Karat Packaging Inc

Previous wording

•We recorded net sales of $112.6 million for the three months ended June 30, 2024, an increase of 3.5% in amount and 3.2% in volume, compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, we recorded net sales of $208.2 million, an increase of 1.8% in amount and 3.3% in volume, compared to the six months ended June 30, 2023.

Current wording

•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.

Previous wording

•We achieved gross margin of 38.5% for the three months ended June 30, 2024, consistent with the three months ended June 30, 2023. We achieved gross margin of 38.9% for the six months ended June 30, 2024, a decrease of 20 basis points from the six months ended June 30, 2023. During the three and six months ended June 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 160 and 80 basis points for the three and six months ended June 30, 2023, respectively.

Current wording

•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.

Previous wording

•We recorded net income of $9.2 million and $15.7 million for the three and six months ended June 30, 2024, respectively, a decrease of 13.6% and 20.9% compared to the three and six months ended June 30, 2023, respectively. Net income for the six months ended June 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 both the three and six months ended June 30, 2023 included a negative tax-effected impact of $1.9 million incurred from 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 incurred from the raw materials write-off, as discussed above.

Current wording

•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.

Previous wording

•We achieved net income margin of 8.2% and 7.5% for the three and six months ended June 30, 2024, respectively, a decrease of 160 and 220 basis points from the three and six months ended June 30, 2023, respectively. Net income margin for the six months ended June 30, 2024 included a negative tax-effected impact of 70 basis points from the non-cash ROU asset impairment, as discussed above. Net income margin for the three and six months ended June 30, 2023 included a negative tax-effected impact of 290 and 150 basis points, respectively, from the raw materials write-off and impairment expense and loss on disposal of machinery, as discussed above.

Current wording

•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.

Previous wording

•We generated $13.7 million and $20.3 million in net cash from operating activities for the three and six months ended June 30, 2024, respectively, compared to $16.9 million on and $31.1 million during the three and six months ended June 30, 2023, respectively.

Current wording

•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.

Previous wording

•We generated consolidated Adjusted EBITDA, a non-GAAP measure defined below, of $15.7 million and $29.2 million for the three and six months ended June 30, 2024, respectively, a decrease of 25.8% and 19.7% from the three and six months ended June 30, 2023, respectively.

Current wording

•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.

Previous wording

•We achieved Adjusted EBITDA margin, a non-GAAP measure defined below, of 13.9% and 14.0% for the three and six months ended June 30, 2024, respectively, a decrease of 550 and 380 basis points from the three and six months ended June 30, 2023, respectively.

Current wording

•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.

Previous wording

•We had financial liquidity of $55.5 million and additional short-term investments of $32.7 million as of June 30, 2024.

Current wording

•We had financial liquidity of $75.1 million and additional short-term investments of $21.5 million as of September 30, 2024.

Previous wording

•On August 6, 2024, our Board of Directors declared a special cash dividend of $0.15 per share on our common stock and another quarterly cash dividend of $0.35 per share on our common stock, both of which will be paid on or around August 30, 2024 to shareholders of record at the close of business on August 21, 2024.

Current wording

•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.

Previous wording

•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 32.3% of total sales in the second quarter of 2024.

Current wording

•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.

Previous wording

Net sales were $112.6 million for the three months ended June 30, 2024 compared to $108.7 million for the three months ended June 30, 2023, an increase of $3.9 million, or 3.5%. The increase is primarily driven by an increase of $8.2 million in volume and change in product mix, and an increase of $2.7 million due to the inclusion of online sales platform fees in operating expenses for the three months ended June 30, 2024, partially offset by a $7.0 million unfavorable year-over-year pricing comparison, as the overall pricing environment remains competitive especially in the distributor channel.

Current wording

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.

Previous wording

Cost of goods sold was $69.2 million for the three months ended June 30, 2024 compared to $66.9 million for the three months ended June 30, 2023, an increase of $2.3 million, or 3.5%. The increase was primarily driven by an increase in freight and duty costs of $2.9 million as a result of higher freight container rates and an increase in inventory reserve adjustment of $1.0 million. Additionally, cost of goods sold during the three months ended June 30, 2024 included $0.7 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 $2.6 million as the three months ended June 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.

Current wording

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.

Previous wording

Gross profit was $43.4 million for the three months ended June 30, 2024 compared to $41.9 million for the three months ended June 30, 2023, an increase of $1.5 million, or 3.7%. Gross margin for the three months ended June 30, 2024 was 38.5%, consistent with the three months ended June 30, 2023. Gross margin for the three months ended June 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. Gross margin for the three months ended June 30, 2024 also benefited from lower product pricing as product costs as a percentage of net sales decreased to 49.9% from 51.8% during the three months ended June 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 June 30, 2024 was negatively impacted by the increase in freight and duty costs and inventory reserve adjustment, as discussed above. Freight and duty costs as a percentage of net sales increased to 8.6% from 6.2% during the three months ended June 30, 2023, and inventory reserve adjustment as a percentage of net sales increased by 0.9% compared to the three months ended June 30, 2023. During the three months ended June 30, 2023, gross margin was negatively impacted by 160 basis points from the 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.

Current wording

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%.

Previous wording

Operating expenses were $32.3 million for the three months ended June 30, 2024 compared to $28.5 million for the three months ended June 30, 2023, an increase of $3.8 million, or 13.2%. Operating expenses for the three months ended June 30, 2024 included $2.7 million of online sales platform fees. Additionally, higher operating expenses was also attributable to an increase of $1.4 million in rent and warehouse expense from the opening of new distribution centers and a higher rate on our Chino, California facility lease extension, an increase of $0.9 million in marketing expense as we increase online marketing efforts to grow our e-commerce sales channel, and an increase of $0.7 million in stock compensation expense. 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 June 30, 2024 and a decrease of $1.9 million in impairment expense and loss on disposal of machinery, which included $0.5 million in loss on disposal of machinery in the normal course of business in the three months ended June 30, 2024 compared to $2.5 million of impairment expense and loss on disposal of machinery primarily due to executing the plan to scale back production in certain locations in the three months ended June 30, 2023.

Current wording

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.

Previous wording

Operating income was $11.1 million for the three months ended June 30, 2024 compared to $13.3 million for the three months ended June 30, 2023, a decrease of $2.2 million, or 16.7%. The decrease was primarily due to an increase in operating expenses of $3.8 million, partially offset by an increase in gross profit of $1.5 million, as discussed above.

Current wording

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.

Previous wording

Other income, net was $1.3 million for the six months ended June 30, 2024 compared to $0.1 million of other expense, net for the six months ended June 30, 2023. Other income, net for the six months ended June 30, 2024 included a gain on foreign currency transactions of $0.4 million, compared to a loss on foreign currency transactions of $0.1 million for the six months ended June 30, 2023. Additionally, interest income increased $0.4 million primarily from our investments in short-term investments and rental income increased $0.4 million primarily from the sublease of our City of Industry warehouse.

Current wording

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.

Previous wording

Provision for income taxes was $2.8 million for the three months ended June 30, 2024 compared to $3.3 million for the three months ended June 30, 2023, a decrease of $0.5 million, or 14.5%. The Company’s effective tax rate was 23.5% and 23.7% for the three months ended June 30, 2024 and 2023, respectively.

Current wording

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.

Previous wording

Net income was $9.2 million for the three months ended June 30, 2024 compared to $10.7 million for the three months ended June 30, 2023, a decrease of $1.5 million, or 13.6%. The decrease was primarily driven by a reduction in operating income of $2.2 million, partially offset by an increase in other income, net of $0.3 million, and a decrease in the provision for income taxes of approximately $0.5 million, as discussed above.

Current wording

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.

Previous wording

Net sales were $208.2 million for the six months ended June 30, 2024 compared to $204.5 million for the six months ended June 30, 2023, an increase of $3.7 million, or 1.8%. Net sales for the six months ended June 30, 2024 was understated by $0.7 million, which represented products shipped and recognized as revenue in 2023 and not delivered until

Current wording

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

Previous wording

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 $12.9 million in volume and change in product mix, and an increase of $4.9 million due to the inclusion of online sales platform fees in operating expenses for the six months ended June 30, 2024, partially offset by $14.1 million unfavorable year-over-year pricing comparison, as the overall pricing environment remains competitive especially in the distributor channel.

