What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-09 · 101 added, 69 removed, 235 unchanged (42% of the section changed)

23 unchanged sentences

• 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, President and COO, CFO and General Counsel and CCO;

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

• Our ability to attract, train and retain employees;

52 unchanged sentences

Financial Overview

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

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

($ in thousands) 2024 2023 Change 2024 2023 Change

Net revenue $ 298,389 $ 281,453 $ 16,936 $ 896,385 $ 867,620 $ 28,765

Net income (loss) $ 235 $ (1,560) $ 1,795 $ (324) $ (7,357) $ 7,033

Net (loss) income $ (3,837) $ 1,974 $ (5,811) $ (4,161) $ (5,383) $ 1,222

Adjusted EBITDA $ 8,305 $ 10,097 $ (1,792) $ 27,568 $ 24,203 $ 3,365

27 unchanged sentences

Results of Operations

Comparison of Three Months Ended June 30, 2024 to Three Months Ended June 30, 2023

The following table sets forth a summary of our consolidated results of operations for the three months ended June 30, 2024 and 2023 .

Comparison of Three Months Ended September 30, 2024 to Three Months Ended September 30, 2023

The following table sets forth a summary of our consolidated results of operations for the three months ended September 30, 2024 and 2023 .

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands) 2024 2023 Change

3 unchanged sentences

Distribution, selling and administrative expenses 49,652 48,841 811

Income (loss) from operations 2,625 (1,577) 4,202

Income from operations 511 2,084 (1,573)

Interest expense 2,644 2,715 (71)

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Lease guarantee income — (95) 95

Income (loss) before income taxes 1,834 (1,351) 3,185

Income tax expense 1,599 209 1,390

Net income (loss) and comprehensive loss 235 (1,560) 1,795

net income (loss) attributable to noncontrolling interests 218 (710) 928

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

(Loss) income before income taxes (5,091) 1,938 (7,029)

Income tax benefit (1,254) (36) (1,218)

Net (loss) income and comprehensive (loss) income (3,837) 1,974 (5,811)

net income attributable to noncontrolling interests 103 90 13

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

$ (3,940) $ 1,884 $ (5,824)

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 June 30,

Three Months Ended September 30,

Net revenue 100.0 % 100.0 %

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Distribution, selling and administrative expenses 16.6 % 17.4 %

Income (loss) from operations 0.9 % (0.5) %

Income from operations 0.2 % 0.7 %

Interest expense 0.8 % 1.0 %

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Lease guarantee income — % — %

Income (loss) before income taxes 0.6 % (0.5) %

Income tax expense 0.5 % 0.1 %

Net income (loss) and comprehensive income (loss) 0.1 % (0.5) %

net income (loss) attributable to noncontrolling interests 0.1 % (0.2) %

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

Net revenue for the three months ended June 30, 2024 increased by $10.0 million, or 3.4%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation, volume increases and improved pricing in certain categories, such as chicken and seafood, partially offset by deflation in commodities, such as cooking oils, and the $3.1 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

Gross profit was $52.5 million for three months ended June 30, 2024 compared to $50.7 million in the same period in 2023 , an increase of $1.8 million, or 3.6%.

The increase was primarily attributable to increased net revenue.

Gross profit margin for the three months ended June 30, 2024 increased slightly to 17.4% compared to 17.3% in the same period in 2023 .

(Loss) income before income taxes (1.7) % 0.7 %

Income tax (benefit) expense (0.4) % — %

Net (loss) income and comprehensive (loss) income (1.3) % 0.7 %

net income attributable to noncontrolling interests — % — %

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

(1.3) % 0.7 %

Net revenue for the three months ended September 30, 2024 increased by $16.9 million, or 6.0%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation and volume increases which improved pricing in certain categories, such as chicken and seafood, partially offset by deflation in commodities, such as cooking oils, and the $2.7 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

Gross profit was $50.2 million for three months ended September 30, 2024 compared to $50.9 million in the same period in 2023 , a decrease of $0.8 million, or 1.5%.

The decrease was primarily attributable to a decrease in margins on meat and poultry during the quarter.

Gross profit margin for the three months ended September 30, 2024 decreased to 16.8% compared to 18.1% in the same period in 2023 .

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses decreased by $2.4 million, or 4.6%, for the three months ended June 30, 2024 primarily due to a decrease of $5.5 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 16.5% for the three months ended June 30, 2024 from 17.9% in the same period in 2023, primarily due to increased net revenue and lower professional fees, partially offset by increased headcount.

Distribution, selling and administrative expenses increased by $0.8 million, or 1.7%, for the three months ended September 30, 2024 primarily due to increases of $1.0 million each in both auto expenses and insurance costs, partially offset by a decrease of $1.6 million in professional fees.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.6% for the three months ended September 30, 2024 from 17.4% in the same period in 2023, primarily due to increased net revenue and lower professional fees, partially offset by increased rental expenses and insurance costs.

Interest Expense

Interest expense for the three months ended June 30, 2024 of $3.1 million remained consistent compared to the three months ended June 30, 2023, having increased slightly from $2.8 million.

Average floating interest rates on our floating-rate debt for the three months ended June 30, 2024 increased by approximately 0.4% on our line of credit and 0.3% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $19.2 million, or 51.7%, to $56.4 million for the three months ended June 30, 2024 from $37.2 million for the three months ended June 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.6%, to $104.2 million for the three months ended June 30, 2024 from $109.3 million for the three months ended June 30, 2023.

Income Tax Expense

Income tax expense was $1.6 million for the three months ended June 30, 2024, compared to an income tax expense of $0.2 million for the three months ended June 30, 2023, primarily due to discrete tax items related to the SEC settlement and stock-based compensation shortfalls impacting the tax provision for the current period.

Interest expense for the three months ended September 30, 2024 of $2.6 million remained consistent compared to the three months ended September 30, 2023, having decreased slightly from $2.7 million.

Average floating interest rates on our floating-rate debt for the three months ended September 30, 2024 remained consistent on our line of credit and the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $22.3 million, or 56.6%, to $61.7 million for the three months ended September 30, 2024 from $39.4 million for the three months ended September 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.7%, to $103.0 million for the three months ended September 30, 2024 from $108.0 million for the three months ended September 30, 2023.

Income Tax Expense (Benefit)

Income tax benefit was $1.3 million for the three months ended September 30, 2024, compared to an income tax benefit of $36 thousand for the three months ended September 30, 2023, primarily due to an increase in loss before income taxes.

Net Income (Loss) Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $0.0 million for the three months ended June 30, 2024 , compared to net loss of $0.9 million for the three months ended June 30, 2023.

The improvement was primarily driven by an increase in our income from operations of $4.2 million, as well as the $5.3 million reversal of our lease guarantee liability, partially offset by our SEC settlement of $3.9 million, the decrease of the gain related to the fair value of interest rate swap contracts of $2.5 million and the increase of income tax expense of $1.4 million.

Net loss attributable to HF Foods Group Inc.

was $3.9 million for the three months ended September 30, 2024 , compared to net income of $1.9 million for the three months ended September 30, 2023.

The loss was primarily driven by the change related to the fair value of interest rate swap contracts of $5.3 million and increases of $1.0 million each in both auto expenses and insurance costs partially offset by the increase of income tax benefit of $1.2 million.

EBITDA and Adjusted EBITDA

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure:

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands) 2024 2023 Change

Net income (loss) $ 235 $ (1,560) $ 1,795

Net (loss) income $ (3,837) $ 1,974 $ (5,811)

Interest expense 2,644 2,715 (71)

Income tax expense 1,599 209 1,390

Income tax benefit (1,254) (36) (1,218)

Depreciation and amortization 6,666 6,422 244

3 unchanged sentences

Stock-based compensation expense 701 757 (56)

SEC settlement 3,900 — 3,900

Asset impairment charges — 1,200 (1,200)

Business transformation costs (1)

Other non-routine expense (2)

260 1,255 (995)

Adjusted EBITDA $ 8,305 $ 10,097 $ (1,792)

3 unchanged sentences

Results of Operations

Comparison of Six Months Ended June 30, 2024 to Six Months Ended June 30, 2023

The following table sets forth a summary of our consolidated results of operations for the six months ended June 30, 2024 and 2023 .

Comparison of Nine Months Ended September 30, 2024 to Nine Months Ended September 30, 2023

The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2024 and 2023 .

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands) 2024 2023 Change

8 unchanged sentences

Lease guarantee income (5,548) (305) (5,243)

Income (loss) before income taxes 1,094 (9,374) 10,468

Loss before income taxes (3,997) (7,436) 3,439

Income tax expense (benefit) 164 (2,053) 2,217

4 unchanged sentences

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

Six Months Ended June 30,

Nine Months Ended September 30,

Net revenue 100.0 % 100.0 %

7 unchanged sentences

Lease guarantee income (0.6) % — %

Income (loss) before income taxes 0.1 % (1.6) %

Loss before income taxes (0.4) % (1.0) %

Income tax expense (benefit) — % (0.2) %

3 unchanged sentences

(0.5) % (0.8) %

Net revenue for the six months ended June 30, 2024 increased by $11.8 million, or 2.0%, compared to the same period in 2023.

Net revenue for the nine months ended September 30, 2024 increased by $28.8 million, or 3.3%, 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 $13.3 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

Gross profit was $102.9 million for the six months ended June 30, 2024 compared to $100.8 million in the same period in 2023 , an increase of $2.1 million, or 2.0% .

The gross profit increase was primarily attributable to increased net revenue.

Gross profit margin for the six months ended June 30, 2024 was flat at 17.2% in the same period in 2023.

Gross profit was $153.0 million for the nine months ended September 30, 2024 compared to $151.8 million in the same period in 2023 , an increase of $1.3 million, or 0.8% .

The gross profit increase was primarily attributable to increased net revenue partially offset by increased costs.

Gross profit margin for the nine months ended September 30, 2024 decreased to 17.1% compared to 17.5% in the same period in 2023.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses of $100.3 million for the six months ended June 30, 2024 decreased compared to prior year expenses of $105.2 million primarily due to a decrease of $8.4 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 16.8% for the six months ended June 30, 2024 from 17.9% in the same period in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased headcount.

Distribution, selling and administrative expenses of $150.0 million for the nine months ended September 30, 2024 decreased compared to prior year expenses of $154.0 million primarily due to a decrease of $10.0 million in professional fees, partially offset by an increase of $3.6 million in payroll and related labor costs and an increase of $2.0 million in insurance costs.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.7% for the nine months ended September 30, 2024 from 17.8% in the same period in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased payroll and related labor costs and insurance costs.

Interest Expense

Interest expense for the six months ended June 30, 2024 increased by $0.2 million or 4.2% , compared to the six months ended June 30, 2023, primarily due to a slightly higher interest-rate environment.

Average floating interest rates on our floating-rate debt for the six months ended June 30, 2024 increased by approximately 0.6% on the line of credit and 0.6% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $10.7 million, or 26.8%, to $50.6 million for the six months ended June 30, 2024 from $39.9 million for the six months ended June 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5.0 million, or 4.5%, to $104.9 million for the six months ended June 30, 2024 from $109.9 million for the six months ended June 30, 2023.

Interest expense for the nine months ended September 30, 2024 increased by $0.2 million or 2.0% , compared to the nine months ended September 30, 2023, primarily due to an increase in our average daily line of credit balance of $13.1 million combined with a slightly higher interest-rate environment, partially offset by a decrease in our average daily JPMorgan Chase mortgage-secured term loan balance of $5.1 million .

Average floating interest rates on our floating-rate debt for the nine months ended September 30, 2024 increased by approximately 0.4% on the line of credit and 0.4% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $13.1 million, or 31.9%, to $54.3 million for the nine months ended September 30, 2024 from $41.2 million for the nine months ended September 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5.1 million, or 4.6%, to $104.2 million for the nine months ended September 30, 2024 from $109.3 million for the nine months ended September 30, 2023.

Income Tax Expense (Benefit)

Income tax expense was $1.4 million for the six months ended June 30, 2024, compared to an income tax benefit of $2.0 million for the six months ended June 30, 2023, primarily due to discrete tax expense items impacting the tax provision for the current period compared to losses from operations in the prior period.

Income tax expense was $0.2 million for the nine months ended September 30, 2024, compared to an income tax benefit of $2.1 million for the nine months ended September 30, 2023, primarily due to a decrease in loss before income taxes and discrete tax items related to the previously-disclosed settlement agreement with the SEC and stock-based compensation shortfalls impacting the tax provision for the current period.

Net Loss Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc.

was $0.7 million for the six months ended June 30, 2024 , compared to net loss of $6.8 million for the six months ended June 30, 2023.

The improvement of $6.1 million was primarily driven by an increase in our income from operations of $6.9 million, the $5.3 million reversal of our lease guarantee liability and the increase of the gain related to the fair value of interest rate swap contracts of $2.2 million, partially offset by our SEC settlement of $3.9 million and the increase of income tax expense of $3.4 million.

was $4.6 million for the nine months ended September 30, 2024 , compared to net loss of $4.9 million for the nine months ended September 30, 2023.

The decrease in net loss of $0.3 million was primarily driven by the increase in our income from operations of $5.3 million and the $5.2 million reversal of our lease guarantee liability, partially offset by the previously-disclosed settlement with the SEC of $3.9 million, the increase of income tax expense of $2.2 million and the loss of $3.1 million resulting from the change in fair value of interest rate swap contracts.

EBITDA and Adjusted EBITDA

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure:

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands) 2024 2023 Change

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Liquidity and Capital Resources

As of June 30, 2024, we had cash of approximately $14.0 million, checks issued not presented for payment of $6.5 million and access to approximately $29.9 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

As of September 30, 2024, we had cash of approximately $11.4 million, checks issued not presented for payment of $12.0 million and access to approximately $27.3 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 June 30, 2024.

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.

1 unchanged sentence

Our liquidity is also affected by the entry of an administrative civil cease-and-desist order by the SEC, whereby we agreed to payment of a civil monetary penalty of $3.9 million.

We made this payment during the three months ended June 30, 2024.

We made this payment during the nine months ended September 30, 2024.

Management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months.

1 unchanged sentence

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 June 30, 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 June 30, 2024 and 2023:

Six Months Ended June 30,

As of September 30, 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 September 30, 2024 and 2023:

Nine Months Ended September 30,

(In thousands) 2024 2023 Change

4 unchanged sentences

Operating Activities

Net cash (used in) provided by operating activities consists primarily of net income, which includes a $3.9 million civil monetary penalty payment, 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 (used in) provided by operating activities consists primarily of net income, which includes the $3.9 million SEC settlement payment, 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 (used in) provided by operating activities decreased by $23.9 million primarily due to the timing of working capital outlays and the $3.9 million SEC settlement payment partially offset by improved operating income.

Investing Activities

Net cash used in investing activities increased by $4.8 million primarily due to increased capital project spend in the six months ended June 30, 2024.

Net cash used in investing activities increased by $6.8 million primarily due to increased capital project spend in the nine months ended September 30, 2024.

Financing Activities

Net cash provided by (used in) financing activities decreased by $21.6 million to $5.1 million provided by financing activities primarily due to net line of credit activity, as well as the checks issued not presented for payment activity for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Net cash provided by (used in) financing activities decreased by $37.0 million to $8.9 million provided by financing activities primarily due to net line of credit activity, as well as the checks issued not presented for payment activity for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

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 and estimates we believe are the most important to aid in understanding our financial results.

There have been no changes to those critical accounting policies and estimates that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months ended June 30, 2024.

As a result of our 2023 financial performance in comparison to previous forecasts, combined with our level of stock price, we performed a quantitative impairment assessment as of December 31, 2023.

