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Item 1. Business

2023-01-31 compared with 2021-03-16 · 133 added, 311 removed, 66 unchanged (87% of the section changed)

HF Foods Group Inc.

acting through its subsidiaries (“HF Group,” the “Company,” “we,” “us,” or “our”), is a leading food service distributor to Asian restaurants, primarily Chinese restaurants located in the Southeastern, Pacific and Mountain West regions of the United States.

HF Group is the result of a merger between two complementary market leaders, HF Foods Group Inc.

and B&R Global Holdings, Inc.

HF Foods Group Inc., operating through its subsidiaries (“HF Group,” the “Company,” “we,” “us,” or “our”), is a leading foodservice distributor to Asian restaurants, primarily Chinese restaurants located throughout the United States.

HF Group was formed through a merger between two complementary market leaders, HF Group and B&R Global Holdings, Inc.

("B&R Global") on November 4, 2019.

We currently have 13 distribution centers strategically located across the east and west coasts of the United States in California, Arizona, Colorado, Florida, Georgia, Nevada, North Carolina, Oregon, Utah, and Washington, and a fleet of over 300 refrigerated vehicles.

Capitalizing on our deep understanding of the Chinese culture and with over 780 employees and subcontractors, and supported by two call centers in China, we have become a trusted partner serving approximately 10,000 Asian restaurants in 22 states, providing round-the-clock sales and service support to customers who mainly converse in Mandarin or Chinese dialects.

Operating through its subsidiaries, the Company is dedicated to serve the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices.

With 18 distribution centers and a fleet of close to 400 refrigerated vehicles, our distribution network now spans 46 states covering approximately 95% of the contiguous United States.

Capitalizing on our deep understanding of the Chinese culture, with over 1,000 employees and subcontractors, and supported by two outsourced call centers in China, we have become a trusted partner serving approximately 15,000 Asian restaurants in over 46 states, providing sales and service support to customers who mainly converse in Mandarin or Chinese dialects.

We are committed to providing excellent customer service by delivering a distinctive product portfolio built from an indelible partnership with both foreign and domestic suppliers.

These relationships, coupled with our proprietary centralized inventory procurement system, ensure that we deliver an outstanding array of products at competitive prices.

The centralized procurement system provides the Company with great negotiating power with suppliers resulting in competitive prices for our customers.

This proprietary system also helps to better manage customer relationships and inventory while providing a solid platform for expansion from acquisition of smaller companies in this fast growing yet fragmented niche market.

Recent Developments

Business Combination with B&R Global

On November 4, 2019, the Company completed the transactions contemplated by that certain merger agreement dated as of June 21, 2019 (the “Merger Agreement”) by and among the Company, B&R Merger Sub Inc., a Delaware corporation (“Merger Sub”), B&R Global, the stockholders of B&R Global (the “B&R Global Stockholders”), and Xiao Mou Zhang (aka Peter Zhang), as representative of the stockholders (the “Business Combination”).

Capitalized terms used herein without definition have the meaning given to them in the Merger Agreement.

Pursuant to the Merger Agreement, Merger Sub merged with and into B&R Global, resulting in B&R Global becoming a wholly owned subsidiary of HF Group.

In connection with the closing, HF Group issued 30.7 million of its shares of common stock to the B&R Global Stockholders.

Pursuant to the Amendment to HF Group’s certificate of incorporation, HF Group currently has authorized share capital of 101,000,000 shares consisting of 100,000,000 shares of common stock with a par value of $0.0001 per share and 1,000,000 shares of preferred stock with a par value of $0.0001 per share.

Immediately after the Business Combination, HF Group’s pre-Business Combination public shareholders owned approximately 12% of HF Group, HF Group’s pre-Business Combination directors, officers and affiliates owned approximately 29.1% of HF Group, and the B&R Global Stockholders owned approximately 58.9% of HF Group.

In connection with the Business Combination:

• HF Group, Xiao Mou Zhang, as representative of the stockholders of B&R Group, and Loeb & Loeb LLP, as escrow agent, entered into an Escrow Agreement pursuant to which HF Group deposited shares of HF Group common stock representing 5% of the aggregate amount of shares issued to the B&R Global Stockholders pursuant to the Merger, to secure the indemnification obligations of the B&R Global Stockholders as contemplated by the Merger Agreement ("Escrow Shares").

The Escrow Shares have since been released on November 25, 2020, one year after the closing of the Business Combination.

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• Certain shareholders of HF Group and certain of the B&R Global Stockholders entered into a Tag-Along Agreement, which provides the stockholder parties thereto with tag-along rights in the event any such stockholder desires to sell his or her HF Group securities in a private transaction, or enter into any transaction that would have the same effect as a sale, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such shares, or to enter into any transaction, swap, hedge or other arrangement, or engage in any short sales with respect to any such securities ("Tag-Along Agreement").

The Tag-Along Agreement has since been rescinded in May 2020.

• HF Group and the B&R Global Stockholders entered into a Registration Rights Agreement to provide for the registration of the common stock issued to the B&R Global Stockholders in connection with the Business Combination.

The B&R Global Stockholders will be entitled to “piggy-back” registration rights with respect to registration statements filed following the consummation of the Business Combination, and will have certain demand rights for registration.

HF Group will bear the expenses incurred in connection with the filing of any such registration statements.

• HF Group, B&R Global, and certain of the B&R Global Stockholders entered into a five year Voting Agreement, which provided that, immediately after the closing of the Business Combination, (i) Zhou Min Ni, the former Chief Executive Officer of HF Group, would continue to serve as a director and the chairman of the board of the Company and as Co-CEO;

(ii) Xiao Mou Zhang, the pre-Business Combination Chief Executive Officer of B&R Global, would begin serving as a director of HF Group and Co-CEO;

(iii) Zhou Min Ni would select one person to serve as an independent director of the Company, (iv) Xiao Mou Zhang would select one person to serve as an independent director, and (v) Zhou Min Ni and Xiao Mou Zhang would jointly select one person to serve as an independent director.

• Pursuant to our 8-K filing on February 25, 2021, Zhou Min Ni has voluntarily resigned as the chairman of the board of directors, Co-CEO and any positions he holds with any of the Company's subsidiaries, effective February 23, 2021.

The Company entered into a separation agreement with Zhou Min Ni which amended certain terms of the Voting Agreement mentioned above.

In particular, Zhou Min Ni has agreed on behalf of himself and the other parties related to him and which he controls, that the provisions of Sections 2.1(b) (naming Mr.

Ni to the Board as the Company Designee), 2.1(d) (allowing Mr.

Ni to designate the Company Independent Designee) and 2.1(e) (allowing Mr.

Ni to join in the nomination of the Joint Independent Designee) and Section 2.4 (requiring Mr.

Ni to be named to the position of Co-Chief Executive Officer) of the Voting Agreement (as it relates only to Mr.

Ni and not Xiao Mou Zhang) are no longer applicable or enforceable.

On the same date, Xiao Mou Zhang has been promoted to become the sole CEO of Company.

The board of directors have also appointment Russell Libby as the new chair of the Company's board of directors.

See Note 19 Subsequent Events.

Acquisition of Warehouse Facilities

On January 17, 2020, the Company completed the transactions contemplated by that certain membership interest purchase agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, B&R Group Realty, and nine subsidiary limited liability companies wholly owned by B&R Group Realty (the “B&R Realty Subsidiaries”) (the “Acquisition”).

Capitalized terms used herein without definition have the meaning given to them in the Purchase Agreement.

Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the B&R Realty Subsidiaries, which own warehouse facilities that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana.

Co-CEO of the Company, Peter Zhang, managed and owned an 8.91% interest in B&R Group Realty.

The total purchase price for the Acquisition was set at $101,269,706.

Financing for the Acquisition was provided under the Second Amended and Restated Credit Agreement, the terms of which are set forth below, and the lender parties thereto relied upon the appraisals in determining to provide such financing.

Based in part on the foregoing, the special transactions review committee, composed of the Company’s independent directors, reviewed and approved the Acquisition and the related financing on behalf of HF Group’s board.

Consideration for the Acquisition was funded by (i) $75.6 million in mortgage-backed term loans financed under the Second Amended and Restated Credit Agreement, (ii) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note (the “Note”) to B&R Group Realty, and (iii) payment of $18.7 million from funds drawn from the Company’s revolving credit facility.

The restatement of the mortgage-backed term loans released B&R Group Realty from its obligations to the lenders under the First Amended Credit Agreement and predecessor financing arrangements.

Amendment to Credit Facility

On November 4, 2019, the Company, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as

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guarantors, entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A.

(“JPMorgan”), as Administrative Agent, and certain lender parties thereto.

The Amended Credit Agreement provided for (a) a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and (b) mortgage-secured Term Loans of $55.4 million, and amended and restated the existing $75 million secured revolving credit facility and $60 million of real estate term loans evidenced by that certain Credit Agreement, dated as of November 6, 2017, among B&R Global, its affiliates and JP Morgan Chase Bank, N.A., as the sole lender.

On January 17, 2020, the Borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) by and among JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank.

The Second Amended Credit Agreement provided for (a) a $100 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Facility”), and (b) mortgage-secured Term Loans of $75.6 million.

The Second Amended Credit Agreement amended and restated the existing $55.0 million of real estate term loans under the Amended Credit Agreement.

As of January 17, 2020, the existing balance of revolving debt under the Amended Credit Agreement, $41.2 million, was rolled over, and an additional $18.7 million available to the Company under the Facility was drawn.

The Company used the $75.6 million in mortgage-secured term loans and $18.7 million drawn from the revolving credit facility to fund in part the Acquisition.

Borrowings under the Second Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions).

The Borrowers have the ability to increase the amount of the Facility, which increases may take the form of increases to the revolving credit commitments, by an aggregate amount of up to $30 million upon satisfaction of customary conditions precedent for such increases, or incremental loans and receipt of additional commitments by one or more existing or new lenders.

Borrowings under the Facility bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.375%, or a base rate of prime rate minus 1.125%.

The Term Loans bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.875%, or a base rate of prime rate minus 0.625%.

A commitment fee of 0.15% is payable monthly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility.

Business Model and Competitive Advantage

We are committed to providing our customers with a wide range of products at competitive prices.

Since inception, we have differentiated ourselves from our competitors with our distinctive product portfolio, supplier relationships, strategic locations, and technology.

Our wide range of Asian Specialty product offerings sets us apart from other mainstream competitors such as Sysco Corporation and US Foods Holding Corp., as many of the items we offer are specific to the Chinese restaurant industry.

More importantly, our relationships with our suppliers allow us to procure a large variety of products in volume at a low cost.

We also import specialized items that would be difficult to procure domestically.

With fourteen warehouses and over three hundred trucks executing daily routes within 300 miles of our distribution centers, we offer our customers prompt delivery of high-quality products.

We believe that the following elements of our business model provide us with a competitive advantage and has contributed greatly to our success:

• We offer a wide array of specialty products that are not commonly provided by large distributors serving the mainstream market.

• We have a deep understanding of Chinese culture and most of our employees can speak the native language of our customers.

• We lower our sales and administrative expenses by outsourcing our telephone-based sales and customer service directly to two call centers located in China, which serves our customers with Mandarin and Chinese dialects (Fuzhounese) speaking agents.

• We capitalize on economies of scale and have strong negotiating power with our suppliers.

• We have strategically located distribution centers supported by trucking fleets with most routes limited to 3 to 5 hours driving time, ensuring prompt delivery of our customers orders.

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• With our self-developed proprietary inventory management system, we are able to manage our customer relationships and inventory efficiently and reduce operating expenses.

• Employees’ bilingual capabilities provide a competitive advantage against other major providers in the industry.

We aim to be a nationwide foodservice supplier by expanding geographically into new key markets in the United States where we currently do not have a presence, as well as to strategically consolidate our market leadership position in existing markets through acquisitions.

We will also explore potential vertical expansion, both upstream and downstream of the foodservice value chain, including providing value-added items such as semi-prepared food products to help our customers upgrade their service.

We continue to build on technological advancement to develop state-of-the-art management information and operating systems to further improve our operational efficiency, accuracy and customer satisfaction.

Industry and Market Analysis

We distribute food and supplies to Asian/Chinese restaurants, primarily Chinese restaurants that mainly serve non-Chinese Americans, which is a niche market segment of the foodservice distribution industry.

Food Service Market is one of the largest, valued at USD $3.1 Trillion in 2018 and is projected to reach USD 4.5 Trillion by 2026 (www.verifiedmarketresearch.com).

There are several large distributors such as Sysco Corporation, US Foods Holding Corp.

and Performance Food Group Company, each capturing a significant market share of the industry by offering food related products and services, or carrying specific products for large chains.

However, the Chinese restaurant segment is unique and the restaurants are generally not well served by these mainstream players, thereby create opportunities for specialty players like HF Foods Group to fill the gap.

These relationships ensure that we deliver an outstanding array of products at competitive prices.

Our relationships with suppliers and knowledge of the market are the cornerstones of our negotiating power with suppliers and enable us to better manage potential supply chain disruptions and stockouts, gain price concessions and increase delivery schedules.

Corporate History

HF Group was originally incorporated in the State of Delaware on May 19, 2016 as a special purpose acquisition company under the name Atlantic Acquisition Corp.

(“Atlantic”), in order to acquire, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with, one or more businesses or entities.

On August 22, 2018, Atlantic consummated a reverse acquisition transaction resulting in the shareholders of HF Group Holding Corporation (“HF Holding”) becoming the majority shareholders of Atlantic, and changed its name to HF Foods Group Inc.

On November 4, 2019, we consummated a merger transaction, resulting in B&R Global becoming a wholly-owned subsidiary of HF Group.

On January 17, 2020, we acquired 100% equity membership interest in nine subsidiaries under B&R Group Realty Holding, LLC ("BRGR"), which owned warehouse facilities that were being leased to B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana.

On December 30, 2021, HF Group acquired substantially all of the assets of leading seafood suppliers Great Wall Seafood Supply, Inc., a Texas corporation, Great Wall Restaurant Supplier, Inc., an Ohio corporation, and First Mart Inc., an Illinois corporation (collectively the "Great Wall Group").

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

Our Business and Products

As of December 31, 2021, our business featured 16 strategically positioned distribution centers with over one million square feet of warehouse space and a fleet of over 380 vehicles to provide a wide variety of products with a strong focus on Asian specialty food ingredients essential for Asian cooking.

Supported by an extensive supplier network, we aim to provide a one-stop service with on-time delivery and high fulfillment rates, at competitive pricing.

We offer over 2,000 different products to our clients, which include virtually all items needed to operate their restaurant business.

Product offerings range from meat and poultry, perishable fresh produce, frozen seafood, general commodities and takeout food packaging materials to meet our customers’ demands.

The majority of our procurement currently consists of goods purchased domestically and imported good purchased through domestic brokers, such as frozen meat, seafood and fresh vegetables, which are procured through large suppliers or directly from producers.

The following table sets forth our broad range of products and sales percentage by category for the year ended December 31, 2021:

Category Description Percentage

Asian Specialty Products with an Asian flair or flavor, including specialty noodles, rice, dry goods, such as dried mushrooms or dried beans, specialty sauces/seasonings, spring rolls, and canned products, such as preserved vegetables, bamboo shoots and water chestnuts

Meat and Poultry Beef, pork, chicken and duck 27%

Seafood Lobster, shrimp, crab, scallops and fish, such as tuna and Alaskan salmon 16%

Fresh Produce Fresh, seasonal fruits and vegetables, such as celery, Chinese cabbage and winter melon which are widely used in Chinese cuisines 13%

Packaging and Other Take-out accessories for customers, from bamboo chopsticks to takeout containers, plastic cups and sushi combo boxes 9%

Commodity General commodities including oil, flour, salt and sugar 6%

We have an extensive supplier network and established long-term relationships with our major suppliers.

Our long-term relationships and vast distribution network enable our increased negotiating power given the large quantities, thereby improving our inventory turnover and accounts payable, and reducing our operating costs.

Instead of going to fragmented direct store distributors to source their products, customers are consolidating their vendors into our full service, one-stop-shop for most of their purchasing needs.

This initiative is made possible from order placement to delivery due to our warehouse operations, optimized fleet management, material handling equipment and techniques, and efficient administrative and operating staffs.

This is further complemented by our two outsourced sales call centers located in China which take customers' inbound calls during non-office hours in the U.S.

(inbound calls in the U.S.

are redirected to China) for order taking, customer relationship management and after-sales service, offering customers a warm and friendly human interaction channel who speaks and understands their language and needs.

We have an extensive reach to our customers through localized, high frequency deliveries which allows them to reduce their inventory through higher inventory turnover and just-in-time inventory, and to reduce waste, especially in fresh products.

Our temperature-controlled trucks deliver both short and medium distance routes daily to ensure on-time delivery and to achieve high fill rates to our customers.

We are differentiated from mainstream food distribution companies, such as Sysco Corporation ("Sysco"), US Foods Holding Corp.

("US Foods") and Performance Food Group Company ("PFGC"), through our strong understanding of Asian culture and cooking essentials, distinctive product portfolio and resourceful supply chains.

We believe our wide range of Asian centric product offerings is unmatched, as many of the items we offer are unique and specific to the Chinese restaurant industry.

We believe that the following strategic initiatives provide us with a competitive advantage over our direct competitors and have contributed greatly to our success:

• Wide array of Asian specialty products:

These are not commonly provided by large distributors serving the mainstream market.

• Deep understanding of Chinese culture:

As our customers are primarily Chinese and Asian restaurants, most of our employees can speak Mandarin as well as the native dialects of our customers.

This is extremely crucial as many of the restaurants' owners/chefs are migrants who feel less comfortable conversing in English.

• Lower sales and administrative expenses:

We outsource our telephone-based sales and customer service to two call centers located in China with Mandarin and Chinese dialect (Fuzhounese) speaking agents to better serve our customers.

• Purchasing power:

We capitalize on economies of scale and have strong relationships with both our domestic and foreign suppliers over our direct competitors.

• Warehouse location:

We have strategically located distribution centers and cross-docks, supported by our fleet of delivery vehicles with most routes limited to 3 to 5 hours driving time, ensuring on-time delivery and order fill-rate.

• Technology:

With our customized inventory management system, we are able to manage our customer relationships and inventory efficiently and reduce operating expenses.

• Customer-specific marketing:

Our employees’ bilingual capabilities provide a competitive advantage against other major providers in the industry.

We aim to further expand into new key markets, as well as to strategically consolidate our market leadership position in existing markets through acquisitions.

We continue to invest in technological advancements to develop state-of-the-art management information and operating systems, to further improve our operational efficiency, accuracy and customer satisfaction, and to cement our foothold as a leading foodservice distributor to Asian restaurants in the U.S.

Features of Chinese Restaurants

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There are tens of thousands of Chinese restaurants spread throughout the U.S., primarily serving non-Chinese American customers.

Although the dishes they serve cater to the preferences of American mainstream customers and are more simply and quickly prepared as compared to traditional full-service Chinese restaurant cuisine, they still require specialized and unique Chinese ingredients with traditional Chinese cooking styles.

Although the dishes they serve cater to the preferences of American mainstream customers and are more simply and quickly prepared as compared to traditional full-service Chinese restaurant cuisine, they still require specialized and distinctive Chinese ingredients with traditional Chinese cooking styles.

Operated by Chinese Individual Families .

Most Chinese restaurants serviced by HF Group are generally family-owned with very few workers, who are usually immigrants from China or second generation Chinese Americans.

These restaurant owners, especially the founders are generally less sophisticated, with limited education and very limited resources and appreciate value-added services from suppliers to help them improve their operational efficiency.

The owners and workers in the Chinese restaurants usually speak Mandarin or other regional dialects of the Chinese language.

Understanding the Chinese culture and language is paramount to facilitating efficient communications with customers.

These restaurant owners, especially the founders are generally less sophisticated, with limited education and resources and appreciate value-added services from suppliers to help them improve their operational efficiency.

The owners and workers in these Chinese restaurants usually speak Mandarin or other regional dialects of the Chinese language.

Understanding their culture and language is paramount to facilitating efficient communications and building trust with customers.

Close-Knit Chinese American Community .

Second or third generation Chinese Americans living in the U.S.

inherit their traditional cultural, and ethnic languages, and our experience has been that people in these communities prefer to do business with Chinese Americans as opposed to other ethnic groups.

inherit their traditional cultural values, and ethnic languages, and our experience has been that people in these communities prefer to do business with Chinese Americans that speak their language and share their values.

Unique Cooking Style and Ingredients for Chinese Cuisines .

Chinese cuisine requires unique cooking techniques such as steaming and stir-frying in Chinese wok, and requires specialty ingredients and vegetables such as bitter melons, Chinese yams, vine spinach, Chinese cabbage and winter melon.

It also requires Chinese and Asian seasonings and spices, including peanut oil, cooking wine, vinegar, dark soy source, black bean sauce, pepper oil and chili oil.

Chinese cuisine requires unique cooking techniques such as steaming and stir-frying in a Chinese wok, and requires specialty ingredients and vegetables such as bitter melons, Chinese yams, vine spinach, Chinese cabbage and winter melon.

It also requires Chinese and Asian seasonings and spices, including peanut oil, Chinese cooking wine, vinegar, dark soy source, black bean sauce, pepper oil and chili oil.

Most of the unique ingredients for Chinese cuisine are staple supplies of HF Group that are not widely available from mainstream U.S.

Growth Potential

Growing Consumption Trend for Food-Away-from-Home (FAFH) .

According to U.S.

Department of Agriculture (USDA), the percentage of Consumers' spending on FAFH increased dramatically from approximately 27% in 1950 to about 52% in 2015, outpacing spending on Food-At-Home (FAH) for the first time in America history.

This powerful trend continued through 2019 which saw FAFH spending accounted for 54.8% of total food expenditures.

Although it reversed in 2020 due to the outbreak of COVID-19, we believe this long-term trend of increasing FAFH consumption will resume and continue to be the key driver of demand for Asian/Chinese restaurants.

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Increased Recognition of Chinese Cuisines by Americans .

With the growing influence of China’s economy and the Chinese culture globally, and increased tourism and investment into Asia and China from the Western world, more and more Americans are exposed to, and have shown an increased preference for Chinese and Asian cuisine.

According to Euromonitor and article published by The Washington Post, Asian food is the fastest growing cuisine in U.S., registering a blistering cumulative growth rate of 135% since 1999 to 2014, outpacing others like Latino and Middle Eastern cuisines.

We believe that the above-mentioned powerful trends will result in expanded opportunities for Asian/Chinese restaurants, and thus represent tremendous growth opportunity for specialized Asian food distributors like HF Group.

Current Industry Landscape and Opportunities

Natural Culture Barriers to Entry .

Growing Demand in Asian Cuisines .

The demand for Chinese and Asian cuisines continues to grow in the U.S.

In addition, according to the Pew Research Center, the Asian population in the U.S.

is the fastest growing population group in the country.

We believe that these powerful trends will continue and result in expanded opportunities for Asian/Chinese restaurants.

