HF Foods Group Inc. 10-Q

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY This Quarterly Report on Form 10-Q for HF Foods Group Inc. (“HF Group,” “HF Foods”, the “Company,” “we,” “us,” or “our”) contains forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation: • Low margins in the foodservice distribution industry and periods of significant or prolonged inflation or deflation; • Qualified labor shortages; • Unfavorable macroeconomic conditions in the United States; • Competition in the foodservice distribution industry particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche; • Increases in fuel costs; • Disruption of relationships with vendors and increases in product prices; • Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains; • The effects of the COVID-19 pandemic or other pandemics; • The steps taken by the governments where our suppliers are located, including the People’s Republic of China, to address the COVID-19 pandemic or other pandemics; • Disruption of relationships with or loss of customers; • Changes in consumer eating and dining out habits; • Related party transactions and possible conflicts of interests; • Related parties and variable interest entities consolidation; • Failure to protect our intellectual property rights; • Our ability to renew or replace our current warehouse leases on favorable terms, or terminations prior to expiration of stated terms; • Failure to retain our senior management and other key personnel, particularly our CEO, COO, CFO and CCO/General Counsel; • Our ability to attract, train and retain employees; • Changes in and enforcement of immigration laws; • Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws; • Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations; • Costs to comply with environmental laws and regulations; • Litigation, regulatory investigations and potential enforcement actions; • Increases in commodity prices; • U.S. government tariffs on products imported into the United States, particularly from China; • Severe weather, natural disasters and adverse climate change; • Unfavorable geopolitical conditions; • Any cyber security incident, other technology disruption or delay in implementing our information technology systems; • Current indebtedness affecting our liquidity and ability of future financing; • Failure to acquire other distributors or wholesalers and enlarge our customer base could negatively impact our results of operations and financial condition; • Scarcity of and competition for acquisition opportunities; • Our ability to obtain acquisition financing; • The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions; • Our ability to identify acquisition candidates; • Increases in debt in order to successfully implement our acquisition strategy; 20 • Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results; • The impact on the price and demand for our common stock resulting from the relative illiquidity of the market for our common stock; • Significant stockholders’ ability to significantly influence the Company; and • The impact of state anti-takeover laws and related provisions in our governance documents. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications. We caution you that the important factors referenced above may not contain all of the risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you. These risks and uncertainties include, but are not limited to, those factors described under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise. Overview We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States. HF Group was formed through a merger between two complementary market leaders, HF Foods Group Inc. and B&R Global. On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc. (the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. See Note 6 - Acquisitions to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information. We aim to supply the increasing demand for Asian American restaurant cuisine, leveraging our nationwide network of distribution centers and our strong relations with growers and suppliers of fresh, high-quality specialty restaurant food products and supplies in the US, South America, and China. Capitalizing on our deep understanding of the Chinese culture, we have become a trusted partner serving Asian and Chinese restaurants and other foodservice customers throughout the United States, providing sales and service support to customers who mainly converse in Mandarin or other Chinese dialects. We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices. Transformation Plan To position the business for long-term success, we have initiated a comprehensive, operational transformation plan in an effort to drive growth and cost savings. Our transformation is focused on four key areas, each of which we expect will positively impact future growth or cost savings. The components of our transformation are as follows: • Centralized Purchasing: We will formalize its national category purchases and welcome new vendors into our ecosystem. This will allow us to unlock synergies from our prior acquisitions, and deliver savings in our largest categories. • Fleet and Transportation: We will be establishing a national fleet maintenance program. Within this, we plan to define new truck specifications, initiate a replacement program for 50% of our current fleet, implement a national fuel savings program to maximize efficiency, and outsource domestic inbound freight logistics to a third-party partner to adopt a cohesive national approach to its supply chain. This is expected to deliver substantial improvements to our transportation system. • Digital Transformation: We will be implementing a modern ERP solution across all of our distribution centers. This is expected to deliver enhanced operational efficiency and responsiveness, streamlined processes, and greater data driven decision-making. • Facility Upgrades: We will be reorganizing and upgrading our facilities and distribution centers to efficiently streamline costs, and to capitalize on cross-selling opportunities with both new and existing customers. 