What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-26 · 114 added, 95 removed, 150 unchanged (58% of the section changed)

5 unchanged sentences

– Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 26, 2024.

Recent Developments

CEO Transition

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

In connection with Mr.

Zhang’s departure, the Company entered into a Severance Agreement and General Release (the “Severance Agreement”) with Mr.

Zhang on November 21, 2024.

Pursuant to the Severance Agreement, which includes a general release of claims by Mr.

Zhang against the Company, Mr.

Zhang will be entitled to receive standard severance benefits provided to a Chief Executive Officer under the Company’s Amended and Restated Severance Plan.

Zhang continues to serve as a Director on the Board of Directors.

On October 24, 2024, Xi (Felix) Lin was appointed to serve as Interim Chief Executive Officer, effective immediately, and continued to serve as the Company’s Chief Operating Officer and President.

On December 17, 2024, the Board of Directors of HF Foods Group Inc.

appointed Felix Lin to serve as the Company’s Chief Executive Officer and President, effective January 1, 2025.

Credit Facility Amended

On February 12, 2025, the Company amended certain terms and conditions of the JPM Credit Agreement, by, among other things, (i) increasing the Revolving Commitment (as defined in the Credit Agreement) from $100.0 million to $125.0 million, (ii) joining three new subsidiaries of the Company to the Credit Agreement, each as a “Borrower” thereunder, (iii) joining Wells Fargo Bank, N.A.

to the JPM Credit Agreement as a “Lender” thereunder, (iv) amending certain affirmative covenants commensurate with the increase in the Revolving Facility, and (v) amending certain restrictions regarding incurring obligations under real property leases and equipment financings in the ordinary course of business.

Business Overview

We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States.

3 unchanged sentences

On April 29, 2022, HF Foods acquired substantially all of the assets of Sealand Food, Inc.

(the “Sealand Acquisition”), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

(the “Sealand Acquisition”), one of the largest frozen seafood suppliers servicing the Asian restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

See Note 7 - Acquisitions to the consolidated financial statements in this Annual Report on Form 10-K for additional information regarding recent acquisitions.

We have grown our distribution network to eighteen distribution centers and cross-docks servicing forty-six states and covering approximately 95% of the contiguous United States with a fleet of over 400 refrigerated vehicles.

Capitalizing on our deep understanding of the Chinese culture, with over 1,000 employees and subcontractors and supported by two call centers in China, we have become a trusted partner serving approximately 15,000 Asian restaurants, providing sales and service support to customers who mainly converse in Mandarin or other Chinese dialects.

We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices.

With sixteen distribution centers and three cross-docks and a fleet of over 400 vehicles, our distribution network now spans 46 states covering approximately 95% of the contiguous United States.

Capitalizing on our deep understanding of Asian cultures, strong relationships with growers and suppliers of food products primarily in North America, South America, and Asia, with over 1,000 employees, and supported by two outsourced call centers in China, we have become a trusted partner serving approximately 15,000 customer locations throughout the United States.

We are dedicated to serving the vast array of Asian restaurants in need of high-quality and specialized food ingredients at competitive prices.

How to Assess HF Foods’ Performance

26 unchanged sentences

• Net revenue:

Net revenue was $1,148.5 million in 2023, compared to $1,170.5 million in 2022, a decrease of $22.0 million, or 1.9%.

This decrease was primarily attributable to deflationary pricing in imported frozen seafood, Asian Specialty, poultry, and, to a lesser extent, the exit of our chicken processing businesses.

Net revenue was $1,201.7 million in 2024, compared to $1,148.5 million in 2023, an increase of $53.2 million, or 4.6%.

This increase was primarily attributable to volume growth associated with new wholesale accounts, case count growth, product cost inflation and improved pricing in certain categories, partially offset by the $13.3 million loss in revenue from the exit of our chicken processing businesses during the second half of 2023.

• Gross profit :

Gross profit was $204.0 million in 2023 compared to $205.5 million in 2022, a decrease of $1.5 million, or 0.7%.

The decrease was primarily attributable to lower revenue.

Gross profit margin of 17.8% for 2023 increased from 17.6% in the prior year.

Gross profit was $205.2 million in 2024 compared to $204.0 million in 2023, an increase of $1.2 million, or 0.6%.

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

Gross profit margin of 17.1% for 2024 decreased from 17.8% in the prior year.

• Distribution, selling and administrative expenses :

Distribution, selling and administrative expenses increased by $0.1 million, or 0.1%, mainly due to settlement amounts received partially offset by an increase in payroll and related labor costs as well as insurance costs.

During 2023, we received legal settlements amounts totaling $9.25 million and $1.7 million, of which we paid $0.9 million, for a net settlement totaling $10.0 million.

These net settlement amounts were recorded as a reduction of distribution, selling and administrative expenses.

Distribution, selling and administrative expenses as a percentage of net revenue increased to 17.0% in 2023 from 16.7% in 2022, primarily due to the costs disclosed above combined with the decrease in revenue year over year.

• Net (loss) income attributable to HF Foods Group Inc .:

Distribution, selling and administrative expenses increased by $3.0 million, or 1.5%, in 2024 compared to 2023, mainly due to an increase in payroll and related labor costs of $4.3 million as well as insurance costs of $1.1 million partially offset by a reduction in professional fees of $2.8 million.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.5% in 2024 from 17.0% in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased payroll and related labor costs and insurance costs.

• Net loss attributable to HF Foods Group Inc .:

was $2.2 million in 2023 compared to net income of $0.5 million in 2022.

The decrease of $2.6 million was primarily driven by a decrease in our income from operations of $1.6 million, an increase in interest expense of $4.0 million, a change in fair value of interest rate swap contracts of $2.4 million, and a change in other income of $0.7 million, partially offset by a favorable change in lease guarantee expense of $6.1 million.

• Exit of chicken processing businesses:

During the second half of 2023, we exited both of our low margin chicken processing businesses on the east and west coast as part of our commitment to refocusing on our core business.

Net loss attributable to HF Foods Group Inc.

was $48.5 million in 2024 compared to net loss of $2.2 million in 2023.

The increase of $46.3 million was primarily driven by goodwill impairment charges of $46.3 million in 2024.

Results of Operations

2 unchanged sentences

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

Year Ended December 31, Change

($ in thousands) 2023 2022 Amount

Year Ended December 31,

($ in thousands) 2024 2023 Change

Net revenue $ 1,201,667 $ 1,148,493 $ 53,174

2 unchanged sentences

Distribution, selling and administrative expenses 198,026 195,062 2,964

Income from operations 8,969 10,559 (1,590)

Goodwill impairment charges 46,303 — 46,303

(Loss) income from operations (39,135) 8,969 (48,104)

Interest expense 11,425 11,478 (53)

Other income (1,091) (1,829) 738

Other expense (income), net 2,818 (1,091) 3,909

Change in fair value of interest rate swap contracts (1,693) 1,580 (3,273)

Lease guarantee (income) expense (377) 5,744 (6,121)

(Loss) income before income taxes (2,621) 4 (2,625)

Income tax expense (benefit) 41 (231) 272

Net (loss) income and comprehensive (loss) income (2,662) 235 (2,897)

net loss attributable to noncontrolling interests (488) (225) (263)

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

Lease guarantee income (5,548) (377) (5,171)

Loss before income taxes (46,137) (2,621) (43,516)

Income tax expense 1,965 41 1,924

Net loss and comprehensive loss (48,102) (2,662) (45,440)

net income (loss) attributable to noncontrolling interests 409 (488) 897

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

$ (48,511) $ (2,174) $ (46,337)

5 unchanged sentences

Distribution, selling and administrative expenses 16.5 % 17.0 %

Income from operations 0.8 % 0.9 %

Goodwill impairment charges 3.9 % — %

(Loss) income from operations (3.3) % 0.8 %

Interest expense 0.9 % 1.0 %

Other income (0.1) % (0.2) %

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

Change in fair value of interest rate swap contracts (0.1) % 0.1 %

Lease guarantee expense — % 0.5 %

(Loss) income before income taxes (0.2) % — %

Income tax expense (benefit) — % — %

Net (loss) income and comprehensive (loss) income (0.2) % — %

net loss attributable to noncontrolling interests — % — %

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

Net revenue for the year ended December 31, 2023 decreased by $22.0 million, or 1.9%, compared to the same period in 2022.

This decrease was primarily attributable to deflationary pricing product categories such as frozen seafood, poultry, Asian Specialty and packaging.

The revenue decrease due to pricing was partially offset by higher volume and the Seafood revenue generated due to the Sealand Acquisition which has a full year of revenue in 2023 compared to a partial year in 2022.

Gross profit was $204.0 million for the year ended December 31, 2023 compared to $205.5 million in the same period in 2022 , a decrease of $1.5 million, or 0.7% .

The gross profit decrease was primarily attributable to decreases in revenue from Meat and Poultry, and to a lesser extent, Packaging and Other, partially offset by the increased revenue from Asian Specialty, the additional Seafood revenue generated due to the Sealand Acquisition and the successful execution of our Seafood centralized purchasing program.

During the year ended December 31, 2023, poultry pricing came down from the elevated levels we benefited from during the same period in 2022.

Gross profit margin for 2023 of 17.8% increased from 17.6% in the prior year.

Lease guarantee income (0.5) % — %

Loss before income taxes (3.8) % (0.2) %

Income tax expense 0.2 % — %

Net loss and comprehensive loss (4.0) % (0.2) %

net income (loss) attributable to noncontrolling interests — % — %

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

(4.0) % (0.2) %

Net revenue for the year ended December 31, 2024 increased by $53.2 million, or 4.6%, compared to the same period in 2023.

This increase was primarily attributable to volume growth associated with new wholesale accounts, case count growth, 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 during the second half of 2023.

Gross profit was $205.2 million for the year ended December 31, 2024 compared to $204.0 million in the same period in 2023 , an increase of $1.2 million, or 0.6% .

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

Gross profit margin for the year ended December 31, 2024 decreased to 17.1% compared to 17.8% in the same period in 2023.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses of $195.1 million for the year ended December 31, 2023 remained consistent with prior year expenses of $195.0 million.

For 2023, there was a decrease in professional fees as a result of the net settlement amounts received totaling $10.0 million, partially offset by increases of $7.3 million in payroll and related labor costs, inclusive of the additional costs due to the Sealand Acquisition, and $2.0 million in insurance related costs.

Professional fees decreased $12.9 million, or $2.9 million net of the settlement amounts received, to $13.9 million for the year ended December 31, 2023 , from $26.8 million for the year ended December 31, 2022.

In addition, we recognized an asset impairment of $1.2 million related to the exit of our chicken processing facility.

Distribution, selling and administrative expenses as a percentage of net revenue increased to 17.0% for the year ended December 31, 2023 from 16.7% in the same period in 2022, primarily due to the costs disclosed above combined with the decrease in revenue year over year.

Distribution, selling and administrative expenses of $198.0 million for the year ended December 31, 2024 increased compared to prior year expenses of $195.1 million primarily due to an increase of $4.3 million in payroll and related labor costs and an increase of $1.1 million in insurance costs, partially offset by a decrease of $2.8 million in professional fees.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.5% for the year ended December 31, 2024 from 17.0% 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 year ended December 31, 2023 increased by $4.0 million or 53.9% , compared to the year ended December 31, 2022, primarily due to a sharply higher interest-rate environment.

Interest expense for the year ended December 31, 2024 decreased by $0.1 million or 0.5% , compared to the year ended December 31, 2023, primarily due to a decrease in our average daily JPMorgan Chase mortgage-secured term loan balance of $5.1 million, partially offset by an increase in our average daily line of credit balance of $10.6 million combined with a slightly higher interest-rate environment.

Average floating interest rates on our floating-rate debt for the year ended December 31, 2024 increased by approximately 0.2% on the line of credit and 0.1% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance decreased by $10.2 million, or 18.5%, to $44.9 million for the year ended December 31, 2023 from $55.0 million for the year ended December 31, 2022, and our average daily JPMorgan Chase mortgage-secured term loan balance increased by $6.5 million, or 6.4%, to $108.6 million for the year ended December 31, 2023 from $102.1 million for the year ended December 31, 2022.

Income Tax Expense (Benefit)

Income tax expense (benefit) was an income tax expense of approximately $41,000 for the year ended December 31, 2023, compared to income tax benefit of $0.2 million for the year ended December 31, 2022, primarily due to the impact of non-deductible items, change in valuation allowance, and state taxes, partially offset by the expiration of the statute of limitations in relation to unrecognized tax benefits, tax credits, and other tax adjustments during the year ended December 31, 2023.

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

Our average daily line of credit balance increased by $10.6 million, or 23.7%, to $55.5 million for the year ended December 31, 2024 from $44.9 million for the year ended December 31, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5.1 million, or 4.7%, to $103.6 million for the year ended December 31, 2024 from $108.6 million for the year ended December 31, 2023.

Income Tax Expense

Income tax expense was $2.0 million for the year ended December 31, 2024, compared to $41,000 for the year ended December 31, 2023.

The increase in income tax expense of $1.9 million was due to non-deductible items including the impact of the Company’s goodwill impairment charges, SEC settlement, and state taxes, partially offset by the change in valuation allowance, tax credits, the expiration of the statute of limitations in relation to unrecognized tax benefits, and other tax adjustments during the year ended December 31, 2024.

Net Loss Attributable to HF Foods Group Inc.

was $2.2 million for the year ended December 31, 2023 , compared to net income of $0.5 million for the year ended December 31, 2022.

Net loss attributable to HF Foods Group Inc.

was $48.5 million for the year ended December 31, 2024 , compared to net loss of $2.2 million for the year ended December 31, 2023.

The increase in loss of $46.3 million was primarily driven by goodwill impairment charges of $46.3 million recorded during the year ended December 31, 2024.

EBITDA and Adjusted EBITDA

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

Year Ended December 31, Change

($ in thousands) 2023 2022 Amount

Net (loss) income $ (2,662) $ 235 $ (2,897)

Year Ended December 31,

($ in thousands) 2024 2023 Change

Net loss $ (48,102) $ (2,662) $ (45,440)

Interest expense 11,425 11,478 (53)

Income tax expense (benefit) 41 (231) 272

Income tax expense 1,965 41 1,924

Depreciation and amortization 26,677 25,918 759

EBITDA (8,035) 34,775 (42,810)

Lease guarantee (income) expense (377) 5,744 (6,121)

Lease guarantee income (5,548) (377) (5,171)

Change in fair value of interest rate swap contracts (1,693) 1,580 (3,273)

Stock-based compensation expense 2,088 3,352 (1,264)

SEC settlement 3,900 — 3,900

Goodwill impairment charges 46,303 — 46,303

Settlement gain (1)

— (10,000) 10,000

Other asset impairment charges — 1,200 (1,200)

Business transformation costs (2)

Acquisition-related costs — 1,130 (1,130)

1,223 929 294

Other non-routine expense (3)

874 3,124 (2,250)

Asset impairment charges 1,200 422 778

Executive transition and organizational redesign (4)

2,929 — 2,929

Adjusted EBITDA $ 42,041 $ 34,583 $ 7,458

_________________

(1) Represents non-recurring costs associated with the launch of strategic projects including supply chain management improvements and technology infrastructure initiatives.

(1) As discussed in Note 17 - Commitments and Contingencies to the consolidated financial statements in this Annual Report on Form 10-K, the Company recovered approximately $10.0 million related to the Settlement Agreement.

The Company accounted for the settlement as a recovery of previously recorded expenses related to the litigation.

The Company has adjusted for the $10.0 million recovery.

(2) Represents costs associated with the launch of strategic projects including supply chain management improvements and technology infrastructure initiatives.

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

(4) Includes severance and related expenses for the Company’s transition of executive officers and organizational redesign.

Liquidity and Capital Resources

7 unchanged sentences

Pursuant to the agreement, we will pay the swap counterparty a fixed rate of 4.11% in exchange for floating payments based on CME Term SOFR.

Effective as of April 20, 2023, we and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023.

The Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice, thereby resolving all existing and potential liability against all named defendants in the Delaware Action, in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company, making a payment to the Company in the sum of $9.25 million (the “Settlement Amount”).

The full terms of the settlement of the Delaware Action were incorporated into the long-form settlement agreement, which was subject to approval of the Court of Chancery (as amended on November 1, 2023, the “Settlement Agreement”).

On September 8, 2023, the Court of Chancery approved the proposed settlement and an application by Bishop’s counsel for an award of attorneys’ fees and expenses.

On October 16, 2023, after approval of the settlement had become final, the Ni Defendants paid the Company $1.5 million of the Settlement Amount.

On December 1, 2023, the Company received 1,997,423 shares of the Company’s common stock as consideration for the remaining $7.75 million balance due under the Settlement Agreement.

All of the shares of Company common stock received as consideration for the Settlement have been placed by the Company in treasury.

Please refer to Part I.

Legal Proceedings in this Annual Report on Form 10-K and Note 16 - Commitments and Contingencies to the consolidated financial statements herein for additional information.

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 year ended December 31, 2024.

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

3 unchanged sentences

The following table summarizes cash flow data for the years ended December 31, 2024 and 2023:

Years Ended December 31,

Year Ended December 31,

(In thousands) 2024 2023 Change

Net cash provided by operating activities $ 15,804 $ 31,284 $ (15,480)

Net cash provided by (used in) operating activities $ 22,636 $ (1,648) $ 24,284

Net cash used in investing activities (12,548) (1,514) (11,034)

Net cash (used in) provided by financing activities (23,347) 28,999 (52,346)

Net (decrease) increase in cash and cash equivalents $ (9,057) $ 9,497 $ (18,554)

Net cash used in financing activities (10,853) (5,895) (4,958)

Net decrease in cash and cash equivalents $ (765) $ (9,057) $ 8,292

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes.

Net cash provided by operating activities decreased by $15.5 million, or 49%, primarily due to the timing of working capital outlays.

During the year ended December 31, 2023, we implemented new enterprise accounting and finance applications, which modified our accounts receivable, accounts payable and treasury processes.

As a result of this transformation, we significantly paid down our accounts payable, which negatively impacted our net cash provided by operating activities.

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, asset impairment charges, changes in deferred income taxes and others, and includes the effect of working capital changes.

Checks issued not presented for payment was reclassified from financing to operating activities for both the current and prior year which resulted in a $1.2 million increase to net cash provided by operating activities in the current year and a $17.5 million decrease in the prior year.

Net cash provided by operating activities increased by $24.3 million primarily due to the timing of working capital outlays such as the increase of $18.6 million resulting from checks issued not presented for payment and was partially offset by decreased operating income (excluding the $46.3 million non-cash goodwill impairment charge) and the $3.9 million SEC settlement payment.

Investing Activities

Net cash used in investing activities decreased by $49.3 million, or 97%, primarily due to payments related to acquisitions in the year ended December 31, 2022.

Net cash used in investing activities increased by $11.0 million primarily due to increased capital project spend in the year ended December 31, 2024.

Financing Activities

Net cash (used in) provided by financing activities decreased by $52.3 million to $23.3 million used in financing activities primarily due to the reduction in proceeds from long-term debt for the year ended December 31, 2023.

In addition, checks issued not presented for payment decreased significantly for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the reduction in checks issued as a result of our new enterprise accounting and finance applications.

Net cash used in financing activities increased by $5.0 million to $10.9 million during the year ended December 31, 2024 primarily due to the change in line of credit activity from net proceeds for the year ended December 31, 2023 to net payments for the year ended December 31, 2024.

Critical Accounting Estimates

28 unchanged sentences

If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

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 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.

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 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 fair value of the reporting unit exceeded the carrying value by approximately 1%, and therefore we concluded no impairment existed as of that date.

As a result of continued declines in the level of stock price, the Company performed a quantitative impairment assessment as of December 31, 2024.

The results of the testing as of December 31, 2024, concluded that the estimated fair value of the reporting unit fell short of carrying value, and therefore impairment existed as of that date.

A goodwill impairment charge of $46.3 million was recorded in the consolidated statements of operations during the year ended December 31, 2024.

For the December 31, 2024, September 30, 2024 and December 31, 2023 impairment tests, we used 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 of the reporting unit.

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

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

The income approach requires detailed forecasts of cash flows, including significant assumptions such as revenue growth rates, gross profit margins, distribution, selling and administrative expenses, among other assumptions, 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.

In addition, we considered the reasonableness of the fair value of the reporting unit 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 outstanding and common stock publicly traded price.

We determined that the implied control premium was reasonable which corroborates our fair value estimates.

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.

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

In addition, we corroborated the reasonableness of the total fair value of the reporting unit by assessing the implied control premium based on our market capitalization.

Our market capitalization is calculated using the number of common shares issued and common stock 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 $10%, or $45.0 million.

No goodwill impairment was recorded for the year ended December 31, 2023.

See Note 8 - Goodwill and Acquired Intangible Assets to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

3 unchanged sentences

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, 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 long-term 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.

Assuming all other assumptions and inputs used in the fair value analysis are held constant, for the December 31, 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 $11.6 million, $31.0 million, $7.3 million, and $5.5 million, respectively, which would likely result in further impairment.

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 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.

Impairment of Long-lived Assets

3 unchanged sentences

If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value.

No impairment of long-lived assets was recognized during the year ended December 31, 2024.

We impaired machinery used in the operations within HF Foods Industrial, Inc.

5 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis