HF Foods Group Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Our management, including our principal executive officer and principal financial and accounting officer, conducted an evaluation of the effectiveness of our internal controls over financial reporting, and disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial and accounting officer concluded that, due to the material weaknesses described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2023. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal controls over financial reporting is a process designed under the supervision of our principal executive officer and principal financial and accounting officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2023, management assessed the effectiveness of our internal controls over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework”, issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in 2013. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on this assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to the material weaknesses in our internal control over financial reporting described below. As previously reported, we identified the following material weaknesses, which continue to exist as of December 31, 2023. We did not maintain appropriately designed entity-level controls impacting the (1) control environment, (2) risk assessment procedures, (3) control activities, (4) information and communication, and (5) monitoring activities to prevent or detect material misstatements to the financial statements and assess whether the components of internal control were present and functioning properly. These deficiencies were primarily attributed to an insufficient number of qualified resources to support and provide proper oversight and accountability over the performance of controls. These entity-level material weaknesses resulted in the following specific material weaknesses: • Information Technology (IT) General Controls - We did not design and maintain effective information technology general controls over logical access, program change management, and segregation of duties for key IT systems. As a result, certain business process controls that are dependent upon information from these systems were also not effective. Additionally, we did not design and maintain effective controls over the implementation of new IT systems. • Financial Reporting - We did not properly design or maintain effective controls over the financial reporting process to enable timely reporting of complete and accurate financial information. We did not design and implement certain review controls with a sufficient precision to prevent or detect a material misstatement, did not consistently perform 79 sufficient review of journal entries, or consistently retain adequate supporting documentation for financial statement balances and the related footnote disclosures. Additionally, we did not design and maintain effective controls over certain non-routine transactions or significant management estimates, including the review of underlying data and assumptions for completeness and accuracy. Remediation Activities In response to these material weaknesses, with oversight from the Audit Committee of the Board of Directors, we have continued to implement measures to improve our internal control structure. Specifically, we have: • Hired additional finance and accounting personnel and also provided training in key financial reporting and internal control areas; • Designed and implemented new entity-level controls (“ELCs”) with greater alignment to the COSO 2013 Internal Controls Framework; • Established requirements over documentation and retention of appropriate evidence to support the operation of ELCs, business process controls, IT general controls; • Enhanced the structure, governance, and communication over related party transactions; • Designed and implemented enhanced review procedures over technical accounting memos for non-routine transactions and complex accounting matters; • Implemented new enterprise finance and human capital system and evaluated technology alternatives to initiate a change from our legacy inventory and distribution system to better ensure data accuracy, completeness, and continued progress towards an improved operational and control environment; • Designed and implemented uniform controls across all distribution centers and improved processes around our inventory cycle counts and year-end inventory count procedures; • Designed and implemented controls over stock compensation, corporate tax, and year-end financial reporting procedures with enhanced precision and control attributes; and, • Designed and implemented an enhanced control testing program throughout the period to evaluate our system of internal control to determine whether components of the internal control were present and functioning properly in a more timely manner. We are committed to ensuring that our internal controls over financial reporting are designed and operating effectively. We believe the efforts taken to date and certain measures that are in progress will improve the effectiveness of our internal controls over financial reporting and mitigate risks of material misstatement. We are still in the process of implementing these steps and cannot assure investors that these measures will significantly improve or remediate the material weaknesses described above. Additionally, while we believe these efforts will improve our internal control environment, our remediation is still in progress and subject to ongoing testing of the design and operating effectiveness over a sufficient period of time in order to effectively remediate these material weaknesses. The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by BDO USA, P.C., an independent registered public accounting firm, as stated in their attestation report, which is included in Part II, Item 8 of this Form 10-K. Changes in Internal Controls Over Financial Reporting and Disclosure Controls Other than the actions taken to continue our material weaknesses remediation efforts, described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 80 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors HF Foods Group Inc. Las Vegas, Nevada Opinion on Internal Control over Financial Reporting We have audited HF Foods Group Inc.’s (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 (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), 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 financial statements”) and our report dated March 26, 2024 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in the accompanying Management’s Report on Internal Control Over Financial Reporting: The Company did not maintain appropriately designed entity-level controls impacting the (1) control environment, (2) risk assessment procedures, (3) control activities, (4) information and communication, and (5) monitoring activities to prevent or detect material misstatements to the financial statements and assess whether the components of internal control were present and functioning properly. These deficiencies were primarily attributed to an insufficient number of qualified resources to support and provide proper oversight and accountability over the performance of controls. These entity-level material weaknesses resulted in the following specific material weaknesses: • Information Technology (IT) General Controls – The Company did not design and maintain effective information technology general controls over logical access, program change management and segregation of duties for key IT systems. As a result, certain business process controls that are dependent upon information from these systems were also not effective. Additionally, the Company did not design and maintain effective controls over the implementation of new IT systems. 81 • Financial Reporting - The Company did not properly design or maintain effective controls over the financial reporting process to enable timely reporting of complete and accurate financial information. The Company did not design and implement certain review controls with a sufficient precision to prevent or detect a material misstatement, did not consistently perform sufficient review of journal entries, or consistently retain adequate supporting documentation for financial statement balances and the related footnote disclosures. Additionally, the Company did not design and maintain effective controls over certain non-routine transactions or significant management estimates, including the review of underlying data and assumptions for completeness and accuracy. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 financial statements, and this report does not affect our report dated March 26, 2024. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, P.C. Troy, Michigan March 26, 2024 ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 82 PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information required by this Item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC, within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required by this Item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC, within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information required by this Item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC, within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Information required by this Item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC, within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Information required by this Item will be included in our Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the SEC, within 120 days of the fiscal year ended December 31, 2023, and is incorporated herein by reference. PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. We have filed the following documents as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements See Index to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. 2. Financial Statement Schedules All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes in this Annual Report on Form 10-K. 3. Exhibits The following exhibits are incorporated herein by reference or are filed or furnished with this report as indicated below: Incorporated by Reference Exhibit Number Description Form Exhibit/ Appendix Filing Date 2.1 Merger Agreement dated March 27, 2018, by and among Atlantic Acquisition Corp., HF Group Merger Sub Inc., HF Group Holding Corporation, the stockholders of HF Group Holding Corporation and Zhou Min Ni, as the stockholders’ representative DEF14A A 7/18/2018 3.1 Second Amended and Restated Certificate of Incorporation 8-K 3.1.2 11/5/2019 83 Incorporated by Reference Exhibit Number Description Form Exhibit/ Appendix Filing Date 3.2 Amended and Restated Bylaws 8-K 3.02 11/4/2022 3.3 Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock 8-K 3.1 4/12/2023 3.4 First Amendment to Amended and Restated Bylaws, dated April 25, 2023 8-K 3.1 4/26/2023 4.1 Specimen Common Stock Certificate S-1/A 4.2 7/28/2017 4.2 Form of Rights Agreement, dated August 8, 2017, by and between American Stock Transfer & Trust Company, LLC and the Registrant 8-K 4.1 8/11/2017 4.3 Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC S-1/A 4.5 7/28/2017 4.4 Preferred Stock Rights Agreement, dated as of April 11, 2023, by and between HF Foods Group Inc. and American Stock Transfer & Trust Company, LLC, as rights agent 8-K 4.1 4/12/2023 4.5* Description of Registrant's Securities 10.1† HF Food Group Inc. 2018 Omnibus Equity Incentive Plan DEF14A B 7/18/2018 10.2 Form of Registration Rights Agreement between the Company, HF Group Holdings Corporation and Zhou Min Ni, as representative of the stockholders of HF Foods 8-K 10.9 8/27/2018 10.3† Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Zhou Min Ni 8-K 10.10 9/13/2018 10.4† Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Chan Sin Wong 8-K 10.11 9/13/2018 10.5† Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Jian Ming Ni 8-K 10.12 9/13/2018 10.6 Credit Agreement dated as of January 5, 2012 between Han Feng, Inc. and East West Bank 10-K 10.12 4/1/2019 10.7 Amendment to Credit Agreement dated as of May 21, 2013 by and between Han Feng, Inc. and East West Bank 10-K 10.13 4/1/2019 10.8 Second Amendment to Credit Agreement dated as of December 10, 2013 by and between Han Feng, Inc. and East West Bank 10-K 10.14 4/1/2019 10.9 Third Amendment to Credit Agreement dated as of July 1, 2016 between Han Feng, Inc. and East West Bank 10-K 10.15 4/1/2019 10.10 Fourth Amendment to Credit Agreement dated July 18, 2017 between Han Feng, Inc. and East West Bank 10-K 10.16 4/1/2019 10.11 Credit Agreement dated as of February 26, 2018 between New Southern Food Distributors, Inc. and Bank of America, N.A. 10-K 10.17 4/1/2019 10.12 Warehouse Lease Agreement dated as January 7, 2019 between Yoan Chang Trading and Kirnland Food Service 10-K 10.18 4/1/2019 10.13 Membership Interest Purchase Agreement among B&R Global Holdings, Inc., B&R Group Realty Holding, LLC, and subsidiaries of B&R Group Realty Holding, LLC, dated January 17, 2020 10-Q 2.1 5/18/2020 10.14 Second Amended and Restated Credit Agreement among HF Foods Group Inc. B&R Global Holdings, Inc., subsidiaries of the Company, JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto, dated January 17, 2020 10-Q 10.1 5/18/2020 10.15† Letter Agreement between HF Foods Group Inc. and Russell T. Libby 10-Q 10.2 5/18/2020 10.16 Mutual Rescission Agreement between HF Foods and Rescinding Shareholders dated April 1, 2020 10-Q 10.3 5/18/2020 10.17 Assignment and Assumption of Lease Agreement, dated as of January 21, 2021 between Anheart, Inc. and 273 Fifth Avenue, LLC 10-K 10.25 3/16/2021 10.18 Lease dated July 2, 2018, between Anheart Inc. and Premier 273 Fifth, LLC 10-K 10.26 3/16/2021 10.19 Amendment of Lease, dated as of January 21, 2021, between Anheart, Inc. and Premier 273 Fifth, LLC 10-K 10.27 3/16/2021 84 Incorporated by Reference Exhibit Number Description Form Exhibit/ Appendix Filing Date 10.20† Separation Agreement between HF Foods Group Inc. and Zhou Min Ni, dated February 23, 2021 10-K 10.28 3/16/2021 10.21 Lease Agreement between Yoan Chang Trading, Inc. and Kirnland Food Distribution, Inc., dated as of January 1, 2021 10-K 10.29 3/16/2021 10.22 Stock Purchase Agreement, dated May 28, 2021, by and among Ki Tai Yeung, HF Group Holding Corp., and Kirnland Food Distribution, Inc. 8-K 10.1 6/1/2021 10.23† HF Foods Group Inc. Amended and Restated Severance Plan 8-K 10.1 1/5/2023 10.24† Employment Agreement between Christine Chang and HF Foods Group Inc., dated as of July 29, 2021 8-K 10.2 8/4/2021 10.25 Continuing Guaranty, dated August 2, 2021, executed by HF Foods Group Inc. in favor of JPMorgan Chase Bank, N.A. 8-K 10.1 9/9/2021 10.26† Letter Agreement by and between HF Foods Group Inc. and Valerie P. Chase, dated December 10, 2021 8-K 5.1 12/15/2021 10.27 Consent, Waiver, Joinder and Amendment No. 3 to Second Amended and Restated Credit Agreement by and among HF Foods Group Inc., B&R Global Holdings, Inc. and certain of the wholly-owned subsidiaries and affiliates of the Company, including Great Wall Seafood IL, L.L.C., and Great Wall Seafood TX, L.L.C., as borrowers, JPMorgan Chase Bank, N.A. as Administrative Agent, and certain lender parties thereto, including Comerica Bank, dated December 30, 2021 8-K 10.1 1/4/2022 10.28 Asset Purchase Agreement by and among Great Wall Seafood Supply, Inc., Great Wall Restaurant Supplier, Inc., First Mart Inc., Great Wall Seafood IL, L.L.C., Great Wall Seafood TX, L.L.C., Bo Chuan Wong and Qiu Xian Li, dated December 30, 2021 8-K 10.2 1/4/2022 10.29† Form of Restricted Stock Agreement S-8 4.7 6/15/2021 10.30 Third Amended and Restated Credit Agreement by and among HF Foods Group Inc., B&R Global Holdings, Inc. and certain of the wholly-owned subsidiaries and affiliates of the Company, as borrowers, JPMorgan Chase Bank, N.A. as Administrative Agent, and certain lender parties thereto, including Comerica Bank, dated March 31, 2022 8-K 10.1 4/1/2022 10.31† Offer of Employment for Felix Lin dated April 15, 2022 8-K 10.1 4/20/2022 10.32 Asset Purchase Agreement, dated as of April 19, 2022, by and among Sealand Food, Inc., Connie Wang, Jenny Wang and Great Wall Seafood VA, L.L.C. and, solely for purposes of Section 2.1(d) thereof, HF Foods Group, Inc. 8-K 10.1 4/25/2022 10.33† Separation and Release Agreement, dated May 18, 2022, by and among HF Foods Group Inc. and Kong Hian Lee 8-K 10.1 5/24/2022 10.34† Offer Letter, dated July 8, 2022, by and among HF Foods Group, Inc. and Carlos A. Rodriguez 8-K 10.1 7/14/2022 10.35† Letter Agreement, dated January 17, 2022, by and among HF Foods Group Inc. and Prudence Kuai 8-K 10.1 1/19/2023 10.36 Consent Under Third Amended and Restated Credit Agreement, dated October 26, 2022 8-K 10.1 10/31/2022 10.37† Separation Agreement and Release of Claims, dated March 26, 2021, by and among HF Foods Group Inc. and Caixuan Xu 10-K 10.45 1/31/2023 21.1* Subsidiaries of Registrant 23.1* Consent of BDO USA, P.C. 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 85 Incorporated by Reference Exhibit Number Description Form Exhibit/ Appendix Filing Date 32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 97.1* Policy for the Recovery of Erroneously Awarded Compensation 101* Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) _______________ * Filed herewith. ** Furnished herewith. † Indicates a management contract or compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HF Foods Group Inc. Date: March 26, 2024 By: /s/ Xiao Mou Zhang Xiao Mou Zhang Chief Executive Officer Date: March 26, 2024 By: /s/ Felix Lin Felix Lin Interim Chief Financial Officer; President and Chief Operating Officer (Principal accounting and financial officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Xiao Mou Zhang Chief Executive Officer and Director March 26, 2024 Xiao Mou Zhang /s/ Russell Libby Chairman of the Board and Director March 26, 2024 Russell Libby /s/ Valerie Chase Director March 26, 2024 Valerie Chase /s/ Prudence Kuai Director March 26, 2024 Prudence Kuai /s/ Hong Wang Director March 26, 2024 Hong Wang 87