Karat Packaging KRT Form 10-Q filing Q2 FY2026

KARAT PACKAGING INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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

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1. Nature of Operations

Lollicup USA Inc. ("Lollicup") was incorporated in 2001 in California and in October 2025, redomesticated to the State of Texas. Karat Packaging Inc. ("Karat Packaging") was incorporated in 2018 in Delaware and became the holding company for Lollicup (collectively, the "Company") through a share exchange with the shareholders of Lollicup. The Company's shares are listed on the NASDAQ Global Market under the symbol "KRT".

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

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

The Company currently operates manufacturing facilities and distribution centers in Chino, California, Rockwall, Texas, and Kapolei, Hawaii. In addition, the Company operates 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.

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 June 30, 2026 and for the three and six months ended June 30, 2026 and 2025 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 six months ended June 30, 2026 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2026.

The condensed consolidated balance sheet at December 31, 2025 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, 2025, as included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2026.

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, and Global Wells Investment Group ("Global Wells"), a variable interest entity wherein the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated.

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.

Share Repurchases: The Company’s Board of Directors has approved a Share Repurchase Program authorizing the Company to repurchase up to $15,000,000 of its common stock. Under the Share Repurchase Program, the Company may repurchase shares through open market transactions, through privately negotiated transactions, or pursuant to a trading plan separately adopted in the future, subject to the requirements of the Securities Exchange Act of 1934, as amended. The Company records the shares repurchased as treasury stock based on the amount paid to repurchase its shares. Direct costs incurred to acquire treasury stock are treated like stock issue costs and added to the cost of the treasury stock.

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The International Emergency Economic Powers Act ("IEEPA") Tariff Refund Claims: On February 20, 2026, the U.S. Supreme Court held that certain tariffs previously imposed under 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. In April 2026, the Company submitted refund claims with U.S. Customs and Border Protection related to eligible tariff payments made in prior periods. The Company has elected to apply the loss recovery guidance under FASB ASC 450 — Contingencies to account for the recognition of IEEPA tariff refunds. Refunds are recognized when deemed probable as a reduction of cost of goods sold when the related inventory has been sold, and any excess amount received associated with the refund is recognized as interest income.

Reporting Segments: The Company manages and evaluates its operations in one reportable segment. This segment consists of manufacturing and distribution of a broad portfolio of single-use products that are used to serve food and beverages and are available in plastic, paper, biopolymer-based, and other compostable forms. It also consists of the distribution of certain specialty food and beverage products, such as syrup, boba, and coffee drinks, as well as restaurant and warehouse supplies.

Variable Interest Entities: The Company has a variable interest in Global Wells located in Rockwall, Texas. In 2017, Lollicup along with three other unrelated parties formed Global Wells, of which Lollicup received a 13.5% ownership interest and a 25% voting interest. On February 29, 2024, Global Wells and one of its members (the "Selling Member") entered into a membership interest redemption agreement, under which the Selling Member sold and Global Wells purchased and redeemed all of the Selling Member's 10.8% ownership interest in Global Wells for a total cash consideration of $3,208,000, subject to tax withholding. Subsequent to the redemption, the ownership interests and voting power of the remaining members of Global Wells were adjusted proportionally, with Lollicup's ownership interest increasing to 15.1% and voting interest increasing to 33.3%. During the year ended December 31, 2024, a total cash payment of $2,325,000, net of tax withholding, was made to the Selling Member in full consideration of the redemption.

The purpose of Global Wells is to own, construct, and manage warehouses and manufacturing facilities. Global Wells’ operating agreement may require its members to make additional contributions upon the unanimous decision of the members or when the cash in Global Wells’ bank account falls below $50,000. In the event that a member is unable to make an additional capital contribution, the other members will be required to make contributions to offset the amount that the member cannot contribute, up to $25,000.

Global Wells was determined to be a variable interest entity in accordance with ASC Topic 810, Consolidations, however, at the time the investment was made, it was determined that Lollicup was not the primary beneficiary. In 2018, Lollicup entered into an operating lease with Global Wells (the “Texas Lease”). In 2020, the Company entered into another operating lease with Global Wells (the “New Jersey Lease”). On June 26, 2025, the Company renewed the New Jersey Lease with Global Wells, extending the lease term for an additional five years to August 31, 2030.

Upon entering into the Texas Lease with Lollicup on March 23, 2018, it was determined that Lollicup holds current and potential rights that give it the power to direct activities of Global Wells that most significantly impact Global Wells’ economic performance, the ability to receive significant benefits, and the obligation to absorb potentially significant losses, resulting in Lollicup having a controlling financial interest in Global Wells. As a result, Lollicup was deemed to be the primary beneficiary of Global Wells and has consolidated Global Wells under the risk and reward model of ASC 810, for the period from March 23, 2018. The monthly lease payments for both the Texas Lease and the New Jersey Lease are eliminated upon consolidation.

Assets recognized as a result of consolidating Global Wells do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating Global Wells do not represent additional claims of the Company’s general assets; rather they represent claims against the specific assets of Global Wells. See Note 8 — Long-Term Debt for a description of the two term loans that Global Wells had with financial institutions as of June 30, 2026.

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

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interests are deducted from their equity balances, as shown in the condensed consolidated statements of stockholders’ equity.

