10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-40336

Karat Packaging Inc.

(Exact name of registrant as specified in its charter)

Delaware	83-2237832
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6185 Kimball Avenue Chino, CA	91708
(Address of principal executive offices)	(Zip Code)

(626) 965-8882

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	KRT	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of Common Stock, $0.001 par value, outstanding on November 6, 2023 was 19,964,413 shares.

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30
Item 4.	Controls and Procedures	30
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
SIGNATURES		35

1

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

PART I - FINANCIAL INFORMATION

	September 30, 2023		December 31, 2022
Assets
Current assets
Cash and cash equivalents (including $7,770 and $2,022 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	$	28,162	$	16,041
Short-term investments (including $8,000 and $0 associated with variable interest entity at September 30, 2023, and December 31, 2022, respectively)	18,063		—
Accounts receivable, net of allowance for doubtful accounts of $430 and $1,260 at September 30, 2023 and December 31, 2022, respectively (including $0 and $6 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	33,984		29,912
Inventories	71,657		71,206
Prepaid expenses and other current assets (including $25 and $191 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	6,823		6,641
Total current assets	158,689		123,800
Property and equipment, net (including $44,489 and $45,399 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	96,690		95,568
Deposits	1,672		12,413
Goodwill	3,510		3,510
Intangible assets, net	333		353
Operating right-of-use assets	17,068		15,713
Other assets (including $55 and $38 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	2,002		818
Total assets	$	279,964	$	252,175
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable (including $60 and $2 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	$	19,384	$	18,559
Accrued expenses (including $461 and $625 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	8,858		9,005
Related party payable	2,555		4,940
Income taxes payable	8,010		—
Customer deposits (including $116 and $165 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	803		1,281
Long-term debt, current portion (including $1,111 and $957 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	1,111		957
Operating lease liabilities, current portion	4,927		4,511
Other payables	49		—
Total current liabilities	45,697		39,253

2

	September 30, 2023		December 31, 2022
Deferred tax liability	5,156		5,156
Long-term debt, net of current portion and debt discount of $219 and $216 at September 30, 2023 and December 31, 2022, respectively (including $48,668 and $41,558 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively, and debt discount of $219 and $216 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	48,668		41,558
Operating lease liabilities, net of current portion	12,866		11,623
Other liabilities (including $1,302 associated with variable interest entity at both September 30, 2023 and December 31, 2022)	2,824		2,652
Total liabilities	115,211		100,242
Commitments and Contingencies (Note 17)
Karat Packaging Inc. stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding, at both September 30, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value, 100,000,000 shares authorized, 19,916,839 and 19,893,839 shares issued and outstanding, respectively, as of September 30, 2023 and 19,908,005 and 19,885,005 shares issued and outstanding, respectively, as of December 31, 2022	20		20
Additional paid in capital	86,620		85,792
Treasury stock, $0.001 par value, 23,000 shares at both September 30, 2023 and December 31, 2022	(248)		(248)
Retained earnings	67,773		56,118
Total Karat Packaging Inc. stockholders’ equity	154,165		141,682
Noncontrolling interest	10,588		10,251
Total stockholders’ equity	164,753		151,933
Total liabilities and stockholders’ equity	$	279,964	$	252,175

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 

3

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	105,528	$	109,996	$	310,069	$	330,290
Cost of goods sold	66,584		75,828		191,120		227,869
Gross profit	38,944		34,168		118,949		102,421
Operating expenses
Selling expense	8,004		9,413		25,500		28,218
General and administrative expense (including $702 and $665 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; $2,020 and $1,899 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	19,870		16,861		53,767		49,033
Impairment expense and (gain) loss, net, on disposal of machinery	(310)		(16)		2,231		(33)
Total operating expenses	27,564		26,258		81,498		77,218
Operating income	11,380		7,910		37,451		25,203
Other income (expense)
Rental income (including $235 and $239 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $721 and $715 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	259		239		781		715
Other income (expense), net	32		28		(58)		(235)
Gain on foreign currency transactions	455		369		350		1,352
Interest income (including $80 and $0 interest income associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $278 and $2,160 interest income associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	454		—		1,040		2,160
Interest expense (including $528 and $470 interest expense associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $1,499 and $1,379 interest expense associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(536)		(493)		(1,516)		(1,576)
Total other income, net	664		143		597		2,416
Income before provision for income taxes	12,044		8,053		38,048		27,619
Provision for income taxes	2,904		1,900		9,045		6,323
Net income	9,140		6,153		29,003		21,296
Net income attributable to noncontrolling interest	75		57		431		2,189
Net income attributable to Karat Packaging Inc.	$	9,065	$	6,096	$	28,572	$	19,107
Basic and diluted earnings per share:
Basic	$	0.46	$	0.31	$	1.44	$	0.96
Diluted	$	0.45	$	0.31	$	1.43	$	0.96
Weighted average common shares outstanding, basic	19,890,646		19,809,417		19,888,244		19,808,813
Weighted average common shares outstanding, diluted	19,994,648		19,938,042		19,962,999		19,922,047

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 

4

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share and per share data)

	Common Stock			Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity Attributable to Karat Packaging Inc.		Noncontrolling Interest		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance, January 1, 2022	19,827,417	$	20	(23,000)	$	(248)	$	83,694	$	39,434	$	122,900	$	9,125	$	132,025
Stock-based compensation	—	—		—	—		611		—		611		—		611
Exercise of common stock options	5,000	—		—	—		51		—		51		—		51
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(387)		(387)
Net income	—	—		—	—		—		6,667		6,667		1,276		7,943
Balance, March 31, 2022	19,832,417	$	20	(23,000)	$	(248)	$	84,356	$	46,101	$	130,229	$	10,014	$	140,243
Stock-based compensation	—	—		—	—		565		—		565		—		565
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(487)		(487)
Net income	—	—		—	—		—		6,344		6,344		856		7,200
Balance, June 30, 2022	19,832,417	$	20	(23,000)	$	(248)	$	84,921	$	52,445	$	137,138	$	10,383	$	147,521
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	—	—		—	—		598		—		598		—		598
Stock-based compensation	—	—		—	—		—		—		—		(190)		(190)
Net income	—	—		—	—		—		6,096		6,096		57		6,153
Balance, September 30, 2022	19,832,417	$	20	(23,000)	$	(248)	$	85,519	$	58,541	$	143,832	$	10,250	$	154,082
	Common Stock			Treasury Stock			Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity Attributable to Karat Packaging Inc.		Noncontrolling Interest		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount
Balance, January 1, 2023	19,908,005	$	20	(23,000)	$	(248)	$	85,792	$	56,118	$	141,682	$	10,251	$	151,933
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	2,452	—		—	—		(14)		—		(14)		—		(14)
Stock-based compensation	—	—		—	—		277		—		277		—		277
Net income	—	—		—	—		—		9,005		9,005		181		9,186
Balance, March 31, 2023	19,910,457	$	20	(23,000)	$	(248)	$	86,055	$	65,123	$	150,950	$	10,432	$	161,382
Cash dividends declared ($0.35 per share)	—	—		—	—		—		(6,965)		(6,965)		—		(6,965)
Issuance of common stock upon vesting of restricted stock units, net shares withheld to cover taxes	582	—		—	—		(4)		—		(4)		—		(4)
Stock-based compensation	—	—		—	—		216		—		216		—		216
Net income	—	—		—	—		—		10,502		10,502		175		10,677
Balance, June 30, 2023	19,911,039	$	20	(23,000)	$	(248)	$	86,267	$	68,660	$	154,699	$	10,607	$	165,306
Cash dividends declared ($0.50 per share)	—	—		—	—		—		(9,952)		(9,952)		—		(9,952)
Stock-based compensation	—	—		—	—		250				250		—		250
Exercise of stock options	5,800	—		—	—		103		—		103		—		103
Noncontrolling interest tax withholding	—	—		—	—		—		—		—		(94)		(94)
Net income	—	—		—	—		—		9,065		9,065		75		9,140
Balance, September 30, 2023	19,916,839	$	20	(23,000)	$	(248)	$	86,620	$	67,773	$	154,165	$	10,588	$	164,753

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

5

KARAT PACKAGING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net income	$	29,003	$	21,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including $910 associated with variable interest entity for both the nine months ended September 30, 2023 and 2022)	8,058		7,752
Adjustments to allowance for doubtful accounts	(673)		1,112
Adjustments to inventory reserve	(27)		441
Write-off of inventory	3,225		—
Impairment of deposits	523		—
Loss (gain), net, on disposal of machinery and equipment	1,708		(33)
Change in fair value of interest rate swap (including $0 and $2,159 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	—		(2,159)
Amortization of loan fees (including $41 and $28 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	57		28
Accrued interest on certificates of deposit	(63)		—
Stock-based compensation	743		1,774
Amortization of operating right-of-use assets	3,617		2,897
(Increase) decrease in operating assets
Accounts receivable (including $6 and $21 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(3,399)		(5,068)
Inventories	(3,649)		(15,255)
Prepaid expenses and other current assets (including $22 and $396 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	431		(2,264)
Other assets (including $34 and $458 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(75)		(43)
Increase (decrease) in operating liabilities
Accounts payable (including $57 and $470 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	1,701		459
Accrued expenses (including $163 and $414 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(147)		1,130
Related party payable	(2,385)		2,855
Income taxes payable	8,010		111
Customer deposits (including $49 and $156 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(478)		(29)
Operating lease liability	(3,313)		(2,897)
Other liabilities (including $0 and $1 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	172		150
Other payables	49		242
Net cash provided by operating activities	$	43,088	$	12,499

6

	Nine Months Ended September 30,
	2023		2022
Cash flows from investing activities
Purchases of property and equipment	(2,870)		(2,007)
Proceeds from disposal of property and equipment	605		76
Payments for costs incurred from sale of machinery and equipment	(189)		—
Deposits paid for joint venture investment	(2,900)		(4,000)
Deposits refunded from joint venture investment	6,900		—
Deposit refund from cancelled property and equipment purchase	503		—
Deposits paid for property and equipment	(5,390)		(11,471)
Proceeds from settlement of interest rate swap (including $0 and $825 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	—		825
Purchase of short-term investments (including $8,000 and $0 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(28,000)		—
Redemption of short-term investments	10,000		—
Net cash used in investing activities	$	(21,341)	$	(16,577)
Cash flows from financing activities
Proceeds from line of credit	—		21,100
Payments on line of credit	—		(21,100)
Proceeds from long-term debt (including $8,000 and $27,477 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	8,000		27,477
Payments for lender fees	(61)		—
Payments on long-term debt (including $733 and $21,338 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(733)		(21,338)
Tax withholding on vesting of restricted stock units	(18)		—
Proceeds from exercise of common stock options	103		51
Dividends paid to shareholders	(16,917)		—
Payments of noncontrolling interest tax withholding (including $0 and $1,064 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	—		(1,064)
Net cash (used in) provided by financing activities	$	(9,626)	$	5,126
Net increase in cash and cash equivalents	12,121		1,048
Cash and cash equivalents
Beginning of period	$	16,041	$	6,483
End of period	$	28,162	$	7,531
Supplemental disclosures of non-cash investing and financing activities:
Transfers from deposit to property and equipment	$	8,953	$	6,639
Non-cash purchases of property and equipment	$	71	$	—
Supplemental disclosures of cash flow information:
Cash paid for income tax	$	309	$	7,069
Cash paid for interest	$	1,493	$	1,541

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 

7

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Lollicup USA Inc. (“Lollicup”) was incorporated on January 21, 2001 under the laws of the State of California as an S-corporation. Effective January 1, 2018, Lollicup elected to convert from an S-Corporation to a C-Corporation. Karat Packaging Inc. (“Karat Packaging”) was incorporated on September 26, 2018 as a Delaware corporation and became the holding company for Lollicup (collectively, the “Company”) through a share exchange with the shareholders of Lollicup.

The Company is a manufacturer and distributor of single-use disposable products used in a variety of restaurant and foodservice settings. The Company supplies a wide range of products such as food containers, tableware, cups, lids, cutlery, and straws. The products are available in plastic, paper, biopolymer-based and other compostable forms. In addition to manufacturing and distribution, the Company offers customized solutions to customers, including new product development, design, printing, and logistics services, and distributes certain specialty food and beverages products, such as boba and coffee drinks.

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

The Company currently operates manufacturing facilities and distribution and fulfillment centers in Chino, California; Rockwall, Texas and Kapolei, Hawaii. In addition, the Company operates seven other distribution centers located in Sumner, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; City of Industry, California, Aurora, Illinois; and Sugar Land, Texas.

2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. The financial information as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023.

The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022, as included in the Company's Annual Report on Form 10-K filed on March 16, 2023.

Principles of Consolidation: The condensed consolidated financial statements include the accounts of Karat Packaging and its wholly-owned and controlled operating subsidiaries, Lollicup, Lollicup Franchising, LLC (“Lollicup Franchising”) and Global Wells, a variable interest entity wherein the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated.

Variable Interest Entities: In 2017, Lollicup along with three other unrelated parties formed Global Wells. Lollicup has a 13.5% ownership interest and a 25% voting interest in Global Wells, which is located in Rockwall, Texas. The purpose of this entity is to own, construct, and manage warehouses and manufacturing facilities. Global Wells’ operating agreement may require its members to make additional contributions upon the unanimous decision of the members or when the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000.

In 2018, Lollicup entered into an operating lease with Global Wells for a facility in Rockwall, Texas. Upon the execution of this lease, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in

8

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Global Wells. As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC Topic 810, Consolidations.

Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets; they represent claims against the specific assets of Global Wells. See Note 9 — Long-Term Debt for a description of the two term loans that Global Wells had with financial institutions as of September 30, 2023.

Noncontrolling Interests: The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the Company’s stockholders’ equity. The amount of net income attributable to noncontrolling interests is disclosed in the condensed consolidated statements of income. Tax payments made by the Company on behalf of the noncontrolling interests are deducted from their equity balances, as shown in the condensed consolidated statements of stockholders’ equity.

Estimates and Assumptions: Management uses estimates and assumptions in preparing financial statements in accordance with US GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ materially from the estimates that were assumed in preparing the condensed consolidated financial statements. Estimates that are significant to the condensed consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for slow-moving and obsolete inventory.

Reporting Segments: The Company manages and evaluates its operations in one reportable segment. This segment consists of manufacturing and supply of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, foam, post-consumer recycled content and renewable materials. It also consists of the distribution of certain specialty food and beverage products, such as boba and coffee drinks, and certain restaurant and warehouse supplies. The Company’s long-lived assets are all located in the United States, and its revenues are all generated in the United States.

Fair Value Measurements: The Company has financial instruments classified within the fair value hierarchy, which consist of the following:

•At September 30, 2023, the Company had money market accounts and short-term investments classified as Level 1 within the fair value hierarchy. The short-term investments comprise of certificates of deposits with an original maturity of longer than 90 days and are reported at their carrying value as current assets on the condensed consolidated balance sheet. The carrying value of these short-term investments approximates fair value as they were purchased near or on September 30, 2023. At December 31, 2022, the Company had money market accounts classified as Level 1 within the fair value hierarchy, and reported as current assets on the condensed consolidated balance sheet.

The following table summarizes the Company’s fair value measurements by level at September 30, 2023:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	19,024	$	—	$	—
Short-term investments	18,063		—		—
Fair value, September 30, 2023	$	37,087	$	—	$	—

The following table summarize the Company’s fair value measurements by level at December 31, 2022:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	10,609	$	—	$	—
Fair value, December 31, 2022	$	10,609	$	—	$	—

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related-party payable, accrued and other liabilities and other payables at September 30, 2023 and December 31, 2022, approximated fair value

9

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

because of the short maturity of these instruments. The following is a summary of the carrying amount and estimated fair value of the $23,000,000 and $28,700,000 term loans that mature in September 2026 and July 2027, respectively (the "2026 Term Loan" and "2027 Term Loan," respectively):

	September 30, 2023
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	21,640	$	19,496
2027 Term Loan	28,139		27,090
	$	49,779	$	46,586

	December 31, 2022
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	22,079	$	20,115
2027 Term Loan	20,436		18,918
	$	42,515	$	39,033

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

New and Recently Adopted Accounting Standards: The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and as such, the Company have elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which adds to US GAAP an impairment model known as the current expected credit loss ("CECL") model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of US GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The FASB subsequently issued ASU 2019-10 (Topic 326), “Financial Instruments-Credit Losses: Effective Dates” which amends the effective date for SEC filers that are eligible to be ‘smaller reporting companies’, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. The Company adopted this new standard using the modified retrospective adoption method beginning with its first quarter in 2023. The application of this new standard did not have a material impact on its consolidated financial statements.

3. Goodwill

The following table summarizes the activity in the Company's goodwill from December 31, 2022 to September 30, 2023:

	(in thousands)
Balance at December 31, 2022	$	3,510
Goodwill acquired	—
Balance at September 30, 2023	$	3,510

4. Joint Venture

On April 6, 2022, the Company entered into a joint venture agreement (the "JV Agreement") to establish a new corporation, Bio Earth, to build a bagasse factory in Taiwan. The JV Agreement stipulated an investment by the Company of approximately $6,500,000 for a 49% interest in Bio Earth. Through December 31, 2022, the Company made net

10

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

payments totaling $4,000,000 under the JV Agreement. During the three months ended March 31, 2023, the Company made additional payments of $2,900,000 and received a refund of $900,000 under the JV Agreement.

On May 8 2023, the Company entered into a Share Transfer Agreement (the "Share Transfer Agreement"), with approval of the Board of Directors, to sell all of its equity interest in Bio Earth to Keary Global for a total consideration of approximately $6,100,000 (the "Share Transfer"), representing the total net deposits made by the Company of $6,000,000 under the JV Agreement as discussed above and interest accruing at 5% per annum. Keary Global and its affiliate, Keary International are both owned or controlled by Jeff Yu, brother of our Chief Executive Officer, Alan Yu. Concurrent with the Share Transfer Agreement, the Company also entered into an agreement with Keary Global, Bio Earth and Happiness Moon Co., Ltd. (“Happiness Moon”) pursuant to which (i) Lollicup agreed to transfer all Bio Earth shares, as well as its rights and obligations under the JV Agreement to Keary Global, (ii) Happiness Moon and Bio Earth agree to foregoing and (iii) Bio Earth shall manage the regulatory and registration requirements related to the Share Transfer.

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

See Note 15 — Related Party Transactions for further discussion on our business activities with Keary Global.

5. Inventories

Inventories consist of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
Raw materials	$	9,427	$	18,061
Semi-finished goods	2,413		1,850
Finished goods	60,539		52,044
Subtotal	72,379		71,955
Less inventory reserve	(722)		(749)
Total inventories	$	71,657	$	71,206

The Company incurred inventory adjustments and write-off of $281,000 and $3,225,000 for the three and nine months ended September 30, 2023, respectively. There were no inventory adjustments and write-offs for the three and nine months ended September 30, 2022. Included within the amount for the nine months ended September 30, 2023, was a $1,710,000 write-off of raw materials, as the Company disposed of certain machinery and equipment in executing the strategy to scale back production in certain locations. Inventory adjustments and write-offs are included in cost of goods sold on the accompanying condensed consolidated statements of income. See Note 14 — Impairment Expense and (Gain) Loss, Net, on Disposal of Machinery for further discussion about the disposal of machinery.

6. Property and Equipment

	September 30, 2023		December 31, 2022
	(in thousands)
Machinery and equipment	$	70,150	$	70,234
Leasehold improvements	19,070		19,063
Vehicles	7,480		6,725
Furniture and fixtures	1,141		1,016
Building	38,505		36,599
Land	11,907		11,907
Computer hardware and software	593		593
	148,846		146,137
Less: accumulated depreciation and amortization	(52,156)		(50,569)
Total property and equipment, net	$	96,690	$	95,568

11

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and amortization expense on property and equipment was $2,701,000 and $2,597,000 for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense on property and equipment was $8,038,000 and $7,732,000 for the nine months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense is reported within general and administrative expense except for depreciation and amortization expense related to manufacturing facilities and equipment, which is included in cost of goods sold on the accompanying condensed consolidated statements of income.

7. Line of Credit

Pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the “Loan Agreement”), the Company has a line of credit with a maximum borrowing capacity of $40,000,000 (the “Line of Credit”) secured by the Company’s assets. The Company is not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. The Company is required to comply with certain financial covenants, including a minimum current ratio, minimum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio and a minimum fixed charge coverage ratio.

On March 14, 2023, the Company amended the Line of Credit. Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%. The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.

The Line of Credit also includes a standby letter of credit sublimit, which was amended and increased to $5,000,000 from $2,000,000 on June 20, 2023.

The Company had no borrowings outstanding under the Line of Credit as of both September 30, 2023 and December 31, 2022. The amount issued under the standby letter of credit was $3,736,000 and $1,070,000 as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the maximum remaining amount that could be borrowed under the Line of Credit was $36,264,000. As of both September 30, 2023 and December 31, 2022, the Company was in compliance with the financial covenants under the Line of Credit.

8. Accrued Expenses

The following table summarizes information related to accrued expense liabilities:

	September 30, 2023		December 31, 2022
	(in thousands)
Accrued miscellaneous expenses	$	2,368	$	1,646
Accrued interest	73		108
Accrued payroll	1,180		1,586
Accrued vacation and sick pay	834		543
Accrued shipping expenses	1,478		1,918
Accrued professional services fees	499		600
Accrued property tax	876		1,164
Accrued sale taxes and use taxes	1,021		992
Accrued sales discount	529		448
Total accrued expenses	$	8,858	$	9,005

12

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Long-Term Debt

Long-term debt consists of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
The 2026 Term Loan, with an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022, which the Company exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $116,000 are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.	$	21,711	$	22,168
The 2027 Term Loan, with an initial balance of $20,700,000 and an option to request for additional advances up to a maximum of $8,000,000 through June 30, 2023, which the Company exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Prior to August 1, 2023, principal and interest payments of $104,000 are due monthly. Beginning August 1, 2023, monthly principal and interest payments increased to $144,000 for the remainder of the loan term, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt coverage ratio.	$	28,287	$	20,563
Long-term debt	49,998		42,731
Less: unamortized loan fees	(219)		(216)
Less: current portion	(1,111)		(957)
Long-term debt, net of current portion	$	48,668	$	41,558

At September 30, 2023, future maturities are:

	(in thousands)
2023 (remainder)	$	277
2024	1,122
2025	1,179
2026	20,798
2027	26,622
	$	49,998

The 2027 Loan was a refinance in June 2022 from a previous $21,580,000 term loan, and was accounted for as a debt modification. The Company was in compliance with all of its financial covenants as of both September 30, 2023 and December 31, 2022.

10. Interest Rate Swap

In June 2022, Global Wells terminated its ten-year floating-to-fixed interest rate swap, and recognized cash proceeds of $825,000 as gain on the settlement, which was included in interest income in the accompanying condensed consolidated statements of income. This interest rate swap had a notional value of $21,580,000 as of the effective date of June 13, 2019 based on the prime rate versus a 5.0% fixed rate.

For the nine months ended September 30, 2022, Global Wells recognized $2,159,000 (including the gain on settlement) as interest income related to the interest rate swap.

13

11. Stock-Based Compensation

In January 2019, the Company’s Board of Directors adopted the 2019 Stock Incentive Plan (the “Plan”). A total of 2,000,000 shares of common stock were authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards. A compensation committee appointed by the Board of Directors of the Company determines the terms and conditions of each grant under the Plan. Employees, directors, and consultants are eligible to receive stock options and stock awards under the Plan. The aggregate number of shares available under the Plan and the number of shares subject to outstanding options may be increased or decreased by the Plan administrator to reflect any changes in the outstanding common stock by reason of any recapitalization, reorganization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock or similar transaction.

The exercise price of incentive stock options may not be less than the fair market value of the common stock at the date of grant. The exercise price of incentive stock options granted to individuals that own greater than 10% of the voting stock may not be less than 110% of the fair market value of the common stock at the date of grant.

The term of each incentive and nonqualified option is based upon conditions as determined by the option agreement; however, the term can be no more than ten years from the date of the grant. In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the term of the option will be a shorter term as provided in the option agreement, but not more than five years from the date of the grant.

As of September 30, 2023, a total of 1,334,017 shares of common stock were available for further award grants under the Plan. For the three months ended September 30, 2023 and 2022, the Company recognized a total of $250,000 and $598,000 in stock-based compensation expense, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized a total of $743,000 and $1,774,000 in stock-based compensation expense, respectively. The Company recognizes stock-based compensation over the vesting period, which is generally three (3) years for both the restricted stock units and stock options.

Stock Options

A summary of the Company’s stock option activity under the Plan for the period ended September 30, 2023 is as follows:

	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contract Life (In Years)	Aggregate Intrinsic Value
					(in thousands)
Outstanding at December 31, 2022	420,000	$	18.6	8.8	$	—
Exercised	(5,800)	$	17.7
Forfeited	(10,000)	$	18.9
Outstanding at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Vested and expected to vest at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Exercisable at September 30, 2023	130,867	$	18.6	8.1	$	581

There were no stock options granted during the nine months ended September 30, 2023. At September 30, 2023, total remaining stock-based compensation cost for unvested stock options under the Plan was approximately $282,000. The cost is expected to be recognized over a weighted-average period of 1.0 year.

The aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on September 30, 2023, multiplied by the number of shares per each option.

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

The Company issued restricted stock units to its employees. The following table summarizes the unvested restricted stock units for the nine months ended September 30, 2023:

	Number of Shares Outstanding	Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	82,146	11.47
Vested	(4,550)	16.64
Forfeited	(1,667)	10.00
Unvested at September 30, 2023	75,929	11.19

There were no restricted stock units granted during the nine months ended September 30, 2023. At September 30, 2023, total remaining stock-based compensation cost for unvested restricted stock units was approximately $39,000. The cost is expected to be recognized over a weighted-average period of 0.6 years.

12. Earnings Per Share

(a)Basic

Basic earnings per share is calculated by dividing the net income attributable to equity holders of the Company for the period by the weighted average number of common shares outstanding during the period.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$9,065		$6,096		$28,572		$19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Basic earnings per share	$	0.46	$	0.31	$	1.44	$	0.96

(b)Diluted

Diluted earnings per share is calculated based upon the weighted average number of common shares and common equivalent shares outstanding during the period, calculated using the treasury stock method. Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost related to stock awards for future services that the Company has not yet recognized. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.

The following table summarizes the calculation of diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$	9,065	$	6,096	$	28,572	$	19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Dilutive shares
Stock options and restricted stock units	104		129		75		113
Adjusted weighted average number of common shares	19,995		19,938		19,963		19,922
Diluted earnings per share	$	0.45	$	0.31	$	1.43	$	0.96

For the three months ended September 30, 2023 and 2022, a total of 0 and 434,000 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their anti-dilutive impact on earnings per share. For the nine months ended September 30, 2023 and 2022, a total of 285,000 and 452,000 shares of

15

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their anti-dilutive impact on earnings per share.

13. Leases

The Company primarily leases manufacturing facilities, distribution centers and office spaces with lease terms expiring through 2031. The Company recognized the following lease costs in the accompanying condensed consolidated statement of income:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Operating lease expense	$	1,606	$	1,336	$	4,454	$	3,256
Short-term lease expense	106		4		143		14
Variable lease expense	260		212		750		501
Total lease expense	$	1,972	$	1,552	$	5,347	$	3,771

For the three months ended September 30, 2023 and 2022, rent expense included in operating expenses was $1,653,000 and $1,260,000, respectively, and rent expense included in cost of goods sold was $319,000 and $292,000, respectively. For the nine months ended September 30, 2023 and 2022, rent expense included in operating expenses was $4,542,000 and $2,974,000, respectively, and rent expense included in cost of goods sold was $805,000 and $797,000, respectively.

The following table presents supplemental information related to operating leases:

	September 30, 2023		December 31, 2022
Weighted average remaining lease term	4.41 years		4.27 years
Weighted average discount rate	5.8	%	5.3	%

	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases	$	4,129	$	3,120

As of September 30, 2023, future lease payments under operating leases were as follows:

	(in thousands)
2023 (remainder)	$	1,544
2024	5,254
2025	3,928
2026	4,044
2027	2,711
Thereafter	2,885
Total future lease payments	20,366
Less: imputed interest	2,573
Total lease liability balance	$	17,793

In September 2020, Global Wells entered into an operating lease with an unrelated party as the landlord. The lease generates monthly rental payments from $58,000 to $61,000 over the lease term of 38 months beginning September 9,

16

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2020. The lease was extended for a period of two additional years beginning November 1, 2023, and will generate monthly rental payments from $62,000 to $65,000. The expected rental income is $185,000 for the remaining three months of the year ending December 31, 2023, and $739,000 and $616,000 for the years ending December 31, 2024, and 2025, respectively.

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

In February 2023, the Company started to execute a strategy to increase imports and scale back manufacturing in certain locations. The Company subsequently reached an agreement with two unrelated third-party vendors in Taiwan to sell them certain of its manufacturing machinery and equipment. The sale of these assets occurred in the second and third quarter of 2023. During the same period, the Company also cancelled certain equipment purchase commitments that it had previously paid deposits towards, and disposed of certain machinery and equipment through abandonment.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
(Gain) loss, net, on disposal of machinery in scaling back manufacturing	$	(310)	$	—	$	1,612	$	—
(Gain) loss, net, on disposal of machinery within normal course of business	—		(16)		96		(33)
(Gain) Loss, net, on disposal	(310)		(16)		1,708		(33)
Impairment of deposits	—		—		523		—
Impairment expense and (gain) loss, net, on disposal of machinery	$	(310)	$	(16)	$	2,231	$	(33)

15. Related Party Transactions

Keary Global Ltd. ("Keary Global") owns 250,004 shares of the Company's common stock as of September 30, 2023, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018. Keary Global and its affiliate, Keary International, are owned by one of the Company’s stockholders’ family member. In addition to being a stockholder, Keary Global and Keary International are inventory suppliers and purchasing agents for the Company overseas. The Company has entered into ongoing purchase and supply agreements with Keary Global. At September 30, 2023 and December 31, 2022, the Company has accounts payable due to Keary Global and Keary International of $2,555,000 and $4,940,000, respectively. Purchases for the three months ended September 30, 2023 and 2022 from this related party were $7,371,000 and $7,336,000, respectively. Purchases for the nine months ended September 30, 2023 and 2022 from this related party were $32,384,000 and $33,051,000, respectively.

See Note 4 — Joint Venture for discussion on our share transfer agreement with Keary Global.

16. Income Taxes

For the three months ended September 30, 2023 and 2022, the Company's income tax expense was $2,904,000 and $1,900,000, with effective tax rate of 24.1% and 23.6%, respectively. For the nine months ended September 30, 2023 and 2022, the Company's income tax expense was $9,045,000 and $6,323,000, with effective tax rate of 23.8% and 22.9%, respectively. For both the three and nine months ended September 30, 2023 and 2022, the Company's effective tax rate differed from the United States federal statutory rate of 21% primarily due to state taxes.

In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Based upon the level of historical taxable income, at this time, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not there will be full utilization of the deferred tax assets in each jurisdiction. As such, as of September 30, 2023, based on the available evidence, the Company did not record any valuation allowance.

17

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company remains subject to the Internal Revenue Services ("IRS") examination for the 2019 through 2022 tax years, and has received notice in February 2019 that it is under examination for years 2016 and 2017. Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions for the 2018 through 2021 tax years. As of September 30, 2023, and December 31, 2022, the Company did not have any unrecognized tax benefit.

In August 2022, the Inflation Reduction Act of 2022 (the "Act") was signed into law. The Act, among other things, imposes a nondeductible 1% excise tax on the fair market value of certain stock that is "repurchased" during the taxable year by publicly traded U.S. corporations or acquired by certain of its subsidiaries. The taxable amount is reduced by the fair market value of certain issuances of stock throughout the year. The Act also imposes a 15% corporate minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022. We do not expect these tax law changes to have a material impact on our condensed consolidated financial statements; however, we will continue to evaluate their impact.

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

17. Commitments and Contingencies

The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. Management believes that the outcome of such litigation and claims, should they arise in the future, is not likely to have a material effect on the Company’s financial position or results of income.

18. Secondary Offering

On September 12, 2023, certain selling stockholders completed a secondary public offering of shares of the Company's common stock. The Company did not receive any of the proceeds from the sale of these shares by the selling stockholders. The Company incurred offering transaction costs of $453,000, which were recognized in general and administrative expense in the condensed consolidated statement of income.

19. Subsequent Events

In October 2023, the Company made tax payments totaling approximately $9,600,000 related to the current year quarterly estimate tax payments that were previously deferred under the Winter Storm Relief declared by the IRS. See Note 16 — Income Taxes for details on this tax relief.

In October 2023, Global Wells made a pro rata distribution of approximately $3,956,000, net of all applicable withholding taxes, to its four members.

In October 2023, the Company received deposit refund of $1,272,000 related to the cancellation of a machinery purchase.

In October 2023, the Company signed an amended and restated lease agreement for a 98,000 square-foot distribution facility in Puyallup, Washington for a term of 64-months, which amended, restated and superseded the lease dated June 15, 2023. The lease term is expected to commence in November 2023 pending completion of certain landlord work or an earlier date as mutually agreed-upon between the Company and the landlord. Under the lease agreement, monthly base lease payments range from $94,000 to $115,000 after an initial rent abatement period.

On November 6, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share on the Company's common stock, which will be paid on or around November 30, 2023 to shareholders of record at the close of business on November 20, 2023.

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes. This discussion and analysis contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to expectations concerning matters that are not historical facts. For example, statements discussing, among other things, business strategies, growth strategies and initiatives, future revenues and future performance and expected costs and liabilities are forward-looking statements. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “remain,” “should,” or “will” or the negative of these terms or other comparable terminology. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause those actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:

•fluctuations in the demand for our products in light of changes in laws and regulations applicable to food and beverages and changes in consumer preferences;

•supply chain disruptions that could interrupt product manufacturing and increase product costs;

•our ability to source raw materials and navigate a shortage of available materials;

•our ability to compete successfully in our industry;

•the impact of earthquakes, fire, power outages, floods, pandemics and other catastrophic events, as well as the impact of any interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems;

•our ability to accurately forecast demand for our products or our results of operations;

•the impact of problems relating to delays or disruptions in the shipment of our goods through operational ports;

•our ability to expand into additional foodservice and geographic markets;

•our ability to successfully design and develop new products;

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

•the effects of COVID-19 or other public health crises;

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

•other risks and uncertainties described in “Risk Factors" as set forth in Item I, Part 1A, “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission (the "SEC") on March 16, 2023 (the "2022 Form 10-K").

As used in this Quarterly Report on Form 10-Q, “we”, “us”, “our”, “Karat”, “the Company” or “our Company” refer to Karat Packaging Inc., a Delaware corporation, and, unless the context requires otherwise, our operating subsidiaries. References to “Global Wells” or “our variable interest entity” refer to Global Wells Investment Group LLC, a Texas limited liability company and our consolidated variable interest entity, in which the Company has an equity interest and which is controlled by one of our stockholders. References to “Lollicup” refer to Lollicup USA Inc., a California corporation, our wholly-owned subsidiary.

Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures.

19

Overview

We are a rapidly-growing specialty distributor and select manufacturer of disposable foodservice products and related items. We are a nimble supplier of a wide range of products for the foodservice industry, including food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. Our Karat Earth® line provides environmentally friendly options to our customers, who are increasingly focused on sustainability. We offer customized solutions to our customers, including new product development, design, printing and logistics services.

While a 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. We operate our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses. We believe our ability to source products quickly on a cost-effective basis via a 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.

