What changed in this filing

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Item 1. Financial Statements

2024-05-10 compared with 2023-11-09 · 212 added, 349 removed, 365 unchanged (61% of the section changed)

4 unchanged sentences

(In thousands, except share data)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

CURRENT ASSETS:

Cash $ 18,215 $ 15,232

Accounts receivable, net 43,133 44,186

Accounts receivable, net of allowances of $ 2,077 and $ 2,119

49,705 47,524

Accounts receivable - related parties 295 308

6 unchanged sentences

Customer relationships, net 144,540 147,181

Trademarks and other intangibles, net 32,055 36,343

Trademarks, trade names and other intangibles, net 29,196 30,625

Goodwill 85,118 85,118

20 unchanged sentences

SHAREHOLDERS’ EQUITY:

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

Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 54,152,903 shares issued and outstanding as of September 30, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022

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 54,153,391 shares issued and 52,155,968 and 52,155,968 shares outstanding as of March 31, 2024 and December 31, 2023, respectively

Treasury stock, at cost;

1,997,423 shares as of March 31, 2024, and 1,997,423 shares as of December 31, 2023

( 7,750 ) ( 7,750 )

Additional paid-in capital 603,832 603,094

8 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Net revenue - third parties $ 294,836 $ 291,562

6 unchanged sentences

Distribution, selling and administrative expenses 50,496 52,929

INCOME (LOSS) FROM OPERATIONS 2,084 ( 3,096 ) ( 2,250 ) 13,950

Other expenses (income):

LOSS FROM OPERATIONS ( 85 ) ( 2,757 )

Interest expense 2,834 2,868

1 unchanged sentence

Change in fair value of interest rate swap contracts ( 1,970 ) 2,746

Lease guarantee expense ( 95 ) ( 58 ) ( 305 ) 5,831

Total other expenses (income), net 146 1,470 5,186 8,681

INCOME (LOSS) BEFORE INCOME TAXES 1,938 ( 4,566 ) ( 7,436 ) 5,269

Income tax expense (benefit) ( 36 ) ( 672 ) ( 2,053 ) 1,529

NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 1,974 ( 3,894 ) ( 5,383 ) 3,740

net income (loss) attributable to noncontrolling interests 90 ( 30 ) ( 484 ) ( 74 )

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

Lease guarantee income ( 115 ) ( 120 )

LOSS BEFORE INCOME TAXES ( 740 ) ( 8,023 )

Income tax benefit ( 181 ) ( 2,226 )

NET LOSS AND COMPREHENSIVE LOSS ( 559 ) ( 5,797 )

net income attributable to noncontrolling interests 135 136

NET LOSS AND COMPREHENSIVE LOSS ATTRIBUTABLE TO HF FOODS GROUP INC.

$ ( 694 ) $ ( 5,933 )

EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.03 $ ( 0.07 ) $ ( 0.09 ) $ 0.07

EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.03 $ ( 0.07 ) $ ( 0.09 ) $ 0.07

LOSS PER COMMON SHARE - BASIC $ ( 0.01 ) $ ( 0.11 )

LOSS PER COMMON SHARE - DILUTED $ ( 0.01 ) $ ( 0.11 )

WEIGHTED AVERAGE SHARES - BASIC 52,155,968 53,822,794

5 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net (loss) income $ ( 5,383 ) $ 3,740

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

Net loss $ ( 559 ) $ ( 5,797 )

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

Depreciation and amortization expense 6,676 6,689

Asset impairment charges 1,200 422

Gain from disposal of property and equipment ( 278 ) ( 1,327 )

Provision for credit losses ( 40 ) 57

3 unchanged sentences

Non-cash lease expense 935 965

Lease guarantee expense ( 305 ) 5,831

Other expense 446 54

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

Lease guarantee income ( 115 ) ( 120 )

Other non-cash expense (income) 39 93

Changes in operating assets and liabilities:

Accounts receivable ( 2,141 ) 1,034

10 unchanged sentences

Purchase of property and equipment ( 2,585 ) ( 629 )

Proceeds from sale of property and equipment 900 7,805

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

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

Net cash used in investing activities ( 2,585 ) ( 629 )

3 unchanged sentences

Repayment of line of credit ( 349,082 ) ( 306,808 )

Proceeds from long-term debt — 45,956

Repayment of long-term debt ( 1,414 ) ( 1,642 )

