What changed in this filing

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Item 1. Financial Statements

2024-08-09 compared with 2024-05-10 · 159 added, 125 removed, 452 unchanged (39% of the section changed)

4 unchanged sentences

(In thousands, except share data)

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

CURRENT ASSETS:

40 unchanged sentences

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

54,668,169 and 54,153,391 shares issued and 52,670,746 and 52,155,968 shares outstanding as of June 30, 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

1,997,423 shares as of June 30, 2024 and December 31, 2023

( 7,750 ) ( 7,750 )

9 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share data)

Three Months Ended March 31,

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

2024 2023 2024 2023

Net revenue - third parties $ 301,331 $ 290,364 $ 596,167 $ 581,926

6 unchanged sentences

Distribution, selling and administrative expenses 49,840 52,243 100,336 105,172

LOSS FROM OPERATIONS ( 85 ) ( 2,757 )

INCOME (LOSS) FROM OPERATIONS 2,625 ( 1,577 ) 2,540 ( 4,334 )

Interest expense 3,119 2,847 5,953 5,715

Other income ( 94 ) ( 228 )

Other expense (income), net 3,466 ( 127 ) 3,372 ( 355 )

Change in fair value of interest rate swap contracts ( 361 ) ( 2,856 ) ( 2,331 ) ( 110 )

Lease guarantee income ( 5,433 ) ( 90 ) ( 5,548 ) ( 210 )

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.

INCOME (LOSS) BEFORE INCOME TAXES 1,834 ( 1,351 ) 1,094 ( 9,374 )

Income tax expense (benefit) 1,599 209 1,418 ( 2,017 )

NET INCOME (LOSS) AND COMPREHENSIVE LOSS 235 ( 1,560 ) ( 324 ) ( 7,357 )

net income (loss) attributable to noncontrolling interests 218 ( 710 ) 353 ( 574 )

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

$ 17 $ ( 850 ) $ ( 677 ) $ ( 6,783 )

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

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

EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.00 $ ( 0.02 ) $ ( 0.01 ) $ ( 0.13 )

EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.00 $ ( 0.02 ) $ ( 0.01 ) $ ( 0.13 )

WEIGHTED AVERAGE SHARES - BASIC 52,585,715 54,046,328 52,370,842 53,935,178

5 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

Net loss $ ( 324 ) $ ( 7,357 )

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

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

Depreciation and amortization expense 13,266 13,129

Asset impairment charges — 1,200

Provision for credit losses ( 40 ) 56

4 unchanged sentences

Lease guarantee income ( 5,548 ) ( 210 )

Other non-cash expense (income) 39 93

Other non-cash expense 485 389

Changes in operating assets and liabilities:

8 unchanged sentences

Accrued expenses and other liabilities ( 1,733 ) ( 25 )

Net cash provided by operating activities 7,055 12,570

Net cash (used in) provided by operating activities ( 17 ) 8,732

Cash flows from investing activities:

2 unchanged sentences

Cash flows from financing activities:

Payments for tax withholding related to vested stock awards ( 128 ) —

Checks issued not presented for payment 1,958 ( 1,072 )

3 unchanged sentences

Repayment of obligations under finance leases ( 1,737 ) ( 1,399 )

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

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

Net cash provided by (used in) financing activities 5,084 ( 16,553 )

Net decrease in cash ( 1,264 ) ( 9,343 )

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

3 unchanged sentences

Property acquired in exchange for finance leases 9,218 1,059

Dissolution of noncontrolling interests 772 —

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

4 unchanged sentences

Common Stock Treasury Stock Additional

Capital Retained Earnings

(Accumulated Deficit) Total Shareholders’

Capital Accumulated Deficit Total Shareholders’

Equity Attributable to

11 unchanged sentences

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

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

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

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

Stock-based compensation — — — — 752 — 752 — 752

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

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

2 unchanged sentences

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

Net income — — — — — 17 17 218 235

Issuance of common stock pursuant to equity compensation plan 555,181 — — — — — — — —

Shares withheld for tax withholdings on vested awards ( 40,403 ) — — — ( 128 ) — ( 128 ) — ( 128 )

Dissolution of noncontrolling interests ( 772 ) ( 772 ) 772 —

Stock-based compensation — — — — 522 — 522 — 522

Balance at June 30, 2024 54,668,169 $ 5 1,997,423 $ ( 7,750 ) $ 603,454 $ ( 309,365 ) $ 286,344 $ 2,447 $ 288,791

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

14 unchanged sentences

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.

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

All significant intercompany balances and transactions have been eliminated in consolidation.

5 unchanged sentences

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

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 months ended March 31, 2024 and 2023.

The Company previously disclosed one VIE, AnHeart, Inc.

(“AnHeart”), for which the Company was not the primary beneficiary and therefore did not consolidate.

During the three months ended June 30, 2024, the Company assumed the lease for which AnHeart was a lessee and the Company was a guarantor, and as such, it no longer recognizes AnHeart as a VIE as of June 30, 2024.

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

2 unchanged sentences

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

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

As of June 30, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following:

($ in thousands) Ownership of

noncontrolling interest at March 31, 2024

March 31, 2024 December 31, 2023

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

noncontrolling interest at June 30, 2024

June 30, 2024 December 31, 2023

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

— % $ — $ ( 759 )

Min Food, Inc.

2 unchanged sentences

Total $ 2,447 $ 1,322

_______________

(a) During the quarter ended June 30, 2024, upon dissolution of HFFI, the Company assumed HFFI’s remaining assets and liabilities.

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

No gain or loss was recognized.

As a result of this transaction, noncontrolling interest of $ 0.8 million was reclassified to additional paid-in capital on the condensed consolidated balance sheets.

Uses of Estimates

15 unchanged sentences

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

Three Months Ended March 31,

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

($ in thousands) 2024 2023 2024 2023

2 unchanged sentences

Meat and Poultry 63,792 20 % 56,012 19 % 121,542 20 % 108,061 18 %

Fresh Produce 32,083 11 % 32,211 11 %

Produce 32,171 11 % 31,636 11 % 64,254 11 % 63,847 11 %

Packaging and Other 15,645 5 % 18,037 6 % 32,019 6 % 37,433 6 %

3 unchanged sentences

Accounts receivable, net consisted of the following:

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

(In thousands) June 30, 2024 December 31, 2023

Accounts receivable $ 52,944 $ 49,643

2 unchanged sentences

Movement of allowance for expected credit losses was as follows:

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands) 2024 2023

Beginning balance $ 2,119 $ 1,442

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

(Decrease) increase in provision for expected credit losses ( 40 ) 56

Bad debt write-offs ( 2 ) ( 24 )

1 unchanged sentence

Prepaid expenses and other current assets consisted of the following:

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

(In thousands) June 30, 2024 December 31, 2023

Prepaid expenses $ 2,093 $ 4,591

3 unchanged sentences

Property and equipment, net consisted of the following:

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

(In thousands) June 30, 2024 December 31, 2023

Automobiles (1)

$ 47,312 $ 37,256

Buildings 63,045 63,045

7 unchanged sentences

Property and equipment, net $ 143,538 $ 133,136

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

_________________

(1) The cost and accumulated depreciation of property and equipment related to finance leases was $ 31.0 million and $ 12.3 million at June 30, 2024 and $ 22.2 million and $ 10.3 million at December 31, 2023, which primarily relates to Automobiles.

During the six months ended June 30, 2024, the Company entered into finance leases for automobiles which mature in 4 to 6 years and have a weighted average discount rate of 6.6 %.

The total future minimum lease payments under finance leases as of June 30, 2024 is $ 30.1 million.

As of June 30, 2024, the Company had additional leases that had not yet commenced which totaled $ 16.9 million in future minimum lease payments.

Depreciation expense was $ 2.5 million and $ 2.4 million for the three months ended June 30, 2024 and 2023, respectively.

Depreciation expense was $ 5.1 million and $ 5.0 million for the six months ended June 30, 2024 and 2023, respectively.

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

Long-term investments consisted of the following:

(In thousands) Ownership as of March 31,

2024 March 31, 2024 December 31, 2023

(In thousands) Ownership as of June 30,

2024 June 30, 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 March 31, 2024 for these investments.

The Company determined there was no impairment as of June 30, 2024 for these investments.

Accrued expenses and other liabilities consisted of the following:

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

(In thousands) June 30, 2024 December 31, 2023

Accrued compensation $ 5,617 $ 7,941

6 unchanged sentences

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

14 unchanged sentences

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

March 31, 2024

June 30, 2024

Fixed rate debt:

18 unchanged sentences

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.

No adjustments to fair value from the write-down of asset values due to impairment were made during the three and six months ended June 30, 2024 and 2023.

There were no assets carried at nonrecurring fair value at June 30, 2024 and December 31, 2023.

Note 6 - Goodwill and Acquired Intangible Assets

6 unchanged sentences

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.

The Company determined that there were no events or circumstances during the six months ended June 30, 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 June 30, 2024 and December 31, 2023.

Acquired Intangible Assets

The components of the intangible assets are as follows:

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

(In thousands) Gross

7 unchanged sentences

Total $ 233,365 $ ( 63,699 ) $ 169,666 $ 233,365 $ ( 55,559 ) $ 177,806

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

Amortization expense for acquired intangible assets was $ 4.1 million for the three months ended June 30, 2024 and 2023.

Amortization expense for acquired intangible assets was $ 8.1 million for the six months ended June 30, 2024 and 2023.

Note 7 - Derivative Financial Instruments

12 unchanged sentences

The Company evaluated the aforementioned IRS contracts currently in place and did not designate those as cash flow hedges.

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

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

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

As of June 30, 2024, the Company determined that the fair values of the IRS contracts were $ 1.1 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.

3 unchanged sentences

Note 8 - Debt

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

Long-term debt at June 30, 2024 and December 31, 2023 is summarized as follows:

($ in thousands)

Bank Name Maturity Interest Rate at March 31, 2024

March 31, 2024 December 31, 2023

Bank Name Maturity Interest Rate at June 30, 2024

June 30, 2024 December 31, 2023

Bank of America (a)

7 unchanged sentences

Other finance institutions (d)

July 2024 5.99 % - 6.17 %

July 2024 N/A

Total debt, principal amount 111,651 114,419

8 unchanged sentences

Balloon payments of $ 1.9 million and $ 3.0 million are due at maturity in 2027 and 2029, respectively.

(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.

(c) Real estate term loan with a principal balance of $ 103.8 million as of June 30, 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 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;

As of June 30, 2024, the Company was in compliance with its covenants.

Credit Facility

The outstanding principal balance on the line of credit as of June 30, 2024 was $ 66.4 million and outstanding letters of credit amounted to $ 3.8 million leaving access to approximately $ 29.9 million in additional funds through our $ 100.0 million line of credit, subject to a borrowing base calculation.

On March 31, 2022, the Company amended the $ 100.0 million asset-secured revolving credit facility agreement, extending for five years , with a maturity date of November 4, 2027.

On February 6, 2024, the Company amended the 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;

6 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 1,470,541 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.

There were 37,084 and 967,779 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 June 30, 2024 and 2023, respectively, because their effect could have been anti-dilutive.

There were 1,354,908 and 620,402 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 six months ended June 30, 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 March 31,

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

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

Net loss attributable to HF Foods Group Inc.

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

$ 17 $ ( 850 ) $ ( 677 ) $ ( 6,783 )

2 unchanged sentences

Weighted-average dilutive shares outstanding 52,661,119 54,046,328 52,370,842 53,935,178

Loss per common share:

Earnings (loss) per common share:

Basic $ 0.00 $ ( 0.02 ) $ ( 0.01 ) $ ( 0.13 )

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.

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.

As of June 30, 2024, the Company had no subsidiaries outside the U.S., as such, no foreign income tax was recorded.

For the three and six months ended June 30, 2024, the Company's effective income tax rate of 87.2 % and 129.6 %, respectively, differed from the federal statutory tax rate primarily as a result of discrete tax items, permanent differences and state income taxes.

The Company’s tax provision for the three and six months ended June 30, 2024 includes a discrete tax expense of $ 1.0 million related to the Company’s SEC settlement and $ 0.1 million tax expense related to stock-based compensation shortfalls.

Absent the discrete items, the estimated annual effective income tax rate from continuing operations for the three and six months ended June 30, 2024 was 25.5 % and 25.1 %, respectively.

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

During the three months ended June 30, 2024, the Company dissolved one of its subsidiaries, HFFI.

The Company is in the process of determining the tax impact of the dissolution.

However, the Company does not expect the dissolution of HFFI to have a significant impact on the income tax provision as HFFI’s deferred tax assets were subject to a full valuation allowance.

Note 11 - Related Party Transactions

8 unchanged sentences

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:

The related party transactions as of June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 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 months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Below is a summary of purchases of goods and services from related parties recorded for the three and six months ended June 30, 2024 and 2023:

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

(In thousands) Nature 2024 2023 2024 2023

(a) Asahi Food, Inc.

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

Trade $ 29 $ 17 $ 56 $ 39

(b) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) Trade 1,763 2,729 2,913 4,813

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

Trade 60 74 140 242

5 unchanged sentences

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,

Below is a summary of sales to related parties recorded for the three and six months ended June 30, 2024 and 2023:

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

(In thousands) 2024 2023 2024 2023

1 unchanged sentence

(b) Asahi Food, Inc.

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

148 191 287 386

(a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) 335 93 588 526

19 unchanged sentences

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

Rent expense was $ 0.1 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.

Rent expense, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss), was $ 0.1 million and $ 0.1 million for the three months ended June 30, 2024 and 2023, respectively and $ 0.1 million and $ 0.2 million for the six months ended June 30, 2024 and 2023, respectively.

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 $ 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.

Rental income was $ 36 thousand and $ 36 thousand for the three months ended June 30, 2024 and 2023, respectively and $ 72 thousand and $ 72 thousand for the six months ended June 30, 2024 and 2023, respectively.

Rental income is included in other income in the condensed consolidated statements of operations and comprehensive income (loss).

Related Party Balances

Accounts Receivable - Related Parties, Net

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

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

Below is a summary of accounts receivable with related parties recorded as of June 30, 2024 and December 31, 2023, respectively:

(In thousands) June 30, 2024 December 31, 2023

(a) ABC Food Trading, LLC $ 194 $ 94

(b) Asahi Food, Inc.

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

(a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) 168 84

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

(d) Union Food LLC — 2

(d) Fortune One Foods, Inc.

(e) Union Food LLC — 2

Total $ 548 $ 308

4 unchanged sentences

Zhou Min Ni owns an equity interest in this entity.

(d) Tina Ni, one of Mr.

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

(e) Tina Ni, one of Mr.

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 March 31, 2024 and December 31, 2023.

as of June 30, 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 March 31, 2024 and December 31, 2023.

No additional allowance is deemed necessary as of June 30, 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 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

Below is a summary of accounts payable with related parties recorded as of June 30, 2024 and December 31, 2023, respectively:

(In thousands) June 30, 2024 December 31, 2023

(a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) $ 627 $ 379

Total $ 651 $ 397

4 unchanged sentences

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 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.

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 and non-employee directors.

On June 3, 2024, the Company’s shareholders approved an amendment to the 2018 Incentive Plan which increased the number of shares of the Company's common stock available for issuance under the 2018 Incentive Plan to 7,000,000 , an increase of 4,000,000 shares.

As of June 30, 2024, the Company had 1,065,174 time-based vesting restricted stock units unvested, 981,894 performance-based restricted stock units unvested, 1,086,403 shares of common stock vested and 3,866,529 shares remaining available for future awards under the 2018 Incentive Plan.

Stock-based compensation expense was $ 0.5 million and $ 0.8 million for the three months ended June 30, 2024 and 2023, respectively.

Stock-based compensation expense was $ 1.3 million and $ 1.8 million for the six months ended June 30, 2024 and 2023, respectively.

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

As of June 30, 2024, there was $ 6.8 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of 2.32 years.

Note 13 - Commitments and Contingencies

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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.

On June 6, 2024, the SEC announced that it had accepted an Offer of Settlement submitted by the Company in order to resolve 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.

Under the settlement, without admitting or denying the SEC’s findings in this matter, the Company consented to the entry of an administrative civil cease-and-desist order by the SEC (the “Order”) with respect to violations of Sections 17(a) of the Securities Act, and of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, as amended, and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), and 14a-9 thereunder, resulting from the materially false and misleading disclosures and other fraudulent conduct implemented by its former Chairman and CEO Zhou Min Ni and former CFO Jian Ming “Jonathan” Ni.

The Company agreed to payment of a civil monetary penalty of $ 3.9 million, paid during the three months ended June 30, 2024, which was recorded in other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive income (loss).

The Order states that, in determining to accept the Company’s Offer of Settlement, the SEC considered the numerous remedial actions promptly undertaken by the Company and its cooperation during the investigation.

The Company’s resolution follows charges brought by the SEC against the two former executives in a District Court action filed on June 3, 2024.

As a result of the SEC’s district court complaint against them, the two former executives agreed to pay civil fines and disgorgement, and agreed to be subject to officer and director bars.

Zhou Min Ni also agreed to a conduct-based injunction which enjoins him from directly or indirectly participating in the management of, or otherwise exercising any control of influence over the Company.

The Special Litigation Committee of the Board of Directors previously obtained a monetary settlement from the former executives that was ratified by the Delaware Chancery Court.

AnHeart Lease Guarantee

The Company provided a guarantee for two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively.

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

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

The Company previously determined that AnHeart was a VIE as a result of the guarantee.

However, the Company concluded it was not the primary beneficiary of AnHeart and therefore did not consolidate, because it did not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance.

During the three months ended June 30, 2024, the Company assumed the lease for 275 Fifth Avenue and no longer recognized AnHeart as a VIE.

As a result of the lease assumption, the lease guarantee liability of $ 5.4 million was reversed and an operating lease right-of-use asset and liability of $ 4.9 million was recorded on the condensed consolidated balance sheets.

As a result of the reversal, a gain of $ 5.4 million was recorded to other expense (income), net on the condensed consolidated statements of operations and comprehensive income (loss).

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

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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.

The Company incurred $ 2.2 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 June 30, 2024.

The Company expects to complete construction in June 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 subsequently defaulted on these obligations.

On October 25, 2023, the Company commenced a new legal action by filing a complaint in New York County Supreme Court to pursue legal remedies against AnHeart and Minsheng.

On October 25, 2023, the Company commenced a new legal action by filing a complaint in New York County Supreme Court to pursue legal remedies against AnHeart and Minsheng (the “2023 Action”).

As of the filing of the new summons and complaint, AnHeart and Minsheng are indebted to the Company in the amount of $ 474,000 .

In accordance with ASC Topic 460, Guarantees , the Company has determined that its maximum exposure resulting from the 275 Fifth Avenue lease guarantee includes future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases with a remaining term of approximately 10 years.

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

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

During the year ended December 31, 2022, the Company recorded a lease guarantee liability of $ 5.9 million.

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

As of 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.

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,

2024 (remaining nine months) $ 442

Thereafter 3,822

imputed interest ( 1,390 )

Total minimum lease payments $ 5,393

Note 14 - Subsequent Events

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

AnHeart and the Company have since reached a settlement agreement (the “Settlement Agreement”) for AnHeart to pay the Company $ 40,000 a month in rent through December 2024 and commence regular monthly rental payments in accordance with the lease for 275 Fifth Avenue.

The Settlement Agreement also provides that AnHeart will pay twenty-four monthly installments of $ 11,250 from January 2025 through December 2026 as payment for all back rent due.

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.

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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.

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

Note 14 - Subsequent Events

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

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

What changed 10-Q

Item 1. Financial Statements