What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-09 · 72 added, 176 removed, 154 unchanged (62% of the section changed)

2 unchanged sentences

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.

(“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.

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• 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;

• Failure to retain our senior management and other key personnel, particularly our CEO, President and COO, CFO and General Counsel and CCO;

• Our ability to attract, train and retain employees;

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• 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;

• Failure to acquire other distributors or wholesalers and enlarge our customer base;

• Scarcity of and competition for acquisition opportunities;

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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.

HF Foods 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.

In 2022, HF Foods acquired two frozen seafood suppliers, expanding its distribution network in Illinois, Texas and along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

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.

Capitalizing on our deep understanding of the Chinese culture, we have become a trusted partner serving Asian 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 restaurants in need of high-quality and specialized food ingredients at competitive prices.

Transformation Plan

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• 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.

We began the roll out of our centralized purchasing program with seafood products and have yielded significant positive results with respect to margin expansion for the product category.

We are now focusing on expanding the program to other categories.

• Fleet and Transportation:

We will be establishing a national fleet maintenance program.

We have established 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.

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Financial Overview

Three Months Ended September 30, Change Nine Months Ended September 30, Change

($ in thousands) 2023 2022 Amount % 2023 2022 Amount %

Three Months Ended March 31, Change

($ in thousands) 2024 2023 Amount %

Net revenue $ 295,654 $ 293,855 $ 1,799 0.6 %

Net income (loss) $ 1,974 $ (3,894) $ 5,868 NM $ (5,383) $ 3,740 $ (9,123) NM

Net loss $ (559) $ (5,797) $ 5,238 NM

Adjusted EBITDA $ 8,702 $ 5,749 $ 2,953 51.4 %

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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

How to Assess HF Foods’ 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.

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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:

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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

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)%

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,

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) %

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 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 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.

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)

Acquisition and integration costs and other (2)

146 71 75 105.6%

Adjusted EBITDA $ 10,004 $ 3,985 $ 6,019 151.0%

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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.

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 .

Comparison of Three Months Ended March 31, 2024 to Three Months Ended March 31, 2023

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2024 and 2023 .

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 %

Three Months Ended March 31,

($ in thousands) 2024 2023 Change

Net revenue $ 295,654 $ 293,855 $ 1,799

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Distribution, selling and administrative expenses 50,496 52,929 (2,433)

(Loss) income from operations (2,250) 13,950 (16,200) NM

Loss from operations (85) (2,757) 2,672

Interest expense 2,834 2,868 (34)

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Change in fair value of interest rate swap contracts (1,970) 2,746 (4,716)

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)%

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.

Lease guarantee income (115) (120) 5

Loss before income taxes (740) (8,023) 7,283

Income tax benefit (181) (2,226) 2,045

Net loss and comprehensive loss (559) (5,797) 5,238

net income attributable to noncontrolling interests 135 136 (1)

Net loss and comprehensive loss attributable to HF Foods Group Inc.

$ (694) $ (5,933) $ 5,239

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,

Three Months Ended March 31,

Net revenue 100.0 % 100.0 %

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Distribution, selling and administrative expenses 17.1 % 18.0 %

(Loss) income from operations (0.3) % 1.6 %

Loss from operations — % (0.9) %

Interest expense 0.9 % 1.0 %

Other income, net (0.1) % (0.2) %

Other income — % (0.1) %

Change in fair value of interest rate swap contracts (0.7) % 0.9 %

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 %

Lease guarantee income — % — %

Loss before income taxes (0.3) % (2.7) %

Income tax benefit (0.1) % (0.8) %

Net loss and comprehensive loss (0.2) % (1.9) %

net income attributable to noncontrolling interests — % 0.1 %

Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc.

Net loss and comprehensive loss attributable to HF Foods Group Inc.

(0.2) % (2.0) %

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 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%.

Net revenue for the three months ended March 31, 2024 increased by $1.8 million, or 0.6%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation and improved pricing in certain categories, partially offset by the $2.7 million loss in revenue resulting from the exit of our chicken processing businesses.