A quantitative goodwill impairment analysis requires valuation of the respective reporting unit, which requires complex analysis and judgment.

The results of the testing as of December 31, 2023, concluded that the estimated fair value exceeded carrying value by approximately 10%, and no impairment existed as of that date.

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 results of the testing as of September 30, 2024 concluded that the estimated fair value exceeded carrying value by approximately 1% and no impairment existed as of that date.

For both the September 30, 2024 and December 31, 2023 impairment tests, we use a combination of discounted cash flow (“DCF”) model and market approaches, such as public company comparable analysis and comparable acquisitions analysis to determine fair value.

The income approach and market approaches were weighted equally to estimate fair value.

approach requires detailed forecasts of cash flows, including significant assumptions such as revenue growth rates, gross profit margin, distribution, selling, and administrative expenses, and an estimate of weighted-average cost of capital which we believe approximate the assumptions from a market participant’s perspective.

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

These estimates incorporate many uncertain factors which could be impacted by changes in market conditions, interest rates, growth rate, tax rates, costs, customer behavior, regulatory environment and other macroeconomic changes.

We categorize the fair value determination as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

We corroborated the reasonableness of the total fair value of the reporting unit at both September 30, 2024 and December 31, 2023 by assessing the implied enterprise value control premium based on our market capitalization and also considered the lack of liquidity in the Company’s 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.

Our market capitalization is calculated using the number of common shares issued and the common stock’s publicly traded price.

We also consider the amount of headroom for the reporting unit when determining whether an impairment existed.

Headroom is the difference between the fair value of a reporting unit and its carrying value.

The fair value of the reporting unit exceeded the reporting unit carrying value by approximately 1% or $5 million at September 30, 2024, and 10% or $45.0 million at December 31, 2023.

No goodwill impairment was recorded for the nine months ended September 30, 2024 or the year ended December 31, 2023.

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

Assumptions used in impairment testing are made at a point in time and require significant judgment;

therefore, they are subject to change based on the facts and circumstances present at each impairment test date.

Additionally, these assumptions are generally interdependent and do not change in isolation.

We performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting unit by utilizing changes in assumptions that would reasonably likely occur.

Assuming all other assumptions and inputs used in the fair value analysis are held constant, for the September 30, 2024 impairment test, a 100 basis point increase in the discount rate assumption, a 1x decrease in the respective EBITDA multiple assumptions, a 25 basis point decrease in the gross profit margin assumption, and a 50 basis point decrease in the revenue growth rate assumption would result in a decrease in the fair value of our reporting unit of approximately $13.7 million, $34.1 million, $7.9 million, and $10.1 million, respectively, which would likely result in an impairment.

For the December 31, 2023 impairment test, a 100 basis point increase in the discount rate assumption, a 1x decrease in the respective EBITDA multiple assumptions, a 25 basis point decrease in the gross profit margin assumption, and a 50 basis point decrease in the revenue growth rate assumption would result in a decrease in the fair value of our reporting unit of approximately $14.8 million, $36.9 million, $8.4 million, and $22.6 million, respectively.

These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.

If, in future periods, the financial performance of the reporting unit does not meet forecasted expectations, or a further prolonged decline occurs in the market price of our common stock, it may cause a change in the results of the impairment assessment and, as such, could result in an impairment of goodwill.

Furthermore, as disclosed in Note 14 - Subsequent Events of our condensed consolidated financial statements on this Form 10-Q, on October 24, 2024, the Board of Directors of the Company terminated Xiao Mou (Peter) Zhang as Chief Executive Officer of the Company, effective as of October 24, 2024.

In addition, 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.

Prior to his termination as Chief Executive Officer of the Company, Xiao Mou (Peter) Zhang was determined to be the Company’s chief operating decision maker for purposes of segment reporting.

The Company will need to analyze the impact of this change on not only segment reporting, but also on the determination of reporting units.

If changes in reporting units are concluded to be applicable, such changes could also impact future goodwill impairment assessments.

Recent Accounting Pronouncements

1 unchanged sentence

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