What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-26 compared with 2023-03-31 · 545 added, 694 removed, 798 unchanged (61% of the section changed)

4 unchanged sentences

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2022 and 2021 (BDO USA, LLP;

Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2023 (BDO USA, P.C.;

Troy, Michigan;

PCAOB ID # 243 )

Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2020 (Friedman, LLP;

New York, NY;

PCAOB ID #711)

Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of HF Foods Group Inc.

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the two years then ended , in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 26, 2024, expressed an adverse opinion thereon.

As discussed in Note 1 to the consolidated financial statements, the 2020 financial statements have been restated to correct errors.

We have also audited the adjustments described in Note 1 that were applied to restate the 2020 consolidated financial statements to correct errors.

In our opinion, such adjustments are appropriate and have been properly applied.

We were not engaged to audit, review, or apply any procedures to the 2020 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express any opinion or any other form of assurance on the 2020 consolidated financial statements taken as a whole.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Consolidated Financial Statements - Impact of Control Environment and Information Technology General Controls

commensurate with financial reporting requirements, (ii) design and maintain effective information technology general controls for certain information systems relevant to the preparation of the financial statements, including user access controls, program change management controls and computer operations controls, and (iii) journal entries being completely and accurately recorded to the appropriate accounts.

As disclosed in management’s report on internal control over financial reporting, the Company identified material weaknesses as of December 31, 2023.

These material weaknesses included ineffective information technology general controls (ITGCs), and ineffective controls over certain non-routine transactions, significant management estimates, and financial reporting.

The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, the Company’s ability to (i) design and maintain an effective control environment, including maintaining a sufficient number of qualified resources to support and provide proper oversight and accountability over the performance of controls, (ii) design and maintain effective ITGCs for certain information systems relevant to the preparation of the financial statements, and (iii) design and maintain effective controls over financial reporting.

We identified a critical audit matter over the completeness and accuracy of the consolidated financial statements.

The ineffective control environment and the ineffective information technology general controls resulted in several material weaknesses.

Designing the appropriate procedures and evaluating audit evidence to ensure the completeness and accuracy of the consolidated financial statements, including higher risk areas, with an ineffective control environment and with ineffective information technology general controls, required especially challenging and subjective auditor judgment due to the increased extent of audit effort.

The ineffective control environment, including the ineffective ITGCs resulted in several material weaknesses.

Designing the appropriate procedures and evaluating audit evidence to ensure the completeness and accuracy of the consolidated financial statements, including higher risk areas, with an ineffective control environment, required especially challenging and subjective auditor judgment due to the increased extent of audit effort including the need to modify the nature and extent of audit evidence obtained.

The primary procedures we performed to address this critical audit matter included:

• We applied significant auditor judgment to determine the nature and extent of procedures to be performed over material accounts and or disclosures, including higher risk areas such as revenue, receivables, inventory, and journal entries.

• We increased the number of selections to perform certain audit procedures and lowered the testing thresholds for investigating differences,

• We utilized source documents, including third party support for audit evidence rather than relying on system reports, and

• We evaluated the overall sufficiency of audit evidence obtained based on the procedures performed.

/s/ BDO USA, LLP

• Performing incremental procedures over material financial statement accounts such as revenue and receivables by i) increasing the sample sizes to perform certain audit procedures and ii) lowering the testing thresholds and for journal entries by expanding the types of entries to be tested.

• Evaluating the impact of improper segregation of duties and designing incremental procedures over disbursements.

• Manually testing the completeness and accuracy of information provided by the Company and increasing the extent of our testing for items to be selected and agreed to source documents.

Goodwill Impairment – Valuation of Reporting Unit

As disclosed in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $85.1 million as of December 31, 2023.

There is only one reporting unit at December 31, 2023.

Goodwill is tested for impairment at the reporting unit level at least annually, or whenever events or changes in circumstances indicate that goodwill might be impaired.

In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business.

A change in underlying assumptions could cause a change in the results of the impairment test and, as such, could cause fair value to be less than the carrying amount and result in an impairment of goodwill in the future.

In connection with the annual impairment test completed as of December 31, 2023 using the quantitative goodwill impairment assessment, the Company determined the fair value of the reporting unit, using an average of the income approach, specifically, the discounted cash flow method, and market approaches, specifically, the comparable public company analysis and comparable acquisition analysis methods.

The income approach uses a discounted cash flow model that reflects management significant assumptions that mainly related to revenue growth rates, gross profit margins and a discount rate.

The comparable public company and comparable acquisition analysis methods apply a market multiple assumption to the Company’s EBITDA to calculate fair value.

The fair value of the Company’s reporting unit exceeded the carrying value, and therefore the Company concluded no impairment was required to be recorded during the year ended December 31, 2023.

We identified certain assumptions used in the valuation of goodwill for the reporting unit as a critical audit matter.

Management’s determination of the fair value of the reporting unit required the use of significant judgment due to the subjectivity and uncertainty of the revenue growth rates, gross profit margins and discount rate assumptions used in the income approach, and the EBITDA multiple assumption used in the comparable public company analysis and comparable acquisition analysis approaches.

Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the reasonableness of the forecasted revenue and gross profit margins by:

1) evaluating the consistency of the revenue growth rates and gross profit margins with historical results, ii) evaluating the consistency of the revenue growth rates and gross profit margins with the Company’s objectives and strategies, and iii) comparing the forecasted revenue growth rates and gross profit margins with external market data and evidence obtained in other areas of the audit.

• Utilizing personnel with specialized knowledge and skill with valuation to assist in assessing the reasonableness of the discount rate incorporated in the income approach and the EBITDA multiples incorporated in the comparable company analysis and comparable acquisition analysis approaches.

/s/ BDO USA, P.C.

We have served as the Company’s auditor since 2021.

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March 26, 2024

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

HF Foods Group Inc.

Opinion on the Financial Statements

We have audited, before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the accompanying consolidated statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows of HF Foods Group Inc.

and its subsidiaries (collectively, the “Company”) for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”) (the 2020 financial statements before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1 are not presented herein).

In our opinion, except for the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to audit, review or apply any procedures to the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied.

Those adjustments were audited by other auditors.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Friedman LLP

We have served as the Company’s auditor from 2017 through 2021.

New York, New York

March 16, 2021

HF FOODS GROUP INC.

and Subsidiaries

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Cash $ 15,232 $ 24,289

Accounts receivable, net 44,186 36,281

Accounts receivable, net of allowances of $ 2,119 and $ 1,442

47,524 44,186

Accounts receivable - related parties 308 213

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Customer relationships, net 147,181 157,748

Trademarks and other intangibles, net 36,343 35,891

Trademarks, trade names and other intangibles, net 30,625 36,343

Goodwill 85,118 85,118

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Long-term debt, net of current portion 108,711 115,443

Promissory note payable - related party — 4,500

Obligations under finance leases, non-current 11,229 11,441

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Deferred tax liabilities 29,028 34,443

Lease guarantee liability, net of current portion 5,472 —

Other long-term liabilities 6,891 5,472

TOTAL LIABILITIES 308,537 341,280

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SHAREHOLDERS’ EQUITY:

Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of December 31, 2022 and 2021

Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 53,813,777 shares issued and outstanding as of December 31, 2022 and 53,706,392 shares issued and outstanding as of December 31, 2021

Series A Participating Preferred Stock, par value $ 0.001 ;

100,000 shares authorized, no shares issued and outstanding

Preferred Stock, $ 0.001 par value;

1,000,000 shares authorized;

no shares issued and outstanding

Common Stock, $ 0.0001 par value;

100,000,000 shares authorized;

54,153,391 and 53,813,777 shares issued and 52,155,968 and 53,813,777 shares outstanding as of December 31, 2023 and December 31, 2022, respectively

Treasury stock, at cost;

1,997,423 shares as of December 31, 2023, and zero shares as of December 31, 2022

Additional paid-in capital 603,094 598,322

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Distribution, selling and administrative expenses 195,062 194,953 122,030

Goodwill impairment loss — — 338,191

INCOME (LOSS) FROM OPERATIONS 10,559 29,482 ( 343,799 )

Other expenses (income):

INCOME FROM OPERATIONS 8,969 10,559 29,482

Interest expense 11,478 7,457 4,091

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Change in fair value of interest rate swap contracts 1,580 ( 817 ) ( 1,425 )

Lease guarantee expense 5,744 — —

Total Other expenses, net 10,555 2,158 4,145

INCOME (LOSS) BEFORE INCOME TAX PROVISION 4 27,324 ( 347,944 )

Income tax (benefit) provision ( 231 ) 4,503 ( 4,725 )

NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 235 22,821 ( 343,219 )

Lease guarantee (income) expense ( 377 ) 5,744 —

(LOSS) INCOME BEFORE INCOME TAXES ( 2,621 ) 4 27,324

Income tax expense (benefit) 41 ( 231 ) 4,503

NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ( 2,662 ) 235 22,821

net (loss) income attributable to noncontrolling interests ( 488 ) ( 225 ) 676

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

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

$ ( 2,174 ) $ 460 $ 22,145

EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.01 $ 0.43 $ ( 6.59 )

EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.01 $ 0.43 $ ( 6.59 )

(LOSS) EARNINGS PER COMMON SHARE - BASIC $ ( 0.04 ) $ 0.01 $ 0.43

(LOSS) EARNINGS PER COMMON SHARE - DILUTED $ ( 0.04 ) $ 0.01 $ 0.43

WEIGHTED AVERAGE SHARES - BASIC 53,878,237 53,757,162 51,918,323

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Cash flows from operating activities:

Net income (loss) $ 235 $ 22,821 $ ( 343,219 )

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

Net (loss) income $ ( 2,662 ) $ 235 $ 22,821

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

Depreciation and amortization expense 25,918 24,936 19,126

Goodwill impairment loss — — 338,191

Treasury stock received via legal settlement ( 7,750 ) — —

Asset impairment charges 1,200 422 —

Gain from disposal of property and equipment ( 362 ) ( 1,327 ) ( 1,636 )

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Proceeds from sale of property and equipment 2,000 7,794 3,246

Payment made for acquisition of B&R Realty — — ( 94,004 )

Payment made for acquisition of Sealand — ( 34,848 ) —

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Net cash used in investing activities ( 1,514 ) ( 50,786 ) ( 41,082 )

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

HF FOODS GROUP INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

2022 2021 2020

Cash flows from financing activities:

Payments for tax withholding related to vested stock awards ( 394 ) — —

Checks issued not presented for payment ( 17,452 ) 4,112 2,994

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Cash distribution to shareholders ( 884 ) ( 187 ) ( 338 )

Net cash provided by financing activities 28,999 28,784 43,761

Net increase (decrease) in cash 9,497 5,211 ( 4,957 )

Cash at beginning of the year 14,792 9,581 14,538

Cash at end of the year $ 24,289 $ 14,792 $ 9,581

Net cash (used in) provided by financing activities ( 23,347 ) 28,999 28,784

Net (decrease) increase in cash ( 9,057 ) 9,497 5,211

Cash at beginning of the period 24,289 14,792 9,581

Cash at end of the period $ 15,232 $ 24,289 $ 14,792

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

HF Foods Group Inc.

and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,

2023 2022 2021

Supplemental disclosure of cash flow data:

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Right-of-use assets obtained in exchange for operating lease liabilities $ 2,583 $ 6,815 $ 10,983

Property acquired via a finance lease 1,272 8,947 1,375

Notes payable related to property and equipment purchases — 257 2,528

Property acquired in exchange for finance leases 1,763 1,272 8,947

Treasury stock received via legal settlement 7,750 — —

Acquisition of noncontrolling interests 1,652 — —

Note receivable related to property and equipment sales 300 — 257

Intangible asset acquired in exchange for noncontrolling interests — 566 —

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Deferred consideration from Great Wall Acquisition — — 17,330

Issuance of promissory note for the acquisition of B&R Realty Subsidiaries — — 7,000

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

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Common Stock Treasury Stock Additional

Capital Retained

Earnings (Accumulated Deficit) Total

Shareholders’

Attributable to

Capital Retained Earnings

(Accumulated Deficit) Total Shareholders’

Equity Attributable to

HF Foods Group Inc.

