HF Foods Group Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. HF Foods Group Inc. and Subsidiaries Consolidated Financial Statements Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2022 and 2021 (BDO USA, LLP; Troy, Michigan; PCAOB ID # 243 ) 38 Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2020 (Friedman, LLP; New York, NY; PCAOB ID #711) 40 Consolidated Financial Statements Consolidated Balance Sheets 41 Consolidated Statements of Operations and Comprehensive Income (Loss) 42 Consolidated Statements of Cash Flows 43 Consolidated Statements of Changes in Shareholders’ Equity 45 Notes to Consolidated Financial Statements 46 37 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors HF Foods Group Inc. Las Vegas, Nevada Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of HF Foods Group Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the two years then ended , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 31, 2023 expressed an adverse opinion thereon. Restatement As discussed in Note 1 to the consolidated financial statements, the 2020 financial statements have been restated to correct errors. We have also audited the adjustments described in Note 1 that were applied to restate the 2020 consolidated financial statements to correct errors. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2020 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express any opinion or any other form of assurance on the 2020 consolidated financial statements taken as a whole. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Consolidated Financial Statements - Impact of Control Environment and Information Technology General Controls The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, the Company’s ability to (i) design and maintain an effective control environment, including maintaining a sufficient complement of resources with an appropriate level of controls knowledge and expertise 38 commensurate with financial reporting requirements, (ii) design and maintain effective information technology general controls for certain information systems relevant to the preparation of the financial statements, including user access controls, program change management controls and computer operations controls, and (iii) journal entries being completely and accurately recorded to the appropriate accounts. We identified a critical audit matter over the completeness and accuracy of the consolidated financial statements. The ineffective control environment and the ineffective information technology general controls resulted in several material weaknesses. Designing the appropriate procedures and evaluating audit evidence to ensure the completeness and accuracy of the consolidated financial statements, including higher risk areas, with an ineffective control environment and with ineffective information technology general controls, required especially challenging and subjective auditor judgment due to the increased extent of audit effort. The primary procedures we performed to address this critical audit matter included: • We applied significant auditor judgment to determine the nature and extent of procedures to be performed over material accounts and or disclosures, including higher risk areas such as revenue, receivables, inventory, and journal entries. • We increased the number of selections to perform certain audit procedures and lowered the testing thresholds for investigating differences, • We utilized source documents, including third party support for audit evidence rather than relying on system reports, and • We evaluated the overall sufficiency of audit evidence obtained based on the procedures performed. /s/ BDO USA, LLP We have served as the Company’s auditor since 2021. Troy, Michigan March 31, 2023 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of HF Foods Group Inc. Opinion on the Financial Statements We have audited, before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the accompanying consolidated statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows of HF Foods Group Inc. and its subsidiaries (collectively, the “Company”) for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”) (the 2020 financial statements before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1 are not presented herein). In our opinion, except for the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We were not engaged to audit, review or apply any procedures to the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Friedman LLP We have served as the Company’s auditor from 2017 through 2021. New York, New York March 16, 2021 40 HF FOODS GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash $ 24,289 $ 14,792 Accounts receivable, net 44,186 36,281 Accounts receivable - related parties 213 249 Inventories 120,291 102,690 Prepaid expenses and other current assets 8,937 5,559 TOTAL CURRENT ASSETS 197,916 159,571 Property and equipment, net 140,330 145,908 Operating lease right-of-use assets 14,164 11,664 Long-term investments 2,679 2,462 Customer relationships, net 157,748 159,161 Trademarks and other intangibles, net 36,343 35,891 Goodwill 85,118 80,257 Other long-term assets 3,231 2,032 TOTAL ASSETS $ 637,529 $ 596,946 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Checks issued not presented for payment $ 21,946 $ 17,834 Line of credit 53,056 55,293 Accounts payable 55,515 57,745 Accounts payable - related parties 1,529 1,941 Current portion of long-term debt, net 6,266 5,557 Current portion of obligations under finance leases 2,254 2,274 Current portion of obligations under operating leases 3,676 2,482 Accrued expenses and other liabilities 19,648 12,138 TOTAL CURRENT LIABILITIES 163,890 155,264 Long-term debt, net of current portion 115,443 81,811 Promissory note payable - related party — 4,500 Obligations under finance leases, non-current 11,441 11,676 Obligations under operating leases, non-current 10,591 9,251 Deferred tax liabilities 34,443 39,455 Lease guarantee liability, net of current portion 5,472 — TOTAL LIABILITIES 341,280 301,957 COMMITMENTS AND CONTINGENCIES (NOTE 17) SHAREHOLDERS’ EQUITY: Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of December 31, 2022 and 2021 — — Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 53,813,777 shares issued and outstanding as of December 31, 2022 and 53,706,392 shares issued and outstanding as of December 31, 2021 5 5 Additional paid-in capital 598,322 597,227 Accumulated deficit ( 306,514 ) ( 306,284 ) TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 291,813 290,948 Noncontrolling interests 4,436 4,041 TOTAL SHAREHOLDERS’ EQUITY 296,249 294,989 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 637,529 $ 596,946 The accompanying notes are an integral part of these consolidated financial statements. 41 HF FOODS GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Net revenue - third parties $ 1,163,525 $ 787,829 $ 553,524 Net revenue - related parties 6,942 9,055 13,308 TOTAL NET REVENUE 1,170,467 796,884 566,832 Cost of revenue - third parties 958,775 636,253 453,346 Cost of revenue - related parties 6,180 9,119 12,739 TOTAL COST OF REVENUE 964,955 645,372 466,085 GROSS PROFIT 205,512 151,512 100,747 Distribution, selling and administrative expenses 194,953 122,030 106,355 Goodwill impairment loss — — 338,191 INCOME (LOSS) FROM OPERATIONS 10,559 29,482 ( 343,799 ) Other expenses (income): Interest expense 7,457 4,091 4,321 Other income ( 1,829 ) ( 508 ) ( 1,096 ) Change in fair value of interest rate swap contracts ( 817 ) ( 1,425 ) 920 Lease guarantee expense 5,744 — — Total Other expenses, net 10,555 2,158 4,145 INCOME (LOSS) BEFORE INCOME TAX PROVISION 4 27,324 ( 347,944 ) Income tax (benefit) provision ( 231 ) 4,503 ( 4,725 ) NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 235 22,821 ( 343,219 ) Less: net (loss) income attributable to noncontrolling interests ( 225 ) 676 293 NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC. $ 460 $ 22,145 $ ( 343,512 ) EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.01 $ 0.43 $ ( 6.59 ) EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.01 $ 0.43 $ ( 6.59 ) WEIGHTED AVERAGE SHARES - BASIC 53,757,162 51,918,323 52,095,585 WEIGHTED AVERAGE SHARES - DILUTED 53,863,448 52,091,822 52,095,585 The accompanying notes are an integral part of these consolidated financial statements. 42 HF FOODS GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income (loss) $ 235 $ 22,821 $ ( 343,219 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 24,936 19,126 18,923 Goodwill impairment loss — — 338,191 Gain from disposal of property and equipment ( 1,327 ) ( 1,636 ) ( 140 ) Provision for credit losses 82 ( 433 ) 1,564 Deferred tax benefit ( 5,012 ) ( 6,870 ) ( 5,916 ) Change in fair value of interest rate swap contracts 817 ( 1,425 ) 920 Stock-based compensation 1,257 635 — Non-cash lease expense 4,442 861 533 Lease guarantee expense 5,744 — — Other non-cash expense (income) 156 ( 85 ) ( 81 ) Changes in operating assets and liabilities (excluding effects of acquisitions): Accounts receivable ( 8,577 ) ( 10,999 ) 23,517 Accounts receivable - related parties 36 1,020 2,964 Inventories ( 3,755 ) ( 19,426 ) 18,997 Advances to suppliers - related parties — 197 548 Prepaid expenses and other current assets ( 4,008 ) ( 944 ) ( 204 ) Other long-term assets ( 1,199 ) ( 1,337 ) ( 298 ) Accounts payable 15,207 12,978 ( 11,882 ) Accounts payable - related parties ( 412 ) ( 365 ) ( 2,215 ) Operating lease liabilities ( 4,408 ) ( 724 ) ( 503 ) Accrued expenses and other liabilities 7,070 4,115 3,994 Net cash provided by operating activities 31,284 17,509 45,693 Cash flows from investing activities: Purchase of property and equipment ( 6,287 ) ( 2,205 ) ( 664 ) Proceeds from sale of property and equipment 7,794 3,246 257 Payment made for acquisition of B&R Realty — — ( 94,004 ) Payment made for acquisition of Sealand ( 34,848 ) — — Payment made for acquisition of Great Wall Group ( 17,445 ) ( 37,841 ) — Payment made for acquisition of noncontrolling interests — ( 5,000 ) — Settlement of interest rate swap contracts — 718 — Net cash used in investing activities ( 50,786 ) ( 41,082 ) ( 94,411 ) The accompanying notes are an integral part of these consolidated financial statements. 43 HF FOODS GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2022 2021 2020 Cash flows from financing activities: Checks issued not presented for payment 4,112 2,994 ( 113 ) Proceeds from line of credit 1,200,996 857,304 553,192 Repayment of line of credit ( 1,203,112 ) ( 820,422 ) ( 576,313 ) Proceeds from long-term debt 45,956 — 75,600 Repayment of long-term debt ( 11,336 ) ( 6,599 ) ( 6,590 ) Payment of debt financing costs ( 544 ) — Repayment of obligations under finance leases ( 2,626 ) ( 2,135 ) ( 1,840 ) Repayment of promissory note payable - related party ( 4,500 ) ( 2,500 ) — Proceeds from noncontrolling interests shareholders 240 480 — Cash distribution to shareholders ( 187 ) ( 338 ) ( 175 ) Net cash provided by financing activities 28,999 28,784 43,761 Net increase (decrease) in cash 9,497 5,211 ( 4,957 ) Cash at beginning of the year 14,792 9,581 14,538 Cash at end of the year $ 24,289 $ 14,792 $ 9,581 Supplemental disclosure of cash flow data: Cash paid for interest $ 6,230 $ 3,177 $ 4,123 Cash paid for income taxes 8,655 9,527 804 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 6,815 $ 10,983 $ 339 Property acquired via a finance lease 1,272 8,947 1,375 Notes payable related to property and equipment purchases — 257 2,528 Intangible asset acquired in exchange for noncontrolling interests 566 — — Common stock issued for consideration of acquisition of Great Wall Group — 14,541 — Deferred consideration from Great Wall Acquisition — 17,330 — Issuance of promissory note for the acquisition of B&R Realty Subsidiaries — — 7,000 The accompanying notes are an integral part of these consolidated financial statements. 44 HF FOODS GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Attributable to HF Foods Group Inc. Noncontrolling Interests Total Shareholders’ Equity Shares Amount Shares Amount Balance at December 31, 2019 53,050,211 $ 5 ( 905,115 ) $ ( 12,038 ) $ 599,617 $ 15,083 $ 602,667 $ 4,249 $ 606,916 Net (loss) income — — — — — ( 343,512 ) ( 343,512 ) 293 ( 343,219 ) Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — — Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — — Distribution to shareholders — — — — — — — ( 175 ) ( 175 ) Balance at December 31, 2020 51,913,411 5 — — 587,579 ( 328,429 ) 259,155 4,367 263,522 Net income — — — — 22,145 22,145 676 22,821 Acquisition of noncontrolling interest — — — — ( 3,856 ) — ( 3,856 ) ( 1,144 ) ( 5,000 ) Acquisition of Great Wall Group by issuance of common stock 1,792,981 — — — 12,869 — 12,869 — 12,869 Capital contribution by shareholders — — — — — — — 480 480 Distribution to shareholders — — — — — — — ( 338 ) ( 338 ) Stock-based compensation — — — — 635 — 635 — 635 Balance at December 31, 2021 53,706,392 5 — — 597,227 ( 306,284 ) 290,948 4,041 294,989 Cumulative effect of adoption of CECL (ASU 2016-13) — — — — — ( 690 ) ( 690 ) — ( 690 ) Balance at January 1, 2022 53,706,392 5 — — 597,227 ( 306,974 ) 290,258 4,041 294,299 Net income (loss) — — — — — 460 460 ( 225 ) 235 Capital contribution by shareholders — — — — — — — 806 806 Issuance of common stock pursuant to equity compensation plan 139,239 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 31,854 ) — — — ( 162 ) — ( 162 ) — ( 162 ) Distribution to shareholders — — — — — — — ( 186 ) ( 186 ) Stock-based compensation — — — — 1,257 — 1,257 — 1,257 Balance at December 31, 2022 53,813,777 $ 5 — $ — $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249 The accompanying notes are an integral part of these consolidated financial statements. 45 HF FOODS GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business Organization and General HF Foods Group Inc. and subsidiaries (collectively “HF Group”, or the “Company”) is an Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States. The Company's business consists of one operating segment, which is also its one reportable segment: HF Group, which operates solely in the United States. The Company's customer base consists primarily of Chinese and Asian restaurants, and it provides sales and service support to customers who mainly converse in Mandarin or Chinese dialects. Corporate History HF Group Holding Corporation ("HF Holding") was incorporated as a holding company to acquire and consolidate the various pre-merger operating entities. On January 1, 2018, HF Holding entered into a Share Exchange Agreement with the controlling shareholders in exchange for all of HF Holding’s outstanding shares. On August 22, 2018, Atlantic Acquisition Corp. ("Atlantic") consummated a reverse acquisition transaction resulting in HF Holding becoming the surviving entity and a wholly owned subsidiary of Atlantic (the “Atlantic Acquisition”). The shareholders of HF Holding became the majority shareholders of Atlantic, and the Company changed its name to HF Foods Group Inc. (collectively, these transactions are referred to as the “Atlantic Transactions”). The Atlantic Acquisition was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction, as such, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic were consolidated into the balance sheet and results of operations of HF Holding as of the completion of the Atlantic Transactions. On November 4, 2019, HF Group consummated a merger transaction resulting in B&R Global Holdings, Inc. ("B&R Global") becoming a wholly-owned subsidiary of the Company (the "Business Combination"). At closing, the Company issued 30,700,000 shares of Common Stock of the Company to the shareholders of B&R Global in exchange for the 100 % equity interest of B&R Global. On January 17, 2020, the Company acquired 100 % equity membership interest in nine subsidiaries under B&R Group Realty Holding, LLC ("BRGR"), which owned ten warehouses that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $ 101.3 million. On December 30, 2021, the Company completed the acquisition of Great Wall Seafood Supply, Inc., Great Wall Restaurant Supplier, Inc., and First Mart Inc. (collectively the “Great Wall Group”), and substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses (the “Great Wall Acquisition”). The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States. On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand Food, Inc. ("Sealand") including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. See Note 8 - Acquisitions for additional information on recent acquisitions. Restatement of Previously Issued Consolidated Financial Statements As previously disclosed in Note 1 of the Company’s financial statements for the year ended December 31, 2021, the Company identified certain errors impacting the financial statements, including disclosures, which the company analyzed using Staff 46 Accounting Bulletin (“SAB”) No. 99, “Materiality” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and determined the errors were material. Accordingly, the Company restated the consolidated financial statements as of December 31, 2020 and for the years ended December 31, 2020 and 2019, and the related interim financial statements periods within the years ended December 31, 2021, 2020, and 2019 in accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections . For the year ended December 31, 2020 the errors related to the identification of and accounting for operating and finance leases, the incorrect identification and disclosure of certain related party relationships including the identification of VIEs, the timing of revenue recognition for rental income received from a related party, the accounting for the self-insurance liability for automobile insurance, classification errors in the financial statements, and an error in the calculation of earnings per share. In addition, certain errors were identified during an independent investigation by a Special Investigation Committee commissioned by the Company’s Board of Directors (see Note 17) such as unrecorded executive compensation to a certain executive and immediate family members, and related party disclosures. For the year ended December 31, 2020 the nature of these error corrections is as follows: a. Certain operating and finance leases were not properly identified and accounted for upon the adoption of ASC Topic 842 (“ASC 842”), Leases and adjustments have been made to correct these errors. b. Four entities previously disclosed as related parties were determined not to be related parties. The four related party entities that were reclassified in the financial statements from related party to third party for were EMC Rowland, LLC; The Big Catch Alhambra, LLC; Winfar Foods, Inc; and Wokcano Carlsbad Partner LLP. c. The Company identified an error related to the timing of revenue recognition for rental income received from UGO (a related party). Rental income received from UGO, which was previously recognized in error, was recognized in the appropriate accounting period as part of the error corrections. Please refer to Note 14 - Related Party Transactions for additional information on the lease arrangement with UGO. d. The Company determined that certain payments made by the Company in prior years to related parties should have been accounted for in the Company's consolidated financial statements as executive compensation. The Company made payments for inventory to Revolution Industry, which were diverted to Revolution Automotive to make car lease payments for the benefit of Mr. Ni and his family. The Company also made payments to UGO for marketing services, which services were determined as part of the independent investigation to have not been received commensurate to the amounts paid. Please refer to Note 14 - Related Party Transactions for further details on Revolution Automotive, Revolution Industry and UGO. The Company has recorded an uncertain tax position liability associated with the reclassification of certain amounts as executive compensation as discussed further in j. below. e. The Company had not previously recorded a liability (including incurred but not reported "IBNR") related to the self-insured portion of its automobile insurance policy. f. The 2020 goodwill impairment loss, which was previously misclassified as other income (expense) in the consolidated statements of operations and comprehensive income (loss), was revised to be included in income (loss) from operations. g. The gain/loss on sale of fixed assets, which was previously misclassified in other income (expense), net was revised to be included in distribution, selling and administrative expenses. h. As part of the error corrections being made, the resultant earnings per share was corrected. i. As a result of the executive compensation described in d. above, the Company recorded an uncertain tax position liability to account for potential implications to previously filed tax returns. j. In the Company’s December 31, 2020 financial statements, the Company did not disclose NC Good Taste Noodle, Inc. as a related party since Mr. Zhou Min Ni reported that he sold his ownership effective January 1, 2020. However, the Company’s former Chief Financial Officer, Mr. Jian Ming Ni, continues to own a portion of NC Good Taste Noodle, Inc. and as a result, the Company has concluded that NC Good Taste Noodle, Inc. still meets the definition of a related party. See Note 14 - Related Party Transactions for additional information The corresponding footnotes have been restated for the adjustments noted above. 47 The following table summarizes the effect of the restatements on each affected financial statement line item for the year ended December 31, 2020, impacting the consolidated statements of operations and comprehensive income (loss). The footnotes correspond to the error descriptions above: Consolidated Statement of Operations and Comprehensive Income (Loss) (In thousands, except per share data) As Previously Reported Adjustments As Restated Year Ended December 31, 2020 Net revenue - third parties $ 553,409 $ 115 (b) $ 553,524 Net revenue - related parties 13,423 ( 115 ) (b) 13,308 Cost of revenue - third parties 453,706 94 (b) ( 454 ) (d) 453,346 Cost of revenue - related parties 12,833 ( 94 ) (b) 12,739 TOTAL COST OF REVENUE 466,539 ( 454 ) 466,085 GROSS PROFIT 100,293 454 100,747 Distribution, selling and administrative expenses 106,126 ( 476 ) (a) 454 (d) 391 (e) ( 140 ) (g) 106,355 Goodwill impairment loss — 338,191 (f) 338,191 INCOME (LOSS) FROM OPERATIONS ( 5,833 ) ( 337,966 ) ( 343,799 ) Interest expense ( 3,922 ) ( 399 ) (a) ( 4,321 ) Goodwill impairment loss ( 338,191 ) 338,191 (f) — Other income 1,355 ( 119 ) (c) ( 140 ) (g) 1,096 Total other income (expense), net ( 341,678 ) 337,533 ( 4,145 ) INCOME (LOSS) BEFORE INCOME TAX ( 347,512 ) ( 432 ) ( 347,944 ) Income tax provision (benefit) ( 4,831 ) 106 (i) ( 4,725 ) NET INCOME (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) ( 342,681 ) ( 538 ) ( 343,219 ) NET INCOME (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC. ( 342,974 ) ( 538 ) ( 343,512 ) EARNINGS (LOSS) PER COMMON SHARE - BASIC ( 6.58 ) ( 0.01 ) (h) ( 6.59 ) EARNINGS (LOSS) PER COMMON SHARE - DILUTED ( 6.58 ) ( 0.01 ) (h) ( 6.59 ) The following table summarizes the effect of the restatements on each category of cash flow for the year ended December 31, 2020, impacting the consolidated statements of cash flows: Consolidated Statement of Cash Flows (In thousands) As Previously Reported Adjustment As Restated Year Ended December 31, 2020 Net cash provided by operating activities $ 44,131 $ 1,562 (a) $ 45,693 Net cash used in investing activities ( 94,411 ) — ( 94,411 ) Net cash provided by financing activities 45,323 ( 1,562 ) (a) 43,761 48 The effect of the restatements on the consolidated statements of changes in shareholders’ equity for the year ended December 31, 2020 is as follows: Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Attributable to HF Foods Group Inc. Non-controlling Interests Total Shareholders’ Equity (In thousands, except share data) Shares Amount Shares Amount As Previously Reported Balance at 12/31/2019 53,050,211 $ 5 ( 905,115 ) $ ( 12,038 ) $ 599,617 $ 15,824 $ 603,408 $ 4,249 607,657 Net (loss) income — — — — — ( 342,974 ) ( 342,974 ) 293 ( 342,681 ) Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — — Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — — Distribution to shareholders — — — — — — — ( 175 ) ( 175 ) Balance at 12/31/2020 51,913,411 $ 5 — $ — $ 587,579 $ ( 327,150 ) $ 260,434 $ 4,367 $ 264,801 Restatement Impacts Balance at 12/31/2019 — — — — — ( 741 ) ( 741 ) — ( 741 ) Net (loss) income — — — — — ( 538 ) ( 538 ) — ( 538 ) Escrow shares transferred to and recorded as treasury stock — — — — — — — — — Retirement of treasury stock — — — — — — — — — Distribution to shareholders — — — — — — — — — Balance at 12/31/2020 — $ — — $ — $ — $ ( 1,279 ) $ ( 1,279 ) $ — $ ( 1,279 ) As Restated Balance at 12/31/2019 (As Restated) 53,050,211 $ 5 ( 905,115 ) $ ( 12,038 ) $ 599,617 15,083 602,667 $ 4,249 606,916 Net (loss) income (as restated) — — — — — ( 343,512 ) ( 343,512 ) 293 ( 343,219 ) Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — — Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — — Distribution to shareholders — — — — — — — ( 175 ) ( 175 ) Balance at 12/31/2020 (As Restated) 51,913,411 $ 5 — $ — $ 587,579 $ ( 328,429 ) $ 259,155 $ 4,367 $ 263,522 49 Note 2 - Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the financial statements of HF Group, its subsidiaries and FUSO Trucking LLC ("FUSO") and the Staffing Agencies (through December 31, 2021), which the Company has determined to be VIEs that requires consolidation. All inter-company balances and transactions have been eliminated upon consolidation. Variable Interest Entities GAAP provides guidance on the identification of VIEs and financial reporting for entities over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive the economic benefits of the VIE that could be potentially significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. See Note 3 - Variable Interest Entities for additional information. Noncontrolling Interests GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s consolidated balance sheets. In addition, the amounts attributable to the net income (loss) of those noncontrolling interests are reported separately in the consolidated statements of operations and comprehensive income (loss). On May 28, 2021, the Company purchased the remaining 33.33 % noncontrolling equity interests in Kirnland Food Distribution, Inc. ("Kirnland") for $ 5.0 million, making Kirnland a wholly-owned subsidiary. In accordance with ASC 810, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. No gain or loss was recognized. As a result of this transaction, noncontrolling interests and additional paid-in capital were reduced by $ 1.1 million and $ 3.9 million, respectively. As of December 31, 2022 and 2021, noncontrolling interest equity consisted of the following: ($ in thousands) Ownership of noncontrolling interests at December 31, 2022 December 31, 2022 December 31, 2021 HF Foods Industrial, LLC ("HFFI") 45.00 % $ 204 $ 462 Min Food, Inc. 39.75 % 1,704 1,363 Monterey Food Service, LLC 35.00 % 452 453 Ocean West Food Services, LLC 32.50 % 1,986 1,763 Syncglobal Inc. 43.00 % 90 — Total $ 4,436 $ 4,041 Uses of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s 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. 50 Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or shorter as cash equivalents. As of December 31, 2022 and 2021, the Company had no cash equivalents. Accounts at banks with an aggregate excess of the amount of outstanding checks over the cash balances are included in checks issued not presented for payment in current liabilities in the consolidated balance sheets. Accounts Receivable, net Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for expected credit losses in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for expected credit losses based on a combination of factors. The Company maintains an allowance for expected credit losses based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of December 31, 2022 and 2021, allowances for expected credit losses were $ 1.4 million and $ 0.8 million, respectively. Inventories The Company’s inventories, consisting mainly of food and other foodservice-related products, are considered finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash consideration received from vendors, primarily in the form of rebates. The Company adjusted its inventory balance for slow-moving, excess and obsolete inventories to the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment: Estimated Useful Lives Automobiles 3 to 7 years Buildings and improvements 7 to 39 years Furniture and fixtures 4 to 10 years Machinery and equipment 3 to 10 years Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations and comprehensive income (loss) in distribution, selling and administrative expenses. Business Combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as 51 goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive income (loss). Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. The Company's policy is to test goodwill for impairment annually in the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. As of December 31, 2022 and 2021, the Company has one reporting unit. See Note 9 - Goodwill and Acquired Intangible Assets for additional information. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions including, projections of future cash flows, which include forecasted revenue, discount rate, and other factors which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. The Company also considers the use of market approaches, such as the comparable public company analysis and comparable acquisitions analysis, to estimate the fair value of the reporting unit. The Company bases these fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain. A change in underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future. Additionally, if actual results are not consistent with the estimates and assumptions or if there are significant changes to the Company’s planned strategy, it may cause the fair value of the reporting unit to be less than its carrying amount and result in additional impairments of goodwill in the future. The Company corroborates the reasonableness of the total fair value of the reporting unit by assessing the implied control premium based on the Company’s market capitalization. The Company’s market capitalization is calculated using the relevant shares outstanding and stock price of the Company’s publicly traded shares. In the event of a goodwill impairment, the Company would be required to record an impairment, which would impact earnings and reduce the carrying amounts of goodwill on the consolidated balance sheet. Intangible Assets, net Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows: 52 Estimated Useful Lives Non-competition agreement 3 years Tradenames 10 years Customer relationships 10 to 20 years Long-term Investments The Company’s investments in unconsolidated entities consist of an equity investment and an investment without readily determinable fair value. The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities , using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in earnings equal to the difference between the carrying value and fair value. Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures . Under the equity method, the Company initially records its investment at cost, which is included in the equity method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company did no t record any impairment loss on its long-term investments during the years ended December 31, 2022, 2021 and 2020. Impairment of Long-lived Assets The Company assesses its long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets or asset group exceeds their fair value. The Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 . The Company did no t record any impairment loss on its long-lived assets during the years ended December 31, 2021 and 2020. Insurance and Claim Costs The Company maintains workers compensation and general liability insurance with licensed insurance carriers. Beginning in April 2020, the Company is self-insured for auto claims less than $ 100,000 per claim. Insurance and claims expense represent premiums the Company paid and the accruals made for claims within the Company’s self-insured retention amounts. A liability is recognized for the estimated cost of all self-insured claims including an estimate of incurred but not reported claims based on historical experience and for claims expected to exceed the Company's policy limits. The Company establishes reserves for anticipated losses and expenses related to auto liability claims. The reserves consist of specific reserves for all known claims and an estimate for claims incurred but not reported, and losses arising from known claims ultimately settling in excess of insurance coverage using loss development factors based upon industry data and past experience. In determining the liability, the Company specifically reviews all known claims and records a liability based upon 53 the Company’s best estimate of the amount to be paid. In making the estimate, the Company considers the amount and validity of the claim, as well as the Company’s past experience with similar claims. In establishing the reserve for claims incurred but not reported, the Company considers its past claims history, including the length of time it takes for claims to be reported to the Company. These reserves are periodically reviewed and adjusted to reflect the Company’s experience and updated information relating to specific claims. As of December 31, 2022 and 2021, the Company has recorded a self-insurance liability of $ 1.3 million and $ 1.0 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets. Revenue Recognition The Company recognizes revenue from the sale of products when control of each product passes to the customer and the customer accepts the goods, which occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales. The Company follows ASC Topic 606 ("ASC 606") , Revenue from Contracts with Customers . The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The Company’s revenue streams are recognized at a specific point in time. Cost of Revenue Cost of revenue primarily includes inventory costs (net of vendor consideration, primarily in the form of rebates), inbound freight, customs clearance fees and other miscellaneous expenses. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses consist primarily of salaries and benefits for employees and contract laborers, trucking and fuel expenses for deliveries, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses. Shipping and Handling Costs Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are included in distribution, selling and administrative expenses. Shipping and handling costs were $ 83.7 million, $ 58.3 million and $ 37.8 million for the years ended December 31, 2022, 2021 and 2020, respectively, and includes estimates for labor associated with shipping and handling activities. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2022, the Company does not have a deferred tax asset valuation allowance. The Company records uncertain tax positions in accordance with ASC Topic 740 (“ASC 740”), Income Taxes , on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 13 - Income Taxes for additional information. 54 The Company adopted ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , on January 1, 2021. ASU 2019-12 is intended to simplify various aspects related to managerial accounting for income taxes. The adoption had no material impact on the Company's consolidated financial statements. Leases The Company accounts for leases following ASC 842, Leases ("ASC 842"). The Company determines if an arrangement is a lease at inception and also considers classification of leases as operating or finance. Operating leases are included in operating lease ROU assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under finance leases, and obligations under finance leases, non-current on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company's variable lease payments primarily consist of real estate, maintenance and usage charges. The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. The Company has also elected to combine lease and non-lease components when measuring lease liabilities for vehicle and equipment leases. Derivative Financial Instruments In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, d erivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment. Pursuant to GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the consolidated statements of operations and comprehensive income (loss). Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty. Concentrations and Credit Risk Credit risk Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. The Company maintains cash balances with banks which at times exceed federally insured limits. The Company has not experienced any losses in such accounts Segment Reporting ASC 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. In 2021, former co-CEO Zhou Min Ni resigned, and Xiao Mou Zhang assumed the role of sole CEO and sole Chief Operating Decision Maker ("CODM"). The CODM, reviews operating 55 results and makes resource allocations on a consolidated basis and thus the Company has concluded it has one operating and reportable segment. Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 15, 2022. The Company adopted this ASU within the annual reporting period ending as of December 31, 2022. The adoption of this guidance resulted in an adjustment to retained earnings of $ 0.7 million as of January 1, 2022 as evidenced in the Company's consolidated statements of changes in shareholders’ equity. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 , deferring the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company adopted ASU 2020-04 during 2021. The ASU has not had a material impact on the Company's consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . The guidance requires an acquirer to, at the date of acquisition, recognize and measure the acquired contract assets and contract liabilities acquired in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. This guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date. The Company is in the process of assessing the impact of this ASU on its future consolidated financial statements, but does not expect it to have a material impact. Note 3 - Variable Interest Entities The Company has VIEs for which the Company is not the primary beneficiary and therefore does not consolidate, and VIEs for which the Company is the primary beneficiary and consolidates. The VIEs are summarized as follows: • Consolidated VIEs (collectively "Consolidated VIEs"): • FUSO Trucking LLC (“FUSO”) • 13 staffing agencies (collectively, the “Staffing Agencies”) – Suppliers of staffing services through 2021: ◦ Anfu, Inc. ◦ Anshun, Inc. ◦ Chen Enterprises (until December 2020) ◦ Georgia Kam (until December 2020) ◦ Inchoi, Inc. ◦ Malways, Inc. ◦ Rousafe ◦ S&P ◦ SNP ◦ Suntone ◦ THLI, Inc. (until December 2020) ◦ THLR, Inc. (until December 2020) ◦ TWRR, Inc. (until December 2020) • Unconsolidated VIEs (collectively "Unconsolidated VIEs"): • Revolution Industry, LLC (“Revolution Industry”) – Supplier of goods (until March 2021) • UGO USA, Inc. (“UGO”) – Supplier of online goods, customer, and lessee (until April 2021) • BRGR (until January 2020) • AnHeart, Inc. (“AnHeart”) 56 Consolidated VIEs FUSO FUSO was established solely to provide exclusive trucking services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIEs’ activities. In addition, the Company receives economic benefits from the entity and has concluded that the Company is the primary beneficiary. The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE included in the Company’s consolidated balance sheets, statements of operations and comprehensive income (loss) and statements of cash flows are immaterial. Staffing Agencies The Staffing Agencies were set up by an employee of the Company, or their relatives, and provided temporary labor services exclusively to the Company at the direction of the Company. There were no other substantive business activities of the Staffing Agencies. There were immaterial assets held, or liabilities owed by the Staffing Agencies and immaterial equity. The Company determined it was the primary beneficiary for the Staffing Agencies through 2021 as it controlled how and when the labor force would be utilized. The Company consolidated the Staffing Agencies, recognizing compensation expense within distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss), and the related accrued expenses in the consolidated balance sheets. The Company did not have any guarantees, commitments or other forms of financing to the Staffing Agencies. As of December 31, 2021, the Company no longer had involvement with any of the Staffing Agencies and therefore was no longer considered a VIE and was no longer consolidated. Unconsolidated VIEs Revolution Industry and UGO Revolution Industry was established to produce egg roll mix for the Company. UGO was originally designed to be an online marketplace for various Asian goods. Revolution Industry and UGO were thinly capitalized and were not able to finance their activities without additional subordinated support. The former Co-CEO's (Mr. Ni) son, as sole equity holder of Revolution Industry, had unilateral control over the ongoing activities of Revolution Industry and significantly benefited from their operations. Therefore, the Company was not the primary beneficiary for Revolution Industry. The former Co-CEO (Mr. Ni) and his niece, as equity holders, had unilateral control over the ongoing activities of UGO and significantly benefited from its operations. Therefore, the Company was not the primary beneficiary for UGO. Revolution Industry and UGO are also related parties and were generally the Company’s suppliers or customers and the Company did not have other involvement with these entities. Therefore, the Company’s exposure to loss due to its involvement with these entities was limited to amounts due from these entities, which is included in Accounts receivable – related parties. The Company did not have any guarantees, commitments, or other forms of financing with these entities. All transactions with Revolution Industry and UGO ceased in 2021. Related party transactions with Revolution Industry and UGO are disclosed in Note 14 - Related Party Transactions. BRGR BRGR was established to hold real estate for rent primarily for the Company and BRGR was financed primarily through this rental income and proceeds from the real estate loan for which the Company was guarantor. The Company was not the primary beneficiary of BRGR as the Company did not have the power to direct or control the activities which most significantly influenced the performance of BRGR. On January 17, 2020, the Company acquired 100 % equity membership interests of certain real estate subsidiaries of BRGR, as discussed in Note 8 - Acquisitions . The Company also entered into the Second Amended Credit Agreement, as discussed in Note 11 - Debt , which removed BRGR as a guarantor of its revolving credit facility and as a borrower under its real estate term loans. Related party transactions with BRGR are disclosed in Note 14 - Related Party Transactions . 57 For the period from January 1, 2020 through January 17, 2020, the Company recorded rent expense of $ 0.2 million related to its lease agreements with the realty subsidiaries of BRGR, which is included in distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss). As of December 31, 2019, the Company was a guarantor of BRGR and its subsidiaries’ mortgage-secured real estate term loan, which had an unpaid principal balance of $ 53.3 million. As of January 17, 2020, the Company had no remaining involvement with BRGR and therefore is no longer considered a VIE. AnHeart AnHeart was previously a subsidiary of the Company designed to sell traditional Chinese medicine, sold to a third-party in February 2019. As discussed in Note 7 - Leases, after the sale, the Company continued to provide a guarantee for all rent and related costs associated with two leases of AnHeart in Manhattan, New York. The Company has determined that AnHeart is a VIE as a result of the guarantee. However, the Company concluded it is not the primary beneficiary of AnHeart because it does not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance. Please refer to Note 7 - Leases for additional information regarding the Company's maximum exposure to loss to AnHeart. The Company did not have any sales to or rental income from any of the other VIEs during the three years ended December 31, 2022. Note 4 - Revenue For the years ended December 31, 2022, 2021 and 2020, 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: Year Ended December 31, ($ in thousands) 2022 2021 Seafood $ 354,220 30 % $ 123,808 16 % Asian Specialty 299,215 26 % 236,489 29 % Meat and Poultry 238,276 20 % 214,504 27 % Fresh Produce 126,560 11 % 103,168 13 % Packaging and Other 84,489 7 % 69,187 9 % Commodity 67,707 6 % 49,728 6 % Total $ 1,170,467 100 % $ 796,884 100 % Due to system constraints prior to the year ended December 31, 2021, the Company did not present net revenue by principal product categories. Note 5 - Balance Sheet Components Accounts receivable, net consisted of the following: (In thousands) December 31, 2022 December 31, 2021 Accounts receivable $ 45,628 $ 37,121 Less: allowance for expected credit losses ( 1,442 ) ( 840 ) Accounts receivable, net $ 44,186 $ 36,281 58 Movement of allowance for expected credit losses was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Beginning balance $ 840 $ 909 $ 624 Adjustment for adoption of the new CECL standard (Note 2) 690 — — Increase (decrease) in provision for expected credit losses 82 ( 433 ) 1,338 Bad debt recovery (write-offs) ( 170 ) 364 ( 1,053 ) Ending balance $ 1,442 $ 840 $ 909 Property and equipment, net consisted of the following: (In thousands) December 31, 2022 December 31, 2021 Automobiles $ 34,891 $ 31,577 Buildings 63,045 68,998 Building improvements 20,637 19,004 Furniture and fixtures 444 211 Land 49,929 51,412 Machinery and equipment 17,210 14,114 Subtotal 186,156 185,316 Less: accumulated depreciation ( 45,826 ) ( 39,408 ) Property and equipment, net $ 140,330 $ 145,908 Depreciation expense was $ 9.2 million, $ 8.1 million and $ 8.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Long-term investments consisted of the following: ($ in thousands) Ownership as of December 31, 2022 December 31, 2022 December 31, 2021 Asahi Food, Inc. ("Asahi") 49 % $ 879 $ 662 Pt. Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800 1,800 Total long-term investments $ 2,679 $ 2,462 The investment in Tamron is accounted for using the measurement alternative under ASC 321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. There was no impairment during the years ended December 31, 2022, 2021 and 2020 for these investments. 59 Accrued expenses and other liabilities consisted of the following: (In thousands) December 31, 2022 December 31, 2021 Accrued compensation $ 6,798 $ 5,038 Accrued professional fees 3,866 349 Accrued income taxes — 1,908 Accrued interest and fees 1,082 205 Self-insurance liability 1,286 1,008 Accrued other 6,616 3,630 Total accrued expenses and other liabilities $ 19,648 $ 12,138 Note 6 - Fair Value Measurements The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the dates indicated: December 31, 2022 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (In thousands) Assets: Derivative instruments $ — $ 530 $ — $ 530 $ — $ — $ — $ — Liabilities: Derivative instruments $ — $ — $ — $ — $ — $ 287 $ — $ 287 The Company follows the provisions of ASC Topic 820 ("ASC 820"), Fair Value Measurements and Disclosures . ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments. Carrying Value and Estimated Fair Value of Outstanding Debt - The following table presents the carrying value and estimated fair value of the Company’s outstanding debt as described in Note 11 - Debt of the Notes to the Consolidated Financial Statements, including the current portion, as of the dates indicated: 60 December 31, 2022 December 31, 2021 Carrying Value Fair Value Level Carrying Value Fair Value Level ($ in millions) Fixed rate debt: Promissory note payable to related party $ — $ — $ 4.5 $ 3.4 Level 3 Bank of America 1.9 1.6 Level 3 2.7 2.4 Level 3 East West Bank 2.4 1.8 Level 3 2.5 2.0 Level 3 First Horizon Bank — — 4.5 3.6 Level 3 Other finance institutions 0.2 0.2 Level 3 0.8 0.8 Level 3 Variable rate debt: JPMorgan 111.4 111.4 Level 2 70.8 70.8 Level 2 Bank of America 2.3 2.3 Level 2 2.5 2.5 Level 2 East West Bank 3.5 3.5 Level 2 3.5 3.5 Level 2 The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments and the consistency in market conditions since the loans were entered into. For the Company's fixed rate debt, the fair values were estimated using discounted cash flow analyses, based on the current incremental borrowing rates for similar types of borrowing arrangements. Please refer to Note 11 - Debt and Note 14 - Related Party Transactions for additional information regarding the Company's debt. Note 7 - Leases The Company leases office space, warehouses and vacant land under non-cancelable operating leases, with terms typically ranging from one to thirty years , as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment with various expiration dates through 2051. The Company determines whether an arrangement is or includes an embedded lease at contract inception. Operating and finance lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. As of December 31, 2022, the balances for operating lease right-of-use ("ROU") assets and liabilities were $ 14.2 million and $ 14.3 million, respectively. As of December 31, 2021, the balances for operating lease ROU assets and liabilities were $ 11.7 million and $ 11.7 million, respectively. Operating lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company also recognizes finance lease assets and finance lease liabilities at inception, with lease expense recognized as interest expense and amortization of the lease payment. Variable lease costs were insignificant in the years ended December 31, 2022, 2021 and 2020. Operating Leases The components of operating lease expense were as follows: Year Ended December 31, ($ in thousands) 2022 2021 2020 Operating lease cost $ 4,045 $ 967 $ 785 Short-term lease cost $ 1,037 $ 1,699 $ 1,424 Weighted average remaining lease term (months) 47 56 40 Weighted average discount rate 3.8 % 3.9 % 5.6 % 61 Year Ended December 31, (In thousands) 2022 2021 2020 Operating cash flows from operating leases $ 4,005 $ 822 $ 799 Finance Leases The components of lease expense were as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Finance leases cost: Amortization of ROU assets $ 2,808 $ 2,416 $ 1,978 Interest on lease liabilities 787 820 492 Total finance leases cost $ 3,595 $ 3,236 $ 2,470 Supplemental cash flow information related to finance leases was as follows: Year Ended December 31, (In thousands) 2022 2021 2020 Operating cash flows from finance leases $ 670 $ 701 $ 492 Supplemental balance sheet information related to finance leases was as follows: ($ in thousands) December 31, 2022 December 31, 2021 Property and equipment, at cost $ 20,339 $ 18,412 Accumulated depreciation ( 7,615 ) ( 5,127 ) Property and equipment, net $ 12,724 $ 13,285 Weighted average remaining lease term (months) 215 215 Weighted average discount rate 5.7 % 5.8 % Maturities of lease liabilities are as follows: Operating Leases (In thousands) Related Party (1) Third Party Total Finance Leases Year Ended December 31, 2023 $ 312 $ 3,828 $ 4,140 $ 2,844 2024 321 3,444 3,765 2,010 2025 331 3,343 3,674 1,399 2026 — 3,207 3,207 1,018 2027 — 545 545 752 Thereafter — — — 16,839 Total lease payments 964 14,367 15,331 24,862 Less: Imputed interest ( 52 ) ( 1,012 ) ( 1,064 ) ( 11,167 ) Total $ 912 $ 13,355 $ 14,267 $ 13,695 _______________ (1) See Note 14 - Related Party Transactions AnHeart As discussed in Note 3 - Variable Interest Entities , the Company provided a guarantee for two separate leases for two properties 62 located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. On February 10, 2021, the Company entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC, pursuant to which it assumed the lease of the premises at 273 Fifth Avenue (the “273 Lease Agreement”). At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the Lease Agreement. The Company agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due. Under the terms of the Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $ 2.5 million. The Lease Amendment permits subletting of the premises, and the Company intends to sublease the newly constructed premises to defray the rental expense undertaken pursuant to its guaranty obligations. On January 17, 2022, the Company received notice that AnHeart had defaulted on its obligations as tenant under the lease for 275 Fifth Avenue. On February 7, 2022, the Company undertook its guaranty obligations by assuming responsibility for payment of monthly rent and other tenant obligations, including past due rent as well as property tax obligations beginning with the January 2022 rent due. On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng. In March 2022, the Company agreed to stay 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. While the case remains pending in New York, the Company is not actively litigating the claim. In accordance with ASC 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. The Company elected a policy to apply the discounted cash flow method to loss contingencies with more than 18 months of payments. AnHeart is obligated to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. As of December 31, 2022, the Company had a lease guarantee liability of $ 5.8 million. The Company determined the discounted value of the lease guarantee liability using a discount rate of 4.55 % and is classified as Level 2 in the fair value hierarchy. The current portion of the lease guarantee liability of $ 0.3 million is recorded in Accrued expenses and other liabilities on the 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 December 31, 2022 are presented below: (In thousands) Amount Year Ended December 31, 2023 $ 543 2024 582 2025 604 2026 621 2027 638 Thereafter 4,478 Total 7,466 Less: Imputed interest ( 1,706 ) Total minimum lease payments $ 5,760 Note 8 - Acquisitions Acquisition of Sealand On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand, including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. 63 The price for the purchased assets was $ 20.0 million paid in cash at closing. 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. The assets acquired by the Company were measured at their estimated fair values as of the date of acquisition. 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 totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the consolidated statement of operations and comprehensive income for the year ended December 31, 2022. The information included herein has been 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 purchase price allocation is subject to further adjustment until all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company, not to exceed one year as permitted under ASC 805 . Purchase Price Allocation The total consideration paid to acquire the assets and liabilities of Sealand, as set forth below: (In thousands) Amount Inventory $ 13,846 Property plant, and equipment 1,424 Right-of-use assets 127 Intangible assets 14,717 Total assets acquired 30,114 Obligations under operating leases 127 Total liabilities assumed 127 Net assets 29,987 Goodwill 4,861 Total consideration $ 34,848 The Company recorded acquired intangible assets of $ 14.7 million, which were measured at fair value using Level 3 inputs. These intangible assets include tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-compete agreements of $ 1.4 million. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology and Level 3 inputs including a discount rate. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1 % and a discount rate. The fair value of non-competition agreements was determined by applying the income approach and Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 17.5 % to 18.0 %. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. Acquisition of Great Wall Group On December 30, 2021, the Company executed an Asset Purchase Agreement with Great Wall Group to purchase substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses. The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States. 64 The final aggregate price for the purchased assets was $ 43.7 million with $ 30.8 million paid in cash at closing and the issuance of 1,792,981 shares of common stock of the Company (based on a 60-day VWAP of $ 7.36 ), with a fair value of $ 12.9 million based on the share price of $ 8.11 per share at closing and an 11.5 % discount due to a lock-up restriction. In addition to the closing cash payment, the Company separately acquired all of the sellers’ saleable product inventory, for approximately $ 24.3 million of which approximately $ 6.8 million was paid during the year ended December 31, 2021 and $ 17.4 million was recorded in accounts payable on the consolidated balance sheets as of December 31, 2021. The Company also acquired additional vehicles for approximately $ 0.2 million. As such, the total acquisition price for all operating assets and inventory was approximately $ 68.2 million. 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. The assets acquired by the Company were measured at their estimated fair values as of the date of acquisition. 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. For the year ended December 31, 2021, transaction costs for the acquisition totaled $ 0.9 million and were reflected in distribution, selling and administrative expenses in the consolidated statement of operations and comprehensive income (loss). The information included herein has been 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 flow, and other estimates made by management. Purchase Price Allocation The following table presents the allocation of the total consideration paid to acquire the assets and liabilities of the Great Wall Group: (In thousands) Amount Inventory $ 24,728 Property plant, and equipment 1,537 Intangible assets 30,145 Total assets acquired 56,410 Goodwill 11,745 Total consideration $ 68,155 The Company recorded acquired intangible assets of $ 30.1 million, which included tradenames and trademarks of $ 10.5 million, customer relationships of $ 17.2 million and non-competition agreements of $ 2.4 million. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs including a discount rate. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1 % and a discount rate. The fair value of non-competition agreements was determined by applying the income approach using Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 11.5 % to 14.0 %. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. See Note 9 - Goodwill and Acquired Intangible Assets for additional information on acquired intangibles in the Great Wall Acquisition. Since the Great Wall Acquisition occurred on December 30, 2021, the amounts of revenue and earnings of the Great Wall Group included in the Company’s consolidated statement of operations and comprehensive income (loss) from the acquisition date to December 31, 2021 were immaterial. Unaudited Supplemental Pro Forma Financial Information The following table presents the Company’s unaudited pro forma results for the years ended December 31, 2022 and 2021, respectively, as if the Great Wall Acquisition and the Sealand Acquisition had been consummated on January 1, 2021. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired 65 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. Year Ended December 31, (In thousands, except share and per share data) 2022 2021 Pro forma net revenue $ 1,202,296 $ 1,072,653 Pro forma net income attributable to HF Group $ 35 $ 33,724 Pro forma (loss) earnings per common share - basic $ — $ 0.65 Pro forma (loss) earnings per common share - diluted $ — $ 0.65 Pro forma weighted average shares - basic 53,757,199 53,706,392 Pro forma weighted average shares - diluted 53,757,199 53,809,020 The revenue and operating income from Sealand from the date of acquisition through December 31, 2022 was $ 55.6 million and $ 0.7 million, respectively, and were included in the consolidated statements of operations and comprehensive income (loss). Acquisition of Real Estate Companies On January 17, 2020, the Company acquired 100 % equity membership interest in nine subsidiaries of BRGR, which owned warehouse facilities that were being leased to B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana (the "Realty Acquisition"). Then Co-CEO (and current CEO) of the Company, Xiao Mou Zhang ("Mr. Zhang"), managed and owned an 8.91 % interest in BRGR. The total purchase price of the transaction was $ 101.3 million for which financing was provided by JPMorgan Chase Bank, N.A. ("JPMorgan"), as Administrative Agent, and certain lender parties hereto, including Comerica Bank under an Amended and Restated Credit Agreement ("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 committee, composed of the Company’s independent directors, reviewed and approved the transaction and the related financing on behalf of HF Group’s board. Consideration for the acquisition was funded by (1) $ 75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 11 - Debt for additional information), (2) issuance by B&R Global of a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR maturing on January 17, 2030, and (3) payment of $ 18.7 million from funds drawn from the Company’s revolving credit facility. The reissuance of the mortgage-backed term loans released BRGR from its obligations to the lenders under the First Amended Credit Agreement and predecessor financing arrangements. The majority of the assets acquired was concentrated in a group of similar assets, land and buildings, for the same purpose of warehousing and distribution. As such, the Realty Acquisition was deemed as an asset acquisition under ASC 805-10-55, and the total purchase price was allocated on a relative fair value basis to the net assets acquired. The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: (In thousands) Amount Cash $ 266 Automobile 34 Prepaid expenses 39 Land 48,734 Buildings 53,564 Total assets acquired 102,637 Accounts payable and accrued expenses 1,367 Total liabilities assumed 1,367 Net assets acquired $ 101,270 66 Note 9 - Goodwill and Acquired Intangible Assets Goodwill The changes in the carrying amount of goodwill are presented below: (In thousands) Amount Balance at December 31, 2020 $ 68,512 Acquisition of Great Wall Group 11,745 Balance at December 31, 2021 80,257 Acquisition of Sealand Food, Inc. 4,861 Balance at December 31, 2022 $ 85,118 Accumulated impairment for goodwill is $ 338.2 million as of both December 31, 2022 and 2021. Towards the end of first quarter of fiscal year 2020, the Company experienced significant decline in business volume due to mandatory stay-at-home orders issued by governmental authorities in response to the intensification of the COVID-19 pandemic. The Company determined that the B&R Global reporting unit was very sensitive to these declines and that it was more-likely-than-not that an impairment may exist. The Company, therefore, performed an analysis of the fair value of the B&R Global reporting unit as of March 31, 2020 using a discounted cash flow method for goodwill impairment testing purposes. Based upon the analysis, the Company concluded that the carrying value of its B&R Global reporting unit exceeded its fair value by approximately $ 338.2 million. As a result, the Company recorded the amount as an impairment loss during the first quarter of fiscal year 2020. The Company estimated the fair value of the B&R Global reporting unit using the income approach, discounting projected future cash flows based upon management’s expectations of the current and future operating environment. The calculation of the impairment charge included substantial fact-based determinations and estimates including weighted average cost of capital ("WACC"), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities. The fair value conclusions as of March 31, 2020 for the reporting unit were highly sensitive to changes in the WACC, which considered as observable data for publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. The Company also observed that the WACC applied on March 31, 2020 increased significantly from the original WACC value as of the acquisition date, mainly driven by the increased risk and volatility observed in the market. Volatility had primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country had been reduced to takeout and delivery offerings. Continued uncertainty about the removal or perpetuation of these restrictions and levels of consumer spending cause ongoing volatility. Due to structural changes at the Company during 2021, there is only one aggregated reporting unit at December 31, 2022 and 2021. Due to the sustained decline in the Company’s stock price during 2022, the Company performed a quantitative goodwill impairment assessment. The fair value was determined using an average of the discounted cash flow approach, comparable public company analysis, and comparable acquisitions analysis. The fair value of the reporting unit exceeded the carrying value, and therefore the Company concluded no impairment was required to be recorded during the year ended December 31, 2022. For the year ended December 31, 2021, the Company performed a qualitative goodwill impairment assessment and concluded no impairment was required to be recorded during the year ended December 31, 2021. Acquired Intangible Assets In connection with the Sealand acquisition, the Company acquired $ 14.7 million of intangible assets, primarily representing tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-compete agreements of $ 1.4 million. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. In connection with the Great Wall Group acquisition, HF Group acquired $ 30.1 million of intangible assets, primarily representing a non-competition agreement, tradenames and customer relationships, which have an estimated amortization period of approximately 3 years, 10 years, and 10 years, respectively. 67 In connection with the acquisition of B&R Global, HF Group acquired $ 188.5 million of intangible assets, primarily representing tradenames and customer relationships which have an estimated amortization period of 10 and 20 years, respectively. The components of the intangible assets are as follows: December 31, 2022 December 31, 2021 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Non-competition agreement $ 3,892 $ ( 1,132 ) $ 2,760 $ 2,407 $ — $ 2,407 Trademarks 44,256 ( 10,673 ) 33,583 39,833 ( 6,349 ) 33,484 Customer relationships 185,266 ( 27,518 ) 157,748 176,408 ( 17,247 ) 159,161 Total $ 233,414 $ ( 39,323 ) $ 194,091 $ 218,648 $ ( 23,596 ) $ 195,052 The Company evaluated possible triggering events that would indicate long-lived asset impairment assessment. The Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 . There were no triggering events identified for the remaining intangible assets at December 31, 2022. No impairment was recorded for the years ended December 31, 2021 and 2020. HF Group’s amortization expense for acquired intangible assets was $ 15.7 million in 2022, $ 10.9 million in 2021 and $ 10.9 million in 2020. The estimated future amortization expense for intangible assets is presented below: (In thousands) Amount Year ending December 31, 2023 $ 16,285 2024 16,285 2025 15,152 2026 14,987 2027 14,987 Thereafter 116,395 Total $ 194,091 Note 10 - Derivative Financial Instruments Derivative Instruments The Company utilizes interest rate swaps ("IRS") for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 11 - Debt ). The Company does not use any other derivative financial instruments for trading or speculative purposes. On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $ 1.1 million and $ 2.6 million, respectively. The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amounts that were priced at USD 1-month LIBOR plus 2.25 % per annum for the entire duration of the term loans. The EWB IRS contracts fixed the two term loans at 4.23 % per annum until maturity in September 2029. On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $ 2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount. The term loan was contracted at USD 1-month LIBOR plus 2.15 % per annum, but was fixed at 4.25 % per annum resulting from the corresponding BOA IRS contract. On December 19, 2021, the Company entered into the Second Amendment to Loan 68 Agreement, which pegged the mortgage term loan to Secured Overnight Financing Rate ("SOFR") + 2.5 % . The BOA IRS was modified accordingly to fix the SOFR based loan to approximately 4.50 %. The term loan and corresponding BOA IRS contract mature in December 2029. On June 24, 2020, HF Group entered into a forward starting IRS contract with JPMorgan Chase Bank (the "JPM IRS") for a fixed $ 80.0 million notional amount, effective from June 30, 2021 and expiring on June 30, 2025, as a means to partially hedge its existing floating rate loans exposure. On March 3, 2021, the Company unwound the JPM IRS. The contract was unwound with a view that 1-month LIBOR will continue to remain low in the foreseeable future despite the spike at the long end of the yield curve. The Company recorded a gain of approximately $ 0.7 million during the year ended December 31, 2021. The Company evaluated the aforementioned IRS contracts currently in place and did not designate those as cash flow hedges. 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 consolidated statements of operations and comprehensive income (loss). As of December 31, 2022 and 2021, the Company determined that the fair value of the IRS contracts were $ 0.5 million in an asset position and $ 0.3 million in a liability position, respectively, which is included in other long-term assets and accrued expenses and other liabilities , respectively, on the consolidated balance sheets. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in its assessment of fair value. The inputs used to determine the fair value of the IRS are classified as Level 2 on the fair value hierarchy. Note 11 - Debt Long-term debt at December 31, 2022 and 2021 is summarized as follows: ($ in thousands) Bank Name Maturity Interest Rate at December 31, 2022 December 31, 2022 December 31, 2021 Bank of America (a) March 2023 - December 2029 3.73 % - 5.80 % $ 4,315 $ 5,134 East West Bank (b) August 2027 - September 2029 4.25 % - 4.40 % 5,822 5,994 First Horizon Bank (c) Paid off in May 2022 3.85 % — 4,571 J.P. Morgan Chase (d) February 2023 - January 2030 6.10 % - 6.22 % 111,714 70,866 Other finance institutions (e) April 2023 - March 2024 5.99 % - 6.14 % 160 837 Total debt, principal amount 122,011 87,402 Less: Debt issuance costs ( 302 ) ( 34 ) Total debt, carrying value 121,709 87,368 Less: Current portion ( 6,266 ) ( 5,557 ) Long-term debt $ 115,443 $ 81,811 _______________ (a) Loan balance consists of real estate term loan, equipment term loans, and vehicle term loans, collateralized by one real property and specific equipment and vehicles. The real estate term is pegged to TERM SOFR + 2.5 %. (b) Real estate term loans with East West Bank are collateralized by four real properties. Balloon payments of $ 1.8 million and $ 2.9 million are due at maturity in 2027 and 2029, respectively. (c) Secured by real property. During the year ended December 31, 2022, the Company sold the real property for approximately $ 7.2 million to Enson Seafood (a related party), recognized a gain of $ 1.5 million, which is included in other income in the consolidated statements of operations and comprehensive income (loss), and used a portion of the proceeds to pay the $ 4.5 million loan outstanding with First Horizon Bank. (d) Real estate term loan with a principal balance of $ 111.4 million as of December 31, 2022 and $ 69.8 million as of December 31, 2021 is secured by assets held by the Company and has a maturity date of January 2030. Equipment term loan with a principal balance of $ 0.3 million as of December 31, 2022 and $ 1.0 million as of December 31, 2021 is secured by specific vehicles and equipment as defined in loan agreements. Equipment term loans mature in February 2023 and December 2023. (e) Secured by vehicles. The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants, including, but not limited to, a fixed charge coverage ratio and effective tangible net worth. As of December 31, 2022, the Company was in compliance with its covenants. 69 On March 31, 2022, the Company amended the JPM Credit Agreement extending the Real Estate Term Loan for five years . The amendment provides for an increase in the Real Estate Term Loan from $ 69.0 million to $ 115.0 million with a 1-month SOFR plus a credit adjustment of 0.1 % plus 1.875 % per annum. The future maturities of long-term debt as of December 31, 2022 are as follows: (In thousands) Amount Year ending December 31, 2023 $ 6,266 2024 5,774 2025 5,789 2026 5,810 2027 7,497 Thereafter 90,573 Total $ 121,709 Credit Facility On November 4, 2019, the Company entered into a credit agreement with JPMorgan Chase Bank, NA. (the “JPM Credit Agreement”). The JPM Credit Agreement provided for a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. On January 17, 2020, the Company and certain of the wholly-owned subsidiaries and affiliates of the Company as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement (“Second Amended Credit Agreement”). On December 30, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No. 3 to the Second Amended Credit Agreement with JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement, as amended, provided for (i) a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), (ii) mortgage-secured term loan of $ 75.6 million, (the “Term Loan”), and (iii) amendment in the referenced interest rate from 1-month LIBOR to 1-month Secured Overnight Financing Rate ("SOFR") plus a credit adjustment of 0.1 % (difference between LIBOR and SOFR plus 1.375 % per annum). The existing revolving credit facility balance under the Second Amended Credit Agreement, was rolled over to the Revolving Facility on December 30, 2021. On the same day, the Company utilized an additional $ 33.3 million drawdown from the Revolving Facility to fund the Great Wall Acquisition. The Second Amended Credit Agreement, as amended, contains certain financial covenants, including, but not limited to, a fixed charge coverage ratio and effective tangible net worth. On March 31, 2022, the Company amended the JPM Credit Agreement extending the Revolver Facility for five years , with a maturity date of November 4, 2027. The amendment provides for a $ 100.0 million asset-secured revolving credit facility with a one-month SOFR plus a credit adjustment of 0.1 % plus 1.375 % per annum. As of December 31, 2022, the Company was in compliance with its covenants. During the year ended December 31, 2022, the Company's lenders consented to the delivery of the Company's 2021 audited financial statements on or before January 31, 2023. The outstanding principal balance on the line of credit as of December 31, 2022 was $ 53.1 million. Note 12 - Earnings (Loss) Per Share The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were 44,260 and no potential common shares related to performance-based restricted stock units that were excluded from the calculation of diluted EPS for the year ended December 31, 2022 and 2021 because their effect would have been anti-dilutive. There were 62,026 and no anti-dilutive potential common shares for the year ended December 31, 2022 and 2021, respectively, related to restricted stock units . The following table sets forth the computation of basic and diluted EPS: 70 Year Ended December 31, ($ in thousands, except share and per share data) 2022 2021 2020 Numerator: Net income (loss) attributable to HF Foods Group Inc. $ 460 $ 22,145 $ ( 343,512 ) Denominator: Weighted-average common shares outstanding 53,757,162 51,918,323 52,095,585 Effect of dilutive securities 106,286 173,499 — Weighted-average dilutive shares outstanding 53,863,448 52,091,822 52,095,585 Earnings (loss) per common share: Basic $ 0.01 $ 0.43 $ ( 6.59 ) Diluted $ 0.01 $ 0.43 $ ( 6.59 ) Note 13 - Income Taxes The provision (benefit) for income taxes of the Company for the years ended December 31, 2022, 2021 and 2020 consists of the following: Year Ended December 31, (In thousands) 2022 2021 2020 Current: Federal $ 3,620 $ 9,044 $ 1,245 State 1,161 2,329 ( 54 ) Current income taxes 4,781 11,373 1,191 Deferred income benefit: Federal ( 4,321 ) ( 2,823 ) ( 2,917 ) State ( 691 ) ( 4,047 ) ( 2,999 ) Deferred income benefit: ( 5,012 ) ( 6,870 ) ( 5,916 ) Total (benefit) provision for income taxes $ ( 231 ) $ 4,503 $ ( 4,725 ) The Company's effective income tax rates for the years ended December 31, 2022, 2021 and 2020 were ( 5,148.7 )%, 16.6 % and 1.4 %, respectively. 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. Due to the changes in the Company's business activities, the Company has updated certain state filing methodologies and related state apportionment which resulted in a change in the state tax rate used in measuring deferred income taxes as of December 31, 2022. This change had a favorable impact on the Company's effective tax rate for the year ended December 31, 2022. 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. 71 Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows: (In thousands) December 31, 2022 December 31, 2021 Deferred tax assets: Allowance for expected credit losses $ 301 $ 202 Inventories 1,185 644 State net operating loss 38 161 Equity compensation 467 132 Compensation related accruals 1,031 638 Guarantee liability 1,528 — Fair value change in interest rate swap contracts — 67 Leases 6,553 6,065 Accrued expenses 304 24 Total deferred tax assets 11,407 7,933 Deferred tax liabilities: Property and equipment ( 5,845 ) ( 5,400 ) Intangible assets ( 35,740 ) ( 38,890 ) Right of use assets ( 3,466 ) ( 2,949 ) Equity investments ( 649 ) ( 149 ) Fair value change in interest rate swap contracts ( 150 ) — Total deferred tax liabilities ( 45,850 ) ( 47,388 ) Net deferred tax liabilities $ ( 34,443 ) $ ( 39,455 ) Reconciliations of the statutory income tax rate to the effective income tax rate are as follows: Year Ended December 31, 2022 2021 2020 Federal statutory tax rate (21%) 21.0 % 21.0 % 21.0 % State statutory tax rate 3,963.2 % 5.8 % 0.7 % Impact of goodwill impairment loss – permanent difference — % — % ( 20.5 ) % U.S permanent differences 207.1 % 1.9 % — % Noncontrolling interest 3,164.6 % — % — % Rate change ( 2,566.3 ) % ( 13.7 ) % — % Uncertain tax positions ( 10,573.0 ) % 0.6 % — % Other 634.7 % 1.0 % 0.2 % Income tax (benefit) provision ( 5,148.7 ) % 16.6 % 1.4 % The Company has no federal net operating loss ("NOL") carryovers and $ 0.8 million state NOL carryovers as of December 31, 2022. State NOL carryovers can be carried forward indefinitely. Approximately $ 2.0 million of total state NOL carryovers were utilized in the year ended December 31, 2022. 72 Unrecognized Tax Benefits Year Ended December 31, (In thousands) 2022 2021 2020 Total unrecognized tax benefits on January 1, $ 752 $ 752 $ 646 Decrease related to positions taken on items from prior years ( 402 ) — — Increase related to positions taken in the current year — — 106 Total unrecognized tax benefits on December 31, $ 350 $ 752 $ 752 It is reasonably possible that $ 0.2 million of the total uncertain tax benefits will reverse within the next 12 months. The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized is $ 0.4 million, $ 0.8 million and $ 0.8 million as of December 31, 2022, 2021 and 2020, respectively. Due to the statute of limitations expiring, the unrecognized tax liability for the tax year ended December 31, 2018 was reversed, which was recorded in income tax (benefit) provision on the consolidated financial statements, in the amounts of $ 0.4 million as of December 31, 2022. As of December 31, 2022 and 2021, the Company had accrued penalties of $ 50,000 and $ 93,000 , respectively and accrued interest of $ 34,000 and $ 62,000 , respectively. During the year ended December 31, 2022, the Company reversed accrued penalties and accrued interest of $ 43,000 and $ 28,000 , respectively. The Company recognized the reversal of interest accrued related to unrecognized tax benefits and penalties as income tax benefit. The Company is subject to taxation in the United States and various states. As of December 31, 2022, tax years for 2019 through 2021 are subject to examination by the tax authorities. Note 14 - Related Party Transactions The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company's officers and/or shareholders who owned no less than 10 % shareholdings of the Company. Mr. Zhou Min Ni (“Mr. Ni”) and Mr. Zhang were the Co-Chief Executive Officers as of December 31, 2020 and 2019. Mr. Ni subsequently resigned from all of his official posts on February 23, 2021. Mr. Zhang became the sole Chief Executive. Mr. Ni and his immediate family members are treated as related parties for purposes of this report because Mr. Ni is a principal holder of the Company's securities. North Carolina Good Taste Noodle, Inc. ("NC Noodle") is a related party due to Mr. Jian Ming Ni's, a former Chief Financial Officer of the Company, continued ownership interest in NC Noodle. Revolution Industry, UGO and BRGR were also considered Unconsolidated VIEs as discussed further in Note 3 - Variable Interest Entities. The related party transactions as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 are identified as follows: Related Party Sales, Purchases, and Lease Agreements Purchases Below is a summary of purchases of goods and services from related parties recorded for the years ended December 31, 2022 2021, and 2020, respectively: 73 Year Ended December 31, (In thousands) Nature 2022 2021 2020 (a) Allstate Trading Company, Inc. Trade $ — $ — $ 309 (b) Best Food Services, LLC Trade 10,514 8,341 5,830 (c) Eagle Food Services, LLC Trade — 4 101 (a) Eastern Fresh NJ, LLC Trade 1,093 5,509 4,509 (a) Enson Group, Inc. (formerly as Enson Group, LLC) Trade — 128 143 (d) First Choice Seafood, Inc. Trade 134 322 455 (d) Fujian RongFeng Plastic Co., Ltd Trade 372 3,108 3,617 (e) Hanfeng (Fujian) Information Technology Co., Ltd. Service — — 997 (a) Hanfeng Information Technology (Jinhua), Inc. Service — 122 1,135 (a) N&F Logistics, Inc. Trade — 3 369 (f) North Carolina Good Taste Noodle, Inc. Trade 7,227 5,520 3,986 (a) Ocean Pacific Seafood Group, Inc. Trade 589 452 568 (g) Revolution Industry, LLC Trade — 190 2,362 (a) UGO USA, Inc. Trade — 212 644 (h) Union Foods, LLC Trade — — 1,247 Other Trade 332 133 90 Total $ 20,261 $ 24,044 $ 26,362 _______________ (a) Mr. Ni owns an equity interest in this entity. (b) Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (c) Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Ni owns an equity interest in this entity indirectly through its parent company. (e) Mr. Ni previously owned an equity interest in this entity. Mr. Ni disposed of his equity interest on September 29, 2020. (f) Mr. Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity. Mr. Zhou Min Ni previously owned an equity in this entity as of 12/31/2019. The Company has been informed by Mr. Zhou Min Ni that his equity interest was disposed of on 1/1/2020. (g) Raymond Ni, one of Mr. Ni’s family members, owned an equity interest in this entity. On February 25, 2021, the Company executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL"). The Company acquired substantially all of the operating assets used or held for use in such business operation for the amount of $ 250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from RIL at the time of transaction were an offset to the purchase price paid to RIL. Going forward, the Company has taken the egg roll production business in house and ceased its vendor relationship with RIL. (h) Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity. Anthony Zhang, one of Mr. Zhang's family members, owns an equity interest in this entity. Services rendered by Hanfeng (Fujian) Information Technology Co. Ltd. relate to outsourced sales call center services. Fees for services are based on a percentage of sales generated as defined in the agreement. From time to time such services are subcontracted to Hanfeng Information Technologies (Jinhua), Inc. 74 Sales Below is a summary of sales to related parties recorded for the years ended December 31, 2022, 2021 and 2020, respectively: Year Ended December 31, (In thousands) 2022 2021 2020 (a) ABC Food Trading, LLC $ 3,949 $ 2,642 $ 1,871 (b) Asahi Food, Inc. 639 704 465 (c) Best Food Services, LLC 1,285 792 337 (d) Eagle Food Service, LLC 879 2,864 4,605 (e) Eastern Fresh NJ, LLC — 155 1,602 (e) Enson Group, Inc. (formerly as Enson Group, LLC) — 101 308 (e) Enson Philadelphia, Inc. — — 126 (e) Enson Seafood GA, Inc. (formerly as GA-GW Seafood, Inc.) — 573 493 (f) First Choice Seafood, Inc. 35 99 1,378 (f) Fortune One Foods, Inc. 115 418 311 (e) Heng Feng Food Services, Inc. — 163 669 (e) N&F Logistics, Inc. 40 531 1,027 Others — 13 116 Total $ 6,942 $ 9,055 $ 13,308 _______________ (a) Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (b) The Company, through its subsidiary MF, owns an equity interest in this entity. (c) Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (d) Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (e) Mr. Ni owns an equity interest in this entity. (f) Mr. Ni owns an equity interest in this entity indirectly through its parent company. Lease Agreements The Company leases various facilities to related parties. The Company leased a facility to NC Noodle under an operating lease agreement expiring in 2024. The lease agreement was terminated in connection with the sale of the facility on November 3, 2021. The building and related land was sold to NC Noodle for $ 0.8 million and a gain of $ 0.5 million. Rental income for the years ended December 31, 2021 and 2020 was $ 42,000 and $ 46,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss). The Company leased a facility to UGO USA Inc. under an operating lease agreement which was mutually terminated by both parties effective April 1, 2021. Rental income for the years ended December 31, 2021 and 2020 was $ 7,000 and $ 42,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss). The Company leased a facility to iUnited Services, LLC ("iUnited"), which has been determined to be a related party due to the equity ownership interest in iUnited of Mr. Jian Ming Ni, the Company's former Chief Financial Officer. The lease agreement was terminated in connection with the sale of the facility on November 3, 2021. The building and related land was sold to iUnited for $ 1.5 million and a gain of $ 0.8 million. Rental income for the years ended December 31, 2021 and 2020 was $ 50,000 and $ 25,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss). The Company leased a warehouse to Enson Seafood GA Inc. (formerly GA-GW Seafood, Inc.) under an operating lease agreement expiring on September 21, 2027. Rental income for the years ended December 31, 2022, 2021 and 2020 was $ 0.2 million, $ 0.5 million and $ 0.5 million, respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss). On May 18, 2022, the Company sold the warehouse to Enson Seafood GA Inc., a 75 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. The Company leased a production area to Revolution Industry, LLC under a $ 3,000 month-to-month lease agreement. The lease agreement was terminated as a result of the asset purchase agreement executed on February 25, 2021. Rental income recorded for the years ended December 31, 2021 and 2020 was $ 6,000 and $ 39,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss). The Company leased warehouses from related parties owned by the majority shareholder of B&R Global prior to the Realty Acquisition on January 17, 2020. Before the Realty Acquisition, the CEO of the Company, Mr. Zhang, managed and owned 8.91 % interest in BRGR. Rent incurred related to the BRGR related parties from January 1, 2020 to January 16, 2020 was $ 188,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss). In 2020, the Company renewed a warehouse lease from Yoan Chang Trading Inc. under an operating lease agreement expired on December 31, 2020. In February 2021, the Company executed a new five-year operating lease agreement with Yoan Chang Trading Inc., effective January 1, 2021 and expiring on December 31, 2025. Rent incurred was $ 0.3 million, $ 0.3 million and $ 0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in Distribution, selling and administrative expenses in the 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 December 31, 2022 and 2021, respectively: (In thousands) December 31, 2022 December 31, 2021 (a) ABC Food Trading, LLC $ — $ 76 (b) Asahi Food, Inc. 81 72 (c) Eagle Food Service, LLC 69 16 (d) Enson Seafood GA, Inc. (formerly as GA-GW Seafood, Inc.) 59 24 (e) Fortune One Foods, Inc. 4 24 (d) Heng Feng Food Services, Inc. — 18 (f) North Carolina Good Taste Noodle, Inc. — 15 Others — 4 Total $ 213 $ 249 _______________ (a) Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (b) The Company, through its subsidiary MF, owns an equity interest in this entity. (c) Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Ni owns an equity interest in this entity. (e) Mr. Ni owns an equity interest in this entity indirectly through its parent company. (f) Mr. Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity. The Company has reserved for 80 % of the accounts receivable for Enson Seafood GA, Inc, all other accounts receivable from these related parties are current and considered fully collectible. No other allowance is deemed necessary as of December 31, 2022 and 2021. 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 December 31, 2022 and 2021, respectively: 76 (In thousands) December 31, 2022 December 31, 2021 (a) Best Food Services, LLC $ 729 $ 699 (b) Eastern Fresh NJ, LLC — 581 (c) Fujian RongFeng Plastic Co., Ltd — 20 (d) North Carolina Good Taste Noodle, Inc. 731 595 Others 69 46 Total $ 1,529 $ 1,941 _______________ (a) Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefits of Mr. Zhang's children effective November 1, 2020. (b) Mr. Ni owns an equity interest in this entity. (c) Mr. Ni owns an equity interest in this entity indirectly through its parent company. (d) Mr. Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity. Promissory Note Payable - Related Party The Company issued a $ 7.0 million Unsecured Subordinated Promissory Note ("Promissory Note") to BRGR. The note bears an interest rate of 6 % per annum that matures in January 2030. The Promissory Note issued to BRGR in January 2020 was part of the payment to acquire 100 % equity membership interest in nine subsidiaries of BRGR (Refer to Note 8 - Acquisitions ). The Promissory Note has no requirement to make principal repayments until maturity and there is no prepayment penalty should the Company elect to prepay the principal, in part or in full, prior to maturity, subject to meeting certain repayment provisions as defined in the JPM Credit Agreement. During the year ended December 31, 2022, the Company paid the remaining $ 4.5 million principal balance of this related party promissory note payable. As of December 31, 2022 and 2021, the outstanding balance was nil and $ 4.5 million, respectively, and there was no accrued interest payable. Principal and interest payments were $ 4.6 million and $ 2.9 million for the years ended December 31, 2022 and 2021, respectively. Notes Receivable - Related Parties and Other On September 30, 2019, the Company and Mr. Ni entered into a Loan Purchase and Sale Agreement (the "Loan Sale Agreement"). Pursuant to the Loan Sale Agreement, all outstanding notes receivable, having then a combined outstanding balance of $ 8.4 million ("Total Notes Receivable"), were sold to Mr. Zhou Min Ni in exchange for 632,746 shares of common stock of the Company, which shares were received and recorded in treasury stock by the Company. In connection with the sale of the above notes, the Company also required 208,806 additional shares of common stock of the Company owned by Mr. Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Escrow Period”), which would then be delivered to the Company in part or in full, if the volume weighted average price ("VWAP") of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $ 13.30 . On October 9, 2020, in accordance with the terms of the Loan Sale Agreement, the Company and Mr. Ni determined and agreed that the 250-day VWAP was $ 10.59 , and that, therefore, 161,966 of the Escrow Shares were transferred to and recorded as treasury stock by the Company and the remaining 46,840 Escrow Shares were returned to Mr. Ni. Following which, the Total Notes Receivable guaranteed by Mr. Ni was considered fully settled. As of December 31, 2018, the Company had a promissory note agreement with Feilong Trading, Inc, ("Feilong"). Pursuant to the promissory note agreement, Feilong was permitted to borrow up to $ 4.0 million. The note bore interest at the rate of 5 % per annum on the unpaid balance, compounded monthly. The Company’s former Chairman and Co-CEO, Zhou Min Ni agreed to personally guarantee the repayment of all outstanding balances relating to this note receivable. On September 30, 2019, the Company and Mr. Ni entered into a Loan Purchase and Sale Agreement (the "Feilong Loan Sale Agreement"). Pursuant to the Feilong Loan Sale Agreement, the entire outstanding balance of $ 3.6 million owed by Feilong to the Company was sold to Mr. Ni in exchange for 272,369 shares of common stock of the Company, which shares were received and recorded as treasury stock by the Company. In connection with the sale of this note receivable, the Company also required 89,882 additional shares of the Company's common stock owned by Mr. Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Feilong Escrow Period”), which would then be delivered to the Company in part or in full, if the VWAP of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Feilong Escrow Period was less than $ 13.30 . On October 9, 2020, in accordance with the terms of the Feilong Loan Sale Agreement, the Company and Mr. Ni determined and agreed that the 250-day VWAP immediately preceding September 30, 2020 was $ 10.59 , and consequently, 69,719 of the 77 Escrow Shares were transferred to and recorded as treasury stock by the Company, and the remaining 20,163 Escrow Shares were returned to Mr. Ni. Following this event, the balance due from Feilong to the Company was considered fully settled. The Company retired all treasury stock as of December 31, 2020. Note 15 - Stock-Based Compensation The Company has a stock-based employee compensation plan, known as the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan allows for up to 3,000,000 shares of common stock reserved for issuance of awards to employees, non-employee directors, and consultants. The 2018 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, other stock awards, and performance awards that may be settled in stock, or other property. The Company began issuing awards under the 2018 Incentive Plan in February 2021. As of December 31, 2022, the Company had 598,325 time-based vesting restricted stock units (“RSUs”) unvested, 382,662 performance-based restricted stock units (“PSUs”) unvested, 162,510 shares of common stock vested and 1,856,503 shares remaining available for future awards under the 2018 Incentive Plan. RSUs granted to employees vest over time based on continued service (vesting over a period between one to three years in equal installments). PSUs granted to employees vest based on (i) the attainment of certain financial metrics, as defined by the Company's compensation committee (“Financial PSUs”) and (ii) for the 2021 grants, total shareholder return of the Company’s common stock (“TSR PSUs”). Both types of PSUs vest over three years in equal installments based on the performance metrics established for each year and also require continued service for vesting. A summary of RSU and PSU activity for the year ended December 31, 2022 is as follows: Shares Weighted Average Grant Date Fair Value Unvested RSUs at December 31, 2021 352,920 $ 6.19 Granted 424,386 5.04 Forfeited ( 36,322 ) 6.42 Vested ( 142,659 ) 6.09 Unvested RSUs at December 31, 2022 598,325 5.39 Shares Weighted Average Grant Date Fair Value Unvested PSUs at December 31, 2021 143,278 $ 5.94 Granted 303,263 4.76 Forfeited ( 44,028 ) 5.72 Vested ( 19,851 ) 7.39 Unvested PSUs at December 31, 2022 382,662 4.95 The Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment awards including shares issued under employee stock purchase plans and stock incentive shares. The fair value of the RSUs and Financial PSUs are measured using the closing price of the Company’s common stock on NASDAQ Global Capital Market on the date preceding grant date. The fair value of the TSR PSUs are determined using a Monte Carlo simulation model. No TSR PSUs were granted during the year ended December 31, 2022. The assumptions used to estimate the fair value of the TSR PSUs granted during the years ended December 31, 2021 and valued under the Monte Carlo simulation model were as follows: 78 2021 PSU Grants Risk-free interest rate 0.20 % - 0.34 % Expected dividend yield 0.00 % Expected term (years) 2.56 - 3.15 Expected volatility (1) 62.08 % - 65.74 % _______________ (1) Expected volatility is based on a 50/50 blending of (i) the average historical volatility of a select group of industry peers with a look-back period equal to the expected term, and (ii) the historical volatility of the Company with a look-back period of 0.75 years - 1.17 years, the time from the valuation date to the date six months after the completion of the merger with B&R Global, using daily stock prices. The expected volatility of peer companies was 54.96 % – 63.45 %. The expected volatility of the Company's common stock was 66.10 % – 69.19 %. The fair value of RSUs are amortized on a straight-line basis over the requisite service period for each award. For the PSUs, the Company recognizes stock-based compensation expense on a straight-line basis for each vesting tranche over the longer of the derived, explicit, or implicit service period for the vesting tranche. As of interim and annual reporting periods, the Financial PSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PSUs stock-based compensation expense is not adjusted. The Company recognizes forfeitures as they occur. Stock-based compensation expense is included in distribution, selling and administrative expenses in the Company's consolidated statements of operations and comprehensive income (loss). The components of stock-based compensation expense for the years ended December 31, 2022 and 2021 were as follows: Year Ended December 31, (In thousands) 2022 2021 Stock-based compensation (RSUs) expense $ 897 $ 405 Stock-based compensation (PSUs) expense 360 230 Total stock-based compensation expense $ 1,257 $ 635 Tax benefit of stock-based compensation expense $ 366 $ 132 For the year ended December 31, 2020, there was no stock-based compensation expense. As of December 31, 2022, there was $ 4.2 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under 2018 Incentive Plan, with a weighted average remaining service period of 2.8 years. Of the total unrecognized compensation cost, $ 2.7 million is related to RSUs with time-based vesting provisions and $ 1.5 million is related to PSUs with performance and market-based vesting provisions. Note 16 - Employee Benefit Plan The Company sponsors a defined contribution plan, the HF Foods Group, Inc. Employees 401(k) Savings Plan (the “401(k) Plan”). Under the 401(k) Plan, after six months of service, eligible employees may elect to defer up to 92 % of their compensation before taxes, up to the dollar limit imposed by the Internal Revenue Service for tax purposes. The Company matches 100 % of the first 3 % of the participant’s deferred compensation plus 50 % of the amount contributed between 3 % and 5 % of the participant’s deferred compensation. 401(k) Plan participants vest in matching contributions received from the Company at the rate of 20 % per year for each full year of service starting from their second year of service, such that the participants become 100 % vested after six years of service. For the years ended December 31, 2022, 2021 and 2020, the Company expensed $ 432,000 , $ 240,000 and $ 25,000 , respectively, and were recorded in distribution, selling and administrative expenses. 79 Note 17 - Commitments and Contingencies From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to its pending litigation and revises its estimates when additional information becomes available. Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against the Company that could adversely affect its ability to conduct its business. There also exists the possibility of a material adverse effect on the Company’s financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable. As previously disclosed, in March 2020, an analyst report suggested certain improprieties in the Company’s operations, and in response to those allegations, the Company’s Board of Directors appointed a Special Committee of Independent Directors (the “Special Investigation Committee”) to conduct an internal independent investigation with the assistance of counsel. These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”). These Class Actions have since been dismissed and are now closed. In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions. The Special Investigation Committee and the Company are cooperating with the SEC. On May 20, 2022, the Board of Directors of HF Group received a letter from a stockholder, James Bishop (the “Bishop Demand”). The Bishop Demand alleges that certain current and former officers and directors of HF Group engaged in misconduct and breached their fiduciary duties, and demands that HF Group investigate the allegations and, if warranted, assert claims against those current or former officers and directors. 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 Group 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 in order to determine whether the Company should assert any claims against the current or former officers and directors. On August 19, 2022, James Bishop filed a verified stockholder derivative complaint in the Court of Chancery of the State of Delaware (the “Delaware Action”), 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. The Special Litigation Committee is in the process of analyzing and evaluating the claims alleged in the Bishop Demand and Delaware Action, and has not determined whether any claims should be asserted or the probability of recovery for such claims. While the SEC investigation is ongoing, the Special Investigation Committee has made certain factual findings based on evidence adduced during its investigation, and made recommendations to management regarding improvements to Company operations and structure, including but not limited to its dealings with related parties. 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 any demand made by the SEC nor is it possible to estimate the amount of any such fines and penalties, should they occur. 80 Note 18 - Subsequent Events The Company entered into an amortizing interest rate swap agreement, with an initial notional amount of $ 120.0 million, intended to hedge against future interest rate increases of certain long-term debt obligations of the Company. The interest rate swap became effective March 1, 2023 and continues through March 2028. Pursuant to the agreement, the Company will pay the swap counterparty a fixed rate of 4.11 % in exchange for floating payments based on CME Term SOFR. 81 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.