HF Foods Group Inc. [HFFG] Filings

10-Q 1 hffg-20230630.htm 10-Q hffg-20230630

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 June 30, 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 August 5, 2023, the registrant had 54,145,924 shares of common stock outstanding.

HF Foods Group Inc. and Subsidiaries

Form 10-Q for the Quarter Ended June 30, 2023

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 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34

SIGNATURE PAGE		35

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

HF Foods Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)


	June 30, 2023		December 31, 2022
ASSETS
CURRENT ASSETS:
Cash	$	14,946	$	24,289
Accounts receivable, net	45,586		44,186
Accounts receivable - related parties	607		213
Inventories	111,066		120,291
Prepaid expenses and other current assets	12,482		8,937
TOTAL CURRENT ASSETS	184,687		197,916
Property and equipment, net	136,724		140,330
Operating lease right-of-use assets	12,336		14,164
Long-term investments	2,414		2,679
Customer relationships, net	152,465		157,748
Trademarks and other intangibles, net	33,484		36,343
Goodwill	85,118		85,118

Other long-term assets	4,860		3,231
TOTAL ASSETS	$	612,088	$	637,529
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not presented for payment	$	20,874	$	21,946
Line of credit	42,173		53,056
Accounts payable	54,848		55,515
Accounts payable - related parties	870		1,529
Current portion of long-term debt, net	5,936		6,266
Current portion of obligations under finance leases	1,980		2,254
Current portion of obligations under operating leases	3,538		3,676
Accrued expenses and other liabilities	19,763		19,648
TOTAL CURRENT LIABILITIES	149,982		163,890
Long-term debt, net of current portion	112,623		115,443

Obligations under finance leases, non-current	11,375		11,441
Obligations under operating leases, non-current	9,052		10,591
Deferred tax liabilities	33,119		34,443
Other long-term liabilities	5,337		5,472
TOTAL LIABILITIES	321,488		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 June 30, 2023 and December 31, 2022	—		—
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 54,086,164 shares issued and outstanding as of June 30, 2023 and 53,813,777 shares issued and outstanding as of December 31, 2022	5		5
Additional paid-in capital	600,030		598,322
Accumulated deficit	(313,297)		(306,514)
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC.	286,738		291,813
Noncontrolling interests	3,862		4,436
TOTAL SHAREHOLDERS’ EQUITY	290,600		296,249
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	612,088	$	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 (Loss) Income

(In thousands, except share and per share data)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net revenue - third parties	$	290,364	$	298,138	$	581,926	$	574,289
Net revenue - related parties	1,948		1,504		4,241		3,568
TOTAL NET REVENUE	292,312		299,642		586,167		577,857

Cost of revenue - third parties	239,724		245,716		481,181		471,349
Cost of revenue - related parties	1,922		1,356		4,148		3,211
TOTAL COST OF REVENUE	241,646		247,072		485,329		474,560

GROSS PROFIT	50,666		52,570		100,838		103,297

Distribution, selling and administrative expenses	52,243		45,843		105,172		86,251

(LOSS) INCOME FROM OPERATIONS	(1,577)		6,727		(4,334)		17,046

Other (income) expenses:

Interest expense	2,847		1,549		5,715		2,827
Other income	(127)		(163)		(355)		(939)
Change in fair value of interest rate swap contracts	(2,856)		(208)		(110)		(566)
Lease guarantee expense	(90)		(42)		(210)		5,889
Total other (income) expenses, net	(226)		1,136		5,040		7,211

(LOSS) INCOME BEFORE INCOME TAXES	(1,351)		5,591		(9,374)		9,835

Income tax expense (benefit)	209		1,097		(2,017)		2,201
NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME	(1,560)		4,494		(7,357)		7,634
Less: net (loss) income attributable to noncontrolling interests	(710)		(70)		(574)		(44)
NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC.	$	(850)	$	4,564	$	(6,783)	$	7,678

(LOSS) EARNINGS PER COMMON SHARE - BASIC	$	(0.02)	$	0.08	$	(0.13)	$	0.14
(LOSS) EARNINGS PER COMMON SHARE - DILUTED	$	(0.02)	$	0.08	$	(0.13)	$	0.14
WEIGHTED AVERAGE SHARES - BASIC	54,046,328		53,706,392		53,935,178		53,706,392
WEIGHTED AVERAGE SHARES - DILUTED	54,046,328		53,900,883		53,935,178		53,927,957

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

HF Foods Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net (loss) income	$	(7,357)	$	7,634
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense	13,129		11,859
Asset impairment charges	1,200		422
Gain from disposal of property and equipment	—		(1,351)
Provision for credit losses	56		111
Deferred tax benefit	(1,324)		(2,674)

Change in fair value of interest rate swap contracts	(110)		(565)
Stock-based compensation	1,848		511

Non-cash lease expense	1,916		1,579
Lease guarantee expense	(210)		5,889
Other expense (income)	389		(47)
Changes in operating assets and liabilities (excluding effects of acquisitions):
Accounts receivable	(1,456)		(6,529)
Accounts receivable - related parties	(394)		(629)
Inventories	9,225		(13,662)


Prepaid expenses and other current assets	(3,545)		(4,199)

Other long-term assets	(1,519)		(494)
Accounts payable	(667)		16,799
Accounts payable - related parties	(659)		159
Operating lease liabilities	(1,765)		(1,551)
Accrued expenses and other liabilities	(25)		396
Net cash provided by operating activities	8,732		13,658
Cash flows from investing activities:

Purchase of property and equipment	(1,522)		(4,028)
Proceeds from sale of property and equipment	—		7,667





Payment made for acquisition of Sealand	—		(34,849)
Payment made for acquisition of Great Wall Group	—		(17,445)


Net cash used in investing activities	(1,522)		(48,655)
Cash flows from financing activities:
Checks issued not presented for payment	(1,072)		2,348
Proceeds from line of credit	594,916		625,656
Repayment of line of credit	(605,826)		(620,783)
Proceeds from long-term debt	—		45,952
Repayment of long-term debt	(3,172)		(7,882)
Payment of debt financing costs	—		(579)
Repayment of obligations under finance leases	(1,399)		(1,243)
Repayment of promissory note payable - related party	—		(4,500)
Proceeds from noncontrolling interests shareholders	—		240
Cash distribution to shareholders	—		(186)
Net cash (used in) provided by financing activities	(16,553)		39,023
Net (decrease) increase in cash	(9,343)		4,026
Cash at beginning of the period	24,289		14,792
Cash at end of the period	$	14,946	$	18,818

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

HF Foods Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022

Supplemental disclosure of cash flow data:
Cash paid for interest	$	5,420	$	1,883
Cash paid for income taxes	825		8,525
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities	$	88	$	3,913
Property acquired in exchange for finance leases	1,059		1,220

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

Condensed Consolidated Statements of Changes in Shareholders' Equity

(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
Net income (loss)	—	—			—		4,564		4,564		(70)		4,494
Distribution to shareholders	—	—			—		—		—		(97)		(97)
Stock-based compensation	—	—			221		—		221		—		221
Balance at June 30, 2022	53,706,392	$	5		$	597,738	$	(299,296)	$	298,447	$	4,617	$	303,064

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
Net (loss) income	—	—			—		(850)		(850)		(710)		(1,560)
Issuance of common stock pursuant to equity compensation plan	269,113	—			—		—		—		—		—
Shares withheld for tax withholdings on vested awards	(27,441)	—			(106)		—		(106)		—		(106)
Stock-based compensation	—	—			752		—		752		—		752
Balance at June 30, 2023	54,086,164	$	5		$	600,030	$	(313,297)	$	286,738	$	3,862	$	290,600

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

HF Foods Group Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Organization and Description of Business

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 April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand Food, Inc. ("Sealand") including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. See Note 6 - Acquisitions for additional information on the Sealand acquisition.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements are condensed and should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended December 31, 2022 and 2021. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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

Variable Interest Entities

GAAP provides guidance on the identification of a variable interest entity (“VIE”) and financial reporting for an entity over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive the economic benefits of the VIE that could be potentially significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE.

FUSO Trucking, LLC (“FUSO”) is a VIE for which the Company is the primary beneficiary. Although its operations have wound down and its remaining assets and liabilities are immaterial, FUSO continues to be consolidated by the Company as a VIE. The Company also has a VIE, AnHeart, Inc. (“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 six months ended June 30, 2023. 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 sheets. In addition, the amounts attributable to the net income (loss) of those noncontrolling interests are reported separately in the condensed consolidated statements of operations and comprehensive income (loss).

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


($ in thousands)	Ownership of noncontrolling interest at June 30, 2023	June 30, 2023		December 31, 2022

HF Foods Industrial, LLC ("HFFI") (a)	45.00%	$	(672)	$	204
Min Food, Inc.	39.75%	1,836		1,704
Monterey Food Service, LLC	35.00%	447		452
Ocean West Food Services, LLC	32.50%	2,161		1,986
Syncglobal Inc.	43.00%	90		90
Total		$	3,862	$	4,436

_________________

(a)During the three months ended June 30, 2023, the Company began to wind down HFFI operations. Accordingly, the machinery used in HFFI operations was impaired. See Note 4 - Balance Sheet Components for additional information.

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 expected credit losses, inventory reserves, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, impairment of long-term investments, 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

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

Note 3 - Revenue

For the three and six months ended June 30, 2023 and 2022, revenue recognized from performance obligations related to prior periods was immaterial. Revenue expected to be recognized in any future periods related to remaining performance obligations is immaterial.

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


	Three Months Ended June 30,								Six Months Ended June 30,
($ in thousands)	2023				2022				2023				2022
Seafood	$	91,382	31	%	$	93,397	32	%	$	184,272	32	%	$	168,203	29	%
Asian Specialty	76,337		26	%	75,337		25	%	154,161		26	%	150,013		26	%
Meat and Poultry	56,012		19	%	63,109		21	%	108,061		18	%	124,025		22	%
Fresh Produce	31,636		11	%	31,076		10	%	63,847		11	%	60,955		11	%
Packaging and Other	18,037		6	%	21,296		7	%	37,433		6	%	43,309		7	%
Commodity	18,908		7	%	15,427		5	%	38,393		7	%	31,352		5	%
Total	$	292,312	100	%	$	299,642	100	%	$	586,167	100	%	$	577,857	100	%

Note 4 - Balance Sheet Components

Accounts receivable, net consisted of the following:


(In thousands)	June 30, 2023		December 31, 2022
Accounts receivable	$	47,060	$	45,628
Less: allowance for expected credit losses	(1,474)		(1,442)
Accounts receivable, net	$	45,586	$	44,186

Movement of allowance for expected credit losses was as follows:


	Six Months Ended June 30,
(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	56		(54)
Bad debt write-offs	(24)		(8)
Ending balance	$	1,474	$	1,468

Property and equipment, net consisted of the following:


(In thousands)	June 30, 2023		December 31, 2022
Automobiles	$	37,157	$	34,891
Buildings	63,045		63,045
Building improvements	22,944		20,637
Furniture and fixtures	527		444
Land	49,929		49,929
Machinery and equipment	13,827		17,210
Subtotal	187,429		186,156
Less: accumulated depreciation	(50,705)		(45,826)
Property and equipment, net	$	136,724	$	140,330

Depreciation expense was $2.4 million and $2.2 million for the three months ended June 30, 2023 and 2022, respectively. Depreciation expense was $5.0 million and $4.4 million for the six months ended June 30, 2023 and 2022, respectively. During the three months ended June 30, 2023, the Company impaired machinery and recognized impairment expense of $1.2 million in distribution, selling and administrative expense in the unaudited condensed consolidated statements of income and

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

Long-term investments consisted of the following:


(In thousands)	Ownership as of June 30, 2023	June 30, 2023		December 31, 2022
Asahi Food, Inc. ("Asahi")	49%	$	614	$	879
Pt. Tamron Akuatik Produk Industri ("Tamron")	12%	1,800		1,800
Total long-term investments		$	2,414	$	2,679

The investment in Tamron is accounted for using the measurement alternative under Accounting Standards Codification (“ASC”) Topic 321 Investments—Equity Securities, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. The Company determined there was no impairment as of June 30, 2023 and December 31, 2022 for these investments.

Accrued expenses and other liabilities consisted of the following:


(In thousands)	June 30, 2023		December 31, 2022
Accrued compensation	$	6,007	$	6,798
Accrued professional fees	2,077		3,866

Accrued interest and fees	1,202		1,082
Self-insurance liability	1,413		1,286
Accrued other	9,064		6,616
Total accrued expenses and other liabilities	$	19,763	$	19,648

Note 5 - Fair Value Measurements

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


	June 30, 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	$	—	$	640	$	—	$	640	$	—	$	530	$	—	$	530

The Company follows the provisions of ASC Topic 820 Fair Value Measurement which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

•Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

•Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

•Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information.

Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein.

The carrying amounts reported in the 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
June 30, 2023
Fixed rate debt:

Bank of America	$	—	$	—	$	1,500	$	1,768
East West Bank	—		—		1,747		2,314

Other finance institutions	—		—		81		81
Variable rate debt:
JPMorgan Chase & Co.	$	—	$	108,698	$	—	$	108,698
Bank of America	—		2,261		—		2,261
East West Bank	—		3,437		—		3,437

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.

Please refer to Note 9 - Debt for additional information regarding the Company's debt.

Note 6 - Acquisitions

Acquisition of Sealand

On April 29, 2022, the Company completed the acquisition of substantially all of the operating assets of Sealand, including equipment, machinery and vehicles. The acquisition was completed to expand the Company's territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

The price for the purchased assets was $20.0 million paid in cash at closing. In addition to the closing cash payment, the Company separately acquired all of the sellers' saleable product inventory, for approximately $14.4 million and additional fixed assets for approximately $0.5 million. The Company finalized its purchase accounting as of 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 six months ended June 30, 2022 totaled approximately $0.3 million and were reflected in distribution, selling and administrative expenses in the condensed consolidated statement of operations and comprehensive income.

The information included herein was prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using a combination of quoted market prices, discounted cash flows, and other estimates made by management. The Company finalized the valuation of assets acquired and liabilities assumed for the Sealand acquisition as of March 31, 2023.

Purchase Price Allocation

The total consideration paid to acquire the assets and liabilities of Sealand, as set forth below:


(In thousands)	Amount
Inventory	$	13,846
Property plant, and equipment	1,424
Right-of-use assets	127
Intangible assets	14,717
Total assets acquired	30,114

Obligations under operating leases	127
Total liabilities assumed	127
Net assets	29,987
Goodwill	4,861
Total consideration	$	34,848

The Company recorded acquired intangible assets of $14.7 million, which were measured at fair value using Level 3 inputs. These intangible assets include tradenames and trademarks of $4.4 million, customer relationships of $8.9 million and non-competition agreements of $1.4 million. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology and Level 3 inputs including a discount rate. The fair value of tradenames and trademarks was determined by applying the income approach utilizing the relief from royalty methodology and Level 3 inputs including a royalty rate of 1% and a discount rate. The fair value of non-competition agreements was determined by applying the income approach and Level 3 inputs including a discount rate. Discount rates used in determining fair values for customer relationships, tradenames and trademarks, and non-competition agreements ranged from 17.5% to 18.0%. The useful lives of the tradenames and trademarks are ten years, customer relationships are ten years and non-competition agreements are three years, with a weighted average amortization period of approximately nine years. The associated goodwill is deductible for tax purposes.

Unaudited Supplemental Pro Forma Financial Information

The following table presents the Company’s unaudited pro forma results for the three and six months ended June 30, 2022, as if the acquisition of Sealand had been consummated on January 1, 2022. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets and excludes other non-recurring

transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.


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

Pro forma net revenue	$	307,587	$	609,685

Pro forma net income attributable to HF Group	$	3,628	$	7,253

Pro forma earnings per common share - basic	$	0.07	$	0.14
Pro forma earnings per common share - diluted	$	0.07	$	0.13

Pro forma weighted average shares - basic	53,706,392		53,706,392
Pro forma weighted average shares - diluted	53,900,883		53,927,957

Note 7 - Goodwill and Acquired Intangible Assets

Goodwill

Goodwill was $85.1 million as of June 30, 2023 and December 31, 2022. There was no change in the carrying amount of goodwill for the six months ended June 30, 2023.

Acquired Intangible Assets

The components of the intangible assets are as follows:


	June 30, 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	$	(1,781)	$	2,111	$	3,892	$	(1,132)	$	2,760
Trademarks	44,256		(12,883)		31,373		44,256		(10,673)		33,583
Customer relationships	185,266		(32,801)		152,465		185,266		(27,518)		157,748
Total	$	233,414	$	(47,465)	$	185,949	$	233,414	$	(39,323)	$	194,091

Amortization expense for acquired intangible assets was $4.1 million and $4.0 million for the three months ended June 30, 2023 and 2022, respectively. Amortization expense for acquired intangible assets was $8.1 million and $7.6 million for the six months ended June 30, 2023 and 2022, respectively. During the three months ended June 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 income and comprehensive income.

Note 8 - Derivative Financial Instruments

Derivative Instruments

The Company utilizes interest rate swaps ("IRS") for the sole purpose of mitigating interest rate fluctuation risk associated with floating rate debt instruments (as defined in Note 9 - 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. On April 20, 2023, the Company amended the corresponding mortgage term loans, which pegged the two mortgage term loans to 1-month Term SOFR (Secured Overnight Financing Rate) + 2.29% per annum for the remaining duration of the term loans. The amended EWB IRS contracts fixed the two term loans at 4.23% per annum until maturity in September 2029.

On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $2.7 million in conjunction with a newly contracted mortgage term loan of corresponding amount. On December 19, 2021, the Company entered into the Second Amendment to Loan Agreement, which pegged the mortgage term loan to Term SOFR + 2.5%. The BOA IRS was modified accordingly to fix the SOFR based loan to approximately 4.50%. The term loan and corresponding BOA IRS contract mature in December 2029.

On March 15, 2023, the Company entered into an amortizing IRS contract with J.P. Morgan Chase for an initial notional amount of $120.0 million, effective from March 1, 2023 and expiring in March 2028, as a means to partially hedge its existing floating rate loans exposure. Pursuant to the agreement, the Company will pay the swap counterparty a fixed rate of 4.11% in exchange for floating payments based on Term SOFR.

The Company evaluated the aforementioned IRS contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value change on these IRS contracts are accounted for and recognized as a change in fair value of IRS contracts in the condensed consolidated statements of operations and comprehensive income (loss).

As of June 30, 2023, the Company determined that the fair values of the IRS contracts were $0.6 million in an asset position. As of December 31, 2022, the fair values of the IRS contracts were $0.5 million in an asset position. The Company includes these in other long-term assets and other long-term liabilities, respectively, on the condensed consolidated balance sheets. 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 on the fair value hierarchy.

Note 9 - Debt

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


($ in thousands)
Bank Name	Maturity	Interest Rate at June 30, 2023	June 30, 2023		December 31, 2022
Bank of America (a)	October 2026 - December 2029	4.28% - 5.80%	$	4,030	$	4,315
East West Bank (b)	August 2027 - September 2029	4.40% - 8.75%	5,750		5,822

JPMorgan Chase & Co. (c)	December 2023 - January 2030	6.77% - 7.14%	108,978		111,714
Other finance institutions (d)	December 2023 - March 2024	5.99% - 6.14%	81		160
Total debt, principal amount			118,839		122,011
Less: debt issuance costs			(280)		(302)
Total debt, carrying value			118,559		121,709
Less: current portion			(5,936)		(6,266)
Long-term debt			$	112,623	$	115,443

_______________

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

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

(c)Real estate term loan with a principal balance of $108.8 million as of June 30, 2023 and 111.4 million as of December 31, 2022 is secured by assets held by the Company and has a maturity date of January 2030. Equipment term loan with a principal balance of $0.1 million as of June 30, 2023 and $0.3 million as of December 31, 2022 is secured by specific vehicles and equipment as defined in loan agreements. Equipment term loan matures in December 2023.

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

Note 10 - 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 92,945 and 100,012 potential common shares related to performance-based restricted stock units and restricted stock units that were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2023, respectively, because their effect would have been anti-dilutive. There were 3,471 and 3,668 potential common shares related to total shareholder return performance-based restricted stock units that were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2022, respectively, because their effect would have been anti-dilutive.

