What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2023-01-31 · 287 added, 421 removed, 381 unchanged (65% of the section changed)

3 unchanged sentences

Condensed Consolidated Balance Sheets

(In thousands, except share data) March 31, 2022 December 31, 2021

(In thousands, except share data)

March 31, 2023 December 31, 2022

CURRENT ASSETS:

3 unchanged sentences

Inventories 110,469 120,291

Other current assets 8,388 5,559

Prepaid expenses and other current assets 7,699 8,937

TOTAL CURRENT ASSETS 179,369 197,916

19 unchanged sentences

Long-term debt, net of current portion 114,047 115,443

Promissory note payable - related party 4,500 4,500

Obligations under finance leases, non-current 11,576 11,441

1 unchanged sentence

Deferred tax liabilities 33,119 34,443

Lease guarantee liability, net of current portion

Other long-term liabilities 8,038 5,472

TOTAL LIABILITIES 321,865 341,280

2 unchanged sentences

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

Common stock, $ 0.0001 par value, 100,000,000 shares authorized, 53,706,392 shares issued and outstanding as of March 31, 2022 and December 31, 2021

Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 53,844,492 shares issued and outstanding as of March 31, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022

Additional paid-in capital 599,384 598,322

8 unchanged sentences

and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Three Months Ended March 31,

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share data)

Three Months Ended March 31,

Net revenue - third parties $ 291,562 $ 276,151

6 unchanged sentences

Distribution, selling and administrative expenses 52,929 40,408

INCOME FROM OPERATIONS 10,319 1,339

Other expense (income)

(LOSS) INCOME FROM OPERATIONS ( 2,757 ) 10,319

Other expenses (income):

Interest expense 2,868 1,278

2 unchanged sentences

Lease guarantee expense ( 120 ) 5,931

Total Other expense (income), net 6,075 ( 965 )

INCOME BEFORE INCOME TAX PROVISION 4,244 2,304

Income tax provision 1,104 646

NET INCOME AND COMPREHENSIVE INCOME 3,140 1,658

Total Other expenses, net 5,266 6,075

(LOSS) INCOME BEFORE INCOME TAX PROVISION ( 8,023 ) 4,244

Income tax (benefit) provision ( 2,226 ) 1,104

NET (LOSS) INCOME AND COMPREHENSIVE INCOME (LOSS) ( 5,797 ) 3,140

net income attributable to noncontrolling interests 136 26

NET INCOME AND COMPREHENSIVE INCOME

ATTRIBUTABLE TO HF FOODS GROUP INC.

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

$ ( 5,933 ) $ 3,114

EARNINGS PER COMMON SHARE - BASIC $ 0.06 $ 0.03

EARNINGS PER COMMON SHARE - DILUTED $ 0.06 $ 0.03

(LOSS) EARNINGS PER COMMON SHARE - BASIC $ ( 0.11 ) $ 0.06

(LOSS) EARNINGS PER COMMON SHARE - DILUTED $ ( 0.11 ) $ 0.06

WEIGHTED AVERAGE SHARES - BASIC 53,822,794 53,706,392

4 unchanged sentences

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31,

(In thousands)

Three Months Ended March 31,

Cash flows from operating activities:

Net income $ 3,140 $ 1,658

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 5,797 ) $ 3,140

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization expense 6,689 5,779

Gain from disposal of equipment ( 65 ) ( 4 )

Provision for doubtful accounts ( 12 ) ( 83 )

Gain from disposal of property and equipment — ( 65 )

Provision for credit losses 57 ( 12 )

Deferred tax benefit ( 1,324 ) ( 2,154 )

Income from equity method investment ( 223 ) ( 30 )

Change in fair value of interest rate swap contracts 2,746 ( 358 )

Stock-based compensation 1,096 290

Amortization of debt issuance and other debt-related costs 144 40

Non-cash lease expense 965 737

Lease guarantee expense ( 120 ) 5,931

Other operating expense 79 —

Other expense (income) 93 —

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

2 unchanged sentences

Inventories 9,822 ( 12,070 )

Advances to suppliers - related parties — 197

Other current assets ( 2,758 ) ( 774 )

Prepaid expenses and other current assets 1,238 ( 2,758 )

Other long-term assets ( 829 ) 268

6 unchanged sentences

Purchase of property and equipment ( 629 ) ( 2,672 )

Proceeds from disposal of equipment 79 8

Proceeds from sale of property and equipment — 79

Payment made for acquisition of Great Wall Group — ( 17,339 )

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Payment of debt financing costs — ( 604 )

Repayment of promissory note payable - related party — ( 500 )

Repayment of obligations under finance leases ( 646 ) ( 616 )

Proceeds from noncontrolling interests shareholder 240 —

Proceeds from noncontrolling interests shareholders — 240

Cash distribution to shareholders — ( 89 )

Net cash provided by (used in) financing activities 11,453 ( 8,889 )

Net increase in cash 1,634 1,674

Net cash (used in) provided by financing activities ( 18,753 ) 11,453

Net (decrease) increase in cash ( 6,812 ) 1,634

Cash at beginning of the period 24,289 14,792

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Cash paid for income taxes 96 382

Supplemental disclosure of non-cash operating, investing and financing activities:

Supplemental disclosure of non-cash investing and financing activities:

Right-of-use assets obtained in exchange for operating lease liabilities $ 79 $ 1,483

Property acquired in exchange for finance leases $ 815 $ 8,367

Property and equipment purchases from notes payable $ — $ 257

Property acquired via a finance lease 643 815

Intangible asset acquired in exchange for noncontrolling interests — 566

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Condensed Consolidated Statements of Changes in Shareholders' Equity

Common Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’

Equity Attributable

to HF Foods Group Inc.

(In thousands, except share data)

Common Stock Additional

Capital Retained

Earnings (Accumulated Deficit) Total

Shareholders’

Attributable to

Noncontrolling

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Shareholders’

(In thousands, except share data) Number of

Shares Amount

Balance at January 1, 2022 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 — — — 3,114 3,114 26 3,140

Capital contribution by shareholders — — — — — 806 806

Distribution to shareholders — — — — — ( 89 ) ( 89 )

Stock-based compensation — — 290 — 290 — 290

Balance at March 31, 2022 53,706,392 $ 5 $ 597,517 $ ( 303,860 ) $ 293,662 $ 4,784 $ 298,446

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

Net income — — — 3,114 3,114 26 3,140

Capital contributions by shareholders — — — — — 806 806

Distribution to shareholders — — — — — ( 89 ) ( 89 )

Net (loss) income — — — ( 5,933 ) ( 5,933 ) 136 ( 5,797 )

Issuance of common stock pursuant to equity compensation plan 37,847 — — — — — —

Shares withheld for tax withholdings on vested awards ( 7,132 ) — ( 34 ) — ( 34 ) — ( 34 )

Stock-based compensation — — 1,096 — 1,096 — 1,096

4 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION

Note 1 - Organization and Description of Business

Organization and General

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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.

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.

The total acquisition price for all operating assets and inventory was approximately $ 68.2 million.

See Note 7 - Acquisitions for additional information on recent acquisitions.

Independent Investigation Update

In March 2020, an analyst report suggested certain improprieties in the Company’s operations.

These allegations became the subject of two putative stockholder class action lawsuits which have subsequently been dismissed.

In response to the allegations in the analyst report, the Company's Board of Directors appointed a Special Investigation Committee of Independent Directors (the “Special Investigation Committee”) to conduct an independent investigation with the assistance of independent legal counsel.

As a result of the investigation, the SIC determined certain factual findings.

Management evaluated the factual findings, as presented by the SIC, and analyzed them to determine which had impact on the historical financial statements, including disclosures, of the Company.

In addition to the independent investigation, the Securities and Exchange Commission (“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 action lawsuits.

The Special Investigation Committee and the Company are cooperating with the SEC.

The SEC investigation is still ongoing.

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.

See Note 15 - Commitments and Contingencies for additional information.

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 6 - Acquisitions for additional information on the Sealand acquisition.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information pursuant to the rules and regulations of the SEC and have been consistently applied.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the SEC and have been consistently applied.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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

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

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

All intercompany balances and transactions have been eliminated in consolidation.

For consolidated entities where we own or are exposed to less than 100% of the economics, the Company

records net income (loss) attributable to noncontrolling interest in its consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party.

For consolidated entities where we own or are exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interest in its condensed consolidated statements of operations and comprehensive income (loss) equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party.

Variable Interest Entities

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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) receives the economic benefits of the VIE that could be significant to the 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.

On February 8, 2022, FUSO Trucking LLC, a VIE for which the Company was the primary beneficiary and consolidated, was dissolved.

The Company also has a VIE, AnHeart, Inc.

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

The Company did not incur expenses from VIEs and did not have any sales to or income from any VIEs during the three months ended March 31, 2023 and 2022.

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

Noncontrolling Interests

GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s condensed consolidated balance sheet.

In addition, the amounts attributable to the net income of those subsidiaries are reported separately in the condensed consolidated statements of income and comprehensive income.

GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s condensed consolidated balance sheets.

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

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

($ in thousands) Ownership of

Noncontrolling

Interest March 31,

2022 December 31,

HF Foods Industrial, Inc.

("HFFI") 40.00 % $ 689 $ 462

noncontrolling interest at March 31, 2023

March 31, 2023 December 31, 2022

HF Foods Industrial, LLC ("HFFI") 45.00 % $ 107 $ 204

Min Food, Inc.

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Total $ 4,572 $ 4,436

_______________

(a) During the three months ended March 31, 2022, the Company entered into a joint venture with Syncglobal Inc.

contributing $ 0.6 million and acquiring developed technology.

See Note 8 - Goodwill and Acquired Intangible Assets for additional information.

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.

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

Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, 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.

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 will adopt this ASU within the annual reporting period ending as of December 31, 2022 with an effective date of January 1, 2022 because, as of December 31, 2022, the Company will no longer be an emerging growth company.

The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its 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 three VIEs for which the Company is not the primary beneficiary and therefore does not consolidate, and 14 VIEs for which the Company was the primary beneficiary and consolidates.

The VIEs are summarized as follows noting which VIE's the Company no longer has transactions with in 2022:

• 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)

• AnHeart, Inc.

• Consolidated VIEs (collectively "Consolidated VIEs"):

• FUSO Trucking LLC ("FUSO")

• 13 staffing agencies (collectively, the “Staffing Agencies”) – Suppliers of staffing services through 2021:

• Anshun, Inc.

• Chen Enterprises (until December 2020)

• Georgia Kam (until December 2020)

• Inchoi, Inc.

• Malways, Inc.

(until December 2020)

Consolidated VIEs

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 the 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 income 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, immaterial liabilities owed by the Staffing Agencies and immaterial equity.

Company has determined it was the primary beneficiary for the Staffing Agencies through December 31, 2021 as it controlled how and when the labor force would be utilized.

The Company did not have any guarantees, commitments or other forms of financing to the Staffing Agencies.

Beginning January 1, 2022, the Company no longer has involvement with any of the Staffing Agencies.

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 is 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 is 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.

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, therefore, these entities are no longer considered VIEs as of March 31, 2022.

Related party transactions, such as purchases of goods and services, with Revolution Industry and UGO are disclosed in Note 13 - Related Party Transactions .

AnHeart, Inc.

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 15 - Commitments and Contingencies, 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 reassessed its relationship with AnHeart and determined that AnHeart was a VIE as a result of the guarantee.

However, the Company concluded it was 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.

Therefore, the Company is not the primary beneficiary for AnHeart.

Please refer to Note 15 - Commitments and Contingencies for additional information regarding the Company's maximum exposure to loss to AnHeart.

The Company has implemented all new pronouncements that are in effect and that may impact its condensed consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its condensed consolidated financial statements or results of operations.

Note 3 - Revenue

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.

For the three months ended March 31, 2023 and 2022, revenue recognized from performance obligations related to prior periods was immaterial.

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($ in thousands) 2023 2022

Seafood $ 92,890 32 % $ 74,806 27 %

Asian Specialty 77,824 25 % 74,676 27 %

Commodity 15,926 5 % 12,133 7 %

Fresh Produce 29,879 11 % 21,593 14 %

Meat and Poultry 52,049 18 % 60,915 22 %

Fresh Produce 32,211 11 % 29,879 11 %

Packaging and Other 19,396 7 % 22,013 8 %

Seafood 74,806 27 % 21,992 14 %

Commodity 19,485 7 % 15,926 5 %

Total $ 293,855 100 % $ 278,215 100 %

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Accounts receivable $ 44,570 $ 45,628

allowance for doubtful accounts ( 827 ) ( 840 )

allowance for expected credit losses ( 1,475 ) ( 1,442 )

Accounts receivable, net $ 43,095 $ 44,186

Movement of allowance for doubtful accounts is as follows:

Movement of allowance for expected credit losses was as follows:

Three Months Ended March 31,

1 unchanged sentence

Beginning balance $ 1,442 $ 840

Increase (decrease) in provision for doubtful accounts ( 12 ) ( 83 )

write off / (recovery) ( 1 ) 4

Adjustment for adoption of the CECL standard — 690

Increase (decrease) in provision for expected credit losses 57 ( 12 )

Bad debt write-offs ( 24 ) ( 1 )

Ending balance $ 1,475 $ 1,517

Long-term investments consisted of the following:

($ in thousands) Ownership as of March 31,

2022 March 31, 2022 December 31, 2021

Asahi Food, Inc.

49 % $ 885 $ 662

Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800 1,800

Total $ 2,685 $ 2,462

The investment in Tamron is accounted for using the measurement alternative under ASC Topic 321 (“ASC 321”), Investments – Equity Securities , 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 Food, Inc.

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

The Company determined there was no impairment as of March 31, 2022 and December 31, 2021 for these investments.

Property and equipment, net consisted of the following:

6 unchanged sentences

Machinery and equipment 14,853 17,210

Total property and equipment at cost 188,321 185,316

Subtotal 187,457 186,156

accumulated depreciation ( 48,473 ) ( 45,826 )

1 unchanged sentence

Depreciation expense was $ 2.6 million and $ 2.2 million for the three months ended March 31, 2023 and 2022, respectively.

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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:

Long-term investments consisted of the following:

(In thousands) Ownership as of March 31,

2023 March 31, 2023 December 31, 2022

Asahi Food, Inc.

("Asahi") 49 % $ 866 $ 879

Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800 1,800

Total long-term investments $ 2,666 $ 2,679

The investment in Tamron is accounted for using the measurement alternative under Accounting Standards Codification (“ASC”) Topic 321 Investments—Equity Securities , 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.

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

Accrued expenses and other liabilities consisted of the following:

(In thousands) March 31, 2023 December 31, 2022

Accrued compensation $ 4,863 $ 6,798

Accrued professional fees 2,080 3,866

Accrued interest and fees 1,190 1,082

Self-insurance liability 1,349 1,286

Accrued other 6,926 6,616

Total accrued expenses and other liabilities $ 16,408 $ 19,648

Note 5 - 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:

March 31, 2023 December 31, 2022

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)

Interest rate swaps $ — $ 414 $ — $ 414 $ — $ 530 $ — $ 530

Interest rate swaps $ — $ 2,630 $ — $ 2,630 $ — $ — $ — $ —

The Company follows the provisions of ASC Topic 820 Fair Value Measurement which 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.

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There were no transfers between fair value levels in any of the periods presented herein.

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, 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.

The carrying amounts reported in the condensed 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.

Please refer to Note 8 - Derivative Financial Instruments for additional information regarding the Company’s interest rate swaps.

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 9 - Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements, including the current portion, as of the dates indicated:

Fair Value Measurements

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

March 31, 2023

Fixed rate debt:

Bank of America $ — $ — $ 1,565 $ 1,858

East West Bank — — 1,761 2,335

Other finance institutions — — 117 117

Variable rate debt:

JPMorgan Chase & Co.

$ — $ 110,019 $ — $ 110,019

Bank of America — 2,296 — 2,296

East West Bank — 3,453 — 3,453

December 31, 2022

Fixed rate debt:

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

East West Bank — — 1,786 2,351

Other finance institutions — — 186 197

Variable rate debt:

JPMorgan Chase & Co.

$ — $ 111,413 $ — $ 111,413

Bank of America — 2,330 — 2,330

East West Bank — 3,471 — 3,471

The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments.

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.

As of March 31, 2022, the carrying value of the fixed rate debt, which includes the Company's promissory note payable to related party, was $ 14.5 million and the fair value was $ 10.5 million.

As of December 31, 2021, the carrying value of the fixed rate debt, which included the Company's promissory note payable to related party, was $ 15.0 million and the fair value was $ 12.2 million.

The variable and fixed rate debt are both classified as Level 2.

Please refer to Note 10 - Debt and Note 13 - Related Party Transactions for additional information regarding the Company's debt.

Of the $ 14.5 million of fixed rate debt as of March 31, 2022, $ 4.5 million is related to the Company’s promissory note payable to related party, $ 2.4 million is attributable to real estate term loans with East West Bank, $ 2.5 million is attributable to vehicle and equipment term loans with Bank of America, $ 4.5 million is attributable to loans with First Horizon Bank, and $ 0.6 million is attributable to vehicle loans with other financial institutions.

Of the $ 15.0 million of fixed rate debt as of December 31, 2021, $ 4.5 million is related to the Company’s promissory note payable to related party, $ 2.5 million is attributable to real estate term loans with East West Bank, $ 2.7 million is attributable to vehicle and equipment term loans with Bank of America, $ 4.5 million is attributable to loans with First Horizon Bank, and $ 0.8 million is attributable to vehicle loans with other financial institutions.

Please refer to Note 9 - Derivative Financial Instruments for additional information regarding the fair value of the Company's derivative financial instruments which are classified as Level 2.

Please refer to Note 9 - Debt for additional information regarding the Company's debt.

Note 6 - Acquisitions

On December 30, 2021, the Company executed an Asset Purchase Agreement with Great Wall Seafood Supply Inc., a Texas Corporation;

Great Wall Restaurant Supplier Inc., an Ohio Corporation, and First Mart Inc., an Illinois Corporation (collectively the “Great Wall Group”) to purchase 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.

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 of approximately $ 24.3 million (fair value of $ 24.7 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.

During the three months ended March 31, 2022, the Company paid the $ 17.4 million to acquire the remaining saleable product inventory.

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 were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of income and comprehensive income (loss) and totaled $ 1.3 million, $ 0.4 million for the three months ended March 31, 2022 and $ 0.9 million for the year ended December 31, 2021.

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.

Purchase Price Allocation

The total consideration paid to acquire the assets and liabilities of the Great Wall Group is as set forth below:

(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, including tradenames and trademarks of $ 10.5 million, customer relationships of $ 17.2 million and non-compete 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 8 - Goodwill and Acquired Intangible Assets for additional information on acquired intangibles in the Great Wall Acquisition.

Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the three months ended March 31, 2021, as if the Great Wall 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 intangible assets and excludes synergies and 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.

Accordingly, the unaudited pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations.

(In thousands) Three Months Ended March 31, 2022

Pro forma net revenue $ 199,791

Pro forma net income $ 1,378

Pro forma net income attributable to HF Group $ 1,078

Sealand Acquisition

Subsequent to March 31, 2022, 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.

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.

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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 is in the process of finalizing its purchase accounting, which relates to the valuation of acquired inventory and intangible assets, which may impact the valuation of goodwill.

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.

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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 .

Preliminary Purchase Price Allocation

The Company has performed an allocation of the total consideration paid to acquire the assets and liabilities of Sealand, as set forth below:

The transaction costs for the acquisition for the three months ended March 31, 2022 totaled approximately $ 0.3 million and were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

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

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

Purchase Price Allocation

The total consideration paid to acquire the assets and liabilities of Sealand, as set forth below:

(In thousands) Amount

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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.

These intangible assets include tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-competition 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.

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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-competition agreements are three years , with a weighted average amortization period of approximately nine years .

The associated goodwill is deductible for tax purposes.

Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the three months ended March 31, 2022 as if the acquisition of Sealand had been consummated on January 1, 2022.

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

Statutory rates were used to calculate income taxes.

(In thousands, except share and per share data) Three Months Ended March 31, 2022

Pro forma net revenue $ 302,098

Pro forma net income attributable to HF Group $ 5,996

Pro forma earnings per common share - basic $ 0.11

Pro forma earnings per common share - diluted $ 0.11

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

Pro forma weighted average shares - diluted 53,884,510

Note 7 - Goodwill and Acquired Intangible Assets

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Acquired Intangible Assets

The components of the intangible assets are presented below:

The components of the intangible assets are as follows:

March 31, 2023 December 31, 2022

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Amortization Net

Non-competition

agreement $ 2,407 $ ( 201 ) $ 2,206 $ 2,407 $ — $ 2,407

Tradenames 39,883 ( 7,346 ) 32,537 39,833 ( 6,349 ) 33,484

Non-competition agreement $ 3,892 $ ( 1,456 ) $ 2,436 $ 3,892 $ ( 1,132 ) $ 2,760

Trademarks 44,256 ( 11,778 ) 32,478 44,256 ( 10,673 ) 33,583

Customer relationships 185,266 ( 30,160 ) 155,106 185,266 ( 27,518 ) 157,748

Developed technology 439 ( 25 ) 414 — — —

Total $ 233,414 $ ( 43,394 ) $ 190,020 $ 233,414 $ ( 39,323 ) $ 194,091

Amortization expense for intangible assets was $ 3.6 million and $ 2.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

Amortization expense for acquired intangible assets was $ 4.1 million and $ 3.6 million for the three months ended March 31, 2023 and 2022, respectively.

Note 8 - Derivative Financial Instruments

The Company utilizes interest rate swaps ("IRS") contracts for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 10 - Debt ).

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 9 - 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 (London Interbank Offering Rate) plus 2.25 % per annum for the entire duration of the term loans.

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.

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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 Agreement, which pegged the mortgage term loan to SOFR (Secured Overnight Financing Rate) + 2.5 %.

On December 19, 2021, the Company entered into the Second Amendment to Loan 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 J.P.

Morgan 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 in the three months ended March 31, 2021.

The Company evaluated the above mentioned interest rate swap contracts currently in place and did not designate those as cash flow hedges.

Hence, the fair value change on the aforementioned interest rate swap contracts are accounted for and recognized as a change in fair value of interest rate swap contracts in the unaudited condensed consolidated statements of income and comprehensive income (loss).

As of March 31, 2022, the Company determined that the fair value of the IRS contracts in an asset position was $ 0.1 million, which is included in other current assets in the unaudited condensed consolidated balance sheets.

As of December 31, 2021, the Company determined that the fair value of the interest rate swap contracts in a liability position was $ 0.3 million, which is included in accrued expenses and other liabilities in the unaudited condensed consolidated balance sheets.

On March 15, 2023, the Company entered into an amortizing IRS contract with J.P.

Morgan Chase for an initial notional amount of $ 120.0 million, effective from March 1, 2023 and expiring in March 2028, as a means to partially hedge its existing floating rate loans exposure.

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.

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 condensed consolidated statements of operations and comprehensive income (loss).

As of March 31, 2023, the Company determined that the fair values of the IRS contracts were $ 0.4 million in an asset position and $ 2.6 million in a liability position.

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

The Company included these in other long-term assets and other long-term liabilities , respectively, on the condensed 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 IRS are classified as Level 2 in the fair value hierarchy.

The inputs used to determine the fair value of the IRS are classified as Level 2 on the fair value hierarchy.

Note 9 - Debt

On November 4, 2019, the Company entered into a credit agreement with J.P.

Morgan Chase Bank (the “JPM Credit Agreement”).

The JPM Credit Agreement provides 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 its wholly-owned subsidiaries and affiliates of the Company as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended and Restated Credit Agreement (the "Second Amended Credit Agreement").

On December 31, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No.

3 to the Second Amended Credit Agreement with JP Morgan, as Administrative Agent, and certain lender parties thereto including Comerica Bank.

The Second Amended Credit Agreement, provided for (i) a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), (ii) a mortgage-secured term loan of $ 75.6 million (the "Term Loan"), and (iii) amendment to 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 .

The amendment provides for a $ 100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1 % plus 1.375 % per annum as well as an increase in the 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 "2022 Credit Agreement").

In connection with the amendment, the Company incurred $ 0.6 million in financing fees, of which $ 0.5 million will be amortized over the life of the respective facilities.

Additionally, $ 0.1 million of the unamortized financing fees related to the Revolving Facility has been deferred and will be amortized over the life of the Revolving Facility.

As of March 31, 2022, the Company had not received the Term Loan funds, as such, it did not record the $ 46.0 million increase on its unaudited condensed consolidated balance sheet.

As of March 31, 2022, the Company was in compliance with its covenants.

Subsequent to March 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 March 31, 2022 was $ 68.4 million.

Long-Term Debt

Long-term debt at March 31, 2022 and December 31, 2021 is as follows:

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

($ in thousands)

Bank Name Maturity Interest Rate as of March 31, 2022 March 31, 2022 December 31, 2021

Bank Name Maturity Interest Rate at March 31, 2023

March 31, 2023 December 31, 2022

Bank of America (a)

May 2022 - December 2029 3.73 % — 5.80 % $ 4,906 $ 5,134

October 2026 - December 2029 4.28 % - 5.80 %

$ 4,155 $ 4,315

East West Bank (b)

August 2027 - September 2029 4.40 % - 8.25 %

First Horizon Bank (c)

October 2027 3.85 % 4,519 4,571

Morgan Chase (d)

February 2023 - January 2030 2.17 % — 2.21 % 69,929 70,866

Other finance institutions (e)

July 2022 - March 2024 3.90 % — 7.53 % 627 838

JPMorgan Chase & Co.

December 2023 - January 2030 6.10 % - 6.77 %

110,309 111,714

Other finance institutions (d)

April 2023 - March 2024 5.99 % - 6.14 %

Total debt, principal amount 120,369 122,011

4 unchanged sentences

_______________

(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.

(a) Loan balance consists of real estate term loan and equipment term loan, collateralized by one real property and specific equipment.

The real estate term is pegged to TERM SOFR + 2.5 %.

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

Balloon payment for this debt is $ 3.1 million at maturity.

(d) Real estate term loan with a principal balance of $ 69.0 million as of March 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.

(c) Real estate term loan with a principal balance of $ 110.1 million as of March 31, 2023 and 111.4 million as of December 31, 2022 is secured by assets held by the Company and has a maturity date of January 2030.

Equipment term loan with a principal balance of $ 0.2 million as of March 31, 2023 and $ 0.3 million as of December 31, 2022 is secured by specific vehicles and equipment as defined in loan agreements.

(e) Secured by vehicles.

Equipment term loan matures in December 2023.

(d) 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 March 31, 2022 and December 31, 2021, the Company was in compliance with its covenants.

Subsequent to March 31, 2022, the Company's lenders consented to the delivery of the Company's 2021 audited financial statements on or before January 31, 2023.

NOTE 11 - EARNINGS PER SHARE

As of March 31, 2023, the Company was in compliance with its covenants.

Note 10 - Earnings (Loss) Per Share

The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share .

3 unchanged sentences

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 60,558 potential common shares related to performance-based restricted stock units and 50,256 potential common shares related to restricted stock units that were excluded from the calculation of diluted EPS for the three months ended March 31, 2023 because their effect would have been anti-dilutive.

There were 14,381 potential common shares related to total shareholder return performance-based restricted stock units that were excluded from the calculation of diluted EPS for the three months ended March 31, 2022 because their effect would have been anti-dilutive.

There were no anti-dilutive potential common shares for the three months ended March 31, 2021 .

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

Three Months Ended March 31,

(In thousands, except shares and per share data) 2022 2021

Net income attributable to HF Foods Group Inc.

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

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

$ ( 5,933 ) $ 3,114

2 unchanged sentences

Weighted-average dilutive shares outstanding 53,822,794 53,884,510

Earnings per common share:

(Loss) earnings per common share:

Basic $ ( 0.11 ) $ 0.06

6 unchanged sentences

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

For the three months ended March 31, 2022, the Company's effective income tax rate of 26.0 % differed from the federal statutory tax rate primarily as a result of state income taxes.

For the three months ended March 31, 2021, the Company's effective income tax rate of 28.0 % differed from the federal statutory tax rate primarily as a result of state income taxes.

For the three months ended March 31, 2023 and 2022, the Company's effective income tax rate of 27.7 % and 26.0 %, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

Note 12 - Related Party Transactions

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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.

Xiao Mou Zhang (“Mr.

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

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

The Company believes that Mr.

Zhou Min Ni (“Mr.

Ni"), the Company's former Co-Chief Executive Officer, resigned from all of his official posts on February 23, 2021.

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.

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

Ni's four children, are collectively the beneficial owners of approximately 25 % of the Company’s outstanding shares of common stock, and he and certain of his immediate family members have ownership interests in related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

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

(“NC Noodle”) was 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 and UGO, are also considered Unconsolidated VIEs as discussed further in Note 3 – Variable Interest Entities .

As of January 1, 2023, NC Noodle is no longer considered a related party since it has been three years since Mr.

Jian Ming Ni resigned.

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

Related Party Sales and Purchases Transactions

The Company makes regular sales to and purchases from various related parties.

Purchase - related parties

Related Party Sales, Purchases, and Lease Agreements

Below is a summary of purchases of goods and services from related parties recorded for the three months ended March 31, 2023 and 2022, respectively:

3 unchanged sentences

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

(formerly "Enson Group, LLC") Trade — 52

(formerly “GA-GW Seafood, Inc.”) Trade 37 —

(d) First Choice Seafood, Inc.

(e) Fujian RongFeng Plastic Co., Ltd.

Trade 398 800

(f) Han Feng Information Technology (Jinhua) Inc.

(g) North Carolina Good Taste Noodle, Inc.

(e) Fujian RongFeng Plastic Co., Ltd Trade — 398

(f) North Carolina Good Taste Noodle, Inc.

Trade — 1,658

(h) Ocean Pacific Seafood Group Inc.

(g) Ocean Pacific Seafood Group, Inc.

Trade 168 136

(i) Revolution Industry, LLC Trade — 259

(j) UGO USA Inc.

Other Trade 52 32

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Ni owns an equity interest in this entity indirectly through its parent company.

Ni owns an equity interest in this entity.

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

Ni owns an equity interest in this entity.

(i) Raymond Ni, one of Mr.

Ni’s family members, owns an equity interest in this entity.

On February 25, 2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL").

Han Feng has 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, Han Feng has taken the egg roll production business in house and ceased its vendor relationship with RIL.

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.

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

Jian Ming Ni resigned .

Ni owns an equity interest in this entity.

Services rendered by Hanfeng (Fujian) Information Technology Co.

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.

Sales - related parties

Below is a summary of sales to related parties recorded for the three months ended March 31, 2023 and 2022, respectively:

5 unchanged sentences

(d) Eagle Food Service, LLC 1,020 —

(e) Eastern Fresh NJ LLC — 23

(f) Enson Group, Inc.

(formerly "Enson Group, LLC") — 27

(g) First Choice Seafood Inc 10 75

(h) Fortune One Foods, Inc.

(i) Heng Feng Food Services, Inc.

(j) N&F Logistics, Inc.

(e) First Choice Seafood, Inc.

(f) Fortune One Foods, Inc.

(g) N&F Logistics, Inc.

(h) Union Food LLC 19 —

Total $ 2,293 $ 2,064

1 unchanged sentence

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 3 Irrevocable Trusts for the benefit of Mr.

This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr.

Zhang's children effective November 1, 2020.

1 unchanged sentence

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 3 Irrevocable Trusts for the benefit of Mr.

This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr.

Zhang's children effective November 1, 2020.

1 unchanged sentence

Ni’s family members, owns an equity interest in this entity indirectly through its parent company.

Ni owns an equity interest in this entity.

Ni owns an equity interest in this entity indirectly through its parent company.

Ni owns an equity interest in this entity.

Ni owns an equity interest in this entity indirectly through its parent company.

Ni owns an equity interest in this entity.

Lease agreements - related parties

(h) Tina Ni, one of Mr.

Ni’s family members, owns an equity interest in this entity.

Lease Agreements

The Company leases various facilities to related parties.

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.

No rental income was recorded for the three months ended March 31, 2022.

Rental income was $ 7,000 for the three months ended March 31, 2021, which is included in other income in the unaudited condensed consolidated statements of income and comprehensive income.

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 three months ended March 31, 2021 was $15,000, which is included in other income in the consolidated statements of income and comprehensive income.

The Company leased a production area to Revolution Industry, LLC under a month-to-month lease agreement.

This lease agreement was terminated as a result of the asset purchase agreement executed on February 25, 2021.

No rental income was recorded for the three months ended March 31, 2022.

Rental income was $ 6,000 for the three months ended March 31, 2021, which is included in other income in the unaudited condensed consolidated statements of income and comprehensive income.

The Company leases a warehouse to Enson Seafood GA Inc.

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 three months ended March 31, 2022 and 2021 was $ 80,000 and $ 120,000 , respectively, which is included in other income in the unaudited condensed consolidated statements of income and comprehensive income.

Subsequent to March 31, 2022, on May 18, 2022, the Company sold the warehouse to Enson Seafood GA Inc.

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.

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

Rental income for the three months ended March 31, 2023 and 2022 was nil and $ 80,000 , respectively, which is included in other income in the condensed consolidated statements of operations and comprehensive income (loss).

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

("Yoan") under an operating lease agreement expiring on December 31, 2020.

In February 2021, the Company executed a new 5-year operating lease agreement with Yoan effective January 1, 2021 and expiring on December 31, 2025.

Rent incurred was $ 72,000 and $ 77,000 for the three months ended March 31, 2022 and 2021, respectively, and is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of income and comprehensive income.

under an operating lease agreement which 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 $ 99,000 and $ 72,000 for the three months ended March 31, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Related Party Balances

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(b) Asahi Food, Inc.

(d) Eagle Food Service, LLC 83 69

(e) Enson Seafood GA, Inc.

(formerly “GA-GW Seafood, Inc.”) 5 24

(formerly as GA-GW Seafood, Inc.) 59 59

(f) Fortune One Foods, Inc.

(g) Heng Feng Food Services, Inc.

(h) North Carolina Good Taste Noodle, Inc.

(g) Union Food LLC 2 —

Total $ 629 $ 213

1 unchanged sentence

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 3 Irrevocable Trusts for the benefit of Mr.

This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr.

Zhang's children effective November 1, 2020.

1 unchanged sentence

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 3 Irrevocable Trusts for the benefit of Mr.

This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr.

Zhang's children effective November 1, 2020.

3 unchanged sentences

Ni owns an equity interest in this entity indirectly through its parent company.

Ni owns an equity interest in this entity.

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

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

No allowance is deemed necessary as of March 31, 2022 and December 31, 2021.

Accounts payable - related parties, net

(g) Tina Ni, one of Mr.

Ni’s family members, 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 March 31, 2023 and December 31, 2022.

Accounts Payable - Related Parties

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

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(a) Best Food Services, LLC $ 707 $ 729

(b) Eastern Fresh NJ, LLC 61 581

(d) Fujian RongFeng Plastic Co., Ltd 27 20

(e) North Carolina Good Taste Noodle, Inc.

(b) North Carolina Good Taste Noodle, Inc.

Total $ 753 $ 1,529

1 unchanged sentence

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 3 Irrevocable Trusts for the benefit of Mr.

This equity interest was transferred to three Irrevocable Trusts for the benefits of Mr.

Zhang's children effective November 1, 2020.

Ni owns an equity interest in this entity.

Ni owns an equity interest in this entity indirectly through its parent company.

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

Advances to suppliers - related parties, net

The Company periodically provides purchase advances to various vendors, including the related party suppliers.

There were no advances to related party suppliers recorded as of March 31, 2022 and December 31, 2021.

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.

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

Jian Ming Ni resigned .

Promissory Note Payable - Related Party

The Company issued a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR (a related party via ownership by certain shareholders of the Company, and a former VIE through 2020) in January 2020 as part of the payment for the acquisition of BRGR.

The note matures in January 2030 and carries a fixed interest rate of 6 % per annum.

There is no requirement to make principal repayments until maturity.

There is no prepayment penalty should the Company elect to prepay the principal prior to maturity, subject to meeting certain repayment provisions as defined in the JPM Credit Agreement.

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

As of March 31, 2022, the outstanding balance was $ 4.5 million and there was no accrued interest payable.

No principal payment was made for the three months ended March 31, 2022 and 2021.

Interest payments paid were $ 68,000 and $ 101,000 for the three months ended March 31, 2022 and 2021, respectively.

