HF Foods Group Inc. 10-Q

ITEM 1. Financial Statements. HF Foods Group Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share data) (Unaudited) September 30, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash $ 11,445 $ 15,232 Accounts receivable, net of allowances of $ 2,077 and $ 2,119 51,728 47,524 Accounts receivable - related parties 226 308 Inventories 119,508 105,618 Prepaid expenses and other current assets 10,012 10,145 TOTAL CURRENT ASSETS 192,919 178,827 Property and equipment, net 146,073 133,136 Operating lease right-of-use assets 14,981 12,714 Long-term investments 2,374 2,388 Customer relationships, net 139,257 147,181 Trademarks, trade names and other intangibles, net 26,339 30,625 Goodwill 85,118 85,118 Other long-term assets 5,689 6,531 TOTAL ASSETS $ 612,750 $ 596,520 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Checks issued not presented for payment $ 12,018 $ 4,494 Line of credit 66,911 58,564 Accounts payable 51,566 51,617 Accounts payable - related parties 74 397 Current portion of long-term debt, net 5,410 5,450 Current portion of obligations under finance leases 3,301 1,749 Current portion of obligations under operating leases 4,147 3,706 Accrued expenses and other liabilities 19,684 17,287 TOTAL CURRENT LIABILITIES 163,111 143,264 Long-term debt, net of current portion 104,658 108,711 Obligations under finance leases, non-current 17,726 11,229 Obligations under operating leases, non-current 11,180 9,414 Deferred tax liabilities 27,853 29,028 Other long-term liabilities 2,612 6,891 TOTAL LIABILITIES 327,140 308,537 COMMITMENTS AND CONTINGENCIES (Note 13) SHAREHOLDERS’ EQUITY: Series A Participating Preferred Stock, par value $ 0.001 ; 100,000 shares authorized, no shares issued and outstanding — — Preferred Stock, $ 0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding — — Common Stock, $ 0.0001 par value; 100,000,000 shares authorized; 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 5 5 Treasury stock, at cost; 1,997,423 shares as of September 30, 2024 and December 31, 2023 ( 7,750 ) ( 7,750 ) Additional paid-in capital 604,110 603,094 Accumulated deficit ( 313,305 ) ( 308,688 ) TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 283,060 286,661 Noncontrolling interests 2,550 1,322 TOTAL SHAREHOLDERS’ EQUITY 285,610 287,983 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 612,750 $ 596,520 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 HF Foods Group Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except share and per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net revenue - third parties $ 297,619 $ 280,635 $ 893,786 $ 862,561 Net revenue - related parties 770 818 2,599 5,059 TOTAL NET REVENUE 298,389 281,453 896,385 867,620 Cost of revenue - third parties 247,528 229,772 740,969 710,953 Cost of revenue - related parties 698 756 2,377 4,904 TOTAL COST OF REVENUE 248,226 230,528 743,346 715,857 GROSS PROFIT 50,163 50,925 153,039 151,763 Distribution, selling and administrative expenses 49,652 48,841 149,988 154,013 INCOME (LOSS) FROM OPERATIONS 511 2,084 3,051 ( 2,250 ) Interest expense 2,644 2,715 8,597 8,430 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 ) (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 ) Less: net income (loss) attributable to noncontrolling interests 103 90 456 ( 484 ) NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC. $ ( 3,940 ) $ 1,884 $ ( 4,617 ) $ ( 4,899 ) (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 WEIGHTED AVERAGE SHARES - DILUTED 52,726,683 54,513,314 52,490,321 54,005,010 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 HF Foods Group Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 4,161 ) $ ( 5,383 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization expense 19,932 19,551 Asset impairment charges — 1,200 Provision for credit losses ( 40 ) 56 Deferred tax benefit ( 1,175 ) ( 2,467 ) Change in fair value of interest rate swap contracts 959 ( 2,094 ) Stock-based compensation 1,961 2,605 Non-cash lease expense 2,955 2,668 Lease guarantee income ( 5,548 ) ( 305 ) Other non-cash expense 522 168 Changes in operating assets and liabilities: Accounts receivable ( 4,105 ) 997 Accounts receivable - related parties 23 ( 115 ) Inventories ( 13,890 ) 4,349 Prepaid expenses and other current assets 133 ( 14,074 ) Other long-term assets 734 ( 2,878 ) Accounts payable ( 658 ) 22,618 Accounts payable - related parties ( 323 ) ( 1,039 ) Operating lease liabilities ( 3,015 ) ( 2,511 ) Accrued expenses and other liabilities 2,397 ( 2,722 ) Net cash (used in) provided by operating activities ( 3,299 ) 20,624 Cash flows from investing activities: 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 ) Cash flows from financing activities: Payments for tax withholding related to vested stock awards ( 173 ) — Checks issued not presented for payment 7,524 ( 15,058 ) Proceeds from line of credit 1,120,318 891,510 Repayment of line of credit ( 1,112,012 ) ( 896,959 ) Repayment of long-term debt ( 4,125 ) ( 4,653 ) 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 ) Net decrease in cash ( 3,787 ) ( 9,989 ) Cash at beginning of the period 15,232 24,289 Cash at end of the period $ 11,445 $ 14,300 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 5,222 $ 1,024 Property acquired in exchange for finance leases 10,646 1,285 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. 3 HF Foods Group Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data) (Unaudited) Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Attributable to HF Foods Group Inc. Noncontrolling Interests Total Shareholders’ Equity Shares Amount Shares Amount Balance at January 1, 2023 53,813,777 $ 5 — $ — $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249 Net (loss) income — — — — — ( 5,933 ) ( 5,933 ) 136 ( 5,797 ) Issuance of common stock pursuant to equity compensation plan 37,847 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 7,132 ) — — — ( 34 ) — ( 34 ) — ( 34 ) Stock-based compensation — — — — 1,096 — 1,096 — 1,096 Balance at March 31, 2023 53,844,492 $ 5 — $ — $ 599,384 $ ( 312,447 ) $ 286,942 $ 4,572 $ 291,514 Net loss — — — — ( 850 ) ( 850 ) ( 710 ) ( 1,560 ) Issuance of common stock pursuant to equity compensation plan 269,113 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 27,441 ) — — — ( 106 ) — ( 106 ) — ( 106 ) Stock-based compensation — — — — 752 — 752 — 752 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. 4 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Attributable to HF Foods Group Inc. Noncontrolling Interests Total Shareholders’ Equity Shares Amount 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 Net (loss) income — — — — — ( 694 ) ( 694 ) 135 ( 559 ) Stock-based compensation — — — — 738 — 738 — 738 Balance at March 31, 2024 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,832 $ ( 309,382 ) $ 286,705 $ 1,457 $ 288,162 Net income — — — — — 17 17 218 235 Issuance of common stock pursuant to equity compensation plan 555,181 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 40,403 ) — — — ( 128 ) — ( 128 ) — ( 128 ) Dissolution of noncontrolling interests — — — — ( 772 ) — ( 772 ) 772 — Stock-based compensation — — — — 522 — 522 — 522 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. 5 HF Foods Group Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Organization and Description of Business Organization and General HF Foods Group Inc. and subsidiaries (collectively “HF Foods” or the “Company”) is an Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States. The Company's business consists of one operating segment, which is also its one reportable segment: HF Foods, which operates solely in the United States. The Company's customer base consists primarily of Asian restaurants, and it provides sales and service support to customers who mainly converse in Mandarin or Chinese dialects. Note 2 - Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 26, 2024 (the “2023 Annual Report”). There have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the 2023 Annual Report. All significant intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interest in its condensed consolidated statements of operations and comprehensive loss equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party. Variable Interest Entities GAAP provides guidance on the identification of a variable interest entity (“VIE”) and financial reporting for an entity over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive the economic benefits of the VIE that could be potentially significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. The Company previously disclosed one VIE, AnHeart, Inc. (“AnHeart”), for which the Company was not the primary beneficiary and therefore did not consolidate. 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. Noncontrolling Interests GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s condensed consolidated balance sheets. 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. 6 As of September 30, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following: ($ in thousands) Ownership of noncontrolling interest at September 30, 2024 September 30, 2024 December 31, 2023 HF Foods Industrial, LLC ("HFFI") (a) N/A $ — $ ( 759 ) Min Food, Inc. 39.75 % 2,184 1,715 Monterey Food Service, LLC 35.00 % 366 366 Total $ 2,550 $ 1,322 _______________ (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. No gain or loss was recognized. As a result of this transaction, noncontrolling interest of $( 0.8 ) million was reclassified to additional paid-in capital on the condensed consolidated balance sheets. Uses of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, inventory reserves, impairment of long-lived assets, impairment of goodwill, and the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations. Recent Accounting Pronouncements 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. This standard is effective for the Company’s consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025. The impact of the adoption of this ASU is not expected to have a material effect on the Company’s financial position, or operations, however, the Company is currently evaluating the impact of this standard on its disclosures to the consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): 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. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements and disclosures. 7 Note 3 - Revenue The following table presents the Company's net revenue disaggregated by principal product categories: Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2024 2023 2024 2023 Seafood $ 98,826 33 % $ 87,475 31 % $ 292,751 33 % $ 271,748 32 % Asian Specialty 74,269 25 % 74,384 26 % 231,971 26 % 228,545 26 % Meat and Poultry 64,538 21 % 54,787 19 % 186,080 21 % 162,848 19 % Produce 31,670 11 % 29,578 11 % 95,924 10 % 93,425 11 % Packaging and Other 15,797 5 % 17,342 6 % 47,816 5 % 54,775 6 % Commodity 13,289 5 % 17,887 7 % 41,843 5 % 56,279 6 % Total $ 298,389 100 % $ 281,453 100 % $ 896,385 100 % $ 867,620 100 % Note 4 - Balance Sheet Components Accounts receivable, net consisted of the following: (In thousands) September 30, 2024 December 31, 2023 Accounts receivable $ 53,805 $ 49,643 Less: allowance for expected credit losses ( 2,077 ) ( 2,119 ) Accounts receivable, net $ 51,728 $ 47,524 Movement of allowance for expected credit losses was as follows: Nine Months Ended September 30, (In thousands) 2024 2023 Beginning balance $ 2,119 $ 1,442 (Decrease) increase in provision for expected credit losses ( 40 ) 56 Bad debt write-offs ( 2 ) ( 24 ) Ending balance $ 2,077 $ 1,474 Prepaid expenses and other current assets consisted of the following: (In thousands) September 30, 2024 December 31, 2023 Prepaid expenses $ 4,531 $ 4,591 Advances to suppliers 3,698 3,340 Other current assets 1,783 2,214 Prepaid expenses and other current assets $ 10,012 $ 10,145 8 Property and equipment, net consisted of the following: (In thousands) September 30, 2024 December 31, 2023 Automobiles (1) $ 47,859 $ 37,256 Buildings (2) 63,045 63,045 Building improvements 22,677 22,014 Furniture and fixtures 419 474 Land 49,929 49,929 Machinery and equipment 13,232 11,532 Construction in progress 7,981 1,391 Subtotal 205,142 185,641 Less: accumulated depreciation ( 59,069 ) ( 52,505 ) Property and equipment, net $ 146,073 $ 133,136 _________________ (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 September 30, 2024 September 30, 2024 December 31, 2023 Asahi Food, Inc. ("Asahi") 49 % $ 574 $ 588 Pt. Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800 1,800 Total long-term investments $ 2,374 $ 2,388 The investment in Tamron is accounted for using the measurement alternative under Accounting Standards Codification (“ASC”) Topic 321 Investments—Equity Securities , which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. 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 September 30, 2024 for these investments. Accrued expenses and other liabilities consisted of the following: (In thousands) September 30, 2024 December 31, 2023 Accrued compensation $ 6,090 $ 7,941 Accrued professional fees 854 1,353 Accrued interest and fees 1,089 1,276 Self-insurance liability 2,999 1,723 Other 8,652 4,994 Total accrued expenses and other liabilities $ 19,684 $ 17,287 9 Note 5 - Fair Value Measurements 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: September 30, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (In thousands) Assets: Interest rate swaps $ — $ 304 $ — $ 304 $ — $ 412 $ — $ 412 Liabilities: Interest rate swaps $ — $ 2,452 $ — $ 2,452 $ — $ 1,601 $ — $ 1,601 The Company follows the provisions of ASC Topic 820 Fair Value Measurement which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments. See Note 7 - Derivative Financial Instruments for additional information regarding the Company’s interest rate swaps. 10 Carrying Value and Estimated Fair Value of Outstanding Debt - The following table presents the carrying value and estimated fair value of the Company’s outstanding debt as described in Note 8 - Debt , including the current portion, as of the dates indicated: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Carrying Value September 30, 2024 Fixed rate debt: Bank of America $ — $ — $ 116 $ 126 Variable rate debt: JPMorgan Chase $ — $ 102,294 $ — $ 102,294 Bank of America $ — $ 2,090 $ — $ 2,090 East West Bank $ — $ 5,558 $ — $ 5,558 December 31, 2023 Fixed rate debt: Bank of America $ — $ — $ 151 $ 169 Other finance institutions $ — $ — $ 43 $ 45 Variable rate debt: JPMorgan Chase $ — $ 106,079 $ — $ 106,079 Bank of America $ — $ 2,193 $ — $ 2,193 East West Bank $ — $ 5,675 $ — $ 5,675 The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments. For the Company's fixed rate debt, the fair values were estimated using discounted cash flow analyses, based on the current incremental borrowing rates for similar types of borrowing arrangements. See Note 8 - Debt for additional information regarding the Company's debt. Nonrecurring Fair Values 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 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. 11 Note 6 - Goodwill and Acquired Intangible Assets Goodwill 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 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, distribution, selling and administrative expense levels, and the discount rate. The market approaches were primarily impacted by an enterprise value multiple of EBITDA. 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: September 30, 2024 December 31, 2023 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Non-competition agreement $ 3,892 $ ( 3,400 ) $ 492 $ 3,892 $ ( 2,429 ) $ 1,463 Trademarks and trade names 44,207 ( 18,360 ) 25,847 44,207 ( 15,045 ) 29,162 Customer relationships 185,266 ( 46,009 ) 139,257 185,266 ( 38,085 ) 147,181 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 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. 12 Note 7 - Derivative Financial Instruments Derivative Instruments The Company utilizes interest rate swaps ("IRS") for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 8 - Debt ). The Company does not use any other derivative financial instruments for trading or speculative purposes. On August 20, 2019, HF Foods entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $ 1.1 million and $ 2.6 million, respectively. On April 20, 2023, the Company amended the corresponding mortgage term loans, which pegged the two mortgage term loans to 1-month Term SOFR (Secured Overnight Financing Rate) + 2.29 % per annum for the remaining duration of the term loans. The amended EWB IRS contracts fixed the two term loans at 4.23 % per annum until maturity in September 2029. On December 19, 2019, HF Foods entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $ 2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount. On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to Term SOFR + 2.5 % . The BOA IRS was modified accordingly to fix the SOFR based loan to approximately 4.50 %. The term loan and corresponding BOA IRS contract mature in December 2029. On March 15, 2023, the Company entered into an amortizing IRS contract with JPMorgan Chase for an initial notional amount of $ 120.0 million, effective from March 1, 2023 and expiring in March 2028, as a means to partially hedge its existing floating rate loans exposure. Pursuant to the agreement, the Company will pay the swap counterparty a fixed rate of 4.11 % in exchange for floating payments based on Term SOFR. The Company evaluated the aforementioned IRS contracts currently in place and did not designate those as cash flow hedges. 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 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. The Company includes these in other long-term assets and other long-term liabilities , respectively, on the consolidated balance sheets. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in its assessment of fair value. The inputs used to determine the fair value of the IRS are classified as Level 2 on the fair value hierarchy. Note 8 - Debt Long-term debt at September 30, 2024 and December 31, 2023 is summarized as follows: ($ in thousands) Bank Name Maturity Interest Rate at September 30, 2024 September 30, 2024 December 31, 2023 Bank of America (a) October 2026 - December 2029 4.34 % - 7.95 % $ 2,216 $ 2,362 East West Bank (b) August 2027 - September 2029 7.46 % - 8.50 % 5,558 5,675 JPMorgan Chase (c) January 2030 7.18 % 102,520 106,337 Other finance institutions (d) July 2024 N/A — 45 Total debt, principal amount 110,294 114,419 Less: debt issuance costs ( 226 ) ( 258 ) Total debt, carrying value 110,068 114,161 Less: current portion ( 5,410 ) ( 5,450 ) Long-term debt $ 104,658 $ 108,711 _______________ 13 (a) Loan balance consists of real estate term loan and equipment term loan, collateralized by one real property and specific equipment. The real estate term loan is pegged to TERM SOFR + 2.5 %. (b) Real estate term loans with East West Bank are collateralized by three real properties. 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 $ 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 September 30, 2024, the Company was in compliance with its covenants. Credit Facility 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 The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later. 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 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 September 30, Nine Months Ended September 30, ($ in thousands, except share and per share data) 2024 2023 2024 2023 Numerator: Net income (loss) attributable to HF Foods Group Inc. $ ( 3,940 ) $ 1,884 $ ( 4,617 ) $ ( 4,899 ) Denominator: Weighted-average common shares outstanding 52,726,683 54,142,396 52,490,321 54,005,010 Effect of dilutive securities — 370,918 — — Weighted-average dilutive shares outstanding 52,726,683 54,513,314 52,490,321 54,005,010 Earnings (loss) per common share: Basic $ ( 0.07 ) $ 0.03 $ ( 0.09 ) $ ( 0.09 ) Diluted $ ( 0.07 ) $ 0.03 $ ( 0.09 ) $ ( 0.09 ) 14 Note 10 - Income Taxes The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction. 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 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 The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company's officers and/or shareholders who owned no less than 10 % shareholdings of the Company. Mr. Xiao Mou Zhang (“Mr. 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. Mr. Zhang does not have any involvement in negotiations with any of the above-mentioned related parties. The Company believes that Mr. Zhou Min Ni (“Mr. Ni”), the Company’s former Co-Chief Executive Officer, together with various trusts for the benefit of Mr. 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 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 Purchases 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 (a) Asahi Food, Inc. Trade $ 20 $ 13 $ 76 $ 52 (b) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) Trade 1,136 2,045 4,049 6,858 (c) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) Trade N/A — N/A 37 (c) Ocean Pacific Seafood Group, Inc. Trade 49 73 189 315 (c) Rainfield Ranches, LP Trade 64 80 159 116 Total $ 1,269 $ 2,211 $ 4,473 $ 7,378 _______________ 15 (a) The Company, through its subsidiary Mountain Food, LLC, owns an equity interest in this entity. (b) An equity interest is held by three Irrevocable Trusts for the benefit of Mr. Zhang's children. (c) Mr. Zhou Min Ni owns an equity interest in this entity. 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. Sales 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 (a) ABC Food Trading, LLC $ 475 $ 367 $ 1,309 $ 1,682 (b) Asahi Food, Inc. 152 275 439 661 (a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) 92 149 680 675 (c) Eagle Food Service, LLC — — — 1,942 (d) First Choice Seafood, Inc. 7 8 20 24 (d) Fortune One Foods, Inc. 44 19 151 42 (e) N&F Logistics, Inc. — — — 6 (f) Union Food LLC — — — 27 Total $ 770 $ 818 $ 2,599 $ 5,059 _______________ (a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr. Zhang's children. (b) The Company, through its subsidiary Mountain Food, LLC, owns an equity interest in this entity. (c) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Zhou Min Ni owns an equity interest in this entity indirectly through its parent company. (e) Mr. Zhou Min Ni owns an equity interest in this entity. (f) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity. Lease Agreements The Company leases various facilities to related parties. In 2020, the Company renewed a warehouse lease from Yoan Chang Trading Inc. under an operating lease agreement which expired on December 31, 2020. 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 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. under a commercial lease agreement which was rescinded March 1, 2020. 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 $ 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). 16 Related Party Balances Accounts Receivable - Related Parties, Net 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 (b) Asahi Food, Inc. 116 69 (a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) 7 84 (c) Enson Seafood GA, Inc. (formerly known as GA-GW Seafood, Inc.) N/A 59 (d) Fortune One Foods, Inc. 6 — (e) Union Food LLC — 2 Total $ 226 $ 308 _______________ (a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr. Zhang's children. (b) The Company, through its subsidiary Mountain Food, LLC, owns an equity interest in this entity. (c) No longer considered a related party as of January 1, 2024 since Mr. Zhou Min Ni disposed his equity interest in this entity. (d) Mr. Zhou Min Ni owns an equity interest in this entity indirectly through its parent company. (e) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity. 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 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 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 Others 21 18 Total $ 74 $ 397 _______________ (a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr. Zhang's children. Note 12 - Stock-Based Compensation In 2021, the Company began issuing awards under the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”), which reserves up to 3,000,000 shares of the Company's common stock for issuance of awards to employees and non-employee directors. 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 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). 17 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 From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to its pending litigation and revises its estimates when additional information becomes available. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against the Company that could adversely affect its ability to conduct business. There also exists the possibility of a material adverse effect on the Company’s financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable. Legal costs associated with loss contingencies are expensed as incurred. On June 6, 2024, the SEC announced that it had accepted an Offer of Settlement submitted by the Company in order to resolve the previously disclosed formal, non-public SEC investigation of allegations that the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements. 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. 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. The Company’s resolution follows charges brought by the SEC against the two former executives in a District Court action filed on June 3, 2024. As a result of the SEC’s district court complaint against them, the two former executives agreed to pay civil fines and disgorgement, and agreed to be subject to officer and director bars. Zhou Min Ni also agreed to a conduct-based injunction which enjoins him from directly or indirectly participating in the management of, or otherwise exercising any control of influence over the Company. The Special Litigation Committee of the Board of Directors previously obtained a monetary settlement from the former executives that was ratified by the Delaware Chancery Court. AnHeart Lease Guarantee The Company provided a guarantee for two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. The Company previously determined that AnHeart was a VIE as a result of the guarantee. 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 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. As a result of the reversal, a gain of $ 5.4 million was recorded to other expense (income), net on the condensed consolidated statements of operations and comprehensive income (loss). 18 On February 10, 2021, the Company entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC, pursuant to which it assumed the lease of the premises at 273 Fifth Avenue (the “273 Lease Agreement”). At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the Lease Agreement. The Company agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due. Under the terms of the Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $ 2.5 million. The Lease Amendment permits subletting of the premises, and the Company intends to sublease the newly constructed premises to defray the rental expense undertaken pursuant to its guaranty obligations. 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 $ 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. On January 17, 2022, the Company received notice that AnHeart had defaulted on its obligations as tenant under the lease for 275 Fifth Avenue. On February 7, 2022, the Company undertook its guaranty obligations by assuming responsibility for payment of monthly rent and other tenant obligations, including past due rent as well as property tax obligations beginning with the January 2022 rent due. On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng. In March 2022, the Company agreed to stay that litigation against AnHeart in exchange for AnHeart’s payment of certain back rent from January to April 2022 and its continued partial payment of monthly rent. AnHeart subsequently defaulted on these obligations. On October 25, 2023, the Company commenced a new legal action by filing a complaint in New York County Supreme Court to pursue legal remedies against AnHeart and Minsheng (the “2023 Action”). As of the filing of the new summons and complaint, AnHeart and Minsheng are indebted to the Company in the amount of $ 474,000 . AnHeart and the Company have since reached a settlement agreement (the “Settlement Agreement”) for AnHeart to pay the Company $ 40,000 a month in rent through December 2024 and commence regular monthly rental payments in accordance with the lease for 275 Fifth Avenue. The Settlement Agreement also provides that AnHeart will pay twenty-four monthly installments of $ 11,250 from January 2025 through December 2026 as payment for all back rent due. Effective April 30, 2024, the Company through its subsidiary assumed the lease of a building located on the premises of 275 Fifth Avenue, New York, New York. The Company was the guarantor of this lease under a lease guarantee agreement dated July 2018, and in February 2022, upon receiving notice of default, the Company undertook its lease guarantee obligations. The assumption of the lease had no impact on the Company’s obligations as guarantor. The lease covers certain portions of the ground floor, lower lever, and second floor of the building. The lease term ends on April 30, 2034 and is renewable at the option of the Company for up to two additional five-year terms. 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 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. Mr. Lin continues to serve as the Company’s Chief Operating Officer and President. 19