# Karat Packaging Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [Karat Packaging Inc.](/companies/krt.md) (CIK 1758021)
- Form: 10-Q
- Filed: 2024-11-08
- Accepted by EDGAR: Nov 8, 2024, 14:31 ET
- Period: 2024-09-30
- Accession: 0001628280-24-046600
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1758021/000162828024046600/krt-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1758021/000162828024046600/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $112.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $321.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-07-01 to 2024-09-30 | $69.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2024-01-01 to 2024-09-30 | $196.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-07-01 to 2024-09-30 | $43.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2024-01-01 to 2024-09-30 | $124.5m | us-gaap:GrossProfit |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | $11.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | $30.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $535.0k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $1.6m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $7.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $9.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $24.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 20,133,813 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 20,107,801 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $39.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $718.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $23.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2024-09-30 | $38.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-09-30 | $170.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $306.8m | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $54.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-30 | $143.2m | us-gaap:Liabilities |
| Current portion of debt | at 2024-09-30 | $1.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-09-30 | $157.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,726 characters.

### Forward-Looking Statements

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

- *fluctuations in the demand for our products in light of changes in laws and regulations applicable to food and beverages and changes in consumer preferences;*
- *supply chain disruptions that could interrupt product manufacturing and increase product costs;*
- *our ability to source raw materials and navigate a shortage of available materials;*
- *our ability to compete successfully in our industry;*
- *the impact of earthquakes, fire, power outages, floods, pandemics and other catastrophic events, as well as the impact of any interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems;*
- *our ability to accurately forecast demand for our products or our results of operations;*
- *the impact of problems relating to delays or disruptions in the shipment of our goods through operational ports;*
- *our ability to expand into additional foodservice and geographic markets;*
- *our ability to successfully design and develop new products;*
- *fluctuations in freight carrier costs related to the shipment of our products could have a material adverse impact on our results of operations;*
- *the effects of 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 Item I, Part 1A, “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission (the "SEC") on March 15, 2024 (the "2023 Form 10-K").*

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

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

### Overview

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

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 even during global supply chain disruptions. This model provides us with the flexibility to adjust the mix of our product offering from import and manufacturing in evolving economic environment to drive operating efficiency and sustained margin expansion.

We operate an approximately 500,000 square foot distribution center located in Rockwall, Texas, an approximately 300,000 square foot distribution center in Chino, California, and an approximately 76,000 square foot distribution center located in Kapolei, Hawaii. We have selected manufacturing capabilities in all of these facilities. In addition, we operate seven other warehouse spaces and distribution centers located in Puyallup, Washington; Summerville, South Carolina; Branchburg, New Jersey; Kapolei, Hawaii; Aurora, Illinois; Mesa, Arizona; and Sugar Land, Texas. Our distribution centers are strategically located in proximity to major population centers, including the Los Angeles, New York, Chicago, Dallas, Houston, Seattle, Phoenix, Atlanta, and Honolulu metro areas.

We manage and evaluate our operations in one reportable segment.

### Business Highlights and Trends

- We recorded net sales of $112.8 million for the three months ended September 30, 2024, an increase of 6.9% in amount and 9.9% in volume, compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, we recorded net sales of $321.0 million, an increase of 3.5% in amount and 5.6% in volume, compared to the nine months ended September 30, 2023.
- We achieved gross margin of 38.6% and 38.8% for the three and nine months ended September 30, 2024, respectively, an increase of 170 and 40 basis points from the three and nine months ended September 30, 2023, respectively. During the nine months ended September 30, 2023, we recorded a $1.7 million write-off of certain raw materials, as we disposed of certain machinery and equipment in executing the plan to scale back production in certain locations. The impact of the write-off was a decrease in gross margin of 60 basis points for the nine months ended September 30, 2023.
- We recorded net income of $9.3 million and $25.0 million for the three and nine months ended September 30, 2024, respectively, an increase of 1.3% and a decrease of 13.9% compared to the three and nine months ended September 30, 2023, respectively. Net income for the nine months ended September 30, 2024 included a negative tax-effected impact of $1.5 million from a non-cash impairment of an operating right-of-use asset ("ROU asset"). Net income for the nine months ended September 30, 2023 included a negative tax-effected impact of $1.6 million in impairment expense and loss on disposal of machinery, as we executed our strategy to scale back manufacturing in certain locations, and a negative tax-effected impact of $1.3 million in raw materials write-off, as discussed above.
- We achieved net income margin of 8.2% and 7.8% for the three and nine months ended September 30, 2024, respectively, a decrease of 50 and 160 basis points from the three and nine months ended September 30, 2023, respectively. Net income margin for the nine months ended September 30, 2024 included a negative tax-effected impact of 50 basis points from the non-cash ROU asset impairment, as discussed above. Net income margin for the nine months ended September 30, 2023 included a negative tax-effected impact of 90 basis points from the raw materials write-off and impairment expense and loss on disposal of machinery, as discussed above.
- We generated $19.5 million and $39.7 million in net cash from operating activities for the three and nine months ended September 30, 2024, respectively, compared to $12.0 million on and $43.1 million during the three and nine months ended September 30, 2023, respectively.
- We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $14.7 million and $43.9 million for the three and nine months ended September 30, 2024, respectively, a decrease of 3.4% and 14.9% from the three and nine months ended September 30, 2023, respectively.
- We achieved Adjusted EBITDA margin, a non-GAAP measure defined below, of 13.0% and 13.7% for the three and nine months ended September 30, 2024, respectively, a decrease of 140 and 290 basis points from the three and nine months ended September 30, 2023, respectively.
- We had financial liquidity of $75.1 million and additional short-term investments of $21.5 million as of September 30, 2024.
- On November 5, 2024, our Board of Directors declared another quarterly cash dividend of $0.40 per share on our common stock, which will be paid on or around November 29, 2024 to shareholders of record at the close of business on November 20, 2024.

### Trends in Our Business

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

- One of the most noticeable recent changes in the restaurant industry is how customers view food delivery and take-out as compared to the traditional form of on-premise dining. There now appears to be a growing preference for the former and we believe this trend will continue to have a positive impact on our results of operations, as more of our customers will require packaging and containers to meet the demands of their increased food delivery and take-out dining consumers.
- Environmental concerns regarding disposable products, broadly, have resulted in a number of significant changes that are specific to the food-service industry, including regulations applicable to our customers. 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. Our eco-friendly products made up 33.4% of total sales during the three months ended September 30, 2024 compared to 32.7% during the same period last year.
- 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 a number of imported food-service disposable products, including those imported from China and other countries. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to source our raw materials or manufactured products from countries where tariffs have not been imposed by the current U.S. administration and whether the previously imposed tariffs are removed.
- The cost of raw materials used to manufacture our products, including polyethylene terephthalate, or PET, plastic resin, aluminum and paper boards may continue to fluctuate. Since negotiated sales contracts and the market largely determine the pricing for our products, we are, at times, limited in our ability to raise prices and pass through any impacts of inflation to our costs. There can also be lags between cost inflation and the implementation of price increases, which could negatively impact our gross margin. We believe price fluctuations will have either a positive or a negative impact on our results of operations in the future, depending on whether raw material costs increase or decrease and whether we can successfully implement price increases to offset the impacts of inflation.
- Supplier chain effectiveness could have a long-lasting impact on our operations and financial results. We believe this trend will have either a positive or a negative impact on our results of operations, depending on whether we are able to manage our global supply chain effectively, including the accurate forecast of demand, the successful procurement of raw materials and products, and the effective management of our inventory, production and distribution.
- Fluctuations in foreign currency exchange rates could impact either positively or negatively various aspects of our business activities, including but not limited to our purchasing power and capacity to source inventory.
- We have made a strategic business decision to pivot into a more asset-light growth model by increasing import and scaling back manufacturing in certain locations. We believe this will have either a positive or a negative

impact on our results of operations, depending on whether we can successfully source and import finished goods at a price that is more favorable than domestically manufacturer products, and effectively realize savings from reduced manufacturing capabilities.

### Critical Accounting Estimates

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

There have been no material changes in our critical accounting policies, or in the estimates and assumptions underlying those policies, from those described under the heading “Critical Accounting Policies and Estimates” in Item 7 of Part II of our 2023 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.

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $112,771 | $105,528 | $320,984 | $310,069 |
| Cost of goods sold | 69,274 | 66,584 | 196,478 | 191,120 |
| Gross profit | 43,497 | 38,944 | 124,506 | 118,949 |
| Operating expenses | 32,227 | 27,564 | 94,045 | 81,498 |
| Operating income | 11,270 | 11,380 | 30,461 | 37,451 |
| Other income, net | 589 | 664 | 1,917 | 597 |
| Provision for income taxes | 2,597 | 2,904 | 7,413 | 9,045 |
| Net income | $9,262 | $9,140 | $24,965 | $29,003 |

### Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

#### Net sales

Net sales were $112.8 million for the three months ended September 30, 2024 compared to $105.5 million for the three months ended September 30, 2023, an increase of $7.2 million, or 6.9%. The increase is primarily driven by an increase of $9.4 million in volume and change in product mix, and an increase of $3.0 million due to the inclusion of online sales platform fees for the three months ended September 30, 2024, partially offset by a $5.7 million unfavorable year-over-year pricing comparison, as the overall pricing environment remains competitive especially in the distributor channel.

#### Cost of goods sold

Cost of goods sold was $69.3 million for the three months ended September 30, 2024 compared to $66.6 million for the three months ended September 30, 2023, an increase of $2.7 million, or 4.0%. The increase was primarily driven by an increase in ocean freight and duty costs of $1.4 million as a result of increased import volume coupled with higher freight container rates, and the inclusion of $0.7 million of production expenses primarily related to machinery repair and maintenance during the three months ended September 30, 2024.

#### Gross profit

Gross profit was $43.5 million for the three months ended September 30, 2024 compared to $38.9 million for the three months ended September 30, 2023, an increase of $4.6 million, or 11.7%. Gross margin for the three months ended September 30, 2024 was 38.6% compared to 36.9% for the three months ended September 30, 2023. Gross margin for the three months ended September 30, 2024 included a net favorable impact of 110 basis points from the adjustments to net sales related to online platform fees and cost of goods sold related to production expenses, as discussed above. Compared to the three months ended September 30, 2023, gross margin for the three months ended September 30, 2024 benefited from lower product pricing as product costs as a percentage of net sales decreased to 49.6% from 52.8% during the three months ended September 30, 2023. This is primarily due to more favorable vendor pricing and increased import as a percentage of total product mix, in keeping with our asset-light strategy. At the same time, gross margin during the three months ended September 30, 2024 was negatively impacted by the increase in ocean freight and duty costs, as discussed above, which as a percentage of net sales increased from 7.9% during the three months ended September 30, 2023 to 8.6%.

#### Operating expenses

Operating expenses were $32.2 million for the three months ended September 30, 2024 compared to $27.6 million for the three months ended September 30, 2023, an increase of $4.7 million, or 16.9%. Operating expenses for the three months ended September 30, 2024 included $3.0 million of online sales platform fees. Additionally, rent and warehouse expenses increased $1.3 million due to the opening of new distribution centers in late 2023 and early 2024 and a higher rate on our Chino, California facility lease extension, shipping and transportation costs increased $1.2 million primarily as a result of the volume increase, and marketing expense increased $0.5 million as we increased online marketing efforts to grow our e-commerce sales channel. These increases in operating expenses were partially offset by a decrease of $0.7 million from the inclusion of production expenses in cost of goods sold for the three months ended September 30, 2024, and a decrease of $0.3 million in professional expenses primarily due to transaction costs incurred during the three months ended September 30, 2023 in connection with the secondary offering. See Note 16 — Secondary Offering for further information.

#### Operating income

Operating income was $11.3 million for the three months ended September 30, 2024 compared to $11.4 million for the three months ended September 30, 2023, a decrease of $0.1 million, or 1.0%. The decrease was primarily due to an increase in operating expenses of $4.7 million, partially offset by an increase in gross profit of $4.6 million, as discussed above.

#### Other income, net

Other income, net was $0.6 million for the three months ended September 30, 2024 compared to $0.7 million for the three months ended September 30, 2023, a decrease of $0.1 million, or 11.3%. Other income, net for the three months ended September 30, 2024 included a loss on foreign currency transactions of $0.3 million, compared to a gain on foreign currency transactions of $0.5 million for the three months ended September 30, 2023. At the same time, interest income increased $0.3 million, primarily from the increase in our certificates of deposit investments, and rental income increased $0.3 million primarily from the sublease of our City of Industry warehouse.

#### Provision for income taxes

Provision for income taxes was $2.6 million for the three months ended September 30, 2024 compared to $2.9 million for the three months ended September 30, 2023, a decrease of $0.3 million, or 10.6%. The Company’s effective tax rate was 21.9% for the three months ended September 30, 2024 compared to 24.1% for the three months ended September 30, 2023, primarily due to the change in the non-taxable non-controlling interest income.

#### Net income

Net income was $9.3 million for the three months ended September 30, 2024 compared to $9.1 million for the three months ended September 30, 2023, an increase of $0.1 million, or 1.3%. The increase was primarily driven by a reduction in the provision for income taxes of approximately $0.3 million, partially offset by a decrease in operating income of $0.1 million, and other income, net of $0.1 million, as discussed above.

### Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

#### Net sales

Net sales were $321.0 million for the nine months ended September 30, 2024 compared to $310.1 million for the nine months ended September 30, 2023, an increase of $10.9 million, or 3.5%. Net sales for the nine months ended September 30, 2024 was understated by $0.7 million, which represented products shipped and recognized as revenue in 2023 and not delivered until 2024. See further discussion about the Company's revenue recognition in Note 2 — Summary of Significant

Accounting Policies. Including this impact, the year-over-year increase in net sales is primarily driven by an increase of $22.9 million in volume and change in product mix, and an increase of $8.0 million due to the inclusion of online sales platform fees for the nine months ended September 30, 2024, partially offset by $20.3 million unfavorable year-over-year pricing comparison, as the overall pricing environment remains competitive especially in the distributor channel.

#### Cost of goods sold

Cost of goods sold was $196.5 million for the nine months ended September 30, 2024 compared to $191.1 million for the nine months ended September 30, 2023, an increase of $5.4 million, or 2.8%. Cost of goods sold for the nine months ended September 30, 2024 was understated by $0.4 million related to products shipped and recognized as cost of goods sold in 2023 and not delivered until 2024, as discussed above. Including this impact, the year-over-year increase in cost of goods sold was primarily driven by an increase in freight and duty costs of $5.5 million as a result of increased import volume coupled with higher freight container rates, as well as an increase in inventory reserve adjustment of $0.3 million. Additionally, cost of goods sold during the nine months ended September 30, 2024 included $1.9 million of production expenses primarily related to machinery repair and maintenance. These increases were partially offset by a decrease in inventory adjustments and write-offs of $2.1 million as the nine months ended September 30, 2023 included more inventory write-offs from expired products and a write-off of $1.7 million of raw materials as we disposed of certain machinery and equipment in executing the plan to scale back production in certain locations.

#### Gross profit

Gross profit was $124.5 million for the nine months ended September 30, 2024 compared to $118.9 million for the nine months ended September 30, 2023, an increase of $5.6 million, or 4.7%. Gross profit for the nine months ended September 30, 2024 was understated by $0.3 million related to products shipped and recognized as revenue and cost of goods sold in 2023 and not delivered until 2024, as discussed above. Gross margin increased to 38.8% for the nine months ended September 30, 2024 from 38.4% for the nine months ended September 30, 2023. Gross margin for the nine months ended September 30, 2024 included a net favorable impact of 90 basis points from the adjustments to net sales related to online platform fees and cost of goods sold related to production expenses, respectively, as discussed above. Compared to the nine months ended September 30, 2023, gross margin for the nine months ended September 30, 2024 benefited from lower product pricing as product costs as a percentage of net sales decreased to 49.9% from 52.2% during the nine months ended September 30, 2023. This is primarily due to more favorable vendor pricing and increased import as a percentage of total product mix, in keeping with our asset-light strategy. Additionally, gross margin improved 70 basis points as the nine months ended September 30, 2023 included more inventory write-offs from expired products and a write-off of $1.7 million of raw materials as we disposed of certain machinery and equipment in executing the plan to scale back production in certain locations, as discussed above. At the same time, gross margin during the nine months ended September 30, 2024 was negatively impacted by the increase in freight and duty costs, as discussed above, increasing to 8.2% from 6.7% during the nine months ended September 30, 2023.

#### Operating expenses

Operating expenses were $94.0 million for the nine months ended September 30, 2024 compared to $81.5 million for the nine months ended September 30, 2023, an increase of $12.5 million, or 15.4%. Operating expenses for the nine months ended September 30, 2024 included $8.0 million of online sales platform fees, $2.0 million of non-cash impairment of a ROU asset resulting from the sublease of our City of Industry warehouse in California, as we optimized our distribution footprint in the southwest region with the opening of a new warehouse in Mesa, Arizona, and $0.5 million from loss on disposal of machinery in the normal course of business. In comparison, operating expenses for the nine months ended September 30, 2023 included impairment expense and loss on disposal of machinery of $2.2 million due to executing the plan to scale back production in the U.S.. At the same time, rent and warehouse expenses increased $3.9 million from the opening of new distribution centers in late 2023 and early 2024 and a higher rate on our Chino, California facility lease extension, marketing expense increased $1.2 million as we increased online marketing efforts to grow our e-commerce sales channel, stock-based compensation expense increased $1.0 million, and bad debt expense increased $0.5 million in bad debt expense. Such increases were partially offset by a decrease of $1.9 million from the inclusion of production expenses in cost of goods sold for the nine months ended September 30, 2024.

#### Operating income

Operating income was $30.5 million for the nine months ended September 30, 2024 compared to $37.5 million for the nine months ended September 30, 2023, a decrease of $7.0 million, or 18.7%. The decrease was primarily due to an increase in operating expenses of $12.5 million, partially offset by an increase in gross profit of $5.6 million, as discussed above.

#### Other income, net

Other income, net was $1.9 million for the nine months ended September 30, 2024 compared to $0.6 million for the nine months ended September 30, 2023, an increase of $1.3 million, or 221.1%. The increase was primarily due to an increase of $0.7 million in rental income from the sublease of our City of Industry warehouse, and an increase of $0.7 million in interest income from our investments in certificates of deposit.

#### Provision for income taxes

Provision for income taxes was $7.4 million for the nine months ended September 30, 2024 compared to $9.0 million for the nine months ended September 30, 2023, a decrease of $1.6 million, or 18.0%. The Company’s effective tax rate was 22.9% for the nine months ended September 30, 2024 compared to 23.8% for the nine months ended September 30, 2023, primarily due to the change in the non-taxable non-controlling interest income.

#### Net income

Net income was $25.0 million for the nine months ended September 30, 2024 compared to $29.0 million for the nine months ended September 30, 2023, a decrease of $4.0 million, or 13.9%. The decrease was primarily driven by a decrease in operating income of $7.0 million, partially offset by an increase in other income, net of $1.3 million, and a decrease in the provision for income taxes of $1.6 million, 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 in the Consolidated Statements of Income; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.

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

#### Adjusted EBITDA and Adjusted EBITDA Margin

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

We present Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of our financial performance. Adjusted EBITDA and Adjusted EBITDA margin assist management in assessing our core operating performance. We also believe these measures provide investors with useful perspective on underlying business results and trends and facilitate a comparison of our performance from period to period.

Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as alternatives to net income or cash flows from operating activities and net income margin or other measures determined in accordance with US GAAP. Also, Adjusted EBITDA and Adjusted EBITDA margin are not necessarily comparable to similarly titled measures presented by other companies.

Set forth below is a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.

*(in thousands, except percentages)*

| Reconciliation of Adjusted EBITDA (unaudited) | Three Months Ended September 30, 2024 Amount | % of Net Sales | 2023 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net income | $9,262 | 8.2% | $9,140 | 8.7% |
| Add (deduct): |  |  |  |  |
| Interest income | (770) | (0.7) | (454) | (0.4) |
| Interest expense | 535 | 0.5 | 536 | 0.5 |
| Provision for income taxes | 2,597 | 2.3 | 2,904 | 2.8 |
| Depreciation and amortization | 2,691 | 2.3 | 2,708 | 2.6 |
| Stock-based compensation expense | 400 | 0.4 | 250 | 0.2 |
| Secondary offering transaction costs (1) | — | — | 453 | 0.4 |
| Gain, net, on disposal of machinery (2) | — | — | (310) | (0.4) |
| Adjusted EBITDA | **$14,715** | **13.0%** | **$15,227** | **14.4%** |

28

*(in thousands, except percentages)*

| Reconciliation of Adjusted EBITDA (unaudited) | Nine Months Ended September 30, 2024 Amount | % of Net Sales | 2023 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net income | $24,965 | 7.8% | $29,003 | 9.4% |
| Add (deduct): |  |  |  |  |
| Interest income | (1,734) | (0.5) | (1,040) | (0.3) |
| Interest expense | 1,607 | 0.5 | 1,516 | 0.5 |
| Provision for income taxes | 7,413 | 2.3 | 9,045 | 2.9 |
| Depreciation and amortization | 7,980 | 2.5 | 8,058 | 2.6 |
| Stock-based compensation expense | 1,715 | 0.5 | 743 | 0.2 |
| Secondary offering transaction costs (1) | — | — | 453 | 0.1 |
| Write-off of inventory (2) | — | — | 1,710 | 0.6 |
| Impairment expense and loss, net, on disposal of machinery (2) | — | — | 2,135 | 0.6 |
| Operating right-of-use asset impairment | 1,993 | 0.6 | — | — |
| Adjusted EBITDA | **$43,939** | **13.7%** | **$51,623** | **16.6%** |

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

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

### Liquidity and Capital Resources

### Sources and Uses of Funds

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

As described in Note 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 $40.0 million revolving loan facility and a standby letter of credit sublimit. We are not required to pay a commitment (unused) fee on the undrawn portion of the Line of Credit and interest is payable monthly. On March 14, 2023, we amended the Line of Credit. Prior to March 14, 2023, interest accrued at the annual rate of prime less 0.25% with a minimum floor of 3.25%. The amendment on March 14, 2023, among other things, (1) extended the maturity date to March 14, 2025, and (2) revised the interest on any Line of Credit borrowings to an annual rate of one month term Secured Overnight Financing Rate ("SOFR") plus 2.50%, with a SOFR floor of 1.0%. On June 20, 2023, we further amended the Line of Credit which increased the standby letter of credit sublimit from $2.0 million to $5.0 million. As of September 30, 2024, the amount issued under the standby letter of credit was $3.8 million, and the maximum remaining amount that could be borrowed under the Line of Credit was $36.2 million.

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 for additional advances up to a maximum of $8.0 million through June 2023, which we exercised in March 2023. Interest accrues at a fixed rate of 4.375% per annum. Principal and interest payments of $0.1 million are due monthly throughout the term of the loan, with the remaining principal balance due at maturity. The 2027 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio. Proceeds from the 2027 Term Loan were used to pay down an existing term loan with the same lender, which was set to mature in May 2029 with interest accruing at prime rate less 0.25%, and had an outstanding balance of $20.6 million as of the repayment date.

Additionally, as of September 30, 2024, we have a $23.0 million term loan that matures September 30, 2026 (the “2026 Term Loan”). The 2026 Term Loan had an initial balance of $16.1 million and an option to request for additional advances up to a maximum of $6.9 million through September 2022, which we exercised in February 2022. Interest accrues at a fixed rate of 3.5% 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. The 2026 Term Loan is collateralized by substantially all of Global Wells’ assets and is guaranteed by Global Wells and one of our stockholders. In accordance with the loan agreement, Global Wells is required to comply with certain financial covenants, including a minimum debt service coverage ratio.

As of September 30, 2024, 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, 2024, we had no borrowing on the Line of Credit, $27.8 million in outstanding balance under the 2027 Term Loan, and $21.1 million in outstanding balance under the 2026 Term Loan.

As discussed in Note 15 — *Commitments and Contingencies* to the condensed consolidated financial statements, on February 5, 2024, we received a Notice of Determination from 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 initiated an appeal process by submitting 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. We are in the process of assessing further appeal options. Although we currently have an import duty liability reserve of $3.0 million as of September 30, 2024, the amount of the final payments could vary significantly from this estimate.

Additionally, as described in Note 17 — *Subsequent Events* to the condensed consolidated financial statements, on November 5, 2024, our Board of Directors declared another regular quarterly cash dividend of $0.40 per share on our common stock, which will be paid on or around November 29, 2024 to shareholders of record at the close of business on

November 20, 2024. Prior to this, we paid out regular quarterly and special cash dividends totaling 23.0 million in the current fiscal year.

As disclosed in Note 2 - *Summary of Significant Accounting Policies* in our Annual Report on Form 10-K filed on March 15, 2024, both Lollicup and Global Wells are recipients of certain government grants, which totaled $1.5 million and $1.3 million, respectively, as of September 30, 2024. We have not yet recognized such grants as other income until there is reasonable assurance that both entities have complied with all grant conditions and the grants will be received. These conditions include requiring the facility in Rockwall, Texas to maintain a certain minimum tax value for 5 years calendar years through 2024 (the “Required Period”), continue operations in the facility for the Required Period, have a minimum number of full time equivalent employees with a minimum average annual gross wage employed in the operation of the facility in the Required Period, and promise to not engage in a pattern or practice of unlawful employment of aliens during the Required Period. We believe we have continued to comply and will continue to comply with all such grant requirements through the end of the contingency period of December 31, 2024.

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 platform, talent, and technology capabilities. In addition, we may consider making strategic acquisitions and investments which could require significant liquidity. The rapidly changing macroeconomic and geopolitical dynamics created significant uncertainty in the global economy and capital markets, which could have long-lasting adverse effects. We currently believe that our cash on hand, ongoing cash flows from our operations and funding available under our borrowings will be adequate to meet our working capital needs, service our debt, make lease payments, and fund capital expenditures for at least the next 12 months. We continue to explore other options to further expand our liquidity to support the business growth and enhance shareholder value.

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

### Liquidity Position

The following table summarizes total current assets, liabilities and working capital at September 30, 2024 compared to December 31, 2023:

*(in thousands)*

|  | September 30, 2024 | December 31, 2023 | Change |
| --- | ---: | ---: | ---: |
| Current assets | $170,089 | $154,929 | $15,160 |
| Current liabilities | 54,479 | 44,401 | 10,078 |
| **Working capital** | **$115,610** | **$110,528** | **$5,082** |

As of September 30, 2024, we had working capital of $115.6 million compared to $110.5 million as of December 31, 2023, representing an increase of $5.1 million, or 4.6%. The improvement in working capital was driven by an increase of $15.2 million in current assets partially offset by an increase of $10.1 million in current liabilities. Within current assets, cash and cash equivalents and short-term investments increased $11.0 million, as our operating activities continued to generate strong cash flows. Accounts receivable increased $6.1 million as a result of stronger sales in the three months ended September 30, 2024 compared to the three months ended December 31, 2023. Such increases were partially offset by a decrease in prepaid expenses and other current assets of $1.4 million resulting from the decrease in tax receivables, and a decrease in inventories of $0.6 million. The increase in current liabilities was primarily driven by an increase in operating lease liabilities, current portion of $3.8 million primarily from a higher rate on our Chino facility lease renewal, an increase in accounts payable and related party payables of $3.6 million, and an increase in accrued expenses of $2.2 million.

### Cash Flows

The following table summarizes cash flow for the nine months ended September 30, 2024 and 2023:

*(in thousands)*

|  | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $39,732 | $43,088 |
| Net cash provided by (used in) investing activities | 1,820 | (21,341) |
| Net cash used in financing activities | (25,725) | (9,626) |
| Net change in cash and cash equivalents | **$15,827** | **$12,121** |

*Cash flows provided by operating activities.* Net cash provided by operating activities was $39.7 million for the nine months ended September 30, 2024, primarily the result of net income of $25.0 million, adjusted for certain non-cash items totaling $19.3 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, ROU asset impairment, stock-based compensation, loss on disposal of fixed assets, write-off of inventory, and adjustments to inventory reserve. In addition, cash decreased $4.5 million from changes in working capital, which included a decrease of $6.3 million from an increase in accounts receivable from higher sales, a decrease of $4.5 million from reduction in operating lease liabilities, a decrease of $0.9 million from inventory build-up, and a decrease of $0.4 million from a reduction in deferred revenue. These decreases were partially offset by an increase of $4.2 million from higher accounts and related party payables, an increase of $2.2 million from higher accrued expenses, and a decrease of $1.4 million in prepaid expenses and other current assets primarily resulting from the reduction of tax receivables.

Net cash provided by operating activities was $43.1 million for the nine months ended September 30, 2023, primarily the result of net income of $29.0 million, adjusted for certain non-cash items totaling $17.2 million, consisting mainly of depreciation and amortization of fixed assets and operating right-of-use assets, write-off of inventory, loss, net, on disposal of machinery, stock-based compensation, adjustments to allowance for doubtful accounts, and impairment of deposit. In addition, cash decreased $3.1 million, primarily as a result of changes in working capital, which included a decrease of $3.6 million from inventory build-up, a decrease of $3.4 million from an increase in accounts receivable, a decrease of $3.3 million from a reduction in operating lease liabilities, and a decrease of $0.7 million from lower accounts and related party payables, partially offset by an increase of $8.0 million from the deferral of federal and California state income taxes under the Winter Storm Relief declared by the IRS.

*Cash flows provided by (used in) investing activities.* Net cash provided by investing activities was $1.8 million for the nine months ended September 30, 2024, which primarily included $38.6 million in redemptions of short-term investments, partially offset by $33.6 million in purchases of short-term investments, $2.6 million of deposits paid for the purchase of property and equipment, and $0.7 million paid to directly purchase property and equipment.

Net cash used in investing activities was $21.3 million for the nine months ended September 30, 2023, which primarily included $18.0 million in net purchases of short-term investments, $5.4 million of deposits paid for the purchase of property and equipment, and $2.9 million paid to directly purchase property and equipment, partially offset by $4.0 million of net refund from the joint venture investment, $0.6 million of proceeds from the sale of machinery and equipment, and $0.5 million of deposits refunded from cancelled machinery orders.

*Cash flows used in financing activities.* Net cash used in financing activities was $25.7 million for the nine months ended September 30, 2024, which primarily included $23.0 million of cash dividends paid to shareholders, $2.3 million paid for the redemption of a non-controlling member' interest in Global Wells, and $0.8 million of payments towards long-term debt, partially offset by cash proceeds of $0.4 million received from the exercise of stock options.

Net cash used in financing activities was $9.6 million for the nine months ended September 30, 2023, which primarily included $16.9 million of cash dividends paid to shareholders, and $0.7 million of term loan repayments, partially offset by $8.0 million of additional borrowings under the 2027 Term Loan.

### Related Party Transactions

For a description of significant related party transactions, see Note 13 — *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.

## Controls and procedures

As filed, 9,967 characters.

### Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2024. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2024 due to the material weaknesses described in Part II—Item 9A of the Form 10-K for the year ended December 31, 2023 filed with the SEC on March 15, 2024.

### Material Weaknesses in Internal Control over Financial Reporting

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

Refer to Management’s Annual Report on Internal Control Over Financial Reporting in Part II—Item 9A of the Form 10-K for the year ended December 31, 2023 filed with the SEC on March 15, 2024 for a description of the material weaknesses. The same material weaknesses continue to exist as of September 30, 2024. Each of the material weaknesses could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. The material weaknesses identified did not result in any material misstatements of the Company’s financial statements or disclosures for any prior or current reporting periods, but did result in immaterial misclassification adjustments to net sales, cost of goods sold, selling expenses and general and administrative expenses with no impact on net income for the quarter and year ended December 31, 2023 and an immaterial adjustment to deposits as of December 31, 2023. Management does not believe that they had any effect on the accuracy of the Company’s financial statements for the current reporting period.

### Management’s Remediation Plan

As reported in the 2023 Form 10-K, we are engaged in remedial actions in response to the deficiencies discussed above, and we plan to continue efforts to improve internal control over financial reporting.

#### Actions Taken During the Years Ended December 31, 2023 and 2022

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

- Increased the number of personnel with the appropriate level of knowledge related to accounting transactions, accounting matters, and relevant systems, including the addition of a Chief Financial Officer and Controller.
- With the assistance from the third-party service provider, and under the supervision of the Company's Audit Committee, Chief Executive Officer and Chief Financial Officer, initiated the design and implementation of significant process transaction flows and key controls in the Company's overall IT environment.
- As part of management's risk assessment and evaluation of the design of key controls, management updated control objectives and refined control design and documentation, including such design and documentations as related to the appropriate segregation of duties and monitoring activities.
- Enhanced policies and procedures to improve Information Technology General Controls and the Company's overall IT environment. Examples of some of management's efforts include:
- Adopted the policy and procedure to regularly review user's access rights relating to the Company's significant information technology systems;
- Designed and started to perform review of users’ access rights to our significant information technology systems; and
- Maintained and enforced certain procedures, controls and developed IT policies around change management.
- Completed a risk assessment based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") to identify internal control over financial reporting ("ICFR") risks and control objectives.
- Enhanced training programs for personnel that provide key information and perform key roles associated with ICFR. Management designed such training programs in order to improve the level of understanding of the design and proper implementation of controls by the control owners and to instruct such individuals on appropriate level of documentation practices for evidencing review, especially over the completeness and accuracy of underlying data and the precision level used in the review.
- Updated objectives, processes and control design and documentation, including such design and documentation as related to the completeness and accuracy of underlying data and a sufficient precision level in management review controls to detect material misstatement across all financial statement areas.

#### Actions Taken During the Three Months Ended March 31, 2024

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

- Continued to refine the design of entity-level controls impacting the control environment, risk assessment procedures and monitoring activities, including the implementation of controls and procedures to ensure adequate oversight and accountability over the performance of controls.
- Continued to enhance policies and procedures to improve Information Technology General Controls and the Company's overall IT environment, including continuing to enforce newly or enhanced policies and controls around logical access and changes to significant IT systems.

#### Actions Taken During the Three Months Ended June 30, 2024

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

- Updated and refined the COSO-based risk assessment to evaluate and identify risks impacting internal control over financial reporting.
- Implemented formal control activities to provide trainings and upskilling to key business process owners.
- Implemented and performed new control procedures to review all activities carried out and transactions completed by users with administrative rights (“privileged users”) within the Company’s ERP system.
- Continued to enhance control procedures around the monitoring and validating of information produced by the company (“IPC”) supporting the performance of key controls including change management review procedures.
- Further expanded its user access review procedures to all key applications and relevant infrastructures that impact internal control over financial reporting.
- Enhanced user access control procedures by implementing additional review from the CFO for all new privileged users.

#### Actions Taken During the Three Months Ended September 30, 2024

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

- Launched a new internally-developed management system which streamlined and centralized the workflow around user provisioning and deprovisioning and further expanded and enhanced deprovisioning review procedures.
- Enhanced control procedures around the completeness and accuracy of IPC used in supporting the performance of key controls. Restricted access to making changes to the IPC to only IT administrators, and enhanced the IT change management process to include changes to IPC.
- Implemented and expanded periodic review procedures of user rights and permissions across all key applications to assess segregation of duties.

#### Ongoing Remediation Efforts

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

- Continue to evaluate the Company's needs for additional personnel and add, as needed, additional headcount primarily within the accounting and information technology departments. Management continues to onboard individuals with the appropriate education, experience, certifications, and training.

Management is committed to remediating the material weaknesses in a timely fashion and to making continuous improvements to the Company's internal control over financial reporting. Management believes the measures described above have strengthened the Company's internal control over financial reporting, Management will continually assess the effectiveness of the remediation efforts and may determine to take additional measures to address control deficiencies or modify the remediation plan described above. The material weaknesses will not be considered remediated until a sustained period of time has passed to allow for continued operation of the new controls and for management to test the operating effectiveness of the new controls. Testing is expected to continue during the year ended December 31, 2024 and management will continue to provide an update on the status of our remediation activities on a quarterly basis.

### Changes in Internal Control Over Financial Reporting

Other than those described above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2024, 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.

## Risk factors

As filed, 143 characters.

There have been no material changes to the Risk Factors previously disclosed in the 2023 Form 10-K, which are incorporated herein by reference.

Filed Nov 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-046600. Last ingested by Listed: Nov 6, 2026, 17:16 ET. No prices; not investment advice.