Gross profit was $50.4 million for three months ended March 31, 2024 compared to $50.2 million in the same period in 2023 , an increase of $0.2 million, or 0.5%.

Gross profit margin for the three months ended March 31, 2024 was flat at 17.1% in the same period in 2023 .

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.

Distribution, selling and administrative expenses decreased by $2.4 million, or 4.6%, for the three months ended March 31, 2024 primarily due to a decrease of $2.8 million in professional fees, partially offset by higher payroll and related labor costs.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 17.1% for the three months ended March 31, 2024 from 18.0% in the same period in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased headcount.

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.

Interest expense for the three months ended March 31, 2024 of $2.8 million remained consistent compared to the three months ended March 31, 2023, having decreased slightly from $2.9 million.

Average floating interest rates on our floating-rate debt for the three months ended March 31, 2024 increased by approximately 0.8% on our line of credit and 0.8% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $2.0 million, or 4.8%, to $44.7 million for the three months ended March 31, 2024 from $42.6 million for the three months ended March 31, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.6%, to $105.5 million for the three months ended March 31, 2024 from $110.5 million for the three months ended March 31, 2023.

Income Tax Benefit

Income tax benefit was $181,000 for the three months ended March 31, 2024, compared to an income tax benefit of $2.2 million for the three months ended March 31, 2023, primarily due to a decrease in loss before income taxes, permanent differences and state income taxes during the current period.

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.

Net loss attributable to HF Foods Group Inc.

was $0.7 million for the three months ended March 31, 2024 , compared to net loss of $5.9 million for the three months ended March 31, 2023.

The improvement of $5.2 million, or 88.3% , is primarily due to the impact from changes in the fair value of interest rate swap and the decreased distribution, selling, and administrative costs.

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

Three Months Ended March 31,

($ in thousands) 2024 2023 Change

Net loss $ (559) $ (5,797) $ 5,238

Interest expense 2,834 2,868 (34)

Income tax (benefit) expense (2,053) 1,529 (3,582) NM

Income tax benefit (181) (2,226) 2,045

Depreciation and amortization 6,676 6,689 (13)

EBITDA 8,770 1,534 7,236

Lease guarantee expense (305) 5,831 (6,136) NM

Lease guarantee income (115) (120) 5

Change in fair value of interest rate swap contracts (1,970) 2,746 (4,716)

Stock-based compensation expense 2,605 673 1,932 NM

Stock-based compensation expense 738 1,096 (358)

Business transformation costs (1)

Acquisition, integration costs and other (2)

Other non-routine expense (2)

306 449 (143)

Asset impairment charges 1,200 422 778 184.4%

Adjusted EBITDA $ 8,702 $ 5,749 $ 2,953

_________________

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.

(2) Includes contested proxy and related legal and consulting costs and facility closure 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.

As of March 31, 2024, we had cash of approximately $18.2 million, checks issued not presented for payment of $8.7 million and access to approximately $40.9 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.

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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.

We are party to an amortizing interest rate swap contract with JPMorgan Chase 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.

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.

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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 %

As of March 31, 2024, 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 three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(In thousands) 2024 2023 Change

Net cash provided by operating activities $ 7,055 $ 12,570 $ (5,515)

Net cash used in investing activities (2,585) (629) (1,956)

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

Net cash used in financing activities (1,487) (18,753) 17,266

Net increase (decrease) in cash and cash equivalents $ 2,983 $ (6,812) $ 9,795

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.

Net cash provided by operating activities decreased by $5.5 million, or 44%, primarily due to the timing of working capital outlays partially offset by improved operating loss.

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.

Net cash used in investing activities increased by $2.0 million, or 311%, primarily due to increased capital project spend in the three months ended March 31, 2024.

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.

Net cash used in financing activities decreased by $17.3 million to $1.5 million used in financing activities primarily due to checks issued not presented for payment activity for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, as well as net line of credit activity.

Critical Accounting Policies and Estimates

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Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 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.

Additionally, see Note 6 - Goodwill and Acquired Intangible Assets of our unaudited condensed consolidated financial statements on this Form 10-Q for disclosure regarding the Company’s at risk single reporting unit.

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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis