UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________ to _______________________.

Commission File Number: 001-38180

HF FOODS GROUP INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)			81-2717873 (I.R.S. Employer Identification No.)

6325 South Rainbow Boulevard, Suite 420, Las Vegas, NV 89118
(Address of principal executive offices) (Zip Code)

(888) 905-0988

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	HFFG	Nasdaq Capital Market
Preferred Share Purchase Rights	N/A	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒☐
		Emerging growth company	☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~January 27,~~May 5, 2023, the registrant had ~~53,706,392~~54,086,164 shares of common stock outstanding.

HF ~~FOODS GROUP INC. AND SUBSIDIARIES~~Foods Group Inc. and Subsidiaries

~~FORM~~Form 10-Q ~~FOR THE QUARTER ENDED SEPTEMBER 30, 2022~~for the Quarter Ended March 31, 2023

~~TABLE OF CONTENTS~~Table of Contents


Description		Page

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income ~~(Loss)~~ (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	54
	Notes to Unaudited Condensed Consolidated Financial Statements	65
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2520
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3427
Item 4.	Controls and Procedures	3527

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	3629
Item 1A.	Risk Factors	3629
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3630
Item 3.	Defaults Upon Senior Securities	3630
Item 4.	Mine Safety Disclosures	3630
Item 5.	Other Information	3630
Item 6.	Exhibits	3730

SIGNATURE PAGE		3831

PART I. FINANCIAL INFORMATION

~~Item~~ITEM 1. Financial Statements.

HF ~~FOODS GROUP INC. AND SUBSIDIARIES~~Foods Group Inc. and Subsidiaries

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~Condensed Consolidated Balance Sheets

~~(UNAUDITED)~~(In thousands, except share data)

(In thousands, except share data) September 30, 2022 December 31, 2021
ASSETS
CURRENT ASSETS
Cash $ 17,806 $ 14,792
Accounts receivable, net 44,276 36,281
Accounts receivable - related parties 428 249
Inventories 132,524 102,690
Other current assets 9,890 5,559
TOTAL CURRENT ASSETS 204,924 159,571
Property and equipment, net 141,300 145,908
Operating lease right-of-use assets 15,917 11,664
Long-term investments 2,632 2,462
Customer relationships, net 160,390 159,161
Trademarks and other intangibles, net 37,773 35,891
Goodwill 85,118 80,257
Other long-term assets 2,623 2,032
TOTAL ASSETS $ 650,677 $ 596,946
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued not presented for payment $ 18,517 $ 17,834
Line of credit 71,329 55,293
Accounts payable 49,260 57,745
Accounts payable - related parties 1,498 1,941
Current portion of long-term debt, net 6,442 5,557
Current portion of obligations under finance leases 2,246 2,274
Current portion of obligations under operating leases 3,933 2,482
Accrued expenses and other liabilities 15,717 12,138
TOTAL CURRENT LIABILITIES 168,942 155,264
Long-term debt, net of current portion 116,990 81,811
Promissory note payable - related party — 4,500
Obligations under finance leases, non-current 11,187 11,676
Obligations under operating leases, non-current 12,085 9,251
Deferred tax liabilities 36,064 39,455
Lease guarantee liability, net of current portion 5,549 —
TOTAL LIABILITIES 350,817 301,957
Commitments and contingencies (Note 15)
SHAREHOLDERS’ EQUITY
Preferred stock, $0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021 — —
Common stock, $0.0001 par value, 100,000,000 shares authorized, 53,813,366 and 53,706,392 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 5 5
Additional paid-in capital 597,738 597,227
Accumulated deficit (302,470) (306,284)
TOTAL SHAREHOLDERS' EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 295,273 290,948
Noncontrolling interests 4,587 4,041
TOTAL SHAREHOLDERS’ EQUITY 299,860 294,989
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 650,677 $ 596,946
(Unaudited)


	March 31, 2023		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash	$	17,477	$	24,289
Accounts receivable, net	43,095		44,186
Accounts receivable - related parties	629		213
Inventories	110,469		120,291
Prepaid expenses and other current assets	7,699		8,937
TOTAL CURRENT ASSETS	179,369		197,916
Property and equipment, net	138,984		140,330
Operating lease right-of-use assets	13,278		14,164
Long-term investments	2,666		2,679
Customer relationships, net	155,106		157,748
Trademarks and other intangibles, net	34,914		36,343
Goodwill	85,118		85,118

Other long-term assets	3,944		3,231
TOTAL ASSETS	$	613,379	$	637,529
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not presented for payment	$	14,094	$	21,946
Line of credit	44,456		53,056
Accounts payable	57,842		55,515
Accounts payable - related parties	753		1,529
Current portion of long-term debt, net	6,031		6,266
Current portion of obligations under finance leases	2,116		2,254
Current portion of obligations under operating leases	3,592		3,676
Accrued expenses and other liabilities	16,408		19,648
TOTAL CURRENT LIABILITIES	145,292		163,890
Long-term debt, net of current portion	114,047		115,443

Obligations under finance leases, non-current	11,576		11,441
Obligations under operating leases, non-current	9,793		10,591
Deferred tax liabilities	33,119		34,443
Other long-term liabilities	8,038		5,472
TOTAL LIABILITIES	321,865		341,280
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS’ EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022	—		—
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 53,844,492 shares issued and outstanding as of March 31, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022	5		5
Additional paid-in capital	599,384		598,322
Accumulated deficit	(312,447)		(306,514)
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC.	286,942		291,813
Noncontrolling interests	4,572		4,436
TOTAL SHAREHOLDERS’ EQUITY	291,514		296,249
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	613,379	$	637,529

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

HF Foods Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share data)

(Unaudited)

~~HF FOODS GROUP INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)~~

~~(UNAUDITED)~~


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In thousands, except share and per share data)		2022		2021		2022		2021
												2023		2022
Net revenue - third parties	Net revenue - third parties	$	298,929	$	213,179	$	873,218	$	560,629	Net revenue - third parties		$	291,562	$	276,151
Net revenue - related parties	Net revenue - related parties	1,782		2,363		5,350		7,839		Net revenue - related parties		2,293		2,064
TOTAL NET REVENUE	TOTAL NET REVENUE	300,711		215,542		878,568		568,468		TOTAL NET REVENUE		293,855		278,215

Cost of revenue - third parties	Cost of revenue - third parties	247,703		171,431		719,052		453,990		Cost of revenue - third parties		241,457		225,633
Cost of revenue - related parties	Cost of revenue - related parties	1,515		2,199		4,726		8,004		Cost of revenue - related parties		2,226		1,855
TOTAL COST OF REVENUE	TOTAL COST OF REVENUE	249,218		173,630		723,778		461,994		TOTAL COST OF REVENUE		243,683		227,488

GROSS PROFIT	GROSS PROFIT	51,493		41,912		154,790		106,474		GROSS PROFIT		50,172		50,727

Distribution, selling and administrative expenses	Distribution, selling and administrative expenses	54,589		31,048		140,840		88,927		Distribution, selling and administrative expenses		52,929		40,408

(LOSS) INCOME FROM OPERATIONS	(LOSS) INCOME FROM OPERATIONS	(3,096)		10,864		13,950		17,547		(LOSS) INCOME FROM OPERATIONS		(2,757)		10,319

Other expense (income)
Other expenses (income):										Other expenses (income):

Interest expense	Interest expense	2,274		902		5,101		2,732		Interest expense		2,868		1,278
Other income	Other income	(462)		(573)		(1,401)		(1,437)		Other income		(228)		(776)
Change in fair value of interest rate swap contracts	Change in fair value of interest rate swap contracts	(284)		(52)		(850)		(1,371)		Change in fair value of interest rate swap contracts		2,746		(358)
Lease guarantee expense	Lease guarantee expense	(58)		—		5,831		—		Lease guarantee expense		(120)		5,931
Total Other Expense (Income), net		1,470		277		8,681		(76)
Total Other expenses, net										Total Other expenses, net		5,266		6,075

(LOSS) INCOME BEFORE INCOME TAX PROVISION	(LOSS) INCOME BEFORE INCOME TAX PROVISION	(4,566)		10,587		5,269		17,623		(LOSS) INCOME BEFORE INCOME TAX PROVISION		(8,023)		4,244

Income tax (benefit) provision	Income tax (benefit) provision	(672)		2,676		1,529		4,738		Income tax (benefit) provision		(2,226)		1,104
NET (LOSS) INCOME AND COMPREHENSIVE INCOME		(3,894)		7,911		3,740		12,885
Less: net income (loss) attributable to noncontrolling interests		(30)		357		(74)		566
NET (LOSS) INCOME AND COMPREHENSIVE INCOME ATTRIBUTABLE TO HF FOODS GROUP INC.		$	(3,864)	$	7,554	$	3,814	$	12,319
NET (LOSS) INCOME AND COMPREHENSIVE INCOME (LOSS)										NET (LOSS) INCOME AND COMPREHENSIVE INCOME (LOSS)		(5,797)		3,140
Less: net income attributable to noncontrolling interests										Less: net income attributable to noncontrolling interests		136		26
NET (LOSS) INCOME AND COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC.										NET (LOSS) INCOME AND COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC.		$	(5,933)	$	3,114

(LOSS) EARNINGS PER COMMON SHARE - BASIC	(LOSS) EARNINGS PER COMMON SHARE - BASIC	$	(0.07)	$	0.15	$	0.07	$	0.24	(LOSS) EARNINGS PER COMMON SHARE - BASIC		$	(0.11)	$	0.06
(LOSS) EARNINGS PER COMMON SHARE - DILUTED	(LOSS) EARNINGS PER COMMON SHARE - DILUTED	$	(0.07)	$	0.15	$	0.07	$	0.24	(LOSS) EARNINGS PER COMMON SHARE - DILUTED		$	(0.11)	$	0.06

WEIGHTED AVERAGE SHARES - BASIC	WEIGHTED AVERAGE SHARES - BASIC	53,798,131		51,913,411		53,716,464		51,913,411		WEIGHTED AVERAGE SHARES - BASIC		53,822,794		53,706,392
WEIGHTED AVERAGE SHARES - DILUTED	WEIGHTED AVERAGE SHARES - DILUTED	53,798,131		51,932,712		53,981,687		51,919,932		WEIGHTED AVERAGE SHARES - DILUTED		53,822,794		53,884,510

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

HF ~~FOODS GROUP INC. AND SUBSIDIARIES~~Foods Group Inc. and Subsidiaries

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~Condensed Consolidated Statements of Cash Flows

~~(UNAUDITED)~~(In thousands)

(Unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
(In thousands)		2022		2021
							2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income		$	3,740	$	12,885
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income						Net (loss) income	$	(5,797)	$	3,140
Adjustments to reconcile net (loss) income to net cash provided by operating activities:						Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense	Depreciation and amortization expense	18,245		14,233		Depreciation and amortization expense	6,689		5,779

Gain from disposal of property and equipment	Gain from disposal of property and equipment	(1,327)		(33)		Gain from disposal of property and equipment	—		(65)
Provision for doubtful accounts		226		(374)
Provision for credit losses						Provision for credit losses	57		(12)
Deferred tax benefit	Deferred tax benefit	(3,391)		(2,126)		Deferred tax benefit	(1,324)		(2,154)
Income from equity method investment		(317)		(67)
Return on equity method investment		147		—

Change in fair value of interest rate swap contracts	Change in fair value of interest rate swap contracts	(849)		(1,371)		Change in fair value of interest rate swap contracts	2,746		(358)
Stock-based compensation	Stock-based compensation	673		375		Stock-based compensation	1,096		290
Amortization of debt issuance and other debt-related costs		144		120

Non-cash lease expense	Non-cash lease expense	2,562		580		Non-cash lease expense	965		737
Lease guarantee expense	Lease guarantee expense	5,831		—		Lease guarantee expense	(120)		5,931
Other operating expense		502		—
Other expense (income)						Other expense (income)	93		—
Changes in operating assets and liabilities (excluding effects of acquisitions):	Changes in operating assets and liabilities (excluding effects of acquisitions):					Changes in operating assets and liabilities (excluding effects of acquisitions):
Accounts receivable	Accounts receivable	(8,221)		(8,861)		Accounts receivable	1,034		(7,026)
Accounts receivable - related parties	Accounts receivable - related parties	(178)		296		Accounts receivable - related parties	(416)		(669)
Inventories	Inventories	(15,988)		(18,704)		Inventories	9,822		(12,070)
Advances to suppliers - related parties		—		197
Other current assets		(3,769)		1,974

Prepaid expenses and other current assets						Prepaid expenses and other current assets	1,238		(2,758)

Other long-term assets	Other long-term assets	(593)		(451)		Other long-term assets	(829)		268
Accounts payable	Accounts payable	8,953		14,083		Accounts payable	2,327		16,805
Accounts payable - related parties	Accounts payable - related parties	(443)		644		Accounts payable - related parties	(776)		(309)
Operating lease liabilities	Operating lease liabilities	(2,530)		(489)		Operating lease liabilities	(961)		(715)
Accrued expenses and other liabilities	Accrued expenses and other liabilities	3,515		(1,578)		Accrued expenses and other liabilities	(3,274)		3,299
Net cash provided by operating activities	Net cash provided by operating activities	6,932		11,333		Net cash provided by operating activities	12,570		10,113
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:

Purchase of property and equipment	Purchase of property and equipment	(5,745)		(1,521)		Purchase of property and equipment	(629)		(2,672)
Proceeds from disposal of property and equipment		7,805		77
Payment made for acquisition of noncontrolling interest		—		(5,000)
Payment made for acquisition of Sealand		(34,849)		—
Proceeds from sale of property and equipment						Proceeds from sale of property and equipment	—		79

Payment made for acquisition of Great Wall Group	Payment made for acquisition of Great Wall Group	(17,445)		—		Payment made for acquisition of Great Wall Group	—		(17,339)

Net cash used in investing activities	Net cash used in investing activities	(50,234)		(6,444)		Net cash used in investing activities	(629)		(19,932)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Checks issued not presented for payment	Checks issued not presented for payment	682		4,583		Checks issued not presented for payment	(7,852)		679
Proceeds from line of credit	Proceeds from line of credit	938,251		582,617		Proceeds from line of credit	298,195		281,616
Repayment of line of credit	Repayment of line of credit	(922,080)		(577,974)		Repayment of line of credit	(306,808)		(268,298)
Proceeds from long-term debt		45,956		—

Repayment of long-term debt	Repayment of long-term debt	(9,614)		(4,544)		Repayment of long-term debt	(1,642)		(1,475)
Payment of debt financing costs	Payment of debt financing costs	(556)		—		Payment of debt financing costs	—		(604)
Repayment of promissory note payable - related party		(4,500)		(2,000)
Repayment of obligations under finance leases	Repayment of obligations under finance leases	(1,876)		(1,577)		Repayment of obligations under finance leases	(646)		(616)
Proceeds from noncontrolling interest shareholder		240		180

Proceeds from noncontrolling interests shareholders						Proceeds from noncontrolling interests shareholders	—		240
Cash distribution to shareholders	Cash distribution to shareholders	(187)		(212)		Cash distribution to shareholders	—		(89)
Net cash provided by (used in) financing activities		46,316		1,073
Net increase in cash		3,014		5,962
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(18,753)		11,453
Net (decrease) increase in cash						Net (decrease) increase in cash	(6,812)		1,634
Cash at beginning of the period	Cash at beginning of the period	14,792		9,581		Cash at beginning of the period	24,289		14,792
Cash at end of the period	Cash at end of the period	$	17,806	$	15,543	Cash at end of the period	$	17,477	$	16,426

