Karat Packaging Inc.

11/06/2026 | Press release | Distributed by Public on 11/06/2026 15:24

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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 contain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to expectations concerning matters that are not historical facts. For example, statements discussing, among other things, business strategies, growth strategies and initiatives, future revenues and future performance and expected costs and liabilities are forward-looking statements. Such forward-looking statements may be identified by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "remain," "should," or "will" or the negative of these terms or other comparable terminology. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause those actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:
•fluctuations in the demand for our products in light of changes in laws and regulations applicable to food and beverages and changes in consumer preferences;
•supply chain disruptions that could interrupt product manufacturing and increase product costs;
•our ability to source raw materials and navigate a shortage of available materials;
•our ability to compete successfully in our industry;
•the impact of earthquakes, fire, power outages, floods, pandemics and other catastrophic events, as well as the impact of any interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems;
•our ability to accurately forecast demand for our products or our results of operations;
•the impact of problems relating to delays or disruptions in the shipment of our goods through operational ports;
•our ability to expand into additional foodservice and geographic markets;
•our ability to successfully design and develop new products;
•fluctuations in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations;
•the effects of public health crises including pandemics;
•our ability to attract and retain skilled personnel and senior management; and
•other risks and uncertainties described in "Risk Factors" as set forth in Part I, Item 1A, "Risk Factors" of the Annual Report on Form 10-K for the year ended December 31, 2025 as filed with the Securities and Exchange Commission (the "SEC") on March 13, 2026 (the "2025 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 Texas 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.
Overview
We are a rapidly-growing and nimble distributor and manufacturer of disposable foodservice products and related items, including food and take-out containers, bags, boxes, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, gloves, janitorial supplies, and other products. Our products are available in plastic, paper, biopolymer-based and other compostable forms. We are a leader in product innovation, offering a growing line of environmentally-friendly products to our customers, who are increasingly focused on sustainability. We also offer customized solutions to our customers, including new product design and development, custom printing, distribution of specialty food and beverage products, and logistics services.
We operate our business strategically and with broad flexibility to provide both our large and small customers with the wide spectrum of products they need to successfully run and grow their businesses. We believe we have established ourselves as a differentiated provider of high-quality products relative to our competitors. Our operating model entails generating the majority of our revenue from the distribution of our vendors' products complemented by select manufacturing capabilities in the U.S., which allows us to provide customers with broad product choices and customized offerings with short lead times. This model provides us with the flexibility to adjust the mix of our product offering from import and manufacturing in an evolving economic environment to drive operating efficiency and sustain margin expansion. We have strengthened our supply chain resilience and efficiency by prioritizing strong partnerships with reliable and cost-efficient sources and diversifying sourcing to countries with more favorable trade conditions and minimal tariffs in a dynamic global trade landscape. This has enabled us to expand our supplier base, minimize reliance on individual suppliers, enhance the resilience of our supply chain, expand our margin and improve our operating cash flows.
We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, an approximately 300,000 square foot distribution center in Chino, California, and an approximately 76,000 square foot distribution center located in Kapolei, Hawaii. We have selected manufacturing capabilities in all of these facilities. In addition, we operate eight other distribution centers located in Chino, California; Puyallup, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; Aurora, Illinois; Mesa, Arizona; and Sugar Land, Texas. We recently entered into a 50-month lease agreement for a new distribution center in Orlando, Florida, which is expected to be fully operational in November 2026. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Chicago, Dallas, Houston, Seattle, Phoenix, Atlanta, Honolulu and Orlando metro areas. On October 17, 2025, we announced that Lollicup, our wholly-owned business operating subsidiary, relocated its headquarters to Rockwall, Texas, from Chino, California.
We manage and evaluate our operations in one reportable segment.
Trade and Tariffs Update
Beginning in 2025, the U.S. implemented a baseline tariff framework on most imports with higher country and product-specific rates for certain trading partners, including Taiwan and China, among others. In February 2026, the U.S. Supreme Court ruled that these tariffs levied under the International Emergency Economic Powers Act ("IEEPA") were unconstitutional. With the removal of IEEPA tariffs following the Supreme Court's ruling, a new temporary 10% tariff for all imports under Section 122 of the Trade Act of 1974 was imposed effective February 24, 2026, and remained in effect for 150 days, the maximum period that Section 122 permits without congressional action. Subsequent to the expiration of the Section 122 tariff on July 24, 2026, new Section 301 tariffs ranging from 10% to 12.5% were imposed on approximately 60 trading partners effective July 24, 2026.
As a result of the Supreme Court's ruling, and in response to the order from the U.S. Court of International Trade, the U.S. Customs and Border Protection ("CBP") formalized a process for refunds of previously paid IEEPA tariffs to importers of record. We have completed the process of reviewing our import data, and determined that we have paid a total of $26.0 million of IEEPA tariffs during the year ended December 31, 2025 and the first two months of 2026. In April 2026, we submitted refund claims totaling $25.8 million eligible for processing at time of filing, and expect to submit the remaining eligible claims once CBP opens the filing window.
We did not recognize any IEEPA tariff refunds during the three months ended September 30, 2026. During the nine months ended September 30, 2026, we recognized IEEPA tariff refunds of $26.7 million, including principal of $25.8 million recognized as a reduction of cost of goods sold because all related inventory was sold at the time of recognition, and interest of $0.9 million recognized as interest income in the accompanying condensed consolidated statements of income.
Business Highlights and Trends
•We continue to realign our global supply chain within a dynamic global trade environment and diversified sourcing to countries with more favorable trade conditions, such as increasing sourcing from Indonesia, South America, and Malaysia for the three and nine months ended September 30, 2026 to an aggregate of 19.4% and 15.6%, respectively, from 13.0% and 9.6%, respectively, for the three and nine months ended September 30, 2025. Further, we have decreased our sourcing from Taiwan for the three and nine months ended September 30, 2026 to 39.1% and 43.1%, respectively, from 41.6% and 51.5%, respectively, for the three and nine months ended September 30, 2025. Similarly, we have decreased our sourcing from China for the three and nine months ended September 30, 2026 to 14.4% and 12.5%, respectively, from 17.1% and 14.9%, respectively, for the three and nine months ended September 30, 2025.
•We did not recognize any IEEPA tariff refunds during the three months ended September 30, 2026. For the nine months ended September 30, 2026, we recognized $25.8 million as a reduction of cost of goods sold and $0.9 million as interest income related to IEEPA tariff refunds. The recorded IEEPA tariff refunds increased our gross profit and our adjusted EBITDA by $25.8 million, our other income, net, by $0.9 million, and our net income by $20.2 million for the nine months ended September 30, 2026. The refunds delivered benefits to our gross margin and our adjusted EBITDA margin of 660 basis points and our net income margin of 520 basis points for the nine months ended September 30, 2026. The refunds represent the recovery of tariffs paid in prior periods and provided a one-time benefit to our results during the nine months ended September 30, 2026. Cash received from IEEPA tariff refunds, included in cash from operating activities, totaled $25.2 million during the nine months ended September 30, 2026.
•We recorded quarterly net sales of $134.7 million for the three months ended September 30, 2026, an increase of 8.2% in amount and 7.4% in volume, compared to the three months ended September 30, 2025. For the nine months ended September 30, 2026, we recorded net sales of $388.0 million, an increase of 10.2% in amount and 8.8% in volume, compared to the nine months ended September 30, 2025.
•Our gross margin was 33.5% and 42.2% for the three and nine months ended September 30, 2026, a decrease of 100 and an increase of 450 basis points compared to the three and nine months ended September 30, 2025, respectively.
•We recorded quarterly net income of $4.7 million for the three months ended September 30, 2026, a decrease of 37.8% compared to the three months ended September 30, 2025. For the nine months ended September 30, 2026, we recorded net income of $41.5 million, an increase of 63.0%, compared to the nine months ended September 30, 2025.
•Our net income margin was 3.5% and 10.7% for the three and nine months ended September 30, 2026, a decrease of 260 and an increase of 350 basis points compared to the three and nine months ended September 30, 2025, respectively.
•We generated $9.7 million and $50.0 million in net cash from operating activities for the three and nine months ended September 30, 2026, an increase of 885.7% and 171.0% compared to the three and nine months ended September 30, 2025, respectively.
•We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $8.9 million and $63.0 million for the three and nine months ended September 30, 2026, a decrease of 31.5% and an increase of 47.8% compared to the three and nine months ended September 30, 2025, respectively.
•Our Adjusted EBITDA margin, a non-GAAP measure defined below, was 6.6% and 16.2% for the three and nine months ended September 30, 2026, a decrease of 390 and an increase of 410 basis points compared to the three and nine months ended September 30, 2025, respectively.
•As of September 30, 2026, we had financial liquidity of $37.0 million, consisting of $33.4 million in cash and cash equivalents and $3.6 million in availability under Line of Credit. In addition, we had $10.0 million in short-term investments as of September 30, 2026.
•On September 30, 2026, we made a lump-sum payment of $11.2 million to fully repay the 2026 Term Loan upon maturity.
•On November 3, 2026, our Board of Directors declared a regular quarterly cash dividend of $0.47 per share on our common stock, which will be paid on or about November 27, 2026 to shareholders of record at the close of business on November 19, 2026.
Trends in Our Business
The following trends have contributed to the results of our operations, and we anticipate that they will continue to affect our future results:
•A significant trend in the restaurant industry is the changing perception of food delivery and take-out compared to traditional on-premise dining. There is a clear growing preference for delivery and take-out, and we expect this trend to continue positively, influencing our operating results, as more customers will need packaging and containers to support the rising demand from food delivery and take-out consumers.
•Environmental concerns regarding disposable products, broadly, have resulted in a number of significant changes to the food-service industry, including regulations applicable to our customers. We believe this trend will have a positive long-lasting impact on our results of operations, as we expect there will be an increased demand for eco-friendly and compostable single-use disposable products.
•Most of our products are sourced from vendors abroad and as a result we incur freight costs from these overseas import shipments, which could be a significant component of our cost of goods sold. Elevated ocean freight rates could pressure our gross margin, and if we raise our prices, dampen the demand for our products. Steady or dropping ocean freight could yield significant opportunities for us to expand our margin. However, it could also reduce the barrier of entry, intensifying the competition.
•U.S. foreign trade policy continues to evolve, such as the imposition of tariffs on imports 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 continue to strengthen our global supply chain, whether any previously imposed tariffs are removed and whether we can implement procedures to mitigate the impact from the tariffs.
•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, and the availability and cost of such raw materials are subject to global geopolitical risks. 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 on our costs. There can also be lags between cost inflation and the implementation of price increases, which could negatively impact our gross margin. Conversely, periods of deflation, where raw material costs decrease, may create pricing pressure and start price wars, potentially requiring us to lower prices, which could also affect our gross margin. Additionally, the availability of raw materials may affect our suppliers' ability to manufacture products and may limit the volume of products we are able to import, which in turn could impact our ability to meet customer demand. We believe price fluctuations and the availability of raw materials 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, whether we can successfully implement price adjustments to maintain gross margin and whether we can effectively realign our global supply chain to mitigate disruptions and support product availability.
•Supply chain effectiveness could have a long-lasting impact on our operations and financial results. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to manage our global supply chain effectively, including the accurate forecast of demand, the successful procurement and transportation of raw materials and products, and the effective management of our inventory, production and distribution.
•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.
Critical Accounting Estimates
The following discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments.
There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading "Critical Accounting Estimates" in Item 7 of Part II of our 2025 Form 10-K.
Results of Operations
The amount and percentage changes calculated in the discussion below were based on numbers rounded to the nearest thousands.
Three Months Ended September 30, Nine Months Ended September 30,
2026 2025 2026 2025
(in thousands)
Net sales $ 134,742 $ 124,516 $ 387,991 $ 352,126
Cost of goods sold 89,611 81,598 224,174 219,339
Gross profit 45,131 42,918 163,817 132,787
Operating expenses 40,259 34,345 112,879 99,844
Operating income 4,872 8,573 50,938 32,943
Other income, net 979 1,334 3,321 411
Provision for income taxes 1,125 2,304 12,743 7,884
Net income $ 4,726 $ 7,603 $ 41,516 $ 25,470
Three Months Ended September 30, 2026 Compared to Three Months Ended September 30, 2025
Net sales
Net sales were $134.7 million for the three months ended September 30, 2026 compared to $124.5 million for the three months ended September 30, 2025, an increase of $10.2 million, or 8.2%. The sales growth was primarily driven by an increase of $10.7 million in volume and product mix, as well as a $0.4 million favorable year-over-year pricing comparison, partially offset by a decrease of $0.8 million in shipping and logistics revenue.
Cost of goods sold
Cost of goods sold was $89.6 million for the three months ended September 30, 2026, compared to $81.6 million for the three months ended September 30, 2025, an increase of $8.0 million, or 9.8%. Product costs increased by $7.2 million compared to the three months ended September 30, 2025 due to increased sales volume and resin prices. Import costs increased by $1.3 million, compared to the three months ended September 30, 2025, as ocean freight costs grew $2.4 million due to an 11.7% increase in the number of containers imported and a 17.0% increase in average container rate, while duty and tariff costs decreased by $1.1 million.
Gross profit
Gross profit was $45.1 million for the three months ended September 30, 2026 compared to $42.9 million for the three months ended September 30, 2025, an increase of $2.2 million, or 5.2%. Gross margin was 33.5% for the three months ended September 30, 2026 compared to 34.5% for the three months ended September 30, 2025, a decrease of 100 basis points, primarily resulting from product costs as a percentage of net sales increasing to 50.6% from 48.9%, partially offset by depreciation expense as a percentage of net sales decreasing to 1.0% from 1.3%, compared to the three months ended September 30, 2025.
Operating expenses
Operating expenses were $40.3 million for the three months ended September 30, 2026 compared to $34.3 million for the three months ended September 30, 2025, an increase of $5.9 million, or 17.2%. Shipping and transportation costs increased $2.8 million during the three months ended September 30, 2026, mainly due to the increase in online shipping
costs of $2.2 million as online sales grew 37.7% compared to the three months ended September 30, 2025. Driven by this online sales growth, online platform fees also increased $0.9 million and online marketing expense increased $0.7 million. Additionally, salaries and benefits increased $0.9 million, warehouse expense increased $0.4 million, and stock-based compensation expense increased $0.4 million.
Operating income
Operating income was $4.9 million for the three months ended September 30, 2026 compared to $8.6 million for the three months ended September 30, 2025, a decrease of $3.7 million, or 43.2%. The decrease was due to an increase in operating expenses of $5.9 million, partially offset by an increase in gross profit of $2.2 million, as discussed above.
Other income, net
Other income, net was $1.0 million for the three months ended September 30, 2026 compared to $1.3 million for the three months ended September 30, 2025, a decrease of $0.4 million, or 26.6%, primarily due to a decrease in gain on foreign currency transactions of $0.5 million as a result of the fluctuation of currency exchange rate between the United States Dollar and the New Taiwan Dollar.
Provision for income taxes
Provision for income taxes was $1.1 million for the three months ended September 30, 2026 compared to $2.3 million for the three months ended September 30, 2025, a decrease of $1.2 million, or 51.2%. The Company's effective tax rate decreased to 19.2% for the three months ended September 30, 2026 compared to 23.3% for the three months ended September 30, 2025, primarily due to the stock compensation windfall benefit from stock options exercised.
Net income
Net income was $4.7 million for the three months ended September 30, 2026 compared to $7.6 million for the three months ended September 30, 2025, a decrease of $2.9 million, or 37.8%. The decrease was primarily driven by a decrease of $3.7 million in operating income and a decrease of $0.4 million in other income, net, partially offset by a decrease of $1.2 million in provision for income taxes, as discussed above.
Nine Months Ended September 30, 2026 Compared to Nine Months Ended September 30, 2025
Net sales
Net sales were $388.0 million for the nine months ended September 30, 2026 compared to $352.1 million for the nine months ended September 30, 2025, an increase of $35.9 million, or 10.2%. The year-over-year increase in net sales was primarily driven by an increase of $36.5 million in volume and change in product mix, as well as a $2.2 million favorable year-over-year pricing comparison, partially offset by a decrease of $2.8 million in shipping and logistics revenue.
Cost of goods sold
Cost of goods sold was $224.2 million for the nine months ended September 30, 2026 compared to $219.3 million for the nine months ended September 30, 2025, an increase of $4.8 million, or 2.2%. Product costs increased by $19.3 million compared to the nine months ended September 30, 2025 primarily as a result of higher sales volume and resin prices. Import costs increased by $12.0 million compared to the nine months ended September 30, 2025, as duty and tariff costs increased by $9.5 million from $18.4 million for the nine months ended September 30, 2025 to $27.8 million for the nine months ended September 30, 2026, and ocean freight costs increased by $1.7 million, primarily driven by a 4.9% increase in the number of containers imported and a 3.3% increase in average container rate. These increases were partially offset by a decrease of $0.7 million in logistic costs compared to the nine months ended September 30, 2025 and $25.8 million of IEEPA tariff refunds recognized during the nine months ended September 30, 2026.
Gross profit
Gross profit was $163.8 million for the nine months ended September 30, 2026 compared to $132.8 million for the nine months ended September 30, 2025, an increase of $31.0 million, or 23.4%. Gross margin was 42.2% for the nine months ended September 30, 2026 compared to 37.7% for the nine months ended September 30, 2025, an increase of 450 basis points. IEEPA tariff refunds delivered a favorable impact on gross margin of 660 basis points for the nine months
ended September 30, 2026. Partially offsetting this benefit, product costs as a percentage of net sales increased to 49.4% from 49.0% and import costs as a percentage of net sales increased to 13.0% from 11.0%, compared to the nine months ended September 30, 2025.
Operating expenses
Operating expenses were $112.9 million for the nine months ended September 30, 2026 compared to $99.8 million for the nine months ended September 30, 2025, an increase of $13.0 million, or 13.1%. Shipping and transportation costs increased $5.5 million during the nine months ended September 30, 2026 driven by higher shipping volume mainly due to online sales growth of 24.1% compared to the nine months ended September 30, 2025 and increased shipping rates. Driven by this online sales growth, online marketing expense also increased $1.1 million and online platform fees increased $0.8 million. In addition, salaries and benefits increased $2.6 million, warehouse expense increased $1.2 million, and stock-based compensation expense increased $0.4 million. Further, a net loss of less than $0.1 million was recognized on disposal of property and equipment during the nine months ended September 30, 2026 compared to a $0.7 million gain during the nine months ended September 30, 2025.
Operating income
Operating income was $50.9 million for the nine months ended September 30, 2026 compared to $32.9 million for the nine months ended September 30, 2025, an increase of $18.0 million, or 54.6%. The increase was due to an increase in gross profit of $31.0 million, partially offset by an increase in operating expenses of $13.0 million, as discussed above.
Other income, net
Other income, net was $3.3 million for the nine months ended September 30, 2026 compared to $0.4 million for the nine months ended September 30, 2025, an increase of $2.9 million, or 708.0%. The increase was driven primarily by a gain on foreign currency transactions of $0.3 million during the nine months ended September 30, 2026, compared with a loss on foreign currency transactions of $1.9 million during the nine months ended September 30, 2025, due to the foreign currency fluctuation between the United States Dollar and the New Taiwan Dollar. In addition, interest income increased $0.3 million due to $0.9 million interest income related to IEEPA tariff refunds recognized in the nine months ended September 30, 2026, partially offset by a decrease of $0.6 million in interest income from investment in certificates of deposit compared to the nine months ended September 30, 2025.
Provision for income taxes
Provision for income taxes was $12.7 million, including a $6.6 million impact from IEEPA tariff refunds, for the nine months ended September 30, 2026 compared to $7.9 million for the nine months ended September 30, 2025, an increase of $4.9 million, or 61.6%. The Company's effective tax rate was 23.5% for the nine months ended September 30, 2026 compared to 23.6% for the nine months ended September 30, 2025.
Net income
Net income was $41.5 million for the nine months ended September 30, 2026 compared to $25.5 million for the nine months ended September 30, 2025, an increase of $16.0 million, or 63.0%. The increase was primarily driven by an increase of $18.0 million in operating income and an increase of $2.9 million in other income, net, partially offset by an increase of $4.9 million in provision for income taxes, as discussed above.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to assess our financial and operating performance that are not defined by, or calculated in accordance with, U.S. GAAP. A non-GAAP financial measure is defined as a numerical measure of a company's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with U.S. GAAP; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure calculated and presented in accordance with U.S. GAAP.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our operating results.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is a financial measure calculated as net income excluding (i) interest income, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation expense, and (vi) secondary offering transaction costs. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.
We present Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our financial performance. Adjusted EBITDA and Adjusted EBITDA margin assist management in assessing our core operating performance. We believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as alternatives to net income, net income margin, or other measures determined in accordance with US GAAP. Also, Adjusted EBITDA and Adjusted EBITDA margin are not necessarily comparable to similarly titled measures presented by other companies.
Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.
Reconciliation of Adjusted EBITDA (unaudited)
Three Months Ended September 30,
2026 2025
(in thousands, except percentages)
Amount % of Net Sales Amount % of Net Sales
Net income $ 4,726 3.5 % $ 7,603 6.1 %
Add (deduct):
Interest income (518) (0.4) (415) (0.3)
Interest expense 420 0.3 539 0.4
Provision for income taxes 1,125 0.8 2,304 1.9
Depreciation and amortization 2,535 1.9 2,766 2.2
Stock-based compensation expense 655 0.5 253 0.2
Adjusted EBITDA $ 8,943 6.6 % $ 13,050 10.5 %
Reconciliation of Adjusted EBITDA (unaudited) Nine Months Ended September 30,
2026 2025
(in thousands, except percentages)
Amount % of Net Sales Amount % of Net Sales
Net income $ 41,516 10.7 % $ 25,470 7.2 %
Add (deduct):
Interest income (1,965) (0.5) (1,657) (0.5)
Interest expense 1,254 0.3 1,569 0.4
Provision for income taxes 12,743 3.3 7,884 2.2
Depreciation and amortization 8,003 2.1 8,132 2.4
Stock-based compensation expense 1,493 0.3 1,044 0.3
Secondary offering transaction costs (1)
- - 214 0.1
Adjusted EBITDA $ 63,044 16.2 % $ 42,656 12.1 %
(1) Secondary offering transaction costs represent legal and professional fees incurred in connection with the completion of the secondary offering by certain executive officers and stockholders of the Company, which were directly related to the offering and were incremental to our normal operating expenses, as discussed in Note 16 - Secondary Offering.
Free Cash Flow
Free Cash Flow is a financial measure calculated as cash from operating activities less cash used in (i) purchases of property and equipment and (ii) deposits paid for property and equipment.
We present Free Cash Flow as a supplemental measure of our financial liquidity. Free Cash Flow assists management in assessing our ability to fund growth through generation of additional cash from business operations. We believe this measure also provides investors with an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business.
Free Cash Flow should not be considered in isolation or as alternatives to net income or cash flows from operating activities. Also, Free Cash Flow is not necessarily comparable to similarly titled measures presented by other companies.
Set forth below is a reconciliation of net cash provided by operating activities to Free Cash Flow:
Reconciliation of Free Cash Flow (unaudited)
Nine Months Ended September 30,
2026 2025
(in thousands)
Net cash provided by operating activities (2)
$ 50,025 $ 18,458
Deduct:
Purchases of property and equipment (678) (520)
Deposits paid for property and equipment (2,129) (3,244)
Free Cash Flow $ 47,218 $ 14,694
(2) Net cash provided by operating activities included cash receipts related to the IEEPA tariff refunds of $25.2 million during the nine months ended September 30, 2026.
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 the challenging macro environment at times.
As described in Note 6 - Line of Credit to the condensed consolidated financial statements, the Line of Credit is available for working capital and general corporate purposes and is secured by our assets. It consists of a revolving loan facility and a standby letter of credit sub-limit. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. On March 3, 2025, we amended the Line of Credit. Prior to March 3, 2025, the revolving loan facility had a maximum borrowing capacity of $40.0 million and interest accrued at an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.00%. The amendment on March 3, 2025, among other things, (1) extended the maturity date to March 14, 2027, (2) reduced the maximum borrowing capacity of the revolving loan facility to $20.0 million, and (3) revised the interest on any Line of Credit borrowings to an annual rate of one month term SOFR plus 2.25%, with a SOFR floor of 1.00%. On March 17, 2025, August 21, 2025, October 3, 2025, and May 11, 2026, we entered into four separate amendments of the Line of Credit, increasing the standby letter of credit sub-limit, respectively, from $5.0 million to $7.5 million, from $7.5 million to $10.0 million, from $10.0 million to $15.0 million, and from $15.0 million to $18.0 million. As of September 30, 2026, the amount issued under the standby letter of credit was $16.4 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $3.6 million.
As described in Note 8 - Long-Term Debt to the condensed consolidated financial statements, on June 17, 2022, we entered into a $28.7 million term loan agreement which matures July 1, 2027 (the "2027 Term Loan"). The 2027 Term Loan had an initial balance of $20.7 million and an option to request additional advances up to a maximum of $8.0 million through June 30, 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. On September 5, 2025, we made an early payment of $3.5 million to reduce the remaining principal balance due at maturity, with total monthly payments remaining the same for the remainder of the loan term. 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. As of September 30, 2026, the entire remaining balance of $23.1 million is included in the long-term debt, current portion on the condensed consolidated balance sheet.
Additionally, we had a $23.0 million term loan that matured on September 30, 2026 (the "2026 Term Loan"). The 2026 Term Loan had an initial balance of $16.1 million and an option to request additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022. Interest accrues at a fixed rate of 3.5% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. On December 18, 2025 and April 24, 2026, we made early payments of $8.0 million and $0.4 million, respectively, to reduce the remaining principal balance due at maturity, with total monthly payments remaining the same for the remainder of the loan term. On September 30, 2026, we made a lump-sum payment of $11.2 million to fully repay the loan upon maturity. The 2026 Term Loan was collateralized by substantially all of Global Wells' assets and was guaranteed by Global Wells and one of our stockholders. In accordance with the loan agreement, Global Wells was required to comply with certain financial covenants, including a minimum debt service coverage ratio.
As of September 30, 2026, 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, 2026, we had no borrowings outstanding under the Line of Credit and $23.1 million in outstanding balance under the 2027 Term Loan.
As discussed in Note 14 - Commitments and Contingencies to the condensed consolidated financial statements, on February 5, 2024, we received a Notice of Determination from the U.S. Customs and Border Protection ("CBP") related to its investigation to determine whether we have evaded the anti-dumping and countervailing duty on certain imported thermal paper products. On March 19, 2024, we submitted a request for an administrative review of the initial determination issued by CBP. On June 11, 2024, CBP completed the administrative review and upheld its initial
conclusion. In February 2025, we started to receive bills related to certain of our thermal paper shipments. During the year ended December 31, 2025, we submitted protests of certain bills received with CBP, and received its determination on all submitted protests as of April 3, 2026. We made total payments of $1.9 million related to certain shipments under the investigation for the year ended December 31, 2025 and $0.3 million for the nine months ended September 30, 2026. Additionally, we made total payments of $0.8 million in October 2026. Payments on bills received are currently due as all submitted protests are resolved. Although we have an import duty liability reserve of $0.9 million as of September 30, 2026, the amount of the final payments could vary significantly from the estimated liability reserve.
On February 20, 2026, the U.S. Supreme Court held that certain tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA") were unconstitutional. The case was remanded to the U.S. Court of International Trade for further instructions regarding the refund of all IEEPA tariffs paid by importers of record. We have completed the process of reviewing our import data, and determined that we have paid a total of $26.0 million of IEEPA tariffs during the year ended December 31, 2025 and the first two months of 2026. In April 2026, we submitted refund claims totaling $25.8 million eligible for processing at time of filing and expect to submit the remaining eligible claims once CBP opens the filing window.
We did not recognize any IEEPA tariff refunds during the three months ended September 30, 2026, but recognized $26.7 million during the nine months ended September 30, 2026. Of the total amount recognized, $25.2 million had been received and $1.5 million was deemed probable and recognized as prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of September 30, 2026. We currently expect to receive the refund of the remaining $1.5 million within the next 12 months, and continue to closely monitor the status of our submitted claims and developments.
Additionally, on November 3, 2026, our Board of Directors declared a regular quarterly cash dividend of $0.47 per share on our common stock, which will be paid on or about November 27, 2026 to shareholders of record at the close of business on November 19, 2026. Prior to this, we paid out regular quarterly cash dividends totaling $27.3 million in the current fiscal year.
Our ongoing operations and growth strategy may require us to continue to make investments in new markets and products, logistics and manufacturing infrastructure, e-commerce platforms, talent, and technology capabilities. In addition, we may consider making strategic acquisitions and investments which could require significant liquidity. The rapidly changing macroeconomic, geopolitical and global trade dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects. We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, including the entire balance due on our 2027 Term Loan upon maturity, make lease payments, and fund capital expenditures for at least the next 12 months. We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value.
Beyond the next 12 months, if we require additional capital resources to grow our business, either organically or through acquisition, we may seek to sell additional equity securities, renew and 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, 2026 compared to December 31, 2025:
September 30, 2026 December 31, 2025 Change
(in thousands)
Current assets $ 191,929 $ 161,188 $ 30,741
Current liabilities 104,894 70,220 34,674
Working capital $ 87,035 $ 90,968 $ (3,933)
As of September 30, 2026, we had working capital of $87.0 million compared to $91.0 million as of December 31, 2025, representing a decrease of $3.9 million, or 4.3%, driven by an increase of $34.7 million in current liabilities, partially offset by an increase of $30.7 million in current assets. The increase in current liabilities was primarily driven by an increase in accounts payable and related party payables of $21.6 million, an increase in long-term debt, current portion of $10.1 million, and an increase in accrued expenses of $2.3 million. The increase in current assets was primarily driven by an increase in inventories of $15.1 million primarily due to seasonality, an increase in accounts receivable of $8.5 million as a result of stronger sales, an increase in cash and cash equivalents and short-term investments of $5.6 million, and an increase in prepaid expenses and other current assets of $1.6 million due to the addition of the $1.5 million IEEPA tariff receivable.
Cash Flows
The following table summarizes cash flow for the nine months ended September 30, 2026 and 2025:
Nine Months Ended September 30,
2026 2025
(in thousands)
Net cash provided by operating activities $ 50,025 $ 18,458
Net cash (used in) provided by investing activities
(13,045) 5,447
Net cash used in financing activities (41,416) (31,467)
Net change in cash and cash equivalents $ (4,436) $ (7,562)
Cash flows provided by operating activities. Net cash provided by operating activities was $50.0 million for the nine months ended September 30, 2026, primarily the result of net income of $41.5 million, adjusted for certain non-cash items totaling $19.2 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, stock-based compensation, and allowance for bad debt and inventory adjustments. In addition, cash decreased by $10.7 million from changes in working capital, primarily as a result of a decrease of $16.1 million from an increase in inventory due to increased inventory purchases, a decrease of $9.0 million from an increase in accounts receivable due to higher sales, a decrease of $9.0 million from a reduction in operating lease liabilities, and a decrease of $1.3 million from an increase in prepaid expenses, partially offset by an increase of $22.1 million from higher accounts and related party payables primarily due to increased inventory purchases and an increase of $2.3 million from higher accrued expenses.
Net cash provided by operating activities was $18.5 million for the nine months ended September 30, 2025, primarily the result of net income of $25.5 million, adjusted for certain non-cash items totaling $16.6 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, stock-based compensation, gain on disposal of machinery in the normal course of business, and write-off of inventory. In addition, cash decreased by $23.6 million from changes in working capital, which included a decrease of $13.9 million from the increase in inventory primarily due to higher import costs, a decrease of $11.2 million from an increase in accounts receivable due to higher sales, and a decrease of $7.4 million from a reduction in operating lease liabilities. These decreases were partially offset by an increase of $6.7 million from higher accounts and related party payables primarily associated with increased inventory purchases and an increase of $2.7 million from higher accrued expenses.
Cash flows (used in) provided by investing activities. Net cash used in investing activities was $13.0 million for the nine months ended September 30, 2026, which primarily included $15.7 million in purchases of short-term investments, $2.1 million in deposits paid for the purchase of property and equipment, and $0.7 million paid to directly purchase property and equipment, partially offset by $5.7 million in redemption of short-term investments.
Net cash provided by investing activities was $5.4 million for the nine months ended September 30, 2025, which primarily included $24.7 million in redemptions of short-term investments, partially offset by $16.3 million in purchases of short-term investments and $3.2 million of deposits paid for the purchase of property and equipment.
Cash flows used in financing activities. Net cash used in financing activities was $41.4 million for the nine months ended September 30, 2026, which primarily included $27.3 million of cash dividends paid to shareholders, $12.8 million of payments towards long-term debt, and $2.0 million of repurchases of common stock, partially offset by $1.2 million of proceeds from exercise of common stock options.
Net cash used in financing activities was $31.5 million for the nine months ended September 30, 2025, which primarily included $27.1 million of cash dividends paid to shareholders, $4.4 million of payments towards long-term debt, $3.5 million of repayment on the Line of Credit, and $0.9 million of Global Wells noncontrolling membership interest redemption gain tax withholding payment, partially offset by $4.5 million of proceeds from the Line of Credit.
Related Party Transactions
For a description of significant related party transactions, see Note 12 - Related Party Transactions in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
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.
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