Current wording

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.

Previous wording

Cost of goods sold was $127.2 million for the six months ended June 30, 2024 compared to $124.5 million for the six months ended June 30, 2023, an increase of $2.7 million, or 2.1%. Cost of goods sold for the six months ended June 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 $4.2 million as a result of increased import volume coupled with higher freight and container rates, as well as an increase in inventory reserve adjustment of $0.7 million. Additionally, cost of goods sold during the six months ended June 30, 2024 included $1.3 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 $2.5 million as the six months ended June 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. Cost of goods sold also benefited from reduced product costs and the strengthening of the United States Dollar against Taiwan New Dollar.

Current wording

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.

Previous wording

Gross profit was $81.0 million for the six months ended June 30, 2024 compared to $80.0 million for the six months ended June 30, 2023, an increase of $1.0 million, or 1.3%. Gross profit for the six months ended June 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. With this impact, gross margin decreased to 38.9% for the six months ended June 30, 2024 compared to 39.1% for the six months ended June 30, 2023. Gross margin for the six months ended June 30, 2024 included a net favorable impact of 80 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. Gross margin also benefited from the strengthening of the United States Dollar against Taiwan New Dollar, reduced 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 six months ended June 30, 2024 was negatively impacted by the increase in freight and duty costs and inventory reserve adjustment, as discussed above. Freight and duty costs as a percentage of net sales increased to 8.0% from 6.1% during the six months ended June 30, 2023, and inventory reserve adjustment as a percentage of net sales increased by 0.4% compared to the six months ended June 30, 2023. During the six months ended June 30, 2023, gross margin was negatively impacted by 80 basis points from the 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.

Current wording

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.

Previous wording

Operating expenses were $61.8 million for the six months ended June 30, 2024 compared to $53.9 million for the six months ended June 30, 2023, an increase of $7.9 million, or 14.6%. Operating expenses for the six months ended June 30, 2024 included a $2.0 million 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 six months ended June 30, 2023 included impairment expense and loss on disposal of machinery of $2.5 million due to executing the plan to scale back production in certain locations. Operating expenses for the six months ended June 30, 2024 increased year-over-year primarily due to the inclusion of $4.9 million of online sales platform fees in operating expenses, an increase of $2.6 million in rent and warehouse expense from the opening of new distribution centers and a higher rate on our Chino, California facility lease extension, an increase of $0.7 million in marketing expense as we increase online marketing efforts to grow our e-commerce sales channel, an increase of $0.8 million in stock compensation expense, and an increase of $0.8 million in bad debt expense. Operating expenses also decreased $1.3 million from the inclusion of production expenses in cost of goods sold for the six months ended June 30, 2024, as well as by $0.8 million from a reduction in shipping and transportation costs.

Current wording

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.

Previous wording

Operating income was $19.2 million for the six months ended June 30, 2024 compared to $26.1 million for the six months ended June 30, 2023, a decrease of $6.9 million, or 26.4%. The decrease was primarily due to an increase in operating expenses of $7.9 million, partially offset by an increase in gross profit of $1.0 million, as discussed above.

Current wording

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.

Previous wording

Other income, net was $1.0 million for the three months ended June 30, 2024 compared to $0.7 million for the three months ended June 30, 2023. The increase was primarily due to an increase in rental income of $0.3 million from the sublease of our City of Industry warehouse.

Current wording

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.

Previous wording

Provision for income taxes was $4.8 million for the six months ended June 30, 2024 compared to $6.1 million for the six months ended June 30, 2023, a decrease of $1.3 million, or 21.6%. The Company’s effective tax rate was 23.5% and 23.6% for the six months ended June 30, 2024 and 2023, respectively.

Current wording

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.

Previous wording

Net income was $15.7 million for the six months ended June 30, 2024 compared to $19.9 million for the six months ended June 30, 2023, a decrease of $4.2 million, or 20.9%. The decrease was primarily driven by a decrease in operating income of $6.9 million, partially offset by an increase in other income (expenses), net of $1.4 million, and a decrease in the provision for income taxes of $1.3 million, as discussed above.