Supplemental disclosure of cash flow data:						Supplemental disclosure of cash flow data:
Cash paid for interest						Cash paid for interest	$	2,644	$	927
Cash paid for income taxes						Cash paid for income taxes	96		382
Supplemental disclosure of non-cash investing and financing activities:						Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities						Right-of-use assets obtained in exchange for operating lease liabilities	$	79	$	1,483
Property acquired via a finance lease						Property acquired via a finance lease	643		815

Intangible asset acquired in exchange for noncontrolling interests						Intangible asset acquired in exchange for noncontrolling interests	—		566

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

HF ~~FOODS GROUP INC. AND SUBSIDIARIES~~Foods Group Inc. and Subsidiaries

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~Condensed Consolidated Statements of Changes in Shareholders' Equity

~~(UNAUDITED)~~(In thousands, except share data)

(Unaudited)


	Common Stock			Additional Paid-in Capital	Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity Attributable to HF Foods Group Inc.		Noncontrolling Interests		Total Shareholders’ Equity
	Shares	Amount























Balance at January 1, 2022	53,706,392	$	5		$	597,227	$	(306,284)	$	290,948	$	4,041	$	294,989
Cumulative effect of adoption of CECL (ASU 2016-13)	—	—			—		(690)		(690)		—		(690)
Balance at January 1, 2022	53,706,392	5			597,227		(306,974)		290,258		4,041		294,299
Net income	—	—			—		3,114		3,114		26		3,140
Capital contribution by shareholders	—	—			—		—		—		806		806


Distribution to shareholders	—	—			—		—		—		(89)		(89)
Stock-based compensation	—	—			290		—		290		—		290
Balance at March 31, 2022	53,706,392	$	5		$	597,517	$	(303,860)	$	293,662	$	4,784	$	298,446

Balance at January 1, 2023	53,813,777	$	5		$	598,322	$	(306,514)	$	291,813	$	4,436	$	296,249
Net (loss) income	—	—			—		(5,933)		(5,933)		136		(5,797)

Issuance of common stock pursuant to equity compensation plan	37,847	—			—		—		—		—		—
Shares withheld for tax withholdings on vested awards	(7,132)	—			(34)		—		(34)		—		(34)

Stock-based compensation	—	—			1,096		—		1,096		—		1,096
Balance at March 31, 2023	53,844,492	$	5		$	599,384	$	(312,447)	$	286,942	$	4,572	$	291,514

Nine Months Ended September 30,
(In thousands) 2022 2021
Supplemental disclosure of cash flow data:
Cash paid for interest $ 3,873 $ 2,948
Cash paid for income taxes $ 8,358 $ 5,680
Supplemental disclosure of non-cash operating, investing and financing activities:
Right of use assets obtained in exchange for operating lease liabilities $ 6,815 $ 2,108
Property acquired in exchange for finance leases $ 1,272 $ 8,554
Property and equipment purchases from notes payable $ — $ 257
Intangible asset acquired in exchange for noncontrolling interests $ 566 $ —

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

HF ~~FOODS GROUP INC. AND SUBSIDIARIES~~Foods Group Inc. and Subsidiaries

~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY~~

~~(UNAUDITED)~~Notes to Unaudited Condensed Consolidated Financial Statements

Common Stock Additional Paid-in Capital Accumulated Deficit Total Shareholders’
Equity Attributable
to HF Foods Group Inc. Noncontrolling
Interests Total
Shareholders’
Equity
(In thousands, except share data) Number of
Shares Amount
Balance at January 1, 2021 51,913,411 $ 5 $ 587,579 $ (328,429) $ 259,155 $ 4,367 $ 263,522
Net income — — — 1,358 1,358 300 1,658
Distribution to shareholders — — — — — (73) (73)
Balance at March 31, 2021 51,913,411 5 587,579 (327,071) 260,513 4,594 265,107
Net income (loss) — — — 3,407 3,407 (91) 3,316
Acquisition of noncontrolling
interest — — (3,856) — (3,856) (1,144) (5,000)
Distribution to shareholders — — — — — (77) (77)
Balance at June 30, 2021 51,913,411 5 583,723 (323,664) 260,064 3,282 263,346
Net income — — — 7,554 7,554 357 7,911
Capital contributions by shareholders — — — — — 180 180
Distribution to shareholders — — — — — (62) (62)
Stock-based compensation — — 375 — 375 — 375
Balance at September 30, 2021 51,913,411 $ 5 $ 584,098 $ (316,110) $ 267,993 $ 3,757 $ 271,750
Balance at January 1, 2022 53,706,392 $ 5 $ 597,227 $ (306,284) $ 290,948 $ 4,041 $ 294,989
Net income — — — 3,114 3,114 26 3,140
Capital contributions by shareholders — — — — — 806 806
Distribution to shareholders — — — — — (89) (89)
Stock-based compensation — — 290 — 290 — 290
Balance at March 31, 2022 53,706,392 5 597,517 (303,170) 294,352 4,784 299,136
Net income (loss) — — — 4,564 4,564 (70) 4,494
Distribution to shareholders — — — — — (97) (97)
Stock-based compensation — — 221 — 221 — 221
Balance at June 30, 2022 53,706,392 5 597,738 (298,606) 299,137 4,617 303,754
Net loss — — — (3,864) (3,864) (30) (3,894)
Issuance of common stock pursuant to equity compensation plan 138,412 — — — — — —
Shares withheld for tax withholdings on vested stock awards (31,438) — (162) — (162) — (162)
Stock-based compensation — — 162 — 162 — 162
Balance at September 30, 2022 53,813,366 $ 5 $ 597,738 $ (302,470) $ 295,273 $ 4,587 $ 299,860

~~The accompanying notes are an integral part~~Note 1 - Organization and Description of ~~these unaudited condensed consolidated financial statements.~~Business

~~HF FOODS GROUP INC. AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION~~

Organization and General

HF Foods Group Inc. and subsidiaries (collectively “HF Group”, or the “Company”) is an Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States. The Company's business consists of one operating segment, which is also its one reportable segment: HF Group, which operates solely in the United States. The Company's customer base consists primarily of Chinese and Asian restaurants, and it provides sales and service support to customers who mainly converse in Mandarin or Chinese dialects.

On December 30, 2021, the Company completed the acquisition of Great Wall Seafood Supply, Inc., Great Wall Restaurant Supplier, Inc., and First Mart Inc. (collectively the “Great Wall Group”), and substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses (the “Great Wall Acquisition”). The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States. The total acquisition price for all operating assets and inventory was approximately $68.2 million.

On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand Food, Inc. ("Sealand")~~. This included~~ including equipment, machinery and vehicles for cash consideration of $20.0 million plus, inventory for cash consideration of $14.4 million, and additional fixed assets for cash consideration of approximately $0.5 million (the "Sealand Acquisition").vehicles. The acquisition was completed ~~as part of~~to expand the ~~Company’s strategy to develop a national footprint through continued expansion in~~Company's territory along the East Coast, ~~of the United States,~~ from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

See Note 76 - Acquisitionsfor additional information on ~~recent acquisitions.~~

~~Independent Investigation Update~~

~~In March 2020, an analyst report suggested certain improprieties in~~ the Company’s operations. These allegations became the subject of two putative stockholder class action lawsuits which have subsequently been dismissed. In response to the allegations in the analyst report, the Company's Board of Directors appointed a Special Investigation Committee of Independent Directors (the “Special Investigation Committee”) to conduct an independent investigation with the assistance of independent legal counsel. As a result of the investigation, the SIC determined certain factual findings. Management evaluated the factual findings, as presented by the SIC, and analyzed them to determine which had impact on the historical financial statements, including disclosures, of the Company.

In addition to the independent investigation, the Securities and Exchange Commission (“SEC”) initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the class action lawsuits. The Special Investigation Committee and the Company are cooperating with the SEC. The SEC investigation is still ongoing.

As with any SEC investigation, there is also the possibility of potential fines and penalties. At this time, however, there has not been any demand made by the SEC nor is it possible to estimate the amount of any such fines and penalties, should they occur. See ~~Note 15 - Commitments and Contingencies~~ ~~for additional information.~~Sealand acquisition.

~~NOTE~~Note 2 - ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with ~~GAAP~~generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been

included. These financial statements are condensed and should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended December 31, ~~2021~~2022 and ~~2020.~~2021. Operating results for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023.

The accompanying condensed consolidated financial statements include the accounts of HF Group and ~~certain~~a variable interest ~~entities~~entity for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, the Company records net income (loss) attributable to noncontrolling interest in its condensed consolidated statements of operations and comprehensive income (loss) equal to the percentage of the economic or ownership interest retained in such entity by the respective noncontrolling party.

Variable Interest Entities

GAAP provides guidance on the identification of VIEs and financial reporting for entities 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) ~~receives~~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.

On February 8, 2022, FUSO Trucking LLC, a VIE for which the Company was the primary beneficiary and consolidated, was dissolved. The Company also has a VIE, AnHeart, Inc. (“AnHeart”), for which the Company is not the primary beneficiary and therefore does not consolidate. The Company did not incur expenses from VIEs and did not have any sales to or income from any VIEs during the three months ended March 31, 2023 and 2022. See Note 14 - Commitments and Contingencies for additional information on AnHeart.

Noncontrolling Interests

GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of the Company’s condensed consolidated balance ~~sheet.~~sheets. In addition, the amounts attributable to the net income (loss) of those ~~subsidiaries~~noncontrolling interests are reported separately in the condensed consolidated statements of operations and comprehensive ~~income.~~income (loss).

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, noncontrolling interest equity consisted of the following:

($ in thousands) Ownership of
Noncontrolling
Interest September 30, 2022 December 31, 2021
HF Foods Industrial, Inc. ("HFFI") 45.00% $ 527 $ 462
Min Food, Inc. 39.75% 1,618 1,363
Monterey Food Service, LLC 35.00% 452 453
Ocean West Food Services, LLC 32.50% 1,900 1,763
Syncglobal Inc.(a)
43.00% 90 —
Total $ 4,587 $ 4,041

~~_______________~~


($ in thousands)	Ownership of noncontrolling interest at March 31, 2023		March 31, 2023		December 31, 2022

HF Foods Industrial, LLC ("HFFI")	45.00	%	$	107	$	204
Min Food, Inc.	39.75	%	1,798		1,704
Monterey Food Service, LLC	35.00	%	448		452
Ocean West Food Services, LLC	32.50	%	2,129		1,986
Syncglobal Inc.	43.00	%	90		90
Total			$	4,572	$	4,436

~~(a)~~During the three months ended March 31, 2022, the Company entered into a joint venture with Syncglobal Inc. contributing $0.6 million and acquiring developed technology. During the three months ended June 30, 2022, the joint venture began to wind down operations, accordingly, the developed technology was fully impaired. See ~~Note 7 - Goodwill and Intangibles~~ ~~for additional information.~~

Uses of Estimates

The preparation of condensed 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 condensed 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 condensed consolidated financial statements include, but are not limited to, allowance for ~~doubtful accounts,~~expected credit losses, inventory reserves, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, impairment of long-term investments, ~~lease guarantee liability,~~ impairment of goodwill, the purchase price allocation and fair value of assets and liabilities acquired with respect to business combinations, realization of deferred tax assets, uncertain income tax positions, the liability for self-insurance and stock-based compensation.

Recent Accounting Pronouncements

~~In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326):~~ ~~Measurement of Credit Losses on Financial Instruments~~. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was further amended in

November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 15, 2022. The Company will adopt this ASU within the annual reporting period ending as of December 31, 2022 with an effective date of January 1, 2022 because, as of December 31, 2022, the Company will no longer be an emerging growth company. The Company is currently assessing thehas implemented all new pronouncements that are in effect and that may impact ~~of adopting this standard, but based upon~~ its ~~preliminary assessment,~~condensed consolidated financial statements and does not ~~expect the adoption of this guidance to~~believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its ~~consolidated financial statements.~~

~~In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):~~ ~~Accounting for Contract Assets and Contract Liabilities from Contracts with Customers~~. The guidance requires an acquirer to, at the date of acquisition, recognize and measure the acquired contract assets and contract liabilities acquired in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. This guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date. The Company is in the process of assessing the impact of this ASU on its futurecondensed consolidated financial statements ~~but does not expect it to have a material impact.~~or results of operations.

~~NOTE~~Note 3 - ~~VARIABLE INTEREST ENTITIES~~

The Company has three VIEs for which the Company is not the primary beneficiary and therefore does not consolidate, and 14 VIEs for which the Company was the primary beneficiary and consolidates. The VIEs are summarized as follows noting which VIE's the Company no longer has transactions with in 2022:

•~~Unconsolidated VIEs (collectively "Unconsolidated VIEs"):~~

•~~Revolution Industry, LLC (“Revolution Industry”) – Supplier of goods (until March 2021)~~

•~~UGO USA, Inc. (“UGO”) – Supplier of online goods, customer, and lessee (until April 2021)~~

•~~AnHeart, Inc. ("AnHeart")~~

•~~Consolidated VIEs (collectively "Consolidated VIEs"):~~

•~~FUSO Trucking LLC ("FUSO")~~

•~~13 staffing agencies (collectively, the “Staffing Agencies”) – Suppliers of staffing services through 2021:~~

•~~Anfu, Inc.~~

•~~Anshun, Inc.~~

•~~Chen Enterprises (until December 2020)~~

•~~Georgia Kam (until December 2020)~~

•~~Inchoi, Inc.~~

•~~Malways, Inc.~~

•~~Rousafe~~

•~~S&P~~

•~~SNP~~

•~~Suntone~~

•~~THLI, Inc. (until December 2020)~~

•~~THLR, Inc. (until December 2020)~~

•~~TWRR, Inc. (until December 2020)~~

~~Consolidated VIEs~~

~~FUSO~~

FUSO was established solely to provide exclusive trucking services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIEs’ activities. In addition, the Company receives the economic benefits from the entity and has concluded that the Company is the primary beneficiary. The carrying amounts of the assets, liabilities, the results of operations and cash flows of

~~the VIE included in the Company’s consolidated balance sheets, statements of income and comprehensive income (loss) and statements of cash flows are immaterial.~~

~~Staffing Agencies~~

The Staffing Agencies were set up by an employee of the Company, or their relatives, and provided temporary labor services exclusively to the Company at the direction of the Company. There were no other substantive business activities of the Staffing Agencies. There were immaterial assets held, immaterial liabilities owed by the Staffing Agencies and immaterial equity. The Company has determined it was the primary beneficiary for the Staffing Agencies through December 31, 2021 as it controlled how and when the labor force would be utilized. The Company did not have any guarantees, commitments or other forms of financing to the Staffing Agencies. Beginning January 1, 2022, the Company no longer has involvement with any of the Staffing Agencies.

~~Unconsolidated VIEs~~

~~Revolution Industry and UGO~~

Revolution Industry was established to produce egg roll mix for the Company. UGO was originally designed to be an online marketplace for various Asian goods. Revolution Industry and UGO were thinly capitalized and were not able to finance their activities without additional subordinated support.The former Co-CEO's (Mr. Ni) son, as sole equity holder of Revolution Industry, had unilateral control over the ongoing activities of Revolution Industry and significantly benefited from their operations. Therefore, the Company is not the primary beneficiary for Revolution Industry. The former Co-CEO (Mr. Ni) and his niece, as equity holders, had unilateral control over the ongoing activities of UGO and significantly benefited from its operations. Therefore, the Company is not the primary beneficiary for UGO.

Revolution Industry and UGO are also related parties and were generally the Company’s suppliers or customers and the Company did not have other involvement with these entities. Therefore, the Company’s exposure to loss due to its involvement with these entities was limited to amounts due from these entities. The Company did not have any guarantees, commitments, or other forms of financing with these entities. All transactions with Revolution Industry and UGO ceased in 2021, therefore, these entities are no longer considered VIE's as of September 30, 2022. Related party transactions, such as purchases of goods and services, with Revolution Industry and UGO are disclosed in ~~Note 13 - Related Party Transactions~~.

~~AnHeart~~

~~AnHeart, Inc. ("AnHeart") was previously a subsidiary of the Company designed to sell traditional Chinese medicine, sold to a third-party in February 2019. As discussed in~~ ~~Note 15 - Commitments and Contingencies,~~ after the sale, the Company continued to provide a guarantee for all rent and related costs associated with two leases of AnHeart in Manhattan, New York. The Company reassessed its relationship with AnHeart and determined that AnHeart is a VIE as a result of the guarantee. However, the Company concluded it was not the primary beneficiary of AnHeart because it does not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance. Therefore, the Company is not the primary beneficiary for AnHeart. Please refer to ~~Note 15 - Commitments and Contingencies~~ ~~for additional information regarding the Company's maximum exposure to loss to AnHeart.~~

~~NOTE 4 - REVENUE~~

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. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.

~~The Company follows ASC Topic 606 ("ASC 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.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ revenue recognized from performance obligations related to prior periods was immaterial. Revenue expected to be recognized in any future periods related to remaining performance obligations is immaterial.

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

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Asian Specialty $ 73,380 24 % $ 62,592 29 % $ 223,393 25 % $ 170,433 30 %
Commodity 17,480 6 % 11,905 6 % 48,833 6 % 35,322 6 %
Fresh Produce 31,260 10 % 27,251 13 % 92,215 10 % 72,376 13 %
Meat and Poultry 63,647 21 % 61,283 28 % 187,671 21 % 152,895 27 %
Packaging and Other 20,867 7 % 17,909 8 % 64,176 7 % 49,460 9 %
Seafood 94,077 32 % 34,602 16 % 262,280 31 % 87,982 15 %
Total $ 300,711 100 % $ 215,542 100 % $ 878,568 100 % $ 568,468 100 %


	Three Months Ended March 31,
($ in thousands)	2023				2022
Seafood	$	92,890	32	%	$	74,806	27	%
Asian Specialty	77,824		25	%	74,676		27	%
Meat and Poultry	52,049		18	%	60,915		22	%
Fresh Produce	32,211		11	%	29,879		11	%
Packaging and Other	19,396		7	%	22,013		8	%
Commodity	19,485		7	%	15,926		5	%
Total	$	293,855	100	%	$	278,215	100	%

~~NOTE 5~~Note 4 - ~~BALANCE SHEET COMPONENTS~~Balance Sheet Components

Accounts receivable, net consisted of the following:

(In thousands) September 30, 2022 December 31, 2021
Accounts receivable $ 45,334 $ 37,121
Less: allowance for doubtful accounts (1,058) (840)
Accounts receivable, net $ 44,276 $ 36,281


(In thousands)	March 31, 2023		December 31, 2022
Accounts receivable	$	44,570	$	45,628
Less: allowance for expected credit losses	(1,475)		(1,442)
Accounts receivable, net	$	43,095	$	44,186

Movement of allowance for ~~doubtful accounts is~~expected credit losses was as follows:

Nine Months Ended September 30,
(In thousands) 2022 2021
Beginning balance $ 840 $ 909
Increase (decrease) in provision for doubtful accounts 226 (374)
Write off (8) (186)
Ending balance $ 1,058 $ 349


	Three Months Ended March 31,
(In thousands)	2023		2022
Beginning balance	$	1,442	$	840
Adjustment for adoption of the CECL standard	—		690
Increase (decrease) in provision for expected credit losses	57		(12)
Bad debt write-offs	(24)		(1)
Ending balance	$	1,475	$	1,517

Property and equipment, net consisted of the following:


(In thousands)	March 31, 2023		December 31, 2022
Automobiles	$	36,863	$	34,891
Buildings	63,045		63,045
Building improvements	22,321		20,637
Furniture and fixtures	446		444
Land	49,929		49,929
Machinery and equipment	14,853		17,210
Subtotal	187,457		186,156
Less: accumulated depreciation	(48,473)		(45,826)
Property and equipment, net	$	138,984	$	140,330

Depreciation expense was $2.6 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively.

Long-term investments consisted of the following:

(In thousands) Ownership as of September 30,
2022 September 30, 2022 December 31, 2021
Asahi Food, Inc. 49% $ 832 $ 662
Pt. Tamron Akuatik Produk Industri ("Tamron") 12% 1,800 1,800
Total $ 2,632 $ 2,462


(In thousands)	Ownership as of March 31, 2023	March 31, 2023		December 31, 2022
Asahi Food, Inc. ("Asahi")	49%	$	866	$	879
Pt. Tamron Akuatik Produk Industri ("Tamron")	12%	1,800		1,800
Total long-term investments		$	2,666	$	2,679

The investment in Tamron is accounted for using the measurement alternative under ~~ASC~~Accounting Standards Codification (“ASC”) Topic 321 ~~(“ASC 321”),~~ ~~Investments –~~ 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 ~~Food, Inc.~~ is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. The Company determined there was no impairment as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 for these investments.

~~Property~~Accrued expenses and ~~equipment, net~~other liabilities consisted of the following:

(In thousands) September 30, 2022 December 31, 2021
Automobiles $ 34,794 $ 31,577
Buildings 70,881 68,998
Building improvements 12,023 19,004
Furniture and fixtures 356 211
Land 49,920 51,412
Machinery and equipment 17,636 14,114
Total property and equipment at cost 185,610 185,316
Less: accumulated depreciation (44,310) (39,408)
Property and equipment, net $ 141,300 $ 145,908

Depreciation expense was $2.2 million and $2.0 million for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense was $6.6 million and $6.0 million for the nine months ended September 30, 2022 and 2021, respectively.


(In thousands)	March 31, 2023		December 31, 2022
Accrued compensation	$	4,863	$	6,798
Accrued professional fees	2,080		3,866

Accrued interest and fees	1,190		1,082
Self-insurance liability	1,349		1,286
Accrued other	6,926		6,616
Total accrued expenses and other liabilities	$	16,408	$	19,648

~~NOTE 6~~Note 5 - ~~FAIR VALUE OF FINANCIAL INSTRUMENTS~~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:


	March 31, 2023								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(In thousands)
Assets:
Interest rate swaps	$	—	$	414	$	—	$	414	$	—	$	530	$	—	$	530

Liabilities:
Interest rate swaps	$	—	$	2,630	$	—	$	2,630	$	—	$	—	$	—	$	—

The Company follows the provisions of ASC Topic 820 ~~("ASC 820"),~~ Fair Value ~~Measurements and Disclosures~~Measurement~~. ASC 820~~ 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 ~~unaudited~~ condensed consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, checks issued not presented for payment and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments.

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

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


	Fair Value Measurements
(In thousands)	Level 1		Level 2		Level 3		Carrying Value
March 31, 2023
Fixed rate debt:

Bank of America	$	—	$	—	$	1,565	$	1,858
East West Bank	—		—		1,761		2,335

Other finance institutions	—		—		117		117
Variable rate debt:
JPMorgan Chase & Co.	$	—	$	110,019	$	—	$	110,019
Bank of America	—		2,296		—		2,296
East West Bank	—		3,453		—		3,453

December 31, 2022
Fixed rate debt:

Bank of America	$	—	$	—	$	1,630	$	1,948
East West Bank	—		—		1,786		2,351

Other finance institutions	—		—		186		197
Variable rate debt:
JPMorgan Chase & Co.	$	—	$	111,413	$	—	$	111,413
Bank of America	—		2,330		—		2,330
East West Bank	—		3,471		—		3,471

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.

As of September 30, 2022, the carrying value of the fixed rate debt was $4.7 million and the fair value was $4.1 million. As of December 31, 2021, the carrying value of the fixed rate debt, which included the Company's promissory note payable to related party, was $15.0 million and the fair value was $12.2 million. The variable and fixed rate debt are both classified as Level 2.

Please refer to Note 109 - Debt ~~and~~ ~~Note 13 - Related Party Transactions~~ for additional information regarding the Company's debt.

Of the $4.7 million of fixed rate debt as of September 30, 2022, $2.4 million is attributable to real estate term loans with East West Bank, $2.0 million is attributable to vehicle and equipment term loans with Bank of America, and $0.3 million is attributable to vehicle loans with other financial institutions.

Of the $15.0 million of fixed rate debt as of December 31, 2021, $4.5 million is related to the Company’s promissory note payable to related party, $2.5 million is attributable to real estate term loans with East West Bank, $2.7 million is attributable to vehicle and equipment term loans with Bank of America, $4.5 million is attributable to loans with First Horizon Bank, and $0.8 million is attributable to vehicle loans with other financial institutions.

~~Please refer to~~ Note 96 - ~~Derivative Financial Instruments~~ ~~for additional information regarding the fair value of the Company's derivative financial instruments which are classified as Level 2.~~Acquisitions

Acquisition of Sealand

~~NOTE 7 - ACQUISITIONS~~

~~Sealand Acquisition~~

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'~~sellers' saleable product inventory, for approximately $14.4 million and additional fixed assets for approximately $0.5 million. The Company ~~is in the process of finalizing~~finalized its purchase accounting ~~which relates to the valuation~~as of ~~intangible assets, which may impact the valuation of goodwill.~~December 31, 2022.

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 three months ended March 31, 2022 totaled approximately ~~$0.7~~$0.3 million and were reflected in distribution, selling and administrative expenses in the ~~unaudited~~ condensed consolidated statement of operations and comprehensive ~~income for the nine months ended September 30, 2022.~~income.

The information included herein ~~has been~~was prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using a combination of quoted market prices, discounted cash flows, and other estimates made by management. The ~~purchase price allocation is subject to further adjustment until all pertinent information regarding~~Company finalized the valuation of assets acquired and liabilities ~~acquired are fully evaluated by~~assumed for the ~~Company, not to exceed one year~~Sealand acquisition as ~~permitted under ASC 805~~of March 31, 2023.

~~Preliminary~~ Purchase Price Allocation

The ~~Company has performed an allocation of 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-compete~~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-compete agreements are three years, with a weighted average amortization period of approximately nine years. The associated goodwill is deductible for tax purposes.

~~Great Wall Acquisition~~

On December 30, 2021, the Company executed an Asset Purchase Agreement with Great Wall Seafood Supply Inc., a Texas Corporation; Great Wall Restaurant Supplier Inc., an Ohio Corporation, and First Mart Inc., an Illinois Corporation (collectively the “Great Wall Group”) to purchase substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses (the “Great Wall Acquisition”). The acquisition was completed as part of the Company’s strategy to develop a national footprint through expansion into the Midwest, Southwest and Southern regions of the United States.

The final aggregate price for the purchased assets was $43.7 million with $30.8 million paid in cash at closing and the issuance of 1,792,981 shares of common stock of the Company (based on a 60-day VWAP of $7.36), with a fair value of $12.9 million based on the share price of $8.11 per share at closing and an 11.5% discount due to a lock-up restriction. In addition to the closing cash payment, the Company separately acquired all of the Sellers’ saleable product inventory for approximately $24.3 million (fair value of $24.7 million) of which approximately $6.8 million was paid during the year ended December 31, 2021 and $17.4 million was recorded in accounts payable on the consolidated balance sheets as of December 31, 2021. The Company also acquired additional vehicles for approximately $0.2 million. As such, the total acquisition price for all operating assets and inventory was approximately $68.2 million. During the three months ended March 31, 2022, the Company paid $17.4 million to acquire the remaining saleable product inventory.

~~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 were reflected in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) and totaled $0.4 million for the nine months ended September 30, 2022.

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

~~Purchase Price Allocation~~

~~The total consideration paid to acquire the assets and liabilities of the Great Wall Group is as set forth below:~~


~~(In thousands)~~	~~Amount~~
~~Inventory~~	$	~~24,728~~
~~Property plant, and equipment~~	~~1,537~~
~~Intangible assets~~	~~30,145~~
~~Total assets acquired~~	~~56,410~~
~~Goodwill~~	~~11,745~~
~~Total consideration~~	$	~~68,155~~

The Company recorded acquired intangible assets of $30.1 million, which were measured at fair value using Level 3 inputs. These intangible assets include tradenames and trademarks of $10.5 million, customer relationships of $17.2 million and non-compete agreements of $2.4 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 11.5% to 14.0%. The useful lives of the tradenames and trademarks are ten years, customer relationships are ten years and ~~non-compete~~non-competition agreements are three years, with a weighted average amortization period of approximately nine years. The associated goodwill is deductible for tax purposes.

Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 as if ~~both~~ the ~~Great Wall Acquisition and~~acquisition of Sealand ~~Acquisition~~ had been consummated on January 1, ~~2021.~~2022. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets and excludes ~~synergies and~~ 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. ~~Accordingly, the unaudited pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations.~~

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
Pro forma net revenue $ 300,712 $ 288,157 $ 910,397 $ 769,881
Pro forma net income (3,364) 13,163 $ 3,316 20,325
Pro forma net income attributable to HF Group (3,368) 12,806 $ 3,389 19,758


(In thousands, except share and per share data)	Three Months Ended March 31, 2022

Pro forma net revenue	$	302,098

Pro forma net income attributable to HF Group	$	5,996

Pro forma earnings per common share - basic	$	0.11
Pro forma earnings per common share - diluted	$	0.11

Pro forma weighted average shares - basic	53,706,392
Pro forma weighted average shares - diluted	53,884,510

~~NOTE 8~~Note 7 - ~~GOODWILL AND ACQUIRED INTANGIBLE ASSETS~~Goodwill and Acquired Intangible Assets

Goodwill

~~The changes~~

Goodwill was $85.1 million as of March 31, 2023 and December 31, 2022. There was no change in the carrying amount of goodwill ~~are presented below:~~for the three months ended March 31, 2023.


~~(In thousands)~~	~~Amount~~
~~Balance at December 31, 2021~~	$	~~80,257~~
~~Acquisition of Sealand Food, Inc.~~	~~4,861~~
~~Balance at September 30, 2022~~	$	~~85,118~~

The Company’s policy is to test goodwill for impairment annually in the fourth quarter or more frequently if certain triggering events or circumstances indicate it could be impaired. The Company is monitoring the decline in its stock price and the potential for this to impact its recorded goodwill. While the Company has determined there to be no triggering events at September 30, 2022, a sustained decline in the Company’s stock price could result in the Company performing a quantitative test of impairment in the fourth quarter.

Acquired Intangible Assets

The components of the intangible assets are ~~presented below:~~as follows:

September 30, 2022 December 31, 2021
(In thousands) Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
amount Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount
Non-competition
agreement $ 3,892 $ (808) $ 3,084 $ 2,407 $ — $ 2,407
Tradenames 44,256 (9,567) 34,689 39,833 (6,349) 33,484
Customer relationships 185,266 (24,876) 160,390 176,408 (17,247) 159,161
Developed technology 440 (440) — — — —
Total $ 233,854 $ (35,691) $ 198,163 $ 218,648 $ (23,596) $ 195,052


	March 31, 2023						December 31, 2022
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Non-competition agreement	$	3,892	$	(1,456)	$	2,436	$	3,892	$	(1,132)	$	2,760
Trademarks	44,256		(11,778)		32,478		44,256		(10,673)		33,583
Customer relationships	185,266		(30,160)		155,106		185,266		(27,518)		157,748
Total	$	233,414	$	(43,394)	$	190,020	$	233,414	$	(39,323)	$	194,091

Amortization expense for acquired intangible assets was $4.1 million and ~~$2.7~~$3.6 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and September 30, 2021,~~ respectively. Amortization expense for intangible assets was $11.7 million and $8.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. During the nine months ended September 30, 2022, the Company impaired its acquired developed technology and recognized impairment expense of $0.4 million in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

~~NOTE 9~~Note 8 - ~~DERIVATIVE FINANCIAL INSTRUMENTS~~Derivative Financial Instruments

Derivative Instruments

The Company utilizes interest rate swaps ("IRS") ~~contracts~~ for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 109 - Debt). The Company does not use any other derivative financial instruments for trading or speculative purposes.