21 Financial Overview Three Months Ended September 30, Change Nine Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % 2023 2022 Amount % Net revenue $ 281,453 $ 300,711 $ (19,258) (6.4) % $ 867,620 $ 878,568 $ (10,948) (1.2) % Net income (loss) $ 1,974 $ (3,894) $ 5,868 NM $ (5,383) $ 3,740 $ (9,123) NM Adjusted EBITDA $ 10,004 $ 3,985 $ 6,019 151.0 % $ 24,024 $ 35,822 $ (11,798) (32.9) % _________________ NM Not meaningful For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below. How to Assess HF Group’s Performance In assessing our performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, as well as certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA. The key measures that we use to evaluate the performance of our business are set forth below: Net Revenue Net revenue is equal to gross sales minus sales returns, sales incentives that we offer to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net revenue is driven by changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold. Gross Profit Gross profit is equal to net revenue minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, customs clearance fees and other miscellaneous expenses. Cost of revenue generally changes as we incur higher or lower costs from suppliers and as the customer and product mix changes. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses. EBITDA and Adjusted EBITDA Discussion of our results includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, that we believe provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our condensed consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede GAAP measures. Management uses EBITDA to measure operating performance, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, or non-recurring expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, and other non-cash charges and is more reflective of other factors that affect our operating performance. 22 The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of HF Group’s results as reported under GAAP. For example, Adjusted EBITDA: • excludes certain tax payments that may represent a reduction in cash available; • does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future; • does not reflect changes in, or cash requirements for, our working capital needs; and • does not reflect the significant interest expense, or the cash requirements, necessary to service our debt. For additional information on EBITDA and Adjusted EBITDA and a reconciliation to their most directly comparable U.S. GAAP financial measures, see “ Results of Operations — EBITDA and Adjusted EBITDA ” below. Results of Operations Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022 The following table sets forth a summary of our consolidated results of operations for the three months ended September 30, 2023 and 2022 . The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Three Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % Net revenue $ 281,453 $ 300,711 $ (19,258) (6.4)% Cost of revenue 230,528 249,218 (18,690) (7.5)% Gross profit 50,925 51,493 (568) (1.1)% Distribution, selling and administrative expenses 48,841 54,589 (5,748) (10.5)% Income (loss) from operations 2,084 (3,096) 5,180 NM Interest expense 2,715 2,274 441 19.4% Other income (490) (462) (28) 6.1% Change in fair value of interest rate swap contracts (1,984) (284) (1,700) NM Lease guarantee expense (95) (58) (37) 63.8% Income (loss) before income taxes 1,938 (4,566) 6,504 NM Income tax expense (benefit) (36) (672) 636 (94.6)% Net income (loss) and comprehensive income (loss) 1,974 (3,894) 5,868 NM Less: net income (loss) attributable to noncontrolling interests 90 (30) 120 NM Net income (loss) and comprehensive income (loss) attributable to HF Foods Group Inc. $ 1,884 $ (3,864) $ 5,748 (148.8)% 23 The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated: Three Months Ended September 30, 2023 2022 Net revenue 100.0 % 100.0 % Cost of revenue 81.9 % 82.9 % Gross profit 18.1 % 17.1 % Distribution, selling and administrative expenses 17.4 % 18.2 % Income (loss) from operations 0.7 % (1.1) % Interest expense 1.0 % 0.8 % Other income (0.2) % (0.2) % Change in fair value of interest rate swap contracts (0.7) % (0.1) % Lease guarantee expense — % — % Income (loss) before income taxes 0.7 % (1.6) % Income tax expense (benefit) — % (0.2) % Net income (loss) and comprehensive income (loss) 0.7 % (1.4) % Less: net income (loss) attributable to noncontrolling interests — % — % Net income (loss) and comprehensive income (loss) attributable to HF Foods Group Inc. 0.7 % (1.4) % Net Revenue Net revenue for the three months ended September 30, 2023 decreased by $19.3 million, or 6.4%, compared to the same period in 2022. This decrease was primarily attributable to decreases of $8.9 million and $6.6 million in Meat and Poultry and Seafood revenue, respectively, compared to the same period in 2022, driven by deflationary pricing in poultry and shrimp. During the three months ended September 30, 2022, we benefited from the significant inflation experienced in poultry pricing, which created a tough year-over-year revenue compare. Gross Profit Gross profit was $50.9 million for three months ended September 30, 2023 compared to $51.5 million in the same period in 2022 , a decrease of $0.6 million, or 1.1%. Gross profit margin for the three months ended September 30, 2023 increased to 18.1% from 17.1% in the same period in 2022 . The increase in gross profit margin was primarily attributable to a mix shift of higher gross margin shrimp and other frozen food sales realized by our centralized purchasing program and the exit of one of our lower margin chicken processing businesses, partially offset by the deflationary pressure in Meat and Poultry. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses decreased by $5.7 million, or 10.5%, for the three months ended September 30, 2023 primarily due to a decrease of $3.9 million in professional fees and $0.8 million of delivery-related costs, partially offset by higher payroll and related labor costs. Distribution, selling and administrative expenses as a percentage of net revenue decreased to 17.4% for the three months ended September 30, 2023 from 18.2% in the same period in 2022, primarily due to lower professional fees offset by increased headcount. Interest Expense Interest expense for the three months ended September 30, 2023 increased by $0.4 million, or 19.4% , compared to the three months ended September 30, 2022, primarily due to a sharply higher interest-rate environment. Average floating interest rates on our floating-rate debt for the three months ended September 30, 2023 increased by approximately 3.1% on our line of credit and 3.1% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2022. Our average daily line of credit balance decreased by $19.1 million, or 32.6%, to $39.4 million for the three months ended September 30, 2023 from $58.5 million for the three months ended September 30, 2022, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5.1 million, or 4.5%, to $108.0 million for the three months ended September 30, 2023 from $113.1 million for the three months ended September 30, 2022. 24 Income Tax Expense (Benefit) Income tax benefit was $36,000 for the three months ended September 30, 2023, compared to an income tax benefit of $0.7 million for the three months ended September 30, 2022, primarily due to an increase in income before income taxes, permanent differences and state income taxes during the current period. Net Income (Loss) Attributable to HF Foods Group Inc. Net income attributable to HF Foods Group Inc. was $1.9 million for the three months ended September 30, 2023 , compared to net loss of $3.9 million for the three months ended September 30, 2022. The increase of $5.7 million, or 148.8% , is primarily due to the decreased distribution, selling, and administrative costs, the $1.7 million change in the fair value of interest rate swaps, partially offset by lower gross profit, higher interest expense and decreased tax benefit as described above. EBITDA and Adjusted EBITDA The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure: Three Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % Net (loss) income $ 1,974 $ (3,894) $ 5,868 NM Interest expense 2,715 2,274 441 19.4% Income tax expense (36) (672) 636 (94.6)% Depreciation and amortization 6,422 6,386 36 0.6% EBITDA 11,075 4,094 6,981 170.5% Lease guarantee expense (95) (58) (37) 63.8% Change in fair value of interest rate swap contracts (1,984) (284) (1,700) NM Stock-based compensation expense 757 162 595 NM Business transformation costs (1) 105 — 105 NM Acquisition and integration costs and other (2) 146 71 75 105.6% Adjusted EBITDA $ 10,004 $ 3,985 $ 6,019 151.0% _________________ NM Not meaningful (1) Represents non-recurring costs associated with the launch of strategic projects including supply chain management improvements and technology infrastructure initiatives. (2) Includes non-recurring contested proxy and related legal and consulting costs for the three months ended September 30, 2023. Adjusted EBITDA was $10.0 million for the three months ended September 30, 2023, a decrease of $6.0 million, or 151.0%, compared to $4.0 million for the three months ended September 30, 2022. The increase in Adjusted EBITDA was attributable to the lower distribution, selling and administrative costs. 25 Results of Operations Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022 The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2023 and 2022 . The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Nine Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % Net revenue $ 867,620 $ 878,568 $ (10,948) (1.2)% Cost of revenue 715,857 723,778 (7,921) (1.1)% Gross profit 151,763 154,790 (3,027) (2.0)% Distribution, selling and administrative expenses 154,013 140,840 13,173 9.4% (Loss) income from operations (2,250) 13,950 (16,200) NM Interest expense 8,430 5,101 3,329 65.3% Other income (845) (1,401) 556 (39.7)% Change in fair value of interest rate swap contracts (2,094) (850) (1,244) 146.4% Lease guarantee expense (305) 5,831 (6,136) NM (Loss) income before income taxes (7,436) 5,269 (12,705) (241.1)% Income tax (benefit) expense (2,053) 1,529 (3,582) NM Net (loss) income and comprehensive (loss) income (5,383) 3,740 (9,123) (243.9)% Less: net (loss) income attributable to noncontrolling interests (484) (74) (410) 554.1 % Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc. $ (4,899) $ 3,814 $ (8,713) (228.4)% The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated: Nine Months Ended September 30, 2023 2022 Net revenue 100.0 % 100.0 % Cost of revenue 82.5 % 82.4 % Gross profit 17.5 % 17.6 % Distribution, selling and administrative expenses 17.8 % 16.0 % (Loss) income from operations (0.3) % 1.6 % Interest expense 1.0 % 0.6 % Other income, net (0.1) % (0.2) % Change in fair value of interest rate swap contracts (0.2) % (0.1) % Lease guarantee expense — % 0.7 % (Loss) income before income taxes (1.0) % 0.6 % Income tax (benefit) expense (0.2) % 0.2 % Net (loss) income and comprehensive (loss) income (0.8) % 0.4 % Less: net income attributable to noncontrolling interests — % — % Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc. (0.8) % 0.4 % 26 Net Revenue Net revenue for the nine months ended September 30, 2023 decreased by $10.9 million, or 1.2%, compared to the same period in 2022. This decrease was attributable to the $24.8 million decrease in Meat and Poultry revenue, compared to the same period in 2022, driven by deflationary pricing in poultry, as well as a $9.4 million decrease in Packaging and Other due to lower volume, partially offset by an increase of $7.4 million in Commodity revenue due to higher volume as well as the Seafood revenue generated due to the Sealand Food, Inc. acquisition (the “Sealand Acquisition”). Gross Profit Gross profit was $151.8 million for the nine months ended September 30, 2023 compared to $154.8 million in the same period in 2022 , a decrease of $3.0 million, or 2.0% . The gross profit decrease was primarily attributable to decreases in Meat and Poultry, Packaging and Other, partially offset by the additional Seafood revenue generated due to the Sealand Acquisition and increased Commodity revenue. During the nine months ended September 30, 2023, poultry pricing came down from the elevated levels we benefited from during the same period in 2022. Gross profit margin for the first nine months of 2023 remained relatively flat at 17.5%. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses increased by $13.2 million, or 9.4%, primarily due to an increase of $5.1 million in payroll and related labor costs, inclusive of the additional costs due to the Sealand Acquisition, and an increase of $1.9 million in insurance related costs. Professional fees increased $1.6 million to $18.7 million for the nine months ended September 30, 2023 , from $17.1 million for the nine months ended September 30, 2022. In addition, the Company recognized asset impairment of $1.2 million related to the exit of our chicken processing facility. Distribution, selling and administrative expenses as a percentage of net revenue increased to 17.8% for the nine months ended September 30, 2023 from 16.0% in the same period in 2022, primarily due to increased headcount and the higher expense described above. Interest Expense Interest expense for the nine months ended September 30, 2023 increased by $3.3 million or 65.3% , compared to the nine months ended September 30, 2022, primarily due to a sharply higher interest-rate environment. Average floating interest rates on our floating-rate debt for the nine months ended September 30, 2023 increased by approximately 3.9% on the line of credit and 3.9% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2022. Our average daily line of credit balance decreased by $12.3 million, or 23.0%, to $41.2 million for the nine months ended September 30, 2023 from $53.5 million for the nine months ended September 30, 2022, and our average daily JPMorgan Chase mortgage-secured term loan balance increased by $10.7 million, or 10.9%, to $109.3 million for the nine months ended September 30, 2023 from $98.5 million for the nine months ended September 30, 2022. Income Tax (Benefit) Expense Income tax benefit of $2.1 million for the nine months ended September 30, 2023, compared to income tax expense of $1.5 million for the nine months ended September 30, 2022, primarily due to losses from operations during the nine months ended September 30, 2023. Net (Loss) Income Attributable to HF Foods Group Inc. Net loss attributable to HF Foods Group Inc. was $4.9 million for the nine months ended September 30, 2023 , compared to net income of $3.8 million for the nine months ended September 30, 2022. The decrease of $8.7 million, or 228.4% , is primarily due to the increased distribution, selling, and administrative costs and interest expense described above, partially offset by the decrease of $6.1 million in lease guarantee expense and the decrease of $1.2 million change in fair value of interest rate swaps. 27 EBITDA and Adjusted EBITDA The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure: Nine Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % Net (loss) income $ (5,383) $ 3,740 $ (9,123) NM Interest expense 8,430 5,101 3,329 65.3% Income tax (benefit) expense (2,053) 1,529 (3,582) NM Depreciation and amortization 19,551 18,245 1,306 7.2% EBITDA 20,545 28,615 (8,070) (28.2)% Lease guarantee expense (305) 5,831 (6,136) NM Change in fair value of interest rate swap contracts (2,094) (849) (1,245) 146.6% Stock-based compensation expense 2,605 673 1,932 NM Business transformation costs (1) 223 — 223 NM Acquisition, integration costs and other (2) 1,850 1,130 720 63.7% Asset impairment charges 1,200 422 778 184.4% Adjusted EBITDA $ 24,024 $ 35,822 $ (11,798) (32.9)% _________________ NM Not meaningful (1) Represents non-recurring costs associated with the launch of strategic projects including supply chain management improvements and technology infrastructure initiatives. (2) Includes non-recurring contested proxy and related legal and consulting costs for the nine months ended