Payment of debt financing costs — ( 556 )

Repayment of obligations under finance leases ( 857 ) ( 646 )

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

Proceeds from noncontrolling interests shareholders — 240

Cash distribution to shareholders ( 884 ) ( 187 )

Net cash (used in) provided by financing activities ( 28,018 ) 46,316

Net (decrease) increase in cash ( 9,989 ) 3,014

Net cash used in financing activities ( 1,487 ) ( 18,753 )

Net increase (decrease) in cash 2,983 ( 6,812 )

Cash at beginning of the period 15,232 24,289

3 unchanged sentences

Property acquired in exchange for finance leases 4,867 643

Note receivable related to property and equipment sales 300 —

Intangible asset acquired in exchange for noncontrolling interests — 566

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

3 unchanged sentences

(In thousands, except share data)

Common Stock Additional

Common Stock Treasury Stock Additional

Capital Retained Earnings

6 unchanged sentences

Shares Amount

Balance at January 1, 2022 53,706,392 $ 5 $ 597,227 $ ( 306,284 ) $ 290,948 $ 4,041 $ 294,989

Cumulative effect of adoption of CECL (ASU 2016-13) — — — ( 690 ) ( 690 ) — ( 690 )

Balance at January 1, 2022 53,706,392 5 597,227 ( 306,974 ) 290,258 4,041 294,299

Net income — — — 3,114 3,114 26 3,140

Capital contribution by shareholders — — — — — 806 806

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

Stock-based compensation — — 290 — 290 — 290

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

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

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

Stock-based compensation — — 221 — 221 — 221

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

Net loss — — — ( 3,864 ) ( 3,864 ) ( 30 ) ( 3,894 )

Issuance of common stock pursuant to equity compensation plan 138,412 — — — — — —

Shares withheld for tax withholdings on vested awards ( 31,438 ) — ( 162 ) — ( 162 ) — ( 162 )

Stock-based compensation — — 162 — 162 — 162

Balance at September 30, 2022 53,813,366 $ 5 $ 597,738 $ ( 303,160 ) $ 294,583 $ 4,587 $ 299,170

Shares Amount

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

4 unchanged sentences

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

Balance at January 1, 2024 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,094 $ ( 308,688 ) $ 286,661 $ 1,322 $ 287,983

Net (loss) income — — — — — ( 694 ) ( 694 ) 135 ( 559 )

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

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

Stock-based compensation — — — — 738 — 738 — 738

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

Net income — — — 1,884 1,884 90 1,974

Issuance of common stock pursuant to equity compensation plan 84,196 — — — — — —

Shares withheld for tax withholdings on vested awards ( 17,457 ) — ( 91 ) — ( 91 ) — ( 91 )

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

Stock-based compensation — — 757 — 757 — 757

Balance at September 30, 2023 54,152,903 $ 5 $ 600,696 $ ( 311,413 ) $ 289,288 $ 3,068 $ 292,356

Balance at March 31, 2024 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,832 $ ( 309,382 ) $ 286,705 $ 1,457 $ 288,162

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

5 unchanged sentences

HF Foods Group Inc.

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

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

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

HF Group, which operates solely in the United States.

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 April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand Food, Inc.

("Sealand") including equipment, machinery and vehicles.

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

See Note 6 - Acquisitions for additional information on the Sealand acquisition.

HF Foods, which operates solely in the United States.

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

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

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

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

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

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

All intercompany balances and transactions have been eliminated in consolidation.

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

Securities and Exchange Commission (“SEC”) regarding interim financial reporting.

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

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 26, 2024 (our “2023 Annual Report”).

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our 2023 Annual Report.

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 condensed consolidated statements of operations and comprehensive loss equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party.

Variable Interest Entities

3 unchanged sentences

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

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

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

The Company also has a VIE, AnHeart, Inc.

As of March 31, 2024, 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 three and nine months ended September 30, 2023 and 2022.

The Company did not incur expenses from VIEs and did not have any sales to or income from any VIEs during the three months ended March 31, 2024 and 2023.

See Note 13 - Commitments and Contingencies for additional information on AnHeart.

1 unchanged sentence

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

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

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

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

As of March 31, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following:

($ in thousands) Ownership of

noncontrolling interest at September 30, 2023

September 30, 2023 December 31, 2022

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

45.00 % $ ( 730 ) $ 204

noncontrolling interest at March 31, 2024

March 31, 2024 December 31, 2023

HF Foods Industrial, LLC ("HFFI") 45.00 % $ ( 765 ) $ ( 759 )

Min Food, Inc.

1 unchanged sentence

Monterey Food Service, LLC 35.00 % 369 366

Ocean West Food Services, LLC (b)

32.50 % 1,652 1,986

Syncglobal Inc.

43.00 % 90 90

Total $ 1,457 $ 1,322

_________________

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

Accordingly, the machinery used in HFFI operations was impaired.

See Note 4 - Balance Sheet Components for additional information.

(b) During the three months ended September 30, 2023, the Company ceased operations of Ocean West Food Services, LLC.

Uses of Estimates

3 unchanged sentences

Recent Accounting Pronouncements

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

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 (“Topic 740”):

Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires public entities to disclose specific categories in its annual effective tax rate reconciliation and disaggregated information about significant reconciling items by jurisdiction and by nature.

ASU 2023-09 also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions.

This guidance is effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively.

Early adoption is permitted.

The Company is currently evaluating the impact of this guidance on the consolidated financial statements and disclosures.

Note 3 - Revenue

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands) 2024 2023

8 unchanged sentences

Accounts receivable, net consisted of the following:

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

(In thousands) March 31, 2024 December 31, 2023

Accounts receivable $ 51,782 $ 49,643

2 unchanged sentences

Movement of allowance for expected credit losses was as follows:

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2024 2023

Beginning balance $ 2,119 $ 1,442

Adjustment for adoption of the CECL standard — 690

Increase (decrease) in provision for expected credit losses 56 226

Increase (decrease) in provision for expected credit losses/doubtful accounts ( 40 ) 57

Bad debt write-offs ( 2 ) ( 24 )

1 unchanged sentence

Prepaid expenses and other current assets consisted of the following:

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

(In thousands) March 31, 2024 December 31, 2023

Prepaid expenses $ 4,108 $ 4,591

3 unchanged sentences

Property and equipment, net consisted of the following:

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

(In thousands) March 31, 2024 December 31, 2023

Automobiles $ 41,534 $ 37,256

4 unchanged sentences

Machinery and equipment 11,639 11,532

Construction in progress 3,590 1,391

Subtotal 192,232 185,641

1 unchanged sentence

Property and equipment, net $ 137,989 $ 133,136

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

Depreciation expense was $ 7.3 million and $ 6.6 million for the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, the Company impaired machinery and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

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

Depreciation expense was $ 2.6 million for the three months ended March 31, 2024 and 2023.

Long-term investments consisted of the following:

(In thousands) Ownership as of September 30,

2023 September 30, 2023 December 31, 2022

(In thousands) Ownership as of March 31,

2024 March 31, 2024 December 31, 2023

Asahi Food, Inc.

4 unchanged sentences

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

The Company determined there was no impairment as of September 30, 2023 and December 31, 2022 for these investments.

The Company determined there was no impairment as of March 31, 2024 for these investments.

Accrued expenses and other liabilities consisted of the following:

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

(In thousands) March 31, 2024 December 31, 2023

Accrued compensation $ 6,649 $ 7,941

2 unchanged sentences

Self-insurance liability 1,697 1,723

Accrued other 7,170 6,616

Other 6,528 4,994

Total accrued expenses and other liabilities $ 17,454 $ 17,287

1 unchanged sentence

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:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

2 unchanged sentences

Interest rate swaps $ — $ 781 $ — $ 781 $ — $ 412 $ — $ 412

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:

4 unchanged sentences

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

The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments.

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

Carrying Value and Estimated Fair Value of Outstanding Debt - The following table presents the carrying value and estimated fair value of the Company’s outstanding debt as described in Note 9 - Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements, including the current portion, as of the dates indicated:

The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments.

See Note 7 - 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 8 - Debt , including the current portion, as of the dates indicated:

Fair Value Measurements

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

September 30, 2023

March 31, 2024

Fixed rate debt:

2 unchanged sentences

Variable rate debt:

JPMorgan Chase & Co.

$ — $ 107,378 $ — $ 107,378

JPMorgan Chase $ — $ 104,791 $ — $ 104,791

Bank of America — 2,159 — 2,159

5 unchanged sentences

Variable rate debt:

JPMorgan Chase & Co.

$ — $ 111,413 $ — $ 111,413

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

Bank of America — 2,193 — 2,193

2 unchanged sentences

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 9 - Debt for additional information regarding the Company's debt.

Note 6 - 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.

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 nine months ended September 30, 2022 totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

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

The Company finalized the valuation of assets acquired and liabilities assumed for the Sealand acquisition as of December 31, 2022.

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.

Unaudited Supplemental Pro Forma Financial Information

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

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

Statutory rates were used to calculate income taxes.

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

Nine Months Ended September 30, 2022

Pro forma net revenue $ 300,712 $ 910,397

Pro forma net income attributable to HF Group $ ( 3,368 ) $ 3,389

See Note 8 - 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.

No adjustments to fair value from the write-down of asset values due to impairment were made during the three months ended March 31, 2024 and 2023.

There were no assets carried at nonrecurring fair value at March 31, 2024 and December 31, 2023.

Note 6 - Goodwill and Acquired Intangible Assets

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

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

The Company performed a quantitative goodwill impairment assessment as of December 31, 2023, 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 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.

The annual goodwill impairment test in 2023 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.

The Company determined that there were no events or circumstances during the three months ended March 31, 2024 that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Goodwill was $ 85.1 million as of March 31, 2024 and December 31, 2023.

Acquired Intangible Assets

The components of the intangible assets are as follows:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(In thousands) Gross

4 unchanged sentences

Non-competition agreement $ 3,892 $ ( 2,754 ) $ 1,138 $ 3,892 $ ( 2,429 ) $ 1,463

Trademarks 44,256 ( 13,988 ) 30,268 44,256 ( 10,673 ) 33,583

Trademarks and trade names 44,207 ( 16,149 ) 28,058 44,207 ( 15,045 ) 29,162

Customer relationships 185,266 ( 40,726 ) 144,540 185,266 ( 38,085 ) 147,181

Total $ 233,365 $ ( 59,629 ) $ 173,736 $ 233,365 $ ( 55,559 ) $ 177,806

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

Amortization expense for acquired intangible assets was $ 12.2 million and $ 11.7 million for the nine months ended September 30, 2023 and 2022, respectively.

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

Amortization expense for acquired intangible assets was $ 4.1 million for the three months ended March 31, 2024 and 2023.

Note 7 - Derivative Financial Instruments

2 unchanged sentences

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

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

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

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 % .

1 unchanged sentence

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 J.P.

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

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.

1 unchanged sentence

Hence, the fair value change on these IRS contracts are accounted for and recognized as a change in fair value of IRS contracts in the condensed consolidated statements of operations and comprehensive income (loss).

As of September 30, 2023, the Company determined that the fair values of the IRS contracts were $ 2.6 million in an asset position.

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

The Company includes these in other long-term assets and other long-term liabilities , respectively, on the condensed consolidated balance sheets.

As of March 31, 2024, the Company determined that the fair values of the IRS contracts were $ 0.8 million in an asset position.

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

1 unchanged sentence

Note 8 - Debt

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

Long-term debt at March 31, 2024 and December 31, 2023 is summarized as follows:

($ in thousands)

Bank Name Maturity Interest Rate at September 30, 2023

September 30, 2023 December 31, 2022

Bank Name Maturity Interest Rate at March 31, 2024

March 31, 2024 December 31, 2023

Bank of America (a)

3 unchanged sentences

August 2027 - September 2029 7.64 % - 9.00 %

JPMorgan Chase & Co.

December 2023 - January 2030 6.77 % - 7.14 %

JPMorgan Chase (c)

January 2030 7.32 % - 7.44 %

105,039 106,337

Other finance institutions (d)

December 2023 - March 2024 5.99 % - 6.14 %

July 2024 5.99 % - 6.17 %

Total debt, principal amount 113,006 114,419

6 unchanged sentences

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

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

(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 $ 107.5 million as of September 30, 2023 and 111.4 million as of December 31, 2022 is secured by assets held by the Company and has a maturity date of January 2030.

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

Equipment term loan matures in December 2023.

(c) Real estate term loan with a principal balance of $ 105.0 million as of March 31, 2024 and $ 106.3 million as of December 31, 2023 is secured by assets held by the Company and has a maturity date of January 2030.

(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 September 30, 2023, the Company was in compliance with its covenants.

As of March 31, 2024, the Company was in compliance with its covenants.

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 9 - Earnings (Loss) Per Share

4 unchanged sentences

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

There were 1,102,972 and 797,860 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2023, respectively, because their effect would have been anti-dilutive.

There were 279,412 and 148,479 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2022, respectively, because their effect would have been anti-dilutive.

There were 1,470,541 and 851,443 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three months ended March 31, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands, except share and per share data) 2024 2023

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

Net loss attributable to HF Foods Group Inc.

$ ( 694 ) $ ( 5,933 )

2 unchanged sentences

Weighted-average dilutive shares outstanding 52,155,968 53,822,794

Earnings (Loss) per common share:

Loss per common share:

Basic $ ( 0.01 ) $ ( 0.11 )

5 unchanged sentences

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

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

For the three and nine months ended September 30, 2023, the Company's effective income tax rate of ( 1.9 )% and 27.6 %, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

For the three and nine months ended September 30, 2022, the Company's effective income tax rate of 14.7 % and 29.0 %, respectively, differed from the federal statutory tax rate primarily as a result of state income taxes.

As of March 31, 2024, the Company had no subsidiaries outside the U.S., as such, no foreign income tax was recorded.

For the three months ended March 31, 2024 and 2023, the Company's effective income tax rate of 24.5 % and 27.7 %, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes.

Note 11 - Related Party Transactions

2 unchanged sentences

Xiao Mou Zhang (“Mr.

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

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

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

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

The Company believes that Mr.

1 unchanged sentence

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 the Company’s outstanding shares of common stock, and he and certain of his immediate family members have ownership interests in related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

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

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

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

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

Jian Ming Ni resigned.

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

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.

The related party transactions as of March 31, 2024 and December 31, 2023 and for the three months ended March 31, 2024 and 2023 are identified as follows:

Related Party Sales, Purchases, and Lease Agreements

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

Three Months Ended September 30, Nine Months Ended September 30,

Below is a summary of purchases of goods and services from related parties recorded for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(In thousands) Nature 2024 2023

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) Trade $ 2,045 $ 2,246 $ 6,858 $ 8,738

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

(b) Enson Seafood GA, Inc.

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

Trade — 25 — 134

(d) North Carolina Good Taste Noodle, Inc.

Trade — 1,798 — 5,226

(b) Ocean Pacific Seafood Group, Inc.

Trade 73 107 315 385

Other Trade 93 115 168 199

(a) Asahi Food, Inc.

(b) Conexus Food Solutions (formerly known as Best Food Services, LLC) Trade $ 1,150 $ 2,084

Total $ 1,314 $ 2,341

_______________

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

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

Zhang's children effective November 1, 2020.

Ni owns an equity interest in this entity.

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

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

Zhou Min Ni previously owned an equity in this entity as of December 31, 2019.

The Company has been informed by Mr.

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

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

Jian Ming Ni resigned .

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

Three Months Ended September 30, Nine Months Ended September 30,

(a) The Company, through its subsidiary Mountain Food, LLC, owns an equity interest in this entity.

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

Zhang's children.

Zhou Min Ni owns an equity interest in this entity.

Below is a summary of sales to related parties recorded for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

(In thousands) 2024 2023

1 unchanged sentence

(b) Asahi Food, Inc.

275 126 661 495

(d) Eagle Food Service, LLC — 576 1,942 576

(e) First Choice Seafood, Inc.

(e) Fortune One Foods, Inc.

(f) N&F Logistics, Inc.

(g) Union Food LLC — — 27 —

(a) Conexus Food Solutions (formerly known as Best Food Services, LLC) 253 433

(d) First Choice Seafood, Inc.

(d) Fortune One Foods, Inc.

(e) N&F Logistics, Inc.

(f) Union Food LLC — 19

Total $ 818 $ 2,293

_______________

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

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

Zhang's children effective November 1, 2020.

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

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

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

Zhang's children effective November 1, 2020.

(d) Tina Ni, one of Mr.

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

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

Ni owns an equity interest in this entity.

(g) Tina Ni, one of Mr.

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

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

Zhang's children.

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

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

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

Zhou Min Ni owns an equity interest in this entity.

(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 warehouse to Enson Seafood GA Inc.

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

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

No rental income was received for the three months ended September 30, 2023 and 2022.

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

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

1 unchanged sentence

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

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

Rent incurred to the related party was $ 0.3 million and $ 0.2 million for the nine months ended September 30, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

Rent expense was $ 0.1 million for the three months ended March 31, 2024 and 2023, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.

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

1 unchanged sentence

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 $ 0.04 million and $ 0.04 million for the three months ended September 30, 2023 and 2022, respectively, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

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

Rental income was $ 36 thousand for the three months ended March 31, 2024 and 2023, which is included in other income in the condensed consolidated statements of operations and comprehensive loss.

Related Party Balances

Accounts Receivable - Related Parties, Net

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

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

Below is a summary of accounts receivable with related parties recorded as of March 31, 2024 and December 31, 2023, respectively:

(In thousands) March 31, 2024 December 31, 2023

(a) ABC Food Trading, LLC $ 125 $ 94

(b) Asahi Food, Inc.

(d) Eagle Food Service, LLC — 69

(e) Enson Seafood GA, Inc.

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

(f) Fortune One Foods, Inc.

(g) Union Food LLC 2 —

(a) Conexus Food Solutions (formerly known as Best Food Services, LLC) — 84

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

(d) Union Food LLC — 2

Total $ 295 $ 308

_______________

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

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

Zhang's children effective November 1, 2020.

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

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

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

Zhang's children effective November 1, 2020.

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

Zhang's children.

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

Zhou Min Ni owns an equity interest in this entity.

(d) Tina Ni, one of Mr.

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

Ni owns an equity interest in this entity.

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

(g) Tina Ni, one of Mr.

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

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

The Company had reserved for 100 % of the accounts receivable for Union Food LLC as of December 31, 2023 and wrote-off the receivable during the three months ended March 31, 2024.

The Company has reserved for 100 % of the accounts receivable for Enson Seafood GA, Inc.

as of September 30, 2023.

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

as of March 31, 2024 and December 31, 2023.

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

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

No additional allowance is deemed necessary as of March 31, 2024 and December 31, 2023.

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 September 30, 2023 and December 31, 2022, respectively:

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

Below is a summary of accounts payable with related parties recorded as of March 31, 2024 and December 31, 2023, respectively:

(In thousands) March 31, 2024 December 31, 2023

(a) Conexus Food Solutions (formerly as Best Food Services, LLC) $ 126 $ 379

(b) North Carolina Good Taste Noodle, Inc.

Total $ 143 $ 397

_______________

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

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

Zhang's children effective November 1, 2020.

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

Zhou Min Ni previously owned an equity in this entity as of December 31, 2019.

The Company has been informed by Mr.

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

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

Jian Ming Ni resigned .

Promissory Note Payable - Related Party

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

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

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

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

Zhang's children.

Note 12 - Stock-Based Compensation

In July 2021, the Company began issuing awards under the HF Foods Group Inc.

In 2021, the Company began issuing awards under the HF Foods Group Inc.

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

As of September 30, 2023, the Company had 820,915 time-based vesting restricted stock units unvested, 674,266 performance-based restricted stock units unvested, 530,395 shares of common stock vested and 974,424 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.8 million and $ 0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $ 2.6 million and $ 0.7 million for the nine months ended September 30, 2023 and 2022, respectively.

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

As of September 30, 2023, there was $ 5.0 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 2.01 years.

As of March 31, 2024, the Company had 808,807 time-based vesting restricted stock units unvested, 627,803 performance-based restricted stock units unvested, 531,222 shares of common stock vested and 1,032,168 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.7 million and $ 1.1 million for the three months ended March 31, 2024 and 2023, respectively.

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

As of March 31, 2024, there was $ 3.5 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 1.65 years.

Note 13 - Commitments and Contingencies

5 unchanged sentences

The Company continuously assesses the potential liability related to its pending litigation and revises its estimates when additional information becomes available.

Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against the Company that could adversely affect its ability to conduct its business.

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.

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 are cooperating with the SEC.

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

The Company is working to implement those improvements.

On October 13, 2023, the Company received a “Wells Notice” from the staff of the SEC (the “Wells Notice”) relating to the Company’s previously disclosed SEC investigation.

A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law an invites recipients to submit a response if they wish.

The Company made a submission in response to the SEC 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.

As with any SEC investigation or action, there is the possibility of potential fines and penalties.

At this time, however, it is not possible to estimate the amount of any such fines and penalties, should they occur.

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

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

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

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

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

Beginning in September 2022, the Court of Chancery approved a series of joint stipulations submitted by Bishop and HF Foods to stay the case through mid-May 2023.

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

The Settlement Agreement, provides for, among other things, the dismissal of the Delaware Action with prejudice, and releases of claims against all named defendants in the Delaware Action in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company (together with Mr.

Ni, the “Ni Defendants”), making a payment to the Company in the sum of $ 9.25 million (the “Settlement Amount”) within five days of final approval of the proposed settlement;

the termination of any rights the Ni Defendants and another named defendant may have had to future advancement or indemnification from the Company above certain specified caps;

and the Company adopting certain changes to its bylaws and/or other internal governance policies and procedures.

On September 8, 2023, the Court of Chancery entered an Order an Final Judgment (the “Judgment”) approving the proposed settlement and an application by Bishop’s counsel for an award of attorneys’ fees and expenses.

On October 16, 2023, after the Judgment officially became final, the Ni Defendants paid the Company $ 1.5 million of the Settlement Amount in cash but failed to pay the balance of the Settlement Amount ($ 7.75 million) due under the Settlement Agreement.

Effective as of November 1, 2023, the Company, the Ni Defendants, and Bishop entered into an amendment to the Settlement Agreement (“the Amendment”) in accordance with the Judgment.

The Amendment provides that the Ni Defendants will pay the $ 7.75 million balance they owe to the Company plus interest on the outstanding balance (at an annual rate of 7.5 %) in shares of common stock of the Company instead of cash based on a per share value of $ 3.88 per share, which was the per share closing price of the Company’s common stock on Friday, October 13, 2023, the last trading day prior to the date on which the payment of the full Settlement Amount was due.

The Amendment provides that, on the terms and subject to the conditions set forth in the Amendment, the Ni Defendants will transfer the requisite number of shares of common stock to the Company as promptly as practicable after entry into the Amendment.

The Amendment also contains, among other things, customary representations, warranties, conditions and covenants for agreements of this type, including, an indemnity from the Ni Defendants and certain remedies in favor of the Company in the event the Amendment is terminated pursuant to its terms or either of the Ni Defendants fails to perform any of his or her obligations under the amendment or the stipulation.

Legal costs associated with loss contingencies are expensed as incurred.

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 final.

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

8 unchanged sentences

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.

In March 2024, the Company began construction of a multi-use facility on 273 Fifth Avenue and committed $ 7.0 million for the completion of the construction project.

The Company incurred $ 1.3 million in construction costs which was recorded in construction in progress within property and equipment, net in the Company’s condensed consolidated balance sheet as of March 31, 2024.

The Company expects to complete construction in the first quarter of 2025.

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

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

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

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

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

As of March 31, 2024, the Company had a lease guarantee liability of $ 5.4 million.

The current portion of the lease guarantee liability of $ 0.4 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 estimated future minimum lease payments as of September 30, 2023 are presented below:

See Note 14 - Subsequent Events for additional information regarding the 275 Fifth Avenue lease.

The estimated future minimum lease payments as of March 31, 2024 are presented below:

(In thousands) Amount

Year Ending December 31,

2023 (remaining three months) $ 140

2024 (remaining nine months) $ 442

Thereafter 3,822

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Note 14 - Subsequent Events

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

Shareholder Rights Plan Amendment

On April 11, 2024, the Company entered into Amendment No.

1 to the Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of April 11, 2023, between the Company and Equiniti Trust Company, LLC (f/k/a American Stock Transfer & Trust Company, LLC), as rights agent, to extend the expiration date of the rights under the Rights Agreement from April 11, 2024 to April 11, 2025.

Assumption of Lease

Effective April 30, 2024, the Company through its subsidiary assumed the lease of a building located on the premises of 275 Fifth Avenue, New York, New York.

The Company was the guarantor of this lease under a lease guarantee agreement dated July 2018, and in February 2022, upon receiving notice of default, the Company undertook its lease guarantee obligations.

The assumption of the lease had no impact on the Company’s obligations as guarantor.

See Note 13 - Commitments and Contingencies for disclosures pertaining to the lease guarantee obligation.

The lease covers certain portions of the ground floor, lower lever, and second floor of the building.

The lease term ends on April 30, 2034 and is renewable at the option of the Company for up to two additional five-year terms.

The Company shall pay rent of approximately $45,000 per month with provisions for yearly increases.

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

What changed 10-Q

Item 1. Financial Statements