HF Foods Group Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HF Foods Group Inc. and Subsidiaries Consolidated Financial Statements Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm - Year Ended December 31, 2024 (BDO USA, P.C.; Troy, Michigan; PCAOB ID # 243 ) 34 Consolidated Financial Statements Consolidated Balance Sheets 36 Consolidated Statements of Operations and Comprehensive Income (Loss) 37 Consolidated Statements of Cash Flows 38 Consolidated Statements of Changes in Shareholders’ Equity 40 Notes to Consolidated Financial Statements 41 33 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors HF Foods Group Inc. Las Vegas, Nevada Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of HF Foods Group Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 17, 2025, expressed an adverse opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Consolidated Financial Statements - Impact of Control Environment and Information Technology General Controls As disclosed in management’s report on internal control over financial reporting, the Company identified material weaknesses as of December 31, 2024. These material weaknesses included ineffective entity-level controls, ineffective information technology general controls (ITGCs), and ineffective controls over certain non-routine transactions, significant management estimates, and financial reporting. The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, the Company’s ability to (i) design and maintain an effective control environment, including maintaining a sufficient number of qualified resources to support and provide proper oversight and accountability over the performance of controls, (ii) design and maintain effective ITGCs for certain information systems relevant to the preparation of the financial statements, and (iii) design and maintain effective controls over financial reporting. We identified a critical audit matter over the completeness and accuracy of the consolidated financial statements. The ineffective control environment, including the ineffective ITGCs resulted in several material weaknesses. Designing the appropriate procedures and evaluating audit evidence to ensure the completeness and accuracy of the consolidated financial 34 statements, including higher risk areas, with an ineffective control environment, required especially challenging and subjective auditor judgment due to the increased extent of audit effort including the need to modify the nature and extent of audit evidence obtained. The primary procedures we performed to address this critical audit matter included: • Performing incremental procedures over material financial statement accounts such as revenue and receivables by i) increasing the sample sizes to perform certain audit procedures and ii) lowering the testing thresholds and by expanding the types of journal entries to be tested. • Evaluating the impact of improper segregation of duties and designing incremental procedures over disbursements. • Manually testing the completeness and accuracy of information provided by the Company and increasing the extent of our testing for items to be selected and agreed to source documents. Goodwill Impairment – Valuation of Reporting Unit As disclosed in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $38.8 million as of December 31, 2024. Goodwill is tested for impairment at the reporting unit level at least annually, or whenever events or changes in circumstances indicate that goodwill might be impaired. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. A change in underlying assumptions could cause a change in the results of the impairment test and, as such, could cause fair value to be less than the carrying amount and result in an impairment of goodwill in the future. In connection with the impairment tests completed as of September 30, 2024 and December 31, 2024 using the quantitative goodwill impairment assessment, the Company determined the fair value of its one reporting unit, using an average of the income approach, specifically, the discounted cash flow method, and market approaches, specifically, the comparable public company analysis and comparable acquisition analysis methods. The income approach uses a discounted cash flow model that reflects management significant assumptions that mainly related to revenue growth rates, gross profit margins, distribution, selling & administrative (DS&A) expenses and a discount rate. The comparable public company and comparable acquisition analysis methods apply a market multiple assumption to the Company’s EBITDA to calculate fair value. The fair value of the Company’s reporting unit exceeded the carrying value as of September 30, 2024. The results of the impairment testing as of December 31, 2024 concluded that the fair value of the Company’s reporting unit did not exceed the carrying value, and therefore the Company recorded a goodwill impairment charge of $46.3 million during the year ended December 31, 2024. We identified certain assumptions used in the valuation of goodwill for the reporting unit for both the September 30, 2024 and December 31, 2024 impairment tests as a critical audit matter. Management’s determination of the fair value of the reporting unit required the use of significant judgment due to the subjectivity and uncertainty of the gross profit margins, DS&A expenses and discount rate assumptions used in the income approach, and the EBITDA multiple assumption used in the comparable public company analysis and comparable acquisition analysis approaches. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: • Evaluating the reasonableness of the gross profit margins and DS&A expenses by: i) evaluating the consistency of the gross profit margins and DS&A expenses with historical results, ii) evaluating the consistency of the gross profit margins, and DS&A expenses with the Company’s objectives and strategies, and iii) comparing the forecasted gross profit margins and DS&A expenses with external market data and evidence obtained in other areas of the audit. • Utilizing personnel with specialized knowledge and skill with valuation to assist in assessing the reasonableness of the concluded fair value of the Company’s reporting unit, as well as the discount rate incorporated in the income approach and the EBITDA multiples incorporated in the comparable public company analysis and comparable acquisition analysis approaches. /s/ BDO USA, P.C. We have served as the Company’s auditor since 2021. Troy, Michigan March 17, 2025 35 HF Foods Group Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share data) December 31, 2024 December 31, 2023 ASSETS CURRENT ASSETS: Cash $ 14,467 $ 15,232 Accounts receivable, net of allowances of $ 1,557 and $ 2,119 54,107 47,524 Accounts receivable - related parties 239 308 Inventories 97,783 105,618 Prepaid expenses and other current assets 11,507 10,145 TOTAL CURRENT ASSETS 178,103 178,827 Property and equipment, net 149,572 133,136 Operating lease right-of-use assets 13,944 12,714 Long-term investments 2,350 2,388 Customer relationships, net 136,615 147,181 Trademarks, trade names and other intangibles, net 24,911 30,625 Goodwill 38,815 85,118 Other long-term assets 5,681 6,531 TOTAL ASSETS $ 549,991 $ 596,520 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Checks issued not presented for payment $ 5,687 $ 4,494 Line of credit 57,483 58,564 Accounts payable 50,592 51,617 Accounts payable - related parties 52 397 Current portion of long-term debt, net 5,410 5,450 Current portion of obligations under finance leases 3,797 1,749 Current portion of obligations under operating leases 4,177 3,706 Accrued expenses and other liabilities 18,001 17,287 TOTAL CURRENT LIABILITIES 145,199 143,264 Long-term debt, net of current portion 103,324 108,711 Obligations under finance leases, non-current 19,929 11,229 Obligations under operating leases, non-current 10,125 9,414 Deferred tax liabilities 29,392 29,028 Other long-term liabilities 728 6,891 TOTAL LIABILITIES 308,697 308,537 COMMITMENTS AND CONTINGENCIES (Note 17) SHAREHOLDERS’ EQUITY: Series A Participating Preferred Stock, par value $ 0.001 ; 100,000 shares authorized, no shares issued and outstanding — — Preferred Stock, $ 0.001 par value; 1,000,000 shares authorized; no shares issued and outstanding — — Common Stock, $ 0.0001 par value; 100,000,000 shares authorized; 54,735,073 and 54,153,391 shares issued and 52,737,650 and 52,155,968 shares outstanding as of December 31, 2024 and December 31, 2023, respectively 5 5 Treasury stock, at cost; 1,997,423 shares as of December 31, 2024 and December 31, 2023 ( 7,750 ) ( 7,750 ) Additional paid-in capital 604,235 603,094 Accumulated deficit ( 357,199 ) ( 308,688 ) TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 239,291 286,661 Noncontrolling interests 2,003 1,322 TOTAL SHAREHOLDERS’ EQUITY 241,294 287,983 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 549,991 $ 596,520 The accompanying notes are an integral part of these consolidated financial statements. 36 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except share and per share data) Year Ended December 31, 2024 2023 2022 Net revenue - third parties $ 1,197,926 $ 1,142,648 $ 1,163,525 Net revenue - related parties 3,741 5,845 6,942 TOTAL NET REVENUE 1,201,667 1,148,493 1,170,467 Cost of revenue - third parties 993,026 938,815 958,775 Cost of revenue - related parties 3,447 5,647 6,180 TOTAL COST OF REVENUE 996,473 944,462 964,955 GROSS PROFIT 205,194 204,031 205,512 Distribution, selling and administrative expenses 198,026 195,062 194,953 Goodwill impairment charges 46,303 — — (LOSS) INCOME FROM OPERATIONS ( 39,135 ) 8,969 10,559 Interest expense 11,425 11,478 7,457 Other expense (income), net 2,818 ( 1,091 ) ( 1,829 ) Change in fair value of interest rate swap contracts ( 1,693 ) 1,580 ( 817 ) Lease guarantee (income) expense ( 5,548 ) ( 377 ) 5,744 (LOSS) INCOME BEFORE INCOME TAXES ( 46,137 ) ( 2,621 ) 4 Income tax expense (benefit) 1,965 41 ( 231 ) NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ( 48,102 ) ( 2,662 ) 235 Less: net income (loss) attributable to noncontrolling interests 409 ( 488 ) ( 225 ) NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC. $ ( 48,511 ) $ ( 2,174 ) $ 460 (LOSS) EARNINGS PER COMMON SHARE - BASIC $ ( 0.92 ) $ ( 0.04 ) $ 0.01 (LOSS) EARNINGS PER COMMON SHARE - DILUTED $ ( 0.92 ) $ ( 0.04 ) $ 0.01 WEIGHTED AVERAGE SHARES - BASIC 52,552,490 53,878,237 53,757,162 WEIGHTED AVERAGE SHARES - DILUTED 52,552,490 53,878,237 53,863,448 The accompanying notes are an integral part of these consolidated financial statements. 37 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2024 2023 2022 Cash flows from operating activities: Net (loss) income $ ( 48,102 ) $ ( 2,662 ) $ 235 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization expense 26,677 25,918 24,936 Treasury stock received via legal settlement — ( 7,750 ) — Goodwill impairment charges 46,303 — — Other asset impairment charges — 1,200 422 Gain from disposal of property and equipment ( 12 ) ( 362 ) ( 1,327 ) (Credit) provision for expected credit losses ( 103 ) 701 82 Deferred tax expense (benefit) 364 ( 5,415 ) ( 5,012 ) Change in fair value of interest rate swap contracts ( 1,693 ) 1,580 817 Stock-based compensation 2,088 3,352 1,257 Non-cash lease expense 3,992 4,033 4,442 Lease guarantee (income) expense ( 5,548 ) ( 377 ) 5,744 Other non-cash expense (income) 1,169 493 ( 266 ) Changes in operating assets and liabilities: Accounts receivable ( 6,421 ) ( 4,039 ) ( 8,577 ) Accounts receivable - related parties 10 ( 95 ) 36 Inventories 7,835 14,673 ( 3,755 ) Prepaid expenses and other current assets ( 1,362 ) ( 1,069 ) ( 4,008 ) Other long-term assets 942 ( 3,418 ) ( 1,199 ) Checks issued not presented for payment 1,193 ( 17,452 ) 4,112 Accounts payable ( 1,025 ) ( 3,898 ) 15,207 Accounts payable - related parties ( 345 ) ( 1,132 ) ( 412 ) Operating lease liabilities ( 4,040 ) ( 3,730 ) ( 4,408 ) Accrued expenses and other liabilities 714 ( 2,199 ) 7,070 Net cash provided by operating activities 22,636 ( 1,648 ) 35,396 Cash flows from investing activities: Purchase of property and equipment ( 12,547 ) ( 3,514 ) ( 6,287 ) Proceeds from sale of property and equipment 48 2,000 7,794 Contribution to equity method investee ( 49 ) — — Payment made for acquisition of Sealand — — ( 34,848 ) Payment made for acquisition of Great Wall Group — — ( 17,445 ) Net cash used in investing activities ( 12,548 ) ( 1,514 ) ( 50,786 ) Cash flows from financing activities: Payments for tax withholding related to vested stock awards ( 175 ) ( 394 ) — Proceeds from line of credit 1,476,106 1,237,101 1,200,996 Repayment of line of credit ( 1,477,240 ) ( 1,231,647 ) ( 1,203,112 ) Proceeds from long-term debt — — 45,956 Repayment of long-term debt ( 5,470 ) ( 7,591 ) ( 11,336 ) Payment of debt financing costs — — ( 544 ) Repayment of obligations under finance leases ( 3,574 ) ( 2,480 ) ( 2,626 ) Repayment of promissory note payable - related party — — ( 4,500 ) Proceeds from noncontrolling interests — — 240 Cash distributions to noncontrolling interests ( 500 ) ( 884 ) ( 187 ) Net cash (used in) provided by financing activities ( 10,853 ) ( 5,895 ) 24,887 Net (decrease) increase in cash ( 765 ) ( 9,057 ) 9,497 Cash at beginning of the period 15,232 24,289 14,792 Cash at end of the period $ 14,467 $ 15,232 $ 24,289 The accompanying notes are an integral part of these consolidated financial statements. 38 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) (In thousands) Year Ended December 31, 2024 2023 2022 Supplemental disclosure of cash flow data: Cash paid for interest $ 11,623 $ 10,407 $ 6,230 Cash paid for income taxes 2,506 4,040 8,655 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liabilities $ 5,222 $ 2,583 $ 6,815 Property acquired in exchange for finance leases 14,322 1,763 1,272 Treasury stock received via legal settlement — 7,750 — Acquisition of noncontrolling interests 772 1,652 — 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 consolidated financial statements. 39 HF Foods Group Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data) Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Attributable to HF Foods Group Inc. Noncontrolling Interests Total Shareholders’ Equity Shares Amount Shares Amount Balance at January 1, 2022 53,706,392 $ 5 — — $ 597,227 $ ( 306,974 ) $ 290,258 $ 4,041 $ 294,299 Net income (loss) — — — — — 460 460 ( 225 ) 235 Capital contribution by shareholders — — — — — — — 806 806 Issuance of common stock pursuant to equity compensation plan 139,239 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 31,854 ) — — — ( 162 ) — ( 162 ) — ( 162 ) Distribution to shareholders — — — — — — — ( 186 ) ( 186 ) Stock-based compensation — — — — 1,257 — 1,257 — 1,257 Balance at December 31, 2022 53,813,777 $ 5 — $ — $ 598,322 $ ( 306,514 ) $ 291,813 $ 4,436 $ 296,249 Net loss — — — — — ( 2,174 ) ( 2,174 ) ( 488 ) ( 2,662 ) Issuance of common stock pursuant to equity compensation plan 391,983 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 52,369 ) — — — ( 232 ) — ( 232 ) — ( 232 ) Treasury stock received via legal settlement — — 1,997,423 ( 7,750 ) — — ( 7,750 ) — ( 7,750 ) Distribution to shareholders — — — — — — — ( 884 ) ( 884 ) Dissolution of noncontrolling interests — — — — 1,652 — 1,652 ( 1,742 ) ( 90 ) Stock-based compensation — — — — 3,352 — 3,352 — 3,352 Balance at December 31, 2023 54,153,391 $ 5 1,997,423 $ ( 7,750 ) $ 603,094 $ ( 308,688 ) $ 286,661 $ 1,322 $ 287,983 Net (loss) income — — — — — ( 48,511 ) ( 48,511 ) 409 ( 48,102 ) Issuance of common stock pursuant to equity compensation plan 638,721 — — — — — — — — Shares withheld for tax withholdings on vested awards ( 57,039 ) — — — ( 175 ) — ( 175 ) — ( 175 ) Distribution to shareholders — — — — — — — ( 500 ) ( 500 ) Dissolution of noncontrolling interests — — — — ( 772 ) — ( 772 ) 772 — Stock-based compensation — — — — 2,088 — 2,088 — 2,088 Balance at December 31, 2024 54,735,073 $ 5 1,997,423 $ ( 7,750 ) $ 604,235 $ ( 357,199 ) $ 239,291 $ 2,003 $ 241,294 The accompanying notes are an integral part of these consolidated financial statements. 40 HF Foods Group Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Organization and Description of Business Organization and General HF Foods Group Inc., headquartered in Las Vegas, Nevada, operating through our subsidiaries (collectively “HF Foods” or the “Company”) is a marketer and distributor of fresh produce, frozen and dry food, and non-food products to Asian restaurants, as well as other foodservice customers, throughout the United States. With multiple distribution centers located throughout the nation, HF Foods supplies Asian cuisine through its relationships with growers and suppliers of food products in North America, South America and Asia. The Company’s business consists of one operating segment, which is also its one reportable segment: HF Foods, which operates solely in the United States, offers specialty restaurant foods and supplies to its customers. Note 2 - Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding annual financial reporting. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements for 2024 and 2023 include the accounts of HF Foods, and for 2022, the accounts of HF Foods and certain variable interest entities for which the Company was the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interest in its consolidated statements of operations and comprehensive income (loss) equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party. Reclassifications During 2024, the Company reclassified the presentation of checks issued not presented for payment from cash flows from financing activities to cash flows from operating activities in the consolidated statement of cash flows. Prior periods amounts were reclassified to conform to the current period presentation. The reclassification did not impact consolidated balance sheets or consolidated statements of operations and comprehensive income (loss). Variable Interest Entities GAAP provides guidance on the identification of a variable interest entity (“VIE”) and financial reporting for an entity over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive the economic benefits of the VIE that could be potentially significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. As of and for the years ended December 31, 2023 and 2022, the Company had one VIE, AnHeart, Inc. (“AnHeart”), for which the Company was not the primary beneficiary and therefore did not consolidate. Effective April 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 December 31, 2024. See Note 17 - Commitments and Contingencies for additional information on AnHeart. During the year ended December 31, 2022, the Company consolidated FUSO Trucking, LLC (“FUSO”) which was established to provide exclusive trucking services to the Company and was dissolved in 2022. The results of operations and cash flows of FUSO prior to being dissolved were immaterial during 2022. 41 Noncontrolling Interests GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s consolidated balance sheets. In addition, the amounts attributable to the net income (loss) of those noncontrolling interests are reported separately in the consolidated statements of operations and comprehensive loss. As of December 31, 2024 and December 31, 2023, noncontrolling interest equity consisted of the following: ($ in thousands) Ownership of noncontrolling interest at December 31, 2024 December 31, 2024 December 31, 2023 HF Foods Industrial, LLC (“HFFI”) (a) N/A $ — $ ( 759 ) Min Food, Inc. 39.75 % 1,561 1,715 Monterey Food Service, LLC 35.00 % 442 366 Total $ 2,003 $ 1,322 _______________ (a) During the year ended December 31, 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 consolidated balance sheets. Uses of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, inventory reserves, impairment of long-lived assets, impairment of goodwill, and the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations. Recent Issued Accounting Pronouncements not yet Adopted In December 2023, the FASB issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, 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. This guidance 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. Upon adoption, ASU 2023-09 should be applied on a prospective basis while retrospective application is permitted. The Company does not expect this adoption to have a material impact on its consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The guidance requires additional disclosure of certain amounts included in the expense captions presented on the Statement of Operations as well as disclosures about selling expenses. This guidance is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. The Company is in the process of assessing the impact the adoption of this guidance will have on the Company’s financial statement disclosures. Recently Adopted Accounting Pronouncements In November 2023, the FASB issued 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. See Note 16 - Segment Information in the accompanying notes to the consolidated financial statements for further detail. 42 Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or shorter as cash equivalents. As of December 31, 2024 and December 31, 2023, the Company had no cash equivalents. Checks issued not presented for payment represent accounts at banks with an aggregate excess of the amount of outstanding checks over the cash balances and are presented in current liabilities in the consolidated balance sheets. The net changes to checks issued not presented for payment are presented in the operating section of the statement of cash flows. Accounts Receivable, net Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for expected credit losses in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for expected credit losses based on a combination of factors. The Company maintains an allowance for expected credit losses based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. Inventories The Company’s inventories, consisting mainly of food and other foodservice-related products, are considered finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash consideration received from vendors, primarily in the form of rebates. The Company adjusts its inventory balance for slow-moving, excess and obsolete inventories to the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment: Estimated Useful Lives Automobiles 3 to 7 years Buildings and improvements 7 to 39 years Furniture and fixtures 4 to 10 years Machinery and equipment 3 to 10 years Leasehold improvements are amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term. Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations and comprehensive income (loss) in distribution, selling and administrative expenses. 43 Software Costs In accordance with ASC 350-40, Internal-Use Software, the Company capitalizes certain computer software licenses and software implementation costs related to developing or obtaining computer software for internal use. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task that it previously did not perform. Internal use software is amortized on a straight-line basis over a three to five year period. Capitalized costs include direct acquisitions as well as software and software development acquired under capitalized leases and internal labor where appropriate. Capitalized software purchases and related development costs, net of accumulated amortization, were $ 4.1 million as of December 31, 2024 and $ 5.1 million as of December 31, 2023, and are included in other long-term assets on the consolidated balance sheets. Business Combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive income (loss). Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. The Company’s policy is to test goodwill for impairment annually on the last day of the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, or at management’s discretion, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. As of December 31, 2024 and December 31, 2023, 44 the Company has one reporting unit for purposes of testing goodwill for impairment. See Note 8 - Goodwill and Acquired Intangible Assets for additional information. Determining the fair value of a reporting unit requires the application of judgment and involves the use of significant estimates and assumptions including, projections of future cash flows, which include forecasted revenue, discount rate, and other factors which can be affected by changes in business climate, economic conditions, the competitive environment and other factors. The Company also considers the use of market approaches, such as the comparable public company analysis and comparable acquisitions analysis, to estimate the fair value of the reporting unit. The Company bases these fair value estimates on assumptions management believes to be reasonable but which are unpredictable and inherently uncertain. A change in underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amount and result in an impairment of goodwill in the future. Additionally, if actual results are not consistent with the estimates and assumptions or if there are significant changes to the Company’s planned strategy, it may cause the fair value of the reporting unit to be less than its carrying amount and result in an impairment of goodwill in the future. The Company corroborates the reasonableness of the total fair value of the reporting unit by assessing the implied control premium based on the Company’s market capitalization. The Company’s market capitalization is calculated using the relevant shares outstanding and stock price of the Company’s publicly traded shares. In the event of a goodwill impairment, the Company would be required to record an impairment, which would impact earnings and reduce the carrying amounts of goodwill on the consolidated balance sheet. Intangible Assets, net Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows: Estimated Useful Lives Non-competition agreements 3 years Trademarks and trade names 10 years Customer relationships 10 to 20 years Long-term Investments The Company’s investments in unconsolidated entities consist of an equity investment and an investment without readily determinable fair value. The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities , using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in earnings equal to the difference between the carrying value and fair value. Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures . Under the equity method, the Company initially records its investment at cost, which is included in the equity method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company did no t record any impairment loss on its long-term investments during the years ended December 31, 2024, 2023 and 2022. 45 Impairment of Long-lived Assets The Company assesses its long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of an asset or asset group is measured by comparison of its carrying amount to future undiscounted cash flows the asset or asset group is expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset or asset group exceeds its fair value. The Company impaired machinery related to HFFI and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2023. The Company fully impaired its acquired developed technology associated with the Syncglobal joint venture and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 . Fair value was determined using Level 3 inputs at the time of impairment. The Company did no t record any impairment loss on its long-lived assets during the year ended December 31, 2024. Insurance and Claim Costs The Company maintains workers compensation and general liability insurance with licensed insurance carriers. Beginning in April 2020, the Company is self-insured for auto claims less than $ 100,000 per claim. Insurance and claims expense represent premiums the Company paid and the accruals made for claims within the Company’s self-insured retention amounts. A liability is recognized for the estimated cost of all self-insured claims including an estimate of incurred but not reported claims based on historical experience and for claims expected to exceed the Company’s policy limits. The Company establishes reserves for anticipated losses and expenses related to auto liability claims. The reserves consist of specific reserves for all known claims and an estimate for claims incurred but not reported, and losses arising from known claims ultimately settling in excess of insurance coverage using loss development factors based upon industry data and past experience. In determining the liability, the Company specifically reviews all known claims and records a liability based upon the Company’s best estimate of the amount to be paid. In making the estimate, the Company considers the amount and validity of the claim, as well as the Company’s past experience with similar claims. In establishing the reserve for claims incurred but not reported, the Company considers its past claims history, including the length of time it takes for claims to be reported to the Company. These reserves are periodically reviewed and adjusted to reflect the Company’s experience and updated information relating to specific claims. As of December 31, 2024 and December 31, 2023, the Company has recorded a self-insurance liability of $ 1.7 million and $ 1.7 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets. Revenue Recognition The Company recognizes revenue from the sale of products when control of each product passes to the customer and the customer accepts the goods, which occurs at delivery. The majority of customer orders are fulfilled within a day and customer payment terms are typically thirty days or less from invoice date. Our 100% satisfaction guarantee permits our customers to reject part of the order or the entire order within twenty-four hours of receipt without any penalty. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales. The Company follows ASC Topic 606 , Revenue from Contracts with Customers . The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The Company’s contracts contain performance obligations which are satisfied when customers have physical possession of each product. The Company’s revenue streams are recognized at a specific point in time. Cost of Revenue Cost of revenue primarily includes inventory costs (net of vendor consideration, primarily in the form of rebates), inbound freight, customs clearance fees and other miscellaneous expenses. 46 Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses consist primarily of salaries and benefits for employees and contract laborers, trucking and fuel expenses for deliveries, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses. Shipping and Handling Costs Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are included in distribution, selling and administrative expenses. Shipping and handling costs were $ 69.2 million, $ 76.0 million and $ 83.7 million for the years ended December 31, 2024, 2023 and 2022, respectively, and includes estimates for labor associated with shipping and handling activities for the years ended December 31, 2023 and 2022. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities based on the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on our assessment, it is more likely than not that the deferred tax assets will be realized through future taxable income. In 2023, management established a valuation allowance of $ 0.7 million against certain deferred taxes attributable to the Company’s subsidiary, HFFI. In 2024, the Company dissolved its subsidiary, HFFI, and as such, the deferred tax balances and corresponding valuation allowance associated with this entity were written off during the year ended December 31, 2024. There is no remaining valuation allowance as of December 31, 2024. The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist. The Company records uncertain tax positions in accordance with ASC Topic 740, Income Taxes (“ASC 740”), on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 12 - Income Taxes for additional information. In 2021, the Organization for Economic Co-operation and Development (“OECD”) published the Tax Challenges Arising from the Global Anti-Base Erosion Model Rules (“Pillar Two”), also referred to as the GloBE Rules or Pillar Two. The rules are designed to ensure large multinational enterprises (“MNEs”) pay a minimum level of tax (15%) on income of each jurisdiction. The legislation applies to MNEs with annual consolidated group revenues of at least €750 million if at least one jurisdiction in which the MNE operates has enacted tax laws in accordance with the Pillar Two framework. Many aspects of Pillar Two are effective for tax years beginning after January 1, 2024 with certain remaining aspects to be effective for tax years beginning January 1, 2025 or later. The Company currently does not have any foreign operations that would trigger the application of Pillar Two and therefore it is not anticipated to have a significant impact. The Company will continue to monitor the effects of Pillar Two and any potential future developments. Leases The Company accounts for leases following ASC Topic 842, Leases (“ASC 842”). The Company determines if an arrangement is a lease at inception and also considers classification of leases as operating or finance. Operating leases are included in 47 operating lease ROU assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under finance leases, and obligations under finance leases, non-current on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company's variable lease payments primarily consist of real estate, maintenance and usage charges. The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. The Company has also elected to combine lease and non-lease components when measuring lease liabilities for vehicle and equipment leases. Derivative Financial Instruments In accordance with the guidance in ASC Topic 815, Derivatives and Hedging (“ASC 815”) , d erivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. The Company has not designated its interest rate swap (“IRS”) contracts as hedges for accounting treatment. Pursuant to GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the consolidated statements of operations and comprehensive income (loss). Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty. Concentrations and Credit Risk The Company had no customers that comprised more than 10% of consolidated net sales for the years ended December 31, 2024, 2023, or 2022, respectively. At December 31, 2024 and 2023, the Company had no customers that comprised more than 10% of consolidated accounts receivable. Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s large customer base and ongoing assessments of its customers’ creditworthiness and outstanding balances. The Company maintains cash balances with banks which at times exceed federally insured limits. The Company has not experienced any losses in such accounts. Segment Reporting ASC Topic 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews operating results and makes resource allocations on a consolidated basis and thus the Company has concluded it has one operating and reportable segment. See Note 16 - Segment Information in the accompanying notes to the consolidated financial statements for further detail. Stock-Based Compensation The Company grants restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) annually. Stock-based compensation expense is based on the fair value of the stock awards at the grant date and is recognized, net of forfeitures, over the requisite service period. See Note 14 - Stock-Based Compensation to the consolidated financial statements for further information regarding stock-based compensation. 48 Note 3 - Revenue The following table presents the Company’s net revenue disaggregated by principal product categories: Year Ended December 31, ($ in thousands) 2024 2023 2022 Seafood $ 394,032 33 % $ 361,219 31 % $ 354,220 30 % Asian Specialty 305,584 25 % 305,466 27 % 299,215 26 % Meat and Poultry 253,008 21 % 215,789 19 % 238,276 20 % Produce 128,837 11 % 123,202 11 % 126,560 11 % Packaging and Other 62,677 5 % 71,245 6 % 84,489 7 % Commodity 57,529 5 % 71,572 6 % 67,707 6 % Total $ 1,201,667 100 % $ 1,148,493 100 % $ 1,170,467 100 % Note 4 - Balance Sheet Components Accounts receivable, net consisted of the following: (In thousands) December 31, 2024 December 31, 2023 Accounts receivable $ 55,664 $ 49,643 Less: allowance for expected credit losses ( 1,557 ) ( 2,119 ) Accounts receivable, net $ 54,107 $ 47,524 Movement of allowance for expected credit losses was as follows: Year Ended December 31, (In thousands) 2024 2023 2022 Beginning balance $ 2,119 $ 1,442 $ 1,530 (Credit) provision for expected credit losses ( 103 ) 701 82 Bad debt write-offs ( 459 ) ( 24 ) ( 170 ) Ending balance $ 1,557 $ 2,119 $ 1,442 Prepaid expenses and other current assets consisted of the following: (In thousands) December 31, 2024 December 31, 2023 Prepaid expenses $ 4,443 $ 4,591 Advances to suppliers 5,606 3,340 Other current assets 1,458 2,214 Prepaid expenses and other current assets $ 11,507 $ 10,145 49 Property and equipment, net consisted of the following: (In thousands) December 31, 2024 December 31, 2023 Automobiles (1) $ 50,565 $ 37,256 Buildings 63,045 63,045 Building improvements 22,709 22,014 Furniture and fixtures 398 474 Land 49,929 49,929 Machinery and equipment 13,216 11,532 Construction in progress 10,370 1,391 Subtotal 210,232 185,641 Less: accumulated depreciation ( 60,660 ) ( 52,505 ) Property and equipment, net $ 149,572 $ 133,136 _________________ (1) The cost and accumulated depreciation of property and equipment related to finance leases was $ 36.1 million and $ 14.3 million, respectively, at December 31, 2024 and $ 22.2 million and $ 10.3 million, respectively, at December 31, 2023, which primarily relates to Automobiles. During the year ended December 31, 2024, the Company entered into finance leases for automobiles which mature in 4 to 7 years and have a weighted average discount rate of 6.3 %. The total future minimum lease payments under finance leases as of December 31, 2024 is $ 35.7 million. As of December 31, 2024, the Company had additional automobile leases that had not yet commenced which total $ 15.4 million in future minimum lease payments. Depreciation expense was $ 10.4 million, $ 9.6 million and $ 9.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. During the year ended December 31, 2023, the Company impaired machinery and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the consolidated statements of operations and comprehensive income (loss). Long-term investments consisted of the following: (In thousands) Ownership as of December 31, 2024 December 31, 2024 December 31, 2023 Asahi Food, Inc. (“Asahi”) 49 % $ 550 $ 588 Pt. Tamron Akuatik Produk Industri (“Tamron”) 12 % 1,800 1,800 Total long-term investments $ 2,350 $ 2,388 The investment in Tamron is accounted for using the measurement alternative under Accounting Standards Codification (“ASC”) Topic 321 Investments—Equity Securities , which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. The Company determined there was no impairment for the years ended December 31, 2024, 2023 and 2022 for these investments. Accrued expenses and other liabilities consisted of the following: (In thousands) December 31, 2024 December 31, 2023 Accrued compensation $ 7,497 $ 7,941 Accrued professional fees 553 1,353 Accrued interest and fees 938 1,276 Self-insurance liability 1,671 1,723 Advance from customers 3,081 1,390 Other 4,261 3,604 Total accrued expenses and other liabilities $ 18,001 $ 17,287 50 Note 5 - Fair Value Measurements The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the dates indicated: December 31, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (In thousands) Assets: Interest rate swaps $ — $ 504 $ — $ 504 $ — $ 412 $ — $ 412 Liabilities: Interest rate swaps $ — $ — $ — $ — $ — $ 1,601 $ — $ 1,601 The Company follows the provisions of ASC Topic 820 Fair Value Measurement which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments. See Note 9 - Derivative Financial Instruments for additional information regarding the Company’s interest rate swaps. 51 Carrying Value and Estimated Fair Value of Outstanding Debt - The following table presents the carrying value and estimated fair value of the Company’s outstanding debt as described in Note 10 - Debt , including the current portion, as of the dates indicated: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Carrying Value December 31, 2024 Fixed rate debt: Bank of America $ — $ — $ 104 $ 113 Variable rate debt: JPMorgan Chase $ — $ 101,040 $ — $ 101,040 Bank of America $ — $ 2,063 $ — $ 2,063 East West Bank $ — $ 5,518 $ — $ 5,518 December 31, 2023 Fixed rate debt: Bank of America $ — $ — $ 151 $ 169 Other finance institutions $ — $ — $ 43 $ 45 Variable rate debt: JPMorgan Chase $ — $ 106,079 $ — $ 106,079 Bank of America $ — $ 2,193 $ — $ 2,193 East West Bank $ — $ 5,675 $ — $ 5,675 The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments. For the Company’s fixed rate debt, the fair values were estimated using discounted cash flow analyses, based on the current incremental borrowing rates for similar types of borrowing arrangements. See Note 10 - Debt for additional information regarding the Company’s debt. Nonrecurring Fair Values The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. As further disclosed in Note 8 - Goodwill and Acquired Intangible Assets, we performed a quantitative goodwill impairment analysis as of December 31, 2024. The results of testing as of December 31, 2024 concluded that the estimated fair value of our one reporting unit fell short of carrying value, and therefore impairment existed as of that date. Goodwill impairment charges of $ 46.3 million were recorded in the consolidated statements of operations during the year ended December 31, 2024. The calculation of the fair value of our reporting unit was determined using Level 3 fair value measurements. No other adjustments to fair value from the write-down of asset values due to impairment were made during the year ended December 31, 2024. During the year ended December 31, 2023, the Company partially impaired machinery related to the operations of HFFI and recognized impairment expense of $ 1.2 million in distribution, selling and administrative expense in the consolidated statements of operations and comprehensive income (loss). The machinery was sold during the year ended December 31, 2023. The impairment was based on sales prices of similar equipment listed by third-party sellers and considered a Level 3 fair value measurement. During the year ended December 31, 2022, the Company fully impaired its acquired developed technology associated with the Syncglobal, Inc. joint venture and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss) during the year ended December 31, 2022. 52 There were no assets other than goodwill that were carried at nonrecurring fair value at December 31, 2024. There were no assets carried at nonrecurring fair value at December 31, 2023. Note 6 - Leases The Company leases office space, warehouses and vacant land that is currently being developed under non-cancelable operating leases, with terms typically ranging from one to thirty years , as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment with various expiration dates through 2051. The Company determines whether an arrangement is or includes an embedded lease at contract inception. Operating and finance lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Operating lease expense is recognized on a straight-line basis over the lease term. The Company also recognizes finance lease assets and finance lease liabilities at inception, with lease expense recognized as interest expense and amortization of the lease payment. Variable lease costs were insignificant in the years ended December 31, 2024, 2023 and 2022. Operating Leases The components of operating lease expense were as follows: Year Ended December 31, ($ in thousands) 2024 2023 2022 Operating lease cost $ 4,709 $ 4,342 $ 4,045 Short-term lease cost $ 868 $ 1,507 $ 1,037 Weighted average remaining lease term (months) 58 42 47 Weighted average discount rate 5.4 % 4.5 % 3.8 % Year Ended December 31, (In thousands) 2024 2023 2022 Operating cash flows from operating leases $ 4,623 $ 4,234 $ 4,005 Finance Leases The components of lease expense were as follows: Year Ended December 31, (In thousands) 2024 2023 2022 Finance leases cost: Amortization of ROU assets $ 4,249 $ 2,639 $ 2,808 Interest on lease liabilities 1,284 755 787 Total finance leases cost $ 5,533 $ 3,394 $ 3,595 Supplemental cash flow information related to finance leases was as follows: Year Ended December 31, (In thousands) 2024 2023 2022 Operating cash flows from finance leases $ 1,205 $ 657 $ 670 53 Supplemental balance sheet information related to finance leases was as follows: ($ in thousands) December 31, 2024 December 31, 2023 Property and equipment, at cost $ 36,072 $ 22,203 Accumulated depreciation ( 14,262 ) ( 10,288 ) Property and equipment, net $ 21,810 $ 11,915 Weighted average remaining lease term (months) 143 219 Weighted average discount rate 5.9 % 5.7 % Maturities of lease liabilities are as follows: Operating Leases (In thousands) Related Party (1) Third Party Total Finance Leases Year Ended December 31, 2025 $ 331 $ 4,834 $ 5,165 $ 5,038 2026 — 4,856 4,856 4,604 2027 — 2,408 2,408 4,146 2028 — 1,666 1,666 3,243 2029 — 694 694 2,020 Thereafter — 3,148 3,148 16,610 Total lease payments 331 17,606 17,937 35,661 Less: Imputed interest ( 6 ) ( 3,629 ) ( 3,635 ) ( 11,935 ) Total $ 325 $ 13,977 $ 14,302 $ 23,726 _______________ (1) See Note 13 - Related Party Transactions As of December 31, 2024, the Company had additional leases for vehicles that had not yet commenced which total $ 15.4 million in future minimum lease payments and were excluded from the table above. These vehicle leases are expected to commence during the year ended December 31, 2025 with lease terms of 4 to 7 years. Also excluded from the table above, the Company entered into a lease on September 30, 2024 for a new Atlanta, Georgia based distribution center which commenced February 1, 2025 and total $ 15.8 million in future minimum lease payments over 10 years. Note 7 - Acquisitions Acquisition of Sealand On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand, including equipment, machinery and vehicles. The acquisition was completed to expand the Company’s territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. The price for the purchased assets was $ 20.0 million paid in cash at closing. In addition to the closing cash payment, the Company separately acquired all of the sellers’ saleable product inventory, for approximately $ 14.4 million and additional fixed assets for approximately $ 0.5 million. The Company accounted for this transaction under ASC 805 Business Combinations, by applying the acquisition method of accounting and established a new basis of accounting on the date of acquisition. The assets acquired by the Company were measured at their estimated fair values as of the date of acquisition. Goodwill is calculated as the excess of the purchase price over the net assets recognized and represent synergies and benefits expected as a result from combining operations with an emerging national presence. The transaction costs for the acquisition for the year ended December 31, 2022 totaled approximately $ 0.7 million and were reflected in distribution, selling and administrative expenses in the consolidated statement of operations and comprehensive income. 54 The information included herein was prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using a combination of quoted market prices, discounted cash flows, and other estimates made by management. Purchase Price Allocation The total consideration paid to acquire the assets and liabilities of Sealand, as set forth below: (In thousands) Amount Inventory $ 13,846 Property plant, and equipment 1,424 Right-of-use assets 127 Intangible assets 14,717 Total assets acquired 30,114 Obligations under operating leases 127 Total liabilities assumed 127 Net assets 29,987 Goodwill 4,861 Total consideration $ 34,848 The Company recorded acquired intangible assets of $ 14.7 million, which were measured at fair value using Level 3 inputs. These intangible assets include tradenames and trademarks of $ 4.4 million, customer relationships of $ 8.9 million and non-competition agreements of $ 1.4 million. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology and Level 3 inputs including a discount rate. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1 % and a discount rate. The fair value of non-competition agreements was determined by applying the income approach and Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 17.5 % to 18.0 %. The useful lives of the tradenames and trademarks are ten years , customer relationships are ten years and non-competition agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. Unaudited Supplemental Pro Forma Financial Information The following table presents the Company’s unaudited pro forma results for the year ended December 31, 2022, as if the Sealand Acquisition had been consummated on January 1, 2021. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes. (In thousands, except share and per share data) Year Ended December 31, 2022 Pro forma net revenue $ 1,202,296 Pro forma net income attributable to HF Foods $ 35 Pro forma earnings per common share — basic $ — Pro forma earnings per common share — diluted $ — Pro forma weighted average shares — basic 53,757,199 Pro forma weighted average shares — diluted 53,757,199 55 Note 8 - Goodwill and Acquired Intangible Assets Goodwill The changes in the carrying amount of goodwill are presented below: (In thousands) Amount Balance at December 31, 2022 $ 85,118 No Goodwill activity — Balance at December 31, 2023 $ 85,118 Goodwill impairment charges ( 46,303 ) Balance at December 31, 2024 $ 38,815 Accumulated impairment for goodwill is $ 384.5 million as of December 31, 2024 and $ 338.2 million as of December 31, 2023 and 2022. Prior to the goodwill impairment charge in the current year, the accumulated impairment resulted from an impairment during the year ended December 31, 2020. There is only one reporting unit at December 31, 2024 and 2023. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicated goodwill might be impaired. The Company performed a quantitative goodwill impairment assessment as of December 31, 2023, as a result of the Company’s results of operations during 2023 compared to previous forecasts, combined with the level of the Company’s stock price. The annual goodwill impairment test in 2023 resulted in an estimated fair value that exceeded carrying value at December 31, 2023, and therefore, the Company concluded no impairment was required to be recorded during the year ended December 31, 2023. As of September 30, 2024, the Company concluded that a triggering event occurred due to a sustained decline in the Company’s stock price since December 31, 2023, which required interim testing for goodwill impairment in accordance with ASC 350. Accordingly, the Company performed a quantitative assessment as of September 30, 2024. 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 period ended September 30, 2024. As a result of continued declines in the level of stock price, the Company performed a quantitative impairment assessment as of December 31, 2024. The results of the testing as of December 31, 2024, concluded that the estimated fair value of the reporting unit fell short of carrying value, and therefore impairment existed as of that date. A goodwill impairment charge of $ 46.3 million was recorded in the consolidated statements of operations during the year ended December 31, 2024. For the December 31, 2024, September 30, 2024 and December 31, 2023 impairment tests, the Company used a combination of discounted cash flow (“DCF”) model and market approaches, such as public company comparable analysis and comparable acquisitions analysis to determine fair value of the reporting unit. The income approach and market approaches were weighted equally to estimate fair value. The income approach requires detailed forecasts of cash flows, including assumptions such as revenue growth rates, gross profit margins, distribution, selling and administrative expenses, among other assumptions, and an estimate of weighted-average cost of capital which the Company believes approximate the assumptions from a market participant’s perspective. The market approaches are primarily impacted by an enterprise value multiple of EBITDA. These estimates incorporate many uncertain factors which could be impacted by changes in market conditions, interest rates, growth rate, tax rates, costs, customer behavior, regulatory environment and other macroeconomic changes. In addition, the Company considered the reasonableness of the fair value of the reporting unit by assessing the implied enterprise value control premium based on the Company’s market capitalization. The Company determined that the implied control premium was reasonable which corroborates the Company’s fair value estimates. The Company categorized the fair value determination as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. 56 If, in future periods, the financial performance of the reporting unit does not meet forecasted expectations, or a prolonged further decline occurs in the market price of the Company’s common stock, it may cause a change in the results of the impairment assessment and, as such, could result in further impairment of goodwill. Acquired Intangible Assets In connection with the Sealand acquisition in 2022, the Company acquired $ 14.7 million of intangible assets, primarily representing trademarks and trade names of $ 4.4 million, customer relationships of $ 8.9 million and non-compete agreements of $ 1.4 million. The useful lives of trademarks and trade names are ten years , customer relationships are ten years and non-compete agreements are three years , with a weighted average amortization period of approximately nine years . The associated goodwill is deductible for tax purposes. In connection with the Great Wall Group acquisition in 2021, HF Foods acquired $ 30.1 million of intangible assets, primarily representing a non-competition agreement, trademarks and trade names and customer relationships, which have an estimated amortization period of approximately 3 years, 10 years, and 10 years, respectively. In connection with the acquisition of B&R Global in 2019, HF Foods acquired $ 188.5 million of intangible assets, primarily representing trademarks and trade names and customer relationships which have an estimated amortization period of 10 and 20 years, respectively . December 31, 2024 December 31, 2023 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Non-competition agreements $ 3,892 $ ( 3,723 ) $ 169 $ 3,892 $ ( 2,429 ) $ 1,463 Trademarks and trade names 44,207 ( 19,465 ) 24,742 44,207 ( 15,045 ) 29,162 Customer relationships 185,266 ( 48,651 ) 136,615 185,266 ( 38,085 ) 147,181 Total $ 233,365 $ ( 71,839 ) $ 161,526 $ 233,365 $ ( 55,559 ) $ 177,806 The Company evaluated possible triggering events that would indicate long-lived asset impairment assessment. The Company impaired its acquired developed technology associated with the former Syncglobal, Inc. joint venture and recognized impairment expense of $ 0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 . There were no triggering events identified for the remaining acquired intangible assets at December 31, 2022. No impairment was recorded against acquired intangible assets for the years ended December 31, 2024 and 2023. Amortization expense for acquired intangible assets was $ 16.3 million, $ 16.3 million and $ 15.7 million for the years ended December 31, 2024, 2023 and 2022, respectively. The estimated future amortization expense for intangible assets is presented below: (In thousands) Amount Year ending December 31, 2025 $ 15,152 2026 14,987 2027 14,987 2028 14,987 2029 14,499 Thereafter 86,914 Total $ 161,526 57 Note 9 - Derivative Financial Instruments Derivative Instruments The Company utilizes interest rate swaps (“IRS”) for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 10 - Debt ). The Company does not use any other derivative financial instruments for trading or speculative purposes. On August 20, 2019, HF Foods entered into two IRS contracts with East West Bank (the “EWB IRS”) for initial notional amounts of $ 1.1 million and $ 2.6 million, respectively. On April 20, 2023, the Company amended the corresponding mortgage term loans, which pegged the two mortgage term loans to 1-month Term SOFR (Secured Overnight Financing Rate) + 2.29 % per annum for the remaining duration of the term loans. The amended EWB IRS contracts fixed the two term loans at 4.23 % per annum until maturity in September 2029. On December 19, 2019, HF Foods entered into an IRS contract with Bank of America (the “BOA IRS”) for an initial notional amount of $ 2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount. On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to Term SOFR + 2.5 % . The BOA IRS was modified accordingly to fix the SOFR based loan to approximately 4.50 %. The term loan and corresponding BOA IRS contract mature in December 2029. On March 15, 2023, the Company entered into an amortizing IRS contract with JPMorgan Chase for an initial notional amount of $ 120.0 million, effective from March 1, 2023 and expiring in March 2028, as a means to partially hedge its existing floating rate loans exposure. Pursuant to the agreement, the Company will pay the swap counterparty a fixed rate of 4.11 % in exchange for floating payments based on Term SOFR. The Company evaluated the aforementioned IRS contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value changes of these IRS contracts are accounted for and recognized as a change in fair value of interest rate swap contracts in the consolidated statements of operations and comprehensive income (loss). As of December 31, 2024, the Company determined that the fair values of the IRS contracts were $ 0.5 million in an asset position and none in a liability 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. Note 10 - Debt Long-term debt at December 31, 2024 and December 31, 2023 is summarized as follows: ($ in thousands) Bank Name Maturity Interest Rate at December 31, 2024 December 31, 2024 December 31, 2023 Bank of America (a) October 2026 - December 2029 4.34 % - 7.22 % $ 2,176 $ 2,362 East West Bank (b) August 2027 - September 2029 6.81 % - 8.00 % 5,518 5,675 JPMorgan Chase (c) January 2030 6.53 % 101,255 106,337 Other finance institutions (d) July 2024 N/A — 45 Total debt, principal amount 108,949 114,419 Less: debt issuance costs ( 215 ) ( 258 ) Total debt, carrying value 108,734 114,161 Less: current portion ( 5,410 ) ( 5,450 ) Long-term debt $ 103,324 $ 108,711 _______________ (a) Loan balance consists of real estate term loan and equipment term loan, collateralized by one real property and specific equipment. The real estate term loan is pegged to TERM SOFR + 2.5 %. (b) Real estate term loans with East West Bank are collateralized by three real properties. Balloon payments of $ 2.2 million and $ 3.3 million are due at maturity in 2027 and 2029, respectively. 58 (c) Real estate term loan with a principal balance of $ 101.3 million as of December 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 December 31, 2024, the Company was in compliance with its covenants. On March 31, 2022, the Company amended the JPM Credit Agreement, defined below, extending the Real Estate Term Loan for five years . The amendment provided for an increase in the Real Estate Term Loan from $ 69.0 million to $ 115.0 million with a 1-month SOFR plus a credit adjustment of 0.1 % plus 1.875 % per annum. The future maturities of long-term debt as of December 31, 2024 are as follows: (In thousands) Amount Year ending December 31, 2025 $ 5,410 2026 5,385 2027 7,194 2028 5,229 2029 9,585 Thereafter 75,931 Total $ 108,734 Credit Facility On November 4, 2019, the Company entered into a credit agreement with JPMorgan Chase (the “JPM Credit Agreement”). The JPM Credit Agreement provided for a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. On January 17, 2020, the Company and certain of the wholly-owned subsidiaries and affiliates of the Company as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement. On December 30, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No. 3 to the Second Amended Credit Agreement with JPMorgan Chase, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement, as amended, provided for (i) a $ 100.0 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), (ii) mortgage-secured term loan of $ 75.6 million, (the “Term Loan”), and (iii) amendment in the referenced interest rate from 1-month LIBOR to 1-month Secured Overnight Financing Rate (“SOFR”) plus a credit adjustment of 0.1 % (difference between LIBOR and SOFR plus 1.375 % per annum). The existing revolving credit facility balance under the Second Amended Credit Agreement, was rolled over to the Revolving Facility on December 30, 2021. On the same day, the Company utilized an additional $ 33.3 million drawdown from the Revolving Facility to fund the Great Wall Acquisition. The Second Amended Credit Agreement, as amended, contains certain financial covenants, including, but not limited to, a fixed charge coverage ratio. On March 31, 2022, the Company entered into the Third Amended Credit Agreement extending the Revolving Facility for five years , with a maturity date of March 31, 2027. The Third Amended Credit Agreement provides for a $ 100.0 million asset-secured revolving credit facility with a one-month SOFR plus a credit adjustment of 0.1 % plus 1.375 % per annum. On February 6, 2024, the Company amended the Third Amended 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 Third Amended Credit Agreement and; (iii) remove certain sublease income from various financial covenants. On July 15, 2024, the Company again amended the Third Amended Credit Agreement to (i) increase the issuing bank sublimit to $ 10.0 million and; (ii) modify the due date for a borrowing base certificate based on availability under the revolving credit facility. As of December 31, 2024, the Company was in compliance with its covenants. The outstanding principal balance on the line of credit as of December 31, 2024 was $ 57.5 million and outstanding letters of credit amounted to $ 6.4 million leaving access to approximately $ 36.1 million in additional funds through our $ 100.0 million line of credit, subject to a borrowing base calculation. 59 On February 12, 2025, the Company amended certain terms and conditions of the Third Amended Credit Agreement, by, among other things, (i) increasing the Revolving Commitment (as defined in the Credit Agreement) from $ 100.0 million to $ 125.0 million, (ii) joining three new subsidiaries of the Company to the Credit Agreement, each as a “Borrower” thereunder, (iii) joining Wells Fargo Bank, N.A. to the credit agreement as a “Lender” thereunder, (iv) amending certain affirmative covenants commensurate with the increase in the Revolving Facility, and (v) amending certain restrictions regarding incurring obligations under real property leases and equipment financings in the ordinary course of business. Note 11 - Earnings (Loss) Per Share The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net (loss) income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were 1,482,062 , 862,182 and 348,610 , potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the years ended December 31, 2024, 2023 and 2022, respectively, because their effect could have been anti-dilutive. The following table sets forth the computation of basic and diluted EPS: Year Ended December 31, ($ in thousands, except share and per share data) 2024 2023 2022 Numerator: Net (loss) income attributable to HF Foods Group Inc. $ ( 48,511 ) $ ( 2,174 ) $ 460 Denominator: Weighted-average common shares outstanding 52,552,490 53,878,237 53,757,162 Effect of dilutive securities — — 106,286 Weighted-average dilutive shares outstanding 52,552,490 53,878,237 53,863,448 (Loss) earnings per common share: Basic $ ( 0.92 ) $ ( 0.04 ) $ 0.01 Diluted $ ( 0.92 ) $ ( 0.04 ) $ 0.01 Note 12 - Income Taxes The provision (benefit) for income taxes of the Company for the years ended December 31, 2024, 2023 and 2022 consists of the following: Year Ended December 31, (In thousands) 2024 2023 2022 Current: Federal $ 1,346 $ 4,237 $ 3,620 State 255 1,219 1,161 Current income taxes 1,601 5,456 4,781 Deferred income benefit: Federal ( 756 ) ( 4,550 ) ( 4,321 ) State 1,120 ( 865 ) ( 691 ) Deferred income taxes (benefit): 364 ( 5,415 ) ( 5,012 ) Total income tax expense (benefit) $ 1,965 $ 41 $ ( 231 ) The Company’s effective income tax rates for the years ended December 31, 2024, 2023 and 2022 were ( 4.3 )%, ( 1.6 )% and ( 5,148.7 )%, respectively. The determination of the Company’s overall effective income tax rate requires the use of estimates. 60 The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective income tax rate in the future. The Company has no operations outside the U.S., as such, no foreign income tax was recorded. Reconciliations of the statutory income tax rate to the effective income tax rate are as follows: Year Ended December 31, 2024 2023 2022 Federal statutory tax rate (21%) 21.0 % 21.0 % 21.0 % State statutory tax rate ( 1.1 ) % ( 13.9 ) % 3,963.2 % U.S permanent differences ( 0.3 ) % ( 8.7 ) % 207.1 % Noncontrolling interests 0.2 % 5.5 % 3,164.6 % Officers’ compensation ( 0.4 ) % ( 12.5 ) % — % Rate change ( 1.2 ) % — % ( 2,566.3 ) % Return to provision — % 21.6 % — % Change in valuation allowance 1.6 % ( 35.9 ) % — % Tax credits 0.3 % 6.7 % — % Uncertain tax positions 0.3 % 14.9 % ( 10,573.0 ) % Stock compensation ( 0.2 ) % ( 6.6 ) % — % Payable adjustments — % 6.0 % — % Dissolution of HFFI ( 1.6 ) % — % — % SEC Settlement ( 1.8 ) % — % — % Goodwill impairment charges ( 21.1 ) % — % — % Other — % 0.3 % 634.7 % Effective tax rate ( 4.3 ) % ( 1.6 ) % ( 5,148.7 ) % 61 Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows: (In thousands) December 31, 2024 December 31, 2023 Deferred tax assets: Allowance for expected credit losses $ 343 $ 523 Inventories 967 1,216 Equity compensation 465 552 Compensation related accruals 948 984 Guarantee liability — 1,326 Fair value change in interest rate swap contracts — 233 Leases 4,956 5,325 Accrued expenses 792 902 Interest expense limitation 2,297 415 Equity investments 163 80 Net operating loss carryovers — 706 Other 283 49 Total deferred tax assets 11,214 12,311 Deferred tax liabilities: Property and equipment ( 6,751 ) ( 4,588 ) Intangible assets ( 30,609 ) ( 32,959 ) Right of use assets ( 2,646 ) ( 3,069 ) Fair value change in interest rate swap contracts ( 170 ) — Other ( 430 ) — Total deferred tax liabilities ( 40,606 ) ( 40,616 ) Less: Valuation allowance — ( 723 ) Net deferred tax liabilities $ ( 29,392 ) $ ( 29,028 ) As of December 31, 2024 and 2023, the Company had no federal net operating loss (“NOL”) carryovers and $ 3.0 million, respectively. As of December 31, 2024 and 2023, the Company had no state NOL carryovers and $ 2.2 million, respectively. The Company previously recorded a full valuation allowance against the NOL carryovers related to the Company’s subsidiary, HFFI. In 2024, the Company dissolved its subsidiary, HFFI, and as such, the NOL balances and valuation allowance associated with this entity were written off during the year. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the year ended December 31, 2024, management concluded that it was more likely than not that the Company would be able to realize the benefit of the deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As of December 31, 2023, management established a valuation allowance of $ 0.7 million against certain deferred taxes attributable to the assets of the Company’s subsidiary, HFFI. In 2024, the Company dissolved its subsidiary, HFFI. As such, the deferred tax balances and corresponding valuation allowance associated with this entity were written off during the year. The Company will continue to assess the need for a valuation allowance in the future by evaluating both positive and negative evidence that may exist. 62 Unrecognized Tax Benefits Year Ended December 31, (In thousands) 2024 2023 2022 Total unrecognized tax benefits on January 1, $ 106 $ 350 $ 752 Decrease related to positions taken on items from prior years ( 106 ) ( 244 ) ( 402 ) Increase related to positions taken in the current year — — — Total unrecognized tax benefits on December 31, $ — $ 106 $ 350 The Company has no unrecognized tax benefits as of December 31, 2024. Due to the statute of limitations expiring, the unrecognized tax liability for the tax year ended December 31, 2020, was reversed, which was recorded as an income tax benefit on the consolidated statements of operations and comprehensive income (loss), in the amount of $ 0.1 million as of December 31, 2024. As of December 31, 2024 and 2023, the Company had no accrued penalties and $ 17,000 , respectively, and no accrued interest and $ 10,000 , respectively. During the year ended December 31, 2024, the Company reversed accrued penalties and accrued interest of $ 17,000 and $ 10,000 , respectively. The Company recognized the reversal of accrued interest and penalties related to unrecognized tax benefits as income tax benefit. The Company is subject to taxation in the United States and various states. As of December 31, 2024, tax years for 2021 through 2023 are subject to examination by the tax authorities. Note 13 - Related Party Transactions The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company’s officers and/or shareholders who owned no less than 10 % shareholdings of the Company. Mr. Xiao Mou Zhang (“Mr. Zhang”), the former Chief Executive Officer through October 24, 2024 and current Director on the board of directors of the Company, and certain of his immediate family members have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors. Mr. Zhang does not have any involvement in negotiations with any of the above-mentioned related parties. Effective October 24, 2024, Mr. Zhang departed from his role as Chief Executive Officer of the Company. In connection with Mr. Zhang’s departure, the Company entered into a Severance Agreement and General Release (the “Severance Agreement”) with Mr. Zhang on November 21, 2024. Pursuant to the Severance Agreement, which includes a general release of claims by Mr. Zhang against the Company, Mr. Zhang will be entitled to receive standard severance benefits provided to a Chief Executive Officer under the Company’s Amended and Restated Severance Plan, which consists of payment of base salary multiplied by two , totaling $ 1.35 million, and payment of COBRA premiums, for up to 12 months. The severance expenses were recorded in distribution, selling, and administrative expense in the consolidated statement of operations and both accrued expenses and other liabilities and other long-term liabilities in the consolidated balance sheet. The Company believes that Mr. Zhou Min Ni (“Mr. Ni”), the Company’s former Co-Chief Executive Officer, together with various trusts for the benefit of Mr. Ni’s four children, are collectively beneficial owners of more than 10 % of the outstanding shares of the Company’s common stock, and he and certain of his immediate family members have ownership interests in related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors. 63 The related party transactions as of December 31, 2024 and December 31, 2023 and for the years ended December 31, 2024, 2023 and 2022, are identified as follows: Related Party Sales, Purchases, and Lease Agreements Purchases Below is a summary of purchases of goods and services from related parties recorded for the years ended December 31, 2024, 2023 and 2022, respectively: Year Ended December 31, (In thousands) Nature 2024 2023 2022 (a) Asahi Food, Inc. Trade $ 97 $ 71 120 (b) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) Trade 5,055 8,581 10,514 (c) Eastern Fresh NJ, LLC Trade — — 1,093 (c) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) Trade N/A 37 52 (d) First Choice Seafood, Inc. Trade — — 134 (d) Fujian RongFeng Plastic Co., Ltd Trade — — 372 (e) North Carolina Good Taste Noodle, Inc. Trade N/A N/A 7,227 (c) Ocean Pacific Seafood Group, Inc. Trade 257 381 589 (c) Rainfield Ranches, LP Trade 186 134 147 Others Trade — — 13 Total $ 5,595 $ 9,204 $ 20,261 _______________ (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. (c) Mr. Zhou Min Ni owns an equity interest in this entity. Enson Seafood GA, Inc. is no longer considered a related party as of January 1, 2024 since Mr. Zhou Min Ni disposed his equity interest in this entity. (d) Mr. Zhou Min Ni owns an equity interest in this entity indirectly through its parent company. (e) No longer considered a related party as of January 1, 2023 since it has been three years since Mr. Jian Ming Ni, a former executive, resigned from the Company. As a result, amounts have not been disclosed for the years ended December 31, 2024 and 2023, respectively.. Sales Below is a summary of sales to related parties recorded for the years ended December 31, 2024, 2023 and 2022, respectively: Year Ended December 31, (In thousands) 2024 2023 2022 (a) ABC Food Trading, LLC $ 1,916 $ 2,078 $ 3,949 (b) Asahi Food, Inc. 565 791 639 (a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) 1,016 928 1,285 (c) Eagle Food Service, LLC — 1,942 879 (d) First Choice Seafood, Inc. 29 31 35 (d) Fortune One Foods, Inc. 215 42 115 (e) N&F Logistics, Inc. — 6 40 (f) Union Food LLC — 27 — Total $ 3,741 $ 5,845 $ 6,942 _______________ (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. (c) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity indirectly through its parent company. (d) Mr. Zhou Min Ni owns an equity interest in this entity indirectly through its parent company. (e) Mr. 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. 64 Lease Agreements The Company leases various facilities to related parties. In 2020, the Company renewed a warehouse lease from Yoan Chang Trading Inc. under an operating lease agreement which expired on December 31, 2020. In February 2021, the Company executed a new five-year operating lease agreement with Yoan Chang Trading Inc., effective January 1, 2021 and expiring on December 31, 2025. Rent expense was $ 0.3 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2024, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Beginning 2014, the Company leased a warehouse to Asahi Food, Inc. under a commercial lease agreement which was rescinded March 1, 2020. A new commercial lease agreement for a period of one year was entered into, expiring February 28, 2021, with a total of four renewal periods with each term being one year . The lease term was extended by an addendum dated September 1, 2023 which extended the lease through September 1, 2025. Rental income was $ 0.1 million, $ 0.1 million and $ 0.1 million for the years ended December 31, 2024, 2023 and 2022, respectively, which is included in other expense (income), net in the consolidated statements of operations and comprehensive income (loss). Related Party Balances Accounts Receivable - Related Parties, Net Below is a summary of accounts receivable with related parties recorded as of December 31, 2024 and December 31, 2023, respectively: (In thousands) December 31, 2024 December 31, 2023 (a) ABC Food Trading, LLC $ 155 $ 94 (b) Asahi Food, Inc. 84 69 (a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) — 84 (c) Enson Seafood GA, Inc. (formerly known as GA-GW Seafood, Inc.) N/A 59 (d) Union Food LLC — 2 Total $ 239 $ 308 _______________ (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. (c) No longer considered a related party as of January 1, 2024 since Mr. Zhou Min Ni disposed his equity interest in this entity. (d) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns an equity interest in this entity. The Company has reserved for 100 % of the accounts receivable due from Enson Seafood GA, Inc. as of December 31, 2023. During the year ended December 31, 2024 it was determined that Enson Seafood GA, Inc. is no longer a related party due to Mr. Ni having sold all of his equity interest to a third party. All other accounts receivable from these related parties are current and considered fully collectible. No additional allowance is deemed necessary as of December 31, 2024 and December 31, 2023. Line of Credit Note - Related Parties The Company issued a $ 51,000 line of credit note to Asahi Food, Inc. on November 1, 2024, which is outstanding at December 31, 2024 and included in other current assets in the consolidated balance sheet. Interest shall accrue at a rate of 7.25 % per annum with monthly payments of interest only due beginning December 1, 2024 and continuing through the first day of each calendar month until the maturity date of October 31, 2025. Interest income was $ 308 for the year ended December 31, 2024, which is included in interest expense in the consolidated statements of operations and comprehensive income (loss). 65 Accounts Payable - Related Parties All the accounts payable to related parties are payable upon demand without interest. Below is a summary of accounts payable with related parties recorded as of December 31, 2024 and December 31, 2023, respectively: (In thousands) December 31, 2024 December 31, 2023 (a) Conexus Food Solutions LLC (formerly known as Best Food Services, LLC) $ 35 $ 379 Others 17 18 Total $ 52 $ 397 _______________ (a) An equity interest is held by three Irrevocable Trusts for the benefit of Mr. Zhang’s children. Note 14 - Stock-Based Compensation In 2021, the Company began issuing awards under the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”), which reserved 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. The 2018 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, other stock awards, and performance awards that may be settled in stock, or other property. As of December 31, 2024, the Company had 619,932 time-based vesting restricted stock units (“RSUs”) unvested, 579,075 performance-based restricted stock units (“PSUs”) unvested, and 1,169,943 shares of common stock vested leaving 4,631,050 shares remaining available for future awards under the 2018 Incentive Plan. RSUs granted to employees vest over time based on continued service (vesting over a period between one to three years in equal installments). PSUs granted to employees vest based on (i) the attainment of certain financial metrics, as defined by the Company’s compensation committee (“Financial PSUs”) and (ii) for the 2021 grants, total shareholder return of the Company’s common stock (“TSR PSUs”). Both types of PSUs vest over three years in equal installments based on the performance metrics established for each year and also require continued service for vesting. A summary of RSU and PSU activity for the year ended December 31, 2024 is as follows: Shares Weighted Average Grant Date Fair Value Unvested RSUs at January 1, 2024 810,944 $ 4.43 Granted 665,427 3.52 Forfeited ( 445,286 ) 3.87 Vested ( 411,153 ) 4.67 Unvested RSUs at December 31, 2024 619,932 3.70 Shares Weighted Average Grant Date Fair Value Unvested PSUs at January 1, 2024 665,932 $ 4.23 Granted 626,591 3.55 Forfeited ( 485,880 ) 3.98 Vested ( 227,568 ) 4.23 Unvested PSUs at December 31, 2024 579,075 3.71 66 The weighted-average grant date fair value per share of RSUs granted during the years ended December 31, 2024, 2023, and 2022 was $ 3.52 , $ 3.86 and $ 5.04 , respectively. The weighted-average grant date fair value per share of PSUs granted during the years ended December 31, 2024, 2023 and 2022 was $ 3.55 , $ 3.86 and $ 4.76 , respectively. The total fair value of equity based awards that vested during the years ended December 31, 2024, 2023 and 2022 was $ 2.0 million, $ 1.5 million and $ 0.8 million, respectively. The Company accounts for stock-based compensation in accordance with ASC Topic 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment awards including shares issued under employee stock purchase plans and stock incentive shares. The fair value of the RSUs and Financial PSUs are measured using the closing price of the Company’s common stock on NASDAQ Global Capital Market on the grant date. The fair value of TSR PSUs are determined using a Monte Carlo simulation model. No TSR PSUs were granted during the years ended December 31, 2024, 2023 and 2022. The fair value of RSUs are amortized on a straight-line basis over the requisite service period for each award. For the PSUs, the Company recognizes stock-based compensation expense on a straight-line basis for each vesting tranche over the longer of the derived, explicit, or implicit service period for the vesting tranche. As of interim and annual reporting periods, the Financial PSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PSUs stock-based compensation expense is not adjusted. The Company recognizes forfeitures as they occur. Stock-based compensation expense is included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). The components of stock-based compensation expense for the years ended December 31, 2024 and 2023 and 2022 were as follows: Year Ended December 31, (In thousands) 2024 2023 2022 Stock-based compensation (RSUs) expense $ 1,382 $ 2,118 $ 897 Stock-based compensation (PSUs) expense 706 1,234 360 Total stock-based compensation expense $ 2,088 $ 3,352 $ 1,257 Tax benefit of stock-based compensation expense $ 742 $ 931 $ 366 As of December 31, 2024, there was $ 3.1 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 1.96 years. Of the total unrecognized compensation cost, $ 1.6 million is related to RSUs with time-based vesting provisions and $ 1.5 million is related to PSUs with performance-based vesting provisions. Note 15 - Employee Benefit Plan The Company sponsors a defined contribution plan, the HF Foods Group, Inc. Employees 401(k) Savings Plan (the “401(k) Plan”). Under the 401(k) Plan, after one month of service, eligible employees may elect to defer up to 100 % of their compensation before taxes, up to the dollar limit imposed by the Internal Revenue Service for tax purposes. The Company matches 100 % of an eligible employee’s contributions, dollar for dollar, up to 3 % of eligible pay, plus 50 % of each additional dollar greater than 3 % and no more than 5 % of eligible pay. 401(k) Plan participants are immediately 100% vested in the Company’s non-discretionary contributions to the plan. For the years ended December 31, 2024, 2023 and 2022, the Company recognized expense of $ 1.2 million, $ 0.8 million and $ 0.4 million, respectively, in distribution, selling and administrative expenses in the consolidated statements of operations and comprehensive income (loss). Note 16 - Segment Information The Company’s business consists of one operating segment, which is also its one reportable segment. The Company operates solely in the United States and derives revenues by providing sales of food and non-food to customers. The segment’s customer base consists primarily of Asian restaurants located throughout the United States. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information presented on a consolidated basis. The CODM uses consolidated net income to assess financial performance and allocate resources. The Company’s measure of segment assets is total assets, as reported on the consolidated balance sheets. Accounting policies for the company’s single operating segment are the same as those described in Note 2 - Summary of Significant Accounting Policies . 67 The following table presents selected financial information with respect to the Company’s single operating segment for the years ended December 31, 2024, 2023 and 2022: Year Ended December 31, (In thousands) 2024 2023 2022 Net Revenue $ 1,201,667 $ 1,148,493 $ 1,170,467 Less: Cost of Revenue 996,473 944,462 964,955 Payroll and related labor costs 98,991 94,680 87,394 Professional fees 11,066 13,878 26,776 Depreciation 10,397 9,633 9,192 Amortization 16,280 16,285 15,744 Other segment expenses (a) 61,292 60,586 55,847 Distribution, selling and administrative expenses 198,026 195,062 194,953 Goodwill impairment charges 46,303 — — Interest expense 11,425 11,478 7,457 Other expense (income), net 2,818 ( 1,091 ) ( 1,829 ) Change in fair value of interest rate swap contracts ( 1,693 ) 1,580 ( 817 ) Lease guarantee (income) expense ( 5,548 ) ( 377 ) 5,744 Income tax expense (benefit) 1,965 41 ( 231 ) Less: net income (loss) attributable to noncontrolling interests 409 ( 488 ) ( 225 ) NET LOSS AND COMPREHENSIVE LOSS ATTRIBUTABLE TO HF FOODS GROUP INC. $ ( 48,511 ) $ ( 2,174 ) $ 460 _______________ (a) Other segment expenses include distribution, selling and administrative expenses which are not provided to the chief operating decision maker on a regular basis. These expenses include primarily auto & truck expense, insurance, occupancy expense and utilities. Note 17 - Commitments and Contingencies From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to its pending litigation and 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 business. There also exists the possibility of a material adverse effect on the Company’s financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable. Legal costs associated with loss contingencies are expensed as incurred. 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 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. During the quarter ended June 30, 2024 the 68 Company agreed to and paid a civil monetary penalty of $ 3.9 million, which was recorded in other expense (income), net in the Company’s 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. The Company also created a Special Litigation Committee which determined to pursue claims against certain former officers and directors. As a result, pursuant to the previously disclosed settlement agreement (as amended on November 1, 2023, the “Settlement Agreement”) between the Company and certain parties to the verified stockholder derivative complaint filed by James Bishop in the Court of Chancery of the State of Delaware, on October 16, 2023, the Company received $ 1.5 million on behalf of Zhou Min Ni and Chan Sin Wong, a former President and Chief Operating Officer of the Company (together, the “Ni Defendants”). Subsequently, on December 1, 2023, the Company received 1,997,423 shares (valued at $ 7.75 million) of the Company’s common stock, based on the closing price of $ 3.88 on October 13, 2023, plus a cash payment of approximately $ 0.1 million of accrued interest through the date of payment, in satisfaction of the Ni Defendants’ payment obligations totaling $ 9.25 million under the Settlement Agreement. Additionally, the Company received a related D&O insurance payout settlement in the amount of $ 1.7 million, of which we paid $ 0.9 million, resulting in total net settlements in 2023 of approximately $ 10.0 million. The receipt of the settlement proceeds were recorded in 2023 in distribution, selling, and administrative expense in the consolidated statement of operations (as a recovery of previously recorded expenses related to the litigation) and cash and treasury stock in the consolidated balance sheet. Pursuant to the terms of the Settlement Agreement, Mr. Ni, Ms. Wong and Jonathan Ni, the former Chief Financial Officer of the Company, agreed to give up any rights to indemnification or the advancement of fees in connection with the SEC investigation and any actions the SEC might take against them relating to the SEC investigation. 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 previously determined that AnHeart was a VIE as a result of the guarantees. 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. On February 10, 2021, the Company entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC, pursuant to which it assumed the lease of the premises at 273 Fifth Avenue (the “273 Lease Agreement”). At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the 273 Lease Agreement. The Company agreed to observe all the covenants and conditions of the 273 Lease Agreement, as amended, including the payment of all rents due. Under the terms of the 273 Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $ 2.5 million. The Lease Amendment permits subletting of the premises, and the Company intends to sublease the newly constructed premises to defray the rental expense undertaken pursuant to its guaranty obligations. 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 has incurred $ 5.4 million in construction costs which was recorded in construction in progress within property and equipment, net in the Company’s consolidated balance sheet as of December 31, 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. On February 7, 2022, the Company undertook its guaranty obligations by assuming responsibility for payment of monthly rent and other tenant obligations, including past due rent as well as property tax obligations beginning with the January 2022 rent due. As a result, during the year ended December 31, 2022, the Company recorded a lease guarantee liability of $ 5.9 million. On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng. In March 2022, the Company agreed to stay that litigation against AnHeart in exchange for AnHeart’s payment of certain back rent from January to April 2022 and its continued partial payment of monthly rent. AnHeart subsequently 69 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 (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 . 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, $ 46,750 a month in rent from January 2025 through December 2025, 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. The assumption of the lease had no impact on the Company’s obligations as guarantor. The lease covers certain portions of the ground floor, lower level, 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. With the assumption of the lease for 275 Fifth Avenue, the Company no longer recognized AnHeart as a VIE. In addition, the remaining 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 to the consolidated balance sheet. As a result of the reversal, a gain of $ 5.4 million was recorded to other expense (income), net on the consolidated statements of operations and comprehensive income (loss) in 2024. Other Commitments On September 30, 2024, the Company entered into the lease of a new distribution center located in Georgia. The lease term commenced February 1, 2025 for a period of 10 years and five months and is renewable at the option of the Company for up to three additional five-year terms. The company shall pay rent of approximately $ 120,000 per month with provisions for yearly increases. As of December 31, 2024, the Company had additional automobile leases that had not yet commenced which total $ 15.4 million in future minimum lease payments. Note 18 - Subsequent Events Appointment of Xi (Felix) Lin as Chief Executive Officer Effective January 1, 2025, Xi (Felix) Lin was appointed to serve as Chief Executive Officer by the Board of Directors. Mr. Lin continues to also serve as the Company’s President. On January 3, 2025, according to the employment agreement entered into on December 16, 2024, Mr. Lin received a market-based performance stock unit award of 310,559 shares of Class A Common Stock contingent upon satisfaction of the applicable vesting conditions. The PSUs are scheduled to vest on the third anniversary of the grant date, if for at least a period of thirty consecutive trading days at any time prior to the vesting date, the closing per share price of the Issuer’s Class A Common Stock averages at least $ 7.00 over such thirty -day period. Credit Facility Amended On February 12, 2025, the Company amended certain terms and conditions of the JPM Credit Agreement. See Note 10 - Debt for additional information regarding the terms of the amendment. 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.