Noncontrolling

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Balance at December 31, 2020 51,913,411 $ 5 — $ — $ 587,579 $ ( 328,429 ) $ 259,155 $ 4,367 $ 263,522

Net (loss) income — — — — — ( 343,512 ) ( 343,512 ) 293 ( 343,219 )

Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — —

Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — —

Distribution to shareholders — — — — — — — ( 175 ) ( 175 )

Balance at December 31, 2020 51,913,411 5 — — 587,579 ( 328,429 ) 259,155 4,367 263,522

Net income — — — — 22,145 22,145 676 22,821

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Balance at December 31, 2022 53,813,777 $ 5 — $ — $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249

Net income (loss) — — — — — ( 2,174 ) ( 2,174 ) ( 488 ) ( 2,662 )

Issuance of common stock pursuant to equity compensation plan 391,983 — — — — — — — —

Shares withheld for tax withholdings on vested awards ( 52,369 ) — — — ( 232 ) — ( 232 ) — ( 232 )

Treasury stock received via legal settlement — — 1,997,423 ( 7,750 ) — — ( 7,750 ) — ( 7,750 )

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

Dissolution of noncontrolling interests — — — — 1,652 — 1,652 ( 1,742 ) ( 90 )

Stock-based compensation — — — — 3,352 — 3,352 — 3,352

Balance at December 31, 2023 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,094 $ ( 308,688 ) $ 286,661 $ 1,322 $ 287,983

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

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Notes to Consolidated Financial Statements

Note 1 - Description of Business

Note 1 - Organization and Description of Business

Organization and General

HF Foods Group Inc.

and subsidiaries (collectively “HF Group”, or the “Company”) is an Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States.

and subsidiaries (collectively “HF Foods”, or the “Company”) is an Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States.

The Company's business consists of one operating segment, which is also its one reportable segment:

HF Group, which operates solely in the United States.

HF Foods, which operates solely in the United States.

The Company's customer base consists primarily of Chinese and Asian restaurants, and it provides sales and service support to customers who mainly converse in Mandarin or Chinese dialects.

Corporate History

HF Group Holding Corporation ("HF Holding") was incorporated as a holding company to acquire and consolidate the various pre-merger operating entities.

On January 1, 2018, HF Holding entered into a Share Exchange Agreement with the controlling shareholders in exchange for all of HF Holding’s outstanding shares.

On August 22, 2018, Atlantic Acquisition Corp.

("Atlantic") consummated a reverse acquisition transaction resulting in HF Holding becoming the surviving entity and a wholly owned subsidiary of Atlantic (the “Atlantic Acquisition”).

The shareholders of HF Holding became the majority shareholders of Atlantic, and the Company changed its name to HF Foods Group Inc.

(collectively, these transactions are referred to as the “Atlantic Transactions”).

The Atlantic Acquisition was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction, as such, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values.

The assets and liabilities and results of operations of Atlantic were consolidated into the balance sheet and results of operations of HF Holding as of the completion of the Atlantic Transactions.

On November 4, 2019, HF Group consummated a merger transaction resulting in B&R Global Holdings, Inc.

("B&R Global") becoming a wholly-owned subsidiary of the Company (the "Business Combination").

At closing, the Company issued 30,700,000 shares of Common Stock of the Company to the shareholders of B&R Global in exchange for the 100 % equity interest of B&R Global.

On January 17, 2020, the Company acquired 100 % equity membership interest in nine subsidiaries under B&R Group Realty Holding, LLC ("BRGR"), which owned ten warehouses that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $ 101.3 million.

On December 30, 2021, the Company completed the acquisition of Great Wall Seafood Supply, Inc., Great Wall Restaurant Supplier, Inc., and First Mart Inc.

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The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

See Note 8 - Acquisitions for additional information on recent acquisitions.

Restatement of Previously Issued Consolidated Financial Statements

As previously disclosed in Note 1 of the Company’s financial statements for the year ended December 31, 2021, the Company identified certain errors impacting the financial statements, including disclosures, which the company analyzed using Staff

Accounting Bulletin (“SAB”) No.

99, “Materiality” and SAB No.

108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and determined the errors were material.

Accordingly, the Company restated the consolidated financial statements as of December 31, 2020 and for the years ended December 31, 2020 and 2019, and the related interim financial statements periods within the years ended December 31, 2021, 2020, and 2019 in accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections .

For the year ended December 31, 2020 the errors related to the identification of and accounting for operating and finance leases, the incorrect identification and disclosure of certain related party relationships including the identification of VIEs, the timing of revenue recognition for rental income received from a related party, the accounting for the self-insurance liability for automobile insurance, classification errors in the financial statements, and an error in the calculation of earnings per share.

In addition, certain errors were identified during an independent investigation by a Special Investigation Committee commissioned by the Company’s Board of Directors (see Note 17) such as unrecorded executive compensation to a certain executive and immediate family members, and related party disclosures.

For the year ended December 31, 2020 the nature of these error corrections is as follows:

Certain operating and finance leases were not properly identified and accounted for upon the adoption of ASC Topic 842 (“ASC 842”), Leases and adjustments have been made to correct these errors.

Four entities previously disclosed as related parties were determined not to be related parties.

The four related party entities that were reclassified in the financial statements from related party to third party for were EMC Rowland, LLC;

The Big Catch Alhambra, LLC;

Winfar Foods, Inc;

and Wokcano Carlsbad Partner LLP.

The Company identified an error related to the timing of revenue recognition for rental income received from UGO (a related party).

Rental income received from UGO, which was previously recognized in error, was recognized in the appropriate accounting period as part of the error corrections.

Please refer to Note 14 - Related Party Transactions for additional information on the lease arrangement with UGO.

The Company determined that certain payments made by the Company in prior years to related parties should have been accounted for in the Company's consolidated financial statements as executive compensation.

The Company made payments for inventory to Revolution Industry, which were diverted to Revolution Automotive to make car lease payments for the benefit of Mr.

Ni and his family.

The Company also made payments to UGO for marketing services, which services were determined as part of the independent investigation to have not been received commensurate to the amounts paid.

Please refer to Note 14 - Related Party Transactions for further details on Revolution Automotive, Revolution Industry and UGO.

The Company has recorded an uncertain tax position liability associated with the reclassification of certain amounts as executive compensation as discussed further in j.

The Company had not previously recorded a liability (including incurred but not reported "IBNR") related to the self-insured portion of its automobile insurance policy.

The 2020 goodwill impairment loss, which was previously misclassified as other income (expense) in the consolidated statements of operations and comprehensive income (loss), was revised to be included in income (loss) from operations.

The gain/loss on sale of fixed assets, which was previously misclassified in other income (expense), net was revised to be included in distribution, selling and administrative expenses.

As part of the error corrections being made, the resultant earnings per share was corrected.

As a result of the executive compensation described in d.

above, the Company recorded an uncertain tax position liability to account for potential implications to previously filed tax returns.

In the Company’s December 31, 2020 financial statements, the Company did not disclose NC Good Taste Noodle, Inc.

as a related party since Mr.

Zhou Min Ni reported that he sold his ownership effective January 1, 2020.

However, the Company’s former Chief Financial Officer, Mr.

Jian Ming Ni, continues to own a portion of NC Good Taste Noodle, Inc.

and as a result, the Company has concluded that NC Good Taste Noodle, Inc.

still meets the definition of a related party.

See Note 14 - Related Party Transactions for additional information

The corresponding footnotes have been restated for the adjustments noted above.

The following table summarizes the effect of the restatements on each affected financial statement line item for the year ended December 31, 2020, impacting the consolidated statements of operations and comprehensive income (loss).

The footnotes correspond to the error descriptions above:

Consolidated Statement of Operations and Comprehensive Income (Loss)

(In thousands, except per share data) As Previously Reported Adjustments As Restated

Year Ended December 31, 2020

Net revenue - third parties $ 553,409 $ 115 (b) $ 553,524

Net revenue - related parties 13,423 ( 115 ) (b) 13,308

Cost of revenue - third parties 453,706 94 (b)

( 454 ) (d) 453,346

Cost of revenue - related parties 12,833 ( 94 ) (b) 12,739

TOTAL COST OF REVENUE 466,539 ( 454 ) 466,085

GROSS PROFIT 100,293 454 100,747

Distribution, selling and administrative expenses 106,126 ( 476 ) (a)

( 140 ) (g) 106,355

Goodwill impairment loss — 338,191 (f) 338,191

INCOME (LOSS) FROM OPERATIONS ( 5,833 ) ( 337,966 ) ( 343,799 )

Interest expense ( 3,922 ) ( 399 ) (a) ( 4,321 )

Goodwill impairment loss ( 338,191 ) 338,191 (f) —

Other income 1,355 ( 119 ) (c)

( 140 ) (g) 1,096

Total other income (expense), net ( 341,678 ) 337,533 ( 4,145 )

INCOME (LOSS) BEFORE INCOME TAX ( 347,512 ) ( 432 ) ( 347,944 )

Income tax provision (benefit) ( 4,831 ) 106 (i) ( 4,725 )

NET INCOME (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) ( 342,681 ) ( 538 ) ( 343,219 )

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

( 342,974 ) ( 538 ) ( 343,512 )

EARNINGS (LOSS) PER COMMON SHARE - BASIC ( 6.58 ) ( 0.01 ) (h) ( 6.59 )

EARNINGS (LOSS) PER COMMON SHARE - DILUTED ( 6.58 ) ( 0.01 ) (h) ( 6.59 )

The following table summarizes the effect of the restatements on each category of cash flow for the year ended December 31, 2020, impacting the consolidated statements of cash flows:

Consolidated Statement of Cash Flows

(In thousands) As Previously Reported Adjustment As Restated

Year Ended December 31, 2020

Net cash provided by operating activities $ 44,131 $ 1,562 (a) $ 45,693

Net cash used in investing activities ( 94,411 ) — ( 94,411 )

Net cash provided by financing activities 45,323 ( 1,562 ) (a) 43,761

The effect of the restatements on the consolidated statements of changes in shareholders’ equity for the year ended December 31, 2020 is as follows:

Common Stock Treasury Stock Additional

Capital Retained

Earnings (Accumulated Deficit) Total

Shareholders’

Attributable to

Non-controlling

Interests Total

Shareholders’

(In thousands, except share data)

Shares Amount

As Previously Reported

Balance at 12/31/2019 53,050,211 $ 5 ( 905,115 ) $ ( 12,038 ) $ 599,617 $ 15,824 $ 603,408 $ 4,249 607,657

Net (loss) income — — — — — ( 342,974 ) ( 342,974 ) 293 ( 342,681 )

Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — —

Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — —

Distribution to shareholders — — — — — — — ( 175 ) ( 175 )

Balance at 12/31/2020 51,913,411 $ 5 — $ — $ 587,579 $ ( 327,150 ) $ 260,434 $ 4,367 $ 264,801

Restatement Impacts

Balance at 12/31/2019 — — — — — ( 741 ) ( 741 ) — ( 741 )

Net (loss) income — — — — — ( 538 ) ( 538 ) — ( 538 )

Escrow shares transferred to and recorded as treasury stock — — — — — — — — —

Retirement of treasury stock — — — — — — — — —

Distribution to shareholders — — — — — — — — —

Balance at 12/31/2020 — $ — — $ — $ — $ ( 1,279 ) $ ( 1,279 ) $ — $ ( 1,279 )

Balance at 12/31/2019 (As Restated) 53,050,211 $ 5 ( 905,115 ) $ ( 12,038 ) $ 599,617 15,083 602,667 $ 4,249 606,916

Net (loss) income (as restated) — — — — — ( 343,512 ) ( 343,512 ) 293 ( 343,219 )

Escrow shares transferred to and recorded as treasury stock — — ( 231,685 ) — — — — — —

Retirement of treasury stock ( 1,136,800 ) — 1,136,800 12,038 ( 12,038 ) — — — —

Distribution to shareholders — — — — — — — ( 175 ) ( 175 )

Balance at 12/31/2020 (As Restated) 51,913,411 $ 5 — $ — $ 587,579 $ ( 328,429 ) $ 259,155 $ 4,367 $ 263,522

See Note 7 - Acquisitions for additional information on the Great Wall Group and Sealand acquisitions.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with GAAP.

The consolidated financial statements include the financial statements of HF Group, its subsidiaries and FUSO Trucking LLC ("FUSO") and the Staffing Agencies (through December 31, 2021), which the Company has determined to be VIEs that requires consolidation.

All inter-company balances and transactions have been eliminated upon consolidation.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The accompanying consolidated financial statements for 2023 include the accounts of HF Foods, and for 2022 and 2021, the accounts of HF Foods and certain variable interest entities for which the Company was the primary beneficiary.

All significant 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 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

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.

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If deemed the primary beneficiary, the Company consolidates the VIE.

See Note 3 - Variable Interest Entities for additional information.

As of and for the year ended December 31, 2023, the Company has one 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 years ended December 31, 2023 and 2022.

See Note 16 - Commitments and Contingencies for additional information on AnHeart.

For the years ended December 31, 2022 and 2021, the Company had both VIEs for which it was not the primary beneficiary and therefore did not consolidate, and VIEs for which it was the primary beneficiary and did consolidate.

The VIEs are summarized as follows:

• Consolidated VIEs (collectively "Consolidated VIEs"):

• FUSO Trucking LLC (“FUSO”) – Dissolved in 2022

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

◦ Anshun, Inc.

◦ Inchoi, Inc.

◦ Malways, Inc.

• 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

FUSO was established solely to provide exclusive trucking services to the Company and was dissolved in 2022.

The entity lacked sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company had the power to direct the VIEs’ activities.

In addition, the Company received economic benefits from the entity and concluded that the Company was the primary beneficiary.

The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE included in the Company’s consolidated balance sheets, statements of operations and comprehensive income (loss) and statements of cash flows were immaterial.

Staffing Agencies

The Staffing Agencies were set up by an employee of the Company, or their relatives, and provided temporary labor services exclusively to the Company at the direction of the Company.

There were no other substantive business activities of the Staffing Agencies.

There were immaterial assets held, or liabilities owed by the Staffing Agencies and immaterial equity.

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

The Company consolidated the Staffing Agencies, recognizing compensation expense within distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss), and the related accrued expenses in the consolidated balance sheets.

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

As of December 31, 2021, the Company no longer had involvement with any of the Staffing Agencies and therefore was no longer considered a VIE and was no longer consolidated.

Unconsolidated VIEs

Revolution Industry and UGO

Revolution Industry was established to produce egg roll mix for the Company.

UGO was originally designed to be an online marketplace for various Asian goods.

Revolution Industry and UGO were thinly capitalized and were not able to finance their activities without additional subordinated support.

The former Co-CEO's (Mr.

Ni) son, as sole equity holder of Revolution Industry, had unilateral control over the ongoing activities of Revolution Industry and significantly benefited from their operations.

Therefore, the Company was not the primary beneficiary for Revolution Industry.

The former Co-CEO (Mr.

Ni) and his niece, as equity holders, had unilateral control over the ongoing activities of UGO and significantly benefited from its operations.

Therefore, the Company was not the primary beneficiary for UGO.

Revolution Industry and UGO are also related parties and were generally the Company’s suppliers or customers and the Company did not have other involvement with these entities.

Therefore, the Company’s exposure to loss due to its involvement with these entities was limited to amounts due from these entities, which was included in Accounts receivable – related parties.

The Company did not have any guarantees, commitments, or other forms of financing with these entities.

All transactions with Revolution Industry and UGO ceased in 2021.

Related party transactions with Revolution Industry and UGO are disclosed in Note 13 - Related Party Transactions.

AnHeart was previously a subsidiary of the Company designed to sell traditional Chinese medicine, sold to a third-party in February 2019.

As discussed in Note 6 - Leases, after the sale, the Company continued to provide a guarantee for all rent and related costs associated with two leases of AnHeart in Manhattan, New York.

The Company has determined that AnHeart is a VIE as a result of the guarantee.

However, the Company concluded it is not the primary beneficiary of AnHeart because it does not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance.

Please refer to Note 6 - Leases for additional information regarding the Company's maximum exposure to loss related to AnHeart.

The Company did not have any sales to or rental income from any of the other VIEs during the three years ended December 31, 2023.

Noncontrolling Interests

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

On May 28, 2021, the Company purchased the remaining 33.33 % noncontrolling equity interests in Kirnland Food Distribution, Inc.

("Kirnland") for $ 5.0 million, making Kirnland a wholly-owned subsidiary.

In accordance with ASC 810, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions.

No gain or loss was recognized.

As a result of this transaction, noncontrolling interests and additional paid-in capital were reduced by $ 1.1 million and $ 3.9 million, respectively.

As of December 31, 2022 and 2021, noncontrolling interest equity consisted of the following:

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

($ in thousands) Ownership of

noncontrolling interests at December 31, 2022

noncontrolling interest at December 31, 2023

December 31, 2023 December 31, 2022

HF Foods Industrial, LLC ("HFFI") 45.00 % $ 204 $ 462

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

45.00 % $ ( 759 ) $ 204

Min Food, Inc.

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Monterey Food Service, LLC 35.00 % 366 452

Ocean West Food Services, LLC 32.50 % 1,986 1,763

Ocean West Food Services, LLC (b)

Syncglobal Inc.

Total $ 1,322 $ 4,436

_________________

(a) During the year ended December 31, 2023, the Company exited HFFI operations.

Accordingly, the machinery used in HFFI operations was impaired and subsequently sold.

See Note 4 - Balance Sheet Components for additional information.

(b) Effective June 30, 2023, Ocean West Food Services, LLC (“Ocean West”) became a wholly-owned subsidiary of the Company.

In accordance with ASC Topic 810 (“ASC 810”), Consolidation , changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions.

No gain or loss was recognized.

As a result of this transaction, noncontrolling interests of $ 1.7 million was reclassified to additional paid-in capital on the consolidated balance sheets.

and dissolved the entity.

Uses of Estimates

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Actual results could differ from those estimates.

Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, allowance for expected credit losses, inventory reserves, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, impairment of long-term investments, impairment of goodwill, the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations, realization of deferred tax assets, uncertain income tax positions, the liability for self-insurance and stock-based compensation.

Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, inventory reserves, impairment of long-lived assets, impairment of goodwill, and the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or shorter as cash equivalents.

As of December 31, 2022 and 2021, the Company had no cash equivalents.

As of December 31, 2023 and December 31, 2022, the Company had no cash equivalents.

Accounts at banks with an aggregate excess of the amount of outstanding checks over the cash balances are included in checks issued not presented for payment in current liabilities in the consolidated balance sheets.

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The Company uses specific criteria to determine uncollectible receivables to be written off, including, bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.

As of December 31, 2022 and 2021, allowances for expected credit losses were $ 1.4 million and $ 0.8 million, respectively.

As of December 31, 2023 and December 31, 2022, allowances for expected credit losses were $ 2.1 million and $ 1.4 million, respectively.

The Company’s inventories, consisting mainly of food and other foodservice-related products, are considered finished goods.

Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash consideration received from vendors, primarily in the form of rebates.

The Company adjusted its inventory balance for slow-moving, excess and obsolete inventories to the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions.

The Company adjusts its inventory balance for slow-moving, excess and obsolete inventories to the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions.

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method.

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Machinery and equipment 3 to 10 years

Leasehold improvements are amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term.

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized as additions to the related assets.

Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations and comprehensive income (loss) in distribution, selling and administrative expenses.

Software Costs

In accordance with ASC 350-40, Internal-Use Software, the Company capitalizes certain computer software licenses and software implementation costs related to developing or obtaining computer software for internal use.

Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task that it previously did not perform.

Internal use software is amortized on a straight-line basis over a three to five year period.

Capitalized costs include direct acquisitions as well as software and software development acquired under capitalized leases and internal labor where appropriate.

Capitalized software purchases and related development costs, net of accumulated amortization, were $ 5.1 million as of December 31, 2023 and zero as of December 31, 2022, and are included in other long-term assets on the consolidated balance sheets.

Business Combinations

The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations .

The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations .

The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values.

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Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests.

The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as

If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

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The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired.

The Company's policy is to test goodwill for impairment annually in the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired.

The Company's policy is to test goodwill for impairment annually on the last day of the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired.

Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price.

This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis.

If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, or at management’s discretion, the Company performs a quantitative analysis.

If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

As of December 31, 2022 and 2021, the Company has one reporting unit.

As of December 31, 2023 and December 31, 2022, the Company has one reporting unit for purposes of testing goodwill for impairment.

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

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The Company bases these fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain.

A change in underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of goodwill in the future.

Additionally, if actual results are not consistent with the estimates and assumptions or if there are significant changes to the Company’s planned strategy, it may cause the fair value of the reporting unit to be less than its carrying amount and result in additional impairments of goodwill in the future.

A change in underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amount and result in an impairment of goodwill in the future.

The Company corroborates the reasonableness of the total fair value of the reporting unit by assessing the implied control premium based on the Company’s market capitalization.

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Impairment of Long-lived Assets

The Company assesses its long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend.

Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate.

If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets or asset group exceeds their fair value.

The Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 .

The Company did no t record any impairment loss on its long-lived assets during the years ended December 31, 2021 and 2020.

Recoverability of an asset or asset group is measured by comparison of its carrying amount to future undiscounted cash flows the asset or asset group is expected to generate.

If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset or asset group exceeds its fair value.

The Company impaired machinery related to HFFI and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2023.

The Company fully impaired its acquired developed technology associated with the Syncglobal joint venture and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 .

Fair value was determined using Level 3 inputs at the time of impairment.

The Company did no t record any impairment loss on its long-lived assets during the year ended December 31, 2021.

Insurance and Claim Costs

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The reserves consist of specific reserves for all known claims and an estimate for claims incurred but not reported, and losses arising from known claims ultimately settling in excess of insurance coverage using loss development factors based upon industry data and past experience.

In determining the liability, the Company specifically reviews all known claims and records a liability based upon

the Company’s best estimate of the amount to be paid.

In determining the liability, the Company specifically reviews all known claims and records a liability based upon the Company’s best estimate of the amount to be paid.

In making the estimate, the Company considers the amount and validity of the claim, as well as the Company’s past experience with similar claims.

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These reserves are periodically reviewed and adjusted to reflect the Company’s experience and updated information relating to specific claims.

As of December 31, 2022 and 2021, the Company has recorded a self-insurance liability of $ 1.3 million and $ 1.0 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets.

As of December 31, 2023 and December 31, 2022, the Company has recorded a self-insurance liability of $ 1.7 million and $ 1.3 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets.

Revenue Recognition

The Company recognizes revenue from the sale of products when control of each product passes to the customer and the customer accepts the goods, which occurs at delivery.

The majority of customer orders are fulfilled within a day and customer payment terms are typically thirty days or less from invoice date.

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

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 follows ASC Topic 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.

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The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

Under this method, the Company determines deferred tax assets and liabilities based on the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

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In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

As of December 31, 2022, the Company does not have a deferred tax asset valuation allowance.

The Company records uncertain tax positions in accordance with ASC Topic 740 (“ASC 740”), Income Taxes , on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

Based on our assessment, it is more likely than not that most of the net deferred tax assets will be realized through future taxable income.

Management has established a valuation allowance against certain deferred taxes attributable to the Company's subsidiary, HFFI.

Management believes the realization of these deferred tax assets will be limited as the Company exited HFFI operations during the year ended December 31, 2023.

As such, the Company has recorded a valuation allowance of $ 0.7 million on the deferred tax assets of HFFI.

The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist.

The Company records uncertain tax positions in accordance with ASC Topic 740, Income Taxes (“ASC 740”), on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

See Note 12 - Income Taxes for additional information.

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The adoption had no material impact on the Company's consolidated financial statements.

The Company accounts for leases following ASC 842, Leases ("ASC 842").

In 2021, the Organization for Economic Co-operation and Development (“OECD”) published the Tax Challenges Arising from the Global Anti-Base Erosion Model Rules (“Pillar Two”), also referred to as the GloBE Rules or Pillar Two.

The rules are designed to ensure large multinational enterprises (“MNEs”) pay a minimum level of tax (15%) on income of each jurisdiction and are expected to be effective for the first time in January 2024.

The legislation applies to MNEs with annual consolidated group revenues of at least €750 million if at least one jurisdiction in which the MNE operates has enacted tax laws in accordance with the Pillar Two framework.

The Company continues to monitor the effects of Pillar Two but does not believe it will have a material impact on the financial statements provided that the Company currently has no foreign operations that would be expected to result in the application of Pillar Two.

The Company accounts for leases following ASC Topic 842, Leases ("ASC 842").

The Company determines if an arrangement is a lease at inception and also considers classification of leases as operating or finance.

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Derivative Financial Instruments

In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, d erivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.

In accordance with the guidance in ASC Topic 815, Derivatives and Hedging ("ASC 815") , d erivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value.

The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment.

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Segment Reporting

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments.

ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments.

The Company uses the “management approach” in determining reportable operating segments.

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In 2021, former co-CEO Zhou Min Ni resigned, and Xiao Mou Zhang assumed the role of sole CEO and sole Chief Operating Decision Maker ("CODM").

The CODM, reviews operating

results and makes resource allocations on a consolidated basis and thus the Company has concluded it has one operating and reportable segment.

The CODM, reviews operating results and makes resource allocations on a consolidated basis and thus the Company has concluded it has one operating and reportable segment.

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326):

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326):

Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”.

This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years.

For emerging growth companies, the effective date has been extended to fiscal years beginning after December 15, 2022.

The Company adopted this ASU within the annual reporting period ending as of December 31, 2022.

ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” The Company adopted this ASU within the annual reporting period ending as of December 31, 2022.

The adoption of this guidance resulted in an adjustment to retained earnings of $ 0.7 million as of January 1, 2022 as evidenced in the Company’s consolidated statements of changes in shareholders’ equity.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , deferring the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

The Company adopted ASU 2020-04 during 2021.

The ASU has not had a material impact on the Company's consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

The guidance requires an acquirer to, at the date of acquisition, recognize and measure the acquired contract assets and contract liabilities acquired in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition.

This guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted.

The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date.

The Company is in the process of assessing the impact of this ASU on its future consolidated financial statements, but does not expect it to have a material impact.

Note 3 - Variable Interest Entities

The Company has VIEs for which the Company is not the primary beneficiary and therefore does not consolidate, and VIEs for which the Company is the primary beneficiary and consolidates.

The VIEs are summarized as follows:

• Consolidated VIEs (collectively "Consolidated VIEs"):

• FUSO Trucking LLC (“FUSO”)

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

◦ Anshun, Inc.

◦ Chen Enterprises (until December 2020)

◦ Georgia Kam (until December 2020)

◦ Inchoi, Inc.

◦ Malways, Inc.

(until December 2020)

• Unconsolidated VIEs (collectively "Unconsolidated VIEs"):

• Revolution Industry, LLC (“Revolution Industry”) – Supplier of goods (until March 2021)

• UGO USA, Inc.

(“UGO”) – Supplier of online goods, customer, and lessee (until April 2021)

• BRGR (until January 2020)

• AnHeart, Inc.

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 economic benefits from the entity and has concluded that the Company is the primary beneficiary.

Staffing Agencies

The Staffing Agencies were set up by an employee of the Company, or their relatives, and provided temporary labor services exclusively to the Company at the direction of the Company.

There were no other substantive business activities of the Staffing Agencies.

There were immaterial assets held, or liabilities owed by the Staffing Agencies and immaterial equity.

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

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

As of December 31, 2021, the Company no longer had involvement with any of the Staffing Agencies and therefore was no longer considered a VIE and was no longer consolidated.

Unconsolidated VIEs

Revolution Industry and UGO

Revolution Industry was established to produce egg roll mix for the Company.

UGO was originally designed to be an online marketplace for various Asian goods.

Revolution Industry and UGO were thinly capitalized and were not able to finance their activities without additional subordinated support.

The former Co-CEO's (Mr.

Ni) son, as sole equity holder of Revolution Industry, had unilateral control over the ongoing activities of Revolution Industry and significantly benefited from their operations.

Therefore, the Company was not the primary beneficiary for Revolution Industry.

The former Co-CEO (Mr.

Ni) and his niece, as equity holders, had unilateral control over the ongoing activities of UGO and significantly benefited from its operations.

Therefore, the Company was not the primary beneficiary for UGO.

Revolution Industry and UGO are also related parties and were generally the Company’s suppliers or customers and the Company did not have other involvement with these entities.

Therefore, the Company’s exposure to loss due to its involvement with these entities was limited to amounts due from these entities, which is included in Accounts receivable – related parties.

The Company did not have any guarantees, commitments, or other forms of financing with these entities.

All transactions with Revolution Industry and UGO ceased in 2021.

Related party transactions with Revolution Industry and UGO are disclosed in Note 14 - Related Party Transactions.

BRGR was established to hold real estate for rent primarily for the Company and BRGR was financed primarily through this rental income and proceeds from the real estate loan for which the Company was guarantor.

The Company was not the primary beneficiary of BRGR as the Company did not have the power to direct or control the activities which most significantly influenced the performance of BRGR.

On January 17, 2020, the Company acquired 100 % equity membership interests of certain real estate subsidiaries of BRGR, as discussed in Note 8 - Acquisitions .

The Company also entered into the Second Amended Credit Agreement, as discussed in Note 11 - Debt , which removed BRGR as a guarantor of its revolving credit facility and as a borrower under its real estate term loans.

Related party transactions with BRGR are disclosed in Note 14 - Related Party Transactions .

For the period from January 1, 2020 through January 17, 2020, the Company recorded rent expense of $ 0.2 million related to its lease agreements with the realty subsidiaries of BRGR, which is included in distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

As of December 31, 2019, the Company was a guarantor of BRGR and its subsidiaries’ mortgage-secured real estate term loan, which had an unpaid principal balance of $ 53.3 million.

As of January 17, 2020, the Company had no remaining involvement with BRGR and therefore is no longer considered a VIE.

AnHeart was previously a subsidiary of the Company designed to sell traditional Chinese medicine, sold to a third-party in February 2019.

As discussed in Note 7 - Leases, after the sale, the Company continued to provide a guarantee for all rent and related costs associated with two leases of AnHeart in Manhattan, New York.

The Company has determined that AnHeart is a VIE as a result of the guarantee.

Please refer to Note 7 - Leases for additional information regarding the Company's maximum exposure to loss to AnHeart.

The Company did not have any sales to or rental income from any of the other VIEs during the three years ended December 31, 2022.

In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires enhanced disclosures about segment expenses on an annual and interim basis.

This standard is effective for the Company’s consolidated financial statements for the year ending December 31, 2024 and for interim periods beginning in 2025.

The impact of the adoption of this ASU is not expected to have a material effect on the Company’s financial position, or operations, however, the Company is currently evaluating the impact of this standard on its disclosures to the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (ASC 740):

Improvement to Income Tax Disclosures, which requires (1) disclosure of specific categories in the rate reconciliation and (2) additional information for reconciling items that meet a quantitative threshold.

Additionally, the amendment requires disclosure of certain disaggregated information about income taxes paid, income from continuing operations before income tax expense (benefit) and income tax expense (benefit).

The standard is effective for the Company’s consolidated financial statements for the year ending December 31, 2025.

The Company is currently evaluating the impact of this standard on its consolidated financial statements.

Note 3 - Revenue

For the years ended December 31, 2022, 2021 and 2020, revenue recognized from performance obligations related to prior periods was immaterial.

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

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

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Total $ 1,148,493 100 % $ 1,170,467 100 % $ 796,884 100 %

Due to system constraints prior to the year ended December 31, 2021, the Company did not present net revenue by principal product categories.

Note 4 - Balance Sheet Components

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Beginning balance $ 1,442 $ 840 $ 909

Adjustment for adoption of the new CECL standard (Note 2) 690 — —

Increase (decrease) in provision for expected credit losses 82 ( 433 ) 1,338

Bad debt recovery (write-offs) ( 170 ) 364 ( 1,053 )

Adjustment for adoption of the CECL standard — 690 —

Increase (decrease) in provision for expected credit losses/doubtful accounts 701 82 ( 433 )

Bad debt (write-offs) recoveries ( 24 ) ( 170 ) 364

Ending balance $ 2,119 $ 1,442 $ 840

Prepaid expenses and other current assets consisted of the following:

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

Prepaid expenses $ 4,591 $ 1,504

Advances to suppliers 3,340 4,494

Other current assets 2,214 2,939

Prepaid expenses and other current assets $ 10,145 $ 8,937

Property and equipment, net consisted of the following:

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Depreciation expense was $ 9.6 million, $ 9.2 million and $ 8.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

During the year ended December 31, 2023, the Company impaired machinery and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the consolidated statements of operations and comprehensive income (loss).

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

Long-term investments consisted of the following:

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Total long-term investments $ 2,388 $ 2,679

The investment in Tamron is accounted for using the measurement alternative under ASC 321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any.

The investment in 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.

There was no impairment during the years ended December 31, 2022, 2021 and 2020 for these investments.

The Company determined there was no impairment for the years ended December 31, 2023, 2022 and 2021 for these investments.

Accrued expenses and other liabilities consisted of the following:

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Accrued professional fees 1,353 3,866

Accrued income taxes — 1,908

Accrued interest and fees 1,276 1,082

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(In thousands)

Derivative instruments $ — $ 530 $ — $ 530 $ — $ — $ — $ —

Derivative instruments $ — $ — $ — $ — $ — $ 287 $ — $ 287

The Company follows the provisions of ASC Topic 820 ("ASC 820"), Fair Value Measurements and Disclosures .

ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Interest rate swaps $ — $ 412 $ — $ 412 $ — $ 530 $ — $ 530

Interest rate swaps $ — $ ( 1,601 ) $ — $ ( 1,601 ) $ — $ — $ — $ —

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 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.

The carrying amounts reported in the 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.

Please refer to Note 9 - 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 10 - Debt of the Notes to the Consolidated Financial Statements, including the current portion, as of the dates indicated:

December 31, 2022 December 31, 2021

Carrying Value Fair Value Level Carrying Value Fair Value Level

($ in millions)

Fair Value Measurements

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

December 31, 2023

Fixed rate debt:

Promissory note payable to related party $ — $ — $ 4.5 $ 3.4 Level 3

Bank of America 1.9 1.6 Level 3 2.7 2.4 Level 3

East West Bank 2.4 1.8 Level 3 2.5 2.0 Level 3

First Horizon Bank — — 4.5 3.6 Level 3

Other finance institutions 0.2 0.2 Level 3 0.8 0.8 Level 3

Bank of America $ — $ — $ 151 $ 169

Other finance institutions — — 43 45

Variable rate debt:

JPMorgan 111.4 111.4 Level 2 70.8 70.8 Level 2

Bank of America 2.3 2.3 Level 2 2.5 2.5 Level 2

East West Bank 3.5 3.5 Level 2 3.5 3.5 Level 2

The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments and the consistency in market conditions since the loans were entered into.

JPMorgan Chase $ — $ 106,079 $ — $ 106,079

Bank of America — 2,193 — 2,193

East West Bank — 5,675 — 5,675

December 31, 2022

Fixed rate debt:

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

Other finance institutions — — 186 197

Variable rate debt:

JPMorgan Chase $ — $ 111,413 $ — $ 111,413

Bank of America — 2,330 — 2,330

East West Bank — 5,822 — 5,822

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.

Please refer to Note 11 - Debt and Note 14 - Related Party Transactions for additional information regarding the Company's debt.

Please refer to Note 10 - Debt for additional information regarding the Company's debt.

Nonrecurring Fair Values

The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

Adjustments to fair value resulted from the write-down of asset values due to impairment.

During the year ended December 31, 2023, the Company partially impaired machinery related to the operations of HFFI and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the consolidated statements of operations and comprehensive income (loss).

The machinery was sold during the year ended December 31, 2023.

The impairment was based on sales prices of similar equipment listed by third-party sellers and considered a Level 3 fair value measurement.

During the year ended December 31, 2022, the Company fully impaired its acquired developed technology associated with the Syncglobal, Inc.

joint venture and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss) during the year ended December 31, 2022 .

Note 6 - Leases

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Operating and finance lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term.

As of December 31, 2022, the balances for operating lease right-of-use ("ROU") assets and liabilities were $ 14.2 million and $ 14.3 million, respectively.

As of December 31, 2021, the balances for operating lease ROU assets and liabilities were $ 11.7 million and $ 11.7 million, respectively.

Operating lease expense is recognized on a straight-line basis over the lease term.

For finance leases, the Company also recognizes finance lease assets and finance lease liabilities at inception, with lease expense recognized as interest expense and amortization of the lease payment.

The Company also recognizes finance lease assets and finance lease liabilities at inception, with lease expense recognized as interest expense and amortization of the lease payment.

Variable lease costs were insignificant in the years ended December 31, 2023, 2022 and 2021.

As of December 31, 2023, the balances for operating lease right-of-use ("ROU") assets and liabilities were $ 12.7 million and $ 13.1 million, respectively.

As of December 31, 2022, the balances for operating lease ROU assets and liabilities were $ 14.2 million and $ 14.3 million, respectively.

Operating Leases

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(1) See Note 13 - Related Party Transactions

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.

On February 10, 2021, the Company entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC, pursuant to which it assumed the lease of the premises at 273 Fifth Avenue (the “273 Lease Agreement”).

At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”).

The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the Lease Agreement.

The Company agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due.

Under the terms of the Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $ 2.5 million.

The Lease Amendment permits subletting of the premises, and the Company intends to sublease the newly constructed premises to defray the rental expense undertaken pursuant to its guaranty obligations.

On January 17, 2022, the Company received notice that AnHeart had defaulted on its obligations as tenant under the lease for 275 Fifth Avenue.

On February 7, 2022, the Company undertook its guaranty obligations by assuming responsibility for payment of monthly rent and other tenant obligations, including past due rent as well as property tax obligations beginning with the January 2022 rent due.

On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng.

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

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

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

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

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

As of December 31, 2022, the Company had a lease guarantee liability of $ 5.8 million.

The Company determined the discounted value of the lease guarantee liability using a discount rate of 4.55 % and is classified as Level 2 in the fair value hierarchy.

The current portion of the lease guarantee liability of $ 0.3 million is recorded in Accrued expenses and other liabilities on the consolidated balance sheet.

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

The estimated future minimum lease payments as of December 31, 2022 are presented below:

(In thousands) Amount

Year Ended December 31,

Thereafter 4,478

Imputed interest ( 1,706 )

Total minimum lease payments $ 5,760

As of December 31, 2023, the Company had additional leases that had not yet commenced which totaled $ 7.0 million in future minimum lease payments and were excluded from the table above.

These leases comprise vehicle leases expected to commence during the year ended December 31, 2024 with lease terms of 4 to 7 years.

Subsequent to December 31, 2023, the Company entered into additional vehicle leases which total $ 15.5 million in future minimum lease payments, with lease terms of 4 to 6 years and were excluded from the table above.

Note 7 - Acquisitions

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

The transaction costs for the acquisition totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the consolidated statement of operations and comprehensive income for the year ended December 31, 2022.

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

The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company, not to exceed one year as permitted under ASC 805 .

The transaction costs for the acquisition for the year ended December 31, 2022 totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the 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.

Purchase Price Allocation

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

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.

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Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the years ended December 31, 2022 and 2021, respectively, as if the Great Wall Acquisition and the Sealand Acquisition had been consummated on January 1, 2021.

The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired

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 years ended December 31, 2022, as if the Great Wall Acquisition and the Sealand Acquisition had been consummated on January 1, 2021.

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

Statutory rates were used to calculate income taxes.

Year Ended December 31,

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

(In thousands, except share and per share data) Year Ended December 31,

Pro forma net revenue $ 1,202,296 $ 1,072,653

Pro forma net income attributable to HF Group $ 35 $ 33,724

Pro forma (loss) earnings per common share - basic $ — $ 0.65

Pro forma (loss) earnings per common share - diluted $ — $ 0.65

Pro forma net income attributable to HF Foods $ 35 $ 33,724

Pro forma earnings per common share — basic

Pro forma earnings per common share — diluted

Pro forma weighted average shares — basic

53,757,199 53,706,392

Pro forma weighted average shares — diluted

The revenue and operating income from Sealand from the date of acquisition through December 31, 2022 was $ 55.6 million and $ 0.7 million, respectively, and were included in the consolidated statements of operations and comprehensive income (loss).

Acquisition of Real Estate Companies

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

Then Co-CEO (and current CEO) of the Company, Xiao Mou Zhang ("Mr.

Zhang"), managed and owned an 8.91 % interest in BRGR.

The total purchase price of the transaction was $ 101.3 million for which financing was provided by JPMorgan Chase Bank, N.A.

("JPMorgan"), as Administrative Agent, and certain lender parties hereto, including Comerica Bank under an Amended and Restated Credit Agreement ("Credit Agreement").

The terms of which are set forth below, and the lender parties thereto relied upon the appraisals in determining to provide such financing.

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

Consideration for the acquisition was funded by (1) $ 75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 11 - Debt for additional information), (2) issuance by B&R Global of a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR maturing on January 17, 2030, and (3) payment of $ 18.7 million from funds drawn from the Company’s revolving credit facility.

The reissuance of the mortgage-backed term loans released BRGR from its obligations to the lenders under the First Amended Credit Agreement and predecessor financing arrangements.

The majority of the assets acquired was concentrated in a group of similar assets, land and buildings, for the same purpose of warehousing and distribution.

As such, the Realty Acquisition was deemed as an asset acquisition under ASC 805-10-55, and the total purchase price was allocated on a relative fair value basis to the net assets acquired.

The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

(In thousands) Amount

Automobile 34

Prepaid expenses 39

Buildings 53,564

Total assets acquired 102,637

Accounts payable and accrued expenses 1,367

Total liabilities assumed 1,367

Net assets acquired $ 101,270

53,757,199 53,809,020

Note 8 - Goodwill and Acquired Intangible Assets

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Balance at December 31, 2021 $ 80,257

Acquisition of Great Wall Group 11,745

Balance at December 31, 2021 80,257

Acquisition of Sealand Food, Inc.

Balance at December 31, 2022 85,118

Accumulated impairment for goodwill is $ 338.2 million as of both December 31, 2022 and 2021.

Towards the end of first quarter of fiscal year 2020, the Company experienced significant decline in business volume due to mandatory stay-at-home orders issued by governmental authorities in response to the intensification of the COVID-19 pandemic.

The Company determined that the B&R Global reporting unit was very sensitive to these declines and that it was more-likely-than-not that an impairment may exist.

The Company, therefore, performed an analysis of the fair value of the B&R Global reporting unit as of March 31, 2020 using a discounted cash flow method for goodwill impairment testing purposes.

Based upon the analysis, the Company concluded that the carrying value of its B&R Global reporting unit exceeded its fair value by approximately $ 338.2 million.

As a result, the Company recorded the amount as an impairment loss during the first quarter of fiscal year 2020.

The Company estimated the fair value of the B&R Global reporting unit using the income approach, discounting projected future cash flows based upon management’s expectations of the current and future operating environment.

The calculation of the impairment charge included substantial fact-based determinations and estimates including weighted average cost of capital ("WACC"), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities.

The fair value conclusions as of March 31, 2020 for the reporting unit were highly sensitive to changes in the WACC, which considered as observable data for publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums.

The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization.

The Company also observed that the WACC applied on March 31, 2020 increased significantly from the original WACC value as of the acquisition date, mainly driven by the increased risk and volatility observed in the market.

Volatility had primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country had been reduced to takeout and delivery offerings.

Continued uncertainty about the removal or perpetuation of these restrictions and levels of consumer spending cause ongoing volatility.

Due to structural changes at the Company during 2021, there is only one aggregated reporting unit at December 31, 2022 and 2021.

Due to the sustained decline in the Company’s stock price during 2022, the Company performed a quantitative goodwill impairment assessment.

The fair value was determined using an average of the discounted cash flow approach, comparable public company analysis, and comparable acquisitions analysis.

The fair value of the reporting unit exceeded the carrying value, and therefore the Company concluded no impairment was required to be recorded during the year ended December 31, 2022.

No Goodwill activity —

Balance at December 31, 2023 $ 85,118

Accumulated impairment for goodwill is $ 338.2 million as of December 31, 2023, 2022 and 2021.

The accumulated impairment resulted from an impairment during the year ended December 31, 2020.

There is only one reporting unit at December 31, 2023 and 2022.

As a result of the Company’s results of operations compared to previous forecasts, combined with the level of the Company’s stock price, the Company performed a quantitative goodwill impairment assessment as of December 31, 2023 and 2022.

The fair value was determined using an average of the income approach, comparable public company analysis, and comparable acquisitions analysis.

The fair value of the reporting unit exceeded the carrying value, and therefore the Company concluded no impairment was required to be recorded during the year ended December 31, 2023 and December 31, 2022.

For the year ended December 31, 2021, the Company performed a qualitative goodwill impairment assessment and concluded no impairment was required to be recorded during the year ended December 31, 2021.

The 2023 impairment test resulted in an estimated fair value that exceeded carrying value by approximately 10% at December 31, 2023.

The most critical assumptions in determining fair value using the income approach were projections of future cash flows such as forecasted revenue growth rates, gross profit margins, and the discount rate.

The market approaches were primarily impacted by an enterprise value multiple of EBITDA.

A significant change in these assumptions or a sustained decline in the Company’s stock price could result in an interim impairment test and/or potential goodwill impairment in the future.

Acquired Intangible Assets

In connection with the Sealand acquisition, the Company acquired $ 14.7 million of intangible assets, primarily representing tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-compete agreements of $ 1.4 million.

In connection with the Sealand acquisition, the Company acquired $ 14.7 million of intangible assets, primarily representing trademarks and trade names of $ 4.4 million, customer relationships of $ 8.9 million and non-compete agreements of $ 1.4 million.

The useful lives of trademarks and trade names are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years .

The associated goodwill is deductible for tax purposes.

In connection with the Great Wall Group acquisition, HF Group acquired $ 30.1 million of intangible assets, primarily representing a non-competition agreement, tradenames and customer relationships, which have an estimated amortization period of approximately 3 years, 10 years, and 10 years, respectively.

In connection with the acquisition of B&R Global, HF Group acquired $ 188.5 million of intangible assets, primarily representing tradenames and customer relationships which have an estimated amortization period of 10 and 20 years, respectively.

The components of the intangible assets are as follows:

In connection with the Great Wall Group acquisition, HF Foods acquired $ 30.1 million of intangible assets, primarily representing a non-competition agreement, trademarks and trade names and customer relationships, which have an estimated amortization period of approximately 3 years, 10 years, and 10 years, respectively.

In connection with the acquisition of B&R Global in 2019, HF Foods acquired $ 188.5 million of intangible assets, primarily representing trademarks and trade names and customer relationships which have an estimated amortization period of 10 and 20 years, respectively .

December 31, 2023 December 31, 2022

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Non-competition agreement $ 3,892 $ ( 2,429 ) $ 1,463 $ 3,892 $ ( 1,132 ) $ 2,760

Trademarks 44,256 ( 10,673 ) 33,583 39,833 ( 6,349 ) 33,484

Trademarks and trade names 44,207 ( 15,045 ) 29,162 44,256 ( 10,673 ) 33,583

Customer relationships 185,266 ( 38,085 ) 147,181 185,266 ( 27,518 ) 157,748

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There were no triggering events identified for the remaining intangible assets at December 31, 2022.

No impairment was recorded for the years ended December 31, 2021 and 2020.

HF Group’s amortization expense for acquired intangible assets was $ 15.7 million in 2022, $ 10.9 million in 2021 and $ 10.9 million in 2020.

There were no triggering events identified for the remaining acquired intangible assets at December 31, 2022.

No impairment was recorded against acquired intangible assets for the years ended December 31, 2023 and 2021.

HF Foods’ amortization expense for acquired intangible assets was $ 16.3 million, $ 15.7 million and $ 10.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The estimated future amortization expense for intangible assets is presented below:

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The Company does not use any other derivative financial instruments for trading or speculative purposes.

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

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

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

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

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

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

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

On August 20, 2019, HF Foods 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.

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 Foods 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.

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 %.

The term loan and corresponding BOA IRS contract mature in December 2029.

On June 24, 2020, HF Group entered into a forward starting IRS contract with JPMorgan Chase Bank (the "JPM IRS") for a fixed $ 80.0 million notional amount, effective from June 30, 2021 and expiring on June 30, 2025, as a means to partially hedge its existing floating rate loans exposure.

On March 3, 2021, the Company unwound the JPM IRS.

The contract was unwound with a view that 1-month LIBOR will continue to remain low in the foreseeable future despite the spike at the long end of the yield curve.

The Company recorded a gain of approximately $ 0.7 million during the year ended December 31, 2021.

On March 15, 2023, the Company entered into an amortizing IRS contract with JPMorgan 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 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 consolidated statements of operations and comprehensive income (loss).

As of December 31, 2022 and 2021, the Company determined that the fair value of the IRS contracts were $ 0.5 million in an asset position and $ 0.3 million in a liability position, respectively, which is included in other long-term assets and accrued expenses and other liabilities , respectively, on the consolidated balance sheets.

As of December 31, 2023, the Company determined that the fair values of the IRS contracts were $ 0.4 million in an asset position and $ 1.6 million in a liability 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 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.

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Note 10 - Debt

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

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

($ in thousands)

Bank Name Maturity Interest Rate at December 31, 2022 December 31, 2022 December 31, 2021

Bank Name Maturity Interest Rate at December 31, 2023

December 31, 2023 December 31, 2022

Bank of America (a)

March 2023 - December 2029 3.73 % - 5.80 %

October 2026 - December 2029 4.34 % - 7.95 %

$ 2,362 $ 4,315

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August 2027 - September 2029 7.64 % - 9.00 %

First Horizon Bank (c)

Paid off in May 2022 3.85 %

Morgan Chase (d)

February 2023 - January 2030 6.10 % - 6.22 %

JPMorgan Chase (c)

January 2030 7.32 % - 7.44 %

106,337 111,714

Other finance institutions (e)

April 2023 - March 2024 5.99 % - 6.14 %

Other finance institutions (d)

January 2024 - July 2024 5.99 % - 6.17 %

Total debt, principal amount 114,419 122,011

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_______________

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

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

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

(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 loan is pegged to TERM SOFR + 2.5 %.

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

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

During the year ended December 31, 2022, the Company sold the real property for approximately $ 7.2 million to Enson Seafood (a related party), recognized a gain of $ 1.5 million, which is included in other income in the consolidated statements of operations and comprehensive income (loss), and used a portion of the proceeds to pay the $ 4.5 million loan outstanding with First Horizon Bank.

(d) Real estate term loan with a principal balance of $ 111.4 million as of December 31, 2022 and $ 69.8 million as of December 31, 2021 is secured by assets held by the Company and has a maturity date of January 2030.

(c) Real estate term loan with a principal balance of $ 106.3 million as of December 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 $ 0.02 million as of December 31, 2023 and $ 0.3 million as of December 31, 2022 is secured by specific vehicles and equipment as defined in loan agreements.

Equipment term loans mature in February 2023 and December 2023.

(e) Secured by vehicles.

Equipment term loan matured in December 2023 and retired after December 31, 2023 with the final payment of remaining outstanding principal.

(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 December 31, 2023, the Company was in compliance with its covenants.

On March 31, 2022, the Company amended the JPM Credit Agreement extending the Real Estate Term Loan for five years .

On March 31, 2022, the Company amended the JPM Credit Agreement, defined below, extending the Real Estate Term Loan for five years .

The amendment provides for an increase in the Real Estate Term Loan from $ 69.0 million to $ 115.0 million with a 1-month SOFR plus a credit adjustment of 0.1 % plus 1.875 % per annum.

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Credit Facility

On November 4, 2019, the Company entered into a credit agreement with JPMorgan Chase Bank, NA.

(the “JPM Credit Agreement”).

On November 4, 2019, the Company entered into a credit agreement with JPMorgan Chase (the “JPM Credit Agreement”).

The JPM Credit Agreement provided for a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion.

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On December 30, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No.

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

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

The Second Amended Credit Agreement, as amended, provided for (i) a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), (ii) mortgage-secured term loan of $ 75.6 million, (the “Term Loan”), and (iii) amendment in the referenced interest rate from 1-month LIBOR to 1-month Secured Overnight Financing Rate ("SOFR") plus a credit adjustment of 0.1 % (difference between LIBOR and SOFR plus 1.375 % per annum).

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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.

The Second Amended Credit Agreement, as amended, contains certain financial covenants, including, but not limited to, a fixed charge coverage ratio.

On March 31, 2022, the Company amended the JPM Credit Agreement extending the Revolver Facility for five years , with a maturity date of November 4, 2027.

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

During the year ended December 31, 2022, the Company's lenders consented to the delivery of the Company's 2021 audited financial statements on or before January 31, 2023.

The outstanding principal balance on the line of credit as of December 31, 2022 was $ 53.1 million.

The outstanding principal balance on the line of credit as of December 31, 2023 was $ 58.6 million and outstanding letters of credit amounted to $ 3.8 million leaving access to approximately $ 37.6 million in additional funds through our $ 100.0 million line of credit, subject to a borrowing base calculation.

Subsequent to December 31, 2023, on February 6, 2024, the Company amended the JPM Credit Agreement to (i) remove a cap on permitted indebtedness in respect of capital lease obligations, subject to certain enumerated conditions;

(ii) create a reserve on the borrowing base, which will be reduced on a dollar-for-dollar basis once the Company has made expenditures in excess of such amount relating to the development and construction of certain real property, and which amounts shall be excluded from certain financial covenants under the JPM Credit Agreement and;

(iii) remove certain sublease income from various financial covenants.

Note 11 - Earnings (Loss) Per Share

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

There were 44,260 and no potential common shares related to performance-based restricted stock units that were excluded from the calculation of diluted EPS for the year ended December 31, 2022 and 2021 because their effect would have been anti-dilutive.

There were 62,026 and no anti-dilutive potential common shares for the year ended December 31, 2022 and 2021, respectively, related to restricted stock units .

There were 862,182 , 348,610 and 130,668 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 years ended December 31, 2023, 2022 and 2021, respectively, because their effect would have been anti-dilutive.

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

1 unchanged sentence

($ in thousands, except share and per share data) 2023 2022 2021

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

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

$ ( 2,174 ) $ 460 $ 22,145

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( 5,415 ) ( 5,012 ) ( 6,870 )

Total (benefit) provision for income taxes $ ( 231 ) $ 4,503 $ ( 4,725 )

Total income tax expense (benefit) $ 41 $ ( 231 ) $ 4,503

The Company's effective income tax rates for the years ended December 31, 2023, 2022 and 2021 were ( 1.6 )%, ( 5,148.7 )% and 16.6 %, respectively.

1 unchanged sentence

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

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

Due to the changes in the Company's business activities, the Company has updated certain state filing methodologies and related state apportionment which resulted in a change in the state tax rate used in measuring deferred income taxes as of December 31, 2022.

This change had a favorable impact on the Company's effective tax rate for the year ended December 31, 2022.

federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, change in valuation allowance, 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.

Reconciliations of the statutory income tax rate to the effective income tax rate are as follows:

Year Ended December 31,

2023 2022 2021

Federal statutory tax rate (21%) 21.0 % 21.0 % 21.0 %

State statutory tax rate ( 13.9 ) % 3,963.2 % 5.8 %

U.S permanent differences ( 8.7 ) % 207.1 % 1.9 %

Noncontrolling interests 5.5 % 3,164.6 % — %

Officers’ compensation ( 12.5 ) % — % — %

Rate change — % ( 2,566.3 ) % ( 13.7 ) %

Return to provision 21.6 % — % — %

Change in valuation allowance ( 35.9 ) % — % — %

Tax credits 6.7 % — % — %

Uncertain tax positions 14.9 % ( 10,573.0 ) % 0.6 %

Stock compensation ( 6.6 ) % — % — %

Payable adjustments 6.0 % — % — %

Other 0.3 % 634.7 % 1.0 %

Effective tax rate ( 1.6 ) % ( 5,148.7 ) % 16.6 %

Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows:

3 unchanged sentences

Inventories 1,216 1,185

State net operating loss 38 161

Equity compensation 552 467

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Accrued expenses 902 304

Interest expense limitation 415 —

Equity investments 80 —

Net operating loss carryovers 706 38

Total deferred tax assets 12,311 11,407

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Total deferred tax liabilities ( 40,616 ) ( 45,850 )

Valuation allowance ( 723 ) —

Net deferred tax liabilities $ ( 29,028 ) $ ( 34,443 )

Reconciliations of the statutory income tax rate to the effective income tax rate are as follows:

Year Ended December 31,

2022 2021 2020

Federal statutory tax rate (21%) 21.0 % 21.0 % 21.0 %

State statutory tax rate 3,963.2 % 5.8 % 0.7 %

Impact of goodwill impairment loss – permanent difference — % — % ( 20.5 ) %

U.S permanent differences 207.1 % 1.9 % — %

Noncontrolling interest 3,164.6 % — % — %

Rate change ( 2,566.3 ) % ( 13.7 ) % — %

Uncertain tax positions ( 10,573.0 ) % 0.6 % — %

Other 634.7 % 1.0 % 0.2 %

Income tax (benefit) provision ( 5,148.7 ) % 16.6 % 1.4 %

The Company has no federal net operating loss ("NOL") carryovers and $ 0.8 million state NOL carryovers as of December 31, 2022.

State NOL carryovers can be carried forward indefinitely.

Approximately $ 2.0 million of total state NOL carryovers were utilized in the year ended December 31, 2022.

As of December 31, 2023 and 2022, the Company had $ 3.0 million and no federal net operating loss ("NOL") carryovers, respectively, with an indefinite carryforward period.

As of December 31, 2023 and 2022, the Company had state NOL carryovers of $ 2.2 million and $ 0.8 million, which will begin to expire in 2038.

As of December 31, 2023, the Company has established a full valuation allowance against the NOL carryovers related to the Company’s subsidiary, HFFI which was recorded through income tax expense.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

During the year ended December 31, 2023, management concluded that with the exception of certain deferred taxes attributable to the Company’s subsidiary, HFFI, it was more likely than not that the Company would be able to realize the benefit of the deferred tax assets in the future.

We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets.

Management has established a valuation allowance against certain deferred taxes attributable to the Company's subsidiary, HFFI.

Management believes the realization of these deferred tax assets will be limited as the Company exited HFFI operations during the year ended December 31, 2023.

As such, the Company has recorded a valuation allowance of $ 0.7 million on the deferred tax assets of HFFI.

The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist.

Unrecognized Tax Benefits

5 unchanged sentences

Total unrecognized tax benefits on December 31, $ 106 $ 350 $ 752

It is reasonably possible that $ 0.2 million of the total uncertain tax benefits will reverse within the next 12 months.

The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized is $ 0.4 million, $ 0.8 million and $ 0.8 million as of December 31, 2022, 2021 and 2020, respectively.

Due to the statute of limitations expiring, the unrecognized tax liability for the tax year ended December 31, 2018 was reversed, which was recorded in income tax (benefit) provision on the consolidated financial statements, in the amounts of $ 0.4 million as of December 31, 2022.

It is reasonably possible that $ 0.1 million of the total uncertain tax benefits will reverse within the next 12 months and would affect the effective tax rate if recognized.

Due to the statute of limitations expiring, the unrecognized tax liability for the tax year ended December 31, 2019 was reversed, which was recorded in income tax (benefit) expense on the consolidated financial statements, in the amount of $ 0.2 million during the year ended December 31, 2023.

As of December 31, 2023 and 2022, the Company had accrued penalties of $ 17,000 and $ 50,000 , respectively and accrued interest of $ 10,000 and $ 34,000 , respectively.

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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”), the Chief Executive Officer of the Company, and certain of his immediate family (collectively greater than 10% shareholders) have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

Zhang does not have any involvement in negotiations with any of the above-mentioned related parties.

The Company believes that Mr.

Zhou Min Ni (“Mr.

Zhang were the Co-Chief Executive Officers as of December 31, 2020 and 2019.

Ni subsequently resigned from all of his official posts on February 23, 2021.

Zhang became the sole Chief Executive.

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 beneficial owners of more than 10% of the outstanding shares of the Company’s 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 years ended December 31, 2022 and 2021, North Carolina Good Taste Noodle, Inc.

(“NC Noodle”) was disclosed as a related party due to Mr.

Jian Ming Ni's, a former Chief Financial Officer of the Company, continued ownership interest in NC Noodle.

Revolution Industry, UGO and BRGR were also considered Unconsolidated VIEs as discussed further in Note 3 - Variable Interest Entities.

The related party transactions as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 are identified as follows:

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 from the Company.

The related party transactions as of December 31, 2023 and December 31, 2022 and for the years ended December 31, 2023, 2022 and 2021 are identified as follows:

Related Party Sales, Purchases, and Lease Agreements

2 unchanged sentences

(In thousands) Nature 2023 2022 2021

(a) Allstate Trading Company, Inc.

Trade $ — $ — $ 309

(b) Best Food Services, LLC Trade 10,514 8,341 5,830

(a) Eastern Fresh NJ, LLC Trade 1,093 5,509 4,509

(a) Enson Group, Inc.

(formerly as Enson Group, LLC) Trade — 128 143

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) Trade $ 8,581 $ 10,514 8,341

(b) Eagle Food Services, LLC Trade — — 4

(formerly “GA-GW Seafood, Inc.”) Trade 37 — 128

(d) First Choice Seafood, Inc.

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(d) Fujian RongFeng Plastic Co., Ltd Trade — 372 3,108

(e) Hanfeng (Fujian) Information Technology Co., Ltd.

Service — — 997

(a) Hanfeng Information Technology (Jinhua), Inc.

Service — — 122

(a) N&F Logistics, Inc.

Trade — 3 369

(f) North Carolina Good Taste Noodle, Inc.

Trade 7,227 5,520 3,986

(a) Ocean Pacific Seafood Group, Inc.

(e) North Carolina Good Taste Noodle, Inc.

Trade N/A 7,227 5,520

Trade 381 589 452

(g) Revolution Industry, LLC Trade — 190 2,362

(a) UGO USA, Inc.

(f) Revolution Industry, LLC Trade — — 190

Trade — — 212

(h) Union Foods, LLC Trade — — 1,247

Other Trade 332 133 90

Others Trade 205 332 133

Total $ 9,204 $ 20,261 $ 24,044

_______________

Ni owns an equity interest in this entity.

Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020.

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

Zhang's children effective November 1, 2020.

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

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

Ni previously owned an equity interest in this entity.

Ni disposed of his equity interest on September 29, 2020.

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

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

The Company has been informed by Mr.

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

(g) Raymond Ni, one of Mr.

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

(a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr.

Zhang's children.

(b) Tina Ni, one of Mr.

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

Zhou Min Ni owns an equity interest in this entity.

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

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

Jian Ming Ni resigned from the Company .

As a result, 2023 amounts have not been disclosed.

(f) Raymond Ni, one of Mr.

Zhou Min Ni’s family members, owned an equity interest in this entity.

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

2 unchanged sentences

Going forward, the Company has taken the egg roll production business in house and ceased its vendor relationship with RIL.

(h) Tina Ni, one of Mr.

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

Anthony Zhang, one of Mr.

Zhang's family members, owns an equity interest in this entity.

Services rendered by Hanfeng (Fujian) Information Technology Co.

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.

Below is a summary of sales to related parties recorded for the years ended December 31, 2023, 2022 and 2021, respectively:

3 unchanged sentences

(b) Asahi Food, Inc.

(d) Eagle Food Service, LLC 879 2,864 4,605

(e) Eastern Fresh NJ, LLC — 155 1,602

(e) Enson Group, Inc.

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) 928 1,285 792

(d) Eastern Fresh NJ, LLC — — 155

(d) Enson Group, Inc.

(formerly as Enson Group, LLC) — — 101

(e) Enson Philadelphia, Inc.

(e) Enson Seafood GA, Inc.

(d) Enson Seafood GA, Inc.

(formerly as GA-GW Seafood, Inc.) — — 573

(f) First Choice Seafood, Inc.

(f) Fortune One Foods, Inc.

(e) Heng Feng Food Services, Inc.

(e) N&F Logistics, Inc.

Others — 13 116

(e) First Choice Seafood, Inc.

(e) Fortune One Foods, Inc.

(d) Heng Feng Food Services, Inc.

(d) N&F Logistics, Inc.

(f) Union Food LLC 27 — —

Total $ 5,845 $ 6,942 $ 9,055

_______________

Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020.

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

Zhang's children effective November 1, 2020.

(a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr.

Zhang's children.

(b) The Company, through its subsidiary MF, owns an equity interest in this entity.

Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020.

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

Zhang's children effective November 1, 2020.

(d) Tina Ni, one of Mr.

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

Ni owns an equity interest in this entity.

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

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

Zhou Min Ni owns an equity interest in this entity.

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

(f) Tina Ni, one of Mr.

Zhou Min 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 NC Noodle under an operating lease agreement expiring in 2024.

The Company leased a facility to NC Noodle under an operating lease agreement originally expiring in 2024.

The lease agreement was terminated in connection with the sale of the facility on November 3, 2021.

The building and related land was sold to NC Noodle for $ 0.8 million and a gain of $ 0.5 million.

Rental income for the years ended December 31, 2021 and 2020 was $ 42,000 and $ 46,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The building and related land were sold to NC Noodle for $ 0.8 million and a gain of $ 0.5 million.

Rental income for the year ended December 31, 2021 was $ 42,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a facility to UGO USA Inc.

under an operating lease agreement which was mutually terminated by both parties effective April 1, 2021.

Rental income for the years ended December 31, 2021 and 2020 was $ 7,000 and $ 42,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a facility to iUnited Services, LLC ("iUnited"), which has been determined to be a related party due to the equity ownership interest in iUnited of Mr.

Rental income for the year ended December 31, 2021 was $ 7,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a facility to iUnited Services, LLC ("iUnited"), which had 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.

1 unchanged sentence

The building and related land was sold to iUnited for $ 1.5 million and a gain of $ 0.8 million.

Rental income for the years ended December 31, 2021 and 2020 was $ 50,000 and $ 25,000 , respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

Rental income for the year ended December 31, 2021 was $ 50,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a warehouse to Enson Seafood GA Inc.

(formerly GA-GW Seafood, Inc.) under an operating lease agreement expiring on September 21, 2027.

Rental income for the years ended December 31, 2022, 2021 and 2020 was $ 0.2 million, $ 0.5 million and $ 0.5 million, respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

On May 18, 2022, the Company sold the warehouse to Enson Seafood GA Inc., a

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.

(formerly GA-GW Seafood, Inc.) under an operating lease agreement originally expiring on September 21, 2027.

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.

Rental income for the years ended December 31, 2022 and 2021 was $ 0.2 million and $ 0.5 million, respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a production area to Revolution Industry, LLC under a $ 3,000 month-to-month lease agreement.

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

Rental income recorded for the years ended December 31, 2021 and 2020 was $ 6,000 and $ 39,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased warehouses from related parties owned by the majority shareholder of B&R Global prior to the Realty Acquisition on January 17, 2020.

Before the Realty Acquisition, the CEO of the Company, Mr.

Zhang, managed and owned 8.91 % interest in BRGR.

Rent incurred related to the BRGR related parties from January 1, 2020 to January 16, 2020 was $ 188,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

Rental income recorded for the year ended December 31, 2021 was $ 6,000 , which is included in other income in the consolidated statements of operations and comprehensive income (loss).

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

under an operating lease agreement expired on December 31, 2020.

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 $ 0.3 million, $ 0.3 million and $ 0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in Distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

Rent expense was $ 0.3 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2023, 2022 and 2021, respectively, which is included in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

Beginning 2014, the Company leased a warehouse to Asahi Food, Inc.

under a commercial lease agreement which was rescinded March 1, 2020.

A new commercial lease agreement for a period of one year was entered into, expiring February 28, 2021, with a total of four renewal periods with each term being one year .

Rental income was $ 0.1 million, $ 0.1 million and $ 0.1 million for the years ended December 31, 2023, 2022 and 2021, respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

Related Party Balances

Accounts Receivable - Related Parties, Net

Below is a summary of accounts receivable with related parties recorded as of December 31, 2022 and 2021, respectively:

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

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

1 unchanged sentence

(b) Asahi Food, Inc.

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) 84 —

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(e) Fortune One Foods, Inc.

(d) Heng Feng Food Services, Inc.

(f) North Carolina Good Taste Noodle, Inc.

(f) Union Food LLC 2 —

Total $ 308 $ 213

_______________

Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020.

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

Zhang's children effective November 1, 2020.

(a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr.

Zhang's children.

(b) The Company, through its subsidiary MF, owns an equity interest in this entity.

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.

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

The Company has reserved for 80 % of the accounts receivable for Enson Seafood GA, Inc, all other accounts receivable from these related parties are current and considered fully collectible.

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

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

Zhou Min Ni owns an equity interest in this entity.

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

(f) Tina Ni, one of Mr.

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

The Company has reserved for 100 % of the accounts receivable for Union Food LLC as of December 31, 2023.

The Company has reserved for 100 % of the accounts receivable for Enson Seafood GA, Inc.

as of December 31, 2023.

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

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

No additional allowance is deemed necessary as of December 31, 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 December 31, 2022 and 2021, respectively:

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

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

(a) Best Food Services, LLC $ 729 $ 699

(b) Eastern Fresh NJ, LLC — 581

(d) North Carolina Good Taste Noodle, Inc.

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) $ 379 $ 729

(b) North Carolina Good Taste Noodle, Inc.

Total $ 397 $ 1,529

_______________

Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020.

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

Zhang's children effective November 1, 2020.

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.

(a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr.

Zhang's children.

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

Jian Ming Ni resigned from the Company .

As a result, 2023 amounts have not been disclosed.

Promissory Note Payable - Related Party

The Company issued a $ 7.0 million Unsecured Subordinated Promissory Note ("Promissory Note") to BRGR.

The note bears an interest rate of 6 % per annum that matures in January 2030.

The Promissory Note issued to BRGR in January 2020 was part of the payment to acquire 100 % equity membership interest in nine subsidiaries of BRGR (Refer to Note 8 - Acquisitions ).

The Promissory Note has no requirement to make principal repayments until maturity and there is no prepayment penalty should the Company elect to prepay the principal, in part or in full, prior to maturity, subject to meeting certain repayment provisions as defined in the JPM Credit Agreement.

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

BRGR was established to hold real estate that is leased primarily to the Company and is owned partially by Mr.

During the year ended December 31, 2022, the Company paid the remaining $ 4.5 million principal balance of this related party promissory note payable.

As of December 31, 2022 and 2021, the outstanding balance was nil and $ 4.5 million, respectively, and there was no accrued interest payable.

Principal and interest payments were $ 4.6 million and $ 2.9 million for the years ended December 31, 2022 and 2021, respectively.

Notes Receivable - Related Parties and Other

On September 30, 2019, the Company and Mr.

Ni entered into a Loan Purchase and Sale Agreement (the "Loan Sale Agreement").

Pursuant to the Loan Sale Agreement, all outstanding notes receivable, having then a combined outstanding balance of $ 8.4 million ("Total Notes Receivable"), were sold to Mr.

Zhou Min Ni in exchange for 632,746 shares of common stock of the Company, which shares were received and recorded in treasury stock by the Company.

In connection with the sale of the above notes, the Company also required 208,806 additional shares of common stock of the Company owned by Mr.

Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Escrow Period”), which would then be delivered to the Company in part or in full, if the volume weighted average price ("VWAP") of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $ 13.30 .

On October 9, 2020, in accordance with the terms of the Loan Sale Agreement, the Company and Mr.

Ni determined and agreed that the 250-day VWAP was $ 10.59 , and that, therefore, 161,966 of the Escrow Shares were transferred to and recorded as treasury stock by the Company and the remaining 46,840 Escrow Shares were returned to Mr.

Following which, the Total Notes Receivable guaranteed by Mr.

Ni was considered fully settled.

As of December 31, 2018, the Company had a promissory note agreement with Feilong Trading, Inc, ("Feilong").

Pursuant to the promissory note agreement, Feilong was permitted to borrow up to $ 4.0 million.

The note bore interest at the rate of 5 % per annum on the unpaid balance, compounded monthly.

The Company’s former Chairman and Co-CEO, Zhou Min Ni agreed to personally guarantee the repayment of all outstanding balances relating to this note receivable.

On September 30, 2019, the Company and Mr.

Ni entered into a Loan Purchase and Sale Agreement (the "Feilong Loan Sale Agreement").

Pursuant to the Feilong Loan Sale Agreement, the entire outstanding balance of $ 3.6 million owed by Feilong to the Company was sold to Mr.

Ni in exchange for 272,369 shares of common stock of the Company, which shares were received and recorded as treasury stock by the Company.

In connection with the sale of this note receivable, the Company also required 89,882 additional shares of the Company's common stock owned by Mr.

Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Feilong Escrow Period”), which would then be delivered to the Company in part or in full, if the VWAP of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Feilong Escrow Period was less than $ 13.30 .

On October 9, 2020, in accordance with the terms of the Feilong Loan Sale Agreement, the Company and Mr.

Ni determined and agreed that the 250-day VWAP immediately preceding September 30, 2020 was $ 10.59 , and consequently, 69,719 of the

Escrow Shares were transferred to and recorded as treasury stock by the Company, and the remaining 20,163 Escrow Shares were returned to Mr.

Following this event, the balance due from Feilong to the Company was considered fully settled.

The Company retired all treasury stock as of December 31, 2020.

Interest payments paid were $ 0.1 million for the year ended December 31, 2022.

Note 14 - Stock-Based Compensation

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Unvested PSUs at December 31, 2023 665,932 4.23

The Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”).

The weighted-average grant date fair value per share of RSUs granted during the years ended December 31, 2023, 2022, and 2021 was $ 3.86 , $ 5.04 and $ 5.22 , respectively.

The weighted-average grant date fair value per share of PSUs granted during the years ended December 31, 2023, 2022 and 2021 was $ 3.86 , $ 4.76 and $ 4.94 , respectively.

The total fair value of equity based awards that vested during the years ended December 31, 2023, 2022 and 2021 was $ 1.5 million, $ 0.8 million and zero , respectively.

The Company accounts for stock-based compensation in accordance with ASC Topic 718 Compensation - Stock Compensation (“ASC 718”).

ASC 718 addresses all forms of share-based payment awards including shares issued under employee stock purchase plans and stock incentive shares.

1 unchanged sentence

The fair value of the TSR PSUs are determined using a Monte Carlo simulation model.

No TSR PSUs were granted during the year ended December 31, 2022.

The assumptions used to estimate the fair value of the TSR PSUs granted during the years ended December 31, 2021 and valued under the Monte Carlo simulation model were as follows:

No TSR PSUs were granted during the years ended December 31, 2023 and 2022.

The assumptions used to estimate the fair value of the TSR PSUs granted during the year ended December 31, 2021 and valued under the Monte Carlo simulation model were as follows:

2021 PSU Grants

13 unchanged sentences

Stock-based compensation expense is included in distribution, selling and administrative expenses in the Company's consolidated statements of operations and comprehensive income (loss).

The components of stock-based compensation expense for the years ended December 31, 2022 and 2021 were as follows:

The components of stock-based compensation expense for the years ended December 31, 2023 and 2022 and 2021 were as follows:

Year Ended December 31,

4 unchanged sentences

Tax benefit of stock-based compensation expense $ 931 $ 366 $ 132

For the year ended December 31, 2020, there was no stock-based compensation expense.

As of December 31, 2022, there was $ 4.2 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under 2018 Incentive Plan, with a weighted average remaining service period of 2.8 years.

As of December 31, 2023, there was $ 4.2 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 1.82 years.

Of the total unrecognized compensation cost, $ 2.3 million is related to RSUs with time-based vesting provisions and $ 1.9 million is related to PSUs with performance and market-based vesting provisions.

2 unchanged sentences

Employees 401(k) Savings Plan (the “401(k) Plan”).

Under the 401(k) Plan, after six months of service, eligible employees may elect to defer up to 92 % of their compensation before taxes, up to the dollar limit imposed by the Internal Revenue Service for tax purposes.

The Company matches 100 % of the first 3 % of the participant’s deferred compensation plus 50 % of the amount contributed between 3 % and 5 % of the participant’s deferred compensation.

401(k) Plan participants vest in matching contributions received from the Company at the rate of 20 % per year for each full year of service starting from their second year of service, such that the participants become 100 % vested after six years of service.

For the years ended December 31, 2022, 2021 and 2020, the Company expensed $ 432,000 , $ 240,000 and $ 25,000 , respectively, and were recorded in distribution, selling and administrative expenses.

Under the 401(k) Plan, after one month of service, eligible employees may elect to defer up to 100 % of their compensation before taxes, up to the dollar limit imposed by the Internal Revenue Service for tax purposes.

The Company matches 100 % of an eligible employee’s contributions, dollar for dollar, up to 3 % of eligible pay, plus 50 % of each additional dollar greater than 3 % and no more than 5 % of eligible pay.

401(k) Plan participants are immediately 100% vested in the Company’s non-discretionary contributions to the plan.

For the years ended December 31, 2023, 2022 and 2021, the Company recognized expense of $ 831,000 , $ 432,000 and $ 240,000 , respectively, in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

Note 16 - Commitments and Contingencies

4 unchanged sentences

If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material.

The Company continuously assesses the potential liability related to its pending litigation and revises its estimates when additional information becomes available.

Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against the Company that could adversely affect its ability to conduct its business.

The Company continuously assesses the potential liability related to its pending litigation and revise 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 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.

Legal costs associated with loss contingencies are expensed as incurred.

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.

3 unchanged sentences

The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions.

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

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

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

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

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

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

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

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

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

The Special Litigation Committee is in the process of analyzing and evaluating the claims alleged in the Bishop Demand and Delaware Action, and has not determined whether any claims should be asserted or the probability of recovery for such claims.

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

The Company is working to implement those improvements.

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

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

The Special Investigation Committee and the Company have been cooperating with the SEC.

Certain factual findings were made based on evidence adduced by the Special Investigation Committee during its internal investigation.

After the conclusion of its internal investigation, the Special Investigation Committee also made recommendations to management regarding improvements to Company operations and structure, including but not limited to its dealings with related parties.

The Company has implemented numerous improvements and continues to improve its compliance program.

The Company has also instituted structural changes including the appointment of an independent Chairman of the Board to replace the former Co-Chief Executive Officer and Chairman of the Board.

In addition, as of January 31, 2023, three other independent directors serve on the Company’s Board of Directors.

The Company’s senior executive team now includes a General Counsel and Chief Compliance Officer, a Chief Operations Officer who was hired in May 2022, and a new Chief Financial Officer who joined the Company in August 2022.

We also hired a Vice President and Head of Internal Audit in April 2022 who reports directly to the Chief Financial Officer and to the Audit Committee Chair.

In November 2022, we hired a Vice President of Compliance and Associate General Counsel, who reports directly to the General Counsel and Chief Compliance Officer.

The Company also created a Special Litigation Committee which determined to pursue claims against certain former officers and directors.

As a result, pursuant to the previously disclosed settlement agreement (as amended on November 1, 2023, the “Settlement Agreement”) between the Company and certain parties to the verified stockholder derivative complaint filed by James Bishop in the Court of Chancery of the State of Delaware, on October 16, 2023, the Company received $ 1.5 million on behalf of Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company (together, the “Ni Defendants”).

Subsequently, on December 1, 2023, the Company received 1,997,423 shares (valued at $ 7.75 million) of the Company’s common stock, based on the closing price of $ 3.88 on October 13, 2023, plus a cash payment of approximately $ 0.1 million of accrued interest through the date of payment, in satisfaction of the Ni Defendant’s payment obligations totaling $ 9.25 million under the Settlement Agreement.

The receipt of the settlement proceeds were recorded in distribution, selling, and administrative expense in the consolidated statement of operations (as a recovery of previously recorded expenses related to the litigation) and cash and treasury stock in the consolidated balance sheet.

Pursuant to the terms of the Settlement Agreement, Mr.

Wong and Jonathan Ni, the former Chief Financial Officer of the Company, agreed to give up any rights to indemnification or the advancement of fees in connection with the SEC investigation and any actions the SEC might take against them relating to the SEC investigation.

On October 13, 2023, the Company received a “Wells Notice” from the staff of the SEC (the “Wells Notice”) relating to the previously disclosed formal, non-public SEC investigation of allegations that 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.

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

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

Following that submission, the staff of the SEC determined that it would no longer be recommending that the SEC file an enforcement action against the Company at this time pending a potential agreed-upon resolution between the Company and the SEC.

The Company is in negotiations with the SEC over a potential resolution, which could include fines and penalties, but the terms of that settlement are not set.

The Company has made no formal offer of settlement to the SEC as of this filing, and therefore, a reasonable estimate of the contingency cannot be made.

AnHeart Lease Guarantee

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.

At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”).

The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the Lease Agreement.

The Company agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due.

Under the terms of the Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $ 2.5 million.

On January 17, 2022, the Company received notice that AnHeart had defaulted on its obligations as tenant under the lease for 275 Fifth Avenue.

On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng.

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

AnHeart subsequently defaulted on these obligations.

On October 25, 2023, the Company commenced a new legal action by filing a complaint in New York County Supreme Court to pursue legal remedies against AnHeart and Minsheng.

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

In accordance with ASC Topic 460, Guarantees , the Company has determined that its maximum exposure resulting from the 275 Fifth Avenue lease guarantee includes future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases with a remaining term of approximately 10 years.

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

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

During the year ended December 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 %.

As of December 31, 2023, the Company had a lease guarantee liability of $ 5.5 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 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 changes in the lease guarantee liability are presented below:

(In thousands) Amount

Balance at December 31, 2021 $ —

Lease guarantee liability recorded 5,942

Lease guarantee liability activity ( 182 )

Balance at December 31, 2022 5,760

Lease guarantee liability activity ( 288 )

Balance at December 31, 2023 $ 5,472

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

(In thousands) Amount

Year Ending December 31,

Thereafter 3,822

imputed interest ( 1,451 )

Total minimum lease payments $ 5,472

Note 17 - Subsequent Events

The Company entered into an amortizing interest rate swap agreement, with an initial notional amount of $ 120.0 million, intended to hedge against future interest rate increases of certain long-term debt obligations of the Company.

The interest rate swap became effective March 1, 2023 and continues through March 2028.

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

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data