On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $1.1 million and $2.6 million, respectively. The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amounts that were priced at USD 1-month LIBOR ~~(London Interbank Offering Rate)~~ plus 2.25% per annum for the entire duration of the term loans. The EWB IRS contracts fixed the two term loans at 4.23% per annum until maturity in September 2029.

On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount. The term loan was contracted at USD 1-month LIBOR plus 2.15% per annum, but was fixed at 4.25% per annum resulting from the corresponding BOA IRS contract. On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to ~~SOFR (Secured~~Secured Overnight Financing ~~Rate)~~Rate ("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 ~~June 24, 2020, HF Group~~March 15, 2023, the Company entered into ~~a forward starting~~an amortizing IRS contract with J.P. Morgan Chase ~~Bank (the "JPM IRS")~~ for ~~a fixed $80.0 million~~an initial notional amount of $120.0 million, effective from ~~June 30, 2021~~March 1, 2023 and expiring ~~on June 30, 2025,~~in March 2028, as a means to partially hedge its existing floating rate loans exposure. ~~On March 3, 2021,~~Pursuant to the agreement, the Company ~~unwound~~will pay the ~~JPM IRS. The contract was unwound with~~swap counterparty a ~~view that 1-month LIBOR will continue to remain low~~fixed rate of 4.11% in ~~the foreseeable future despite the spike at the long end of the yield curve. The Company recorded a gain of approximately $0.7 million in the three months ended March 31, 2021.~~exchange for floating payments based on CME Term SOFR.

The Company evaluated the ~~above mentioned interest rate swap~~aforementioned IRS contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value change on ~~the aforementioned interest rate swap~~these IRS contracts are accounted for and recognized

as a change in fair value of ~~interest rate swap~~IRS contracts in the ~~unaudited~~ condensed consolidated statements of operations and comprehensive income (loss).

As of ~~September 30, 2022,~~March 31, 2023, the Company determined that the fair ~~value~~values of the IRS contracts were $0.4 million in an asset position ~~was $0.6~~and $2.6 million ~~which is included~~ in ~~other current assets in the unaudited condensed consolidated balance sheets.~~a liability position. As of December 31, ~~2021,~~2022, the IRS contracts were $0.5 million in an asset position. The Company ~~determined that~~included these in other long-term assets and other long-term liabilities, respectively, on the ~~fair value of the interest rate swap contracts in a liability position was $0.3 million, which is included in accrued expenses and other liabilities in the unaudited~~ condensed consolidated balance sheets. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in its assessment of fair value. The inputs used to determine the fair value of the IRS are classified as Level 2 inon the fair value hierarchy.

~~NOTE 10~~Note 9 - ~~DEBT~~Debt

On November 4, 2019, the Company entered into a credit agreement with J.P. Morgan Chase Bank (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 its wholly-owned subsidiaries and affiliates of the Company as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement ("Second Amended Credit Agreement"). On December 31, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No. 3 to the Second Amended Credit Agreement with JP Morgan, as Administrative Agent, and certain lender parties thereto including Comerica Bank. The Second Amended Credit Agreement, provided for (i) a $100.0 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), and (ii) a mortgage-secured term loan of $75.6 million (the "Term Loan"), and (iii) amendment to 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 and effective tangible net worth.

On March 31, 2022, the Company amended the JPM Credit Agreement extending the Revolver Facility for five years with a maturity date of November 4, 2027. The amendment provides for a $100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1% plus 1.375% per annum as well as an increase in the 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 "2022 Credit Agreement"). In connection with the amendment, the Company incurred $0.6 million in financing fees, of which $0.5 million will be amortized over the life of the respective facilities. Additionally, $0.1 million of the unamortized financing fees related to the Revolving Facility has been deferred and will be amortized over the life of the Revolving Facility.

As of September 30, 2022, the Company was in compliance with its covenants. Subsequent to September 30, 2022, the Company's lenders consented to the delivery of the Company's 2021 audited financial statements on or before January 31, 2023. The outstanding principal balance on the line of credit as of September 30, 2022 was $71.3 million.

~~Long-Term Debt~~

Long-term debt at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is summarized as follows:

(in thousands)
Bank Name Maturity Interest Rate as of September 30, 2022 September 30, 2022 December 31, 2021
Bank of America (a)
October 2022 - December 2029 3.73% — 5.80% $ 4,514 $ 5,134
East West Bank (b)
August 2027 - September 2029 4.25% — 4.40% 5,863 5,994
First Horizon Bank (c)
Paid off in May 2022 — — 4,571
J.P. Morgan Chase (d)
February 2023 - January 2030 2.93% — 3.05% 113,163 70,866
Other finance institutions (e)
October 2022 - March 2024 3.90% — 6.14% 204 838
Total debt, principal amount 123,744 87,403
Debt issuance costs (312) (35)
Total debt, carrying value 123,432 87,368
Less: current portion (6,442) (5,557)
Long-term debt $ 116,990 $ 81,811


($ in thousands)
Bank Name	Maturity	Interest Rate at March 31, 2023	March 31, 2023		December 31, 2022
Bank of America (a)	October 2026 - December 2029	4.28% - 5.80%	$	4,155	$	4,315
East West Bank (b)	August 2027 - September 2029	4.40% - 8.25%	5,788		5,822

JPMorgan Chase & Co. (c)	December 2023 - January 2030	6.10% - 6.77%	110,309		111,714
Other finance institutions (d)	April 2023 - March 2024	5.99% - 6.14%	117		160
Total debt, principal amount			120,369		122,011
Less: debt issuance costs			(291)		(302)
Total debt, carrying value			120,078		121,709
Less: current portion			(6,031)		(6,266)
Long-term debt			$	114,047	$	115,443

_______________

(a)Loan balance consists of real estate term loan and equipment term ~~loans, and vehicle term loans,~~loan, collateralized by one real property and specific ~~equipment and vehicles.~~ equipment. The real estate term is pegged to TERM SOFR + 2.5%.

(b)Real estate term loans with East West Bank are collateralized by four real properties. Balloon payments of $1.8 million and $2.9 million are due at maturity in 2027 and 2029, respectively.

(c)Secured by real property. During the nine months ended September 30, 2022, the Company sold the real property for approximately $7.2 million to Enson Seafood (a related party), recognized a gain of $1.5 million, which is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss), and used a portion of the proceeds to pay the $4.5 million loan outstanding with First Horizon Bank.

~~(d)~~Real estate term loan with a principal balance of ~~$112.6~~$110.1 million as of ~~September 30, 2022~~March 31, 2023 and ~~$69.8~~111.4 million as of December 31, ~~2021~~2022 is secured by assets held by the Company and has a maturity date of January 2030. Equipment term loan with a principal balance of ~~$0.5~~$0.2 million as of ~~September 30, 2022~~March 31, 2023 and ~~$1.0~~$0.3 million as of December 31, ~~2021~~2022 is secured by specific vehicles and equipment as defined in loan agreements. Equipment term ~~loans mature~~loan matures in ~~February 2023 and~~ December 2023.

~~(e)~~(d)Secured by vehicles.

The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants, including, but not limited to, a fixed charge coverage ratio and effective tangible net worth. As of ~~September 30, 2022 and December~~March 31, ~~2021,~~2023, the Company was in compliance with its covenants. ~~Subsequent to September 30, 2022, the Company's lenders consented to the delivery of the Company's 2021 audited financial statements on or before January 31, 2023.~~

~~NOTE 11~~Note 10 - ~~EARNINGS PER SHARE~~Earnings (Loss) Per Share

The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and restricted stock) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were ~~3,536~~60,558 potential common shares related to performance-based restricted stock units and 50,256 potential common shares related to restricted stock units that were excluded from the calculation of diluted EPS for the three months ended March 31, 2023 because their effect would have been anti-dilutive. There were 14,381 potential common shares related to total shareholder return performance-based restricted stock units that were excluded from the calculation of diluted EPS for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 because their effect would have been anti-dilutive. ~~There were no anti-dilutive potential common shares for the three and nine months ended September 30, 2021~~

1712

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

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except share and per share data) 2022 2021 2022 2021
Numerator:
Net (loss) income attributable to HF Foods Group Inc. $ (3,864) $ 7,554 $ 3,814 $ 12,319
Denominator:
Weighted-average common shares outstanding 53,798,131 51,913,411 53,716,464 51,913,411
Effect of dilutive securities — 19,301 265,223 6,521
Weighted-average dilutive shares outstanding 53,798,131 51,932,712 53,981,687 51,919,932
(Loss) earnings per common share:
Basic $ (0.07) $ 0.15 $ 0.07 $ 0.24
Diluted $ (0.07) $ 0.15 $ 0.07 $ 0.24


	Three Months Ended March 31,
($ in thousands, except share and per share data)		2023		2022
Numerator:
Net (loss) income attributable to HF Foods Group Inc.		$	(5,933)	$	3,114
Denominator:
Weighted-average common shares outstanding		53,822,794		53,706,392
Effect of dilutive securities		—		178,118
Weighted-average dilutive shares outstanding		53,822,794		53,884,510
(Loss) earnings per common share:
Basic		$	(0.11)	$	0.06
Diluted		$	(0.11)	$	0.06

~~NOTE 12~~Note 11 - ~~INCOME TAXES~~Income Taxes

The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, 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.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, the Company's effective income tax rate of ~~14.7%~~27.7% and ~~29.0%~~26.0%, respectively, differed from the federal statutory tax rate primarily as a result of ~~state income taxes. For the three~~permanent differences and ~~nine months ended September 30, 2021, the Company's effective income tax rate of 25.3% and 26.9% differed from the federal statutory tax rate primarily as a result of~~ state income taxes.

~~NOTE 13~~Note 12 - ~~RELATED PARTY TRANSACTIONS~~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. ~~Zhou Min Ni ("~~Xiao Mou Zhang (“Mr. ~~Ni"~~Zhang”), became the ~~Company's former Co-Chief~~sole Chief Executive Officer ~~resigned from all of his official posts~~ on February 23, 2021. Mr. Xiao Mou Zhang and certain of his immediate family also have ownership interests in various related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

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 the beneficial owners of approximately 25% of the Company’s outstanding shares of common stock, and he and certain of his immediate family members ~~are treated as~~have ownership interests in related parties ~~for purposes~~involved in (i) the distribution of ~~this report because Mr. Ni is a principal holder~~food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

For the ~~Company's securities.~~

year ended December 31, 2022, North Carolina Good Taste Noodle, Inc. ("(“NC ~~Noodle"~~Noodle”) iswas a related party due to Mr. Jian Ming Ni's, a former Chief Financial Officer of the Company, continued ownership interest in NC Noodle. As of January 1, 2023, NC Noodle is no longer considered a related party since it has been three years since Mr. Jian Ming Ni resigned.

~~Revolution Industry and UGO, are also considered non-consolidated VIEs as discussed further in~~ ~~Note 3 – Variable Interest Entities~~.

1813

The related party transactions as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ are identified as follows:

Related Party Sales, Purchases, and ~~Purchases Transactions~~

~~The Company makes regular sales to and purchases from various related parties.~~Lease Agreements

Purchases

~~Purchase - related parties~~

Below is a summary of purchases of goods and services from related parties recorded for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively:


					Three Months Ended September 30,				Nine Months Ended September 30,							Three Months Ended March 31,
(In thousands)				Nature	2022		2021		2022		2021
(a)		Best Food Services, LLC	(f)	Trade	$	2,246	$	2,738	$	8,738	$	6,225
														(In thousands)	Nature	2023		2022

~~(b)~~(a)	~~(b)~~(a)	Eastern Fresh NJ LLC		Trade	—		1,457		1,093		4,425		~~(b)~~(a)	Best Food Services, LLC	Trade	$	2,084	$	2,945
(c)		Enson Group, Inc. (formerly "Enson Group, LLC")		Trade	—		—		—		128

~~(d)~~(b)	~~(d)~~(b)	First Choice Seafood, Inc.		Trade	25		106		134		266		~~(d)~~(b)	Eastern Fresh NJ, LLC	Trade	—		1,093
~~(e)~~(c)	~~(e)~~(c)	Fujian RongFeng Plastic Co., Ltd.		Trade	—		808		398		2,398		~~(e)~~(c)	Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”)	Trade	37		—
~~(f)~~(d)	~~(f)~~(d)	North Carolina Good Taste Noodle, Inc.		Trade	1,798		1,345		5,226		3,938		~~(f)~~(d)	First Choice Seafood, Inc.	Trade	—		83
~~(g)~~(e)	~~(g)~~(e)	Ocean Pacific Seafood Group Inc.		Trade	107		114		385		452		~~(g)~~(e)	Fujian RongFeng Plastic Co., Ltd	Trade	—		398
(h)		Revolution Industry, LLC		Trade	—		—		—		190
(i)		UGO USA Inc.		Trade	—		—		—		212
		Other		Trade	115		54		199		219
		Total			$	4,291	$	6,622	$	16,173	$	18,453

(f)													(f)	North Carolina Good Taste Noodle, Inc.	Trade	—		1,658
(g)													(g)	Ocean Pacific Seafood Group, Inc.	Trade	168		136

														Other	Trade	52		32
														Total		$	2,341	$	6,345

_______________

(a)Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020.

(b)Mr. Ni owns an equity interest in this entity.

(c)Mr. Ni owns an equity interest in this entity.

(d)Mr. Ni owns an equity interest in this entity indirectly through its parent company.

(e)Mr. Ni owns an equity interest in this entity indirectly through its parent company.

(f)Mr. Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity. Mr. Zhou Min Ni previously owned an equity in this entity as of 12/31/2019. The Company has been informed by Mr. Zhou Min Ni that his equity interest was disposed of on 1/1/2020. No longer considered a related party as of 1/1/2023 since it has been three years since Mr. Jian Ming Ni resigned.

(g)Mr. Ni owns an equity interest in this entity.

Sales

Below is a summary of sales to related parties recorded for the three months ended March 31, 2023 and 2022, respectively:


		Three Months Ended March 31,
	(In thousands)	2023		2022
(a)	ABC Food Trading, LLC	$	593	$	1,192
(b)	Asahi Food, Inc.	195		181
(c)	Best Food Services, LLC	433		645
(d)	Eagle Food Service, LLC	1,020		—




(e)	First Choice Seafood, Inc.	8		10
(f)	Fortune One Foods, Inc.	19		—

(g)	N&F Logistics, Inc.	6		36
(h)	Union Food LLC	19		—

	Total	$	2,293	$	2,064

_______________

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

(c)Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020.

(d)Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity indirectly through its parent company.

(e)Mr. Ni owns an equity interest in this entity indirectly through its parent company.

(f)Mr. Ni owns an equity interest in this entity indirectly through its parent company.

(g)Mr. Ni owns an equity interest in this entity.

(h)~~Raymond~~Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity. On February 25, 2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL"). Han Feng has acquired substantially all of the operating assets used or held for use in such business operation for the amount of $250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from RIL at the time of transaction were an offset to the purchase price paid to RIL. Going forward, Han Feng has taken the egg roll production business in house and ceased its vendor relationship with RIL.

~~(i)Mr. Ni owns an equity interest in this entity.~~

1914

~~b. Sales~~

Lease Agreements

The Company leases various facilities to related parties.

The Company leased a warehouse to Enson Seafood GA Inc. (formerly GA-GW Seafood, Inc.) under an operating lease agreement expiring on September 21, 2027. On May 18, 2022, the Company sold the warehouse to Enson Seafood GA Inc., a related party, for approximately $7.2 million, recognized a gain of $1.5 million and used a portion of the proceeds to pay the outstanding balance of the Company's $4.5 million loan with First Horizon Bank. Rental income for the three months ended March 31, 2023 and 2022 was nil and $80,000, respectively, which is included in other income in the condensed consolidated statements of operations and comprehensive income (loss).

In 2020, the Company renewed a warehouse lease from Yoan Chang Trading Inc. under an operating lease agreement which expired on December 31, 2020. In February 2021, the Company executed a new five-year operating lease agreement with Yoan Chang Trading Inc., effective January 1, 2021 and expiring on December 31, 2025. Rent incurred was $99,000 and $72,000 for the three months ended March 31, 2023 and 2022, respectively, which is included in distribution, selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

Related Party Balances

Accounts Receivable - ~~related parties~~Related Parties, Net

Below is a summary of ~~sales to~~accounts receivable with related parties recorded ~~for the three~~as of March 31, 2023 and ~~nine months ended September 30,~~December 31, 2022, ~~and 2021,~~ respectively:

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 2022 2021
(a) ABC Food Trading, LLC $ 815 $ 715 $ 3,077 $ 1,935
(b) Asahi Food, Inc. 126 185 495 527
(c) Best Food Services, LLC 189 309 1,058 709
(d) Eagle Food Service, LLC 576 745 576 2,821
(e) Eastern Fresh NJ LLC — 55 — 155
(f) Enson Group, Inc. (formerly "Enson Group, LLC") — — — 53
(g) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) — 18 — 573
(h) First Choice Seafood Inc 9 7 27 89
(i) Fortune One Foods, Inc. 67 136 81 301
(i) Heng Feng Food Services, Inc. — 23 — 128
(j) N&F Logistics, Inc. — 164 36 531
Other — 6 — 17
Total $ 1,782 $ 2,363 $ 5,350 $ 7,839


	(In thousands)	March 31, 2023		December 31, 2022
(a)	ABC Food Trading, LLC	$	291	$	—
(b)	Asahi Food, Inc.	47		81
(c)	Best Food Services. LLC	147		—
(d)	Eagle Food Service, LLC	83		69
(e)	Enson Seafood GA, Inc. (formerly as GA-GW Seafood, Inc.)	59		59
(f)	Fortune One Foods, Inc.	—		4
(g)	Union Food LLC	2		—




	Total	$	629	$	213

_______________

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

(d)Tina Ni, one of Mr. Ni’s family members, owns an equity interest in this entity indirectly through its parent company.

(e)Mr. Ni owns an equity interest in this entity.

(f)Mr. Ni owns an equity interest in this ~~entity.~~entity indirectly through its parent company.

(g)Tina Ni, one of Mr. NiNi’s family members, owns an equity interest in this entity.

~~(h)~~
~~Mr. Ni owns an equity interest in this entity indirectly through its parent company.~~

~~(i)Mr. Ni owns an equity interest in this entity.~~

~~(j)Mr. Ni owns an equity interest in this entity.~~

~~c. Lease agreements - related parties~~

The Company ~~leases various facilities to related parties.~~

~~The Company leased a facility to UGO USA Inc. under an operating lease agreement which was mutually terminated by both parties effective April 1, 2021. No rental income was recorded~~has reserved for the three and nine months ended September 30, 2022 and for the three months ended September 30, 2021. Rental income was $7,000 for the nine months ended September 30, 2021 and is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

The Company leased a facility to iUnited Services, LLC ("iUnited"), which has been determined to be a related party due to the equity ownership interest in iUnited of Mr. Jian Ming Ni, the Company's former Chief Financial Officer. The lease agreement was terminated in connection with the sale80% of the ~~facility on November 3, 2021. The building~~accounts receivable for Enson Seafood GA, Inc. All other accounts receivable from these related parties are current and ~~related land was sold to iUnited for $1.5 million~~considered fully collectible. No other allowance is deemed necessary as of March 31, 2023 and a gain of $0.8 million. Rental income for the three and nine months ended September 30, 2021 was $15,000 and $45,000, respectively, which is included in other income in the consolidated statements of operations and comprehensive income (loss).

The Company leased a production area to Revolution Industry, LLC under a month-to-month lease agreement. This lease agreement was terminated as a result of the asset purchase agreement executed on February 25, 2021. No rental income was recorded for the three and nine months ended September 30, 2022 and for the three months ended September 30, 2021. Rental income was $6,000 for the nine months ended September 30, 2021 and is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).December 31, 2022.

2015

The Company leased a warehouse to Enson Seafood GA Inc. (formerly “GA-GW Seafood, Inc.”) under an operating lease agreement expiring on September 21, 2027. During the three months ended June 30, 2022, the Company sold the warehouse to Enson Seafood GA Inc. (see ~~Note 10 - Debt~~ for additional information). There was no rental income for the three months ended September 30, 2022. Rental income for the three months ended September 30, 2021 was $120,000 and is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Rental income for nine months ended September 30, 2022 and 2021 was $200,000 and $360,000, respectively and is included in other income in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

~~In 2020,~~Accounts Payable - Related Parties

All the Company renewed a warehouse lease from Yoan Chang Trading Inc. ("Yoan") under an operating lease agreement expiring on December 31, 2020. In February 2021, the Company executed a new five year operating lease agreement with Yoan effective January 1, 2021 and expiring on December 31, 2025. Rent incurred was $86,000 and $77,000 for the three months ended September 30, 2022 and 2021, respectively, and is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Rent incurredaccounts payable to the related party was $231,000 and $232,000 for the nine months ended September 30, 2022 and 2021, respectively, and is included in distribution, selling and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

~~Related Party Balances~~

a.~~Accounts receivable -~~ related parties ~~net~~

are payable upon demand without interest. Below is a summary of accounts ~~receivable~~payable with related parties recorded as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively:

(In thousands) September 30, 2022 December 31, 2021
(a) ABC Food Trading, LLC $ 102 $ 76
(b) Asahi Food, Inc. 152 72
(c) Best Food Services, LLC — 1
Other 174 100
Total $ 428 $ 249


	(In thousands)	March 31, 2023		December 31, 2022
(a)	Best Food Services, LLC	$	707	$	729





(b)	North Carolina Good Taste Noodle, Inc.	—		731


	Others	46		69
	Total	$	753	$	1,529

_______________

(a)Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3three Irrevocable Trusts for the ~~benefit~~benefits of Mr. Zhang's children effective November 1, 2020.

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

~~(c)~~Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020.

~~All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary as of September 30, 2022 and December 31, 2021.~~

~~b. Accounts payable - related parties, net~~

All the accounts payable to related parties are payable upon demand without interest. Below is a summary of accounts payable with related parties recorded as of September 30, 2022 and December 31, 2021, respectively:

(In thousands) September 30, 2022 December 31, 2021
(a) Best Food Services, LLC $ 788 $ 699
(b) Eastern Fresh NJ, LLC 18 581
(c) North Carolina Good Taste Noodle, Inc. 581 595
Other 111 66
Total $ 1,498 $ 1,941

~~_______________~~

~~(a)~~Mr. Zhang previously owned an equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020.

~~(b)Mr. Ni owns an equity interest in this entity.~~

~~(c)~~Mr. Jian Ming Ni, former Chief Financial Officer owns an equity interest in this entity. Mr. Zhou Min Ni previously owned an equity in this entity as of 12/31/2019. The Company has been informed by Mr. Zhou Min Ni that his equity interest was disposed of on 1/1/2020. No longer considered a related party as of 1/1/2023 since it has been three years since Mr. Jian Ming Ni resigned.

~~c. Advances to suppliers~~Promissory Note Payable - ~~related parties, net~~

The Company periodically provides purchase advances to various vendors, including the related party suppliers. There were no advances to related party suppliers recorded as of September 30, 2022 and December 31, 2021.Related Party

d.~~Promissory note payable - related party~~

The Company issued a $7.0 million ~~Unsecured Subordinated Promissory Note~~unsecured subordinated promissory note to ~~BRGR (a related party via ownership by certain shareholders~~B&R Group Realty Holding, LLC. As of March 31, 2022, the ~~Company,~~outstanding balance was $4.5 million and ~~a former VIE through 2020) in January 2020 as part of the payment~~there was no accrued interest payable. Interest payments were $0.1 million for the ~~acquisition of BRGR. The note~~three months ended March 31, 2022. No principal payment was ~~to mature in January 2030 and carried a fixed interest rate of 6% per annum. There was no requirement to make principal repayments until maturity.~~made during the three months ended March 31, 2022. During the three months ended June 30, 2022, the Company paid the remaining $4.5 million principal balance of the Unsecured Subordinated Promissory Note. Interest payments paid were $84,000 for the three months ended September 30, 2021. Interest payments paid were $129,000 and $282,000 for the nine months ended September 30, 2022 and 2021, respectively.this related party promissory note payable.

~~NOTE 14~~Note 13 - ~~STOCK-BASED COMPENSATION~~Stock-Based Compensation

In July 2021, the Company began issuing awards under the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”), which reserves up to 3,000,000 shares of the Company's common stock for issuance of awards to employees, non-employee directors and consultants. As of ~~September 30, 2022,~~March 31, 2023, the Company had ~~549,613~~575,906 time-based vesting restricted stock units ~~(“RSUs”) outstanding, 119,396~~unvested, 339,255 performance-based restricted stock units ~~(“PSUs”) outstanding,~~unvested, 180,506 shares of common stock vested and ~~2,224,017~~1,904,333 shares remaining available for future awards under the 2018 Incentive Plan.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, stock-based compensation expense was ~~$0.2~~$1.1 million and ~~$0.7~~$0.3 million, ~~respectively. For the three~~respectively, and ~~nine months ended September 30, 2021, stock-based compensation expense~~ was ~~$0.4 million. Stock-based compensation expense is recorded~~included in distribution, selling and administrative expenses in the Company's unaudited condensed consolidated statements of ~~operations~~income and comprehensive income.

As of ~~September 30, 2022,~~March 31, 2023, there was ~~$2.9~~$3.0 million of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the 2018 Incentive Plan, with a weighted average remaining service period of ~~2.60~~1.83 years.

~~NOTE 15~~Note 14 - ~~COMMITMENTS AND CONTINGENCIES~~

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 ~~the Company’s~~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 usthe Company that could adversely affect ~~our~~its ability to conduct ~~our~~its business. There also exists the possibility of a material adverse effect on ~~our~~the Company’s financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

As previously disclosed, in March 2020, an analyst report suggested certain improprieties in the Company’s operations, and in response to those allegations, the Company’s Board of Directors appointed a Special Committee of Independent Directors (the “Special Investigation Committee”) to conduct an internal independent investigation with the assistance of counsel. These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”). These Class Actions have since been dismissed and are now closed.

In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions. The Special Investigation Committee and the Company are cooperating with the SEC.

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

As with any SEC investigation, there is also the possibility of potential fines and penalties.At this time, however, there has not been any demand made by the SEC nor is it possible to estimate the amount of any such fines and penalties, should they occur.

On May 20, 2022, the Board of Directors of HF Group received a letter from a ~~purported~~ stockholder, James Bishop (the “Bishop Demand”).The Bishop Demand alleges that certain current and former officers and directors of HF Group engaged in misconduct and breached their fiduciary duties, and demands that HF Group investigate the allegations and, if warranted, assert claims against those current or former officers and directors.Many of the allegations contained in the Bishop Demand were the subject of ~~a shareholder derivative action that Bishop filed in August 2020 (the “Bishop Derivative Action”).On November 24, 2021, after~~ the ~~United States District Court for the Central District of California dismissed with prejudice a related securities~~

~~class action, captioned Mendoza v. HF Foods Group Inc. et al., the Bishop Derivative Action was voluntarily dismissed without prejudice.~~Class Actions.

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

On August 19, 2022, James Bishop filed a verified stockholder derivative complaint (the “Delaware Action”) in the Court of Chancery of the State of Delaware (the ~~“Delaware Action”~~“Court of Chancery”), which asserts similar allegations to those set forth in the Bishop Demand.On September 21, 2022, Bishop and the Company filed a stipulation to stay the Delaware Action for 90 days, which the court granted on September 22, 2022. On December 20, 2022, Bishop and the Company filed a stipulation to extend the stay of the Delaware Action for an additional 60 days, which the court granted on December 21, 2022. On March 15, 2023, the Court of Chancery entered an order approving a joint stipulation submitted by Bishop and HF Foods to stay the case for an additional 60 days.

Subsequent to March 31, 2023, effective as of April 20, 2023, the Company and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023. The ~~Special Litigation Committee is~~Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice, thereby resolving all existing and potential liability against all named defendants in the ~~process of analyzing and evaluating the claims alleged in the Bishop Demand and~~ Delaware Action, in exchange for Zhou Min Ni, a former Chairman and ~~has not determined whether any claims should be asserted or the probability of recovery for such claims.~~

~~In addition, the SEC initiated a formal, non-public investigation~~Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the ~~SEC informally requested, and later issued~~Company, making a ~~subpoena for, documents and other information. The subpoena relates to but is not necessarily limited~~payment to the ~~matters identified~~Company in the ~~two putative class actions which were subsequently dismissed. The Special Investigation Committee~~sum of $9.25 million and the Company ~~are cooperating with the SEC.While the SEC investigation is ongoing, the Special Investigation Committee has made~~adopting certain ~~factual findings based on evidence adduced during the investigation and made recommendations to management regarding improvements to Company operations and structure, including but not limited~~changes to its ~~dealings with related parties.~~Certificate of Incorporation, Bylaws and/or other internal governance policies and procedures. The ~~Company is working to implement those improvements. See the Company's 2021 Annual Report for additional information on the findings~~full terms of the ~~Special Investigation Committee.~~settlement of the Delaware Action were incorporated into the long-form settlement agreement, which is subject to approval of the Court of Chancery.

AnHeart Lease Guarantee

~~As discussed in~~
~~Note 3 - Variable Interest Entities, the~~

The Company provided a guarantee for two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. The Company has determined that AnHeart is a VIE as a result of the guarantee. However, the Company concluded it is not the primary beneficiary of AnHeart and therefore does not consolidate, because it does not have the power to direct the activities of AnHeart that most significantly impact AnHeart's economic performance.

On February 10, 2021, the Company entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC, pursuant to which it assumed the lease of the premises at 273 Fifth Avenue (the “273 Lease Agreement”). At the same time, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the Lease Amendment were negotiated in light of the Company’s guarantee obligations as guarantor under the Lease Agreement. The Company agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due. Under the terms of the Lease Agreement and the Assignment, the Company has undertaken to construct, at its own expense, a building on the premises at a minimum cost of $2.5 million. The Lease Amendment permits subletting of the premises, and the Company intends to sublease the newly constructed premises to defray the rental expense undertaken pursuant to its guaranty obligations.

On January 17, 2022, the Company received notice that AnHeart had defaulted on its obligations as tenant under the lease for 275 Fifth Avenue. On February 7, 2022, the Company undertook its guaranty obligations by assuming responsibility for payment of monthly rent and other tenant obligations, including past due rent as well as property tax obligations beginning with the January 2022 rent due. On February 25, 2022, the Company instituted a legal action to pursue legal remedies against AnHeart and Minsheng. In March 2022, the Company agreed to stay litigation against AnHeart in exchange for ~~AnHeart's~~AnHeart’s payment of certain back rent from January to April 2022 and its continued partial payment of monthly rent. While the case remains pending in New York, the Company is not actively litigating the claim.

In accordance with ASC Topic 460, Guarantees, the Company has determined that its maximum exposure resulting from the 275 Fifth Avenue lease guarantee includes future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases with a remaining term of approximately 11 years. The Company elected a policy to apply the discounted cash flow method to loss contingencies with more than 18 months of

payments. AnHeart is obligated to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. During the three months ended March 31, 2022, the Company recorded a lease ~~guarantee-liability~~guarantee liability of $5.9 million. The Company determined the discounted value of the lease guarantee liability using a discount rate of 4.55% and is classified as Level 2 in the fair value hierarchy. As of March 31, 2023, the Company had a lease guarantee liability of $5.7 million. The current portion of the lease guarantee liability of $0.3 million is recorded in Accrued expenses and other liabilities, while the long-term portion is recorded in Other long-term liabilities on the condensed consolidated balance sheet. The Company's monthly rental payments ~~which commenced during the three months ended March 31, 2022,~~ range from approximately $42,000 per month to $63,000 per month, with the final payment due in 2034.

The estimated future minimum lease payments as of ~~September 30, 2022~~March 31, 2023 are presented below:


(In thousands)	(In thousands)	Amount		(In thousands)	Amount
Year Ending December 31,
2022 (remaining three months)		$	127
2023		543
Year Ended December 31,				Year Ended December 31,

2023 (remaining nine months)				2023 (remaining nine months)	$	416
2024	2024	582		2024	582
2025	2025	604		2025	604
2026	2026	621		2026	621
2027				2027	638
Thereafter	Thereafter	5,116		Thereafter	4,478
Total	Total	7,593		Total	7,339
Less: Imputed interest		(1,771)
Total		$	5,822
Less: imputed interest				Less: imputed interest	(1,642)
Total minimum lease payments				Total minimum lease payments	$	5,697

~~NOTE 16~~Note 15 - ~~SUBSEQUENT EVENTS~~Subsequent Events

Shareholder Rights Plan

On April 11, 2023, the Company’s Board of Directors, authorized and declared a dividend distribution of one right (each, a “Right”) for each outstanding share of common stock of the Company to stockholders of record as of the close of business on April 24, 2023. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock of the Company at an exercise price of $19.50 subject to adjustment. The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of April 11, 2023, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.

The Company’s Board of Directors adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires fifteen percent (15%) or more of the shares of common stock without the approval of the Company’s Board of Directors. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Company’s Board of Directors.

See Note 1014 - ~~Debt~~Commitments and Contingencies ~~regarding the Company's waiver received~~for a subsequent event related to the ~~timing~~settlement of the ~~filing of its consolidated financial statements.~~Delaware Action.

2419

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE ~~ABOUT~~REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

~~All statements other than statements of historical fact included in this~~

This Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy andfor HF Foods Group Inc. (“HF Group,” “HF Foods”, the ~~plans and objectives of management for future operations, are~~“Company,” “we,” “us,” or “our”) contains forward-looking statements. ~~When used in this Quarterly Report on Form 10-Q, words~~Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” ~~“possible,”~~ “potential,” “predict,” “project,” “will” ~~and~~or similar ~~expressions, as they relate to us~~words or ~~our management,~~phrases, or the negatives of those words or phrases, may identify forward-looking ~~statements. Such~~statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the ~~beliefs~~impact of ~~management, as well as assumptions made by,~~known factors, and ~~information currently available~~it is impossible for us to anticipate all factors that could affect our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the Securities and Exchange Commission (“SEC”). All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.actual results. All forward-looking statements are subject to risks and uncertainties that ~~could~~may cause actual results ~~and events~~ to differ materially from those ~~included in forward-looking statements.~~that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation:

•The effects of the COVID-19 pandemic or other pandemics;

•Low margins in the foodservice distribution industry and periods of significant or prolonged ~~inflation;~~inflation or deflation;

•Qualified labor shortages;

•Unfavorable macroeconomic conditions in the United States;

•Competition in the foodservice distribution industry particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche;

•Increases in fuel costs;

•Disruption of relationships with vendors and increases in product prices;

•Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains;

•~~Our business has been affected and may in the future be affected by the COVID-19 pandemic and the~~The steps taken by the ~~Chinese government~~governments where our suppliers are located, including the People’s Republic of China, to address the COVID-19 pandemic;

•Disruption of relationships with or loss of customers;

•Changes in consumer eating and dining out habits;

•Related party transactions and possible conflicts of interests;

•Related parties and variable interest entities consolidation;

•Failure to protect our intellectual property rights;

•Our ability to renew or replace our current warehouse leases on favorable terms, or terminations prior to expiration of stated terms;

•Failure to retain our senior management and other key personnel, particularly our CEO, COO, CFO and CCO/General Counsel;

•Our ability to attract, train and retain employees;

•Changes in and enforcement of immigration laws;

•Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws;

•Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations;

•Costs to comply with environmental laws and regulations;

•Litigation;

•Increases in commodity prices;

•U.S. government tariffs on products imported into the United States, particularly from China;

•Severe weather, natural disasters and adverse climate change;

•Unfavorable geopolitical conditions;

•Any cyber security incident, other technology disruption or delay in implementing our information technology systems;

•Current indebtedness affecting our liquidity and ability of future financing;

•Failure to acquire other distributors or wholesalers and enlarge our customer base could negatively impact our results of operations and financial condition;

•Scarcity of and competition for acquisition opportunities;

•Our ability to obtain acquisition financing;

•The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions;

•Our ability to identify acquisition candidates;

•Increases in debt in order to successfully implement our acquisition strategy;

•Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results;

•Our ability to regain compliance with ~~Securities Exchange Act~~Nasdaq listing requirements;

•The impact on the price and demand for our common stock resulting from the relative illiquidity of ~~1934 reporting requirements;~~the market for our common stock and the as yet resolved Nasdaq delisting determination;

•Significant stockholders’ ability to significantly influence the Company; and

•The ~~development~~impact of ~~an active trading market for~~state antitakeover laws and related provision in our ~~common stock.~~governance documents.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications. We caution you that the important factors referenced above may not contain all of the risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you. ~~Factors that might cause or contribute to such differences~~These risks and uncertainties include, but are not limited to, those ~~contained in~~factors described under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, filed with the SEC. ~~We assume no obligation to revise~~

In addition, we cannot assure you that we will realize the results or ~~publicly release any revision to any~~developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements ~~contained~~included in this Quarterly Report on Form 10-Q ~~unless~~are made only as of the date hereof. Except as otherwise required by ~~law.~~law, we undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise.

~~Company Background and~~

Overview

We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States. HF Group was formed through a merger between two complementary ~~industry participants,~~market leaders, HF Foods Group Inc. and B&R Global.

On December 30, 2021, HF Group acquired the Great Wall Group, a seafood supplier, resulting in the addition of three distribution centers, located in Illinois and Texas (the “Great Wall Acquisition”).

On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc. (the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

See Note 76 - Acquisitions to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional ~~information regarding recent acquisitions.~~information.

We have grown our distribution network to 18 distribution centers nationwide with a fleet of over 400 refrigerated vehicles. Capitalizing on our ~~institutional~~deep understanding of the Chinese culture, ~~our over 1,000 employees~~we have become a trusted partner serving Asian and ~~subcontractors~~Chinese restaurants and ~~our support from two outsourced call centers in China, we serve over 15,000 Asian restaurants in 46 states with 18 distribution centers strategically located~~other foodservice customers throughout the ~~nation,~~United States, providing ~~round-the-clock~~ sales and service support to customers who mainly converse in Mandarin or other Chinese dialects. We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices.

As a market leader in servicing the Asian/Chinese restaurant sector, we are well-positioned for long-term success. The fragmented nature of the Asian/Chinese foodservice industry and the current environment creates opportunities for a company that has the necessary expertise and a comprehensive cultural understanding of this unique customer base. We believe we are differentiated from our competitors given our extensive footprint, strong vendor and customer relationships, and value-added service offerings, all of which have allowed and will continue to allow us to better serve our customers in these unprecedented conditions.

~~Financial Overview~~

Three Months Ended September 30, Change Nine Months Ended September 30, Change
(In thousands) 2022 2021 Amount % 2022 2021 Amount %
Net revenue $ 300,711 $ 215,542 $ 85,169 39.5 % $ 878,568 $ 568,468 $ 310,100 54.6 %
Net income (loss) attributable to HF Foods Group Inc. $ (3,864) $ 7,554 $ (11,418) (151.2) % $ 3,814 $ 12,319 $ (8,505) (69.0) %
Adjusted EBITDA $ 3,985 $ 16,555 $ (12,570) (75.9) % $ 35,822 $ 33,592 $ 2,230 6.6 %

~~For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below.~~

~~COVID-19 Impact~~

The devastating impact of the COVID-19 pandemic seen in 2020 has generally subsided. Our net revenue for the fiscal year ended December 31, 2021 recovered to 96% of pre-COVID-19 pandemic levels. Based on current sales volumes and adjusted cost structures, we continue to generate positive operating cash flows on a weekly basis and do not have immediate liquidity concerns. We remain optimistic with regards to the long-term prospects for our business although the extent to which the COVID-19 pandemic will impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among other factors.

How to Assess HF Group’s Performance

In assessing our performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, as well as certain non-GAAP financial measures, including EBITDA and ~~adjusted~~Adjusted EBITDA. The key measures that we use to evaluate the performance of our business are set forth below:

Net Revenue

Net revenue is equal to gross sales minus sales returns, sales incentives that we offer to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net revenue is driven by changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold.

Gross Profit

Gross profit is equal to net revenue minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, customs clearance fees and other miscellaneous expenses. Cost of revenue generally changes as we incur higher or lower costs from suppliers and as the customer and product mix changes.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.

EBITDA and Adjusted EBITDA

Discussion of our results includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, that we believe provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our condensed consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede GAAP measures.

Management uses EBITDA to measure operating performance, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, or non-recurring expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, and other non-cash charges and is more reflective of other factors that affect our operating performance.

The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of HF Group’s results as reported under GAAP. For example, Adjusted EBITDA:

•excludes certain tax payments that may represent a reduction in cash ~~available to the Company;~~available;

•does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

•does not reflect changes in, or cash requirements for, our working capital needs; and

•does not reflect the significant interest expense, or the cash requirements, necessary to service our debt.

For additional information on EBITDA and Adjusted EBITDA, see the ~~table~~section entitled “EBITDA and Adjusted EBITDA” below.

Results of Operations ~~for the Three Months Ended September 30, 2022 and 2021~~

The following table sets forth a summary of our consolidated results of operations for the three months ended ~~September 30,~~March 31, 2023and 2022 ~~and 2021.~~. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


		Three Months Ended September 30,				Change					Three Months Ended March 31,				Change
(In thousands)	(In thousands)	2022		2021		Amount		%		(In thousands)	2023		2022		Amount		%

Net revenue	Net revenue	$	300,711	$	215,542	$	85,169	39.5	%	Net revenue	$	293,855	$	278,215	$	15,640	5.6%
Cost of revenue	Cost of revenue	249,218		173,630		75,588		43.5	%	Cost of revenue	243,683		227,488		16,195		7.1%
Gross profit	Gross profit	51,493		41,912		9,581		22.9	%	Gross profit	50,172		50,727		(555)		(1.1)%
Distribution, selling and administrative expenses	Distribution, selling and administrative expenses	54,589		31,048		23,541		75.8	%	Distribution, selling and administrative expenses	52,929		40,408		12,521		31.0%

(Loss) income from operations	(Loss) income from operations	(3,096)		10,864		(13,960)		(128.5)	%	(Loss) income from operations	(2,757)		10,319		(13,076)		(126.7)%

Interest expense	Interest expense	2,274		902		1,372		152.1	%	Interest expense	2,868		1,278		1,590		124.4%
Other income, net		(462)		(573)		111		(19.4)	%
Other income										Other income	(228)		(776)		548		(70.6)%
Change in fair value of interest rate swap contracts	Change in fair value of interest rate swap contracts	(284)		(52)		(232)		NM		Change in fair value of interest rate swap contracts	2,746		(358)		3,104		(867.0)%
Lease guarantee expense	Lease guarantee expense	(58)		—		(58)		NM		Lease guarantee expense	(120)		5,931		(6,051)		(102.0)%
(Loss) income before income tax provision	(Loss) income before income tax provision	(4,566)		10,587		(15,153)		(143.1)	%	(Loss) income before income tax provision	(8,023)		4,244		(12,267)		(289.0)%
Income tax (benefit) provision		(672)		2,676		(3,348)		(125.1)	%
Net (loss) income		(3,894)		7,911		(11,805)		(149.2)	%
Less: net income (loss) attributable to non-controlling interests		(30)		357		(387)		NM
Net (loss) income attributable to HF Foods Group Inc.		$	(3,864)	$	7,554	$	(11,418)	NM

Income (benefit) tax provision										Income (benefit) tax provision	(2,226)		1,104		(3,330)		(301.6)%
Net (loss) income and comprehensive (loss) income										Net (loss) income and comprehensive (loss) income	(5,797)		3,140		(8,937)		(284.6)%
Less: net income attributable to noncontrolling interests										Less: net income attributable to noncontrolling interests	136		26		110		423.1%
Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc.										Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc.	$	(5,933)	$	3,114	$	(9,047)	(290.5)%

~~____________________~~

~~NM - Not meaningful~~

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:


							Three Months Ended March 31,
		Three Months Ended September 30,					2023		2022
		2022		2021
Net revenue	Net revenue	100.0	%	100.0	%	Net revenue	100.0	%	100.0	%
Cost of revenue	Cost of revenue	82.9	%	80.6	%	Cost of revenue	82.9	%	81.8	%
Gross profit	Gross profit	17.1	%	19.4	%	Gross profit	17.1	%	18.2	%
Distribution, selling and administrative expenses	Distribution, selling and administrative expenses	18.2	%	14.4	%	Distribution, selling and administrative expenses	18.0	%	14.5	%
(Loss) income from operations		(1.1)	%	5.0	%

Income (loss) from operations						Income (loss) from operations	(0.9)	%	3.7	%

Interest expense	Interest expense	0.8	%	0.4	%	Interest expense	1.0	%	0.5	%
Other income, net	Other income, net	(0.2)	%	(0.3)	%	Other income, net	(0.1)	%	(0.3)	%
Change in fair value of interest rate swap contracts	Change in fair value of interest rate swap contracts	(0.1)	%	—	%	Change in fair value of interest rate swap contracts	0.9	%	(0.1)	%

Income before income tax provision		(1.6)	%	4.9	%
(Benefit) provision for income taxes		(0.2)	%	1.2	%
Net (loss) income		(1.4)	%	3.7	%
Less: net income (loss) attributable to noncontrolling interests		—	%	0.2	%
Net (loss) income attributable to HF Foods Group Inc.		(1.4)	%	3.5	%
Lease guarantee expense						Lease guarantee expense	—	%	2.1	%
(Loss) income before income tax provision						(Loss) income before income tax provision	(2.7)	%	1.5	%
Income tax (benefit) provision						Income tax (benefit) provision	(0.8)	%	0.4	%
Net (loss) income and comprehensive (loss) income						Net (loss) income and comprehensive (loss) income	(1.9)	%	1.1	%
Less: net income attributable to noncontrolling interests						Less: net income attributable to noncontrolling interests	0.1	%	—	%
Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc.						Net (loss) income and comprehensive (loss) income attributable to HF Foods Group Inc.	(2.0)	%	1.1	%

Net Revenue

Net revenue for the three months ended ~~September 30, 2022~~March 31, 2023 increased by ~~$85.2~~$15.6 million or ~~39.5%~~6% compared to the same period in ~~2021, primarily due~~2022. This increase was attributable to the additional Seafood revenue generated due to ~~recent acquisitions~~the Sealand Acquisition and ~~overall~~ product cost ~~inflation. Recent acquisitions, which shifted our~~inflation, partially offset by a decrease in Meat and Poultry revenue compared to the same period in 2022.

Gross Profit

Gross profit was $50.2 million for three months ended March 31, 2023 compared to $50.7 million in the same period in 2022, a decrease of $0.6 million, or 1%. The decrease was primarily attributable to a decrease in Meat and Poultry revenue, partially offset by the additional Seafood revenue generated due to the Sealand Acquisition. Gross profit margin for three months ended March 31, 2023 decreased from 18.2% in 2022 to 17.1% for the same period in 2023. The decrease was primarily attributable to the shift in product mix to higher Seafood sales, ~~compared~~timing of inventory purchases, increases in key commodity pricing and a higher than normal gross profit margin in the prior year due to ~~the same period in 2021, contributed $70.7 million and organic growth contributed the remaining $14.5 million.~~

~~Gross Profit~~

~~Gross profit for~~our sales recovery to above pre-COVID-19 pandemic levels during the three months ended September 30, 2022 increased by $9.6 million or 22.9%, compared to the same period in 2021 primarily due to recent acquisitions, which contributed $11.1 million of gross profit for the three months ended September 30,March 31, 2022. Overall gross margin decreased from 19.4% in the three months ended September 30, 2021 to 17.1% in the three months ended September 30, 2022, primarily due to the lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales and timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses ~~for the three months ended September 30, 2022~~ increased by ~~$23.5~~$12.5 million, or ~~75.8%~~31%, primarily due to ~~$54.6~~an increase of $2.8 million ~~compared to $31.0 million for the three months ended September 30, 2021. Of the distribution, selling and administrative expenses increase, $9.3 million primarily resulted from~~in payroll and related labor costs, inclusive of the additional costs due to ~~recent acquisitions, as more workers were, and will continue~~the Sealand Acquisition, increased professional fees of $4.2 million, from $2.9 million for the three months ended March 31, 2022 to ~~be, required to handle~~$7.1 million for the ~~increasing sales demand, $2.5 million was delivery related cost~~three months ended March 31, 2023, primarily driven by ~~increasing fuel prices and revenue growth, and an increase of $4.9 million in professional fees primarily driven by~~ legal ~~costs, acquisition-related~~ costs and increased compliance costs as a result of the SEC and ~~SIC~~Special Investigation Committee investigations, ~~and an SEC comment letter inquiry.~~as well as a $0.8 million increase in sales-related costs driven primarily by the Sealand Acquisition. Distribution, selling and administrative expenses as a percentage of net revenue increased ~~from 14.4%~~to 18.0% for the three months ended ~~September 30, 2021 to 18.2% for~~March 31, 2023 from 14.5% in the ~~three months ended September 30,~~same period in 2022 primarily due to ~~the costs disclosed above.~~higher professional fees and increased headcount.

Interest Expense

Interest expense for the three months ended ~~September 30, 2022~~March 31, 2023 increased by ~~$1.4~~$1.6 million or ~~152.1%~~124%, compared to the ~~same period in 2021 mainly~~three months ended March 31, 2022, primarily due to ~~higher utilization of the line of credit coupled with a higher interest rate and, to a lesser extent,~~ the increase of $46.0 million to our JPMorgan Chase mortgage-secured term ~~loan.~~loan on March 31, 2022 coupled with a sharply higher interest-rate environment. Our average daily line of credit balance ~~increased~~decreased by ~~$42.2~~$19.4 million, or ~~259.0%~~31%, to ~~$58.5~~$42.6 million for the three months ended ~~September 30, 2022~~March 31, 2023 from $16.3 million for three months ended September 30, 2021. The average daily interest rate on our line of credit balance increased to 3.61% for the three months ended September 30, 2022 from 1.47% for three months ended September 30, 2021.

~~Income Tax Provision~~

~~Our provision for income taxes decreased by $3.3 million, or 125.1%, from $2.7~~$62.0 million for the three months ended ~~September 30, 2021~~March 31, 2022, and our average daily JPMorgan Chase mortgage-secured term loan balance increased by $41.2 million, or 59%, to ~~$(0.7)~~$110.5 million for the three months ended ~~September 30,~~March 31, 2023 from $69.3 million for the three months ended March 31, 2022. Average floating interest rates for the three months ended March 31, 2023 increased by approximately 4.41% on the line of credit and 4.41% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2022, which further contributed to higher interest expense.

Income Tax (Benefit) Provision

Income tax (benefit) provision was an income tax benefit of $2.2 million for the three months ended March 31, 2023, compared to income tax provision of $1.1 million for the three months ended March 31, 2022, primarily due to ~~a decrease in~~decreased income before ~~income~~ taxes.

Net (Loss) Income Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc. was $3.9 million for the three months ended September 30, 2022, compared to net income attributable to HF Foods Group Inc. of $7.6 million for the three months ended September 30, 2021. The decrease of $11.4 million, or 151.2%, is primarily attributable to the increased costs disclosed above.

~~EBITDA and Adjusted EBITDA~~

~~The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:~~

Three Months Ended September 30, Change
(In thousands) 2022 2021 Amount %
Net (loss) income $ (3,894) $ 7,911 $ (11,805) (149.2) %
Interest expense 2,274 902 1,372 152.1 %
Income tax provision (672) 2,676 (3,348) (125.1) %
Depreciation and amortization 6,386 4,743 1,643 34.6 %
EBITDA 4,094 16,232 (12,138) (74.8) %
Lease guarantee expense (58) — (58) NM
Change in fair value of interest rate swap contracts (284) (52) (232) 446.2 %
Stock-based compensation expense 162 375 (213) (56.8) %
Acquisition and integration costs 71 — 71 NM
Adjusted EBITDA $ 3,985 $ 16,555 $ (12,570) (75.9) %
Adjusted EBITDA margin 1.3 % 7.7 %
~~____________________~~

~~NM - Not meaningful~~

Adjusted EBITDA was $4.0 million for the three months ended September 30, 2022, a decrease of $12.6 million, or 75.9%, compared to $16.6 million for the three months ended September 30, 2021. The $12.6 million decrease in Adjusted EBITDA was primarily attributable to the increase in distribution, selling and administrative expenses as well as lower gross profit margin. Adjusted EBITDA margin decreased by 640 basis points primarily due to the increase in distribution, selling and administrative expenses as a percentage of net revenue of 380 basis points and a decrease of 230 basis points on gross profit margin.

~~Results of Operations for the Nine Months Ended September 30, 2022 and 2021~~

The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Nine Months Ended September 30, Change
(In thousands) 2022 2021 Amount %
Net revenue $ 878,568 $ 568,468 $ 310,100 54.6 %
Cost of revenue 723,778 461,994 261,784 56.7 %
Gross profit 154,790 106,474 48,316 45.4 %
Distribution, selling and administrative expenses 140,840 88,927 51,913 58.4 %
Income from operations 13,950 17,547 (3,597) (20.5) %
Interest expense 5,101 2,732 2,369 86.7 %
Other income, net (1,401) (1,437) 36 (2.5) %
Change in fair value of interest rate swap contracts (850) (1,371) 521 (38.0) %
Lease guarantee expense 5,831 — 5,831 NM
Income before income tax provision 5,269 17,623 (12,354) (70.1) %
Income tax provision 1,529 4,738 (3,209) (67.7) %
Net income 3,740 12,885 (9,145) (71.0) %
Less: net (loss) income attributable to noncontrolling interests (74) 566 (640) (113.1) %
Net income attributable to HF Foods Group Inc. $ 3,814 $ 12,319 $ (8,505) (69.0) %

~~____________________~~

~~NM - Not meaningful~~

~~The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:~~

Nine Months Ended September 30,
2022 2021
Net revenue 100.0 % 100.0 %
Cost of revenue 82.4 % 81.3 %
Gross profit 17.6 % 18.7 %
Distribution, selling and administrative expenses 16.0 % 15.6 %
Income from operations 1.6 % 3.1 %
Interest expense 0.6 % 0.5 %
Other income, net (0.2) % (0.3) %
Change in fair value of interest rate swap contracts (0.1) % (0.2) %
Lease guarantee expense 0.7 % — %
Income before income tax provision 0.6 % 3.1 %
Provision for income taxes 0.2 % 0.8 %
Net income 0.4 % 2.3 %
Less: net income attributable to noncontrolling interests — % 0.1 %
Net income attributable to HF Foods Group Inc. 0.4 % 2.2 %

~~Net Revenue~~

Net ~~revenue~~ for the nine months ended September 30, 2022 increased by $310.1 million, or 54.6% compared to the same period in 2021, primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to recent acquisitions and overall product cost inflation. Organic growth contributed $125.7 million and recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed the remaining $184.4 million.

~~Gross Profit~~

Gross profit for the nine months ended September 30, 2022 increased by $48.3 million or 45.4%, compared to the same period in 2021 mainly due to strong revenue growth and recent acquisitions, which contributed $26.0 million of gross profit for the nine months ended September 30, 2022. Overall gross margin decreased from 18.7% in the nine months ended September 30, 2021 to 17.6% in the nine months ended September 30, 2022, primarily due to lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales, increases in fuel costs, incremental lower margin sales from newly acquired customers, timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

~~Distribution, Selling and Administrative Expenses~~

Distribution, selling and administrative expenses for the nine months ended September 30, 2022 increased by $51.9 million, or 58.4%, to $140.8 million compared to $88.9 million for the nine months ended September 30, 2021. Of the distribution, selling and administrative expenses increase, $25.5 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, as more workers were, and will continue to be, required to handle the increasing sales demand, $7.5 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth, and an increase of $7.5 million in professional fees primarily driven by legal costs, acquisition-related costs and increased compliance costs as a result of the SEC and SIC investigations and an SEC comment letter inquiry. Distribution, selling and administrative expenses as a percentage of net revenue increased from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022 primarily due to the costs disclosed above partially offset by strong revenue growth and fixed cost leverage.

~~Interest Expense~~

Interest expense for the nine months ended September 30, 2022 increased by $2.4 million, or 86.7%, compared to the same period in 2021 mainly due to higher utilization of our line of credit coupled with a higher interest rate and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan. Our average daily line of credit balance increased by $39.1 million, or 271.0%, to $53.5 million for the nine months ended September 30, 2022 from $14.4 million for nine months ended September 30, 2021. The average daily interest rate on our line of credit increased to 2.45% for the nine months ended September 30, 2022 from 1.48% for nine months ended September 30, 2021.

~~Income Tax Provision~~

Our provision for income taxes slightly decreased by $3.2 million, or 67.7%, from $4.7 million for the nine months ended September 30, 2021 to $1.5 million for the nine months ended September 30, 2022 primarily due to decreased profitability.

~~Net Income Attributable to HF Foods Group Inc.~~

~~Net~~ (loss) income attributable to HF Foods Group Inc. was ~~$3.8~~a net loss of $5.9 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~$12.3~~net income of $3.1 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The decrease of ~~$8.5~~$9.0 million, or ~~69.0%~~291%, is primarily ~~attributable~~due to the ~~$5.8 million~~increased distribution, selling, and administrative costs and interest expense described above as well as the year-over-year change in lease guarantee expense related to our AnHeart lease guarantee and the increased costs disclosed above, partially offset by the increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently.fair value of interest rate swap contracts of $3.1 million.

EBITDA and Adjusted EBITDA

The following table ~~sets forth the calculation of~~reconciles EBITDA and Adjusted EBITDA ~~and reconciliation~~ to ~~net income,~~ the ~~closest~~most directly comparable GAAP measure:


		Nine Months Ended September 30,						Change					Three Months Ended March 31,				Change
($ in thousands)		2022			2021			Amount		%
Net income		$	3,740		$	12,885		$	(9,145)	(71.0)	%
(In thousands)												(In thousands)	2023		2022		Amount		%

Net (loss) income												Net (loss) income	$	(5,797)	$	3,140	$	(8,937)	(284.6)%
Interest expense	Interest expense	5,101			2,732			2,369		86.7	%	Interest expense	2,868		1,278		1,590		124.4%
Income tax provision		1,529			4,738			(3,209)		(67.7)	%
Income tax (benefit) provision												Income tax (benefit) provision	(2,226)		1,104		(3,330)		(301.6)%
Depreciation and amortization	Depreciation and amortization	18,245			14,233			4,012		28.2	%	Depreciation and amortization	6,689		5,779		910		15.7%
EBITDA	EBITDA	28,615			34,588			(5,973)		(17.3)	%	EBITDA	1,534		11,301		(9,767)		(86.4)%
Lease guarantee expense	Lease guarantee expense	5,831			—			5,831		NM		Lease guarantee expense	(120)		5,931		(6,051)		(102.0)%
Change in fair value of interest rate swap contracts	Change in fair value of interest rate swap contracts	(849)			(1,371)			522		(38.1)	%	Change in fair value of interest rate swap contracts	2,746		(358)		3,104		NM
Stock-based compensation expense	Stock-based compensation expense	673			375			298		79.5	%	Stock-based compensation expense	1,096		290		806		277.9%
Acquisition and integration costs	Acquisition and integration costs	1,130			—			1,130		NM		Acquisition and integration costs	—		749		(749)		NM
Impairment loss		422			—			422		NM
Adjusted EBITDA	Adjusted EBITDA	$	35,822		$	33,592		$	2,230	6.6	%	Adjusted EBITDA	$	5,256	$	17,913	$	(12,657)	(70.7)%
Adjusted EBITDA margin		4.1		%	5.9		%

~~____________________~~

~~NM - Not meaningful~~

Adjusted EBITDA was ~~$35.8~~$5.3 million for the ~~nine~~three months ended ~~September 30, 2022, an increase~~March 31, 2023, a decrease of ~~$2.2~~$12.7 million or ~~6.6%~~71%, compared to ~~$33.6~~$17.9 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The ~~$2.2 million increase~~decrease in Adjusted EBITDA was ~~primarily~~ attributable to ~~our strong business recovery to pre-COVID-19 pandemic levels partially offset by~~ the ~~increase of~~lower gross profit and higher distribution, selling and administrative ~~expenses~~costs as a percentage of net revenue from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022. Adjusted EBITDA margin decreased by 180 basis points primarily due to the decrease of 110 basis points on gross profit margin.described above.

Liquidity and Capital Resources

As of ~~September 30, 2022,~~March 31, 2023, we had cash of approximately ~~$17.8~~$17.5 million, checks issued not presented for payment of ~~$18.5~~$14.1 million and access to approximately ~~$28.7~~$55.5 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation. We have funded working capital and other capital requirements primarily by cash flow from operations and ~~our line of credit.~~bank loans. Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and to service debts.

~~Based on current sales volume, which has been increasing steadily quarter-on-quarter since the third quarter of fiscal year 2020, we~~

We believe that our cash flow generated from operations is sufficient to meet our normal working capital needs ~~and debt obligations~~ for at least the next twelve months. However, our ability to repay our current obligations will depend on the future realization of our current assets. Management has ~~taken into consideration~~considered the historical experience, ~~general economic trends in~~ the ~~United States, and~~economy, the trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of ~~September 30, 2022.~~March 31, 2023.

On March ~~31, 2022,~~15, 2023, we ~~amended the Credit Agreement~~entered into an amortizing IRS contract with J.P. Morgan ~~extending our line~~Chase Bank for an initial notional amount of ~~credit~~$120.0 million, effective from March 1, 2023 and expiring on March 2028, as a means to partially hedge its existing floating rate loans exposure. Pursuant to the agreement, we will pay the swap counterparty a fixed rate of 4.11% in exchange for ~~five years.~~floating payments based on CME Term SOFR.

Subsequent to March 31, 2023, effective as of April 20, 2023, we and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023. The ~~amendment~~Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice in exchange for Zhou Min Ni, a ~~$100.0 million asset-secured revolving credit facility with~~former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a ~~1-month SOFR plus~~former President and Chief Operating Officer of the Company, making a ~~credit adjustment of 0.1% plus 1.375% per annum, as well as an increase to our mortgage-secured term loan from $69.0 million to $115.0 million. In April of 2022, the $46.0 million increase~~payment to the ~~mortgage-secured term loan was used~~Company in the sum of $9.25 million. The full terms of the settlement of the Delaware Action were incorporated into the long-form settlement agreement, which is subject to ~~pay down our $100.0 million line~~approval of ~~credit. We also received a waiver through January 31, 2023 related~~ the Court of Chancery. Please refer to Note 14 - Commitments and Contingencies to the ~~timing of our filing of our 2021 audited~~condensed consolidated financial ~~statements.~~

On April 29, 2022, we completed the Sealand Acquisition for cash consideration of $20.0 million plus approximately $14.4 million of inventory. We financed the Sealand Acquisition through our $100.0 million line of credit. See ~~Note 7 - Acquisitions~~ ~~for additional information regarding the Sealand Acquisition.~~

During the three months ended June 30, 2022, we sold a warehouse to a related party for approximately $7.2 million and used a portion of the proceeds to pay the outstanding balance of our $4.5 million loan with First Horizon Bank. See ~~Note 10 - Debt~~ statements in this Quarterly Report on Form 10-Q for additional information.

~~During the three months ended June 30, 2022, we paid the remaining $4.5 million of our related party promissory note payable. See~~ ~~Note 13 - Related Party Transactions~~ ~~for additional information.~~

~~Based on the above considerations, management~~Management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months. However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, ~~government intervention in response to a potential resurgence of COVID-19,~~ competitive pricing in the foodservice distribution industry, and our bank and suppliers being able to provide continued support. If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.

As of ~~September 30, 2022,~~March 31, 2023, we have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes cash flow data for the ~~nine months~~years ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Nine Months Ended September 30,				Change				Three Months Ended March 31,				Change
(In thousands)	(In thousands)	2022		2021		Amount		%	(In thousands)	2023		2022		Amount		%

Net cash provided by operating activities	Net cash provided by operating activities	$	6,932	$	11,333	$	(4,401)	(38.8)%	Net cash provided by operating activities	$	12,570	$	10,113	$	2,457	24.3%
Net cash used in investing activities	Net cash used in investing activities	(50,234)		(6,444)		(43,790)		679.5%	Net cash used in investing activities	(629)		(19,932)		19,303		(96.8)%
Net cash provided by (used in) financing activities		46,316		1,073		45,243		NM
Net increase in cash and cash equivalents		$	3,014	$	5,962	$	(2,948)	(49.4)%
Net cash (used in) provided by financing activities									Net cash (used in) provided by financing activities	(18,753)		11,453		(30,206)		(263.7)%
Net (decrease) increase in cash and cash equivalents									Net (decrease) increase in cash and cash equivalents	$	(6,812)	$	1,634	$	(8,446)	NM

____________________

NM - Not meaningful

Operating Activities

Net cash provided by operating activities ~~decreased to $6.9~~consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes. Net cash provided by operating activities increased by $2.5 million, ~~for the nine months ended September 30, 2022, compared to $11.3 million for the nine months ended September 30, 2021~~or 24%, primarily due to lower ~~net income partially offset by changes in~~ working capital ~~items.~~requirements for the three months ended March 31, 2023 compared to increased working capital investment as a direct result of increasing sales volume and the need for normal inventory level build up post-COVID-19 for the same period in 2022.

Investing Activities

Net cash used in investing activities ~~was $50.2~~decreased by $19.3 million, ~~for the nine months ended September 30, 2022, compared to net cash used in investing activities of $6.4 million for the nine months ended September 30, 2021, an increase of $43.8 million~~or 97%, primarily due to ~~the Sealand Acquisition of $34.9 million and the $17.4 million paid for~~ the inventory acquired related to the Great Wall Acquisition ~~partially offset by proceeds from~~in the ~~$7.2 million sale of a warehouse.~~three months ended March 31, 2022.

Financing Activities

Net ~~cash provided by financing activities was $46.3 million for the nine months ended September 30, 2022, compared to net~~ cash used in financing activities ~~of $1.1~~increased by $30.2 million, ~~for the nine months ended September 30, 2021,~~or 264%, primarily due to the ~~$46.0 million increase of our mortgage-secured term loan and the~~ net impact of ~~$15.4 million on~~ our line of credit from net proceeds of ~~$0.8~~$13.3 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to a net repayment of $8.6 million for the three months ended March 31, 2023, as well as the net impact of $7.6 million on our checks issued not presented for payment from net proceeds of ~~$16.2~~$0.7 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 ~~partially offset by~~to net repayments of $7.6 million for the ~~$4.5 million payoff of our related party promissory note payable and the $4.5 million repayment of long-term debt related to our warehouse sale mentioned above.~~three months ended March 31, 2023.

Critical Accounting Policies and Estimates

We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the ~~2021~~2022 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

Our policy is to test goodwill for impairment annually in the fourth quarter or more frequently if certain triggering events or circumstances indicate it could be impaired. We are monitoring the decline in our stock price and the potential for this to impact our recorded goodwill. While we have determined there to be no triggering events at September 30, 2022, a sustained decline in our stock price could result in a quantitative test of impairment in the fourth quarter.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, ~~refer to Recent Accounting Pronouncements in~~see Note 2 - Summary of Significant Accounting Policies ~~in our unaudited~~to the condensed consolidated financial ~~statements.~~statements in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Our debt exposes us to risk of fluctuations in interest rates. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at higher rates. We manage our debt portfolio to achieve an overall desired proportion of fixed and floating rate debts and may employ interest rate swaps as a tool from time to time to achieve that position. To manage our interest rate risk exposure, we entered into three interest rate swap contracts to hedge the floating rate term loans. See Note 108 - ~~Debt~~Derivative Financial Instruments to the ~~unaudited~~ condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.

As of ~~September 30, 2022,~~March 31, 2023, our aggregate floating rate debt’s outstanding principal balance without hedging was ~~$184.2~~$44.5 million, or ~~94.6%~~27.0% of total debt, consisting of ~~long-term debt and~~ our revolving line of ~~credit. See~~credit (see Note 109 - Debtto the ~~unaudited~~ condensed consolidated financial statements in this Quarterly Report on Form ~~10-Q for additional information.~~10-Q). Our floating rate debt interest is based on the floating 1-month SOFR plus a predetermined credit adjustment rate plus the bank spread. The remaining ~~5.4%~~73.0% of our debt is ~~fixed-rate and~~on a fixed rate or a floating rate with ~~hedge.~~hedging. In a hypothetical scenario, a 1% change in the applicable rate would cause the interest expense on our floating rate debt to change by approximately ~~$1.8~~$0.4 million per year.

Fuel Price Risk

We are also exposed to ~~risks relating to~~ fluctuations risk in the price and availability of diesel fuel. We require significant quantities of diesel fuel for our vehicle fleet, and the inbound delivery of the products we sell is also dependent upon shipment by diesel-fueled vehicles. We currently are able to obtain adequate supplies of diesel fuel, ~~despite the fact that~~and average prices in the ~~current~~first quarter ~~increased by 69.9% from~~of 2023 were consistent in comparison to average prices in the ~~comparable~~same period of ~~2021.~~2022, increasing 0.4% on average. However, it is impossible to predict the future availability or price of diesel fuel. The price and supply of diesel fuel fluctuates based on external factors not within our control, including geopolitical developments, supply and demand for oil and gas, regional production patterns, weather conditions and environmental concerns. Increases in the cost of diesel fuel could increase our cost of goods sold and operating costs to deliver products to our customers.

We do not actively hedge ~~against~~the price ~~fluctuations~~fluctuation of diesel fuel in general. Instead, we seek to minimize fuel cost risk through delivery route optimization and fleet utilization ~~improvements.~~improvement.

~~Item~~ITEM 4. ~~Controls and Procedures.~~CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. In connection with this review and the audit of our consolidated financial statements for the year ended December 31, ~~2021,~~2022, we identified ~~two~~five material weaknesses as were reported previously, which continue to exist as of ~~September 30, 2022. In addition, there were other material weaknesses identified during 2021 that exist as of September 30, 2022.~~March 31, 2023. We did not properly design or maintain effective controls over the control environment, risk assessment, ~~monitoring,~~ control activities, ~~and~~ information and communication components and monitoring of the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that as a result of the material weaknesses and control deficiencies as reported in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, our disclosure controls and procedures were not effective as of ~~September 30, 2022.~~March 31, 2023. Notwithstanding the weaknesses, our management has concluded that the financial statements included elsewhere in this report present fairly, and in all material respects, our financial position, results of operation and cash flow in conformity with GAAP.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

~~Changes in Internal Control Over Financial Reporting~~

3527

Changes in Internal Controls Over Financial Reporting

In order to address and resolve the foregoing material weaknesses, we have begun to implement measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including continuously hiring additional financial personnel with requisite training and experience in the preparation of financial statements in compliance with applicable SEC requirements, formalizing our processes to generate documentation sufficient to support customer orders and purchase orders, and implementing controls to obtain documentation evidencing customer agreements to transaction amounts and account balances.

The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to ongoing efforts to address these material weaknesses. Although we will continue to implement measures to remedy our internal control deficiencies, there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed and operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses identified and described above will continue to exist.

~~There~~

Other than the remediation efforts described above, there have been no ~~other change to~~changes in our internal ~~control~~controls over financial reporting ~~during~~for the ~~three months~~quarter ended ~~September 30, 2022.~~March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to our outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. For information relating to legal proceedings, see Note 1514 - Commitments and Contingencies into our condensed consolidated financial statements.

Item 1A. Risk Factors.

~~There have been~~Except as provided below, there were no material changes from the risk factors ~~that we believe are material to our business, results of operations, and financial condition from those~~ disclosed in ~~Part I,~~ Item 1A ~~— “Risk Factors"~~ of ~~the~~our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the below-detailed risks actually occur, our business, financial condition, operating results, cash flows and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Anti-takeover provisions contained in our amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions:

•authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

•limiting the liability of, and providing indemnification to, our directors and officers;

•limiting the ability of our stockholders to call and bring business before special meetings;

•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and

•controlling the procedures for the conduct and scheduling of stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management, and amendment of our amended and restated certificate of incorporation to change or modify certain of these provisions requires approval of a super-majority of our stockholders, which we may not be able to obtain.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.

In addition, in April 2023, we implemented a stockholder rights plan (the Rights Agreement), also called a “poison pill,” that may have the effect of discouraging or preventing a change of control by, among other things, making it uneconomical for a third party to acquire us without the consent of our board of directors.

Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. ~~Exhibits.~~Exhibits

The following exhibits are ~~being~~incorporated herein by reference or are filed or furnished with this ~~Quarterly Report on Form 10-Q:~~report as indicated below:

Incorporated by Reference
Exhibit Number Description Form Exhibit Filing Date
3.1
Second Amended and Restated Certificate of Incorporation
8-K 3.1 8/11/2017
3.2
Certificate of Amendment to Certificate of Incorporation
8-K 3.1.2 8/27/2018
3.3
Amended and Restated Bylaws
8-K 3.02 11/4/2022
4.1
Specimen Common Stock Certificate
S-1/A 4.2 7/28/2017
4.2
Form of Rights Agreement, dated August 8, 2017, by and between American Stock Transfer & Trust Company, LLC and the Registrant
8-K 4.1 8/11/2017
4.3
Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC
S-1/A 4.5 7/28/2017
10.1†
Letter Agreement, dated June 30, 2022, by and among HF Foods Group Inc. and Jose Maroto
8-K 10.1 7/7/2022
10.2†
Offer Letter, dated July 8, 2022, by and among HF Foods Group, Inc. and Carlos A. Rodriguez
8-K 10.1 7/14/2022
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Incorporated by Reference

Exhibit Number

Description

Form

Exhibit

Filing Date

3.1

Second Amended and Restated Certificate of Incorporation

8-K

3.1

8/11/2017

3.2

Certificate of Amendment to Certificate of Incorporation

8-K

3.1.2

8/27/2018

3.3

Amended and Restated Bylaws

8-K

3.02

11/4/2022

3.4

First Amendment to Amended and Restated Bylaws, dated April 25, 2023

8-K

3.1

4/26/2023

3.5

Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock

8-K

3.1

4/11/2023

4.1

Specimen Common Stock Certificate

S-1/A

4.2

7/28/2017

4 .2

Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC

S-1/A

4.5

7/28/2017

4 .3

Preferred Stock Rights Agreement, dated as of April 11, 2023, by and between HF Foods Group Inc. and American Transfer & Trust Company, LLC, as rights agent

8-K

4.1

4/11/2023

10.1†

HF Foods Group Inc. Amended and Restated Severance Plan

8-K

10.1

1/5/2023

10.2†

Letter Agreement, dated January 17, 2023, by and among HF Foods Group Inc. and Prudence Kuai

8-K

10.1

1/19/2023

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

32.1**

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			Filed herewith.
**			Furnished herewith.
†			Indicates a management contract or compensatory plan or arrangement.

3730

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			HF ~~FOODS GROUP INC.~~Foods Group Inc.

			By: /s/ Xiao Mou Zhang
			Xiao Mou Zhang Chief Executive Officer

			By: /s/ Carlos Rodriguez
			Carlos Rodriguez Chief Financial Officer (Principal accounting and financial officer)

Date: ~~January 31,~~May 10, 2023

3831


(In thousands, except share data)	September 30, 2022		December 31, 2021
ASSETS
CURRENT ASSETS
Cash	$	17,806	$	14,792
Accounts receivable, net	44,276		36,281
Accounts receivable - related parties	428		249
Inventories	132,524		102,690
Other current assets	9,890		5,559

TOTAL CURRENT ASSETS	204,924		159,571
Property and equipment, net	141,300		145,908
Operating lease right-of-use assets	15,917		11,664
Long-term investments	2,632		2,462
Customer relationships, net	160,390		159,161
Trademarks and other intangibles, net	37,773		35,891
Goodwill	85,118		80,257
Other long-term assets	2,623		2,032
TOTAL ASSETS	$	650,677	$	596,946
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued not presented for payment	$	18,517	$	17,834
Line of credit	71,329		55,293
Accounts payable	49,260		57,745
Accounts payable - related parties	1,498		1,941
Current portion of long-term debt, net	6,442		5,557
Current portion of obligations under finance leases	2,246		2,274
Current portion of obligations under operating leases	3,933		2,482
Accrued expenses and other liabilities	15,717		12,138

TOTAL CURRENT LIABILITIES	168,942		155,264
Long-term debt, net of current portion	116,990		81,811
Promissory note payable - related party	—		4,500
Obligations under finance leases, non-current	11,187		11,676
Obligations under operating leases, non-current	12,085		9,251
Deferred tax liabilities	36,064		39,455
Lease guarantee liability, net of current portion	5,549		—
TOTAL LIABILITIES	350,817		301,957
Commitments and contingencies (Note 15)
SHAREHOLDERS’ EQUITY
Preferred stock, $0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021	—		—
Common stock, $0.0001 par value, 100,000,000 shares authorized, 53,813,366 and 53,706,392 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	5		5
Additional paid-in capital	597,738		597,227
Accumulated deficit	(302,470)		(306,284)
TOTAL SHAREHOLDERS' EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC.	295,273		290,948
Noncontrolling interests	4,587		4,041
TOTAL SHAREHOLDERS’ EQUITY	299,860		294,989
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	650,677	$	596,946


($ in thousands)	Ownership of Noncontrolling Interest	September 30, 2022		December 31, 2021
HF Foods Industrial, Inc. ("HFFI")	45.00%	$	527	$	462
Min Food, Inc.	39.75%	1,618		1,363
Monterey Food Service, LLC	35.00%	452		453
Ocean West Food Services, LLC	32.50%	1,900		1,763
Syncglobal Inc.(a)	43.00%	90		—
Total		$	4,587	$	4,041


(In thousands)	Ownership as of September 30, 2022	September 30, 2022		December 31, 2021
Asahi Food, Inc.	49%	$	832	$	662
Pt. Tamron Akuatik Produk Industri ("Tamron")	12%	1,800		1,800
Total		$	2,632	$	2,462