HF Foods Group Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HF Foods Group Inc. and Subsidiaries Consolidated Financial Statements Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2023 (BDO USA, P.C.; Troy, Michigan; PCAOB ID # 243 ) 39 Consolidated Financial Statements Consolidated Balance Sheets 41 Consolidated Statements of Operations and Comprehensive Income (Loss) 42 Consolidated Statements of Cash Flows 43 Consolidated Statements of Changes in Shareholders’ Equity 45 Notes to Consolidated Financial Statements 46 38 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors HF Foods Group Inc. Las Vegas, Nevada Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of HF Foods Group Inc. (the “Company”) as of December 31, 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit 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 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 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. 39 We identified a critical audit matter over the completeness and accuracy of the consolidated financial statements. 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: • 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. Troy, Michigan March 26, 2024 40 HF Foods Group Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share data) December 31, 2023 December 31, 2022 ASSETS CURRENT ASSETS: Cash $ 15,232 $ 24,289 Accounts receivable, net of allowances of $ 2,119 and $ 1,442 47,524 44,186 Accounts receivable - related parties 308 213 Inventories 105,618 120,291 Prepaid expenses and other current assets 10,145 8,937 TOTAL CURRENT ASSETS 178,827 197,916 Property and equipment, net 133,136 140,330 Operating lease right-of-use assets 12,714 14,164 Long-term investments 2,388 2,679 Customer relationships, net 147,181 157,748 Trademarks, trade names and other intangibles, net 30,625 36,343 Goodwill 85,118 85,118 Other long-term assets 6,531 3,231 TOTAL ASSETS $ 596,520 $ 637,529 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Checks issued not presented for payment $ 4,494 $ 21,946 Line of credit 58,564 53,056 Accounts payable 51,617 55,515 Accounts payable - related parties 397 1,529 Current portion of long-term debt, net 5,450 6,266 Current portion of obligations under finance leases 1,749 2,254 Current portion of obligations under operating leases 3,706 3,676 Accrued expenses and other liabilities 17,287 19,648 TOTAL CURRENT LIABILITIES 143,264 163,890 Long-term debt, net of current portion 108,711 115,443 Obligations under finance leases, non-current 11,229 11,441 Obligations under operating leases, non-current 9,414 10,591 Deferred tax liabilities 29,028 34,443 Other long-term liabilities 6,891 5,472 TOTAL LIABILITIES 308,537 341,280 COMMITMENTS AND CONTINGENCIES (Note 16) SHAREHOLDERS’ EQUITY: 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 5 5 Treasury stock, at cost; 1,997,423 shares as of December 31, 2023, and zero shares as of December 31, 2022 ( 7,750 ) — Additional paid-in capital 603,094 598,322 Accumulated deficit ( 308,688 ) ( 306,514 ) TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 286,661 291,813 Noncontrolling interests 1,322 4,436 TOTAL SHAREHOLDERS’ EQUITY 287,983 296,249 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 596,520 $ 637,529 The accompanying notes are an integral part of these consolidated financial statements. 41 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except share and per share data) Year Ended December 31, 2023 2022 2021 Net revenue - third parties $ 1,142,648 $ 1,163,525 $ 787,829 Net revenue - related parties 5,845 6,942 9,055 TOTAL NET REVENUE 1,148,493 1,170,467 796,884 Cost of revenue - third parties 938,815 958,775 636,253 Cost of revenue - related parties 5,647 6,180 9,119 TOTAL COST OF REVENUE 944,462 964,955 645,372 GROSS PROFIT 204,031 205,512 151,512 Distribution, selling and administrative expenses 195,062 194,953 122,030 INCOME FROM OPERATIONS 8,969 10,559 29,482 Interest expense 11,478 7,457 4,091 Other income ( 1,091 ) ( 1,829 ) ( 508 ) Change in fair value of interest rate swap contracts 1,580 ( 817 ) ( 1,425 ) 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 Less: net (loss) income attributable to noncontrolling interests ( 488 ) ( 225 ) 676 NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC. $ ( 2,174 ) $ 460 $ 22,145 (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 WEIGHTED AVERAGE SHARES - DILUTED 53,878,237 53,863,448 52,091,822 The accompanying notes are an integral part of these consolidated financial statements. 42 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 Cash flows from 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 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 ) Provision for credit losses 701 82 ( 433 ) Deferred tax benefit ( 5,415 ) ( 5,012 ) ( 6,870 ) Change in fair value of interest rate swap contracts 1,580 817 ( 1,425 ) Stock-based compensation 3,352 1,257 635 Non-cash lease expense 4,033 4,442 861 Lease guarantee expense ( 377 ) 5,744 — Other non-cash expense (income) 493 ( 266 ) ( 85 ) Changes in operating assets and liabilities (excluding effects of acquisitions): Accounts receivable ( 4,039 ) ( 8,577 ) ( 10,999 ) Accounts receivable - related parties ( 95 ) 36 1,020 Inventories 14,673 ( 3,755 ) ( 19,426 ) Advances to suppliers - related parties — — 197 Prepaid expenses and other current assets ( 1,069 ) ( 4,008 ) ( 944 ) Other long-term assets ( 3,418 ) ( 1,199 ) ( 1,337 ) Accounts payable ( 3,898 ) 15,207 12,978 Accounts payable - related parties ( 1,132 ) ( 412 ) ( 365 ) Operating lease liabilities ( 3,730 ) ( 4,408 ) ( 724 ) Accrued expenses and other liabilities ( 2,199 ) 7,070 4,115 Net cash provided by operating activities 15,804 31,284 17,509 Cash flows from investing activities: Purchase of property and equipment ( 3,514 ) ( 6,287 ) ( 2,205 ) Proceeds from sale of property and equipment 2,000 7,794 3,246 Payment made for acquisition of Sealand — ( 34,848 ) — Payment made for acquisition of Great Wall Group — ( 17,445 ) ( 37,841 ) Payment made for acquisition of noncontrolling interests — — ( 5,000 ) Settlement of interest rate swap contracts — — 718 Net cash used in investing activities ( 1,514 ) ( 50,786 ) ( 41,082 ) 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 Proceeds from line of credit 1,237,101 1,200,996 857,304 Repayment of line of credit ( 1,231,647 ) ( 1,203,112 ) ( 820,422 ) Proceeds from long-term debt — 45,956 — Repayment of long-term debt ( 7,591 ) ( 11,336 ) ( 6,599 ) Payment of debt financing costs — ( 544 ) — Repayment of obligations under finance leases ( 2,480 ) ( 2,626 ) ( 2,135 ) Repayment of promissory note payable - related party — ( 4,500 ) ( 2,500 ) Proceeds from noncontrolling interests shareholders — 240 480 Cash distribution to shareholders ( 884 ) ( 187 ) ( 338 ) 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. 43 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: Cash paid for interest $ 10,407 $ 6,230 $ 3,177 Cash paid for income taxes 4,040 8,655 9,527 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 2,583 $ 6,815 $ 10,983 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 — Common stock issued for consideration of acquisition of Great Wall Group — — 14,541 Deferred consideration from Great Wall Acquisition — — 17,330 The accompanying notes are an integral part of these consolidated financial statements. 44 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Attributable to HF Foods Group Inc. Noncontrolling Interests Total Shareholders’ Equity Shares Amount Shares Amount Balance at December 31, 2020 51,913,411 $ 5 — $ — $ 587,579 $ ( 328,429 ) $ 259,155 $ 4,367 $ 263,522 Net income — — — — 22,145 22,145 676 22,821 Acquisition of noncontrolling interest — — — — ( 3,856 ) — ( 3,856 ) ( 1,144 ) ( 5,000 ) Acquisition of Great Wall Group by issuance of common stock 1,792,981 — — — 12,869 — 12,869 — 12,869 Capital contribution by shareholders — — — — — — — 480 480 Distribution to shareholders — — — — — — — ( 338 ) ( 338 ) Stock-based compensation — — — — 635 — 635 — 635 Balance at December 31, 2021 53,706,392 $ 5 — $ — $ 597,227 $ ( 306,284 ) $ 290,948 $ 4,041 $ 294,989 Cumulative effect of adoption of CECL (ASU 2016-13) — — — — — ( 690 ) ( 690 ) — ( 690 ) Balance at January 1, 2022 53,706,392 $ 5 — — $ 597,227 $ ( 306,974 ) $ 290,258 $ 4,041 $ 294,299 Net income (loss) — — — — — 460 460 ( 225 ) 235 Capital contribution by shareholders — — — — — — — 806 806 Issuance of common stock pursuant to equity compensation plan 139,239 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 31,854 ) — — — ( 162 ) — ( 162 ) — ( 162 ) Distribution to shareholders — — — — — — — ( 186 ) ( 186 ) Stock-based compensation — — — — 1,257 — 1,257 — 1,257 Balance at December 31, 2022 53,813,777 $ 5 — $ — $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249 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. 45 HF Foods Group Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Organization and Description of Business Organization and General HF Foods Group Inc. 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 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. On December 30, 2021, the Company completed the acquisition of Great Wall Seafood Supply, Inc., Great Wall Restaurant Supplier, Inc., and First Mart Inc. (collectively the “Great Wall Group”), and substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses (the “Great Wall Acquisition”). The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States. On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand Food, Inc. ("Sealand") including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. See Note 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 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 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. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive the economic benefits of the VIE that could be potentially significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. 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. 46 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: ◦ Anfu, Inc. ◦ Anshun, Inc. ◦ Inchoi, Inc. ◦ Malways, Inc. ◦ Rousafe ◦ S&P ◦ SNP ◦ Suntone • 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. (“AnHeart”) Consolidated VIEs FUSO 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. 47 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 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 GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s consolidated balance sheets. In addition, the amounts attributable to the net income (loss) of those noncontrolling interests are reported separately in the consolidated statements of operations and comprehensive income (loss). As of December 31, 2023 and December 31, 2022, noncontrolling interest equity consisted of the following: ($ in thousands) Ownership of noncontrolling interest at December 31, 2023 December 31, 2023 December 31, 2022 HF Foods Industrial, LLC ("HFFI") (a) 45.00 % $ ( 759 ) $ 204 Min Food, Inc. 39.75 % 1,715 1,704 Monterey Food Service, LLC 35.00 % 366 452 Ocean West Food Services, LLC (b) — % — 1,986 Syncglobal Inc. (c) — % — 90 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. (c) During the year ended December 31, 2023 the Company ceased operations of Syncglobal Inc. and dissolved the entity. Uses of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, 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. 48 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, 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. Accounts Receivable, net Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for expected credit losses in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for expected credit losses based on a combination of factors. The Company maintains an allowance for expected credit losses based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of December 31, 2023 and December 31, 2022, allowances for expected credit losses were $ 2.1 million and $ 1.4 million, respectively. Inventories The Company’s inventories, consisting mainly of food and other foodservice-related products, are considered finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash consideration received from vendors, primarily in the form of rebates. The Company 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. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment: Estimated Useful Lives Automobiles 3 to 7 years Buildings and improvements 7 to 39 years Furniture and fixtures 4 to 10 years Machinery and equipment 3 to 10 years 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. 49 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, Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive income (loss). Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. 50 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, 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, 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. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions including, projections of future cash flows, which include forecasted revenue, discount rate, and other factors which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. The Company also considers the use of market approaches, such as the comparable public company analysis and comparable acquisitions analysis, to estimate the fair value of the reporting unit. The Company bases these fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain. A change in underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amount 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 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. The Company’s market capitalization is calculated using the relevant shares outstanding and stock price of the Company’s publicly traded shares. In the event of a goodwill impairment, the Company would be required to record an impairment, which would impact earnings and reduce the carrying amounts of goodwill on the consolidated balance sheet. Intangible Assets, net Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows: Estimated Useful Lives Non-competition agreement 3 years Tradenames 10 years Customer relationships 10 to 20 years Long-term Investments The Company’s investments in unconsolidated entities consist of an equity investment and an investment without readily determinable fair value. The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities , using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in earnings equal to the difference between the carrying value and fair value. 51 Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures . Under the equity method, the Company initially records its investment at cost, which is included in the equity method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company did no t record any impairment loss on its long-term investments during the years ended December 31, 2023, 2022 and 2021. 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 or asset group 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 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 The Company maintains workers compensation and general liability insurance with licensed insurance carriers. Beginning in April 2020, the Company is self-insured for auto claims less than $ 100,000 per claim. Insurance and claims expense represent premiums the Company paid and the accruals made for claims within the Company’s self-insured retention amounts. A liability is recognized for the estimated cost of all self-insured claims including an estimate of incurred but not reported claims based on historical experience and for claims expected to exceed the Company's policy limits. The Company establishes reserves for anticipated losses and expenses related to auto liability claims. The reserves consist of specific reserves for all known claims and an estimate for claims incurred but not reported, and losses arising from known claims ultimately settling in excess of insurance coverage using loss development factors based upon industry data and past experience. In determining the liability, the Company specifically reviews all known claims and records a liability based upon the Company’s best estimate of the amount to be paid. In making the estimate, the Company considers the amount and validity of the claim, as well as the Company’s past experience with similar claims. In establishing the reserve for claims incurred but not reported, the Company considers its past claims history, including the length of time it takes for claims to be reported to the Company. These reserves are periodically reviewed and adjusted to reflect the Company’s experience and updated information relating to specific claims. As of December 31, 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. 52 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. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The Company’s revenue streams are recognized at a specific point in time. Cost of Revenue Cost of revenue primarily includes inventory costs (net of vendor consideration, primarily in the form of rebates), inbound freight, customs clearance fees and other miscellaneous expenses. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses consist primarily of salaries and benefits for employees and contract laborers, trucking and fuel expenses for deliveries, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses. Shipping and Handling Costs Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are included in distribution, selling and administrative expenses. Shipping and handling costs were $ 76.0 million, $ 83.7 million and $ 58.3 million for the years ended December 31, 2023, 2022 and 2021, respectively, and includes estimates for labor associated with shipping and handling activities. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities 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. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. 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. The Company adopted ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , on January 1, 2021. ASU 2019-12 is intended to simplify various aspects related to managerial accounting for income taxes. The adoption had no material impact on the Company's consolidated financial statements. 53 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. Leases 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. Operating leases are included in operating lease ROU assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under finance leases, and obligations under finance leases, non-current on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company's variable lease payments primarily consist of real estate, maintenance and usage charges. The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. The Company has also elected to combine lease and non-lease components when measuring lease liabilities for vehicle and equipment leases. Derivative Financial Instruments In accordance with the guidance in ASC Topic 815, 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. Pursuant to GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the consolidated statements of operations and comprehensive income (loss). Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty. Concentrations and Credit Risk Credit risk Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. The Company maintains cash balances with banks which at times exceed federally insured limits. The Company has not experienced any losses in such accounts. 54 Segment Reporting 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. The management approach considers the internal organization and reporting used by the Company’s operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. In 2021, former co-CEO Zhou Min Ni resigned, and Xiao Mou Zhang assumed the role of sole CEO and sole Chief Operating Decision Maker ("CODM"). The CODM, reviews operating 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 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.” 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 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 The following table presents the Company's net revenue disaggregated by principal product categories: Year Ended December 31, ($ in thousands) 2023 2022 2021 Seafood $ 361,219 31 % $ 354,220 30 % $ 123,808 16 % Asian Specialty 305,466 27 % 299,215 26 % 236,489 29 % Meat and Poultry 215,789 19 % 238,276 20 % 214,504 27 % Fresh Produce 123,202 11 % 126,560 11 % 103,168 13 % Packaging and Other 71,245 6 % 84,489 7 % 69,187 9 % Commodity 71,572 6 % 67,707 6 % 49,728 6 % Total $ 1,148,493 100 % $ 1,170,467 100 % $ 796,884 100 % 55 Note 4 - Balance Sheet Components Accounts receivable, net consisted of the following: (In thousands) December 31, 2023 December 31, 2022 Accounts receivable $ 49,643 $ 45,628 Less: allowance for expected credit losses ( 2,119 ) ( 1,442 ) Accounts receivable, net $ 47,524 $ 44,186 Movement of allowance for expected credit losses was as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Beginning balance $ 1,442 $ 840 $ 909 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: (In thousands) December 31, 2023 December 31, 2022 Automobiles $ 37,883 $ 34,891 Buildings 63,145 63,045 Building improvements 22,120 20,637 Furniture and fixtures 474 444 Land 49,929 49,929 Machinery and equipment 12,090 17,210 Subtotal 185,641 186,156 Less: accumulated depreciation ( 52,505 ) ( 45,826 ) Property and equipment, net $ 133,136 $ 140,330 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. 56 Long-term investments consisted of the following: (In thousands) Ownership as of December 31, 2023 December 31, 2023 December 31, 2022 Asahi Food, Inc. ("Asahi") 49 % $ 588 $ 879 Pt. Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800 1,800 Total long-term investments $ 2,388 $ 2,679 The investment in Tamron is accounted for using the measurement alternative under Accounting Standards Codification (“ASC”) Topic 321 Investments—Equity Securities , which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. The Company determined there was no impairment for the years ended December 31, 2023, 2022 and 2021 for these investments. Accrued expenses and other liabilities consisted of the following: (In thousands) December 31, 2023 December 31, 2022 Accrued compensation $ 7,941 $ 6,798 Accrued professional fees 1,353 3,866 Accrued interest and fees 1,276 1,082 Self-insurance liability 1,723 1,286 Accrued other 4,994 6,616 Total accrued expenses and other liabilities $ 17,287 $ 19,648 Note 5 - Fair Value Measurements The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the dates indicated: December 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (In thousands) Assets: Interest rate swaps $ — $ 412 $ — $ 412 $ — $ 530 $ — $ 530 Liabilities: 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. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. 57 • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, 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: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Carrying Value December 31, 2023 Fixed rate debt: Bank of America $ — $ — $ 151 $ 169 Other finance institutions — — 43 45 Variable rate debt: 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 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. 58 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 The Company leases office space, warehouses and vacant land under non-cancelable operating leases, with terms typically ranging from one to thirty years , as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment with various expiration dates through 2051. The Company determines whether an arrangement is or includes an embedded lease at contract inception. Operating and finance lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Operating lease expense is recognized on a straight-line basis over the lease term. 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 The components of operating lease expense were as follows: Year Ended December 31, ($ in thousands) 2023 2022 2021 Operating lease cost $ 4,342 $ 4,045 $ 967 Short-term lease cost $ 1,507 $ 1,037 $ 1,699 Weighted average remaining lease term (months) 42 47 56 Weighted average discount rate 4.5 % 3.8 % 3.9 % Year Ended December 31, (In thousands) 2023 2022 2021 Operating cash flows from operating leases $ 4,234 $ 4,005 $ 822 Finance Leases The components of lease expense were as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Finance leases cost: Amortization of ROU assets $ 2,639 $ 2,808 $ 2,416 Interest on lease liabilities 755 787 820 Total finance leases cost $ 3,394 $ 3,595 $ 3,236 59 Supplemental cash flow information related to finance leases was as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Operating cash flows from finance leases $ 657 $ 670 $ 701 Supplemental balance sheet information related to finance leases was as follows: ($ in thousands) December 31, 2023 December 31, 2022 Property and equipment, at cost $ 22,203 $ 20,339 Accumulated depreciation ( 10,288 ) ( 7,615 ) Property and equipment, net $ 11,915 $ 12,724 Weighted average remaining lease term (months) 219 215 Weighted average discount rate 5.7 % 5.7 % Maturities of lease liabilities are as follows: Operating Leases (In thousands) Related Party (1) Third Party Total Finance Leases Year Ended December 31, 2024 $ 321 $ 4,253 $ 4,574 $ 2,396 2025 331 4,216 4,547 1,747 2026 — 4,164 4,164 1,365 2027 — 1,696 1,696 1,100 2028 — 933 933 929 Thereafter — — — 16,407 Total lease payments 652 15,262 15,914 23,944 Less: Imputed interest ( 23 ) ( 2,771 ) ( 2,794 ) ( 10,966 ) Total $ 629 $ 12,491 $ 13,120 $ 12,978 _______________ (1) See Note 13 - Related Party Transactions 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 Acquisition of Sealand On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand, including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. The price for the purchased assets was $ 20.0 million paid in cash at closing. In addition to the closing cash payment, the Company separately acquired all of the sellers' saleable product inventory, for approximately $ 14.4 million and additional fixed assets for approximately $ 0.5 million. 60 The Company accounted for this transaction under ASC 805 Business Combinations, by applying the acquisition method of accounting and established a new basis of accounting on the date of acquisition. The assets acquired by the Company were measured at their estimated fair values as of the date of acquisition. Goodwill is calculated as the excess of the purchase price over the net assets recognized and represent synergies and benefits expected as a result from combining operations with an emerging national presence. The transaction costs for the acquisition 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 The total consideration paid to acquire the assets and liabilities of Sealand, as set forth below: (In thousands) Amount Inventory $ 13,846 Property plant, and equipment 1,424 Right-of-use assets 127 Intangible assets 14,717 Total assets acquired 30,114 Obligations under operating leases 127 Total liabilities assumed 127 Net assets 29,987 Goodwill 4,861 Total consideration $ 34,848 The Company recorded acquired intangible assets of $ 14.7 million, which were measured at fair value using Level 3 inputs. These intangible assets include tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-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. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1 % and a discount rate. The fair value of non-competition agreements was determined by applying the income approach and Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 17.5 % to 18.0 %. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-competition agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. Acquisition of Great Wall Group On December 30, 2021, the Company executed an Asset Purchase Agreement with Great Wall Group to purchase substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses. The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States. The final aggregate price for the purchased assets was $ 43.7 million with $ 30.8 million paid in cash at closing and the issuance of 1,792,981 shares of common stock of the Company (based on a 60-day VWAP of $ 7.36 ), with a fair value of $ 12.9 million based on the share price of $ 8.11 per share at closing and an 11.5 % discount due to a lock-up restriction. In addition to the closing cash payment, the Company separately acquired all of the sellers’ saleable product inventory, for approximately $ 24.3 million of which approximately $ 6.8 million was paid during the year ended December 31, 2021 and $ 17.4 million was recorded in accounts payable on the consolidated balance sheets as of December 31, 2021. The Company also acquired additional vehicles for approximately $ 0.2 million. As such, the total acquisition price for all operating assets and inventory was approximately $ 68.2 million. 61 The Company accounted for this transaction under ASC 805, Business Combinations, by applying the acquisition method of accounting and established a new basis of accounting on the date of acquisition. The assets acquired by the Company were measured at their estimated fair values as of the date of acquisition. Goodwill is calculated as the excess of the purchase price over the net assets recognized and represent synergies and benefits expected as a result from combining operations with an emerging national presence. For the year ended December 31, 2021, transaction costs for the acquisition totaled $ 0.9 million and were reflected in distribution, selling and administrative expenses in the consolidated statement of operations and comprehensive income (loss). The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using a combination of quoted market prices, discounted cash flow, and other estimates made by management. Purchase Price Allocation The following table presents the allocation of the total consideration paid to acquire the assets and liabilities of the Great Wall Group: (In thousands) Amount Inventory $ 24,728 Property plant, and equipment 1,537 Intangible assets 30,145 Total assets acquired 56,410 Goodwill 11,745 Total consideration $ 68,155 The Company recorded acquired intangible assets of $ 30.1 million, which included tradenames and trademarks of $ 10.5 million, customer relationships of $ 17.2 million and non-competition agreements of $ 2.4 million. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs including a discount rate. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1 % and a discount rate. The fair value of non-competition agreements was determined by applying the income approach using Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 11.5 % to 14.0 %. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. See Note 8 - Goodwill and Acquired Intangible Assets for additional information on acquired intangibles in the Great Wall Acquisition. Since the Great Wall Acquisition occurred on December 30, 2021, the amounts of revenue and earnings of the Great Wall Group included in the Company’s consolidated statement of operations and comprehensive income (loss) from the acquisition date to December 31, 2021 were immaterial. 62 Unaudited Supplemental Pro Forma Financial Information 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. (In thousands, except share and per share data) Year Ended December 31, 2022 2021 Pro forma net revenue $ 1,202,296 $ 1,072,653 Pro forma net income attributable to HF Foods $ 35 $ 33,724 Pro forma earnings per common share — basic $ — $ 0.65 Pro forma earnings per common share — diluted $ — $ 0.65 Pro forma weighted average shares — basic 53,757,199 53,706,392 Pro forma weighted average shares — diluted 53,757,199 53,809,020 Note 8 - Goodwill and Acquired Intangible Assets Goodwill The changes in the carrying amount of goodwill are presented below: (In thousands) Amount Balance at December 31, 2021 $ 80,257 Acquisition of Sealand Food, Inc. 4,861 Balance at December 31, 2022 85,118 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. 63 Acquired Intangible Assets 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 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 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Non-competition agreement $ 3,892 $ ( 2,429 ) $ 1,463 $ 3,892 $ ( 1,132 ) $ 2,760 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 Total $ 233,365 $ ( 55,559 ) $ 177,806 $ 233,414 $ ( 39,323 ) $ 194,091 The Company evaluated possible triggering events that would indicate long-lived asset impairment assessment. The Company impaired its acquired developed technology and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 . There were no triggering events identified for the remaining 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: (In thousands) Amount Year ending December 31, 2024 $ 16,285 2025 15,152 2026 14,987 2027 14,987 2028 14,987 Thereafter 101,408 Total $ 177,806 64 Note 9 - Derivative Financial Instruments Derivative Instruments The Company utilizes interest rate swaps ("IRS") for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 10 - Debt ). The Company does not use any other derivative financial instruments for trading or speculative purposes. 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 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, 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. The inputs used to determine the fair value of the IRS are classified as Level 2 on the fair value hierarchy. Note 10 - Debt 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, 2023 December 31, 2023 December 31, 2022 Bank of America (a) October 2026 - December 2029 4.34 % - 7.95 % $ 2,362 $ 4,315 East West Bank (b) August 2027 - September 2029 7.64 % - 9.00 % 5,675 5,822 JPMorgan Chase (c) January 2030 7.32 % - 7.44 % 106,337 111,714 Other finance institutions (d) January 2024 - July 2024 5.99 % - 6.17 % 45 160 Total debt, principal amount 114,419 122,011 Less: debt issuance costs ( 258 ) ( 302 ) Total debt, carrying value 114,161 121,709 Less: current portion ( 5,450 ) ( 6,266 ) Long-term debt $ 108,711 $ 115,443 _______________ 65 (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. (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 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, 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. The future maturities of long-term debt as of December 31, 2023 are as follows: (In thousands) Amount Year ending December 31, 2024 $ 5,450 2025 5,378 2026 5,385 2027 7,194 2028 5,229 Thereafter 85,525 Total $ 114,161 Credit Facility 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. On January 17, 2020, the Company and certain of the wholly-owned subsidiaries and affiliates of the Company as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement (“Second Amended Credit Agreement”). On December 30, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No. 3 to the Second Amended Credit Agreement with JPMorgan 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). The existing revolving credit facility balance under the Second Amended Credit Agreement, was rolled over to the Revolving Facility on December 30, 2021. On the same day, the Company utilized an additional $ 33.3 million drawdown from the Revolving Facility to fund the Great Wall Acquisition. The Second Amended Credit Agreement, as amended, contains certain financial covenants, including, but not limited to, a fixed charge coverage ratio. On March 31, 2022, the Company amended the JPM Credit Agreement extending the Revolver Facility for five years , with a maturity date of November 4, 2027. The amendment provides for a $ 100.0 million asset-secured revolving credit facility with a one-month SOFR plus a credit adjustment of 0.1 % plus 1.375 % per annum. As of December 31, 2023, the Company was in compliance with its covenants. 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. 66 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 The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were 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: Year Ended December 31, ($ in thousands, except share and per share data) 2023 2022 2021 Numerator: Net (loss) income attributable to HF Foods Group Inc. $ ( 2,174 ) $ 460 $ 22,145 Denominator: Weighted-average common shares outstanding 53,878,237 53,757,162 51,918,323 Effect of dilutive securities — 106,286 173,499 Weighted-average dilutive shares outstanding 53,878,237 53,863,448 52,091,822 Earnings (Loss) per common share: Basic $ ( 0.04 ) $ 0.01 $ 0.43 Diluted $ ( 0.04 ) $ 0.01 $ 0.43 Note 12 - Income Taxes The provision (benefit) for income taxes of the Company for the years ended December 31, 2023, 2022 and 2021 consists of the following: Year Ended December 31, (In thousands) 2023 2022 2021 Current: Federal $ 4,237 $ 3,620 $ 9,044 State 1,219 1,161 2,329 Current income taxes 5,456 4,781 11,373 Deferred income benefit: Federal ( 4,550 ) ( 4,321 ) ( 2,823 ) State ( 865 ) ( 691 ) ( 4,047 ) Deferred income benefit: ( 5,415 ) ( 5,012 ) ( 6,870 ) Total income tax expense (benefit) $ 41 $ ( 231 ) $ 4,503 67 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. The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, 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 % 68 Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows: (In thousands) December 31, 2023 December 31, 2022 Deferred tax assets: Allowance for expected credit losses $ 523 $ 301 Inventories 1,216 1,185 Equity compensation 552 467 Compensation related accruals 984 1,031 Guarantee liability 1,326 1,528 Fair value change in interest rate swap contracts 233 — Leases 5,325 6,553 Accrued expenses 902 304 Interest expense limitation 415 — Equity investments 80 — Net operating loss carryovers 706 38 Other 49 — Total deferred tax assets 12,311 11,407 Deferred tax liabilities: Property and equipment ( 4,588 ) ( 5,845 ) Intangible assets ( 32,959 ) ( 35,740 ) Right of use assets ( 3,069 ) ( 3,466 ) Equity investments — ( 649 ) Fair value change in interest rate swap contracts — ( 150 ) Total deferred tax liabilities ( 40,616 ) ( 45,850 ) Less: Valuation allowance ( 723 ) — Net deferred tax liabilities $ ( 29,028 ) $ ( 34,443 ) 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. 69 Unrecognized Tax Benefits Year Ended December 31, (In thousands) 2023 2022 2021 Total unrecognized tax benefits on January 1, $ 350 $ 752 $ 752 Decrease related to positions taken on items from prior years ( 244 ) ( 402 ) — Increase related to positions taken in the current year — — — Total unrecognized tax benefits on December 31, $ 106 $ 350 $ 752 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. During the year ended December 31, 2023, the Company reversed accrued penalties and accrued interest of $ 28,000 and $ 39,000 , respectively. The Company recognized the reversal of interest accrued related to unrecognized tax benefits and penalties as income tax benefit. The Company is subject to taxation in the United States and various states. As of December 31, 2023, tax years for 2020 through 2022 are subject to examination by the tax authorities. Note 13 - Related Party Transactions The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company's officers and/or shareholders who owned no less than 10 % shareholdings of the Company. Mr. 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. Mr. 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. 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. 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. 70 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 Purchases Below is a summary of purchases of goods and services from related parties recorded for the years ended December 31, 2023, 2022 and 2021, respectively: Year Ended December 31, (In thousands) Nature 2023 2022 2021 (a) Conexus Food Solutions (formerly as Best Food Services, LLC) Trade $ 8,581 $ 10,514 8,341 (b) Eagle Food Services, LLC Trade — — 4 (c) Eastern Fresh NJ, LLC Trade — 1,093 5,509 (c) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) Trade 37 — 128 (d) First Choice Seafood, Inc. Trade — 134 322 (d) Fujian RongFeng Plastic Co., Ltd Trade — 372 3,108 (c) Hanfeng Information Technology (Jinhua), Inc. Service — — 122 (c) N&F Logistics, Inc. Trade — — 3 (e) North Carolina Good Taste Noodle, Inc. Trade N/A 7,227 5,520 (c) Ocean Pacific Seafood Group, Inc. Trade 381 589 452 (f) Revolution Industry, LLC Trade — — 190 (c) UGO USA, Inc. Trade — — 212 Others Trade 205 332 133 Total $ 9,204 $ 20,261 $ 24,044 _______________ (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. (c) Mr. Zhou Min Ni owns an equity interest in this entity. (d) Mr. 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"). The Company acquired substantially all of the operating assets used or held for use in such business operation for the amount of $ 250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from RIL at the time of transaction were an offset to the purchase price paid to RIL. Going forward, the Company has taken the egg roll production business in house and ceased its vendor relationship with RIL. 71 Sales Below is a summary of sales to related parties recorded for the years ended December 31, 2023, 2022 and 2021, respectively: Year Ended December 31, (In thousands) 2023 2022 2021 (a) ABC Food Trading, LLC $ 2,078 $ 3,949 $ 2,642 (b) Asahi Food, Inc. 791 639 704 (a) Conexus Food Solutions (formerly as Best Food Services, LLC) 928 1,285 792 (c) Eagle Food Service, LLC 1,942 879 2,864 (d) Eastern Fresh NJ, LLC — — 155 (d) Enson Group, Inc. (formerly as Enson Group, LLC) — — 101 (d) Enson Seafood GA, Inc. (formerly as GA-GW Seafood, Inc.) — — 573 (e) First Choice Seafood, Inc. 31 35 99 (e) Fortune One Foods, Inc. 42 115 418 (d) Heng Feng Food Services, Inc. — — 163 (d) N&F Logistics, Inc. 6 40 531 (f) Union Food LLC 27 — — Other — — 13 Total $ 5,845 $ 6,942 $ 9,055 _______________ (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. (c) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Zhou Min Ni owns an equity interest in this entity. (e) Mr. 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 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 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 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. The lease agreement was terminated in connection with the sale of the facility on November 3, 2021. The building and related land was sold to iUnited for $ 1.5 million and a gain of $ 0.8 million. Rental income for the 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 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). 72 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 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 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 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, 2023 and December 31, 2022, respectively: (In thousands) December 31, 2023 December 31, 2022 (a) ABC Food Trading, LLC $ 94 $ — (b) Asahi Food, Inc. 69 81 (a) Conexus Food Solutions (formerly as Best Food Services, LLC) 84 — (c) Eagle Food Service, LLC — 69 (d) Enson Seafood GA, Inc. (formerly as GA-GW Seafood, Inc.) 59 59 (e) Fortune One Foods, Inc. — 4 (f) Union Food LLC 2 — Total $ 308 $ 213 _______________ (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. (c) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Zhou Min Ni owns an equity interest in this entity. (e) Mr. 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. 73 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, 2023 and December 31, 2022, respectively: (In thousands) December 31, 2023 December 31, 2022 (a) Conexus Food Solutions (formerly as Best Food Services, LLC) $ 379 $ 729 (b) North Carolina Good Taste Noodle, Inc. N/A 731 Others 18 69 Total $ 397 $ 1,529 _______________ (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 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. Zhang. During the year ended December 31, 2022, the Company paid the remaining $ 4.5 million principal balance of this related party promissory note payable. Interest payments paid were $ 0.1 million for the year ended December 31, 2022. Note 14 - Stock-Based Compensation The Company has a stock-based employee compensation plan, known as the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan allows for up to 3,000,000 shares of common stock reserved for issuance of awards to employees, non-employee directors, and consultants. The 2018 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, other stock awards, and performance awards that may be settled in stock, or other property. The Company began issuing awards under the 2018 Incentive Plan in February 2021. As of December 31, 2023, the Company had 810,944 time-based vesting restricted stock units (“RSUs”) unvested, 665,932 performance-based restricted stock units (“PSUs”) unvested, 531,222 shares of common stock vested and 991,902 shares remaining available for future awards under the 2018 Incentive Plan. RSUs granted to employees vest over time based on continued service (vesting over a period between one to three years in equal installments). PSUs granted to employees vest based on (i) the attainment of certain financial metrics, as defined by the Company's compensation committee (“Financial PSUs”) and (ii) for the 2021 grants, total shareholder return of the Company’s common stock (“TSR PSUs”). Both types of PSUs vest over three years in equal installments based on the performance metrics established for each year and also require continued service for vesting. A summary of RSU and PSU activity for the year ended December 31, 2023 is as follows: Shares Weighted Average Grant Date Fair Value Unvested RSUs at December 31, 2022 598,325 $ 5.39 Granted 520,248 3.86 Forfeited ( 54,589 ) 4.94 Vested ( 253,040 ) 5.45 Unvested RSUs at December 31, 2023 810,944 4.43 74 Shares Weighted Average Grant Date Fair Value Unvested PSUs at December 31, 2022 382,662 $ 4.95 Granted 441,288 3.86 Forfeited ( 38,926 ) 4.19 Vested ( 119,092 ) 5.19 Unvested PSUs at December 31, 2023 665,932 4.23 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. The fair value of the RSUs and Financial PSUs are measured using the closing price of the Company’s common stock on NASDAQ Global Capital Market on the date preceding grant date. The fair value of the TSR PSUs are determined using a Monte Carlo simulation model. No TSR PSUs were granted during the 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 Risk-free interest rate 0.20 % - 0.34 % Expected dividend yield 0.00 % Expected term (years) 2.56 - 3.15 Expected volatility (1) 62.08 % - 65.74 % _______________ (1) Expected volatility is based on a 50/50 blending of (i) the average historical volatility of a select group of industry peers with a look-back period equal to the expected term, and (ii) the historical volatility of the Company with a look-back period of 0.75 years - 1.17 years, the time from the valuation date to the date six months after the completion of the merger with B&R Global, using daily stock prices. The expected volatility of peer companies was 54.96 % – 63.45 %. The expected volatility of the Company's common stock was 66.10 % – 69.19 %. The fair value of RSUs are amortized on a straight-line basis over the requisite service period for each award. For the PSUs, the Company recognizes stock-based compensation expense on a straight-line basis for each vesting tranche over the longer of the derived, explicit, or implicit service period for the vesting tranche. As of interim and annual reporting periods, the Financial PSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PSUs stock-based compensation expense is not adjusted. The Company recognizes forfeitures as they occur. Stock-based compensation expense is included in distribution, selling and administrative expenses in the Company's consolidated statements of operations and comprehensive income (loss). The components of stock-based compensation expense for the years ended December 31, 2023 and 2022 and 2021 were as follows: Year Ended December 31, (In thousands) 2023 2022 2021 Stock-based compensation (RSUs) expense $ 2,118 $ 897 $ 405 Stock-based compensation (PSUs) expense 1,234 360 230 Total stock-based compensation expense $ 3,352 $ 1,257 $ 635 Tax benefit of stock-based compensation expense $ 931 $ 366 $ 132 75 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. Note 15 - Employee Benefit Plan The Company sponsors a defined contribution plan, the HF Foods Group, Inc. Employees 401(k) Savings Plan (the “401(k) Plan”). Under the 401(k) Plan, after 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 From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to its pending litigation and 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. These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”). These Class Actions have since been dismissed and are now closed. In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions. The Special Investigation Committee and the Company 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. 76 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. Ni, Ms. 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. 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 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 . 77 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, 2024 $ 582 2025 604 2026 621 2027 638 2028 656 Thereafter 3,822 Total 6,923 Less: imputed interest ( 1,451 ) Total minimum lease payments $ 5,472 Note 17 - Subsequent Events 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. 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.