Current wording

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.

Previous wording

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) write-off of certain inventory items outside the normal course of business, (vii) impairment expense and loss on disposal of machinery outside the normal course of business, and (viii) operating right-of-use asset impairment. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net sales.

Current wording

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.

Previous wording

(1) The write-off of inventory and impairment expense and loss on disposal of machinery represent costs incurred 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.

Current wording

(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.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

As of June 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 June 30, 2024, we had no borrowing on the Line of Credit, $27.9 million in outstanding balance under the 2027 Term Loan, and $21.2 million in outstanding balance under the 2026 Term Loan.

Current wording

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.

Previous wording

As discussed in Note 15 —Commitments and Contingenciesto 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 $2.9 million as of June 30, 2024, the amount of the final payments could vary significantly from this estimate.

Current wording

As discussed in Note 15 —Commitments and Contingenciesto 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.

Previous wording

Additionally, as described in Note 16 —Subsequent Events to the condensed consolidated financial statements, on August 6, 2024, our Board of Directors declared a special cash dividend of $0.15 per share on our common stock and a regular quarterly cash dividend of $0.35 per share on our common stock, both of which will be paid on or around

Current wording

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

Previous wording

August 30, 2024 to shareholders of record at the close of business on August 21, 2024. Prior to this, we paid out regular quarterly cash dividends totaling $13.0 million in the current fiscal year.

Current wording

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

Previous wording

As of June 30, 2024, we had working capital of $114.2 million compared to working capital of $110.5 million as of December 31, 2023, representing an increase of $3.7 million, or 3.4%. The improvement in working capital was driven by an increase of $14.9 million in current assets partially offset by an increase of $11.2 million in current liabilities. The increase in current assets was primarily driven by an increase in inventory of $8.3 million as we stock up inventory for the summer peak season, an increase in account receivable of $5.9 million, and an increase in cash and cash equivalents and short-term investments totaling $2.6 million, partially offset by a decrease in prepaid expenses of $2.0 million. The increase in current liabilities was primarily driven by an increase in accounts payable and related party payables of $4.4 million and an increase in accrued expense of $3.4 million.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

Cash flows provided by operating activities. Net cash provided by operating activities was $20.3 million for the six months ended June 30, 2024, primarily the result of net income of $15.7 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, 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 $8.8 million from changes in working capital, which included a decrease of $9.1 million from inventory build-up, a decrease of $6.1 million from an increase in accounts receivable from higher sales, a decrease of $3.1 million from reduction in operating lease liabilities. These decreases were partially offset by an increase of $4.9 million from higher accounts and related party payables, $3.4 million from higher accrued expenses, and $2.0 million from reductions in prepaid expenses.

Current wording

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.

Previous wording

Net cash provided by operating activities was $31.1 million for the six months ended June 30, 2023, primarily the result of net income of $19.9 million, adjusted for certain non-cash items totaling $12.4 million, consisting mainly of depreciation and amortization, stock-based compensation, adjustments to accounts receivable and inventory reserves, write-off of inventory, impairment expense and loss on disposal of fixed assets, and amortization of operating right-of-use assets. In addition, cash decreased $1.2 million, primarily as a result of changes in working capital, which included an increase of $7.7 million in inventory build up to accommodate higher demand, an increase of $2.1 million in accounts receivable primarily due to higher sales, a decrease of $2.2 million in operating lease liability, and a decrease of $1.1 million in accrued expenses, partially offset by a decrease of $0.4 million in prepaid expenses, an increase of $6.2 million in accounts payable and related party payable, and an increase of $5.1 million in income taxes payable primarily due to the deferral of federal and California state income taxes under the Winter Storm Relief declared by the IRS.

Current wording

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.

Previous wording

Cash flows used in investing activities. Net cash used in investing activities was $8.5 million for the six months ended June 30, 2024, which primarily included $22.5 million in purchases of short-term investments, $2.0 million of deposits paid for the purchase of property and equipment, and $0.4 million paid to directly purchase property and equipment, partially offset by $16.4 million in redemptions of short-term investments.

Current wording

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.