven by an increase in operating lease liability due within twelve months of $4.5 million, as we adopted ASU 2016-02 (Topic 842), “ Leases ” on January 1, 2022, and an increase in accounts payable and related party payable of $3.0 million.
The increase in current liabilities was primarily driven by an increase in other payable of $3.2 million due to reclassification of government grants from long-term to short-term, an increase in accounts payable and related party payable totaling $0.3 million, an increase in accrued expense of $1.6 million, and an increase in operating lease liability due within twelve months of $0.3 million, partially offset by a decrease in customer deposits of $0.3 million.
Additionally, our board of directors declared a special cash dividend of $0.35 per common share, which was paid on November 30, 2022 totaling $7.0 million to shareholders of record at the close of business on November 21, 2022.
Additionally, as described in Note 22 — Subsequent Events in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K , on February 7, 2024, our Board of Directors declared a quarterly dividend of $0.30 per share on our common stock, which was paid on February 29, 2024 to shareholders of record at the close of business on February 21, 2024.
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.
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: • One of the most noticeable impacts of the COVID-19 pandemic was on the restaurant industry.
Net cash used in investing activities was $13.3 million for year ended December 31, 2021, which included $8.2 million of deposits paid for additional property and equipment, $4.2 million paid to purchase property and equipment, and $0.9 million for our acquisition of Pacific Cup, Inc. Cash flows (used in) provided by financing activities .
Net cash used in investing activities was $30.2 million for the year ended December 31, 2023, which primarily included $49.2 million in purchases of short-term investments, $6.3 million in deposits made towards the purchase of property and equipment, and $2.8 million paid to directly acquire property and equipment, partially offset by $23.0 million in redemptions of short-term investments, $4.0 million of net refund from the joint venture investment, $0.8 million of proceeds from the sale of machinery and equipment, and $0.5 million of deposits refunded from cancelled machinery orders.
Prior to October 6, 2021, interest accrued at an annual rate of prime less 0.25% with a minimum floor of 3.75%, and the amount that could be borrowed was subject to a borrowing base that was calculated as a percentage of the accounts receivable and inventory balances measured monthly.
Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%.
We expect to receive approximately $2.6 million in cash proceeds from the sale of the equipment in the next 12 to 24 months. Our ongoing operations and growth strategy may require us to continue to make investments in our logistics and manufacturing infrastructure and our e-commerce platform.
We are currently in the process of evaluating the appeal options and determining the timing of the payments. Our ongoing operations and growth strategy may require us to continue to make investments in our logistics and manufacturing infrastructure, e-commerce platform, talent, and technology capabilities. In addition, we may consider making strategic acquisitions and investments which could require significant liquidity.
The impact from the out-of-period adjustment was a decrease of gross margin of 20 basis points.
During the year ended December 31, 2022, gross margin included a negative impact of 20 basis points from the $0.9 million out-of-period write-off of certain inventory items discussed above.
As of December 31, 2022, we made net payments totaling $4.0 million as stipulated in the JV Agreement and expect to make the remaining net investment payments totaling $2.5 million under the JV Agreement during the year ended December 31, 2023. As of December 31, 2022, the incorporation and registration of Bio Earth had not been completed.
Through March 31, 2023, we had made net payments totaling $6.0 million as stipulated in the JV Agreement. In May 2023, we entered into a share transfer agreement to sell all of our equity interest in Bio Earth to Keary Global.
The effective tax rate was lower for the year ended December 31, 2021, primarily due to the gain on forgiveness of debt of $5.0 million, which was a discrete item not presented for the year ended December 31, 2022.
The Company’s effective tax rate was 22.8% for the year ended December 31, 2023 compared to 20.5% for the year ended December 31, 2022.
Removed
We believe our ability to source products quickly on a cost-effective basis via a diversified 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 and supported a superior margin profile.
Added
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures. Overview We are a rapidly-growing specialty distributor and select manufacturer of disposable foodservice products and related items.
Removed
We manage and evaluate our operations in one reportable segment. 2022 Business Highlights and Trends • We recorded revenues of $423.0 million for the year ended December 31, 2022, which represents an increase of 16.1% compared to 2021. • We continued to drive significant margin expansion, achieving a record gross margin of 31.2% for the year ended December 31, 2022 despite a $3.5 million writeoff of certain inventory items, out of which $0.9 million was determined to be out-of-period.
Added
This model provides us with the flexibility to adjust the mix of our product offering from import and manufacturing in evolving economic environment to drive operating efficiency and sustained margin expansion.
Removed
The gross margin achieved in 2022 represented an increase of 160 basis points from the year ended December 31, 2021, and an increase of 100 basis points from the year ended December 31, 2020 when gross margin was boosted by significant sales from higher-margin personal protective equipment (PPE) products. • We recorded net income of $25.8 million for the year ended December 31, 2022, which represents an increase of 15.1% compared to 2021. • We generated record net cash provided by operating activities of $29.5 million for the year ended December 31, 2022. • During the year ended December 31, 2022, we refinanced our $21.6 million variable interest rate term loan with a new fixed interest term loan ahead of multiple interest rate hikes in the United States.
Added
We manage and evaluate our operations in one reportable segment. 2023 Business Highlights and Trends • During the year ended December 31, 2023, we invested in the significant expansion of our distribution capabilities through opening new warehouses and racking up additional areas in our existing warehouses. • We enhanced our sales force in 2023 through the addition of new team members and promotion of our inaugural Chief Revenue Officer. • During the year ended December 31, 2023, we executed a strategy to pivot into a more asset-light model by increasing imports and scaling back manufacturing in certain locations in light of dropping ocean freight rates coupled with rising domestic labor and operating costs, resulting in strong margin expansion and cash flows. • We recorded revenues of $405.7 million for the year ended December 31, 2023, a decrease of 4.1% compared to 2022 in revenue amount and an increase of 3.7% in volume. • We achieved a record gross margin of 37.7% for the year ended December 31, 2023, a 650-basis-point increase from the year ended December 31, 2022. • We recorded net income of $33.2 million for the year ended December 31, 2023, an increase of 28.4% compared to the year ended December 31, 2022. • We achieved a record net income margin of 8.2% for the year ended December 31, 2023 compared to 6.1% for the year ended December 31, 2022. 33 • We generated record net cash provided by operating activities of $53.4 million for the year ended December 31, 2023, an increase of 81.1% compared to prior year. • We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $59.1 million for the year ended December 31, 2023, a 29.4% increase from the year ended December 31, 2022. • Our Adjusted EBITDA margin, a non-GAAP measure defined below, expanded to a company record of 14.6% for the year ended December 31, 2023, an increase of 380 basis points from the year ended December 31, 2022. • We had financial liquidity of $59.3 million and additional short-term investments of $26.3 million as of December 31, 2023. • During the second quarter of 2023, we closed the sale of our equity interest in Bio Earth and received total consideration of $6.1 million, which comprised of our original deposits plus accrued interest. • On August 7, 2023, our Board of Directors approved our inaugural regular quarterly cash dividend.
Removed
The original loan was set to mature in May 2029 with a variable interest rate of prime less 0.25%.
Added
During the year ended December 31, 2023, we returned a total of $20.9 million to our shareholders in the form of special and regular cash dividend. • On September 12, 2023, we increased our public float by completing a secondary public offering of 1.2 million shares of our common stock.
Removed
Our new $28.7 million term loan matures in July 2027 with interest accruing at a fixed rate of 4.375%. • We had financial liquidity of $63.0 million as of December 31, 2022, and declared and paid a special cash dividend of $0.35 per share on our common stock in November 2022. 30 • We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $45.6 million for the year ended December 31, 2022, representing an increase of $8.6 million, or 23.2% compared the year ended December 31, 2021. • During the year ended December 31, 2022, we further invested in the enhancement of our distribution infrastructure, adding two distribution centers in the City of Industry, California and Kapolei, Hawaii. • During the year ended December 31, 2022, we continued our efforts and commitment to sustainability by investing, under a joint venture agreement, $4.0 million into establishing Bio Earth, a new Taiwanese corporation for the manufacturing of compostable foodservice products from bagasse.

… 47 more changes not shown on this page.

Other KRT 10-K year-over-year comparisons