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


	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands, except share and per share data)	2023		2022		2023		2022
Numerator:
Net (loss) income attributable to HF Foods Group Inc.	$	(850)	$	4,564	$	(6,783)	$	7,678
Denominator:
Weighted-average common shares outstanding	54,046,328		53,706,392		53,935,178		53,706,392
Effect of dilutive securities	—		194,491		—		221,565
Weighted-average dilutive shares outstanding	54,046,328		53,900,883		53,935,178		53,927,957
(Loss) earnings per common share:
Basic	$	(0.02)	$	0.08	$	(0.13)	$	0.14
Diluted	$	(0.02)	$	0.08	$	(0.13)	$	0.14

Note 11 - Income Taxes

The Company has computed its provision for income taxes under the discrete method which treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of the discrete method is more appropriate than the estimated annual effective tax rate method as the estimated annual effective tax rate method is not reliable.

For the three and six months ended June 30, 2023, the Company's effective income tax rate of (15.5)% and 21.5%, respectively, differed from the federal statutory tax rate primarily as a result of permanent differences and state income taxes. For the three and six months ended June 30, 2022, the Company's effective income tax rate of 19.6% and 22.4%, respectively, differed from the federal statutory tax rate primarily as a result of state income taxes.

Note 12 - Related Party Transactions

The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company's officers and/or shareholders who owned no less than 10% shareholdings of the Company.

Mr. Xiao Mou Zhang (“Mr. Zhang”) became the sole Chief Executive Officer 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 have ownership interests in related parties involved in (i) the distribution of food and related products to restaurants and other retailers and (ii) the supply of fresh food, frozen food, and packaging supplies to distributors.

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

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

Related Party Sales, Purchases, and Lease Agreements

Purchases

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


			Three Months Ended June 30,				Six Months Ended June 30,
	(In thousands)	Nature	2023		2022		2023		2022

(a)	Best Food Services, LLC	Trade	$	2,729	$	3,546	$	4,813	$	6,491

(b)	Eastern Fresh NJ, LLC	Trade	—		—		—		1,093
(b)	Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”)	Trade	—		—		37		—
(c)	First Choice Seafood, Inc.	Trade	—		26		—		109
(c)	Fujian RongFeng Plastic Co., Ltd	Trade	—		—		—		398



(d)	North Carolina Good Taste Noodle, Inc.	Trade	—		1,769		—		3,427
(b)	Ocean Pacific Seafood Group, Inc.	Trade	74		141		242		277




	Other	Trade	23		53		75		85
	Total		$	2,826	$	5,535	$	5,167	$	11,880

_______________

(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 indirectly through its parent company.

(d)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.

Sales

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


		Three Months Ended June 30,				Six Months Ended June 30,
	(In thousands)	2023		2022		2023		2022
(a)	ABC Food Trading, LLC	$	722	$	1,070	$	1,315	$	2,262
(b)	Asahi Food, Inc.	191		188		386		369
(c)	Best Food Services, LLC	93		223		526		869
(d)	Eagle Food Service, LLC	922		—		1,942		—




(e)	First Choice Seafood, Inc.	8		9		16		18
(e)	Fortune One Foods, Inc.	4		14		23		14

(f)

HF Foods Group Inc. [HFFG] Filings
10-Q	[2023-08-09]
10-Q	[2023-05-10]
10-K	[2023-03-31]
10-K	[2023-01-31]
10-Q	[2023-01-31]
10-Q	[2023-01-31]
10-Q	[2023-01-31]
10-Q	[2021-11-15]
10-Q	[2021-08-09]
10-Q	[2021-05-10]
10-K	[2021-03-16]
10-Q	[2020-11-09]
10-Q	[2020-08-10]
10-Q	[2020-05-18]
10-K	[2020-03-16]
10-Q	[2019-11-14]
10-Q	[2019-08-14]
10-Q	[2019-05-15]
10-K	[2019-04-01]
10-Q	[2018-11-14]
10-Q	[2018-08-09]
10-Q	[2018-05-15]
10-K	[2018-03-29]
10-Q	[2017-11-13]
10-Q	[2017-09-19]
S-1	[2016-10-28]