We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, an approximately 300,000 square foot distribution center in Chino, California, and an approximately 76,000 square foot distribution center located in Kapolei, Hawaii. We have selected manufacturing capabilities in all of these facilities. In addition, we operate seven other distribution centers located in Sumner, 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, Houston, Dallas, New York, Seattle, Atlanta, Chicago and Honolulu metro areas.

We manage and evaluate our operations in one reportable segment.

Business Highlights and Trends

•We recorded net sales of $105.5 million and $310.1 million for the three and nine months ended September 30, 2023, respectively.

•Our gross margin expanded to 36.9% and 38.4% for the three and nine months ended September 30, 2023, respectively, a 580 and 740 basis points increase from the three and nine months ended September 30, 2022, respectively. The gross margin for the nine months ended September 30, 2023 included the impact of 60 basis points due to the write-off $1.7 million of certain raw materials as we disposed of certain machinery and equipment in executing our plan to scale back production in certain locations.

•We recorded net income of $9.1 million and $29.0 million for the three and nine months ended September 30, 2023, respectively, an increase of 49% and 36% compared to three and nine months ended September 30, 2022, respectively. We achieved net income margin of 8.7% and 9.4% for the three and nine months ended September 30, 2023, respectively, a 310 and 300 basis points increase from the three and nine months ended September 30, 2022, respectively. Net income for the nine months ended September 30, 2023 included $2.1 million in impairment expense and loss, net, on disposal of machinery as we executed our strategy to scale back manufacturing in certain locations, and $1.7 million in raw materials write-off, as discussed above.

•We generated net cash from operating activities of $12.0 million and $43.1 million for the three and nine months ended September 30, 2023, respectively, compared to $20.2 million and $12.5 million in the three and nine months ended September 30, 2022, respectively.

•We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $15.2 million and $51.6 million for the three and nine months ended September 30, 2023, respectively, a 30% and 41% increase from the three and nine months ended September 30, 2022, respectively.

•Our Adjusted EBITDA margin, a non-GAAP measure defined below, expanded to 14.4% and 16.6% for the three and nine months ended September 30, 2023, respectively, an increase of 370 and 550 basis points from the three and nine months ended September 30, 2022, respectively.

•We had financial liquidity of $64.4 million and additional short-term investments of $18.1 million as of September 30, 2023. On November 6, 2023, our Board of Directors declared the quarterly cash dividend and increased it to $0.20 per share on our common stock, which will be paid on or around November 30, 2023 to shareholders of record at the close of business on November 20, 2023.

•During the second quarter of 2023, we closed the sale of our equity interest in Bio Earth and had received total consideration of $6.1 million, which comprised of our original deposits plus accrued interest.

20

Trends in Our Business

The following trends have contributed to the results of our operations, and we anticipate that they will continue to affect our future results:

•There is a growing trend towards at home dining and mobility-oriented e-commerce, food delivery and take-out dining. We believe this trend will 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. 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. Sale of eco-friendly products represented approximately 33% of total sales in the third quarter of 2023, compared to 27% in the prior year quarter.

•Most of our products are sourced from vendors abroad and as a result we incur freight costs from these overseas import shipments. 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. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to source our raw materials or manufactured products from countries where tariffs have not been imposed by the current U.S. administration and whether the previously imposed tariffs are removed.

•The cost of raw materials used to manufacture our products, including polyethylene terephthalate, or PET, plastic resin, aluminum and paper boards may continue to fluctuate. Since negotiated sales contracts and the market largely determine the pricing for our products, we are, at times, limited in our ability to raise prices and pass through any impacts of inflation to our costs. There can also be lags between cost inflation and the implementation of price increases, which could negatively impact our gross margin. 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 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.

•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 have recently made a strategic business decision to pivot into a more asset-light growth model by increasing import and scaling back manufacturing in certain locations. We believe this will have either a positive or a negative impact on our results of operations, depending on whether we can successfully source and import finished goods at a price that is more favorable than domestically manufacturer products, and effectively realize savings from reduced manufacturing capabilities.

Critical Accounting Estimates

The following discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments.

There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading “Critical Accounting Policies and Estimates” in Item 7 of Part II of our 2022 Form 10-K.

Results of Operations

The amount and percentage changes calculated in the discussion below were based on numbers rounded to the nearest thousands.

21

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Net sales	$	105,528	$	109,996	$	310,069	$	330,290
Cost of goods sold	66,584		75,828		191,120		227,869
Gross profit	38,944		34,168		118,949		102,421
Operating expenses	27,564		26,258		81,498		77,218
Operating income	11,380		7,910		37,451		25,203
Other income	664		143		597		2,416
Provision for income taxes	2,904		1,900		9,045		6,323
Net income	$	9,140	$	6,153	$	29,003	$	21,296

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Net sales

Net sales were $105.5 million for the three months ended September 30, 2023 compared to $110.0 million for the three months ended September 30, 2022, a decrease of $4.5 million, or 4%. This decrease is primarily made up of $10.4 million from unfavorable year-over-year pricing comparison, as we actively passed on savings from ocean freight and raw materials costs to customers and $1.8 million from lower logistic services and shipping revenue, partially offset by $7.7 million from an increase in volume and change in product mix.

Cost of goods sold

Cost of goods sold was $66.6 million for the three months ended September 30, 2023 compared to $75.8 million for the three months ended September 30, 2022, a decrease of $9.2 million, or 12%. The decrease was primarily attributable to a reduction of $8.0 million in freight and duty costs to acquire inventory from overseas as a result of lower ocean freight rate, and a decrease of $1.9 million in product costs due to lower sales in the current period combined with reduced pricing on certain raw materials used in production as well as some imported finished goods, partially offset by an increase of $0.5 million in inventory reserves adjustments.

Gross profit

Gross profit was $38.9 million for the three months ended September 30, 2023 compared to $34.2 million for the three months ended September 30, 2022, an increase of $4.8 million, or 14%. Gross margin increased to 36.9% for the three months ended September 30, 2023, compared to 31.1% for the three months ended September 30, 2022. Despite the unfavorable impact from price reductions, gross margin benefited from a significant decrease in ocean freight costs, which as a percentage of net sales was 7.9% during the three months ended September 30, 2023, down from 14.8% during the three months ended September 30, 2022. Additional margin expansion factors also included strong United States Dollar against Taiwan New Dollar, and our efforts to scale back manufacturing in the U.S. in favor of imports which carry higher margin.

Operating expenses

Operating expenses were $27.6 million for the three months ended September 30, 2023 compared to $26.3 million for the three months ended September 30, 2022, an increase of $1.3 million, or 5%. The increase was primarily due to an increase of $1.4 million in labor costs primarily due to workforce expansion and the shift towards import as we reduced production but increased warehouse headcount, an increase of $0.6 million in marketing expense as we increased online marketing efforts to grow our e-commerce sales channel, an increase of $0.6 million in professional expenses primarily due to transaction costs incurred in connection with the secondary offering, and an increase of $0.3 million in rental expense primarily due to additional leased warehouses as we continued to expand our distribution capabilities. These increases were partially offset by a decrease of $1.7 million in shipping and transportation costs due to lower shipping rates. See Note 18 - Secondary Offering for further information.

Operating income

22

Operating income was $11.4 million for the three months ended September 30, 2023 compared to $7.9 million for the three months ended September 30, 2022, an increase of $3.5 million, or 44%. The increase was primarily due to an increase in gross profit of $4.8 million, partially offset by an increase in operating expenses of $1.3 million, as discussed above.

Other income, net

Other income, net was $0.7 million for the three months ended September 30, 2023 compared to $0.1 million for the three months ended September 30, 2022. The increase of $0.5 million was primarily due to an increase in interest income of $0.5 million.

Provision for income taxes

Provision for income taxes was $2.9 million for the three months ended September 30, 2023 compared to $1.9 million for the three months ended September 30, 2022, an increase of $1.0 million, or 53%. The Company’s effective tax rate was 24.1% for the three months ended September 30, 2023 compared to 23.6% for the three months ended September 30, 2022 primarily due to the change in the non-taxable non-controlling interest income.

Net income

Net income was $9.1 million for the three months ended September 30, 2023 compared to $6.2 million for the three months ended September 30, 2022, an increase of $3.0 million, or 49%. The increase was primarily driven by an increase in operating income of $3.5 million, and an increase in other income, net of $0.5 million, partially offset by an increase in the provision for income taxes of approximately $1.0 million, as discussed above.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Net sales

Net sales were $310.1 million for the nine months ended September 30, 2023 compared to $330.3 million for the nine months ended September 30, 2022, a decrease of $20.2 million, or 6%. This decrease is primarily made up of $22.6 million from unfavorable year-over-year pricing comparison, as we actively passed on savings from ocean freight and raw materials costs to customers and $6.2 million from lower logistic services and shipping revenue, partially offset by $8.6 million from an increase in volume and change in product mix.

Cost of goods sold

Cost of goods sold was $191.1 million for the nine months ended September 30, 2023 compared to $227.9 million for the nine months ended September 30, 2022, a decrease of $36.7 million, or 16%. The decrease was primarily attributable to a reduction of $31.4 million in freight and duty costs to acquire inventory from overseas as a result of lower ocean freight rate, and a decrease of $8.0 million in product costs due to lower sales in the current period combined with reduced pricing on certain raw materials used in production as well as some imported finished goods. These decreases were partially offset by a $1.7 million write-off of raw materials in 2023 as we disposed of certain machinery and equipment in executing the plan to scale back production in the U.S.

Gross profit

Gross profit was $118.9 million for the nine months ended September 30, 2023 compared to $102.4 million for the nine months ended September 30, 2022, an increase of $16.5 million, or 16%. Gross margin was 38.4% for the nine months ended September 30, 2023, including a 60-basis-point impact from the write-off of raw materials associated with the disposal of certain machinery as discussed above, compared to 31.0% for the nine months ended September 30, 2022. Despite the unfavorable impact from the inventory write-offs and price reductions, gross margin benefited from a significant decrease in ocean freight costs, which as a percentage of net sales was 6.7% during the nine months ended September 30, 2023, down from 15.8% during the nine months ended September 30, 2022. Additional margin expansion factors also included strong United States Dollar against Taiwan New Dollar, and our efforts to scale back manufacturing in the U.S. in favor of imports which carry higher margin and improve operating efficiencies.

Operating expenses

Operating expenses were $81.5 million for the nine months ended September 30, 2023 compared to $77.2 million for the nine months ended September 30, 2022, an increase of $4.3 million, or 6%. The operating expenses for the nine months

23

ended September 30, 2023 included impairment expense and loss, net, on disposal of machinery of $2.2 million due to our scaling back manufacturing in the U.S. Additionally, the increase in operating expenses was also attributable to an increase of $3.6 million in labor costs primarily due to workforce expansion and the shift towards import as we reduced production but increased warehouse headcount, an increase of $2.1 million in marketing expense as we increased online marketing efforts to grow our e-commerce sales channel, an increase of $1.2 million in rental expense as we continued to expand our distribution capabilities. These increases were partially offset by a decrease of $4.0 million in shipping and transportation costs due to lower shipping rates, a decrease of $1.0 million in in stock-based compensation expense, and a decrease of $0.9 million in bad debt expense.

Operating income

Operating income was $37.5 million for the nine months ended September 30, 2023 compared to $25.2 million for the nine months ended September 30, 2022, an increase of $12.2 million, or 49%. The increase was primarily due to an increase in gross profit of $16.5 million, partially offset by an increase in operating expenses of $4.3 million, as discussed above.

Other income, net

Other income, net was $0.6 million for the nine months ended September 30, 2023 compared to $2.4 million for the nine months ended September 30, 2022. The decrease of $1.8 million was primarily due to a decrease in the gain on foreign currency transactions of $1.0 million and a decrease in interest income of $1.1 million. Interest income was $1.0 million during the nine months ended September 30, 2023, which was primarily earned on cash and cash equivalents and short-term investments. Interest income during the nine months ended September 30, 2022 represented a gain associated with an interest rate swap of $2.2 million.

Provision for income taxes

Provision for income taxes was $9.0 million for the nine months ended September 30, 2023 compared to $6.3 million for the nine months ended September 30, 2022, an increase of $2.7 million, or 43%. The Company’s effective tax rate was 23.8% for the nine months ended September 30, 2023 compared to 22.9% for the nine months ended September 30, 2022 primarily due to the change in the non-taxable non-controlling interest income.

Net income

Net income was $29.0 million for the nine months ended September 30, 2023 compared to $21.3 million for the nine months ended September 30, 2022, an increase of $7.7 million, or 36%. The increase was primarily driven by an increase in operating income of $12.2 million, partially offset by a decrease in other income, net of $1.8 million and an increase in the provision for income taxes of approximately $2.7 million, as discussed above.

24

Non-GAAP Financial Measure

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. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with US GAAP in the Consolidated Statements of Income; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a financial measure calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation expense, (vi) secondary offering transaction costs, (vii) write-off of certain inventory items outside the normal course of business, and (viii) impairment expense and (gain) loss, net, on disposal of machinery outside the normal course of business. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.

We present Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our financial performance. Adjusted EBITDA and Adjusted EBITDA margin assist management in assessing our core operating performance. We 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.

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 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.

	Three Months Ended September 30,
Reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin (Unaudited)	2023				2022
	(in thousands, except percentages)
	Amount		% of Net Sales		Amount		% of Net Sales
Net income:	$	9,140	8.7	%	$	6,153	5.6	%
Add (deduct):
Interest income	(454)		(0.4)		—		—
Interest expense	536		0.5		493		0.4
Provision for income taxes	2,904		2.8		1,900		1.7
Depreciation and amortization	2,708		2.6		2,604		2.5
Stock-based compensation expense	250		0.2		598		0.5
Secondary offering transaction costs (2)	453		0.4		—		—
Gain on disposal of machinery (1)	(310)		(0.4)		—		—
Adjusted EBITDA	$	15,227	14.4	%	$	11,748	10.7	%

25

	Nine Months Ended September 30,
Reconciliation of Adjusted EBITDA and Adjusted EBITDA Margin (Unaudited)	2023				2022
	(in thousands, except percentages)
	Amount		% of Net Sales		Amount		% of Net Sales
Net income:	$	29,003	9.4	%	$	21,296	6.4	%
Add (deduct):
Interest income	(1,040)		(0.3)		(2,160)		(0.7)
Interest expense	1,516		0.5		1,576		0.5
Provision for income taxes	9,045		2.9		6,323		1.9
Depreciation and amortization	8,058		2.6		7,752		2.4
Stock-based compensation expense	743		0.2		1,774		0.6
Secondary offering transaction costs (2)	453		0.1		—		—
Write-off of inventory (1)	1,710		0.6		—		—
Impairment expense and loss, net, on disposal of machinery (1)	2,135		0.6		—		—
Adjusted EBITDA	$	51,623	16.6	%	$	36,561	11.1	%

(1) The write-off of inventory and impairment expense and (gain) loss, net, on disposal of machinery represent costs incurred in connection with the scaling back of production in the U.S. As part of the execution of this strategy, certain machinery and equipment was disposed of or impaired, and raw materials associated with those machinery and equipment were written-off.

(2) Secondary offering transaction costs represent legal and professional fees incurred in connection with the completion of the secondary offering, which were directly related to the offering and were incremental to our normal operating expenses.

26

Liquidity and Capital Resources

Sources and Uses of Funds

Our primary sources of liquidity are cash provided by operations, borrowings under our line of credit with the Hanmi Bank (the “Line of Credit”), and promissory notes. On an annual basis, we have typically generated positive cash flows from operations. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on global economic conditions and our ability to navigate challenging macro environment at times.

As described in Note 7 — Line of Credit to the condensed consolidated financial statements, the Line of Credit is available for working capital and general corporate purposes, and is secured by our assets. It consists of a $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. Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%. The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%. On June 20, 2023, we amended the Line of Credit which increased the standby letter of credit sublimit from $2 million to $5 million. As of September 30, 2023, the amount issued under the standby letter of credit was $3.7 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $36.3 million.

As described in Note 9 — Long-Term Debt to the condensed consolidated financial statements, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the “2027 Term Loan”). The 2027 Term Loan had an initial balance of $20.7 million and an option to request for additional advances up to a maximum of $8.0 million through June 2023, which we exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The 2027 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio. Proceeds from the 2027 Term Loan were used to pay down an existing term loan with the same lender, which was set to mature in May 2029 with interest accruing at prime rate less 0.25%, and had an outstanding balance of $20.6 million as of the repayment date.

Additionally, as of September 30, 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. Interest accrues at a fixed rate of 3.50% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The 2026 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.

As of September 30, 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. As of September 30, 2023, we had no outstanding balance on the Line of Credit, $28.3 million in outstanding balance under the 2027 Term Loan, and $21.7 million in outstanding balance under the 2026 Term Loan.

As described in Note 4 — Joint Venture in the Notes to the condensed consolidated financial statements, 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. 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. Concurrent with the share transfer agreement, the Company also entered into an agreement with Keary Global, Bio Earth and Happiness Moon Co., Ltd. (“Happiness Moon”) pursuant to which (i) Lollicup agreed to transfer all Bio Earth shares, as well as its rights and obligations under the JV Agreement to Keary Global, (ii) Happiness Moon and Bio Earth agree to foregoing and (iii) Bio Earth shall manage the regulatory and registration requirements related to the share transfer. As of the end of the second quarter of 2023, the share transfer to Keary Global had been completed and we received the full amount of the total consideration owed to us in connection with the sale of our equity interest in Bio Earth of $6.1 million, representing the original deposits totaling $6.0 million plus interest which accrued at 5% per annum.

27

Additionally, as described in Note 19 — Subsequent Events in the Notes to the condensed consolidated financial statements, on November 6, 2023, our Board of Directors declared a regular quarterly dividend of $0.20 per share on our common stock, which will be paid on or around November 30, 2023 to shareholders of record at the close of business on November 20, 2023. Prior to this, we paid out special and regular quarterly dividend totaling $16.9 million in the current fiscal year.

As described in Note 14 — Impairment Expense and (Gain) Loss, Net, on Disposal of Machinery, in February 2023, management started to pivot into a more asset-light growth model by increasing import and scaling back manufacturing in certain locations. As part of the execution of this strategy, management reached an agreement with two unrelated third-party vendors in Taiwan to sell them certain of our manufacturing machinery and equipment. We also cancelled certain equipment purchase commitments that we had previously paid deposits towards. We expanded our efforts to scale back manufacturing across all U.S. manufacturing facilities in the third and fourth quarter of 2023. As of September 30, 2023, we had received $0.5 million in deposit refunds and $0.6 million from sale of the machinery and equipment. We expect to receive approximately $1.9 million in additional net cash proceeds from sale of the various manufacturing equipment in the next 12 months.

As described in Note 16 — Income Taxes, in March 2023, the Internal Revenue Service ("IRS"), under the Winter Storm Relief, announced that taxpayers in California affected by severe winter storms, flooding, landslides, and mudslides have until November 15, 2023, to file various individual and business tax returns and make tax payments. We took advantage of this tax relief and deferred current year quarterly estimate tax payment until October 2023 when we made a tax payment of approximately $9.6 million.

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. In addition, we may consider making strategic acquisitions and investments 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 2023. 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 to further enhance our operating infrastructure and e-commerce platform for at least the next 12 months. We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value.

Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, increase use of the Line of Credit, and acquire additional debt. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future. In the event we are unable to obtain additional financing when needed, we may be compelled to delay or curtail our plans to develop our business, which could have a material adverse effect on our operations, market position and competitiveness. Notwithstanding the potential liquidity challenges described above, we expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.

Liquidity Position

The following table summarizes total current assets, liabilities and working capital at September 30, 2023 compared to December 31, 2022:

	September 30, 2023		December 31, 2022		Increase/(Decrease)
	(in thousands)
Current assets	$	158,689	$	123,800	$	34,889
Current liabilities	45,697		39,253		6,444
Working capital	$	112,992	$	84,547	$	28,445

As of September 30, 2023, we had working capital of $113.0 million compared to working capital of $84.5 million as of December 31, 2022, representing an increase of $28.4 million, or 34%. The improvement in working capital was driven by an increase of $34.9 million in current assets partially offset by an increase of $6.4 million in current liabilities. The increase in current assets was primarily driven by an increase in cash and cash equivalents and short-term investments of $30.2 million and an increase in account receivable of $4.1 million. The increase in current liabilities was primarily driven

28

by an increase of $8.0 million in income taxes payable primarily due to the deferral of federal and California state income taxes under the Winter Storm Relief declared by the Internal Revenue Service partially offset by a decrease of $1.6 million in accounts payable and related party payables.

Cash Flows

The following table summarizes cash flow for the nine months ended September 30, 2023 and 2022:

	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Net cash provided by operating activities	$	43,088	$	12,499
Net cash used in investing activities	(21,341)		(16,577)
Net cash (used in) provided by financing activities	(9,626)		5,126
Net change in cash and cash equivalents	$	12,121	$	1,048

Cash flows provided by operating activities. Net cash provided by operating activities was $43.1 million for the nine months ended September 30, 2023, primarily the result of net income of $29.0 million, adjusted for certain non-cash items totaling $17.2 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, write-off of inventory, loss, net, on disposal of machinery, stock-based compensation, adjustments to allowance for doubtful accounts, and impairment of deposit. In addition, cash decreased $3.1 million, primarily as a result of changes in working capital, which included a decrease of $3.6 million from inventory build-up, a decrease of $3.4 million from an increase in accounts receivable, a decrease of $3.3 million from a reduction in operating lease liabilities, and a decrease of $0.7 million from lower accounts and related party payables, partially offset by an increase of $8.0 million from the deferral of federal and California state income taxes under the Winter Storm Relief declared by the IRS. Net cash provided by operating activities was $12.5 million for the nine months ended September 30, 2022, primarily the result of net income of $21.3 million, adjusted for certain non-cash items totaling $11.8 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, change in fair value of interest rate swap, stock-based compensation, and adjustments to allowance for doubtful accounts and inventory reserves. In addition, cash decreased $20.6 million, primarily as a result of changes in working capital, which included a decrease of $15.3 million from inventory build-up, a decrease of $5.1 million from an increase in accounts receivable, a decrease of $2.9 million from a reduction in operating lease liabilities, and a decrease of $2.3 million from a higher balance of prepaid expenses and other current assets, partially offset by an increase of $3.3 million from higher accounts and related party payables, and an increase of $1.1 million from higher accrued expenses.

Cash flows used in investing activities. Net cash used in investing activities was $21.3 million for the nine months ended September 30, 2023, which primarily included $18.0 million in net purchases of short-term investments, $5.4 million of deposits paid for the purchase of property and equipment, and $2.9 million paid to directly purchase property and equipment, partially offset by $4.0 million of net refund from the joint venture investment, $0.6 million of proceeds from the sale of machinery and equipment, and $0.5 million of deposits refunded from cancelled machinery orders. Net cash used in investing activities was $16.6 million for the nine months ended September 30, 2022, which included $11.5 million of deposits paid for the purchase of property and equipment, $4.0 million of investment made pursuant to the JV Agreement, and $2.0 million paid to purchase property and equipment, partially offset by proceeds of $0.8 million for the settlement of the interest rate swap.

Cash flows (used in) provided by financing activities. Net cash used in financing activities was $9.6 million for the nine months ended September 30, 2023, which primarily included $16.9 million of cash dividends paid to shareholders, and $0.7 million of term loan repayments, partially offset by $8.0 million of additional borrowings under the 2027 Term Loan. Net cash provided by financing activities was $5.1 million for the nine months ended September 30, 2022, which primarily included additional borrowing under the 2026 Term Loan of $6.9 million, and borrowings under the 2027 Term Loan of $20.6 million, partially offset by $21.3 million of term loan repayments, and $1.1 million of noncontrolling interest tax withholding payment.

Related Party Transactions

For a description of significant related party transactions, see Note 15 — Related Party Transactions in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

29

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 2 — Summary of Significant Accounting Policies in the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2023. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023 due to the material weaknesses described in Part II—Item 9A of the Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis.

Refer to the management report on internal control over financial reporting for the material weaknesses in Part II—Item 9A of the Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023. The same material weaknesses continue to exist as of September 30, 2023. Each of the material weaknesses could result in a misstatement of certain account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any related financial disclosure, nor does management believe that they had any effect on the accuracy of the Company’s financial statements for the current reporting period.

Management’s Remediation Plan

As reported in the 2022 Form 10-K, we are engaged in remedial actions in response to the deficiencies discussed above, and we plan to continue efforts to improve internal control over financial reporting.

Actions Taken During the Year Ended December 31, 2022

The following remedial actions were taken in the prior fiscal year:

•Performed a thorough review of users’ access rights to our significant information technology systems and implemented certain updates to allow for appropriate segregation of duties.

•Increased the number of personnel with the appropriate level of knowledge related to accounting transactions, accounting matters, and relevant systems, including the addition of a Chief Financial Officer and Controller.

•Engaged a third-party service provider to assist management with the design and implementation of internal controls.

•Started an initial risk assessment based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") to identify internal control over financial reporting ("ICFR") risks and control objectives.

•With the assistance from the third-party service provider, and under the supervision of the Company's Audit Committee, Chief Executive Officer and Chief Financial Officer, started the design and

30

implementation of significant process transaction flows and key controls in the Company's business processes, including revenue, inventory, income taxes, and overall IT environment.

•Management started to adopt a process to identify and assess the Company's disclosure controls and procedures, including the preparation and review of presentation and disclosure requirement checklists.

Actions Taken During the Three Months Ended March 31, 2023

The following remedial actions were taken in the first quarter of the current fiscal year:

•Improved the process of retaining evidence of sales arrangements with customers including adopting a required retention period for applicable customer purchase orders.

•Management held additional training for warehouse employees to appropriately perform and document the three-way match between sales orders, shipping documents, and sales invoices.

•Enhanced training programs for personnel that provide key information and perform key roles associated with ICFR. Management designed such training programs in order to improve the level of understanding of the design and proper implementation of controls by the control owners and to instruct such individuals on appropriate level of documentation practices for evidencing review, especially over the completeness and accuracy of underlying data and the precision level used in the review.

•Management enhanced controls requiring inventory adjustments to be reviewed and approved by the appropriate level of management and to be appropriately recorded and inventory costing analysis to be appropriately reviewed.

•Management adopted a Company-wide approval matrix that establishes clear guidelines on authority levels for all types of cash disbursement transactions.

Actions Taken During the Three Months Ended June 30, 2023

The following remedial actions were taken in the second quarter of the current fiscal year:

•Enhanced policies and procedures to improve Information Technology General Controls and the Company's overall IT environment. Examples of some of management's efforts include:

◦Adopted the policy and procedure to regularly perform a thorough review of user's access rights relating to the Company's significant information technology systems;

◦Maintained and monitored restrictions to user access where needed to allow for appropriate segregation of duties; and

◦Maintained and enforced procedures and controls around system development and change management.

•Management has reviewed user access and established appropriate reporting lines within the accounts payable department to ensure proper segregation of duties for and performance of controls and procedures including vendor master file changes and the three-way match between purchase orders, receiving documents, and vendor invoices.

Actions Taken During the Three Months Ended September 30, 2023

The following remedial actions were taken in the third quarter of the current fiscal year:

•Updated and enhanced the standard operating procedures of year-end physical counts to ensure all inventory items are counted at all warehouses in a consistent manner.

•Developed and adopted IT policies around software development and implementation, information security, data backup, and change management.

•Continued to update the risk assessment, objectives, processes and control design and documentation, including such design and documentation as related to the completeness and accuracy of underlying data and a sufficient precision level in management review controls to detect material misstatement across all financial statement areas.

Ongoing Remediation Efforts

31

The following remedial actions are currently in the process of being taken or completed:

•Continue to evaluate the Company's needs for additional personnel and add, as needed, additional headcount primarily within the accounting and information technology departments. Management continues to onboard individuals with the appropriate education, experience, certifications, and training. The hiring of new employees is expected to create and ensure proper reporting lines and segregation of duties, while also providing additional oversight and structure to the organization.

Management is committed to remediating the material weaknesses in a timely fashion and to making continuous improvements to the Company's internal control over financial reporting. Management believes the measures described above have strengthened the Company's internal control over financial reporting, Management will continually assess the effectiveness of the remediation efforts and may determine to take additional measures to address control deficiencies or modify the remediation plan described above. The material weaknesses will not be considered remediated until a sustained period of time has passed to allow for continued operation of the new controls and for management to test the operational effectiveness of the new controls. Testing is expected to continue during the year ended December 31, 2023 and management will continue to provide an update on the status of our remediation activities on a quarterly basis.

Changes in Internal Control Over Financial Reporting

Other than those described above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

32

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are involved in various legal proceedings. Although no assurance can be given, we do not believe that any of our currently pending proceedings will have a material adverse effect on our financial condition, cash flows or results of operations.

Item 1A. Risk Factors.

There have been no material changes to the Risk Factors previously disclosed in the 2022 Form 10-K, which are incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On November 6, 2023, the Company's Board of Directors declared the quarterly cash dividend and increased it to $0.20 per share on the Company's common stock, which will be paid on or around November 30, 2023 to shareholders of record at the close of business on November 20, 2023. A copy of the press release announcing the dividend is attached as Exhibit 99.1 to this Form 10-Q.

On November 6, 2023, upon the recommendation of the Company’s Compensation Committee, the Company’s Board of Directors approved and ratified compensation to the Company’s executive directors per Board meeting commensurate with the compensation paid to the Company’s non-employee directors.

Item 6. Exhibits.

Exhibit No.	Description
10.1+	Separation Agreement and General Release, dated August 30, 2023 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2023).
10.2+	Employment Agreement, dated October 5, 2023, between Karat Packaging Inc. and Daniel Quire, Chief Revenue Officer (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2023).
10.3*	Business Loan Agreement between Global Wells Investment Group LLC and Hanmi Bank, dated September 30, 2021.
31.1*	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2*	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1**	Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

32.2**	Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1*	Press release, dated November 7, 2023
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive File (formatted as inline XBRL and contained in Exhibit 101)
* Filed herewith. ** Furnished herewith. + Indicates management compensatory agreement.

34

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: November 9, 2023	KARAT PACKAGING INC.
	By:	/s/ Alan Yu
		Alan Yu
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Jian Guo
		Jian Guo
		Chief Financial Officer
		(Principal Financial Officer and
		Principal Accounting Officer)

35

EX-10.3

EX-31.1

                                         `    Exhibit 31.1

CERTIFICATION

I, Alan Yu, certify that:

(1)I have reviewed this Quarterly Report on Form 10-Q of Karat Packaging Inc.;

(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 9, 2023	By:	/s/ Alan Yu
		Alan Yu Chairman and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Jian Guo, certify that:

(1)I have reviewed this Quarterly Report on Form 10-Q of Karat Packaging Inc.;

(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 9, 2023	By:	/s/ Jian Guo
		Jian Guo Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT

TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Karat Packaging Inc. (the "Company") for the quarter ended September 30, 2023, as filed with the U.S. Securities and Exchange Commission (the "Report"), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge and belief, that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2023	By:	/s/ Alan Yu
		Alan Yu Chairman and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT

TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Karat Packaging Inc. (the "Company") for the quarter ended September 30, 2023, as filed with the U.S. Securities and Exchange Commission (the "Report"), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge and belief, that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2023	By:	/s/ Jian Guo
		Jian Guo Chief Financial Officer (Principal Financial and Accounting Officer)

EX-99.1

Karat Packaging Board Declares Increase in Quarterly Cash Dividend CHINO, Calif, November 7, 2023 – Karat Packaging Inc. (Nasdaq: KRT) (the “Company” or “Karat”), a specialty distributor and manufacturer of disposable foodservice products and related items, today announced that its board of directors approved the payment of a regular quarterly dividend of $0.20 per share on the Company’s common stock, reflecting an increase from the previous quarterly dividend of $0.10 per share. The dividend is payable on or about November 30, 2023, to the stockholders of record as of November 20, 2023. About Karat Packaging Inc. Karat Packaging Inc. is a specialty distributor and manufacturer of a wide range of disposable foodservice products and related items, primarily used by national and regional restaurants and in foodservice settings throughout the United States. Its products include food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. The company’s eco-friendly Karat Earth® line offers quality, sustainably focused products that are made from renewable resources. Karat Packaging also offers customized solutions, including new product development and design, printing, and logistics services. To learn more about Karat Packaging, please visit the company’s website at www.karatpackaging.com. # # # Investor Relations and Media Contacts: PondelWilkinson Inc. Judy Lin or Roger Pondel 310-279-5980 IR@karatpackaging.com

XML

Cover - shares	9 Months Ended
	Sep. 30, 2023	Nov. 06, 2023
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2023
Document Transition Report	false
Entity File Number	001-40336
Entity Registrant Name	Karat Packaging Inc.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	83-2237832
Entity Address, Address Line One	6185 Kimball Avenue
Entity Address, City or Town	Chino
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	91708
City Area Code	626
Local Phone Number	965-8882
Title of 12(b) Security	Common Stock, $0.001 par value
Trading Symbol	KRT
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		19,964,413
Entity Central Index Key	0001758021
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false
Current Fiscal Year End Date	--12-31

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Current assets
Cash and cash equivalents (including $7,770 and $2,022 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	$ 28,162	$ 16,041
Short-term investments (including $8,000 and $0 associated with variable interest entity at September 30, 2023, and December 31, 2022, respectively)	18,063	0
Accounts receivable, net of allowance for doubtful accounts of $430 and $1,260 at September 30, 2023 and December 31, 2022, respectively (including $0 and $6 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	33,984	29,912
Inventories	71,657	71,206
Prepaid expenses and other current assets (including $25 and $191 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	6,823	6,641
Total current assets	158,689	123,800
Property and equipment, net (including $44,489 and $45,399 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	96,690	95,568
Deposits	1,672	12,413
Goodwill	3,510	3,510
Intangible assets, net	333	353
Operating right-of-use assets	17,068	15,713
Other assets (including $55 and $38 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	2,002	818
Total assets	279,964	252,175
Current liabilities
Accrued expenses (including $461 and $625 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	8,858	9,005
Income taxes payable	8,010	0
Customer deposits (including $116 and $165 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	803	1,281
Long-term debt, current portion (including $1,111 and $957 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	1,111	957
Operating lease liabilities, current portion	4,927	4,511
Other payables	49	0
Total current liabilities	45,697	39,253
Deferred tax liability	5,156	5,156
Long-term debt, net of current portion and debt discount of $219 and $216 at September 30, 2023 and December 31, 2022, respectively (including $48,668 and $41,558 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively, and debt discount of $219 and $216 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	48,668	41,558
Operating lease liabilities, net of current portion	12,866	11,623
Other liabilities (including $1,302 associated with variable interest entity at both September 30, 2023 and December 31, 2022)	2,824	2,652
Total liabilities	115,211	100,242
Commitments and Contingencies (Note 17)
Karat Packaging Inc. stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding, at both September 30, 2023 and December 31, 2022	0	0
Common stock, $0.001 par value, 100,000,000 shares authorized, 19,916,839 and 19,893,839 shares issued and outstanding, respectively, as of September 30, 2023 and 19,908,005 and 19,885,005 shares issued and outstanding, respectively, as of December 31, 2022	20	20
Additional paid in capital	86,620	85,792
Treasury stock, $0.001 par value, 23,000 shares at both September 30, 2023 and December 31, 2022	(248)	(248)
Retained earnings	67,773	56,118
Total Karat Packaging Inc. stockholders’ equity	154,165	141,682
Noncontrolling interest	10,588	10,251
Total stockholders’ equity	164,753	151,933
Total liabilities and stockholders’ equity	279,964	252,175
Nonrelated Party
Current liabilities
Accounts payable (including $60 and $2 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	19,384	18,559
Related Party
Current liabilities
Accounts payable (including $60 and $2 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	2,555	4,940
VIE, Primary Beneficiary
Current assets
Cash and cash equivalents (including $7,770 and $2,022 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	7,770	2,022
Short-term investments (including $8,000 and $0 associated with variable interest entity at September 30, 2023, and December 31, 2022, respectively)	8,000	0
Prepaid expenses and other current assets (including $25 and $191 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	25	191
Property and equipment, net (including $44,489 and $45,399 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	44,489	45,399
Other assets (including $55 and $38 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	55	38
Current liabilities
Accounts payable (including $60 and $2 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	60	2
Accrued expenses (including $461 and $625 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	461	625
Customer deposits (including $116 and $165 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	116	165
Long-term debt, current portion (including $1,111 and $957 associated with variable interest entity at September 30, 2023 and December 31, 2022, respectively)	1,111	957
Other liabilities (including $1,302 associated with variable interest entity at both September 30, 2023 and December 31, 2022)	$ 1,302	$ 1,302

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Cash and cash equivalents	$ 28,162	$ 16,041
Short-term investments	18,063	0
Allowance for bad debt	430	1,260
Prepaid expenses and other current assets	6,823	6,641
Property and equipment, net	96,690	95,568
Other assets	2,002	818
Accrued expenses	8,858	9,005
Customer deposits	803	1,281
Long-term debt, current portion	1,111	957
Long-term debt, net of current portion and debt discount	219	216
Other liabilities	$ 2,824	$ 2,652
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	19,916,839	19,908,005
Common stock, shares outstanding (in shares)	19,893,839	19,885,005
Treasury stock, par value (in dollars per share)	$ 0.001	$ 0.001
Treasury stock, shares (in shares)	23,000	23,000
VIE, Primary Beneficiary
Cash and cash equivalents	$ 7,770	$ 2,022
Short-term investments	8,000	0
Allowance for bad debt	0	6
Prepaid expenses and other current assets	25	191
Property and equipment, net	44,489	45,399
Other assets	55	38
Accounts payable	60	2
Accrued expenses	461	625
Customer deposits	116	165
Long-term debt, current portion	1,111	957
Long-term debt, net of current portion and debt discount	48,668	41,558
Other liabilities	$ 1,302	$ 1,302

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Income Statement [Abstract]
Net sales	$ 105,528	$ 109,996	$ 310,069	$ 330,290
Cost of goods sold	66,584	75,828	191,120	227,869
Gross profit	38,944	34,168	118,949	102,421
Operating expenses
Selling expense	8,004	9,413	25,500	28,218
General and administrative expense (including $702 and $665 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; $2,020 and $1,899 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	19,870	16,861	53,767	49,033
Impairment expense and (gain) loss, net, on disposal of machinery	(310)	(16)	2,231	(33)
Total operating expenses	27,564	26,258	81,498	77,218
Operating income	11,380	7,910	37,451	25,203
Other income (expense)
Rental income (including $235 and $239 associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $721 and $715 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	259	239	781	715
Other income (expense), net	32	28	(58)	(235)
Gain on foreign currency transactions	455	369	350	1,352
Interest income (including $80 and $0 interest income associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $278 and $2,160 interest income associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	454	0	1,040	2,160
Interest expense (including $528 and $470 interest expense associated with variable interest entity for the three months ended September 30, 2023 and 2022, respectively; and $1,499 and $1,379 interest expense associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(536)	(493)	(1,516)	(1,576)
Total other income, net	664	143	597	2,416
Income before provision for income taxes	12,044	8,053	38,048	27,619
Provision for income taxes	2,904	1,900	9,045	6,323
Net income	9,140	6,153	29,003	21,296
Net income attributable to noncontrolling interest	75	57	431	2,189
Net income attributable to Karat Packaging Inc.	$ 9,065	$ 6,096	$ 28,572	$ 19,107
Basic and diluted earnings per share:
Basic (in dollars per share)	$ 0.46	$ 0.31	$ 1.44	$ 0.96
Diluted (in dollars per share)	$ 0.45	$ 0.31	$ 1.43	$ 0.96
Weighted average common shares outstanding, basic (in shares)	19,890,646	19,809,417	19,888,244	19,808,813
Weighted average common shares outstanding, diluted (in shares)	19,994,648	19,938,042	19,962,999	19,922,047

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
General and administrative expenses	$ 19,870	$ 16,861	$ 53,767	$ 49,033
Rental income	259	239	781	715
Interest income	454	0	1,040	2,160
Interest expense	536	493	1,516	1,576
VIE, Primary Beneficiary
General and administrative expenses	702	665	2,020	1,899
Rental income	235	239	721	715
Interest income	80	0	278	2,160
Interest expense	$ 528	$ 470	$ 1,499	$ 1,379

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) - USD ($) $ in Thousands	Total	Total Stockholders’ Equity Attributable to Karat Packaging Inc.	Common Stock	Treasury Stock	Additional Paid-in Capital	Retained Earnings	Noncontrolling Interest
Balance at the beginning of period (in shares) at Dec. 31, 2021			19,827,417
Balance at the beginning of period at Dec. 31, 2021	$ 132,025	$ 122,900	$ 20	$ (248)	$ 83,694	$ 39,434	$ 9,125
Treasury stock, balance at the beginning of period (in shares) at Dec. 31, 2021				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation	611	611			611
Exercise of common stock options (in shares)			5,000
Exercise of common stock options	51	51			51
Noncontrolling interest tax withholding	(387)	0					(387)
Net income	7,943	6,667				6,667	1,276
Balance at the end of period (in shares) at Mar. 31, 2022			19,832,417
Balance at the end of period at Mar. 31, 2022	140,243	130,229	$ 20	$ (248)	84,356	46,101	10,014
Treasury stock, balance at the end of period (in shares) at Mar. 31, 2022				(23,000)
Balance at the beginning of period (in shares) at Dec. 31, 2021			19,827,417
Balance at the beginning of period at Dec. 31, 2021	132,025	122,900	$ 20	$ (248)	83,694	39,434	9,125
Treasury stock, balance at the beginning of period (in shares) at Dec. 31, 2021				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	21,296
Balance at the end of period (in shares) at Sep. 30, 2022			19,832,417
Balance at the end of period at Sep. 30, 2022	154,082	143,832	$ 20	$ (248)	85,519	58,541	10,250
Treasury stock, balance at the end of period (in shares) at Sep. 30, 2022				(23,000)
Balance at the beginning of period (in shares) at Mar. 31, 2022			19,832,417
Balance at the beginning of period at Mar. 31, 2022	140,243	130,229	$ 20	$ (248)	84,356	46,101	10,014
Treasury stock, balance at the beginning of period (in shares) at Mar. 31, 2022				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation	565	565			565
Noncontrolling interest tax withholding	(487)						(487)
Net income	7,200	6,344				6,344	856
Balance at the end of period (in shares) at Jun. 30, 2022			19,832,417
Balance at the end of period at Jun. 30, 2022	147,521	137,138	$ 20	$ (248)	84,921	52,445	10,383
Treasury stock, balance at the end of period (in shares) at Jun. 30, 2022				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes (in shares)			0
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes	598	598			598
Stock-based compensation	(190)						(190)
Net income	6,153	6,096				6,096	57
Balance at the end of period (in shares) at Sep. 30, 2022			19,832,417
Balance at the end of period at Sep. 30, 2022	$ 154,082	143,832	$ 20	$ (248)	85,519	58,541	10,250
Treasury stock, balance at the end of period (in shares) at Sep. 30, 2022				(23,000)
Balance at the beginning of period (in shares) at Dec. 31, 2022	19,885,005		19,908,005
Balance at the beginning of period at Dec. 31, 2022	$ 151,933	141,682	$ 20	$ (248)	85,792	56,118	10,251
Treasury stock, balance at the beginning of period (in shares) at Dec. 31, 2022	(23,000)			(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes (in shares)			2,452
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes	$ (14)	(14)			(14)
Stock-based compensation	277	277			277
Net income	9,186	9,005				9,005	181
Balance at the end of period (in shares) at Mar. 31, 2023			19,910,457
Balance at the end of period at Mar. 31, 2023	$ 161,382	150,950	$ 20	$ (248)	86,055	65,123	10,432
Treasury stock, balance at the end of period (in shares) at Mar. 31, 2023				(23,000)
Balance at the beginning of period (in shares) at Dec. 31, 2022	19,885,005		19,908,005
Balance at the beginning of period at Dec. 31, 2022	$ 151,933	141,682	$ 20	$ (248)	85,792	56,118	10,251
Treasury stock, balance at the beginning of period (in shares) at Dec. 31, 2022	(23,000)			(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Exercise of common stock options (in shares)	5,800
Net income	$ 29,003
Balance at the end of period (in shares) at Sep. 30, 2023	19,893,839		19,916,839
Balance at the end of period at Sep. 30, 2023	$ 164,753	154,165	$ 20	$ (248)	86,620	67,773	10,588
Treasury stock, balance at the end of period (in shares) at Sep. 30, 2023	(23,000)			(23,000)
Balance at the beginning of period (in shares) at Mar. 31, 2023			19,910,457
Balance at the beginning of period at Mar. 31, 2023	$ 161,382	150,950	$ 20	$ (248)	86,055	65,123	10,432
Treasury stock, balance at the beginning of period (in shares) at Mar. 31, 2023				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividends declared	(6,965)	(6,965)				(6,965)
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes (in shares)			582
Issuance of common stock upon vesting of‎ restricted stock units, net shares withheld to‎ cover taxes	(4)	(4)			(4)
Stock-based compensation	216	216			216
Net income	10,677	10,502				10,502	175
Balance at the end of period (in shares) at Jun. 30, 2023			19,911,039
Balance at the end of period at Jun. 30, 2023	165,306	154,699	$ 20	$ (248)	86,267	68,660	10,607
Treasury stock, balance at the end of period (in shares) at Jun. 30, 2023				(23,000)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash dividends declared	(9,952)	(9,952)				(9,952)
Stock-based compensation	250	250			250
Exercise of common stock options (in shares)			5,800
Exercise of common stock options	103	103			103
Noncontrolling interest tax withholding	(94)						(94)
Net income	$ 9,140	9,065				9,065	75
Balance at the end of period (in shares) at Sep. 30, 2023	19,893,839		19,916,839
Balance at the end of period at Sep. 30, 2023	$ 164,753	$ 154,165	$ 20	$ (248)	$ 86,620	$ 67,773	$ 10,588
Treasury stock, balance at the end of period (in shares) at Sep. 30, 2023	(23,000)			(23,000)

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Parenthetical) - $ / shares	3 Months Ended
	Sep. 30, 2023	Jun. 30, 2023
Statement of Stockholders' Equity [Abstract]
Dividends paid to stockholders (in dollars per share)	$ 0.50	$ 0.35

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Cash flows from operating activities
Net income	$ 29,003,000	$ 21,296,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including $910 associated with variable interest entity for both the nine months ended September 30, 2023 and 2022)	8,058,000	7,752,000
Adjustments to allowance for doubtful accounts	(673,000)	1,112,000
Adjustments to inventory reserve	(27,000)	441,000
Write-off of inventory	3,225,000	0
Impairment of deposits	523,000	0
Loss (gain), net, on disposal of machinery and equipment	1,708,000	(33,000)
Change in fair value of interest rate swap (including $0 and $2,159 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	0	(2,159,000)
Amortization of loan fees (including $41 and $28 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	57,000	28,000
Accrued interest on certificates of deposit	(63,000)	0
Stock-based compensation	743,000	1,774,000
Amortization of operating right-of-use assets	3,617,000	2,897,000
(Increase) decrease in operating assets
Accounts receivable (including $6 and $21 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(3,399,000)	(5,068,000)
Inventories	(3,649,000)	(15,255,000)
Prepaid expenses and other current assets (including $22 and $396 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	431,000	(2,264,000)
Other assets (including $34 and $458 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(75,000)	(43,000)
Increase (decrease) in operating liabilities
Accounts payable (including $57 and $470 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	1,701,000	459,000
Accrued expenses (including $163 and $414 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(147,000)	1,130,000
Related party payable	(2,385,000)	2,855,000
Income taxes payable	8,010,000	111,000
Customer deposits (including $49 and $156 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(478,000)	(29,000)
Operating lease liability	(3,313,000)	(2,897,000)
Other liabilities (including $0 and $1 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	172,000	150,000
Other payables	49,000	242,000
Net cash provided by operating activities	43,088,000	12,499,000
Cash flows from investing activities
Purchases of property and equipment	(2,870,000)	(2,007,000)
Proceeds from disposal of property and equipment	605,000	76,000
Payments for costs incurred from sale of machinery and equipment	(189,000)	0
Deposits paid for joint venture investment	(2,900,000)	(4,000,000)
Deposits refunded from joint venture investment	6,900,000	0
Deposit refund from cancelled property and equipment purchase	503,000	0
Deposits paid for property and equipment	(5,390,000)	(11,471,000)
Proceeds from settlement of interest rate swap (including $0 and $825 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	0	825,000
Purchase of short-term investments (including $8,000 and $0 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(28,000,000)	0
Redemption of short-term investments	10,000,000	0
Net cash used in investing activities	(21,341,000)	(16,577,000)
Cash flows from financing activities
Proceeds from line of credit	0	21,100,000
Payments on line of credit	0	(21,100,000)
Proceeds from long-term debt (including $8,000 and $27,477 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	8,000,000	27,477,000
Payments for lender fees	(61,000)	0
Payments on long-term debt (including $733 and $21,338 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	(733,000)	(21,338,000)
Tax withholding on vesting of restricted stock units	(18,000)	0
Proceeds from exercise of common stock options	103,000	51,000
Dividends paid to shareholders	(16,917,000)	0
Payments of noncontrolling interest tax withholding (including $0 and $1,064 associated with variable interest entity for the nine months ended September 30, 2023 and 2022, respectively)	0	(1,064,000)
Net cash (used in) provided by financing activities	(9,626,000)	5,126,000
Net increase in cash and cash equivalents	12,121,000	1,048,000
Cash and cash equivalents
Beginning of period	16,041,000	6,483,000
End of period	28,162,000	7,531,000
Supplemental disclosures of non-cash investing and financing activities:
Transfers from deposit to property and equipment	8,953,000	6,639,000
Non-cash purchases of property and equipment	71,000	0
Supplemental disclosures of cash flow information:
Cash paid for income tax	309,000	7,069,000
Cash paid for interest	$ 1,493,000	$ 1,541,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022
Depreciation and amortization	$ 8,058	$ 7,752
Change in fair value of interest rate swap	0	2,159
Amortization of loan fees	(57)	(28)
Accounts receivable	3,399	5,068
Prepaid expenses and other current assets	(431)	2,264
Other assets	75	43
Accounts payable	1,701	459
Accrued expenses	(147)	1,130
Customer deposits	478	29
Other liabilities	172	150
Proceeds from settlement of interest rate swap	0	825
Purchase of short-term investments	28,000	0
Proceeds from long-term debt	8,000	27,477
Payments on long-term debt	(733)	(21,338)
Payments of noncontrolling interest tax withholding associated with variable interest entity	0	(1,064)
VIE, Primary Beneficiary
Depreciation and amortization	910	910
Change in fair value of interest rate swap	0	2,159
Amortization of loan fees	41	28
Accounts receivable	6	21
Prepaid expenses and other current assets	22	396
Other assets	34	458
Accounts payable	57	(470)
Accrued expenses	163	414
Customer deposits	49	(156)
Other liabilities	0	1
Proceeds from settlement of interest rate swap	0	825
Purchase of short-term investments	8,000	0
Proceeds from long-term debt	8,000	27,477
Payments on long-term debt	(733)	(21,338)
Payments of noncontrolling interest tax withholding associated with variable interest entity	$ 0	$ (1,064)

XML

Nature of Operations

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of Operations

Nature of Operations

Lollicup USA Inc. (“Lollicup”) was incorporated on January 21, 2001 under the laws of the State of California as an S-corporation. Effective January 1, 2018, Lollicup elected to convert from an S-Corporation to a C-Corporation. Karat Packaging Inc. (“Karat Packaging”) was incorporated on September 26, 2018 as a Delaware corporation and became the holding company for Lollicup (collectively, the “Company”) through a share exchange with the shareholders of Lollicup.

The Company is a manufacturer and distributor of single-use disposable products used in a variety of restaurant and foodservice settings. The Company supplies a wide range of products such as food containers, tableware, cups, lids, cutlery, and straws. The products are available in plastic, paper, biopolymer-based and other compostable forms. In addition to manufacturing and distribution, the Company offers customized solutions to customers, including new product development, design, printing, and logistics services, and distributes certain specialty food and beverages products, such as boba and coffee drinks.

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

The Company currently operates manufacturing facilities and distribution and fulfillment centers in Chino, California; Rockwall, Texas and Kapolei, Hawaii. In addition, the Company operates seven other distribution centers located in Sumner, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; City of Industry, California, Aurora, Illinois; and Sugar Land, Texas.

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. The financial information as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023.

The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022, as included in the Company's Annual Report on Form 10-K filed on March 16, 2023.

Principles of Consolidation: The condensed consolidated financial statements include the accounts of Karat Packaging and its wholly-owned and controlled operating subsidiaries, Lollicup, Lollicup Franchising, LLC (“Lollicup Franchising”) and Global Wells, a variable interest entity wherein the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated.

Variable Interest Entities: In 2017, Lollicup along with three other unrelated parties formed Global Wells. Lollicup has a 13.5% ownership interest and a 25% voting interest in Global Wells, which is located in Rockwall, Texas. The purpose of this entity is to own, construct, and manage warehouses and manufacturing facilities. Global Wells’ operating agreement may require its members to make additional contributions upon the unanimous decision of the members or when the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000.

In 2018, Lollicup entered into an operating lease with Global Wells for a facility in Rockwall, Texas. Upon the execution of this lease, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in

Global Wells. As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC Topic 810, Consolidations.

Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets; they represent claims against the specific assets of Global Wells. See Note 9 — Long-Term Debt for a description of the two term loans that Global Wells had with financial institutions as of September 30, 2023.

Noncontrolling Interests: The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the Company’s stockholders’ equity. The amount of net income attributable to noncontrolling interests is disclosed in the condensed consolidated statements of income. Tax payments made by the Company on behalf of the noncontrolling interests are deducted from their equity balances, as shown in the condensed consolidated statements of stockholders’ equity.

Estimates and Assumptions: Management uses estimates and assumptions in preparing financial statements in accordance with US GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ materially from the estimates that were assumed in preparing the condensed consolidated financial statements. Estimates that are significant to the condensed consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for slow-moving and obsolete inventory.

Reporting Segments: The Company manages and evaluates its operations in one reportable segment. This segment consists of manufacturing and supply of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, foam, post-consumer recycled content and renewable materials. It also consists of the distribution of certain specialty food and beverage products, such as boba and coffee drinks, and certain restaurant and warehouse supplies. The Company’s long-lived assets are all located in the United States, and its revenues are all generated in the United States.

Fair Value Measurements: The Company has financial instruments classified within the fair value hierarchy, which consist of the following:

•At September 30, 2023, the Company had money market accounts and short-term investments classified as Level 1 within the fair value hierarchy. The short-term investments comprise of certificates of deposits with an original maturity of longer than 90 days and are reported at their carrying value as current assets on the condensed consolidated balance sheet. The carrying value of these short-term investments approximates fair value as they were purchased near or on September 30, 2023. At December 31, 2022, the Company had money market accounts classified as Level 1 within the fair value hierarchy, and reported as current assets on the condensed consolidated balance sheet.

The following table summarizes the Company’s fair value measurements by level at September 30, 2023:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	19,024	$	—	$	—
Short-term investments	18,063		—		—
Fair value, September 30, 2023	$	37,087	$	—	$	—

The following table summarize the Company’s fair value measurements by level at December 31, 2022:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	10,609	$	—	$	—
Fair value, December 31, 2022	$	10,609	$	—	$	—

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related-party payable, accrued and other liabilities and other payables at September 30, 2023 and December 31, 2022, approximated fair value

because of the short maturity of these instruments. The following is a summary of the carrying amount and estimated fair value of the $23,000,000 and $28,700,000 term loans that mature in September 2026 and July 2027, respectively (the "2026 Term Loan" and "2027 Term Loan," respectively):

	September 30, 2023
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	21,640	$	19,496
2027 Term Loan	28,139		27,090
	$	49,779	$	46,586

	December 31, 2022
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	22,079	$	20,115
2027 Term Loan	20,436		18,918
	$	42,515	$	39,033

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

New and Recently Adopted Accounting Standards: The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and as such, the Company have elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which adds to US GAAP an impairment model known as the current expected credit loss ("CECL") model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of US GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The FASB subsequently issued ASU 2019-10 (Topic 326), “Financial Instruments-Credit Losses: Effective Dates” which amends the effective date for SEC filers that are eligible to be ‘smaller reporting companies’, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. The Company adopted this new standard using the modified retrospective adoption method beginning with its first quarter in 2023. The application of this new standard did not have a material impact on its consolidated financial statements.

XML

Goodwill

9 Months Ended

Sep. 30, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

Goodwill

The following table summarizes the activity in the Company's goodwill from December 31, 2022 to September 30, 2023:

	(in thousands)
Balance at December 31, 2022	$	3,510
Goodwill acquired	—
Balance at September 30, 2023	$	3,510

XML

Joint Venture

9 Months Ended

Sep. 30, 2023

Equity Method Investments and Joint Ventures [Abstract]

Joint Venture

Joint Venture On April 6, 2022, the Company entered into a joint venture agreement (the "JV Agreement") to establish a new corporation, Bio Earth, to build a bagasse factory in Taiwan. The JV Agreement stipulated an investment by the Company of approximately $6,500,000 for a 49% interest in Bio Earth. Through December 31, 2022, the Company made net

payments totaling $4,000,000 under the JV Agreement. During the three months ended March 31, 2023, the Company made additional payments of $2,900,000 and received a refund of $900,000 under the JV Agreement.

On May 8 2023, the Company entered into a Share Transfer Agreement (the "Share Transfer Agreement"), with approval of the Board of Directors, to sell all of its equity interest in Bio Earth to Keary Global for a total consideration of approximately $6,100,000 (the "Share Transfer"), representing the total net deposits made by the Company of $6,000,000 under the JV Agreement as discussed above and interest accruing at 5% per annum. Keary Global and its affiliate, Keary International are both owned or controlled by Jeff Yu, brother of our Chief Executive Officer, Alan Yu. Concurrent with the Share Transfer Agreement, the Company also entered into an agreement with Keary Global, Bio Earth and Happiness Moon Co., Ltd. (“Happiness Moon”) pursuant to which (i) Lollicup agreed to transfer all Bio Earth shares, as well as its rights and obligations under the JV Agreement to Keary Global, (ii) Happiness Moon and Bio Earth agree to foregoing and (iii) Bio Earth shall manage the regulatory and registration requirements related to the Share Transfer.

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

See Note 15 — Related Party Transactions for further discussion on our business activities with Keary Global.

XML

Inventories

9 Months Ended

Sep. 30, 2023

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consist of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
Raw materials	$	9,427	$	18,061
Semi-finished goods	2,413		1,850
Finished goods	60,539		52,044
Subtotal	72,379		71,955
Less inventory reserve	(722)		(749)
Total inventories	$	71,657	$	71,206

The Company incurred inventory adjustments and write-off of $281,000 and $3,225,000 for the three and nine months ended September 30, 2023, respectively. There were no inventory adjustments and write-offs for the three and nine months ended September 30, 2022. Included within the amount for the nine months ended September 30, 2023, was a $1,710,000 write-off of raw materials, as the Company disposed of certain machinery and equipment in executing the strategy to scale back production in certain locations. Inventory adjustments and write-offs are included in cost of goods sold on the accompanying condensed consolidated statements of income. See Note 14 — Impairment Expense and (Gain) Loss, Net, on Disposal of Machinery for further discussion about the disposal of machinery.

XML

Property and Equipment

9 Months Ended

Sep. 30, 2023

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and Equipment

	September 30, 2023		December 31, 2022
	(in thousands)
Machinery and equipment	$	70,150	$	70,234
Leasehold improvements	19,070		19,063
Vehicles	7,480		6,725
Furniture and fixtures	1,141		1,016
Building	38,505		36,599
Land	11,907		11,907
Computer hardware and software	593		593
	148,846		146,137
Less: accumulated depreciation and amortization	(52,156)		(50,569)
Total property and equipment, net	$	96,690	$	95,568

Depreciation and amortization expense on property and equipment was $2,701,000 and $2,597,000 for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense on property and equipment was $8,038,000 and $7,732,000 for the nine months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense is reported within general and administrative expense except for depreciation and amortization expense related to manufacturing facilities and equipment, which is included in cost of goods sold on the accompanying condensed consolidated statements of income.

XML

Line of Credit

9 Months Ended

Sep. 30, 2023

Debt Disclosure [Abstract]

Line of Credit

Line of Credit

Pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the “Loan Agreement”), the Company has a line of credit with a maximum borrowing capacity of $40,000,000 (the “Line of Credit”) secured by the Company’s assets. The Company is not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. The Company is required to comply with certain financial covenants, including a minimum current ratio, minimum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio and a minimum fixed charge coverage ratio.

On March 14, 2023, the Company amended the Line of Credit. Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%. The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.

The Line of Credit also includes a standby letter of credit sublimit, which was amended and increased to $5,000,000 from $2,000,000 on June 20, 2023.

The Company had no borrowings outstanding under the Line of Credit as of both September 30, 2023 and December 31, 2022. The amount issued under the standby letter of credit was $3,736,000 and $1,070,000 as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the maximum remaining amount that could be borrowed under the Line of Credit was $36,264,000. As of both September 30, 2023 and December 31, 2022, the Company was in compliance with the financial covenants under the Line of Credit.

Long-Term Debt

Long-term debt consists of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
The 2026 Term Loan, with an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022, which the Company exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $116,000 are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.	$	21,711	$	22,168
The 2027 Term Loan, with an initial balance of $20,700,000 and an option to request for additional advances up to a maximum of $8,000,000 through June 30, 2023, which the Company exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Prior to August 1, 2023, principal and interest payments of $104,000 are due monthly. Beginning August 1, 2023, monthly principal and interest payments increased to $144,000 for the remainder of the loan term, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt coverage ratio.	$	28,287	$	20,563
Long-term debt	49,998		42,731
Less: unamortized loan fees	(219)		(216)
Less: current portion	(1,111)		(957)
Long-term debt, net of current portion	$	48,668	$	41,558

At September 30, 2023, future maturities are:

	(in thousands)
2023 (remainder)	$	277
2024	1,122
2025	1,179
2026	20,798
2027	26,622
	$	49,998

The 2027 Loan was a refinance in June 2022 from a previous $21,580,000 term loan, and was accounted for as a debt modification. The Company was in compliance with all of its financial covenants as of both September 30, 2023 and December 31, 2022.

XML

Accrued Expenses

9 Months Ended

Sep. 30, 2023

Payables and Accruals [Abstract]

Accrued Expenses

Accrued Expenses

The following table summarizes information related to accrued expense liabilities:

	September 30, 2023		December 31, 2022
	(in thousands)
Accrued miscellaneous expenses	$	2,368	$	1,646
Accrued interest	73		108
Accrued payroll	1,180		1,586
Accrued vacation and sick pay	834		543
Accrued shipping expenses	1,478		1,918
Accrued professional services fees	499		600
Accrued property tax	876		1,164
Accrued sale taxes and use taxes	1,021		992
Accrued sales discount	529		448
Total accrued expenses	$	8,858	$	9,005

XML

Long-Term Debt

9 Months Ended

Sep. 30, 2023

Debt Disclosure [Abstract]

Long-Term Debt

Line of Credit

Pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the “Loan Agreement”), the Company has a line of credit with a maximum borrowing capacity of $40,000,000 (the “Line of Credit”) secured by the Company’s assets. The Company is not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. The Company is required to comply with certain financial covenants, including a minimum current ratio, minimum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio and a minimum fixed charge coverage ratio.

On March 14, 2023, the Company amended the Line of Credit. Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%. The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%.

The Line of Credit also includes a standby letter of credit sublimit, which was amended and increased to $5,000,000 from $2,000,000 on June 20, 2023.

The Company had no borrowings outstanding under the Line of Credit as of both September 30, 2023 and December 31, 2022. The amount issued under the standby letter of credit was $3,736,000 and $1,070,000 as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the maximum remaining amount that could be borrowed under the Line of Credit was $36,264,000. As of both September 30, 2023 and December 31, 2022, the Company was in compliance with the financial covenants under the Line of Credit.

Long-Term Debt

Long-term debt consists of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
The 2026 Term Loan, with an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022, which the Company exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $116,000 are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.	$	21,711	$	22,168
The 2027 Term Loan, with an initial balance of $20,700,000 and an option to request for additional advances up to a maximum of $8,000,000 through June 30, 2023, which the Company exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Prior to August 1, 2023, principal and interest payments of $104,000 are due monthly. Beginning August 1, 2023, monthly principal and interest payments increased to $144,000 for the remainder of the loan term, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt coverage ratio.	$	28,287	$	20,563
Long-term debt	49,998		42,731
Less: unamortized loan fees	(219)		(216)
Less: current portion	(1,111)		(957)
Long-term debt, net of current portion	$	48,668	$	41,558

At September 30, 2023, future maturities are:

	(in thousands)
2023 (remainder)	$	277
2024	1,122
2025	1,179
2026	20,798
2027	26,622
	$	49,998

The 2027 Loan was a refinance in June 2022 from a previous $21,580,000 term loan, and was accounted for as a debt modification. The Company was in compliance with all of its financial covenants as of both September 30, 2023 and December 31, 2022.

XML

Interest Rate Swap

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swap

Interest Rate Swap

In June 2022, Global Wells terminated its ten-year floating-to-fixed interest rate swap, and recognized cash proceeds of $825,000 as gain on the settlement, which was included in interest income in the accompanying condensed consolidated statements of income. This interest rate swap had a notional value of $21,580,000 as of the effective date of June 13, 2019 based on the prime rate versus a 5.0% fixed rate.

For the nine months ended September 30, 2022, Global Wells recognized $2,159,000 (including the gain on settlement) as interest income related to the interest rate swap.

XML

Stock-Based Compensation

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Stock-Based Compensation

Stock-Based Compensation

In January 2019, the Company’s Board of Directors adopted the 2019 Stock Incentive Plan (the “Plan”). A total of 2,000,000 shares of common stock were authorized and reserved for issuance under the Plan in the form of incentive or nonqualified stock options and stock awards. A compensation committee appointed by the Board of Directors of the Company determines the terms and conditions of each grant under the Plan. Employees, directors, and consultants are eligible to receive stock options and stock awards under the Plan. The aggregate number of shares available under the Plan and the number of shares subject to outstanding options may be increased or decreased by the Plan administrator to reflect any changes in the outstanding common stock by reason of any recapitalization, reorganization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock or similar transaction.

The exercise price of incentive stock options may not be less than the fair market value of the common stock at the date of grant. The exercise price of incentive stock options granted to individuals that own greater than 10% of the voting stock may not be less than 110% of the fair market value of the common stock at the date of grant.

The term of each incentive and nonqualified option is based upon conditions as determined by the option agreement; however, the term can be no more than ten years from the date of the grant. In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any parent or subsidiary, the term of the option will be a shorter term as provided in the option agreement, but not more than five years from the date of the grant.

As of September 30, 2023, a total of 1,334,017 shares of common stock were available for further award grants under the Plan. For the three months ended September 30, 2023 and 2022, the Company recognized a total of $250,000 and $598,000 in stock-based compensation expense, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized a total of $743,000 and $1,774,000 in stock-based compensation expense, respectively. The Company recognizes stock-based compensation over the vesting period, which is generally three (3) years for both the restricted stock units and stock options.

Stock Options

A summary of the Company’s stock option activity under the Plan for the period ended September 30, 2023 is as follows:

	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contract Life (In Years)	Aggregate Intrinsic Value
					(in thousands)
Outstanding at December 31, 2022	420,000	$	18.6	8.8	$	—
Exercised	(5,800)	$	17.7
Forfeited	(10,000)	$	18.9
Outstanding at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Vested and expected to vest at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Exercisable at September 30, 2023	130,867	$	18.6	8.1	$	581

There were no stock options granted during the nine months ended September 30, 2023. At September 30, 2023, total remaining stock-based compensation cost for unvested stock options under the Plan was approximately $282,000. The cost is expected to be recognized over a weighted-average period of 1.0 year.

The aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on September 30, 2023, multiplied by the number of shares per each option.

Restricted Stock Units

The Company issued restricted stock units to its employees. The following table summarizes the unvested restricted stock units for the nine months ended September 30, 2023:

	Number of Shares Outstanding	Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	82,146	11.47
Vested	(4,550)	16.64
Forfeited	(1,667)	10.00
Unvested at September 30, 2023	75,929	11.19

There were no restricted stock units granted during the nine months ended September 30, 2023. At September 30, 2023, total remaining stock-based compensation cost for unvested restricted stock units was approximately $39,000. The cost is expected to be recognized over a weighted-average period of 0.6 years.

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2023

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

(a)Basic

Basic earnings per share is calculated by dividing the net income attributable to equity holders of the Company for the period by the weighted average number of common shares outstanding during the period.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$9,065		$6,096		$28,572		$19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Basic earnings per share	$	0.46	$	0.31	$	1.44	$	0.96

(b)Diluted

Diluted earnings per share is calculated based upon the weighted average number of common shares and common equivalent shares outstanding during the period, calculated using the treasury stock method. Under the treasury stock method, exercise proceeds include the amount the employee must pay for exercising stock options and the amount of compensation cost related to stock awards for future services that the Company has not yet recognized. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.

The following table summarizes the calculation of diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$	9,065	$	6,096	$	28,572	$	19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Dilutive shares
Stock options and restricted stock units	104		129		75		113
Adjusted weighted average number of common shares	19,995		19,938		19,963		19,922
Diluted earnings per share	$	0.45	$	0.31	$	1.43	$	0.96

For the three months ended September 30, 2023 and 2022, a total of 0 and 434,000 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their anti-dilutive impact on earnings per share. For the nine months ended September 30, 2023 and 2022, a total of 285,000 and 452,000 shares of

potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their anti-dilutive impact on earnings per share.

XML

Leases

9 Months Ended

Sep. 30, 2023

Leases [Abstract]

Leases

Leases

The Company primarily leases manufacturing facilities, distribution centers and office spaces with lease terms expiring through 2031. The Company recognized the following lease costs in the accompanying condensed consolidated statement of income:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Operating lease expense	$	1,606	$	1,336	$	4,454	$	3,256
Short-term lease expense	106		4		143		14
Variable lease expense	260		212		750		501
Total lease expense	$	1,972	$	1,552	$	5,347	$	3,771

For the three months ended September 30, 2023 and 2022, rent expense included in operating expenses was $1,653,000 and $1,260,000, respectively, and rent expense included in cost of goods sold was $319,000 and $292,000, respectively. For the nine months ended September 30, 2023 and 2022, rent expense included in operating expenses was $4,542,000 and $2,974,000, respectively, and rent expense included in cost of goods sold was $805,000 and $797,000, respectively.

The following table presents supplemental information related to operating leases:

	September 30, 2023		December 31, 2022
Weighted average remaining lease term	4.41 years		4.27 years
Weighted average discount rate	5.8	%	5.3	%

	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases	$	4,129	$	3,120

As of September 30, 2023, future lease payments under operating leases were as follows:

	(in thousands)
2023 (remainder)	$	1,544
2024	5,254
2025	3,928
2026	4,044
2027	2,711
Thereafter	2,885
Total future lease payments	20,366
Less: imputed interest	2,573
Total lease liability balance	$	17,793

In September 2020, Global Wells entered into an operating lease with an unrelated party as the landlord. The lease generates monthly rental payments from $58,000 to $61,000 over the lease term of 38 months beginning September 9,

2020. The lease was extended for a period of two additional years beginning November 1, 2023, and will generate monthly rental payments from $62,000 to $65,000. The expected rental income is $185,000 for the remaining three months of the year ending December 31, 2023, and $739,000 and $616,000 for the years ending December 31, 2024, and 2025, respectively.

XML

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

9 Months Ended

Sep. 30, 2023

Discontinued Operations and Disposal Groups [Abstract]

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

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

In February 2023, the Company started to execute a strategy to increase imports and scale back manufacturing in certain locations. The Company subsequently reached an agreement with two unrelated third-party vendors in Taiwan to sell them certain of its manufacturing machinery and equipment. The sale of these assets occurred in the second and third quarter of 2023. During the same period, the Company also cancelled certain equipment purchase commitments that it had previously paid deposits towards, and disposed of certain machinery and equipment through abandonment.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
(Gain) loss, net, on disposal of machinery in scaling back manufacturing	$	(310)	$	—	$	1,612	$	—
(Gain) loss, net, on disposal of machinery within normal course of business	—		(16)		96		(33)
(Gain) Loss, net, on disposal	(310)		(16)		1,708		(33)
Impairment of deposits	—		—		523		—
Impairment expense and (gain) loss, net, on disposal of machinery	$	(310)	$	(16)	$	2,231	$	(33)

XML

Related Party Transactions

9 Months Ended

Sep. 30, 2023

Related Party Transactions [Abstract]

Related Party Transactions

Related Party Transactions

Keary Global Ltd. ("Keary Global") owns 250,004 shares of the Company's common stock as of September 30, 2023, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018. Keary Global and its affiliate, Keary International, are owned by one of the Company’s stockholders’ family member. In addition to being a stockholder, Keary Global and Keary International are inventory suppliers and purchasing agents for the Company overseas. The Company has entered into ongoing purchase and supply agreements with Keary Global. At September 30, 2023 and December 31, 2022, the Company has accounts payable due to Keary Global and Keary International of $2,555,000 and $4,940,000, respectively. Purchases for the three months ended September 30, 2023 and 2022 from this related party were $7,371,000 and $7,336,000, respectively. Purchases for the nine months ended September 30, 2023 and 2022 from this related party were $32,384,000 and $33,051,000, respectively.

See Note 4 — Joint Venture for discussion on our share transfer agreement with Keary Global.

XML

Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

For the three months ended September 30, 2023 and 2022, the Company's income tax expense was $2,904,000 and $1,900,000, with effective tax rate of 24.1% and 23.6%, respectively. For the nine months ended September 30, 2023 and 2022, the Company's income tax expense was $9,045,000 and $6,323,000, with effective tax rate of 23.8% and 22.9%, respectively. For both the three and nine months ended September 30, 2023 and 2022, the Company's effective tax rate differed from the United States federal statutory rate of 21% primarily due to state taxes.

In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Based upon the level of historical taxable income, at this time, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not there will be full utilization of the deferred tax assets in each jurisdiction. As such, as of September 30, 2023, based on the available evidence, the Company did not record any valuation allowance.

The Company remains subject to the Internal Revenue Services ("IRS") examination for the 2019 through 2022 tax years, and has received notice in February 2019 that it is under examination for years 2016 and 2017. Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions for the 2018 through 2021 tax years. As of September 30, 2023, and December 31, 2022, the Company did not have any unrecognized tax benefit.

In August 2022, the Inflation Reduction Act of 2022 (the "Act") was signed into law. The Act, among other things, imposes a nondeductible 1% excise tax on the fair market value of certain stock that is "repurchased" during the taxable year by publicly traded U.S. corporations or acquired by certain of its subsidiaries. The taxable amount is reduced by the fair market value of certain issuances of stock throughout the year. The Act also imposes a 15% corporate minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022. We do not expect these tax law changes to have a material impact on our condensed consolidated financial statements; however, we will continue to evaluate their impact.

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

XML

Commitments and Contingencies	9 Months Ended
	Sep. 30, 2023
Commitments and Contingencies Disclosure [Abstract]
Commitments and Contingencies	Commitments and ContingenciesThe Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. Management believes that the outcome of such litigation and claims, should they arise in the future, is not likely to have a material effect on the Company’s financial position or results of income.

XML

Secondary Offering	9 Months Ended
	Sep. 30, 2023
Equity [Abstract]
Secondary Offering	Secondary OfferingOn September 12, 2023, certain selling stockholders completed a secondary public offering of shares of the Company's common stock. The Company did not receive any of the proceeds from the sale of these shares by the selling stockholders. The Company incurred offering transaction costs of $453,000, which were recognized in general and administrative expense in the condensed consolidated statement of income.

XML

Subsequent Events

9 Months Ended

Sep. 30, 2023

Subsequent Events [Abstract]

Subsequent Events

Subsequent Events

In October 2023, the Company made tax payments totaling approximately $9,600,000 related to the current year quarterly estimate tax payments that were previously deferred under the Winter Storm Relief declared by the IRS. See Note 16 — Income Taxes for details on this tax relief.

In October 2023, Global Wells made a pro rata distribution of approximately $3,956,000, net of all applicable withholding taxes, to its four members.

In October 2023, the Company received deposit refund of $1,272,000 related to the cancellation of a machinery purchase.

In October 2023, the Company signed an amended and restated lease agreement for a 98,000 square-foot distribution facility in Puyallup, Washington for a term of 64-months, which amended, restated and superseded the lease dated June 15, 2023. The lease term is expected to commence in November 2023 pending completion of certain landlord work or an earlier date as mutually agreed-upon between the Company and the landlord. Under the lease agreement, monthly base lease payments range from $94,000 to $115,000 after an initial rent abatement period.

On November 6, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share on the Company's common stock, which will be paid on or around November 30, 2023 to shareholders of record at the close of business on November 20, 2023.

XML

Pay vs Performance Disclosure - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Pay vs Performance Disclosure
Net income (loss)	$ 9,065	$ 6,096	$ 28,572	$ 19,107

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. The financial information as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023.

The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022, as included in the Company's Annual Report on Form 10-K filed on March 16, 2023.

Principles of Consolidation

Principles of Consolidation: The condensed consolidated financial statements include the accounts of Karat Packaging and its wholly-owned and controlled operating subsidiaries, Lollicup, Lollicup Franchising, LLC (“Lollicup Franchising”) and Global Wells, a variable interest entity wherein the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated.

Variable Interest Entities

Variable Interest Entities: In 2017, Lollicup along with three other unrelated parties formed Global Wells. Lollicup has a 13.5% ownership interest and a 25% voting interest in Global Wells, which is located in Rockwall, Texas. The purpose of this entity is to own, construct, and manage warehouses and manufacturing facilities. Global Wells’ operating agreement may require its members to make additional contributions upon the unanimous decision of the members or when the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that member cannot contribute, up to $25,000.

In 2018, Lollicup entered into an operating lease with Global Wells for a facility in Rockwall, Texas. Upon the execution of this lease, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, receive significant benefits, or the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in

Global Wells. As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC Topic 810, Consolidations.Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets; they represent claims against the specific assets of Global Wells. See Note 9 — Long-Term Debt for a description of the two term loans that Global Wells had with financial institutions as of September 30, 2023.

Noncontrolling Interests

Noncontrolling Interests: The Company consolidates its variable interest entity, Global Wells, in which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in Global Wells. The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the Company’s stockholders’ equity. The amount of net income attributable to noncontrolling interests is disclosed in the condensed consolidated statements of income. Tax payments made by the Company on behalf of the noncontrolling interests are deducted from their equity balances, as shown in the condensed consolidated statements of stockholders’ equity.

Estimates and Assumptions

Estimates and Assumptions: Management uses estimates and assumptions in preparing financial statements in accordance with US GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ materially from the estimates that were assumed in preparing the condensed consolidated financial statements. Estimates that are significant to the condensed consolidated financial statements include stock-based compensation, allowance for doubtful accounts and reserve for slow-moving and obsolete inventory.

Reporting Segments

Reporting Segments: The Company manages and evaluates its operations in one reportable segment. This segment consists of manufacturing and supply of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, foam, post-consumer recycled content and renewable materials. It also consists of the distribution of certain specialty food and beverage products, such as boba and coffee drinks, and certain restaurant and warehouse supplies. The Company’s long-lived assets are all located in the United States, and its revenues are all generated in the United States.

Fair Value Measurements

Fair Value Measurements: The Company has financial instruments classified within the fair value hierarchy, which consist of the following:

•At September 30, 2023, the Company had money market accounts and short-term investments classified as Level 1 within the fair value hierarchy. The short-term investments comprise of certificates of deposits with an original maturity of longer than 90 days and are reported at their carrying value as current assets on the condensed consolidated balance sheet. The carrying value of these short-term investments approximates fair value as they were purchased near or on September 30, 2023. At December 31, 2022, the Company had money market accounts classified as Level 1 within the fair value hierarchy, and reported as current assets on the condensed consolidated balance sheet.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related-party payable, accrued and other liabilities and other payables at September 30, 2023 and December 31, 2022, approximated fair value because of the short maturity of these instruments.

New and Recently Adopted Accounting Standards

New and Recently Adopted Accounting Standards: The Company is an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and as such, the Company have elected to take advantage of certain reduced public company reporting requirements. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, as a result, the Company will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for private companies.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which adds to US GAAP an impairment model known as the current expected credit loss ("CECL") model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of US GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The FASB subsequently issued ASU 2019-10 (Topic 326), “Financial Instruments-Credit Losses: Effective Dates” which amends the effective date for SEC filers that are eligible to be ‘smaller reporting companies’, non-SEC filers and all other companies, including not-for-profit companies and employee benefit plans. The Company adopted this new standard using the modified retrospective adoption method beginning with its first quarter in 2023. The application of this new standard did not have a material impact on its consolidated financial statements.

XML

Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2023

Accounting Policies [Abstract]

Schedule of Fair Value Measurements by Level for the Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the Company’s fair value measurements by level at September 30, 2023:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	19,024	$	—	$	—
Short-term investments	18,063		—		—
Fair value, September 30, 2023	$	37,087	$	—	$	—

The following table summarize the Company’s fair value measurements by level at December 31, 2022:

	Level 1		Level 2		Level 3
	(in thousands)
Cash equivalents	$	10,609	$	—	$	—
Fair value, December 31, 2022	$	10,609	$	—	$	—

Schedule of Carrying Values and Estimated Fair Values of Debt

The following is a summary of the carrying amount and estimated fair value of the $23,000,000 and $28,700,000 term loans that mature in September 2026 and July 2027, respectively (the "2026 Term Loan" and "2027 Term Loan," respectively):

	September 30, 2023
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	21,640	$	19,496
2027 Term Loan	28,139		27,090
	$	49,779	$	46,586

	December 31, 2022
	Carrying Amount		Estimated Fair Value
	(in thousands)
2026 Term Loan	$	22,079	$	20,115
2027 Term Loan	20,436		18,918
	$	42,515	$	39,033

XML

Goodwill (Tables)

9 Months Ended

Sep. 30, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

The following table summarizes the activity in the Company's goodwill from December 31, 2022 to September 30, 2023:

	(in thousands)
Balance at December 31, 2022	$	3,510
Goodwill acquired	—
Balance at September 30, 2023	$	3,510

XML

Inventories (Tables)

9 Months Ended

Sep. 30, 2023

Inventory Disclosure [Abstract]

Schedule of Inventories

Inventories consist of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
Raw materials	$	9,427	$	18,061
Semi-finished goods	2,413		1,850
Finished goods	60,539		52,044
Subtotal	72,379		71,955
Less inventory reserve	(722)		(749)
Total inventories	$	71,657	$	71,206

XML

Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2023

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment, Net

	September 30, 2023		December 31, 2022
	(in thousands)
Machinery and equipment	$	70,150	$	70,234
Leasehold improvements	19,070		19,063
Vehicles	7,480		6,725
Furniture and fixtures	1,141		1,016
Building	38,505		36,599
Land	11,907		11,907
Computer hardware and software	593		593
	148,846		146,137
Less: accumulated depreciation and amortization	(52,156)		(50,569)
Total property and equipment, net	$	96,690	$	95,568

XML

Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2023

Payables and Accruals [Abstract]

Schedule of Accrued Expense Liabilities

The following table summarizes information related to accrued expense liabilities:

	September 30, 2023		December 31, 2022
	(in thousands)
Accrued miscellaneous expenses	$	2,368	$	1,646
Accrued interest	73		108
Accrued payroll	1,180		1,586
Accrued vacation and sick pay	834		543
Accrued shipping expenses	1,478		1,918
Accrued professional services fees	499		600
Accrued property tax	876		1,164
Accrued sale taxes and use taxes	1,021		992
Accrued sales discount	529		448
Total accrued expenses	$	8,858	$	9,005

XML

Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2023

Debt Disclosure [Abstract]

Schedule of Long-Term Debt

Long-term debt consists of the following:

	September 30, 2023		December 31, 2022
	(in thousands)
The 2026 Term Loan, with an initial balance of $16,115,000 and an option to request for additional advances up to a maximum of $6,885,000 through September 2022, which the Company exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $116,000 are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.	$	21,711	$	22,168
The 2027 Term Loan, with an initial balance of $20,700,000 and an option to request for additional advances up to a maximum of $8,000,000 through June 30, 2023, which the Company exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Prior to August 1, 2023, principal and interest payments of $104,000 are due monthly. Beginning August 1, 2023, monthly principal and interest payments increased to $144,000 for the remainder of the loan term, with the remaining principal balance due at maturity. The loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of the Company’s stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt coverage ratio.	$	28,287	$	20,563
Long-term debt	49,998		42,731
Less: unamortized loan fees	(219)		(216)
Less: current portion	(1,111)		(957)
Long-term debt, net of current portion	$	48,668	$	41,558

Schedule of Future Maturities

At September 30, 2023, future maturities are:

	(in thousands)
2023 (remainder)	$	277
2024	1,122
2025	1,179
2026	20,798
2027	26,622
	$	49,998

XML

Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2023

Share-Based Payment Arrangement [Abstract]

Schedule of Stock Option Activity

A summary of the Company’s stock option activity under the Plan for the period ended September 30, 2023 is as follows:

	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contract Life (In Years)	Aggregate Intrinsic Value
					(in thousands)
Outstanding at December 31, 2022	420,000	$	18.6	8.8	$	—
Exercised	(5,800)	$	17.7
Forfeited	(10,000)	$	18.9
Outstanding at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Vested and expected to vest at September 30, 2023	404,200	$	18.6	8.1	$	1,807
Exercisable at September 30, 2023	130,867	$	18.6	8.1	$	581

Schedule of Unvested Restricted Stock Unit Activity

The Company issued restricted stock units to its employees. The following table summarizes the unvested restricted stock units for the nine months ended September 30, 2023:

	Number of Shares Outstanding	Weighted Average Grant Date Fair Value
Unvested at December 31, 2022	82,146	11.47
Vested	(4,550)	16.64
Forfeited	(1,667)	10.00
Unvested at September 30, 2023	75,929	11.19

XML

Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2023

Earnings Per Share [Abstract]

Schedule of Earnings Per Share

Basic earnings per share is calculated by dividing the net income attributable to equity holders of the Company for the period by the weighted average number of common shares outstanding during the period.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$9,065		$6,096		$28,572		$19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Basic earnings per share	$	0.46	$	0.31	$	1.44	$	0.96

The following table summarizes the calculation of diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands, except per share data)
Net income attributable to Karat Packaging Inc.	$	9,065	$	6,096	$	28,572	$	19,107
Weighted average number of common shares in issue	19,891		19,809		19,888		19,809
Dilutive shares
Stock options and restricted stock units	104		129		75		113
Adjusted weighted average number of common shares	19,995		19,938		19,963		19,922
Diluted earnings per share	$	0.45	$	0.31	$	1.43	$	0.96

XML

Leases (Tables)

9 Months Ended

Sep. 30, 2023

Leases [Abstract]

Schedule of Lease Cost

The Company recognized the following lease costs in the accompanying condensed consolidated statement of income:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
Operating lease expense	$	1,606	$	1,336	$	4,454	$	3,256
Short-term lease expense	106		4		143		14
Variable lease expense	260		212		750		501
Total lease expense	$	1,972	$	1,552	$	5,347	$	3,771

Schedule of Supplemental Information Related to Operating Leases

The following table presents supplemental information related to operating leases:

	September 30, 2023		December 31, 2022
Weighted average remaining lease term	4.41 years		4.27 years
Weighted average discount rate	5.8	%	5.3	%

	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases	$	4,129	$	3,120

Schedule of Future Lease Payments Under Operating Leases

As of September 30, 2023, future lease payments under operating leases were as follows:

	(in thousands)
2023 (remainder)	$	1,544
2024	5,254
2025	3,928
2026	4,044
2027	2,711
Thereafter	2,885
Total future lease payments	20,366
Less: imputed interest	2,573
Total lease liability balance	$	17,793

XML

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

9 Months Ended

Sep. 30, 2023

Discontinued Operations and Disposal Groups [Abstract]

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)				(in thousands)
(Gain) loss, net, on disposal of machinery in scaling back manufacturing	$	(310)	$	—	$	1,612	$	—
(Gain) loss, net, on disposal of machinery within normal course of business	—		(16)		96		(33)
(Gain) Loss, net, on disposal	(310)		(16)		1,708		(33)
Impairment of deposits	—		—		523		—
Impairment expense and (gain) loss, net, on disposal of machinery	$	(310)	$	(16)	$	2,231	$	(33)

XML

Nature of Operations (Details)	9 Months Ended
	Sep. 30, 2023 distribution_center
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Distribution centers operated by entity	7

XML

Summary of Significant Accounting Policies - Narrative (Details)	9 Months Ended	12 Months Ended
	Sep. 30, 2023 USD ($) segment	Dec. 31, 2017 USD ($)
Debt Instrument [Line Items]
Reportable segment | segment	1
2026 Term Loan
Debt Instrument [Line Items]
Face amount of loan	$ 23,000,000
2027 Term Loan
Debt Instrument [Line Items]
Face amount of loan	$ 28,700,000
Global Wells
Debt Instrument [Line Items]
Ownership interest (as a percent)		13.50%
Voting interest (as a percent)		25.00%
Minimum bank account to make additional contributions from members		$ 50,000
Contributions to offset the amount that member cannot contribute (up to)		$ 25,000

XML

Summary of Significant Accounting Policies - Fair Value Measurements (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Short-term investments	$ 18,063	$ 0
Recurring basis | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	19,024	10,609
Short-term investments	18,063
Fair value	37,087	10,609
Recurring basis | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	0	0
Short-term investments	0
Fair value	0	0
Recurring basis | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	0	0
Short-term investments	0
Fair value	$ 0	$ 0

XML

Summary of Significant Accounting Policies - Summary of Carrying Values and Estimated Fair Values of Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Carrying Amount	$ 49,998	$ 42,731
Carrying Amount
Debt Instrument [Line Items]
Carrying Amount	49,779	42,515
Estimated Fair Value
Debt Instrument [Line Items]
Estimated Fair Value	46,586	39,033
2026 Term Loan
Debt Instrument [Line Items]
Carrying Amount	21,711	22,168
2026 Term Loan | Carrying Amount
Debt Instrument [Line Items]
Carrying Amount	21,640	22,079
2026 Term Loan | Estimated Fair Value
Debt Instrument [Line Items]
Estimated Fair Value	19,496	20,115
2027 Term Loan
Debt Instrument [Line Items]
Carrying Amount	28,287	20,563
2027 Term Loan | Carrying Amount
Debt Instrument [Line Items]
Carrying Amount	28,139	20,436
2027 Term Loan | Estimated Fair Value
Debt Instrument [Line Items]
Estimated Fair Value	$ 27,090	$ 18,918

XML

Goodwill - Schedule of Goodwill (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2023 USD ($)
Goodwill [Roll Forward]
Goodwill, beginning balance	$ 3,510
Goodwill acquired	0
Goodwill, ending balance	$ 3,510

XML

Joint Venture (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2023	Sep. 30, 2023	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2023	May 08, 2023	Apr. 06, 2022
Schedule of Equity Method Investments [Line Items]
Deposits paid for joint venture investment		$ 2,900		$ 4,000
Deposits refunded from joint venture investment		$ 6,900		$ 0
Bio Earth Technology
Schedule of Equity Method Investments [Line Items]
Deposits paid for joint venture investment	$ 2,900		$ 4,000
Deposits refunded from joint venture investment	$ 900
Bio Earth Technology | Lollicup Franchising, LLC
Schedule of Equity Method Investments [Line Items]
Ownership percentage by parent							49.00%
Bio Earth Technology | Lollicup Franchising, LLC
Schedule of Equity Method Investments [Line Items]
Committed capital to joint venture							$ 6,500
Keary Global
Schedule of Equity Method Investments [Line Items]
Noncontrolling interest in joint ventures					$ 6,100	$ 6,100
Noncontrolling interest in joint ventures, gross						$ 6,000
Keary Global | Bio Earth Technology
Schedule of Equity Method Investments [Line Items]
Ownership percentage by parent						5.00%

XML

Inventories - Schedule of Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Inventory Disclosure [Abstract]
Raw materials	$ 9,427	$ 18,061
Semi-finished goods	2,413	1,850
Finished goods	60,539	52,044
Subtotal	72,379	71,955
Less inventory reserve	(722)	(749)
Total inventories	$ 71,657	$ 71,206

XML

Inventories - Narrative (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Inventory [Line Items]
Write-off of inventory	$ 281,000	$ 0	$ 3,225,000	$ 0
Cost of Sales
Inventory [Line Items]
Raw materials			$ 1,710,000

XML

Property and Equipment - Schedule of Property and Equipment, Net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	$ 148,846		$ 148,846		$ 146,137
Less: accumulated depreciation and amortization	(52,156)		(52,156)		(50,569)
Total property and equipment, net	96,690		96,690		95,568
Depreciation and amortization expense	2,701	$ 2,597	8,038	$ 7,732
Machinery and equipment
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	70,150		70,150		70,234
Leasehold improvements
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	19,070		19,070		19,063
Vehicles
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	7,480		7,480		6,725
Furniture and fixtures
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	1,141		1,141		1,016
Building
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	38,505		38,505		36,599
Land
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	11,907		11,907		11,907
Computer hardware and software
Property, Plant and Equipment, Net, by Type [Abstract]
Property and equipment, gross	$ 593		$ 593		$ 593

XML

Line of Credit (Details) - USD ($)	Mar. 14, 2023	Sep. 30, 2023	Jun. 20, 2023	Jun. 19, 2023	Dec. 31, 2022	Feb. 23, 2018
SOFR
Line of Credit Facility [Line Items]
Interest rate	2.50%
Floor interest rate	1.00%
Line of credit
Line of Credit Facility [Line Items]
Maximum borrowing capacity		$ 36,264,000				$ 40,000,000
Floor rate (as a percent)	3.25%
Long-term line of credit, noncurrent		0			$ 0
Line of credit | Prime Rate
Line of Credit Facility [Line Items]
Basis spread on variable rate	0.25%
Standby letter of credit
Line of Credit Facility [Line Items]
Maximum borrowing capacity			$ 5,000,000	$ 2,000,000
Long-term line of credit, noncurrent		$ 3,736,000			$ 1,070,000

XML

Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Payables and Accruals [Abstract]
Accrued miscellaneous expenses	$ 2,368	$ 1,646
Accrued interest	73	108
Accrued payroll	1,180	1,586
Accrued vacation and sick pay	834	543
Accrued shipping expenses	1,478	1,918
Accrued professional services fees	499	600
Accrued property tax	876	1,164
Accrued sale taxes and use taxes	1,021	992
Accrued sales discount	529	448
Total accrued expenses	$ 8,858	$ 9,005

XML

Long-Term Debt - Schedule of Long-term Debt (Details) - USD ($) $ in Thousands		7 Months Ended	9 Months Ended
	Aug. 01, 2023	Jul. 31, 2023	Sep. 30, 2023	Dec. 31, 2022
Debt Instrument [Line Items]
Carrying amount			$ 49,998	$ 42,731
Less: unamortized loan fees			(219)	(216)
Less: current portion			(1,111)	(957)
Long-term debt, net of current portion			48,668	41,558
2026 Term Loan
Debt Instrument [Line Items]
Carrying amount			21,711	22,168
Amount converted to term loan			16,115
Term loan, accordion feature			$ 6,885
Fixed interest rate (as a percent)			3.50%
Monthly principal and interest payments			$ 116
2027 Term Loan
Debt Instrument [Line Items]
Carrying amount			28,287	$ 20,563
Amount converted to term loan			20,700
Term loan, accordion feature			$ 8,000
Fixed interest rate (as a percent)			4.375%
Monthly principal and interest payments	$ 144	$ 104

XML

Long-Term Debt - Schedule of Future Maturities (Details) - USD ($) $ in Thousands	Sep. 30, 2023	Dec. 31, 2022
Future maturities:
2023 (remainder)	$ 277
2024	1,122
2025	1,179
2026	20,798
2027	26,622
Long-term debt	$ 49,998	$ 42,731

XML

Long-Term Debt - Narrative (Details)	Jun. 30, 2022 USD ($)
Term Loan, Maturing May 2029
Debt Instrument [Line Items]
Face amount of loan	$ 21,580,000

XML

Interest Rate Swap (Details) - USD ($) $ in Thousands	1 Months Ended	9 Months Ended
	Jun. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Jun. 13, 2019
Derivative [Line Items]
Proceeds from settlement of interest rate swap		$ 0	$ 825
Global Wells | Interest Rate Swap
Derivative [Line Items]
Term of contract (in years)	10 years
Proceeds from settlement of interest rate swap	$ 825
Notional value				$ 21,580
Fixed interest rate (as a percent)				5.00%
Derivative interest income (expense)			$ 2,159

XML

Stock-Based Compensation - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Jan. 31, 2019
Stock-based Compensation
Shares reserved for issuance (in shares)	1,334,017		1,334,017		2,000,000
Stock-based compensation expense	$ 250	$ 598	$ 743	$ 1,774
Remaining stock-based compensation expense for unvested stock options	282		282
Remaining stock-based compensation expense for unvested restricted stock units	$ 39		$ 39
Restricted Stock Units (RSUs)
Stock-based Compensation
Vesting period (in years)			3 years
Cost not yet recognized, period for recognition (in years)			7 months 6 days
Share-based Payment Arrangement, Option
Stock-based Compensation
Vesting period (in years)			3 years
Cost not yet recognized, period for recognition (in years)			1 year
Maximum
Stock-based Compensation
Award term (in years)			10 years
Incentive Stock Optionee, Stock Ownership Greater than Ten Percent of Voting Power
Stock-based Compensation
Minimum exercise price to fair market value of common stock at the date of grant (as a percent)	110.00%		110.00%
Incentive Stock Optionee, Stock Ownership Greater than Ten Percent of Voting Power | Maximum
Stock-based Compensation
Award term (in years)			5 years

XML

Stock-Based Compensation - Schedule of Stock Options Activity (Details) $ / shares in Units, $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2023 USD ($) $ / shares shares	Dec. 31, 2022 USD ($) $ / shares shares
Number of Options
Outstanding at beginning of period (in shares) | shares	420,000
Exercised (in shares) | shares	(5,800)
Forfeited (in shares) | shares	(10,000)
Outstanding at end of period (in shares) | shares	404,200	420,000
Number of options, vested and expected to vest (in shares) | shares	404,200
Number of options, exercisable (in shares) | shares	130,867
Weighted-Average Exercise Price
Outstanding at beginning of period (in dollars per share) | $ / shares	$ 18.6
Exercised (in dollars per share) | $ / shares	17.7
Forfeited (in dollars per share) | $ / shares	18.9
Outstanding at end of period (in dollars per share) | $ / shares	18.6	$ 18.6
Weighted average exercise price, vested and expected to vest (in dollars per share) | $ / shares	18.6
Weighted average exercise price, exercisable (in dollars per share) | $ / shares	$ 18.6
Stock Option Activity, Additional Disclosures
Weighted average remaining contract life, options outstanding	8 years 1 month 6 days	8 years 9 months 18 days
Weighted average remaining contract life, vested and expected to vest	8 years 1 month 6 days
Weighted average remaining contract life, exercisable	8 years 1 month 6 days
Aggregate intrinsic value, options outstanding | $	$ 1,807	$ 0
Aggregate intrinsic value, vested and expected to vest | $	1,807
Aggregate intrinsic value, exercisable | $	$ 581

XML

Stock-Based Compensation - Schedule of Unvested Restricted Stock Units (Details) - Restricted Stock Units (RSUs)	9 Months Ended
	Sep. 30, 2023 $ / shares shares
Number of Shares Outstanding
Outstanding at beginning of period (in shares) | shares	82,146
Vested (in shares) | shares	(4,550)
Forfeited (in shares) | shares	(1,667)
Outstanding at end of period (in shares) | shares	75,929
Weighted Average Grant Date Fair Value
Outstanding at beginning of period (in dollars per share) | $ / shares	$ 11.47
Vested (in dollars per share) | $ / shares	16.64
Forfeited (in dollars per share) | $ / shares	10.00
Outstanding at end of period (in dollars per share) | $ / shares	$ 11.19

XML

Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Earnings Per Share Reconciliation [Abstract]
Net income attributable to Karat Packaging Inc.	$ 9,065	$ 6,096	$ 28,572	$ 19,107
Weighted average number of common shares in issue (in shares)	19,890,646	19,809,417	19,888,244	19,808,813
Basic earnings per share (in dollars per share)	$ 0.46	$ 0.31	$ 1.44	$ 0.96
Weighted Average Number of Shares Outstanding, Diluted [Abstract]
Net income attributable to Karat Packaging Inc.	$ 9,065	$ 6,096	$ 28,572	$ 19,107
Weighted average number of common shares in issue (in shares)	19,890,646	19,809,417	19,888,244	19,808,813
Dilutive shares
Stock options and restricted stock units (in shares)	104,000	129,000	75,000	113,000
Adjusted weighted average number of common shares (in shares)	19,994,648	19,938,042	19,962,999	19,922,047
Diluted earnings per share (in dollars per share)	$ 0.45	$ 0.31	$ 1.43	$ 0.96
Potentially dilutive shares excluded from diluted earnings per share calculation (in shares)	0	434,000	285,000	452,000

XML

Leases - Schedule of Lease Cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Leases [Abstract]
Operating lease expense	$ 1,606	$ 1,336	$ 4,454	$ 3,256
Short-term lease expense	106	4	143	14
Variable lease expense	260	212	750	501
Total lease expense	$ 1,972	$ 1,552	$ 5,347	$ 3,771

XML

Leases - Narrative (Details) - USD ($) $ in Thousands			1 Months Ended	3 Months Ended		9 Months Ended
	Nov. 01, 2023	Sep. 09, 2020	Oct. 31, 2023	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Lessee, Lease, Description [Line Items]
Expected rental income, remainder of the year				$ 185		$ 185
Expected rental income in 2024				739		739
Expected rental income in 2025				616		616
Minimum | Subsequent Event
Lessee, Lease, Description [Line Items]
Lease expense			$ 94
Maximum | Subsequent Event
Lessee, Lease, Description [Line Items]
Lease expense			$ 115
Global Wells
Lessee, Lease, Description [Line Items]
Term of contract		38 months
Global Wells | Subsequent Event
Lessee, Lease, Description [Line Items]
Lease renewal term	2 years
Global Wells | Minimum
Lessee, Lease, Description [Line Items]
Monthly lease payment		$ 58
Global Wells | Minimum | Subsequent Event
Lessee, Lease, Description [Line Items]
Monthly lease payment	$ 62
Global Wells | Maximum
Lessee, Lease, Description [Line Items]
Monthly lease payment		$ 61
Global Wells | Maximum | Subsequent Event
Lessee, Lease, Description [Line Items]
Monthly lease payment	$ 65
Operating Expense
Lessee, Lease, Description [Line Items]
Lease expense				1,653	$ 1,260	4,542	$ 2,974
Cost of Sales
Lessee, Lease, Description [Line Items]
Lease expense				$ 319	$ 292	$ 805	$ 797

XML

Leases - Schedule of Supplemental Information Related to Operating Leases (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Leases [Abstract]
Weighted average remaining lease term (in years)	4 years 4 months 28 days		4 years 3 months 7 days
Weighted average discount rate	5.80%		5.30%
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases	$ 4,129	$ 3,120

XML

Leases - Schedule of Maturities of Operating Lease Liabilities (Details) $ in Thousands	Sep. 30, 2023 USD ($)
Leases [Abstract]
2023 (remainder)	$ 1,544
2024	5,254
2025	3,928
2026	4,044
2027	2,711
Thereafter	2,885
Total future lease payments	20,366
Less: imputed interest	2,573
Total lease liability balance	$ 17,793

XML

Impairment Expense and (Gain) Loss, Net, on Disposal of Machinery and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Discontinued Operations and Disposal Groups [Abstract]
(Gain) loss, net, on disposal of machinery in scaling back manufacturing	$ (310)	$ 0	$ 1,612	$ 0
(Gain) loss, net, on disposal of machinery within normal course of business	0	(16)	96	(33)
(Gain) Loss, net, on disposal	(310)	(16)	1,708	(33)
Impairment of deposits	0	0	523	0
Impairment expense and (gain) loss, net, on disposal of machinery	$ (310)	$ (16)	$ 2,231	$ (33)

XML

Related Party Transactions (Details) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2023 USD ($) shares	Sep. 30, 2022 USD ($)	Sep. 30, 2018 convertible_note	Sep. 30, 2023 USD ($) shares	Sep. 30, 2022 USD ($)	Dec. 31, 2022 USD ($) shares
Related Party Transaction [Line Items]
Common stock, shares outstanding (in shares) | shares	19,893,839			19,893,839		19,885,005
Number of exercised convertible notes | convertible_note			2
Keary Global | Affiliated Entity
Related Party Transaction [Line Items]
Common stock, shares outstanding (in shares) | shares	250,004			250,004
Keary Global and Keary International
Related Party Transaction [Line Items]
Purchases from related party | $	$ 7,371	$ 7,336		$ 32,384	$ 33,051
Keary Global and Keary International | Affiliated Entity
Related Party Transaction [Line Items]
Accounts payable | $	$ 2,555			$ 2,555		$ 4,940

XML

Income Taxes - Narrative (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
Income Tax Disclosure [Abstract]
Provision for income taxes	$ 2,904,000	$ 1,900,000	$ 9,045,000	$ 6,323,000
Effective tax rate	24.10%	23.60%	23.80%	22.90%
Deferred tax assets, valuation allowance	$ 0		$ 0
Uncertain tax positions	$ 0		$ 0		$ 0

XML

Secondary Offering (Details) $ in Thousands	Sep. 12, 2023 USD ($)
Equity [Abstract]
Offering transaction costs	$ 453

XML

Subsequent Events (Details) $ / shares in Units, ft² in Thousands, $ in Thousands	1 Months Ended	9 Months Ended
	Oct. 31, 2023 USD ($) ft²	Sep. 30, 2023 USD ($)	Sep. 30, 2022 USD ($)	Nov. 30, 2023 $ / shares
Subsequent Event [Line Items]
Cash paid for income tax		$ 309	$ 7,069
Subsequent Event
Subsequent Event [Line Items]
Cash paid for income tax	$ 9,600
Refund received from machinery and equipment deposit	$ 1,272
Area of distribution facility | ft²	98
Lease term	64 months
Ordinary share per dividend (in dollars per share) | $ / shares				$ 0.20
Subsequent Event | Minimum
Subsequent Event [Line Items]
Lease expense	$ 94
Subsequent Event | Maximum
Subsequent Event [Line Items]
Lease expense	115
Subsequent Event | Global Wells
Subsequent Event [Line Items]
Pro rata distribution	$ 3,956