Subsequent to March 31, 2022, during the three months ended June 30, 2022, the Company paid the remaining $ 4.5 million of its related party promissory note payable.

Interest payments were $ 0.1 million for the three months ended March 31, 2022.

No principal payment was made during the three months ended March 31, 2022.

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

Note 13 - Stock-Based Compensation

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2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”), which reserves up to 3,000,000 shares of the Company's common stock for issuance of awards to employees, non-employee directors and consultants.

As of March 31, 2022, the Company had 356,340 time-based vesting restricted stock units (“RSUs”) outstanding, 143,277 performance-based restricted stock units (“PSUs”) outstanding, and 2,500,383 shares remaining available for future awards under the 2018 Incentive Plan.

For the three months ended March 31, 2022, stock-based compensation expense was $ 0.3 million and was included in distribution, selling and administrative expenses in the Company's unaudited condensed consolidated statements of income and comprehensive income.

No stock-based compensation expense was recognized for three months ended March 31, 2021.

As of March 31, 2023, the Company had 575,906 time-based vesting restricted stock units unvested, 339,255 performance-based restricted stock units unvested, 180,506 shares of common stock vested and 1,904,333 shares remaining available for future awards under the 2018 Incentive Plan.

For the three months ended March 31, 2023 and 2022, stock-based compensation expense was $ 1.1 million and $ 0.3 million, respectively, and was included in distribution, selling and administrative expenses in the Company's unaudited condensed consolidated statements of income and comprehensive income.

As of March 31, 2023, there was $ 3.0 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 1.83 years.

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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.

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 the Company’s 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 us that could adversely affect our ability to conduct our business.

There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

On May 20, 2022, the Board of Directors of HF Group received a letter from a purported 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 a shareholder derivative action that Bishop filed in August 2020 (the “Bishop Derivative Action”).

On November 24, 2021, after the United States District Court for the Central District of California dismissed with prejudice a related securities class action, captioned Mendoza v.

HF Foods Group Inc.

et al., the Bishop Derivative Action was voluntarily dismissed without prejudice.

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.

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.

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 two putative class actions which were subsequently dismissed.

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.

While the SEC investigation is ongoing, the Special Investigation Committee has made certain factual findings based on evidence adduced during the investigation and made recommendations to management regarding improvements to Company operations and structure, including but not limited to its dealings with related parties.

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.

See the Company's 2021 Annual Report for additional information on

the findings of the Special Investigation Committee.

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.

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

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

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

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

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

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

Subsequent to March 31, 2023, effective as of April 20, 2023, the Company and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023.

The Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice, thereby resolving all existing and potential liability against all named defendants in the Delaware Action, in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company, making a payment to the Company in the sum of $ 9.25 million and the Company adopting certain changes to its Certificate of Incorporation, Bylaws and/or other internal governance policies and procedures.

The full terms of the settlement of the Delaware Action were incorporated into the long-form settlement agreement, which is subject to approval of the Court of Chancery.

AnHeart Lease Guarantee

As discussed in Note 3 - Variable Interest Entities , the Company provided a guarantee for two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively.

The Company provided a guarantee for two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively.

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 and therefore does not consolidate, because it does not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance.

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”).

3 unchanged sentences

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.

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.

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.

3 unchanged sentences

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.

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

The Company elected a policy to apply the discounted cash flow method to loss contingencies with more than 18 months of payments.

During the three months ended March 31, 2022, the Company recorded a one-time lease guarantee liability of $ 5.9 million, The Company determined the discounted value of the lease guarantee liability was $ 5.9 million as of March 31, 2022 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 condensed consolidated balance sheet.

The Company's monthly rental payments, which commenced during the three months ended March 31, 2022, range from approximately $ 42,000 per month to $ 63,000 per month, with the final payment due in 2034.

AnHeart is obligated to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs.

During the three months ended March 31, 2022, the Company recorded a lease guarantee liability of $ 5.9 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.

As of March 31, 2023, the Company had a lease guarantee liability of $ 5.7 million.

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

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

The estimated future minimum lease payments as of March 31, 2023 are presented below:

(In thousands) Amount

Year Ending December 31,

Year Ended December 31,

2023 (remaining nine months) $ 416

1 unchanged sentence

imputed interest ( 1,642 )

Total $ 5,942

Total minimum lease payments $ 5,697

Note 15 - Subsequent Events

See Note 7 - Acquisitions , regarding the Sealand Acquisition, Note 10 - Debt , regarding the amendment of the Company's JPM Credit Agreement as well as a waiver, and Note 13 - Related Party Transactions , regarding the related party promissory note payable as well as the Company's related party sale of a warehouse for subsequent events.

Shareholder Rights Plan

On April 11, 2023, the Company’s Board of Directors, authorized and declared a dividend distribution of one right (each, a “Right”) for each outstanding share of common stock of the Company to stockholders of record as of the close of business on April 24, 2023.

Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock of the Company at an exercise price of $ 19.50 subject to adjustment.

The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of April 11, 2023, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.

The Company’s Board of Directors adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics.

In general terms, it works by imposing a significant penalty upon any person or group that acquires fifteen percent ( 15 %) or more of the shares of common stock without the approval of the Company’s Board of Directors.

As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Company’s Board of Directors.

See Note 14 - Commitments and Contingencies for a subsequent event related to the settlement of the Delaware Action.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements