What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-12 · 68 added, 198 removed, 138 unchanged (66% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for HF Foods Group Inc.

(“HF Foods”, the “Company,” “we,” “us,” or “our”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

(“HF Foods”, the “Company,” “we,” “us,” or “our”) contains forward-looking statements.

Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

Words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

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All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation:

• Low margins in the foodservice distribution industry and periods of significant or prolonged inflation or deflation;

• Qualified labor shortages;

• Unfavorable macroeconomic conditions in the United States;

• Competition in the foodservice distribution industry particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche;

• Increases in fuel costs;

• Disruption of relationships with vendors and increases in product prices;

• Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains;

• The effects of the COVID-19 pandemic or other pandemics;

• The steps taken by the governments where our suppliers are located, including the People’s Republic of China, to address the COVID-19 pandemic or other pandemics;

• Disruption of relationships with or loss of customers;

• Changes in consumer eating and dining out habits;

• Related party transactions and possible conflicts of interests;

• Related parties and variable interest entities consolidation;

• Failure to protect our intellectual property rights;

• Our ability to renew or replace our current warehouse leases on favorable terms, or terminations prior to expiration of stated terms;

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

• Our ability to attract, train and retain employees;

• Changes in and enforcement of immigration laws;

• Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws;

• Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations;

• Costs to comply with environmental laws and regulations;

• Litigation, regulatory investigations and potential enforcement actions;

• Increases in commodity prices;

government tariffs on products imported into the United States, particularly from China;

• Severe weather, natural disasters and adverse climate change;

• Unfavorable geopolitical conditions;

• Any cyber security incident, other technology disruption or delay in implementing our information technology systems;

• Current indebtedness affecting our liquidity and ability of future financing;

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

• Scarcity of and competition for acquisition opportunities;

• Our ability to obtain acquisition financing;

• The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions;

• Our ability to identify acquisition candidates;

• Increases in debt in order to successfully implement our acquisition strategy;

• Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results;

• The impact on the price and demand for our common stock resulting from the relative illiquidity of the market for our common stock;

• Significant stockholders’ ability to significantly influence the Company;

• The impact of state anti-takeover laws and related provisions in our governance documents.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications.

We caution you that the important factors referenced above may not contain all of the risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you.

These risks and uncertainties include, but are not limited to, those factors described under Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC.

Factors that could cause or contribute to such differences include those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”).

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect.

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

We aim to supply the increasing demand for Asian American restaurant cuisine, leveraging our nationwide network of distribution centers and our strong relations with growers and suppliers of fresh, high-quality specialty restaurant food products and supplies in the US, South America, and China.

Capitalizing on our deep understanding of the Chinese culture, we have become a trusted partner serving Asian restaurants and other foodservice customers throughout the United States, providing sales and service support to customers who mainly converse in Mandarin or other Chinese dialects.

Capitalizing on our deep understanding of the Asian culture, we have become a trusted partner serving Asian restaurants and other foodservice customers 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.

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• Centralized Purchasing:

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

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

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

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• Digital Transformation:

We will be implementing a modern ERP solution across all of our distribution centers.

We are in the process of completing the implementation of a modern ERP solution across all of our distribution centers.

This is expected to deliver enhanced operational efficiency and responsiveness, streamlined processes, and greater data driven decision-making.

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Financial Overview

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

($ in thousands) 2024 2023 Change 2024 2023 Change

Three Months Ended March 31,

($ in thousands) 2025 2024 Change

Net revenue $ 298,428 $ 295,654 $ 2,774

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

Net loss $ (1,530) $ (559) $ (971)

Adjusted EBITDA $ 9,773 $ 8,702 $ 1,071

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Results of Operations

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

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

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

Three Months Ended September 30,

($ in thousands) 2024 2023 Change

Net revenue $ 298,389 $ 281,453 $ 16,936

Cost of revenue 248,226 230,528 17,698

Gross profit 50,163 50,925 (762)

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

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

Interest expense 2,644 2,715 (71)

Other expense (income), net (332) (490) 158

Change in fair value of interest rate swap contracts 3,290 (1,984) 5,274

Lease guarantee income — (95) 95

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

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

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

net income attributable to noncontrolling interests 103 90 13

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

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

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

Three Months Ended September 30,

Net revenue 100.0 % 100.0 %

Cost of revenue 83.2 % 81.9 %

Gross profit 16.8 % 18.1 %

Distribution, selling and administrative expenses 16.6 % 17.4 %

Income from operations 0.2 % 0.7 %

Interest expense 0.8 % 1.0 %

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

Change in fair value of interest rate swap contracts 1.1 % (0.7) %

Lease guarantee income — % — %

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

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

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

net income attributable to noncontrolling interests — % — %

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

(1.3) % 0.7 %

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

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

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

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

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

Distribution, Selling and Administrative Expenses

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

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

Interest Expense

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

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

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

Income Tax Expense (Benefit)

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

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

Net loss attributable to HF Foods Group Inc.

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

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

EBITDA and Adjusted EBITDA

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

Three Months Ended September 30,

($ in thousands) 2024 2023 Change

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

Interest expense 2,644 2,715 (71)

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

Depreciation and amortization 6,666 6,422 244

EBITDA 4,219 11,075 (6,856)

Lease guarantee income — (95) 95

Change in fair value of interest rate swap contracts 3,290 (1,984) 5,274

Stock-based compensation expense 701 757 (56)

Business transformation costs (1)

Other non-routine expense (2)

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

_________________

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

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

Results of Operations

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

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

Comparison of Three Months Ended March 31, 2025 to Three Months Ended March 31, 2024

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2025 and 2024 .

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

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands) 2025 2024 Change

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Interest expense 2,609 2,834 (225)

Other expense (income), net 3,040 (845) 3,885

Other income, net (177) (94) (83)

Change in fair value of interest rate swap contracts 1,184 (1,970) 3,154

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Loss before income taxes (2,462) (740) (1,722)

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

Income tax benefit (932) (181) (751)

Net loss and comprehensive loss (1,530) (559) (971)

net income (loss) attributable to noncontrolling interests 456 (484) 940

net income attributable to noncontrolling interests 115 135 (20)

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net revenue 100.0 % 100.0 %

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Loss before income taxes (0.8) % (0.3) %

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

Income tax benefit (0.3) % (0.1) %

Net loss and comprehensive loss (0.5) % (0.2) %

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

net income attributable to noncontrolling interests — % — %

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

(0.6) % (0.2) %

Net revenue for the nine months ended September 30, 2024 increased by $28.8 million, or 3.3%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation and improved pricing in certain categories, partially offset by the $13.3 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

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

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

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

Net revenue for the three months ended March 31, 2025 increased by $2.8 million, or 0.9%, compared to the same period in 2024.

This growth was achieved despite one fewer day of operations compared to the prior year period.

The increase was primarily attributable to volume increases and improved pricing in Commodity, Meat & Poultry and Seafood, offset by a decrease in volume within other categories.

Gross profit was $51.0 million for three months ended March 31, 2025 compared to $50.4 million in the same period in 2024 , an increase of $0.5 million, or 1.1%.

The increase was primarily attributable to an increase in margins on Commodity and Seafood during the quarter.

Gross profit margin for the three months ended March 31, 2025 of 17.1% remained consistent compared to 17.1% in the same period in 2024 .

Distribution, Selling and Administrative Expenses

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

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

Distribution, selling and administrative expenses decreased by $0.7 million, or 1.4%, to $49.8 million, for the three months ended March 31, 2025 primarily due to a decrease of $1.6 million in professional fees.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.7% for the three months ended March 31, 2025 from 17.1% in the same period in 2024, primarily due to increased net revenue and lower professional fees, partially offset by increased payroll, insurance, rental and other expenses.

Interest Expense

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

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

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

Income Tax Expense (Benefit)

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

Net Loss Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc.

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

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

Interest expense for the three months ended March 31, 2025 of $2.6 million decreased slightly compared to $2.8 million for the three months ended March 31, 2024.

Average floating interest rates on our floating-rate debt for the three months ended March 31, 2025 decreased by approximately 1.0% on our line of credit and 1.0% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2024.

Our average daily line of credit balance increased by $4.0 million, or 9.0%, to $48.7 million for the three months ended March 31, 2025 from $44.7 million for the three months ended March 31, 2024, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.8%, to $100.4 million for the three months ended March 31, 2025 from $105.5 million for the three months ended March 31, 2024.

Income Tax Benefit

Income tax benefit was $932 thousand for the three months ended March 31, 2025, compared to an income tax benefit of $181 thousand for the three months ended March 31, 2024, primarily due to an increase in loss before income taxes.

Net loss was $1.5 million for the three months ended March 31, 2025 , compared to net loss of $0.6 million for the three months ended March 31, 2024.

The increased loss was primarily driven by the change related to the fair value of interest rate swap contracts of $3.2 million partially offset by the change in income from operations of $1.2 million.

EBITDA and Adjusted EBITDA

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

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands) 2025 2024 Change

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Interest expense 2,609 2,834 (225)

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

Income tax benefit (932) (181) (751)

Depreciation and amortization 6,758 6,676 82

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Stock-based compensation expense 374 738 (364)

SEC settlement 3,900 — 3,900

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

Business transformation costs (1)

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100 306 (206)

Executive transition and organizational redesign (3)

Adjusted EBITDA $ 9,773 $ 8,702 $ 1,071

_________________

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

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

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

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

Liquidity and Capital Resources

As of September 30, 2024, we had cash of approximately $11.4 million, checks issued not presented for payment of $12.0 million and access to approximately $27.3 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

As of March 31, 2025, we had cash of approximately $16.1 million, checks issued not presented for payment of $5.0 million and access to approximately $60.0 million in additional funds through our $125.0 million line of credit, subject to a borrowing base calculation.

We have funded working capital and other capital requirements primarily by cash flow from operations and bank loans.

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However, our ability to repay our current obligations will depend on the future realization of our current assets.

Management has considered the historical experience, the economy, the trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of September 30, 2024.

We are party to an amortizing interest rate swap contract with JPMorgan Chase for an initial notional amount of $120.0 million, expiring in March 2028, as a means to partially hedge our existing floating rate loans exposure.

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.

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 nine months ended September 30, 2024.

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

However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, competitive pricing in the foodservice distribution industry, and our bank and suppliers being able to provide continued support.

If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.

As of September 30, 2024, we have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes cash flow data for the three months ended September 30, 2024 and 2023:

Nine Months Ended September 30,

If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected capital investment plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.

As of March 31, 2025, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes cash flow data for the three months ended March 31, 2025 and 2024:

Three Months Ended March 31,

(In thousands) 2025 2024 Change

Net cash (used in) provided by operating activities $ (3,299) $ 20,624 $ (23,923)

Net cash provided by operating activities $ 6,948 $ 11,224 $ (4,276)

Net cash used in investing activities (3,564) (2,585) (979)

Net cash provided by (used in) financing activities 8,935 (28,018) 36,953

Net decrease in cash and cash equivalents $ (3,787) $ (9,989) $ 6,202

Net cash used in financing activities (1,752) (5,656) 3,904

Net increase in cash and cash equivalents $ 1,632 $ 2,983 $ (1,351)

Operating Activities

Net cash (used in) provided by operating activities consists primarily of net income, which includes the $3.9 million SEC settlement payment, adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes.

Net cash (used in) provided by operating activities decreased by $23.9 million primarily due to the timing of working capital outlays and the $3.9 million SEC settlement payment partially offset by improved operating income.

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.

Net cash provided by operating activities decreased by $4.3 million primarily due to the timing of working capital outlays such as the increase of account receivable due to sales growth, inventory purchases to counter potential tariff increase partially offset by decreases in prepaid expenses.

Investing Activities

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

Net cash used in investing activities increased by $1.0 million primarily due to increased capital project spend in the three months ended March 31, 2025.

Financing Activities

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

Net cash used in financing activities decreased by $3.9 million to $1.8 million during the three months ended March 31, 2025 primarily due to the change in line of credit activity from net payments for the three months ended March 31, 2024 to net proceeds for the three months ended March 31, 2025.

Critical Accounting Policies and Estimates

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Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2024 Annual Report on Form 10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results.

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

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

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

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

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

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

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

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

As a result of continued declines in the level of stock price, the Company performed a quantitative goodwill 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 during the fourth quarter of the year ended December 31, 2024.

For the December 31, 2024 impairment test, 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.

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

The 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.

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

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

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 issued and the common stock’s publicly traded price.

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

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

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

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

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

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.

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

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

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

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

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 further prolonged decline occurs in the market price of our common stock, it may cause a change in the results of the impairment assessment and, as such, could result in an impairment of goodwill.

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

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

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

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

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

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

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 further impairment of goodwill.

The Company determined that there were no events or circumstances during the three months ended March 31, 2025 that would more likely than not reduce the fair value of the reporting unit below its carrying value.

Recent Accounting Pronouncements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis