What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-08-09 · 157 added, 136 removed, 557 unchanged (34% of the section changed)

4 unchanged sentences

(In thousands, except share data)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

CURRENT ASSETS:

32 unchanged sentences

SHAREHOLDERS’ EQUITY:

Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of June 30, 2023 and December 31, 2022

Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 54,086,164 shares issued and outstanding as of June 30, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022

Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022

Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 54,152,903 shares issued and outstanding as of September 30, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022

Additional paid-in capital 600,696 598,322

8 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share data)

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

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

2023 2022 2023 2022

7 unchanged sentences

Distribution, selling and administrative expenses 48,841 54,589 154,013 140,840

(LOSS) INCOME FROM OPERATIONS ( 1,577 ) 6,727 ( 4,334 ) 17,046

Other (income) expenses:

INCOME (LOSS) FROM OPERATIONS 2,084 ( 3,096 ) ( 2,250 ) 13,950

Other expenses (income):

Interest expense 2,715 2,274 8,430 5,101

2 unchanged sentences

Lease guarantee expense ( 95 ) ( 58 ) ( 305 ) 5,831

Total other (income) expenses, net ( 226 ) 1,136 5,040 7,211

(LOSS) INCOME BEFORE INCOME TAXES ( 1,351 ) 5,591 ( 9,374 ) 9,835

Total other expenses (income), net 146 1,470 5,186 8,681

INCOME (LOSS) BEFORE INCOME TAXES 1,938 ( 4,566 ) ( 7,436 ) 5,269

Income tax expense (benefit) ( 36 ) ( 672 ) ( 2,053 ) 1,529

NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ( 1,560 ) 4,494 ( 7,357 ) 7,634

net (loss) income attributable to noncontrolling interests ( 710 ) ( 70 ) ( 574 ) ( 44 )

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

NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 1,974 ( 3,894 ) ( 5,383 ) 3,740

net income (loss) attributable to noncontrolling interests 90 ( 30 ) ( 484 ) ( 74 )

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

$ 1,884 $ ( 3,864 ) $ ( 4,899 ) $ 3,814

(LOSS) EARNINGS PER COMMON SHARE - BASIC $ ( 0.02 ) $ 0.08 $ ( 0.13 ) $ 0.14

(LOSS) EARNINGS PER COMMON SHARE - DILUTED $ ( 0.02 ) $ 0.08 $ ( 0.13 ) $ 0.14

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

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

WEIGHTED AVERAGE SHARES - BASIC 54,142,396 53,798,131 54,005,010 53,716,464

5 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

10 unchanged sentences

Lease guarantee expense ( 305 ) 5,831

Other expense (income) 389 ( 47 )

Other expense 446 54

Changes in operating assets and liabilities (excluding effects of acquisitions):

30 unchanged sentences

Cash at end of the period $ 14,300 $ 17,806

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

HF Foods Group Inc.

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

Six Months Ended June 30,

Supplemental disclosure of cash flow data:

Cash paid for interest $ 5,420 $ 1,883

Cash paid for income taxes 825 8,525

Supplemental disclosure of non-cash investing and financing activities:

1 unchanged sentence

Property acquired in exchange for finance leases 1,285 1,272

Note receivable related to property and equipment sales 300 —

Intangible asset acquired in exchange for noncontrolling interests — 566

5 unchanged sentences

Common Stock Additional

Capital Retained

Earnings (Accumulated Deficit) Total

Shareholders’

Attributable to

Capital Retained Earnings

(Accumulated Deficit) Total Shareholders’

Equity Attributable to

HF Foods Group Inc.

Noncontrolling

14 unchanged sentences

Balance at June 30, 2022 53,706,392 5 597,738 ( 299,296 ) 298,447 4,617 303,064

Net loss — — — ( 3,864 ) ( 3,864 ) ( 30 ) ( 3,894 )

Issuance of common stock pursuant to equity compensation plan 138,412 — — — — — —

Shares withheld for tax withholdings on vested awards ( 31,438 ) — ( 162 ) — ( 162 ) — ( 162 )

Stock-based compensation — — 162 — 162 — 162

Balance at September 30, 2022 53,813,366 $ 5 $ 597,738 $ ( 303,160 ) $ 294,583 $ 4,587 $ 299,170

Balance at January 1, 2023 53,813,777 $ 5 $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249

9 unchanged sentences

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

Net income — — — 1,884 1,884 90 1,974

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

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

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

Stock-based compensation — — 757 — 757 — 757

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

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

18 unchanged sentences

These financial statements are condensed and should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended December 31, 2022 and 2021.

Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The accompanying condensed consolidated financial statements include the accounts of HF Group and a variable interest entity for which the Company is the primary beneficiary.

10 unchanged sentences

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

The Company did not incur expenses from VIEs and did not have any sales to or income from any VIEs during the six months ended June 30, 2023.

The Company did not incur expenses from VIEs and did not have any sales to or income from any VIEs during the three and nine months ended September 30, 2023 and 2022.

See Note 14 - Commitments and Contingencies for additional information on AnHeart.

2 unchanged sentences

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

As of June 30, 2023 and December 31, 2022, noncontrolling interest equity consisted of the following:

As of September 30, 2023 and December 31, 2022, noncontrolling interest equity consisted of the following:

($ in thousands) Ownership of

noncontrolling interest at June 30, 2023

June 30, 2023 December 31, 2022

noncontrolling interest at September 30, 2023

September 30, 2023 December 31, 2022

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

3 unchanged sentences

Monterey Food Service, LLC 35.00 % 446 452

Ocean West Food Services, LLC 32.50 % 2,161 1,986

Ocean West Food Services, LLC (b)

32.50 % 1,652 1,986

Syncglobal Inc.

2 unchanged sentences

_________________

(a) During the three months ended June 30, 2023, the Company began to wind down HFFI operations.

(a) During the nine months ended September 30, 2023, the Company began to wind down HFFI operations.

Accordingly, the machinery used in HFFI operations was impaired.

See Note 4 - Balance Sheet Components for additional information.

(b) During the three months ended September 30, 2023, the Company ceased operations of Ocean West Food Services, LLC.

Uses of Estimates

1 unchanged sentence

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, allowance for expected credit losses, inventory reserves, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, impairment of long-term investments, impairment of goodwill, the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations, realization of deferred tax assets, uncertain income tax positions, the liability for self-insurance and stock-based compensation.

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

1 unchanged sentence

Note 3 - Revenue

For the three and six months ended June 30, 2023 and 2022, revenue recognized from performance obligations related to prior periods was immaterial.

For the three and nine months ended September 30, 2023 and 2022, revenue recognized from performance obligations related to prior periods was immaterial.

Revenue expected to be recognized in any future periods related to remaining performance obligations is immaterial.

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

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

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

($ in thousands) 2023 2022 2023 2022

8 unchanged sentences

Accounts receivable, net consisted of the following:

(In thousands) June 30, 2023 December 31, 2022

(In thousands) September 30, 2023 December 31, 2022

Accounts receivable $ 44,607 $ 45,628

2 unchanged sentences

Movement of allowance for expected credit losses was as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2023 2022

4 unchanged sentences

Ending balance $ 1,474 $ 1,748

Prepaid expenses and other current assets consisted of the following:

(In thousands) September 30, 2023 December 31, 2022

Prepaid expenses $ 3,317 $ 1,504

Advances to suppliers 15,230 4,494

Other current assets 5,064 2,939

Prepaid expenses and other current assets $ 23,611 $ 8,937

Property and equipment, net consisted of the following:

(In thousands) June 30, 2023 December 31, 2022

(In thousands) September 30, 2023 December 31, 2022

Automobiles $ 37,753 $ 34,891

7 unchanged sentences

Property and equipment, net $ 135,350 $ 140,330

Depreciation expense was $ 2.4 million and $ 2.2 million for the three months ended June 30, 2023 and 2022, respectively.

Depreciation expense was $ 5.0 million and $ 4.4 million for the six months ended June 30, 2023 and 2022, respectively.

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

comprehensive income.

Depreciation expense was $ 2.4 million and $ 2.2 million for the three months ended September 30, 2023 and 2022, respectively.

Depreciation expense was $ 7.3 million and $ 6.6 million for the nine months ended September 30, 2023 and 2022, 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 unaudited condensed consolidated statements of operations and comprehensive income (loss).

See Note 2 - Summary of Significant Accounting Policies for additional information regarding the Company’s operations at HFFI.

Long-term investments consisted of the following:

(In thousands) Ownership as of June 30,

2023 June 30, 2023 December 31, 2022

(In thousands) Ownership as of September 30,

2023 September 30, 2023 December 31, 2022

Asahi Food, Inc.

4 unchanged sentences

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

The Company determined there was no impairment as of June 30, 2023 and December 31, 2022 for these investments.

The Company determined there was no impairment as of September 30, 2023 and December 31, 2022 for these investments.

Accrued expenses and other liabilities consisted of the following:

(In thousands) June 30, 2023 December 31, 2022

(In thousands) September 30, 2023 December 31, 2022

Accrued compensation $ 5,710 $ 6,798

6 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

13 unchanged sentences

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

June 30, 2023

September 30, 2023

Fixed rate debt:

Bank of America $ — $ — $ 1,454 $ 1,703

East West Bank — — 1,747 2,314

Other finance institutions — — 49 48

7 unchanged sentences

Bank of America $ — $ — $ 1,630 $ 1,948

East West Bank — — 1,786 2,351

Other finance institutions — — 186 197

13 unchanged sentences

In addition to the closing cash payment, the Company separately acquired all of the sellers' saleable product inventory, for approximately $ 14.4 million and additional fixed assets for approximately $ 0.5 million.

The Company finalized its purchase accounting as of December 31, 2022.

The Company accounted for this transaction under ASC 805 Business Combinations, by applying the acquisition method of accounting and established a new basis of accounting on the date of acquisition.

1 unchanged sentence

Goodwill is calculated as the excess of the purchase price over the net assets recognized and represent synergies and benefits expected as a result from combining operations with an emerging national presence.

The transaction costs for the acquisition for the six months ended June 30, 2022 totaled approximately $ 0.3 million and were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

The transaction costs for the acquisition for the nine months ended September 30, 2022 totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

The information included herein was prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using a combination of quoted market prices, discounted cash flows, and other estimates made by management.

The Company finalized the valuation of assets acquired and liabilities assumed for the Sealand acquisition as of March 31, 2023.

The Company finalized the valuation of assets acquired and liabilities assumed for the Sealand acquisition as of December 31, 2022.

Purchase Price Allocation

20 unchanged sentences

Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the three and six months ended June 30, 2022, as if the acquisition of Sealand had been consummated on January 1, 2022.

The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets and excludes other non-recurring

transaction costs directly associated with the acquisition such as legal and other professional service fees.

The following table presents the Company’s unaudited pro forma results for the three and nine months ended September 30, 2022, as if the acquisition of Sealand had been consummated on January 1, 2022.

The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees.

Statutory rates were used to calculate income taxes.

(In thousands, except share and per share data) Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

(In thousands, except share and per share data) Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

Pro forma net revenue $ 300,712 $ 910,397

Pro forma net income attributable to HF Group $ ( 3,368 ) $ 3,389

Pro forma earnings per common share - basic $ 0.07 $ 0.14

Pro forma earnings per common share - diluted $ 0.07 $ 0.13

Pro forma weighted average shares - basic 53,706,392 53,706,392

Pro forma weighted average shares - diluted 53,900,883 53,927,957

Note 7 - Goodwill and Acquired Intangible Assets

Goodwill was $ 85.1 million as of June 30, 2023 and December 31, 2022.

There was no change in the carrying amount of goodwill for the six months ended June 30, 2023.

Goodwill was $ 85.1 million as of September 30, 2023 and December 31, 2022.

There was no change in the carrying amount of goodwill for the nine months ended September 30, 2023.

Acquired Intangible Assets

The components of the intangible assets are as follows:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(In thousands) Gross

7 unchanged sentences

Total $ 233,414 $ ( 51,536 ) $ 181,878 $ 233,414 $ ( 39,323 ) $ 194,091

Amortization expense for acquired intangible assets was $ 4.1 million and $ 4.0 million for the three months ended June 30, 2023 and 2022, respectively.

Amortization expense for acquired intangible assets was $ 8.1 million and $ 7.6 million for the six months ended June 30, 2023 and 2022, respectively.

During the three months ended June 30, 2022, the Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of income and comprehensive income.

Amortization expense for acquired intangible assets was $ 4.1 million and $ 4.1 million for the three months ended September 30, 2023 and 2022, respectively.

Amortization expense for acquired intangible assets was $ 12.2 million and $ 11.7 million for the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2022, the Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Note 8 - Derivative Financial Instruments

14 unchanged sentences

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

As of June 30, 2023, the Company determined that the fair values of the IRS contracts were $ 0.6 million in an asset position.

As of September 30, 2023, the Company determined that the fair values of the IRS contracts were $ 2.6 million in an asset position.

As of December 31, 2022, the fair values of the IRS contracts were $ 0.5 million in an asset position.

3 unchanged sentences

Note 9 - Debt

Long-term debt at June 30, 2023 and December 31, 2022 is summarized as follows:

Long-term debt at September 30, 2023 and December 31, 2022 is summarized as follows:

($ in thousands)

Bank Name Maturity Interest Rate at June 30, 2023

June 30, 2023 December 31, 2022

Bank Name Maturity Interest Rate at September 30, 2023

September 30, 2023 December 31, 2022

Bank of America (a)

18 unchanged sentences

Balloon payments of $ 1.8 million and $ 2.9 million are due at maturity in 2027 and 2029, respectively.

(c) Real estate term loan with a principal balance of $ 108.8 million as of June 30, 2023 and 111.4 million as of December 31, 2022 is secured by assets held by the Company and has a maturity date of January 2030.

Equipment term loan with a principal balance of $ 0.1 million as of June 30, 2023 and $ 0.3 million as of December 31, 2022 is secured by specific vehicles and equipment as defined in loan agreements.

(c) Real estate term loan with a principal balance of $ 107.5 million as of September 30, 2023 and 111.4 million as of December 31, 2022 is secured by assets held by the Company and has a maturity date of January 2030.

Equipment term loan with a principal balance of $ 0.1 million as of September 30, 2023 and $ 0.3 million as of December 31, 2022 is secured by specific vehicles and equipment as defined in loan agreements.

Equipment term loan matures in December 2023.

1 unchanged sentence

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

As of June 30, 2023, the Company was in compliance with its covenants.

As of September 30, 2023, the Company was in compliance with its covenants.

Note 10 - Earnings (Loss) Per Share

1 unchanged sentence

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.

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 92,945 and 100,012 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 and six months ended June 30, 2023, respectively, because their effect would have been anti-dilutive.

There were 3,471 and 3,668 potential common shares related to total shareholder return performance-based restricted stock units that were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2022, respectively, because their effect would have been anti-dilutive.

There were 1,102,972 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 three and nine months ended September 30, 2023, respectively, because their effect would have been anti-dilutive.

There were 279,412 and 148,479 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 and nine months ended September 30, 2022, respectively, because their effect would have been anti-dilutive.

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

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

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

($ in thousands, except share and per share data) 2023 2022 2023 2022

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

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

$ 1,884 $ ( 3,864 ) $ ( 4,899 ) $ 3,814

2 unchanged sentences

Weighted-average dilutive shares outstanding 54,513,314 53,798,131 54,005,010 53,981,687

(Loss) earnings per common share:

Earnings (Loss) per common share:

Basic $ 0.03 $ ( 0.07 ) $ ( 0.09 ) $ 0.07

1 unchanged sentence

Note 11 - Income Taxes

The Company has computed its provision for income taxes under the discrete method which treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis.

The Company believes that, at this time, the use of the discrete method is more appropriate than the estimated annual effective tax rate method as the estimated annual effective tax rate method is not reliable .

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

For the three and six months ended June 30, 2022, the Company's effective income tax rate of 19.6 % and 22.4 %, respectively, differed from the federal statutory tax rate primarily as a result of state 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.

The Company has no operations outside the U.S., as such, no foreign income tax was recorded.

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.

For the three and nine months ended September 30, 2022, the Company's effective income tax rate of 14.7 % and 29.0 %, respectively, differed from the federal statutory tax rate primarily as a result of state income taxes.

Note 12 - Related Party Transactions

3 unchanged sentences

Zhang”) became the sole Chief Executive Officer on February 23, 2021.

Xiao Mou Zhang and certain of his immediate family also have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

Zhang and certain of his immediate family also 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.

The Company believes that Mr.

1 unchanged sentence

Ni”), the Company’s former Co-Chief Executive Officer, together with various trusts for the benefit of Mr.

Ni's four children, are collectively the beneficial owners of approximately 25 % of the Company’s outstanding shares of 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.

Ni's four children, are collectively beneficial owners of the Company’s outstanding shares of 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.

