What changed in this filing

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Item 1. Financial Statements

2024-11-12 compared with 2024-08-09 · 151 added, 99 removed, 512 unchanged (33% of the section changed)

4 unchanged sentences

(In thousands, except share data)

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

CURRENT ASSETS:

40 unchanged sentences

100,000,000 shares authorized;

54,668,169 and 54,153,391 shares issued and 52,670,746 and 52,155,968 shares outstanding as of June 30, 2024 and December 31, 2023, respectively

54,734,585 and 54,153,391 shares issued and 52,737,162 and 52,155,968 shares outstanding as of September 30, 2024 and December 31, 2023, respectively

Treasury stock, at cost;

1,997,423 shares as of June 30, 2024 and December 31, 2023

1,997,423 shares as of September 30, 2024 and December 31, 2023

( 7,750 ) ( 7,750 )

11 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended June 30, Six Months Ended June 30,

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

2024 2023 2024 2023

9 unchanged sentences

Interest expense 2,644 2,715 8,597 8,430

Other expense (income), net 3,466 ( 127 ) 3,372 ( 355 )

Other (income) expense, net ( 332 ) ( 490 ) 3,040 ( 845 )

Change in fair value of interest rate swap contracts 3,290 ( 1,984 ) 959 ( 2,094 )

Lease guarantee income — ( 95 ) ( 5,548 ) ( 305 )

INCOME (LOSS) BEFORE INCOME TAXES 1,834 ( 1,351 ) 1,094 ( 9,374 )

Income tax expense (benefit) 1,599 209 1,418 ( 2,017 )

NET INCOME (LOSS) AND COMPREHENSIVE LOSS 235 ( 1,560 ) ( 324 ) ( 7,357 )

(LOSS) INCOME BEFORE INCOME TAXES ( 5,091 ) 1,938 ( 3,997 ) ( 7,436 )

Income tax (benefit) expense ( 1,254 ) ( 36 ) 164 ( 2,053 )

NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ( 3,837 ) 1,974 ( 4,161 ) ( 5,383 )

net income (loss) attributable to noncontrolling interests 103 90 456 ( 484 )

NET INCOME (LOSS) AND COMPREHENSIVE LOSS ATTRIBUTABLE TO HF FOODS GROUP INC.

NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC.

$ ( 3,940 ) $ 1,884 $ ( 4,617 ) $ ( 4,899 )

EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.00 $ ( 0.02 ) $ ( 0.01 ) $ ( 0.13 )

EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.00 $ ( 0.02 ) $ ( 0.01 ) $ ( 0.13 )

(LOSS) EARNINGS PER COMMON SHARE - BASIC $ ( 0.07 ) $ 0.03 $ ( 0.09 ) $ ( 0.09 )

(LOSS) EARNINGS PER COMMON SHARE - DILUTED $ ( 0.07 ) $ 0.03 $ ( 0.09 ) $ ( 0.09 )

WEIGHTED AVERAGE SHARES - BASIC 52,726,683 54,142,396 52,490,321 54,005,010

5 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

23 unchanged sentences

Purchase of property and equipment ( 9,435 ) ( 3,495 )

Proceeds from sale of property and equipment 12 900

Net cash used in investing activities ( 9,423 ) ( 2,595 )

6 unchanged sentences

Repayment of obligations under finance leases ( 2,597 ) ( 1,974 )

Cash distribution to shareholders — ( 884 )

Net cash provided by (used in) financing activities 8,935 ( 28,018 )

6 unchanged sentences

Dissolution of noncontrolling interests 772 —

Capital expenditures included in accounts payable 607 —

Note receivable related to property and equipment sales — 300

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

23 unchanged sentences

Balance at June 30, 2023 54,086,164 $ 5 — $ — $ 600,030 $ ( 313,297 ) $ 286,738 $ 3,862 $ 290,600

Net income — — — — — 1,884 1,884 90 1,974

Issuance of common stock pursuant to equity compensation plan 84,196 — — — — — — — —

Shares withheld for tax withholdings on vested awards ( 17,457 ) — — — ( 91 ) — ( 91 ) — ( 91 )

Distribution to shareholders — — — — — — — ( 884 ) ( 884 )

Stock-based compensation — — — — 757 — 757 — 757

Balance at September 30, 2023 54,152,903 $ 5 — — $ 600,696 $ ( 311,413 ) $ 289,288 $ 3,068 $ 292,356

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

Common Stock Treasury Stock Additional

Capital Accumulated Deficit Total Shareholders’

Equity Attributable to

HF Foods Group Inc.

Noncontrolling

Interests Total

Shareholders’

Shares Amount

Balance at January 1, 2024 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,094 $ ( 308,688 ) $ 286,661 $ 1,322 $ 287,983

8 unchanged sentences

Balance at June 30, 2024 54,668,169 $ 5 1,997,423 $ ( 7,750 ) $ 603,454 $ ( 309,365 ) $ 286,344 $ 2,447 $ 288,791

Net (loss) income — — — — — ( 3,940 ) ( 3,940 ) 103 ( 3,837 )

Issuance of common stock pursuant to equity compensation plan 82,713 — — — — — — — —

Shares withheld for tax withholdings on vested awards ( 16,297 ) — — — ( 45 ) — ( 45 ) — ( 45 )

Stock-based compensation — — — — 701 — 701 — 701

Balance at September 30, 2024 54,734,585 $ 5 1,997,423 $ ( 7,750 ) $ 604,110 $ ( 313,305 ) $ 283,060 $ 2,550 $ 285,610

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

25 unchanged sentences

(“AnHeart”), for which the Company was not the primary beneficiary and therefore did not consolidate.

During the three months ended June 30, 2024, the Company assumed the lease for which AnHeart was a lessee and the Company was a guarantor, and as such, it no longer recognizes AnHeart as a VIE as of June 30, 2024.

Effective April 30, 2024, the Company assumed the lease for which AnHeart was a lessee and the Company was a guarantor, and as such, it no longer recognizes AnHeart as a VIE as of September 30, 2024.

See Note 13 - Commitments and Contingencies for additional information on AnHeart.

2 unchanged sentences

In addition, the amounts attributable to the net income (loss) of those noncontrolling interests are reported separately in the condensed consolidated statements of operations and comprehensive loss.

As of June 30, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following:

As of September 30, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following:

($ in thousands) Ownership of

noncontrolling interest at June 30, 2024

June 30, 2024 December 31, 2023

noncontrolling interest at September 30, 2024

September 30, 2024 December 31, 2023

HF Foods Industrial, LLC ("HFFI") (a)

— % $ — $ ( 759 )

N/A $ — $ ( 759 )

Min Food, Inc.

3 unchanged sentences

_______________

(a) During the quarter ended June 30, 2024, upon dissolution of HFFI, the Company assumed HFFI’s remaining assets and liabilities.

(a) During the nine months ended September 30, 2024, upon dissolution of HFFI, the Company assumed HFFI’s remaining assets and liabilities.

In accordance with ASC Topic 810 (“ASC 810”), Consolidation, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions.

6 unchanged sentences

Recent Accounting Pronouncements

In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280):

In November 2024, the FASB issued Accounting Standards Update (ASU) 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses.

The guidance requires additional disclosure of certain amounts included in the expense captions presented on the Statement of Operations as well as disclosures about selling expenses.

This guidance is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027.

The Company is in the process of assessing the impact the adoption of this guidance will have on the Company’s financial statement disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires enhanced disclosures about segment expenses on an annual and interim basis.

2 unchanged sentences

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires public entities to disclose specific categories in its annual effective tax rate reconciliation and disaggregated information about significant reconciling items by jurisdiction and by nature.

ASU 2023-09 also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions.

Improvements to Income Tax Disclosures, which requires public entities to disclose specific categories in its annual effective tax rate reconciliation and disaggregated information about significant reconciling items by jurisdiction and by nature.

This guidance also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions.

This guidance is effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively.

3 unchanged sentences

The following table presents the Company's net revenue disaggregated by principal product categories:

Three Months Ended June 30, Six Months Ended June 30,

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

($ in thousands) 2024 2023 2024 2023

8 unchanged sentences

Accounts receivable, net consisted of the following:

(In thousands) June 30, 2024 December 31, 2023

(In thousands) September 30, 2024 December 31, 2023

Accounts receivable $ 53,805 $ 49,643

2 unchanged sentences

Movement of allowance for expected credit losses was as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2024 2023

4 unchanged sentences

Prepaid expenses and other current assets consisted of the following:

(In thousands) June 30, 2024 December 31, 2023

(In thousands) September 30, 2024 December 31, 2023

Prepaid expenses $ 4,531 $ 4,591

3 unchanged sentences

Property and equipment, net consisted of the following:

(In thousands) June 30, 2024 December 31, 2023

(In thousands) September 30, 2024 December 31, 2023

Automobiles (1)

1 unchanged sentence

Buildings (2)

63,045 63,045

Building improvements 22,677 22,014

7 unchanged sentences

_________________

(1) The cost and accumulated depreciation of property and equipment related to finance leases was $ 31.0 million and $ 12.3 million at June 30, 2024 and $ 22.2 million and $ 10.3 million at December 31, 2023, which primarily relates to Automobiles.

During the six months ended June 30, 2024, the Company entered into finance leases for automobiles which mature in 4 to 6 years and have a weighted average discount rate of 6.6 %.

The total future minimum lease payments under finance leases as of June 30, 2024 is $ 30.1 million.

As of June 30, 2024, the Company had additional leases that had not yet commenced which totaled $ 16.9 million in future minimum lease payments.

Depreciation expense was $ 2.5 million and $ 2.4 million for the three months ended June 30, 2024 and 2023, respectively.

Depreciation expense was $ 5.1 million and $ 5.0 million for the six months ended June 30, 2024 and 2023, respectively.

During the three months ended June 30, 2023, the Company impaired machinery and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the condensed consolidated statements of operations and comprehensive income.

(1) The cost and accumulated depreciation of property and equipment related to finance leases was $ 32.4 million and $ 13.1 million at September 30, 2024 and $ 22.2 million and $ 10.3 million at December 31, 2023, which primarily relates to Automobiles.

During the nine months ended September 30, 2024, the Company entered into finance leases for automobiles which mature in 4 to 6 years and have a weighted average discount rate of 6.6 %.

The total future minimum lease payments under finance leases as of September 30, 2024 is $ 31.5 million.

As of September 30, 2024, the Company had additional automobile leases that had not yet commenced which totaled $ 16.2 million in future minimum lease payments.

(2) The Company entered into a finance lease on September 30, 2024 for a new Atlanta, GA based distribution center which will commence during 2025 and totaled $ 15.8 million in future minimum lease payments over 10 years.

Depreciation expense was $ 2.6 million and $ 2.4 million for the three months ended September 30, 2024 and 2023, respectively.

Depreciation expense was $ 7.7 million and $ 7.3 million for the nine months ended September 30, 2024 and 2023, respectively.

During the nine months ended September 30, 2023, the Company impaired machinery and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the condensed consolidated statements of operations and comprehensive income.

Long-term investments consisted of the following:

(In thousands) Ownership as of June 30,

2024 June 30, 2024 December 31, 2023

(In thousands) Ownership as of September 30,

2024 September 30, 2024 December 31, 2023

Asahi Food, Inc.

4 unchanged sentences

The investment in Asahi is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee.

The Company determined there was no impairment as of June 30, 2024 for these investments.

The Company determined there was no impairment as of September 30, 2024 for these investments.

Accrued expenses and other liabilities consisted of the following:

(In thousands) June 30, 2024 December 31, 2023

(In thousands) September 30, 2024 December 31, 2023

Accrued compensation $ 6,090 $ 7,941

6 unchanged sentences

The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the dates indicated:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

14 unchanged sentences

(In thousands) Level 1 Level 2 Level 3 Carrying Value

June 30, 2024

September 30, 2024

Fixed rate debt:

Bank of America $ — $ — $ 116 $ 126

Other finance institutions — — 4 4

Variable rate debt:

15 unchanged sentences

The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

No adjustments to fair value from the write-down of asset values due to impairment were made during the three and six months ended June 30, 2024 and 2023.

There were no assets carried at nonrecurring fair value at June 30, 2024 and December 31, 2023.

No adjustments to fair value from the write-down of asset values due to impairment were made during the three and nine months ended September 30, 2024 and 2023.

There were no assets carried at nonrecurring fair value at September 30, 2024 and December 31, 2023.

Note 6 - Goodwill and Acquired Intangible Assets

The Company performed a quantitative goodwill impairment assessment as of December 31, 2023, as a result of the Company’s results of operations compared to previous forecasts, combined with the level of the Company’s stock price.

The fair value was determined using an average of the income approach, comparable public company analysis, and comparable acquisitions analysis.

The fair value of the reporting unit exceeded the carrying value, and therefore the Company concluded no impairment was required to be recorded during the year ended December 31, 2023.

The annual goodwill impairment test in 2023 resulted in an estimated fair value that exceeded carrying value by approximately 10% at December 31, 2023.

The most critical assumptions in determining fair value using the income approach were projections of future cash flows such as forecasted revenue growth rates, gross profit margins, and the discount rate.

There is only one reporting unit at September 30, 2024 and December, 31, 2023.

The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicated goodwill might be impaired.

The Company performed a quantitative goodwill impairment assessment as of December 31, 2023, as a result of the Company’s results of operations during 2023 compared to previous forecasts, combined with the level of the Company’s stock price.

The fair value of the reporting unit was determined using an average of the income approach, comparable public company analysis, and comparable acquisitions analysis.

The annual goodwill impairment test in 2023 resulted in an estimated fair value that exceeded carrying value by approximately 10 % at December 31, 2023, and therefore, the Company concluded no impairment was required to be recorded during the year ended December 31, 2023.

As of September 30, 2024, the Company concluded that a triggering event occurred due to a sustained decline in the Company’s stock price since December 31, 2023, which required interim testing for goodwill impairment in accordance with ASC 350.

Accordingly, the Company performed a quantitative assessment as of September 30, 2024.

The fair value of the reporting unit was determined using an average of the income approach, comparable public company analysis, and comparable acquisitions analysis.

The fair value of the reporting unit exceeded the carrying value by approximately 1 %, and therefore the Company concluded no impairment was required to be recorded during the period.

In calculating the fair value of the reporting unit, the Company considered the resulting implied enterprise value control premium compared to recent control premiums paid in the industry, and also considered the lack of liquidity in its common stock.

The Company’s common stock is fairly thinly traded, with a higher level of internal stockholders than its peers, and no major analyst coverage.

As a result, the implied value from the traded stock price is based on limited investment public interest.

The Company determined that the implied control premium was reasonable in light of these recent comparable transactions and considering the lack of liquidity in its common stock, which corroborates the Company’s fair value estimate.

The market approaches were primarily impacted by an enterprise value multiple of EBITDA.

A significant change in these assumptions or a sustained decline in the Company’s stock price could result in an interim impairment test and/or potential goodwill impairment in the future.

The Company determined that there were no events or circumstances during the six months ended June 30, 2024 that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Goodwill was $ 85.1 million as of June 30, 2024 and December 31, 2023.

A significant change in these assumptions or a further sustained decline in the Company’s stock price could result in potential goodwill impairment in the future, and such impairment could be material.

Goodwill was $ 85.1 million as of September 30, 2024 and December 31, 2023.

Acquired Intangible Assets

The components of the intangible assets are as follows:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(In thousands) Gross

7 unchanged sentences

Total $ 233,365 $ ( 67,769 ) $ 165,596 $ 233,365 $ ( 55,559 ) $ 177,806

Amortization expense for acquired intangible assets was $ 4.1 million for the three months ended June 30, 2024 and 2023.

Amortization expense for acquired intangible assets was $ 8.1 million for the six months ended June 30, 2024 and 2023.

Amortization expense for acquired intangible assets was $ 4.1 million for the three months ended September 30, 2024 and 2023.

Amortization expense for acquired intangible assets was $ 12.2 million for the nine months ended September 30, 2024 and 2023.

Note 7 - Derivative Financial Instruments

13 unchanged sentences

Hence, the fair value changes of these IRS contracts are accounted for and recognized as a change in fair value of interest rate swap contracts in the condensed consolidated statements of operations and comprehensive income (loss).

As of June 30, 2024, the Company determined that the fair values of the IRS contracts were $ 1.1 million in an asset position.

As of September 30, 2024, the Company determined that the fair values of the IRS contracts were $ 0.3 million in an asset position and $ 2.5 million in a liability position.

As of December 31, 2023, the fair values of the IRS contracts were $ 0.4 million in an asset position and $ 1.6 million in a liability position.

3 unchanged sentences

Note 8 - Debt

Long-term debt at June 30, 2024 and December 31, 2023 is summarized as follows:

Long-term debt at September 30, 2024 and December 31, 2023 is summarized as follows:

($ in thousands)

Bank Name Maturity Interest Rate at June 30, 2024

June 30, 2024 December 31, 2023

Bank Name Maturity Interest Rate at September 30, 2024

September 30, 2024 December 31, 2023

Bank of America (a)

18 unchanged sentences

Balloon payments of $ 2.2 million and $ 3.4 million are due at maturity in 2027 and 2029, respectively.

(c) Real estate term loan with a principal balance of $ 103.8 million as of June 30, 2024 and $ 106.3 million as of December 31, 2023 is secured by assets held by the Company and has a maturity date of January 2030.

(c) Real estate term loan with a principal balance of $ 102.5 million as of September 30, 2024 and $ 106.3 million as of December 31, 2023 is secured by assets held by the Company and has a maturity date of January 2030.

(d) Secured by vehicles.

The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants, including, but not limited to, a fixed charge coverage ratio and effective tangible net worth.

As of June 30, 2024, the Company was in compliance with its covenants.

As of September 30, 2024, the Company was in compliance with its covenants.

Credit Facility

The outstanding principal balance on the line of credit as of June 30, 2024 was $ 66.4 million and outstanding letters of credit amounted to $ 3.8 million leaving access to approximately $ 29.9 million in additional funds through our $ 100.0 million line of credit, subject to a borrowing base calculation.

On March 31, 2022, the Company amended the $ 100.0 million asset-secured revolving credit facility agreement, extending for five years , with a maturity date of November 4, 2027.

On February 6, 2024, the Company amended the agreement to (i) remove a cap on permitted indebtedness in respect of capital lease obligations, subject to certain enumerated conditions;

The outstanding principal balance on the line of credit as of September 30, 2024 was $ 66.9 million and outstanding letters of credit amounted to $ 5.8 million leaving access to approximately $ 27.3 million in additional funds through our $ 100.0 million line of credit, subject to a borrowing base calculation.

On March 31, 2022, the Company amended the $ 100.0 million asset-secured revolving credit facility agreement with JPMorgan Chase (the “JPM Credit Agreement”), extending it for five years , with a maturity date of November 4, 2027.

On February 6, 2024, the Company amended the JPM Credit Agreement to (i) remove a cap on permitted indebtedness in respect of capital lease obligations, subject to certain enumerated conditions;

(ii) create a reserve on the borrowing base, which will be reduced on a dollar-for-dollar basis once the Company has made expenditures in excess of such amount relating to the development and construction of certain real property, and which amounts shall be excluded from certain financial covenants under the JPM Credit Agreement and;

(iii) remove certain sublease income from various financial covenants.

On July 15, 2024, the Company again amended the JPM Credit Agreement to (i) increase the issuing bank sublimit to $ 10.0 million and;

(ii) modify the due date for a borrowing base certificate based on availability under the revolving credit facility.

Note 9 - Earnings (Loss) Per Share

4 unchanged sentences

Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

There were 37,084 and 967,779 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three months ended June 30, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

There were 1,354,908 and 620,402 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the six months ended June 30, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

There were 601,719 and 1,102,972 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three months ended September 30, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

There were 1,542,412 and 797,860 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the nine months ended September 30, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

The following table sets forth the computation of basic and diluted EPS:

Three Months Ended June 30, Six Months Ended June 30,

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

($ in thousands, except share and per share data) 2024 2023 2024 2023

12 unchanged sentences

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective income tax rate in the future.

As of June 30, 2024, the Company had no subsidiaries outside the U.S., as such, no foreign income tax was recorded.

For the three and six months ended June 30, 2024, the Company's effective income tax rate of 87.2 % and 129.6 %, respectively, differed from the federal statutory tax rate primarily as a result of discrete tax items, permanent differences and state income taxes.

The Company’s tax provision for the three and six months ended June 30, 2024 includes a discrete tax expense of $ 1.0 million related to the Company’s SEC settlement and $ 0.1 million tax expense related to stock-based compensation shortfalls.

Absent the discrete items, the estimated annual effective income tax rate from continuing operations for the three and six months ended June 30, 2024 was 25.5 % and 25.1 %, respectively.

For the three and six months ended June 30, 2023, the Company's effective income tax rate of ( 15.5 )% and 21.5 %, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

During the three months ended June 30, 2024, the Company dissolved one of its subsidiaries, HFFI.

The Company is in the process of determining the tax impact of the dissolution.

However, the Company does not expect the dissolution of HFFI to have a significant impact on the income tax provision as HFFI’s deferred tax assets were subject to a full valuation allowance.

As of September 30, 2024, the Company had no subsidiaries outside the U.S., as such, no foreign income tax was recorded.

For the three and nine months ended September 30, 2024, the Company's effective income tax rate of 24.6 % and ( 4.1 )%, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

The Company’s tax provision for the nine months ended September 30, 2024 includes a discrete tax expense of $ 1.0 million related to the Company’s SEC settlement.

Additionally, the Company’s tax provision for the three and nine months ended September 30, 2024 includes a discrete tax expense of $ 0.1 million and $ 0.2 million, respectively, related to stock-based compensation shortfalls.

For the three and nine months ended September 30, 2023, the Company's effective income tax rate of ( 1.9 )% and 27.6 %, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

Note 11 - Related Party Transactions

2 unchanged sentences

Xiao Mou Zhang (“Mr.

Zhang”), the Chief Executive Officer of the Company, and certain of his immediate family members (collectively greater than 10 % shareholders) have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

Zhang”), the Chief Executive Officer through October 24, 2024 and current member of the Board of Directors of the Company (see Note 14 - Subsequent Events to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information), and certain of his immediate family members have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

Zhang does not have any involvement in negotiations with any of the above-mentioned related parties.

3 unchanged sentences

Ni's four children, are collectively beneficial owners of more than 10 % of the outstanding shares of the Company’s common stock, and he and certain of his immediate family members have ownership interests in related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

The related party transactions as of June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 2024 and 2023 are identified as follows:

The related party transactions as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023 are identified as follows:

Related Party Sales, Purchases, and Lease Agreements

Below is a summary of purchases of goods and services from related parties recorded for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30, Six Months Ended June 30,

Below is a summary of purchases of goods and services from related parties recorded for the three and nine months ended September 30, 2024 and 2023:

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

(In thousands) Nature 2024 2023 2024 2023

3 unchanged sentences

(formerly “GA-GW Seafood, Inc.”) Trade — — — 37

(formerly “GA-GW Seafood, Inc.”) Trade N/A — N/A 37

7 unchanged sentences

Zhou Min Ni owns an equity interest in this entity.

Below is a summary of sales to related parties recorded for the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30, Six Months Ended June 30,

Enson Seafood GA, Inc.

is no longer considered a related party as of January 1, 2024 since Mr.

Zhou Min Ni disposed his equity interest in this entity.

Below is a summary of sales to related parties recorded for the three and nine months ended September 30, 2024 and 2023:

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

(In thousands) 2024 2023 2024 2023

24 unchanged sentences

In February 2021, the Company executed a new five-year operating lease agreement with Yoan Chang Trading Inc., effective January 1, 2021 and expiring on December 31, 2025.

Rent expense, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss), was $ 0.1 million and $ 0.1 million for the three months ended June 30, 2024 and 2023, respectively and $ 0.1 million and $ 0.2 million for the six months ended June 30, 2024 and 2023, respectively.

Rent expense, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss), was $ 0.1 million and $ 0.1 million for the three months ended September 30, 2024 and 2023, respectively and $ 0.2 million and $ 0.3 million for the nine months ended September 30, 2024 and 2023, respectively.

Beginning 2014, the Company leased a warehouse to Asahi Food, Inc.

1 unchanged sentence

A new commercial lease agreement for a period of one year was entered into, expiring February 28, 2021, with a total of four renewal periods with each term being one year .

Rental income was $ 36 thousand and $ 36 thousand for the three months ended June 30, 2024 and 2023, respectively and $ 72 thousand and $ 72 thousand for the six months ended June 30, 2024 and 2023, respectively.

Rental income was $ 0.04 million and $ 0.04 million for the three months ended September 30, 2024 and 2023, respectively and $ 0.1 million and $ 0.1 million for the nine months ended September 30, 2024 and 2023, respectively.

Rental income is included in other income in the condensed consolidated statements of operations and comprehensive income (loss).

1 unchanged sentence

Accounts Receivable - Related Parties, Net

Below is a summary of accounts receivable with related parties recorded as of June 30, 2024 and December 31, 2023, respectively:

(In thousands) June 30, 2024 December 31, 2023

Below is a summary of accounts receivable with related parties recorded as of September 30, 2024 and December 31, 2023, respectively:

(In thousands) September 30, 2024 December 31, 2023

(a) ABC Food Trading, LLC $ 97 $ 94

2 unchanged sentences

(formerly known as GA-GW Seafood, Inc.) 59 59

(formerly known as GA-GW Seafood, Inc.) N/A 59

(d) Fortune One Foods, Inc.

5 unchanged sentences

(b) The Company, through its subsidiary Mountain Food, LLC, owns an equity interest in this entity.

Zhou Min Ni owns an equity interest in this entity.

Zhou Min Ni disposed his equity interest in this entity.

Zhou Min Ni owns an equity interest in this entity indirectly through its parent company.

1 unchanged sentence

Zhou Min Ni’s family members, owns an equity interest in this entity.

The Company has reserved for 100 % of the accounts receivable for Enson Seafood GA, Inc.

as of June 30, 2024 and December 31, 2023.

The Company has reserved for 100 % of the accounts receivable due from Enson Seafood GA, Inc.

as of December 31, 2023.

During the nine months ended September 30, 2024 it was determined that Enson Seafood GA, Inc.

is no longer a related party due to Mr.

Ni having sold all of his equity interest to a third party.

All other accounts receivable from these related parties are current and considered fully collectible.

No additional allowance is deemed necessary as of June 30, 2024 and December 31, 2023.

No additional allowance is deemed necessary as of September 30, 2024 and December 31, 2023.

Accounts Payable - Related Parties

All the accounts payable to related parties are payable upon demand without interest.

Below is a summary of accounts payable with related parties recorded as of June 30, 2024 and December 31, 2023, respectively:

(In thousands) June 30, 2024 December 31, 2023

Below is a summary of accounts payable with related parties recorded as of September 30, 2024 and December 31, 2023, respectively:

(In thousands) September 30, 2024 December 31, 2023

(a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) $ 53 $ 379

7 unchanged sentences

On June 3, 2024, the Company’s shareholders approved an amendment to the 2018 Incentive Plan which increased the number of shares of the Company's common stock available for issuance under the 2018 Incentive Plan to 7,000,000 , an increase of 4,000,000 shares.

As of June 30, 2024, the Company had 1,065,174 time-based vesting restricted stock units unvested, 981,894 performance-based restricted stock units unvested, 1,086,403 shares of common stock vested and 3,866,529 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.5 million and $ 0.8 million for the three months ended June 30, 2024 and 2023, respectively.

Stock-based compensation expense was $ 1.3 million and $ 1.8 million for the six months ended June 30, 2024 and 2023, respectively.

As of September 30, 2024, the Company had 878,890 time-based vesting restricted stock units unvested, 843,588 performance-based restricted stock units unvested, 1,169,116 shares of common stock vested and 4,108,406 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.7 million and $ 0.8 million for the three months ended September 30, 2024 and 2023, respectively.

Stock-based compensation expense was $ 2.0 million and $ 2.6 million for the nine months ended September 30, 2024 and 2023, respectively.

Stock-based compensation expense was included in distribution, selling and administrative expenses in the Company's condensed consolidated statements of operations and comprehensive income (loss).

As of June 30, 2024, there was $ 6.8 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 2.32 years.

As of September 30, 2024, there was $ 5.2 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 2.12 years.

Note 13 - Commitments and Contingencies

10 unchanged sentences

Under the settlement, without admitting or denying the SEC’s findings in this matter, the Company consented to the entry of an administrative civil cease-and-desist order by the SEC (the “Order”) with respect to violations of Sections 17(a) of the Securities Act, and of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, as amended, and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), and 14a-9 thereunder, resulting from the materially false and misleading disclosures and other fraudulent conduct implemented by its former Chairman and CEO Zhou Min Ni and former CFO Jian Ming “Jonathan” Ni.

The Company agreed to payment of a civil monetary penalty of $ 3.9 million, paid during the three months ended June 30, 2024, which was recorded in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive income (loss).

During the quarter ended June 30, 2024 the Company agreed to and paid a civil monetary penalty of $ 3.9 million, which was recorded in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive income (loss).

The Order states that, in determining to accept the Company’s Offer of Settlement, the SEC considered the numerous remedial actions promptly undertaken by the Company and its cooperation during the investigation.

7 unchanged sentences

However, the Company concluded it was not the primary beneficiary of AnHeart and therefore did not consolidate, because it did not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance.

During the three months ended June 30, 2024, the Company assumed the lease for 275 Fifth Avenue and no longer recognized AnHeart as a VIE.

During the quarter ended June 30, 2024, the Company assumed the lease for 275 Fifth Avenue and no longer recognized AnHeart as a VIE.

As a result of the lease assumption, the lease guarantee liability of $ 5.4 million was reversed and an operating lease right-of-use asset and liability of $ 4.9 million was recorded on the condensed consolidated balance sheets.

7 unchanged sentences

In March 2024, the Company began construction of a multi-use facility on 273 Fifth Avenue and committed $ 7.0 million for the completion of the construction project.

The Company incurred $ 2.2 million in construction costs which was recorded in construction in progress within property and equipment, net in the Company’s condensed consolidated balance sheet as of June 30, 2024.

The Company incurred $ 3.8 million in construction costs which was recorded in construction in progress within property and equipment, net in the Company’s condensed consolidated balance sheet as of September 30, 2024.

The Company expects to complete construction in June 2025.

14 unchanged sentences

The Company shall pay rent of approximately $ 45,000 per month with provisions for yearly increases.

On September 30, 2024, the Company entered into the lease of a new distribution center located on the premises of 4795 Innovative Way, Powder Springs, Georgia.

The lease term commences February 1, 2025 for a period of 10 years and five months and is renewable at the option of the Company for up to three additional five-year terms.

The company shall pay rent of approximately $ 120,000 per month with provisions for yearly increases.

Note 14 - Subsequent Events

Other than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the accompanying notes.

Termination of Xiao Mou (Peter) Zhang as Chief Executive Officer

On October 24, 2024, the Board of Directors (the “Board”) of the Company terminated Xiao Mou (Peter) Zhang as Chief Executive Officer of the Company, without cause, effective as of October 24, 2024.

Appointment of Xi (Felix) Lin as Interim Chief Executive Officer

On October 24, 2024, Xi (Felix) Lin was appointed to serve as Interim Chief Executive Officer, effective as of October 24, 2024.

Lin continues to serve as the Company’s Chief Operating Officer and President.

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 1. Financial Statements