As a leading foodservice distributor to Asian/Chinese restaurants in the U.S., these trends represent a significant growth opportunity for HF Group.

Cultural Barriers to Entry .

Understanding Chinese cooking culture is important to run a Chinese restaurant and, therefore, most Chinese restaurants are operated by Chinese Americans.

It is very difficult for mainstream food distributors to serve these restaurants because of various cultural and language barriers.

Highly Fragmented Market Segment .

The market is currently highly fragmented with many unsophisticated competitors.

Most participants are small players such as wholesalers, specialty import brokers, farmers markets, and local produce retailers without the support of sophisticated logistics infrastructure.

We believe we are the only Chinese food distributor operating in the United States with such a well-developed logistics infrastructure and experienced management team and that the fragmented market gives us the opportunity to consolidate supply and further develop a dominant market position.

Highly Fragmented Market .

The Asian foodservice market is currently highly fragmented with many small and unsophisticated direct store distributors, such as small-scale wholesaler redistributors, specialty import brokers, farmers markets, and local produce retailers, operating without the financial support or a sophisticated logistics infrastructure.

We believe we are the leading Chinese food distributor in the U.S.

with a well-developed logistics infrastructure, strong financial means, and experienced management team that provides the market place with an avenue for consolidated purchasing, high fill rate, and efficient delivery frequency at a competitive price.

Infrastructure Barriers for New Entrants .

The food distribution industry requires large capital investments and resources to build the necessary logistics infrastructure including warehouses and a fleet of trucks to cover its distribution network.

In addition, the size of HF Group gives us greater negotiating power with vendors, resulting in price advantages for our customers which we believe are simply not easily achievable by smaller suppliers.

Each distribution center requires a large amount of invested capital to support the full temperature-controlled logistics and warehouse operations to help customers grow their sales and profit.

Consolidated purchasing allows us to pass on cost savings to our customers and provide competitive pricing.

We believe our continued investment in technology will lead to long term expense reduction and further administrative efficiency.

These competitive advantages result in economies of scale which are unparalleled and unmatched by smaller and fragmented suppliers.

Demand for Value-Added Services .

Our customers are Asian/Chinese restaurants, primarily takeout restaurants.

These customers are price and quality sensitive and prefer large suppliers with economies of scale to provide them with competitive prices and quality products.

Given the limited labor forces and resources of these restaurants, most desire to have more value-added services from the suppliers to help them to operate more efficiently.

In summary, we believe we have numerous advantages to address the current market imperfections and become a national leader in this unique market.

With economies of scale, we can provide high quality products at competitive prices in an efficient way.

Business Model

Our business model features an integrated structure with thirteen distribution centers with over one million square feet of total storage space, a fleet of over 300 vehicles for primarily short-distance delivery, and a centralized inventory management and procurement system, supported by two outsourced call centers located in China for customer relationship management.

We offer a variety of high-quality products at competitive prices to our customers.

Customers can benefit from our efficient supply chain to support their own growth.

We offer one-stop service to Chinese restaurants with over 1,500 types of products, including mainstream products like fresh and frozen meats, frozen seafoods and general commodities, as well as Chinese specialty products like Chinese vegetables, sauces, and packaging materials for takeout restaurants.

Chinese restaurants, especially small or takeout restaurants, can find virtually all the products they needed in our product offerings, which can help minimize the effort involved in managing their purchase of inventory.

We utilize outsourced call centers in Fuzhou, China, with 24-hour availability for sales and marketing, order placement and post-sales service, which reduces our operating costs, and offers service to our customers in Mandarin, Cantonese and regional Chinese dialects, in addition to English.

We have established a large supplier network and we continue to maintain long-term relationships with many major suppliers.

The procurement team was led by Zhou Min Ni and Peter Zhang, co-CEOs of the Company in both 2019 and 2020, who have a deep insight of the industry.

Since assuming the role of sole CEO in 2021, Peter Zhang continues to oversee the procurement team.

The centralized procurement management system gives us increased negotiating power given the large procurement quantities, improves our turnover of inventory and account payables, and reduces our operating costs.

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We offer over 1,500 different products for our clients, which includes virtually all items needed to operate their business.

Products range from perishable produce to takeout food packaging materials.

To meet our customers’ demands, we have a large variety and a complete line of products in our inventory.

Eighty percent of our sales volume currently consists of domestic goods such as frozen meat and vegetables, which are procured through large suppliers or directly from the producers.

The remaining twenty percent are imported specialty products.

We provide a full service one-stop-shop for our customers by providing most or all of the products they need, from order placement to delivery and post-sales services.

Services to customers are supported by our plentiful physical facilities, vehicles, material handling equipment and techniques, and administrative and operating staffs.

The products we distribute include:

• Asian specialty food items :

Asian specialty encompasses any product that has an Asian flair or flavor, including noodles, rice, dry goods (such as dried mushrooms, and dried beans), specialty sauces/ seasonings, spring rolls, and canned products (such as preserved vegetables, bamboo shoots and water chestnut).

• Meat and Poultry :

We provide our customers with a variety of beef, pork, chicken and duck products with different brands to choose from, such as Smithfield, Teys Australia and Tyson.

We are committed to providing our customers with the freshest possible seafood.

We provide our clients with a variety of seafood including lobster, shrimp, crab, scallops and flavorful fish such as tuna and Alaskan salmon, with different brands to choose from, like Asian Star and Atlantic Bay.

• Fresh Produce :

We offer fresh, seasonal fruits and vegetables such as celery, Chinese cabbage, and winter melon, which are widely used in Chinese cuisines.

• Packaging and Other Items :

We offer a wide range of take-out accessories for customers, from bamboo chopsticks to takeout containers, plastic cups and sushi combo boxes.

• Commodities :

True commodity products such as regular rice, flour, sugar and oil are classified as “commodity”.

The following table sets forth sales percentage by category for the year ended December 31, 2020:

Category Percentage

Asian Specialty 30 %

Meat and Poultry 26 %

Fresh Produce 13 %

Packaging and Others 11 %

Commodity 6 %

These customers are price and quality sensitive with a high demand for great service and mutual trust.

Our employees speak their language, understand their culture and build a bond with our customers.

Our 24-hour after sale service call domestically and in China eradicates any doubt of a supportive and dependable business partner.

Through vendor partnerships, we help our large customers source distinct products from their choice of vendors, either domestically or internationally.

These are the value added services that we are able to add to our customers in our one-stop shopping offering.

Continued Consumer Spending on Food Away From Home .

Prior to the onset of the COVID-19 pandemic, according to the U.S.

Department of Agriculture ("USDA"), the food away from home market grew to surpass spending on the food at home market.

The foodservice industry declined sharply when COVID-19 restrictions adversely impacted restaurants' operations and foot traffic.

As COVID-19 restrictions eased in 2021 and into 2022, both full service and fast food/take out restaurants have rebounded.

We believe the long term trend of increasing food away from home market consumption will resume and continue to be a key driver of demand for Asian/Chinese restaurants.

We believe we have numerous advantages to address the current market imperfections and become a national leader in this unique market.

With our economies of scale, we can provide high quality products at competitive prices in an efficient way.

Customer Service

We utilize outsourced call centers located in China to manage our sales order, customer development, sales promotion and post-sales services.

The outsourced call centers are located in Fuzhou, the capital city of Fujian Province of China, with local employees speaking Mandarin, Cantonese, regional Chinese dialects (Fuzhounese) and English.

By offering the customer service in their native language, the sales staff can communicate smoothly and efficiently with our clients and understand their needs.

With cultural understanding and a common language, the sales team can design a product portfolio for our customers and use a precision marketing strategy to promote our products.

China, where our two call centers are located, has lower prevailing wages compared to the US.

The strategic decision to outsource customer service to China not only enables the Company to provide around the clock service in our customer's native tongue, but also allows the Company to better manage costs.

One of the call centers, Hanfeng (Fujian) Information Technology Co., Ltd ("HFFIT"), is a related party to our former Chairman and Co-CEO, Zhou Min Ni.

Refer to Note 16 for more details.

We also have a domestic sales team in the U.S., with sales agents that make on-site visits to customers’ restaurants, in order to gain a better understanding of customers’ operations and needs.

Currently, we maintain our sales department, which involves decision-making for sales strategies and supervision of sales performance by our key sales managers, in our corporate headquarters in City of Industry, California and regional office in

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Greensboro, North Carolina.

The sales managers work closely with the sales staff in China to ensure our market strategies are implemented effectively.

Our plan is to further integrate our operating model with the outsourced call centers to expand our business and operate even more efficiently.

A proprietary information system is used to maintain each customer’s records, including location, size, contact information, purchasing history, preferences, orders and payment records.

Customers can directly call the outsourced call centers in China or our domestic sales team to inquire about products and to place orders.

Once orders are confirmed, electronic sales orders are generated by the information system and sent to the distribution center designated to the customer.

Upon receipt of the sales orders, products are pulled from the shelves and moved to a staging area at the loading docks.

Products are then loaded into delivery vehicles in preparation for delivery.

Products are generally delivered to customers within only two days of an order.

Customer analysis can be generated through the information system and prompts the salesperson to follow up with customers for product promotion, post-sales services and the taking of new orders.

We offer a refund policy for non-satisfaction without penalty, which many of our small competitors in the market segment are unable to provide.

We provide a 100% satisfaction guarantee to our customer.

When a shipment is made and the products are not to the standards of the customer, we allow our customers to reject the order in whole or in part with no penalty within 24 hours.

The non-penalty refund policy works to help us earn the trust and loyalty of our customers.

Inventory Procurement

The Company utilizes centralized procurement on bulk and frequently sold items.

Subsidiaries send their inventory procurement requests to headquarters and regional offices where the operation team is responsible for fulfillment in the most cost-effective way.

The centralized procurement allows HF Group to establish a meaningful vendor relationship under one brand.

We employ a two-pronged approach for a complete and cohesive support to both existing and prospective customers;

namely, the two outsourced call centers located in Fuzhou, China, and the domestic sales team in the U.S.

Utilizing these outsourced call centers in China, customers embrace and appreciate our personal customer service conducted in their native Mandarin and other regional dialects such as Fuzhounese and Cantonese.

Full sales support from the beginning of a sales order to post-sales service is offered through these call centers.

These services are complemented by our domestic sales teams who make frequent and periodic on-site visits to customers’ restaurants.

With cultural understanding coupled with a distinct and diverse cultural bonding, the entire sales team is adept at forging better customer rapport and retention with better ability to understand customers’ needs and operations as compared to the mainstream foodservice distributors attempting to serve this channel.

Utilizing our customized information system to share valuable and pertinent information with our customers is imperative to help them grow their business.

This information includes, but is not limited to, purchasing history, order tracking, item availability, items on promotion, and best-selling or trending items.

We formulate strategies and implement action plans to ensure cohesive sales and marketing efforts to our existing and prospective customers.

The domestic sales team works closely with the sales staff in China to ensure our cohesive strategies are implemented effectively and our action plans are carried out swiftly.

Distribution centers are decentralized and empowered to cater to local and regional customers’ needs by customizing their specific product portfolio.

Where customer care and satisfaction are concerned, we offer a refund policy without penalty, which many of our small competitors in the market segment and the direct store distributors are unable to provide.

Our 100% satisfaction guarantee permits our customers to reject part of the order or the entire order within 24 hours of receipt without any penalty.

This refund policy further cements the trust and loyalty of our customers toward our brand and company.

We consolidate procurement on bulk and frequently sold items.

Our distribution centers send their inventory procurement requests to regional buyers who are responsible for consolidation and fulfillment in the most cost-effective way.

The consolidated procurement process allows HF Group to establish a meaningful vendor relationship under one brand.

We maintain a large supplier network through a vendor pool with a carefully selected group of suppliers to ensure product quality, availability and competitive pricing.

Eighty percent of sales volume currently consists of domestic goods such as frozen meat and vegetables, which are procured through large suppliers or directly from the producers.

The remaining twenty percent are imported specialty products.

To minimize costs, the procurement team directly manages our major vendors for large and frequent purchases and engages brokers for our smaller suppliers of specialty goods.

Utilizing brokers allows us to maintain lower costs due to the brokers’ volume.

The key procurement team members closely monitor the supply market for seasonal products such as vegetables and make procurement adjustments according to market conditions.

The key procurement team members closely monitor the supply market for seasonal products, such as vegetables, and makes procurement adjustments according to market conditions.

In addition, they use a dual-sourcing method for their suppliers and can negotiate lower prices for comparable products.

Each distribution center reviews the inventory level in the information system daily and submits purchase requests as needed to the procurement team at headquarters and regional offices.

The procurement team at headquarter and regional office also can alter or adjust purchasing decisions based on an analysis of the inventory data in the system.

The procurement teams at headquarters and our regional offices can alter or adjust purchasing decisions based on an analysis of the inventory data in the system.

Upon receipt of ordered products, the delivery schedule is determined based on the needs of each location.

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None of our suppliers accounted for more than 10% of our aggregate purchases during the years ended December 31, 2021 and December 31, 2020.

We use our information system for warehouse management with daily inventory monitoring.

The system allows us to manage our inventory in an efficient way.

It optimizes the inventory level and turnover, reducing waste, and helps to reduce labor costs to track and record the inventory.

Inventory levels are maintained based on the category of products.

Perishable goods are kept in the refrigerated warehouse for a period of no more than 7 days.

This includes fresh produce and fresh meat products.

Frozen produce, seafood and meat products are kept in the freezer to extend shelf life.

Frozen products usually turn over between 30 and 60 days.

Non-perishable goods are held in greater quantities of inventory based on the pricing of the market.

Non-perishable items are carefully monitored for pricing changes.

As they have an extended shelf life, there is an advantage to ordering larger quantities of stock.

Non-perishable goods generally turn over in approximately 3 weeks, which we believe is average for distributors of similar size.

Maintaining this level of inventory allows us to manage any surges in demand.

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Products are stored in warehouses through our various distribution centers.

A routine inventory count is taken to ensure stock quantity and replenishment needs.

Forty percent of the inventory consists of fresh meats and produce, of which is counted daily.

The other sixty percent consists of frozen and dry goods with cycle counts every two weeks.

Non-perishable items are stored on racks until their shelf life is reached or the product is sold, whichever comes first.

Products are broken down from their pallets and sold in their original packaging.

Items stored in the warehouses are not removed from their original packaging.

Each package is sold as one unit and priced accordingly.

We currently have thirteen distribution centers with a total of over one million square feet of storage, including refrigerated storage of over 320,000 square feet.

The distribution centers are located on the route of many of our suppliers;

product delivery can be made seamlessly to each location with one large order.

Each warehouse is equipped with multiple loading docks, allowing simultaneous parallel loading of products onto the trucks.

Warehouse locations are also located in industrial regions, allowing large delivery trucks to enter without the need of acquiring permits.

It is important for us to strategically place our warehouses within certain markets to maximize our market share.

We currently strategically place our warehouses within markets that are not saturated and have limited competitors.

This allows us to quickly penetrate the market and develop customer relationships that will assist in promotion of products and provide post-sales services.

Upon penetrating the market, we seek to expand our warehouses into regional areas in order to streamline our distribution network.

This strategy is designed to improve the delivery routes and maximize the utilization of our delivery vehicles.

The table below summarizes certain details of our distribution centers:

Location Total Size

Feet) Size of Cooler and

Refrigerated Storage

(Square Feet) Year

Established Number of

Phoenix, AZ 68,000 14,000 2011 17

City of Industry, CA 128,000 35,000 2013 52

Fresno, CA 10,000 3,000 2011 9

Hayward, CA 108,000 36,000 2012 27

Irwindale, CA 85,000 45,000 2006 17

West Sacramento, CA 25,000 8,000 2011 17

Aurora, CO 55,000 16,000 2010 21

Ocala, FL 130,000 30,000 2008 39

Atlanta, GA 100,000 25,000 2006 20

Greensboro, NC 170,000 45,000 2002 46

Murray, UT 59,000 14,000 2013 29

West Jordan, UT 34,000 10,000 2006 —

Renton, WA 70,000 40,000 2015 19

1,042,000 321,000 313

Fleet Management

We currently operate a fleet of over 300 refrigerated vehicles.

Vehicles range from vans, 16-foot semi-delivery trucks, to 53-foot refrigerated trucks and trailer units.

These vehicles are maintained by both in-house and external mechanics and follow a strict maintenance schedule.

Each vehicle has a 7-year life cycle of approximately 250,000 miles.

Each vehicle is refueled daily upon return from its delivery route.

Promotion and Marketing

We do not advertise in the media or magazines.

We believe that it is more efficient and cost effective to promote our business through telemarketing, online platform and have our drivers promote our business while executing deliveries.

Our drivers visit the Chinese/Asian restaurants along their delivery routes and are trained to market our products and our online ordering

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platform to both existing customers and non-customers along their routes.

Telemarketing is conducted by salespersons from the outsourced call centers in China.

Competitive Strengths

• A Large Array of Products to Meet the Demands of Customers.

• Cultural Understanding and Language Advantages.

• Outsourced Customer Call Centers with Low Costs.

• Cost Efficiency with Economies of Scale.

• Strong Negotiation Power with Vendors.

• Developed Logistics Infrastructure.

• Proprietary Information System.

• Experienced Management and Proven Growth.

The foodservice distribution industry is large and highly competitive.

There are a few very large distributors serving the mainstream U.S.

However, with natural cultural and language barriers, it has been a challenge for the the mainstream foodservice distributors to capture a meaningful market share for Chinese restaurants.

Management believes that the market participants in the niche market segment that we are serving is highly fragmented and immature.

With the continuing growth of demand for Chinese cuisine, we believe that this industry sector has significant opportunity for consolidation.

The competitors serving the industry sector for Chinese restaurants include a large number of small wholesalers, some medium-sized distributors, as well as large established market players.

However, we believe there is no dominating market provider in this segment.

Our customers also make purchases from local farms, retailers and grocery stores.

Small wholesalers sometimes supply the same specialized items such as spices, specialized sauces, and specialty foods, which we carry, but these small suppliers are not able to offer the same broad base and wide array of products that we do.

Compared with the medium-sized distributors and large mainstream market players, we have the advantages of offering a broad line of both staple and niche products, efficient operation infrastructure, and cultural understanding to maintain our market position and continue to grow our business.

Trademarks and Other Intellectual Property

We own several registered trademarks, including the following design/combined marks.

Trademarks registrations are subject to renewal.

Below is a summary of the Company's trademarks.

Trademark U.S.

Registration Number Next Renewal Date

<333> 5543532 8/20/2023

HF [B/W Logo] 5985676 2/9/2025

HF [Color Logo] 5888817 10/10/2024

Rong 5619958 12/3/2023

Rong GREEN LEAF 5609442 11/19/2023

SEA333 5713248 3/31/2024

SEA888 5520118 7/16/2023

We use insurance to provide coverage for potential liability for workers compensation, automobile and general liability, product liability, director and officer’s liability, employee health care benefits and other casualty and property risks coverage.

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in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency or insurance carriers, and changes in discount rates could all affect the ultimate settlements of various claims.

We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.

As of December 31, 2020, we had a workforce over 780 persons, including both our employees and workers engaged through agency placements.

Over 99% are full-time associates and over 5% of our employees have worked for the Company for ten or more years.

Except for the trademarks for HF black and white/color logos, Rong, Rong GREEN LEAF, Great Wall logos, <333>, SEA333, and SEA888, we do not own or have the right to use any patent, trademark, trade name, license, franchise or concession, the loss of which would have a material adverse effect on our business, financial condition or results of operations.

As of December 31, 2021, we had a workforce of over 900 personnel, which includes approximately 650 employees and approximately 250 workers engaged through agency placements.

Over 99% are full-time associates and over 10% of our employees have worked for us for ten or more years.

Our workforce is not unionized and we are not aware of any plans for them to unionize.

We have never experienced a strike or significant work stoppage.

We regard our employee relations to be good.

Government Regulation

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We are required to comply, and it is our policy to comply, with all applicable laws in the numerous jurisdictions in which we do business.

As a marketer and distributor of food products in the United States, we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S.

Food and Drug Administration (FDA).

The FDA regulates food safety and quality through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point (HACCP) requirements for certain foods, and the food and color additive approval process.

As a marketer and distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S.

Food and Drug Administration (the "FDA").

The FDA regulates food safety and quality through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point requirements for certain foods, and the food and color additive approval process.

The agency also specifies the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences.

For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the U.S.

Department of Agriculture (USDA) to interpret and implement these statutory provisions.

The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program.

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We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.

The recently published and pending rules under the Food Safety Modernization Act (FSMA) will significantly expand food safety requirements, including those of the Company.

The recently published and pending rules under the Food Safety Modernization Act ("FSMA") will significantly expand food safety requirements, including those of HF Group.

Among other things, FDA regulations implementing the FSMA require us to establish and maintain comprehensive, prevention-based controls across the food supply chain that are both verified and validated.

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and provides the FDA with mandatory recall authority.

The Company and our products are also subject to state and local regulation through such measures as the licensing of our facilities;

HF Group and our products are also subject to state and local regulation through such measures as the licensing of our facilities;

enforcement by state and local health agencies of state and local standards for our products;

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In addition, we are subject to the U.S.

False Claims Act, and similar

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state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments.

False Claims Act, and similar state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments.

Our operations are also subject to a broad range of U.S.

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complying with clean air laws, including those governing vehicle emissions;

properly handling and disposal of solid and hazardous wastes;

proper handling and disposal of solid and hazardous wastes;

protecting against and appropriately investigating and remediating spills and releases;

and monitoring and maintaining underground and aboveground storage tanks for diesel fuel and other petroleum products.

As of December 31, 2020, the costs of managing our compliance with environmental laws and regulations was nominal.

and monitoring and maintaining underground and above ground storage tanks for diesel fuel and other petroleum products.

For the year ended December 31, 2021, the costs of managing our compliance with environmental laws and regulations was nominal.

Foreign Corrupt Practices Act ("FCPA") prohibits bribery of public officials to obtain or retain business in foreign jurisdictions.

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We have implemented appropriate policy and will continue to maintain a robust anti-corruption compliance program applicable to our operations.

For the purchase of items produced, harvested or manufactured outside of the United States, we are subject to applicable customs laws regarding the import and export of various products.

For the purchase of items produced, harvested or manufactured outside of the U.S., we are subject to applicable customs laws regarding the import and export of various products.

Certain activities, including working with customs brokers and freight forwarders, are subject to applicable regulation by U.S.

Customs and Border Protection, which is a part of the Department of Homeland Security.

Website and Availability of Information

Our corporate website is located at hffoodsgroup.com.

We file annual, quarterly and current reports, proxy statements and other information with the SEC.

Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov.

Those filings are also available to the public on, or accessible through, our corporate website for free via the “Investor Relations” section at hffoodsgroup.com/investor-relations/.

The information contained on or accessible through our corporate website or any other website that we may maintain is not incorporated by reference into and is not part of this Annual Report on Form 10-K.

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 1. Business