For the year ended December 31, 2022, North Carolina Good Taste Noodle, Inc.

3 unchanged sentences

Jian Ming Ni resigned.

The related party transactions as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022 are identified as follows:

The related party transactions as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 are identified as follows:

Related Party Sales, Purchases, and Lease Agreements

Below is a summary of purchases of goods and services from related parties recorded for the three and six months ended June 30, 2023 and 2022, respectively:

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

Below is a summary of purchases of goods and services from related parties recorded for the three and nine months ended September 30, 2023 and 2022, respectively:

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

(In thousands) Nature 2023 2022 2023 2022

(a) Best Food Services, LLC Trade $ 2,729 $ 3,546 $ 4,813 $ 6,491

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) Trade $ 2,045 $ 2,246 $ 6,858 $ 8,738

(b) Eastern Fresh NJ, LLC Trade — — — 1,093

17 unchanged sentences

Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity.

Zhou Min Ni previously owned an equity in this entity as of 12/31/2019.

Zhou Min Ni previously owned an equity in this entity as of December 31, 2019.

The Company has been informed by Mr.

Zhou Min Ni that his equity interest was disposed of on 1/1/2020.

No longer considered a related party as of 1/1/2023 since it has been three years since Mr.

Zhou Min Ni that his equity interest was disposed of on January 1, 2020.

No longer considered a related party as of January 1, 2023 since it has been three years since Mr.

Jian Ming Ni resigned .

Below is a summary of sales to related parties recorded for the three and six months ended June 30, 2023 and 2022, respectively:

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

Below is a summary of sales to related parties recorded for the three and nine months ended September 30, 2023 and 2022, respectively:

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

(In thousands) 2023 2022 2023 2022

2 unchanged sentences

275 126 661 495

(d) Eagle Food Service, LLC — 576 1,942 576

23 unchanged sentences

On May 18, 2022, the Company sold the warehouse to Enson Seafood GA Inc., a related party, for approximately $ 7.2 million, recognized a gain of $ 1.5 million and used a portion of the proceeds to pay the outstanding balance of the Company's $ 4.5 million loan with First Horizon Bank.

Rental income for the three months ended June 30, 2023 and 2022 was nil and $ 0.1 million, respectively, and is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rental income for the six months ended June 30, 2023 and 2022 was nil and $ 0.2 million, respectively, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

No rental income was received for the three months ended September 30, 2023 and 2022.

Rental income for the nine months ended September 30, 2023 and 2022 was nil and $ 0.2 million, respectively, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

In 2020, the Company renewed a warehouse lease from Yoan Chang Trading Inc.

1 unchanged sentence

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 incurred was $ 0.1 million and $ 0.1 million for the three months ended June 30, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rent incurred to the related party was $ 0.2 million and $ 0.1 million for the six months ended June 30, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rent incurred was $ 0.1 million and $ 0.1 million for the three months ended September 30, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rent incurred to the related party was $ 0.3 million and $ 0.2 million for the nine months ended September 30, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

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, 2023 and 2022, respectively, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rental income was $ 0.1 million and $ 0.1 million for the nine months ended September 30, 2023 and 2022, respectively, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Related Party Balances

Accounts Receivable - Related Parties, Net

Below is a summary of accounts receivable with related parties recorded as of June 30, 2023 and December 31, 2022, respectively:

(In thousands) June 30, 2023 December 31, 2022

Below is a summary of accounts receivable with related parties recorded as of September 30, 2023 and December 31, 2022, respectively:

(In thousands) September 30, 2023 December 31, 2022

(a) ABC Food Trading, LLC $ 96 $ —

(b) Asahi Food, Inc.

(d) Eagle Food Service, LLC — 69

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The Company has reserved for 90 % of the accounts receivable for Enson Seafood GA, Inc.

as of June 30, 2023.

as of September 30, 2023.

This outstanding balance was reserved for 80 % as of December 31, 2022.

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

No additional allowance is deemed necessary as of June 30, 2023 and December 31, 2022.

No additional allowance is deemed necessary as of September 30, 2023 and December 31, 2022.

Accounts Payable - Related Parties

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

Below is a summary of accounts payable with related parties recorded as of June 30, 2023 and December 31, 2022, respectively:

(In thousands) June 30, 2023 December 31, 2022

(a) Best Food Services, LLC $ 836 $ 729

Below is a summary of accounts payable with related parties recorded as of September 30, 2023 and December 31, 2022, respectively:

(In thousands) September 30, 2023 December 31, 2022

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) $ 451 $ 729

(b) North Carolina Good Taste Noodle, Inc.

5 unchanged sentences

Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity.

Zhou Min Ni previously owned an equity in this entity as of 12/31/2019.

Zhou Min Ni previously owned an equity in this entity as of December 31, 2019.

The Company has been informed by Mr.

Zhou Min Ni that his equity interest was disposed of on 1/1/2020.

No longer considered a related party as of 1/1/2023 since it has been three years since Mr.

Zhou Min Ni that his equity interest was disposed of on January 1, 2020.

No longer considered a related party as of January 1, 2023 since it has been three years since Mr.

Jian Ming Ni resigned .

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The Company issued a $ 7.0 million unsecured subordinated promissory note to B&R Group Realty Holding, LLC in January 2020.

During the three months ended June 30, 2022, the Company paid the remaining $ 4.5 million principal balance of this related party promissory note payable.

Interest payments paid were $ 0.1 million for the three and six months ended June 30, 2022.

During the nine months ended September 30, 2022, the Company paid the remaining $ 4.5 million principal balance of this related party promissory note payable.

Interest payments paid were $ 0.1 million for the three and nine months ended September 30, 2022.

Note 13 - Stock-Based Compensation

1 unchanged sentence

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, non-employee directors and consultants.

As of June 30, 2023, the Company had 909,226 time-based vesting restricted stock units unvested, 678,381 performance-based restricted stock units unvested, 449,619 shares of common stock vested and 962,774 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.8 million and $ 0.2 million for the three months ended June 30, 2023 and 2022, respectively, and $ 1.8 million and $ 0.5 million for the six months ended June 30, 2023 and 2022, respectively.

As of September 30, 2023, the Company had 820,915 time-based vesting restricted stock units unvested, 674,266 performance-based restricted stock units unvested, 530,395 shares of common stock vested and 974,424 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.8 million and $ 0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $ 2.6 million and $ 0.7 million for the nine months ended September 30, 2023 and 2022, respectively.

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

As of June 30, 2023, there was $ 5.8 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 2.22 years.

As of September 30, 2023, there was $ 5.0 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 2.01 years.

Note 14 - Commitments and Contingencies

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The Company is working to implement those improvements.

As with any SEC investigation, there is also the possibility of potential fines and penalties.

At this time, however, there has not been a demand made by the SEC nor is it possible at this time to estimate the amount of any such fines and penalties, should they occur.

On October 13, 2023, the Company received a “Wells Notice” from the staff of the SEC (the “Wells Notice”) relating to the Company’s previously disclosed SEC investigation.

A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law an invites recipients to submit a response if they wish.

The Company made a submission in response to the SEC Wells Notice explaining why an enforcement action would not be appropriate.

Following that submission, the staff of the SEC determined that it would no longer be recommending that the SEC file an enforcement action against the Company at this time.

As with any SEC investigation or action, there is the possibility of potential fines and penalties.

At this time, however, it is not possible to estimate the amount of any such fines and penalties, should they occur.

On May 20, 2022, the Board of Directors of HF Foods received a letter from a stockholder, James Bishop (the “Bishop Demand”).

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Many of the allegations contained in the Bishop Demand were the subject of the Class Actions.

On June 30, 2022, the Board of Directors of HF Foods resolved to form a special committee (the “Special Litigation Committee”) comprised of independent directors and advised by counsel to analyze and evaluate the allegations in the Bishop Demand to determine whether the Company should assert any claims based on the allegations made in the Bishop Demand against the current or former officers and directors.

On August 19, 2022, James Bishop filed a verified stockholder derivative complaint (the “Delaware Action”) in the Court of Chancery of the State of Delaware (the “Court of Chancery”), which asserts similar allegations to those set forth in the Bishop Demand.

On September 21, 2022, Bishop and the Company filed a stipulation to stay the Delaware Action for 90 days, which the court granted on September 22, 2022.

On December 20, 2022, Bishop and the Company filed a stipulation to extend the stay of the Delaware Action for an additional 60 days, which the court granted on December 21, 2022.

On March 15, 2023, the Court of Chancery entered an order approving a joint stipulation submitted by Bishop and HF Foods to stay the case for an additional 60 days.

Beginning in September 2022, the Court of Chancery approved a series of joint stipulations submitted by Bishop and HF Foods to stay the case through mid-May 2023.

Effective as of April 20, 2023, the Company 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, which was incorporated into a long-form settlement agreement on May 5, 2023 (the “Settlement Agreement”), which was filed with the Court of Chancery on May 8, 2023.

The Settlement Agreement, which is subject to the approval of the Court of Chancery, provided for, among other things, the dismissal of the Delaware Action with prejudice, and releases of claims 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 and the Company adopting certain changes to its bylaws and/or other internal governance policies and procedures.

On May 11, 2023, the Court of Chancery scheduled a hearing to be held on September 8, 2023, to consider, among other things, whether to approve the proposed settlement and an application by Bishop’s counsel for an award of attorneys’ fees and expenses.

The Settlement Agreement, provides for, among other things, the dismissal of the Delaware Action with prejudice, and releases of claims 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 (together with Mr.

Ni, the “Ni Defendants”), making a payment to the Company in the sum of $ 9.25 million (the “Settlement Amount”) within five days of final approval of the proposed settlement;

the termination of any rights the Ni Defendants and another named defendant may have had to future advancement or indemnification from the Company above certain specified caps;

and the Company adopting certain changes to its bylaws and/or other internal governance policies and procedures.

On September 8, 2023, the Court of Chancery entered an Order an Final Judgment (the “Judgment”) approving the proposed settlement and an application by Bishop’s counsel for an award of attorneys’ fees and expenses.

On October 16, 2023, after the Judgment officially became final, the Ni Defendants paid the Company $ 1.5 million of the Settlement Amount in cash but failed to pay the balance of the Settlement Amount ($ 7.75 million) due under the Settlement Agreement.

Effective as of November 1, 2023, the Company, the Ni Defendants, and Bishop entered into an amendment to the Settlement Agreement (“the Amendment”) in accordance with the Judgment.

The Amendment provides that the Ni Defendants will pay the $ 7.75 million balance they owe to the Company plus interest on the outstanding balance (at an annual rate of 7.5 %) in shares of common stock of the Company instead of cash based on a per share value of $ 3.88 per share, which was the per share closing price of the Company’s common stock on Friday, October 13, 2023, the last trading day prior to the date on which the payment of the full Settlement Amount was due.

The Amendment provides that, on the terms and subject to the conditions set forth in the Amendment, the Ni Defendants will transfer the requisite number of shares of common stock to the Company as promptly as practicable after entry into the Amendment.

The Amendment also contains, among other things, customary representations, warranties, conditions and covenants for agreements of this type, including, an indemnity from the Ni Defendants and certain remedies in favor of the Company in the event the Amendment is terminated pursuant to its terms or either of the Ni Defendants fails to perform any of his or her obligations under the amendment or the stipulation.

AnHeart Lease Guarantee

11 unchanged sentences

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 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.

The case remains pending in New York.

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.

As of the filing of the new summons and complaint, AnHeart and Minsheng are indebted to the Company in the amount of $ 474,000 .

In accordance with ASC Topic 460, Guarantees , the Company has determined that its maximum exposure resulting from the 275 Fifth Avenue lease guarantee includes future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases with a remaining term of approximately 11 years.

3 unchanged sentences

The Company determined the discounted value of the lease guarantee liability using a discount rate of 4.55 %.

As of June 30, 2023, the Company had a lease guarantee liability of $ 5.6 million.

As of September 30, 2023, the Company had a lease guarantee liability of $ 5.6 million.

The current portion of the lease guarantee liability of $ 0.3 million is recorded in accrued expenses and other liabilities, while the long-term portion is recorded in other long-term liabilities on the condensed consolidated balance sheet.

The Company's monthly rental payments range from approximately $ 42,000 per month to $ 63,000 per month, with the final payment due in 2034.

The estimated future minimum lease payments as of June 30, 2023 are presented below:

The estimated future minimum lease payments as of September 30, 2023 are presented below:

(In thousands) Amount

Year Ended December 31,

2023 (remaining six months) $ 280

Year Ending December 31,

2023 (remaining three months) $ 140

Thereafter 4,478

4 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-Q

Item 1. Financial Statements