Revenue Recognition: The Company generates revenues from product sales to customers that include national and regional chains, distributors, small local restaurants, and those that purchase for individual consumption primarily through our online stores. The Company considers revenue disaggregated by customer type to most accurately reflect the nature and uncertainty of its revenue and cash flows that are affected by economic factors. For the three and six months ended June 30, 2026 and 2025, net sales disaggregated by customer type consist of the amounts shown below.

• Chains and distributors revenue: National and regional chains revenue is derived from chain restaurants, supermarkets, and other businesses with multiple locations. Distributors revenue is derived from distributors across the U.S. that purchase the Company’s products for resale and distribution to restaurants, supermarkets, and other businesses. Chain accounts often order through their distribution partners. Revenue from transactions with chains and distributors is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss pass to the customer.
• Online revenue: Online revenue is derived from the Company's online storefront on www.lollicupstore.com, and through the Company's mobile app, as well as other e-commerce platforms with customers largely consisting of small businesses such as small mom-and-pop restaurants, coffee houses, bubble tea cafes, pizza parlors, and frozen yogurt shops. Revenue from online transactions is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer. For online sales on third-party e-commerce platforms, the Company is the principal in the three-party arrangement and control of the products remains with the Company until transferring to the end customer or upon return from the end customer. Online platform fees are recognized as selling expenses.
• Retail revenue: Retail revenue is derived primarily from regional and local restaurants, small mom-and-pop restaurants, coffee houses, bubble tea cafes, pizza parlors, and frozen yogurt shops. Revenue from retail transactions is recognized at a point in time upon transfer of control of promised products to customers. Transfer of control typically occurs when the title and risk of loss passes to the customer.

For all of the Company's revenue streams, shipping terms generally indicate when the title and risk of loss have passed, which is generally when products are delivered to customers.

In addition to product sales, the Company also generates revenue from logistics services, which is the transportation and delivery of shipping containers from ports to local retail customers. Logistics services revenue was classified under retail in net sales disaggregated by customer type table above and is recognized over time due to the continuous transfer of control to the customer. As control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. During the three months ended June 30, 2026 and 2025, logistics services revenue was $679,000 and $1,349,000, respectively. During the six months ended June 30, 2026 and 2025, logistics services revenue was $1,444,000 and $2,622,000, respectively.

The Company’s contract liabilities consist primarily of rebates, sales incentives, cooperative advertising, and deferred revenue. As of June 30, 2026 and December 31, 2025, the Company had accrued $923,000 and $1,133,000, respectively, related to rebates, sales incentives, and cooperative advertising, included in accrued expenses in the condensed consolidated balance sheets. During the three months ended June 30, 2026 and 2025, the Company recognized revenue of $31,000 and $39,000, respectively, related to previously deferred revenue at the beginning of each respective period. During the six months ended June 30, 2026 and 2025, the Company recognized revenue of $432,000 and $556,000, respectively, related to previously deferred revenue at the beginning of each respective period.

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

• At June 30, 2026, the Company had money market accounts and investments in publicly-traded equity securities classified as Level 1 and certificates of deposit classified as Level 2 within the fair value hierarchy.
• At December 31, 2025, the Company had money market accounts classified as Level 1 and certificates of deposit classified as Level 2 within the fair value hierarchy.

Short-term investments consist of certificates of deposit with an original maturity of longer than 3 months and are reported at their carrying value as current assets on the condensed consolidated balance sheets. The carrying value of these short-term investments approximates fair value as they were purchased near or on the respective balance sheet dates. Other certificates of deposit with an original maturity of equal to or shorter than 3 months have been included as cash equivalents on the condensed consolidated balance sheets.

The following table summarizes the Company’s fair value measurements by level at June 30, 2026 for the assets measured at fair value on a recurring basis:

The following table summarizes the Company’s fair value measurements by level at December 31, 2025 for the assets measured at fair value on a recurring basis:

The Company has not elected the fair value option as presented by ASC 825, Fair Value Option for Financial Assets and Financial Liabilities, for the financial assets and liabilities that are not otherwise required to be carried at fair value. Under ASC 820, material financial assets and liabilities not carried at fair value, including accounts receivable, accounts payable, related-party payable, accrued expenses, other current liabilities, and borrowings under promissory notes and Line of Credit (as defined below), are reported at their carrying value.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, related-party payable, accrued expenses, and other current liabilities at June 30, 2026 and December 31, 2025 approximate 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 the "2027 Term Loan", respectively):

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

Certain long-lived non-financial assets and liabilities may be required to be measured at fair value on a nonrecurring basis in certain circumstances, including when there is evidence of impairment. These non-financial assets and liabilities may include assets acquired in a business combination or long-lived assets that are determined to be impaired. For the three and six months ended June 30, 2026, management concluded that an impairment of long-lived assets was not required. The Company did not have any non-financial assets or liabilities that had been measured at fair value subsequent to initial recognition with the exception of a non-cash impairment of an operating ROU asset of $1,993,000 in the year ended December 31, 2024, resulting from the sublease of the Company's City of Industry warehouse in California.

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

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance requires disaggregated information about the effective tax rate reconciliation and additional information on taxes paid that meet a quantitative threshold. The new guidance is effective for public companies for annual reporting periods beginning after December 15, 2024, and for non-public companies for annual reporting periods beginning after December 15, 2025, with early adoption permitted for both. The Company will adopt the new standard in its annual reporting period beginning after December 15, 2025, and is currently evaluating the impacts of the new guidance on its disclosures within the consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03 Income Statement Expenses (Topic 220): Disaggregation of Income Statement Expenses. The new guidance requires enhanced disclosure of disaggregated information about specific expense categories in the notes to financial statements on an annual and interim basis. The new guidance is effective for all public companies for annual reporting periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company will adopt the new standard in its annual reporting period beginning after December 15, 2026. The application of this new guidance is not expected to have a material impact on the Company’s consolidated balance sheets, statements of income or cash flows, as the guidance pertains to disclosures only.

In December 2025, the FASB issued ASU 2025-11 Interim Reporting (Topic 270): Narrow-Scope Improvements. The new guidance creates a comprehensive list of interim disclosures required under US GAAP and incorporates a disclosure principle that requires disclosures at interim periods when an event or change that has a material effect on an entity has occurred since the previous year end. The new guidance is effective for all public companies for interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company will adopt the new standard in its interim reporting period beginning after December 15, 2027, and is currently evaluating the impacts of the new guidance on its disclosures within the condensed consolidated financial statements.

3. Inventories

Inventories consist of the following:

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4. Property and Equipment

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.

For the three months ended June 30, 2026 and 2025, depreciation and amortization expense reported within general and administrative expense was $1,175,000 and $1,138,000, respectively, and depreciation expense reported within cost of goods sold was $1,545,000 and $1,534,000, respectively. For the six months ended June 30, 2026 and 2025, depreciation and amortization expense reported within general and administrative expense was $2,342,000 and $2,270,000, respectively, and depreciation expense reported within cost of goods sold was $3,112,000 and $3,083,000, respectively.

5. Goodwill

The following table summarizes the activity in the Company's goodwill from December 31, 2025 to June 30, 2026:

6. Line of Credit

Pursuant to the terms of the Business Loan Agreement, dated February 23, 2018, between Lollicup, as borrower, and Hanmi Bank, as lender (as amended, the "Loan Agreement"), the Company has a line of credit with a maximum borrowing capacity of $20,000,000 (the "Line of Credit") secured by the Company’s assets. The Company is not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. The Company is required to comply with certain financial covenants, including a minimum current ratio, minimum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio and a minimum fixed charge coverage ratio. As of both

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June 30, 2026 and December 31, 2025, the Company was in compliance with the financial covenants under the Line of Credit.

On March 3, 2025, the Company amended the Line of Credit. Prior to March 3, 2025, the revolving loan facility had a maximum borrowing capacity of $40,000,000 and interest accrued at an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.00%. The amendment on March 3, 2025, among other things, (1) extended the maturity date to March 14, 2027, (2) reduced the maximum borrowing capacity of the revolving loan facility to $20,000,000, and (3) revised the interest on any Line of Credit borrowings to an annual rate of one month term SOFR plus 2.25%, with a SOFR floor of 1.00%. On March 17, 2025, August 21, 2025, October 3, 2025, and May 11, 2026, the Company entered into four separate amendments of the Line of Credit, increasing the standby letter of credit sub-limit, respectively, from $5,000,000 to $7,500,000, from $7,500,000 to $10,000,000, from $10,000,000 to $15,000,000, and from $15,000,000 to $18,000,000. As of both June 30, 2026 and December 31, 2025, the Company had no borrowings outstanding under the Line of Credit.

The amount issued under the standby letter of credit was $16,431,000 and $12,313,000 as of June 30, 2026 and December 31, 2025, respectively. As of June 30, 2026, the maximum remaining amount that could be borrowed under the Line of Credit was $3,569,000.

7. Accrued Expenses

The following table summarizes information related to accrued expense liabilities:

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8. Long-Term Debt

Long-term debt consists of the following:

At June 30, 2026, future maturities are:

The Company was in compliance with all of its financial covenants as of both June 30, 2026 and December 31, 2025.

The 2026 Term Loan matures on September 30, 2026. As of June 30, 2026, the entire remaining balance of $11,372,000 is included in the long-term debt, current portion on the condensed consolidated balance sheet. The Company intends to repay the 2026 Term Loan at maturity using available liquidity, which includes $38,399,000 in cash and cash equivalents and $15,744,000 in short-term investments as of June 30, 2026.

9. Stockholders' Equity

On November 5, 2025, the Company’s Board of Directors approved a Share Repurchase Program (the "Share Repurchase Program") of up to $15,000,000 of its common stock. Under the Share Repurchase Program, the Company may repurchase shares through open market transactions, through privately negotiated transactions, or pursuant to a trading plan separately adopted in the future, subject to the requirements of the Securities Exchange Act of 1934, as amended. The Share Repurchase Program has no set expiration date, and may be suspended, modified or discontinued at any time.

A summary of the Company’s common stock that has been repurchased as part of the Share Repurchase Program for the three and six months ended June 30, 2026 is as follows:

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As of June 30, 2026, the Company had approximately $10,021,000 of remaining authorization for purchases under the Share Repurchase Program.

In January 2019, the Company’s board of directors adopted the 2019 Stock Incentive Plan (the "Plan"). As of June 30, 2026, a total of 1,136,267 shares of common stock were available for further award grants under the Plan. For the three months ended June 30, 2026 and 2025, the Company recognized a total of $596,000 and $445,000 in stock-based compensation expense, respectively. For the six months ended June 30, 2026 and 2025, the Company recognized a total of $838,000 and $791,000 in stock-based compensation expense, respectively. The Company recognizes stock-based compensation over the vesting period, which is generally within three 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 six months ended June 30, 2026 is as follows:

There were no stock options granted or forfeited during the six months ended June 30, 2026. At June 30, 2026, all stock options granted under the Plan were fully vested and exercisable.

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 June 30, 2026 and December 31, 2025, respectively, multiplied by the number of shares per each option.

Restricted Stock Units

A summary of the Company’s unvested restricted stock units' activity under the Plan for the six months ended June 30, 2026 is as follows:

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At June 30, 2026, total remaining stock-based compensation cost for unvested restricted stock units was approximately $2,842,000. The cost is expected to be recognized over a weighted-average period of 1.5 years.

10. Earnings Per Share (a)Basic

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

(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:

For the three months ended June 30, 2026 and 2025, there were no potentially dilutive shares. For the six months ended June 30, 2026 and 2025, a total of 9,333 and 0 shares of potentially dilutive shares, respectively, have been excluded in the diluted earnings per share calculation due to their anti-dilutive impact on earnings per share.

11. Leases

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

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For the three months ended June 30, 2026 and 2025, rent expense included in operating expenses was $3,464,000 and $3,755,000, respectively, and rent expense included in cost of goods sold was $847,000 and $714,000, respectively. For the six months ended June 30, 2026 and 2025, rent expense included in operating expenses was $7,054,000 and $6,945,000 respectively, and rent expense included in cost of goods sold was $1,664,000 and $1,534,000, respectively.

The following table presents supplemental information related to operating leases:

As of June 30, 2026, future lease payments under operating leases were as follows:

Global Wells has been the landlord under an operating lease agreement with an unrelated party since September 2020. On February 28, 2025, the lease agreement between Global Wells and the tenant was terminated and effective March 1, 2025, Global Wells entered into a new six-year operating lease agreement ending on February 28, 2031 with a different unrelated party that generates monthly rental payments from $87,000 to $101,000. The expected rental income is $564,000 for the remaining six months of the year ending December 31, 2026, $1,128,000 per annum over the next four years, and $188,000 for the year ending December 31, 2031.

12. Related Party Transactions

Keary Global Group, Ltd. ("Keary Global") owns 250,004 shares of the Company's common stock as of June 30, 2026, which Keary Global acquired upon exercise of two convertible notes during the third quarter of 2018. Keary Global and its affiliate, Keary International, Ltd. ("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

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agents for the Company overseas. The Company has an ongoing agreement (the "Procurement Agreement") with Keary Global, which was amended and restated on June 26, 2025 to clarify the responsibilities of both parties under the Procurement Agreement. At June 30, 2026 and December 31, 2025, the Company has accounts payable due to Keary Global of $7,390,000 and $4,672,000, respectively. Purchases for the three months ended June 30, 2026 and 2025 from Keary Global were $13,297,000 and $10,583,000, respectively. Purchases for the six months ended June 30, 2026 and 2025 from Keary Global were $22,463,000 and $20,923,000, respectively.

On June 26, 2025, the Company renewed the New Jersey Lease with Global Wells, extending the lease term for an additional five years to August 31, 2030. Under this lease renewal, monthly base lease payments range from $122,000 to $140,000 after an initial rent abatement period.

13. Income Taxes

For the three months ended June 30, 2026 and 2025, the Company's income tax expense was $9,377,000 and $3,459,000, respectively, with an effective tax rate of 24.0% and 23.8%, respectively. For the six months ended June 30, 2026 and 2025, the Company's income tax expense was $11,618,000 and $5,580,000, respectively, with an effective tax rate of 24.0% and 23.8%, respectively. For both the three and six months ended June 30, 2026 and 2025, the Company's effective tax rate differed from the United States federal statutory rate of 21% primarily due to state taxes and the non-taxable non-controlling interest income.

In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Based upon the level of historical taxable income, at this time, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not there will be full utilization of the deferred tax assets in each jurisdiction. As such, as of June 30, 2026, the Company did not record any valuation allowance.

On July 4, 2025, the President signed H.R. 1, the One Big Beautiful Bill Act into law. The legislation includes several changes to federal tax law that generally allow for more favorable deductibility of certain business expenses beginning in 2025, including the restoration of immediate expensing of domestic research and development expenditures, reinstatement of 100% bonus depreciation, and more favorable rules for determining the limitation on business interest expense. These changes, primarily timing differences with no net impact, were incorporated in the income tax provision for the period ended June 30, 2026.

The Company remains subject to IRS examination for the 2022 through 2024 tax years. Additionally, the Company files multiple state and local income tax returns and remains subject to examination in various jurisdictions for the 2021 through 2024 tax years. The Company continues to work with the IRS relating to the 2016 and 2017 tax years and does not expect a material impact to the financial statements. In October 2025, the Company received a notice from the IRS that its 2023 federal income tax return was selected for examination. No issues have been raised by the IRS to date. As of both June 30, 2026 and December 31, 2025, the Company did not have any unrecognized tax benefit.

14. Commitments and Contingencies

In May 2023, the Company received a Notice of Investigations and Interim Measures stating that the U.S. Customs and Border Protection ("CBP") had initiated a formal investigation to determine whether the Company had evaded the anti-dumping and countervailing duty orders on lightweight thermal paper from China by transshipping the merchandise through Taiwan. The period of investigation was from January 2022 through the pendency of the investigation. On February 5, 2024, CBP issued its Notice of Determination concluding that the manufacturing procedures performed by the manufacturer in Taiwan, which the Company imported certain thermal paper products from, did not constitute substantial transformation. On March 19, 2024, the Company 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, the Company started to receive bills related to certain of its thermal paper shipments. During the year ended December 31, 2025, the Company submitted protests of certain bills received with CBP, and received its determination on all submitted protests as of April 3, 2026. The Company made total payments of $1,909,000 related to certain shipments under the investigation for the year ended December 31, 2025 and $188,000 for the six months ended June 30, 2026. Payments on bills received are currently due as all submitted protests are resolved. However, the Company is also evaluating other appeal options. The Company maintains a liability reserve, representing the total estimated probable loss from the investigation plus accrued interest, of $1,291,000 and $1,720,000 as of June 30, 2026 and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2025, respectively. 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. The Company has completed the process of reviewing its import data, and determined that it has paid a total of $25,982,000 of IEEPA tariffs during the year ended December 31, 2025 and the first two months of 2026. In April 2026, the Company submitted refund claims totaling $25,790,000 eligible for processing at time of filing. The Company recognized $26,722,000 of IEEPA tariff refunds during the three and six months ended June 30, 2026, consisting of $25,790,000 of principal recognized as a reduction of cost of goods sold, as all related inventory has been sold as of June 30, 2026, and $932,000 of excess amount recognized as interest income in the accompanying condensed consolidated statements of income. Of the total amount recognized, $25,192,000 had been received and $1,530,000 was deemed probable and recognized as prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of June 30, 2026.

The Company is a party to, and certain of its property is the subject of, various pending claims, government investigations 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 operations.

15. Segment Report

The Company operates and evaluates its business as a single reportable segment. The following is the summary of the financial information for the Company’s reportable segment:

KARAT PACKAGING INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• Other segment expenses include property taxes, insurance expenses, office expenses, bad debt expenses, and utilities.

There are no changes in the basis of segmentation or measurement of segment profit or loss since December 31, 2025. The Company’s long-lived assets are almost entirely located in the United States, and similarly its revenues are almost entirely generated in the United States. Additionally, the segment assets are the same as the assets reported on the condensed consolidated balance sheets.

16. Secondary Offering

On June 12, 2025, certain executive officers and stockholders of the Company (the "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 $214,000, which were recognized in general and administrative expense in the condensed consolidated statements of income.

17. Subsequent Events

On August 4, 2026, the Company's Board of Directors declared an increase in its regular quarterly cash dividend to $0.47 per share on the Company's common stock, which will be paid on or about August 28, 2026 to shareholders of record at the close of business on August 21, 2026.

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

We recorded $26.7 million of IEEPA tariff refunds during the three and six months ended June 30, 2026, consisting of $25.8 million of principal recognized as a reduction of cost of goods sold, as all related inventory has been sold as of June 30, 2026, and $0.9 million of excess amount 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. We increased domestic purchases for the three and six months ended June 30, 2026 to 19.5% and 19.0%, respectively, from

14.6% and 14.2%, respectively, for the three and six months ended June 30, 2025, and diversified sourcing to countries with more favorable trade conditions. Specifically, we reduced sourcing from Taiwan to 45.9% and 46.0%, respectively, for the three and six months ended June 30, 2026, from 58.0% and 56.0%, respectively, for the three and six months ended June 30, 2025. Further, we increased our purchases from Indonesia, South America, and Singapore for the three and six months ended June 30, 2026 to an aggregate of 12.0% and 9.1%, respectively, from 0.9% and 1.1%, respectively, for the three and six months ended June 30, 2025.

• 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 during the three and six months ended June 30, 2026. 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, respectively, for the three and six months ended June 30, 2026. The refunds delivered benefits to our gross margin and our adjusted EBITDA margin of 18.9% and 10.2%, respectively, and our net income margin of 14.8% and 8.0%, respectively, for the three and six months ended June 30, 2026. The refunds represent the recovery of tariffs paid in prior periods and provided a one-time benefit to our results during the quarter. Cash received from IEEPA tariff refunds, included in cash from operating activities, totaled $25.2 million during the three and six months ended June 30, 2026.
• We achieved record quarterly net sales of $136.3 million for the three months ended June 30, 2026, an increase of 9.9% in amount and 8.9% in volume, compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, we recorded net sales of $253.2 million, an increase of 11.3% in amount and 9.6% in volume, compared to the six months ended June 30, 2025.
• Our gross margin was 56.6% and 46.9% for the three and six months ended June 30, 2026, an increase of 1,700 basis points and 740 basis points compared to the three and six months ended June 30, 2025.
• We achieved record quarterly net income of $29.6 million for the three months ended June 30, 2026, an increase of 168.3% compared to the three months ended June 30, 2025. For the six months ended June 30, 2026, we recorded net income of $36.8 million, an increase of 105.9%, compared to the six months ended June 30, 2025.
• Our net income margin was 21.8% and 14.5% for the three and six months ended June 30, 2026, an increase of 1,290 and 670 basis points compared to the three and six months ended June 30, 2025.
• We generated $33.2 million and $40.3 million in net cash from operating activities for the three and six months ended June 30, 2026, an increase of 240.0% and 130.9% compared to the three and six months ended June 30, 2025.
• We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $41.6 million and $54.1 million for the three and six months ended June 30, 2026, an increase of 135.2% and 82.7% compared to the three and six months ended June 30, 2025.
• Our Adjusted EBITDA margin, a non-GAAP measure defined below, was 30.5% and 21.4% for the three and six months ended June 30, 2026, an increase of 1,620 and 840 basis points compared to the three and six months ended June 30, 2025.
• As of June 30, 2026, we had financial liquidity of $42.0 million, consisting of $38.4 million in cash and cash equivalents and $3.6 million in availability under Line of Credit. In addition, we had $15.7 million in short-term investments as of June 30, 2026.
• On August 4, 2026, our Board of Directors declared an increase to our quarterly cash dividend to $0.47 per share on our common stock, which will be paid on August 28, 2026 to shareholders of record at the close of business on August 21, 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 price, dampen the demand for our products. Steady or dropping ocean freight could yield significant opportunities for us to expand our margin. However, it could also reduce the barrier of entry, intensifying the competition.
• 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 June 30, 2026 Compared to Three Months Ended June 30, 2025

Net sales

Net sales were $136.3 million for the three months ended June 30, 2026 compared to $124.0 million for the three months ended June 30, 2025, an increase of $12.3 million, or 9.9%. The sales growth was primarily driven by an increase of $13.1 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 $1.1 million in shipping and logistics revenue.

Cost of goods sold

Cost of goods sold was $59.1 million for the three months ended June 30, 2026, compared to $74.9 million for the three months ended June 30, 2025, a decrease of $15.7 million, or 21.0%. This is primarily driven by IEEPA tariff refunds of $25.8 million, partially offset by higher product costs of $6.9 million due to increased sales volume and resin price, coupled with higher import costs of $3.5 million, including duty and tariffs and ocean freight, mainly due to a 4.3% increase in the number of containers imported and an 8.9% increase in average container rate compared to the three months ended June 30, 2025.

Gross profit

Gross profit was $77.2 million for the three months ended June 30, 2026 compared to $49.1 million for the three months ended June 30, 2025, an increase of $28.1 million, or 57.1%. Gross margin was 56.6% for the three months ended June 30, 2026 compared to 39.6% for the three months ended June 30, 2025, an increase of 1,700 basis points. IEEPA tariff refunds delivered a favorable impact on gross margin of 1,890 basis points for the three months ended June 30, 2026. Partially offset this benefit, product costs as a percentage of net sales increased to 49.2% from 48.5%, and import costs increased to 11.1% from 9.5%, compared to the three months ended June 30, 2025.

Operating expenses

Operating expenses were $39.6 million for the three months ended June 30, 2026 compared to $32.6 million for the three months ended June 30, 2025, an increase of $7.0 million, or 21.5%. Shipping and transportation costs increased $3.1 million during the three months ended June 30, 2026 driven by higher shipping volume and increased shipping rate. Online platform fees increased $0.6 million and marketing expense increased $0.5 million, as online sales grew 23.6% compared to the three months ended June 30, 2025. Additionally, salaries and benefits increased $1.1 million, bad debt expense increased $0.6 million, and warehouse expense increased $0.4 million. Further, the three months ended June 30, 2026 included a $0.1 million loss compared to a $0.3 million gain on disposal of machinery in the normal course of business during the three months ended June 30, 2025.

Operating income

Operating income was $37.6 million for the three months ended June 30, 2026 compared to $16.6 million for the three months ended June 30, 2025, an increase of $21.1 million, or 127.2%. The increase was due to an increase in gross profit of $28.1 million partially offset by an increase in operating expenses of $7.0 million, as discussed above.

Other income (expenses), net

Other income, net was $1.4 million for the three months ended June 30, 2026 compared to other expenses, net of $2.0 million for the three months ended June 30, 2025, a favorable variance of $3.5 million, primarily due to a decrease in loss on foreign currency transactions of $2.8 million a result of the fluctuation of currency exchange rate between the United States Dollar and the New Taiwan Dollar. Additionally, interest income increased $0.5 million compared to the three months ended June 30, 2025. Interest income in the three months ended June 30, 2026 consisted mostly of the $0.9 million related to IEEPA tariff refunds. Interest income in the three months ended June 30, 2025 consisted entirely of interest generated from investment in certificates of deposit of $0.7 million.

Provision for income taxes

Provision for income taxes was $9.4 million, including an impact of $6.6 million from IEEPA tariff refunds, for the three months ended June 30, 2026 compared to $3.5 million for the three months ended June 30, 2025, an increase of $5.9 million, or 171.1%. The Company’s effective tax rate was 24.0% for the three months ended June 30, 2026 compared to 23.8% for the three months ended June 30, 2025.

Net income

Net income was $29.6 million for the three months ended June 30, 2026 compared to $11.1 million for the three months ended June 30, 2025, an increase of $18.6 million, or 168.3%. The increase was primarily driven by an increase of $21.1 million in operating income and an increase of $3.5 million in other income, net, partially offset by an increase of $5.9 million in provision for income taxes, as discussed above.

Six Months Ended June 30, 2026 Compared to Six Months Ended June 30, 2025

Net sales

Net sales were $253.2 million for the six months ended June 30, 2026 compared to $227.6 million for the six months ended June 30, 2025, an increase of $25.6 million, or 11.3%. The year-over-year increase in net sales was primarily driven by an increase of $25.4 million in volume and change in product mix, as well as a $2.3 million favorable year-over-year pricing comparison, partially offset by a decrease of $2.0 million in shipping and logistics revenue.

Cost of goods sold

Cost of goods sold was $134.6 million for the six months ended June 30, 2026 compared to $137.7 million for the six months ended June 30, 2025, a decrease of $3.2 million, or 2.3%, primarily due to IEEPA tariff refunds of $25.8 million during the six months ended June 30, 2026. This decrease is partially offset by an increase of $12.1 million in product costs primarily driven by increased sales volume and resin price, and an increase of $10.7 million in import costs, including duty and tariffs and ocean freight, primarily as a result of higher import duty and tariffs, which increased from $8.1 million for the six months ended June 30, 2025 to $18.9 million for the six months ended June 30, 2026.

Gross profit

Gross profit was $118.7 million for the six months ended June 30, 2026 compared to $89.9 million for the six months ended June 30, 2025, an increase of $28.8 million, or 32.1%. Gross margin was 46.9% for the six months ended June 30, 2026 compared to 39.5% for the six months ended June 30, 2025, an increase of 740 basis points. IEEPA tariff refunds delivered a favorable impact on gross margin of 1,020 basis points for the six months ended June 30, 2026. Additionally, product costs as a percentage of net sales decreased to 48.8% from 48.9%, while import costs as a percentage of net sales increased to 12.4% from 9.1%, compared to the six months ended June 30, 2025.

Operating expenses

Operating expenses were $72.6 million for the six months ended June 30, 2026 compared to $65.5 million for the six months ended June 30, 2025, an increase of $7.1 million, or 10.9%. Shipping and transportation costs increased $2.7 million during the six months ended June 30, 2026 driven by higher shipping volume and increased shipping rate. In addition, salaries and benefits increased $1.7 million, bad debt expense increased $0.7 million, warehouse expense increased $0.7 million, and marketing expense increased $0.4 million. Further, the six months ended June 30, 2026 included a $0.1 million loss compared to a $0.3 million gain on disposal of machinery in the normal course of business during the six months ended June 30, 2025.

Operating income

Operating income was $46.1 million for the six months ended June 30, 2026 compared to $24.4 million for the six months ended June 30, 2025, an increase of $21.7 million, or 89.0%. The increase was due to an increase in gross profit of $28.8 million, partially offset by an increase in operating expenses of $7.1 million, as discussed above.

Other income (expenses), net

Other income, net was $2.3 million for the six months ended June 30, 2026 compared to other expenses, net of $0.9 million for the six months ended June 30, 2025, a favorable variance of $3.3 million. The variance was driven primarily by a gain on foreign currency transactions of $0.2 million during the six months ended June 30, 2026, compared to a loss on foreign currency transactions of $2.6 million during the six months ended June 30, 2025, due to the foreign currency fluctuation between the United States Dollar and the New Taiwan Dollar. In addition, interest income increased $0.2 million due to $0.9 million interest income related to IEEPA tariff refunds recognized in the six months ended June 30, 2026, partially offset by a decrease of $0.7 million in interest income from investment in certificates of deposit compared to the six months ended June 30, 2025.

Provision for income taxes

Provision for income taxes was $11.6 million, including $6.6 million impact from IEEPA tariff refunds, for the six months ended June 30, 2026 compared to 5.6 million for the six months ended June 30, 2025, an increase of $6.0 million, or 108.2%. The Company’s effective tax rate was 24.0% for the six months ended June 30, 2026 compared to 23.8% for the six months ended June 30, 2025.

Net income

Net income was $36.8 million for the six months ended June 30, 2026 compared to $17.9 million for the six months ended June 30, 2025, an increase of $18.9 million, or 105.9%. The increase was primarily driven by an increase of $21.7 million in operating income and an increase of $3.3 million in other income, net, partially offset by an increase of $6.0 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.

(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:

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 $5,000,000 to $7,500,000, from $7,500,000 to $10,000,000, from $10,000,000 to $15,000,000, and from $15,000,000 to $18,000,000. As of June 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.

Additionally, as of June 30, 2026, 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 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. 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 June 30, 2026, the entire remaining balance of $11.4 million is included in the long-term debt, current portion on the condensed consolidated balance sheet. We intend to repay the 2026 Term Loan at maturity using our available liquidity, which includes $38.4 million in cash and cash equivalents and $15.7 million in short-term investments as of June 30, 2026.

As of June 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 June 30, 2026, we had no borrowings outstanding under the Line of Credit, $23.3 million in outstanding balance under the 2027 Term Loan, and $11.4 million in outstanding balance under the 2026 Term Loan.

As discussed in Note 14 — Commitments and Contingencies to the condensed consolidated financial statements, on February 5, 2024, we received a Notice of Determination from 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 $0.2 million for the six months ended June 30, 2026. Payments on bills received are currently due as all submitted protests are resolved. Although we have an import duty liability reserve of $1.3 million as of June 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 and expect to submit the remaining eligible claims once CBP opens the filing window.

We recognized $26.7 million of IEEPA tariff refunds during the three and six months ended June 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 June 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 its submitted claims and developments.

Additionally, on August 4, 2026 our Board of Directors declared an increase to our regular quarterly cash dividend to $0.47 per share on our common stock, which will be paid on August 28, 2026 to shareholders of record at the close of business on August 21, 2026. Prior to this, we paid out regular quarterly cash dividends totaling $18.0 million in the current fiscal year.

Our ongoing operations and growth strategy may require us to continue to make investments in new markets and products, logistics and manufacturing infrastructure, e-commerce 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 2026 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 June 30, 2026 compared to December 31, 2025:

As of June 30, 2026, we had working capital of $110.8 million compared to $91.0 million as of December 31, 2025, representing an increase of $19.8 million, or 21.8%, driven by an increase of $38.2 million in current assets, partially offset by an increase of $18.3 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 $16.3 million, an increase in accounts receivable of $12.8 million as a result of stronger sales, an increase in inventories of $7.4 million as we stock up for the summer peak season, and an increase in prepaid expenses and other current assets of $1.7 million due to $1.5 million outstanding IEEPA tariff receivable. The increase in current liabilities was primarily driven by an increase in accounts payable and related party payables of $10.4 million, an increase in income tax payable of $5.7 million, and an increase in accrued expenses of $2.5 million, partially offset by a decrease in long-term debt, current portion of $0.9 million.

Cash Flows

The following table summarizes cash flow for the six months ended June 30, 2026 and 2025:

Cash flows provided by operating activities. Net cash provided by operating activities was $40.3 million for the six months ended June 30, 2026, primarily the result of net income of $36.8 million, adjusted for certain non-cash items totaling $13.3 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 $9.7 million from changes in working capital, primarily resulted from a decrease of $13.4 million from an increase in accounts receivable due to higher sales, a decrease of $8.2 million from an increase in inventory due to increased inventory purchases, a decrease of $5.9 million from a reduction in operating lease liabilities, and a decrease of $1.6 million from an increase in prepaid expenses, partially offset by an increase of $10.9 million from higher accounts and related party payables primarily due to increased inventory purchases, an increase of $2.5 million from higher accrued expenses, and an increase of $5.7 million from the increase in income tax payable.

Net cash provided by operating activities was $17.5 million for the six months ended June 30, 2025, primarily the result of net income of $17.9 million, adjusted for certain non-cash items totaling $11.1 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 $11.5 million from changes in working capital, which included a decrease of $18.4 million from inventory build-up, a decrease of $9.6 million from an increase in accounts receivable from higher sales, and a decrease of $4.6 million from an increase in operating lease liabilities. These decreases were partially offset by an increase of $20.4 million from higher accounts and related party payables primarily associated with increased inventory purchases and an increase of $0.7 million from higher accrued expenses.

Cash flows (used in) provided by investing activities. Net cash used in investing activities was $18.3 million for the six months ended June 30, 2026, which primarily included $15.7 million in purchases of short-term investments, $1.7 million in deposits paid for the purchase of property and equipment, and $0.6 million paid to directly purchase property and equipment.

Net cash provided by investing activities was $1.2 million for the six months ended June 30, 2025, which primarily included $18.2 million in redemptions of short-term investments, $0.5 million of proceeds from the disposal of publicly-traded equity securities, and $0.5 million of proceeds from the sale of machinery and equipment, partially offset by $16.3 million in purchases of short-term investments, $1.0 million of deposits paid for the purchase of property and equipment, $0.5 million paid to invest in publicly-traded equity securities, and $0.3 million paid to directly purchase property and equipment.

Cash flows used in financing activities. Net cash used in financing activities was $21.6 million for the six months ended June 30, 2026, which primarily included $18.0 million of cash dividends paid to shareholders, $2.0 million of repurchases of common stock ,and $1.2 million of payments towards long-term debt.

Net cash used in financing activities was $19.7 million for the six months ended June 30, 2025, which primarily included $18.0 million of cash dividends paid to shareholders, $0.9 million of Global Wells noncontrolling membership interest redemption gain tax withholding payment, and $0.6 million of payments towards long-term debt.

Related Party Transactions

For a description of significant related party transactions, see Note 12 — Related Party Transactions in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

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 Disclosure

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 June 30, 2026. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2026.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2026, 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.

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. See Note 14 — Commitments and Contingencies in Part I, Item 1 of this Quarterly Report for a description of our commitments and contingencies.

Item 1A. Risk Factors.

There have been no material changes to the Risk Factors previously disclosed in the 2025 Form 10-K, which is incorporated herein by reference.

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

Issuer Purchases of Equity Securities

The following table sets forth information regarding our purchases of shares of our common stock during the second quarter of fiscal year 2026:

(1) On November 5, 2025, the Company announced that the Board of Directors approved a Share Repurchase Program authorizing the Company to repurchase up to $15.0 million of its common stock. The Share Repurchase Program has no set expiration date, and may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common stock under the program. All dollar amounts presented in the table above and in this report related to our share repurchases and our share repurchase authorizations exclude the impact of the excise tax imposed on share repurchases pursuant to the Inflation Reduction Act of 2022. See Note 9 - Stockholders' Equity or further information related to our share repurchases.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Rule 10b5-1 Trading Arrangements

During the three months ended June 30, 2026, none of the Company’s directors or officers adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement”, as such terms are defined under Item 408 of Regulation S-K.

Item 6. Exhibits.