September 30, 2023. During the three months ended September 30, 2023, we identified non-recurring charges related to our contested proxy and related legal defense which occurred in prior periods. Adjusted EBITDA was $24.0 million for the nine months ended September 30, 2023, a decrease of $11.8 million or 32.9%, compared to $35.8 million for the nine months ended September 30, 2022. The decrease in Adjusted EBITDA was attributable to the lower gross profit and higher distribution, selling and administrative costs. Liquidity and Capital Resources As of September 30, 2023, we had cash of approximately $14.3 million, checks issued not presented for payment of $6.9 million and access to approximately $48.6 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation. We have funded working capital and other capital requirements primarily by cash flow from operations and bank loans. Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and to service debts. We believe that our cash flow generated from operations is sufficient to meet our normal working capital needs for at least the next twelve months. However, our ability to repay our current obligations will depend on the future realization of our current assets. Management has considered the historical experience, the economy, the trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of September 30, 2023. We are party to an amortizing IRS contract with J.P. Morgan Chase Bank for an initial notional amount of $120.0 million, expiring in March 2028, as a means to partially hedge our existing floating rate loans exposure. Pursuant to the agreement, we will pay the swap counterparty a fixed rate of 4.11% in exchange for floating payments based on CME Term SOFR. 28 Effective as of April 20, 2023, we and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023. The Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company, making a payment to the Company in the sum of $9.25 million. The full terms of the settlement of the Delaware Action were incorporated into the long-form settlement agreement, which is subject to approval of the Court of Chancery. On September 8, 2023, the Court of Chancery approved the proposed settlement and an application by Bishop’s counsel for an award of attorneys’ fees and expenses. Subsequent to September 30, 2023, on October 16, 2023, after approval of the settlement had become final, the Ni Defendants paid the Company $1.5 million of the Settlement Amount. As of November 9, 2023, the Ni Defendants had not yet paid the Company the balance of the Settlement Amount ($7.75 million) due under the Settlement Agreement. The Company and the Ni Defendants are in discussions regarding the timing and form of payment of the balance owed by the Ni Defendants and the Company intends to take all necessary actions to enforce the terms of the Settlement Agreement. Please refer to Note 14 - Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information. Management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months. However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, competitive pricing in the foodservice distribution industry, and our bank and suppliers being able to provide continued support. If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt. As of September 30, 2023, we have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. The following table summarizes cash flow data for the nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, Change ($ in thousands) 2023 2022 Amount % Net cash provided by operating activities $ 20,624 $ 6,932 $ 13,692 197.5% Net cash used in investing activities (2,595) (50,234) 47,639 (94.8)% Net cash (used in) provided by financing activities (28,018) 46,316 (74,334) NM Net (decrease) increase in cash and cash equivalents $ (9,989) $ 3,014 $ (13,003) NM ____________________ NM - Not meaningful Operating Activities Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes. Net cash provided by operating activities increased by $13.7 million, or 198%, primarily due to the timing of working capital outlays. During the three months ended September 30, 2023, we implemented new enterprise accounting and finance applications, which modified our accounts receivable, accounts payable and treasury processes. As a result of this transformation, there were temporary delays in September that affected our working capital activities. Investing Activities Net cash used in investing activities decreased by $47.6 million, or 95%, primarily due to payments related to acquisitions in the nine months ended September 30, 2022. 29 Financing Activities Net cash (used in) provided by financing activities decreased by $74.3 million to $28.0 million used in financing activities primarily due to the change in the net impact of our line of credit from net proceeds of $16.2 million for the nine months ended September 30, 2022 to a net repayment of $5.4 million for the nine months ended September 30, 2023, as well as a decrease of $15.1 million in checks issued not presented for payment for the nine months ended September 30, 2023 compared to an increase of $0.7 million for the nine months ended September 30, 2022 related to the changes to certain processes described above. In addition, the nine months ended September 30, 2022 included proceeds from long-term debt of $46.0 million due to the increase of our mortgage secured term loan. Critical Accounting Policies and Estimates We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months and nine months ended September 30, 2023. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.