What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-10 · 146 added, 121 removed, 547 unchanged (33% of the section changed)

4 unchanged sentences

(In thousands, except share data)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

CURRENT ASSETS:

32 unchanged sentences

SHAREHOLDERS’ EQUITY:

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

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

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

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

Additional paid-in capital 600,030 598,322

8 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except share and per share data)

Three Months Ended March 31,

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

2023 2022 2023 2022

Net revenue - third parties $ 290,364 $ 298,138 $ 581,926 $ 574,289

7 unchanged sentences

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

Other expenses (income):

Other (income) expenses:

Interest expense 2,847 1,549 5,715 2,827

2 unchanged sentences

Lease guarantee expense ( 90 ) ( 42 ) ( 210 ) 5,889

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

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

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

Income tax expense (benefit) 209 1,097 ( 2,017 ) 2,201

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

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

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

$ ( 850 ) $ 4,564 $ ( 6,783 ) $ 7,678

8 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

2 unchanged sentences

Depreciation and amortization expense 13,129 11,859

Asset impairment charges 1,200 422

Gain from disposal of property and equipment — ( 1,351 )

20 unchanged sentences

Proceeds from sale of property and equipment — 7,667

Payment made for acquisition of Sealand — ( 34,849 )

Payment made for acquisition of Great Wall Group — ( 17,445 )

4 unchanged sentences

Repayment of line of credit ( 605,826 ) ( 620,783 )

Proceeds from long-term debt — 45,952

Repayment of long-term debt ( 3,172 ) ( 7,882 )

1 unchanged sentence

Repayment of obligations under finance leases ( 1,399 ) ( 1,243 )

Repayment of promissory note payable - related party — ( 4,500 )

Proceeds from noncontrolling interests shareholders — 240

4 unchanged sentences

Cash at end of the period $ 14,946 $ 18,818

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

HF Foods Group Inc.

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

Six Months Ended June 30,

Supplemental disclosure of cash flow data:

3 unchanged sentences

Right-of-use assets obtained in exchange for operating lease liabilities $ 88 $ 3,913

Property acquired via a finance lease 643 815

Property acquired in exchange for finance leases 1,059 1,220

Intangible asset acquired in exchange for noncontrolling interests — 566

21 unchanged sentences

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

Net income (loss) — — — 4,564 4,564 ( 70 ) 4,494

Distribution to shareholders — — — — — ( 97 ) ( 97 )

Stock-based compensation — — 221 — 221 — 221

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

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

4 unchanged sentences

Balance at March 31, 2023 53,844,492 5 599,384 ( 312,447 ) 286,942 4,572 291,514

Net (loss) income — — — ( 850 ) ( 850 ) ( 710 ) ( 1,560 )

Issuance of common stock pursuant to equity compensation plan 269,113 — — — — — —

Shares withheld for tax withholdings on vested awards ( 27,441 ) — ( 106 ) — ( 106 ) — ( 106 )

Stock-based compensation — — 752 — 752 — 752

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

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

18 unchanged sentences

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

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

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

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

2 unchanged sentences

Variable Interest Entities

GAAP provides guidance on the identification of VIEs and financial reporting for entities over which control is achieved through means other than voting interests.

GAAP provides guidance on the identification of a variable interest entity (“VIE”) and financial reporting for an entity over which control is achieved through means other than voting interests.

The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE.

1 unchanged sentence

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.

FUSO Trucking, LLC (“FUSO”) is a VIE for which the Company is the primary beneficiary.

Although its operations have wound down and its remaining assets and liabilities are immaterial, FUSO continues to be consolidated by the Company as a VIE.

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.

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

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

2 unchanged sentences

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

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

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

($ in thousands) Ownership of

noncontrolling interest at March 31, 2023

March 31, 2023 December 31, 2022

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

noncontrolling interest at June 30, 2023

June 30, 2023 December 31, 2022

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

45.00 % $ ( 672 ) $ 204

Min Food, Inc.

5 unchanged sentences

Total $ 3,862 $ 4,436

_________________

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

Accordingly, the machinery used in HFFI operations was impaired.

See Note 4 - Balance Sheet Components for additional information.

Uses of Estimates

5 unchanged sentences

Note 3 - Revenue

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

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

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

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

Three Months Ended March 31,

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

($ in thousands) 2023 2022 2023 2022

8 unchanged sentences

Accounts receivable, net consisted of the following:

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

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

Accounts receivable $ 47,060 $ 45,628

2 unchanged sentences

Movement of allowance for expected credit losses was as follows:

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2023 2022

5 unchanged sentences

Property and equipment, net consisted of the following:

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

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

Automobiles $ 37,157 $ 34,891

7 unchanged sentences

Property and equipment, net $ 136,724 $ 140,330

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

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

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

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

comprehensive income.

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

Long-term investments consisted of the following:

(In thousands) Ownership as of March 31,

2023 March 31, 2023 December 31, 2022

(In thousands) Ownership as of June 30,

2023 June 30, 2023 December 31, 2022

Asahi Food, Inc.

4 unchanged sentences

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

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

The Company determined there was no impairment as of June 30, 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

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

Accrued compensation $ 6,007 $ 6,798

6 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

2 unchanged sentences

Interest rate swaps $ — $ 640 $ — $ 640 $ — $ 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:

9 unchanged sentences

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

March 31, 2023

June 30, 2023

Fixed rate debt:

30 unchanged sentences

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

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

The 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.

22 unchanged sentences

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.

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

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

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

Statutory rates were used to calculate income taxes.

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

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

Six Months Ended June 30, 2022

Pro forma net revenue $ 307,587 $ 609,685

5 unchanged sentences

Note 7 - Goodwill and Acquired Intangible Assets

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

There was no change in the carrying amount of goodwill for the three months ended March 31, 2023.

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

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

Acquired Intangible Assets

The components of the intangible assets are as follows:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(In thousands) Gross

7 unchanged sentences

Total $ 233,414 $ ( 47,465 ) $ 185,949 $ 233,414 $ ( 39,323 ) $ 194,091

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.

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

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

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

Note 8 - Derivative Financial Instruments

3 unchanged sentences

On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $ 1.1 million and $ 2.6 million, respectively.

The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amounts that were priced at USD 1-month LIBOR plus 2.25 % per annum for the entire duration of the term loans.

The EWB IRS contracts fixed the two term loans at 4.23 % per annum until maturity in September 2029.

On April 20, 2023, the Company amended the corresponding mortgage term loans, which pegged the two mortgage term loans to 1-month Term SOFR (Secured Overnight Financing Rate) + 2.29 % per annum for the remaining duration of the term loans.

The amended EWB IRS contracts fixed the two term loans at 4.23 % per annum until maturity in September 2029.

On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $ 2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount.

The term loan was contracted at USD 1-month LIBOR plus 2.15 % per annum, but was fixed at 4.25 % per annum resulting from the corresponding BOA IRS contract.

On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to Secured Overnight Financing Rate ("SOFR") + 2.5 % .

On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to Term SOFR + 2.5 % .

The BOA IRS was modified accordingly to fix the SOFR based loan to approximately 4.50 %.

2 unchanged sentences

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.

Pursuant to the agreement, the Company will pay the swap counterparty a fixed rate of 4.11 % in exchange for floating payments based on 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.

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

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

The Company includes 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.

1 unchanged sentence

Note 9 - Debt

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

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

($ in thousands)

Bank Name Maturity Interest Rate at March 31, 2023

March 31, 2023 December 31, 2022

Bank Name Maturity Interest Rate at June 30, 2023

June 30, 2023 December 31, 2022

Bank of America (a)

7 unchanged sentences

Other finance institutions (d)

April 2023 - March 2024 5.99 % - 6.14 %

December 2023 - March 2024 5.99 % - 6.14 %

Total debt, principal amount 118,839 122,011

5 unchanged sentences

(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 %.

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

(b) Real estate term loans with East West Bank are collateralized by four real properties.

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

(c) 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.

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

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

Equipment term loan matures in December 2023.

1 unchanged sentence

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

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

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

Note 10 - Earnings (Loss) Per Share

1 unchanged sentence

ASC 260 requires companies with complex capital structures to present basic and diluted EPS.

Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period.

Basic EPS is measured as net

income divided by the weighted average common shares outstanding for the period.

Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later.

Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

There were 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 92,945 and 100,012 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2023, respectively, because their effect would have been anti-dilutive.

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

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

Three Months Ended March 31,

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

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

8 unchanged sentences

Note 11 - Income Taxes

The determination of the Company’s overall effective income tax rate requires the use of estimates.

The effective income tax rate reflects the income earned and taxed in U.S.

federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction.

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective income tax rate in the future.

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

For the three 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.

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

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

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

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

Note 12 - Related Party Transactions

13 unchanged sentences

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:

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

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:

Three Months Ended March 31,

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

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

(In thousands) Nature 2023 2022 2023 2022

1 unchanged sentence

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

(b) Enson Seafood GA, Inc.

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

(d) First Choice Seafood, Inc.

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

(f) North Carolina Good Taste Noodle, Inc.

Trade — 26 — 109

(g) Ocean Pacific Seafood Group, Inc.

(d) North Carolina Good Taste Noodle, Inc.

Trade — 1,769 — 3,427

(b) Ocean Pacific Seafood Group, Inc.

Trade 74 141 242 277

Other Trade 23 53 75 85

5 unchanged sentences

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.

4 unchanged sentences

Jian Ming Ni resigned .

Ni owns an equity interest in this entity.

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

Three Months Ended March 31,

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

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

(In thousands) 2023 2022 2023 2022

1 unchanged sentence

(b) Asahi Food, Inc.

191 188 386 369

1 unchanged sentence

(e) First Choice Seafood, Inc.

(f) Fortune One Foods, Inc.

(g) N&F Logistics, Inc.

(h) Union Food LLC 19 —

(e) Fortune One Foods, Inc.

(f) N&F Logistics, Inc.

(g) Union Food LLC 8 — 27 —

Total $ 1,948 $ 1,504 $ 4,241 $ 3,568

10 unchanged sentences

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

Ni owns an equity interest in this entity.

(h) Tina Ni, one of Mr.

(g) Tina Ni, one of Mr.

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

4 unchanged sentences

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

Rental income for the three months ended 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).

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

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

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

1 unchanged sentence

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

Rent incurred was $ 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).

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

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

Related Party Balances

Accounts Receivable - Related Parties, Net

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

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

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

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

(a) ABC Food Trading, LLC $ 146 $ —

22 unchanged sentences

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

as of June 30, 2023.

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

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

No other allowance is deemed necessary as of March 31, 2023 and December 31, 2022.

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

Accounts Payable - Related Parties

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

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

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

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

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

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

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Promissory Note Payable - Related Party

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.

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.

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

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

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

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, 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.

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

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

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

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

Note 14 - Commitments and Contingencies

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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”).

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.

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

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

The Bishop Demand alleges that certain current and former officers and directors of HF Foods engaged in misconduct and breached their fiduciary duties, and demands that HF Foods investigate the allegations and, if warranted, assert claims against those current or former officers and directors.

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

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

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

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

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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.

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

The Settlement Agreement, which is subject to the approval of the Court of Chancery, provided for, among other things, the dismissal of the Delaware Action with prejudice, and releases of claims against all named defendants in the Delaware Action, in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company, making a payment to the Company in the sum of $ 9.25 million and the Company adopting certain changes to its bylaws and/or other internal governance policies and procedures.

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

AnHeart Lease Guarantee

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In March 2022, the Company agreed to stay litigation against AnHeart in exchange for AnHeart’s payment of certain back rent from January to April 2022 and its continued partial payment of monthly rent.

While the case remains pending in New York, the Company is not actively litigating the claim.

The case remains pending in New York.

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.

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

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

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:

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

(In thousands) Amount

Year Ended December 31,

2023 (remaining nine months) $ 416

2023 (remaining six months) $ 280

Thereafter 4,478

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Note 15 - 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.

Other than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the unaudited condensed consolidated financial statements or disclosure in the accompanying notes.

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