HFFG · Read the filing

ITEM 7. MANAGEMENT’S DISCUSSION ANDANALYSISOF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS.

The following discussion and analysis provides information about our business, the results of operations, financial condition, liquidity and capital resources of HF Foods Group Inc. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our results of operations and financial condition. This discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K.

During 2022, the Company identified certain errors impacting the financial statements, including disclosures, for the years ended December 31, 2020 and 2019 and each interim quarterly period for 2021, 2020 and 2019 related to the identification of and accounting for operating and finance leases, the incorrect identification and disclosure of certain related party relationships including the identification of VIEs, the timing of revenue recognition for rental income received from a related party, the accounting for the self-insurance liability for automobile insurance beginning in 2020, classification errors in the financial statements, and an error in the calculation of earnings per share. In addition, certain errors were identified based on the factual findings of the Special Investigation Committee such as unrecorded executive compensation to the Company's major shareholder and former Chief Executive Officer, Mr. Zhou Min Ni ("Mr. Ni"), and related party disclosures. These errors have been restated in the consolidated financial statements as of December 31, 2020 and for the years ended December 31, 2020 and 2019 in Note 1 - Organization, Business Description and Restatement of Previously Issued Consolidated Financial Statements to the consolidated financial statements in this Annual Report on Form 10-K and should be read in conjunction with the discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in "Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 16, 2021.

Independent Investigation Update

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 determined by the SIC, and analyzed them to determine their impact on the historical consolidated financial statements, including disclosures, of the Company. The following is a summary of the findings and the Company's analysis of how those findings impact the historical consolidated financial statements:

•Feilong Trading, Inc. (“Feilong”) Note Receivable - On September 30, 2018, the Company entered into a line of credit promissory note agreement with Feilong. The note was later amended in November 2018 whereby Feilong could borrow up to $4,000,000. These notes followed previous lines of credit granted to Feilong before the Company was an issuer. The outstanding balance of the note receivable at December 31, 2018 was $3,803,826. In or around October 2019, the Company’s major shareholder and former Chief Executive Officer, Mr. Ni agreed to personally guarantee the repayment of the note receivable. The Company previously stated that Feilong was a supplier to the Company. As previously disclosed, Mr. Ni purchased the outstanding balance in exchange for a certain number of his shares of common stock of the Company, and as a result at December 31, 2019, the outstanding balance from Feilong was $0. The SIC determined that 1) Feilong was not a supplier to the Company, 2) there is no evidence that funds from the line of credit were provided to Feilong, 3) the notes receivable were not in the ordinary course of business and may not have been fully realizable from Feilong, and 4) the notes receivable appears to have benefited Mr. Ni because the funds may have been used to pay off other debts for which Mr. Ni was responsible. It was not disclosed that the Feilong funds were used to satisfy Mr. Ni's debts. The investigation did not conclude that Feilong was a related party. The Company considered the factual findings as presented to the SIC and the impact such findings had on its historical accounting. While it was determined that the historical disclosures were inaccurate or incomplete the Company concluded there would be no change necessary to previous accounting. Although it was determined that the Feilong note might not have been fully realizable from Feilong, the Company considered the existence of Mr. Ni’s guarantee to support the realizability of the note receivable, which was ultimately realized in 2019 when Mr. Ni purchased the note receivable in exchange for certain of his shares of common stock in the Company.

•Promissory Notes to Related Parties – As disclosed in the previously filed financial statements, the Company had previously made loans to certain entities that were owned by Mr. Ni or his family members. At December 31, 2018, the total related party notes receivable balance was $8,540,949 which was due from Enson Seafood, GA, Inc., NSG

International, Inc. and Revolution Automotive, LLC. The notes receivable were personally guaranteed by Mr. Ni. As disclosed in the 2019 financial statements, Mr. Ni purchased the outstanding balance of these notes receivable in exchange for a certain number of his shares of common stock of the Company, and as a result, at December 31 2019, the outstanding balance of the notes receivable was $0. The SIC determined that the loans were not in the ordinary course of business and may not have been fully realizable from the counterparties. The Company considered the SIC's factual findings and determined no adjustments were needed to its prior accounting as there was no conclusive evidence that the related party notes receivable were not enforceable with the counterparties. Although it was determined that the related party notes receivable might not have been fully realizable from the counterparties, the Company considered the existence of Mr. Ni’s guarantee to support the realizability of the notes receivable, which was ultimately realized in 2019 when Mr. Ni purchased the notes receivable in exchange for certain of his shares of common stock of the Company.

•Members of the Ni family received undisclosed compensation from transactions with related parties which was excluded from previously filed proxy statements.

•Revolution Industry was determined to be a variable interest entity (“VIE”).

•Certain advances to Revolution Industry, LLC (“Revolution Industry”), in particular, payments for luxury cars, did not occur in the normal course of business. The Company has determined that certain payments to Revolution Industry should be accounted for as compensation expense, including in the previously filed financial statements, as Revolution Industry and Revolution Automotive, LLC were used to obtain funds which paid for luxury cars to the benefit of the Ni family.

•The Company had previously disclosed in its 2019 proxy filing that the Board of Directors had analyzed the prices paid to related parties as well as the level of service, reliability, delivery terms, and historical performance, and concluded such prices and terms were substantially equivalent to, or more advantageous than, prices and terms the Company would receive from third parties. The SIC determined that such an analysis did not occur. This finding does not appear to have resulted in errors to the historical financial statements. Amounts recorded in the historical financial statements were recorded based on the amount transacted with the related parties.

•Monies owed to the Company’s related party call center were diverted to other persons, entities, or Zhou Min Ni. The SIC did not identify that the call center was paid amounts substantially different than the contractual terms, but concluded that payments for such services may have been diverted to other parties. The Company determined that the amounts recorded in the previously filed financial statements as expense was not inaccurate, and therefore, there were no adjustments needed to the historical financial statements.

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 Actions. 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 18 - Commitments and Contingencies to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Overview

We market and distribute Asian specialty food products, 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 market leaders, HF Foods Group Inc. and B&R Global.

On December 30, 2021, HF Group acquired a leading seafood supplier, the Great Wall Group, resulting in the addition of 3 distribution centers, located in Illinois and Texas (the “Great Wall Acquisition”). See Note 7 - Acquisitions to the consolidated financial statements in this Annual Report on Form 10-K for additional information regarding the Great Wall Acquisition.

Subsequent to December 30, 2021, 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, for cash consideration of $20.0 million plus approximately $14.4 million worth of inventory.

Including the Sealand Acquisition, we have grown our distribution network to 18 distribution centers servicing over 46 states and covering approximately 95% of the contiguous United States with a fleet of close to 400 refrigerated vehicles. Capitalizing on our deep understanding of the Chinese culture, with over 1,000 employees and subcontractors and supported by two call centers in China, we have become a trusted partner serving over 15,000 Asian restaurants, providing 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.

COVID-19 Impact

The impact of the COVID-19 pandemic had an adverse effect on our business, financial condition and operational results in 2020. All states across the country issued some form of stay-at-home orders, shutdowns, voluntary containment measures, and social distancing. The operations of our restaurant customers were also severely disrupted due to the “cliff-like” decline in consumer demand for food away from home. The government mandates forced many of our restaurant customers to temporarily close or convert to take-out or delivery-only operations. As a result, there was a significant decline in net revenue beginning from the last two weeks of March 2020 through September 2020, negatively impacting our overall financial results in 2020. Since the third quarter of 2020, we've experienced a quarter-on-quarter recovery in net revenue.

The impact of COVID-19 seen in 2020 has generally subsided. Our net revenue for 2021 strongly 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 flow on a weekly basis and do not have immediate liquidity concerns. We remain optimistic on the long-term prospects for our business although we may continue to face intermittent government restrictions on our restaurant customers' business operations.

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.

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 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 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;

•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 section entitled “EBITDA and Adjusted EBITDA” below.

Financial Review

Highlights for 2021 included:

•Net revenue: Net revenue was $796.9 million in 2021, compared to $566.8 million in 2020, an increase of $230.1 million, or 40.6%. This increase was primarily attributable to the strong recovery of restaurant demand from the COVID-19 pandemic.

•Gross profit: Gross profit was $151.5 million in 2021 compared to $100.7 million in 2020, an increase of $50.8 million, or 50.4%. The increase was mainly due to strong sales growth in 2021 and improved gross profit margin from 17.8% in 2020 to 19.0% in 2021.

•Distribution, selling and administrative expenses ("DSA expenses"): DSA expenses increased by $15.7 million, or 14.7%, mainly due to an increase in sales related cost, driven by net revenue growth. DSA expenses as a percentage of net revenue decreased from 18.8% in 2020 to 15.3% in 2021, which represented cost savings from improved operational efficiencies.

•Net income attributable to HF Foods Group Inc.: Net income was $22.1 million in 2021 compared to a net loss of $343.5 million in 2020, primarily due to a goodwill impairment loss of $338.2 million in 2020 and our significant business recovery to pre-COVID-19 pandemic levels in 2021.

•Great Wall Acquisition: On December 30, 2021, we acquired substantially all of the operating assets of the Great Wall Group’s seafood and restaurant products sales, marketing, and distribution businesses for an aggregate purchase price of $43.7 million in stock and cash, as well as $24.3 million of acquired saleable inventory and additional vehicles for approximately $0.2 million, for total consideration of $68.2 million. This acquisition extended our territory to include the Midwest and Southwest markets and expanded our product portfolio.

•Inventory: Inventory as of December 31, 2021 was $102.7 million, compared to $58.5 million as of December 31, 2020, an increase of $44.2 million, or 75.4%, We kept higher inventory levels as of December 31, 2021 mainly due to an expectation of continued sales growth as our business continues to recover from the impact of the COVID-19 pandemic, and we also acquired $24.3 million of inventory related to the Great Wall Acquisition.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2021and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Year Ended December 31, Change

(As Restated)

Change in fair value of interest rate swap contracts 1,425 (920) 2,345 NM

Less: net income attributable to noncontrolling interests 676 293 383 130.4%

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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:

Year Ended December 31,

(As Restated)

Distribution, selling and administrative expenses 15.3 % 18.8 %

Goodwill impairment loss — % 59.7 %

Income (loss) from operations 3.7 % (60.7) %

Interest expense (0.6) % (0.8) %

Other income, net 0.1 % 0.2 %

Change in fair value of interest rate swap contracts 0.2 % (0.2) %

Income (loss) before income tax provision 3.4 % (61.5) %

Provision (benefit) for income taxes 0.5 % (0.8) %

Net income (loss) 2.9 % (60.7) %

Less: net income attributable to noncontrolling interests 0.1 % 0.1 %

Net Revenue

Net revenue for the year ended December 31, 2021 increased by $230.1 million or 40.6% compared to the same period in 2020. The increase was primarily due to the easing of COVID-19 related restrictions in 2021 that resulted in more dine-in business for our customers and the increase in overall foot traffic to restaurants.

Gross Profit

Gross profit for the year ended December 31, 2021 increased by $50.8 million or 50.4%, compared to the same period in 2020, Overall gross margin improved to 19.0% for the year ended December 31, 2021 from 17.8% for the year ended December 31, 2020. An increase in sales contributed 79% of total increase in gross profit and an improvement in gross profit margin represented 21% of total increase in gross profit. The improvement in gross profit margin was primarily due to the favorable inventory allocation from supplier partners and timing of inventory purchasing.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the year ended December 31, 2021 increased by $15.7 million, or 14.7%, to $122.0 million, compared to $106.4 million for the year ended December 31, 2020. Of the distribution, selling and administrative expenses increase, $17.2 million, primarily came from payroll and related labor costs, as more workers were, and will continue to be, required to handle the increasing sales demand, and $4.3 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth. Distribution, selling and administrative expenses as a percentage of net revenue improved from 18.8% in 2020 to 15.3% in 2021 primarily due to better cost control measures and higher net revenue.

Goodwill Impairment Loss

Goodwill impairment loss was $338.2 million for the year ended December 31, 2020 primarily due to the negative impact of the COVID-19 pandemic on sales. No goodwill impairment loss was recorded for year ended December 31, 2021, as our business returned to pre-COVID-19 pandemic levels. See Note 8 - Goodwill and Acquired Intangible Assets to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Interest Expense and Bank Charges

Interest expense for the year ended December 31, 2021 increased by $0.2 million or 5.3%, compared to the year ended December 31, 2020, primarily due to increased interest expense related to finance leases, partially offset by lower utilization of our line of credit, a reduction of our real estate term loan and a decrease in interest due to the lower interest-rate environment. Our average daily line of credit balance decreased by $17.9 million, or 52.0%, to $16.5 million in 2021 from $34.4 million in 2020, and our average daily real estate term loan balance decreased by $2.1 million, or 2.9%, to $71.2 million in 2021 from $73.3 million in 2020. Additionally, average floating interest rates for the year ended December 31, 2021 decreased by approximately 0.52%, compared to the same period in 2020, which further contributed to lower interest expense.

Income Tax Provision (Benefit)

Income tax provision was $4.5 million for the year ended December 31, 2021, compared to an income tax benefit of $4.7 million for the year ended December 31, 2020, primarily due to our improved profitability.

Net Income (Loss) Attributable to Our Shareholders

Net income attributable to our shareholders was $22.1 million for the year ended December 31, 2021, versus a net loss attributable to our shareholders of $343.5 million for the year ended December 31, 2020. The positive trend is attributed to increased consumer demand for dine-in/take out meals as COVID-19 restrictions eased in 2021, thereby prompting restaurants to replenish products at a more frequent rate. In addition, the year ended December 31, 2020 included the goodwill impairment loss discussed above.

EBITDA and Adjusted EBITDA

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure:

Year Ended December 31, Change

(As Restated)

Stock-based compensation expense 635 — 635 NM

Acquisition and integration costs 1,090 47 1,043 NM

Adjusted EBITDA margin 6.4 % 2.6 %

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NM - Not meaningful

Adjusted EBITDA was $50.8 million for the year ended December 31, 2021, an increase of $36.4 million or 251.6%, compared to $14.5 million for the year ended December 31, 2020. The increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels and an improvement of 1.2% in gross profit margin, resulting from increased bargaining purchase power.

Liquidity and Capital Resources

As of December 31, 2021, we had cash of approximately $14.8 million, checks issued not presented for payment of $17.8 million and access to approximately $44.7 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 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 outbreak of COVID-19 in the first half of 2020, we believe that our cash flow generated from operations is sufficient to meet our normal working capital needs 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 considered the historical experience, the economy, the trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of December 31, 2021.

On December 30, 2021, the Company entered into the Consent, Waiver, Joinder and Amendment No. 3 to the Second Amended Credit Agreement with JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank (see Note 10 - Line of Credit to the consolidated financial statements in this Annual Report on Form 10-K).

Subsequent to December 31, 2021, on March 31, 2022, we amended the Credit Agreement with J.P. Morgan extending our line of credit for five years. The amendment provided 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 to our mortgage-secured term loan from $69.0 million to $115.0 million. In April of 2022, the $46.0 million increase to the mortgage-secured term loan was used to pay down our $100.0 million line of credit. We also received a waiver through January 31, 2023 associated with the timing of our filing of our 2021 audited financial statements. See Note 10 - Line of Credit to the consolidated financial statements in this Annual Report on Form 10-K.

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.

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. We also paid the remaining $4.5 million of our related party promissory note payable.

Based on the above considerations, 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 December 31, 2021, aside from the lease guarantee liability disclosed in Note 12 - Leases to the consolidated financial statements in this Annual Report on Form 10-K, 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 years ended December 31, 2021and 2020:

Years Ended December 31, Change

(As Restated)

____________________

NM - Not meaningful

Operating Activities

Net cash provided by operating activities 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 decreased by $28.2 million, or 61.7%, as a result of changes in working capital items primarily due to two factors: (a) Accounts receivable balance as of December 31, 2020 was significantly lower as the business pivoted to lower sales volume on open credit terms and higher sales volume for Cash on Delivery in response to the heightened risk from the COVID-19 pandemic and (b) Inventory level as of December 31, 2020 was significantly lower due to lower demand in 2020, whereas our inventory level as of December 31, 2021 increased sharply as a direct result of increasing sales volume and the need for normal inventory level build up during the period.

Investing Activities

Net cash used in investing activities decreased by $53.3 million, or 56.5%, primarily due to a one-time payment of $94.0 million to acquire 100% equity membership interest in nine subsidiaries of BRGR in 2020 (see Corporate History in Part I. Item 1), compared to a one-time payment of $37.8 million for the acquisition of Great Wall Group in December 2021.

Financing Activities

Net cash provided by financing activities decreased by $15.0 million, or 34.2%, primarily resulting from a $75.6 million term loan obtained in 2020 to acquire 100% equity membership interest in nine subsidiaries of BRGR, partially offset by the net impact of $60.0 million on our line of credit from net repayments of $23.1 million in 2020 to net proceeds of $36.9 million in 2021.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. The estimates include, but are not limited to, accounts receivable, impairment of long-lived assets and income taxes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and the actual results, future financial statements will be affected.

We believe that among our significant accounting policies, which are described in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

Revenue Recognition

We recognize 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.

We follow ASC Topic 606 ("ASC 606"), Revenue from Contracts with Customers. We recognize revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in such exchange. This requires us 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. Our contracts contain performance obligations which are satisfied when customers have physical possession of each product. Our revenue streams are recognized at a specific point in time.

For the years ended December 31, 2021, 2020 and 2019, 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.

Business Combinations

We account for our business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations. The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities we acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

We estimate the fair value of assets acquired and liabilities assumed in a business combination. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations and comprehensive income (loss).

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We test goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired.

We review the carrying value of goodwill whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350, Intangibles — Goodwill and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. No goodwill impairment was recorded for the year ended December 31, 2021. A goodwill impairment loss of $338.2 million was recorded for the year ended December 31, 2020. See Note 8 - Goodwill and Acquired Intangible Assets to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Impairment of Long-lived Assets

We assess our long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows which the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. No impairment of long-lived assets was recorded for the years ended December 31, 2021 and 2020.

Income taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax

bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2021, we do not have a deferred tax asset valuation allowance.

We record uncertain tax positions in accordance with ASC Topic 740, Income Taxes on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 14 - Income Taxes to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements in this Annual Report on Form 10-K.

Emerging Growth Company Status

We have been an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and may at this time take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We took advantage of these exemptions up until December 31, 2022 (the last day of the fiscal year following the fifth anniversary of our IPO). We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates, or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.

ITEM 7A. 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 9 - Derivative Financial Instruments to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

As of December 31, 2021, our aggregate floating rate debt’s outstanding principal balance without hedging was $126.1 million, or 88.4% of total debt, consisting of long-term debt and revolving line of credit (see Note 10 - Line of Credit and Note 11 - Long-Term Debt to the consolidated financial statements in this Annual Report on Form 10-K). 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 11.6% of our debt are on a fixed rate or a floating rate with 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 $1.3 million per year.

Fuel Price Risk

We are also exposed 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, and average prices in 2021 increased 29.5%, compared to average prices in 2020. 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 the price fluctuation of diesel fuel in general. Instead, we seek to minimize fuel cost risk through delivery route optimization and fleet utilization improvement.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

HF Foods Group Inc. and Subsidiaries

Consolidated Financial Statements

Index to Consolidated Financial Statements

Page

Consolidated Financial Statements

Consolidated Balance Sheets 43

Consolidated Statements of Operations and Comprehensive Income (Loss) 44

Consolidated Statements of Cash Flows 45

Consolidated Statements of Changes in Shareholders’ Equity 46

Notes to Consolidated Financial Statements 47

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

HF Foods Group Inc.

Las Vegas, Nevada

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of HF Foods Group Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Restatement

As discussed in Note 1 to the consolidated financial statements, the 2020 and 2019 financial statements have been restated to correct errors.

We also have audited the adjustments described in Note 1 that were applied to restate the 2020 and 2019 consolidated financial statements to correct errors. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2020 and 2019 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2020 and 2019 consolidated financial statements taken as a whole.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2021.

Troy, Michigan

January 31, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

HF Foods Group Inc.

Opinion on the Financial Statements

We have audited, before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the accompanying consolidated balance sheet of HF Foods Group Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”) (the 2020 financial statements before the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1 are not presented herein). In our opinion, except for the effects of the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to audit, review or apply any procedures to the adjustments the Company identified during 2022 to restate the financial statements as described in Note 1, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Friedman LLP

We served as the Company’s auditor 2017 to 2021.

New York, New York

March 16, 2021

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(As Restated)

ASSETS

CURRENT ASSETS:

Accounts receivable - related parties 249 1,269

Advances to suppliers - related parties — 197

Operating lease right-of-use assets 11,664 1,457

Trademarks and other intangibles, net 35,891 25,884

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Checks issued not presented for payment $ 17,834 $ 14,840

Accounts payable - related parties 1,941 2,306

Current portion of long-term debt, net 5,557 5,641

Current portion of obligations under finance leases 2,274 2,006

Current portion of obligations under operating leases 2,482 470

Accrued expenses and other liabilities 12,138 8,854

Long-term debt, net of current portion 81,811 88,009

Promissory note payable - related party 4,500 7,000

Obligations under finance leases, non-current 11,676 5,012

Obligations under operating leases, non-current 9,251 996

COMMITMENTS AND CONTINGENCIES (NOTE 18)

SHAREHOLDERS’ EQUITY:

TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 290,948 259,155

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 596,946 $ 490,591

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

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

Year Ended December 31,

(As Restated) (As Restated)

Goodwill impairment loss — 338,191 —

Other income (expense):

Change in fair value of interest rate swap contracts 1,425 (920) —

Total Other income (expenses), net (2,158) (4,145) (306)

Less: net income attributable to noncontrolling interests 676 293 506

EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.43 $ (6.59) $ 0.18

EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.43 $ (6.59) $ 0.18

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

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities: (As Restated) (As Restated)

Goodwill impairment loss — 338,191 —

(Gain) loss from disposal of equipment (1,636) (140) 78

Change in allowance for doubtful accounts (433) 1,564 72

Income from equity method investment (85) (81) (7)

Change in fair value of interest rate swap contracts (1,425) 920 —

Stock-based compensation 635 — —

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

Advances to suppliers - related parties 197 548 781

Accounts payable - related parties (365) (2,215) (930)

Cash flows from investing activities:

Cash received from acquisition of B&R Global — — 7,018

Purchase of property and equipment (2,205) (664) (4,836)

Proceeds from disposal of property and equipment 3,246 257 287

Cash received from long-term notes receivable — — 290

Payment made for notes receivable — — (109)

Proceeds from long-term notes receivable to related parties — — 386

Payment made for long-term notes receivable to related parties — — (261)

Payment made for acquisition of B&R Realty — (94,004) —

Payment made for acquisition of Great Wall Group (37,841) — —

Payment made for acquisition of noncontrolling interests (5,000) — —

Settlement of interest rate swap contracts 718 — —

Net cash (used in) provided by investing activities (41,082) (94,411) 2,775

Cash flows from financing activities:

Checks issued not presented for payment 2,994 (113) 2,870

Repayment of obligations under finance leases (2,135) (1,840) (525)

Repayment of promissory note payable - related party (2,500) — —

Proceeds from noncontrolling interests shareholders 480 — —

Cash distribution to shareholders (338) (175) (303)

Net cash provided by (used in) financing activities 28,784 43,761 1,466

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

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands, except share data)

Shares Amount Shares Amount

Restatement impact — — — — — (325) (325) — (325)

Exercise of stock options 182,725 — — — — — — — —

Distribution to shareholders — — — — — — — (303) (303)

Distribution to shareholders — — — — — — — (175) (175)

Capital contribution by shareholders — — — — — — — 480 480

Distribution to shareholders — — — — — — — (338) (338)

Stock-based compensation — — — — 635 — 635 — 635

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

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION, BUSINESS DESCRIPTION AND RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

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, 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.

Corporate History

HF Group Holding Corporation ("HF Holding") was incorporated as a holding company to acquire and consolidate the various pre-merger operating entities.On January 1, 2018, HF Holding entered into a Share Exchange Agreement with the controlling shareholders in exchange for all of HF Holding’s outstanding shares.

On August 22, 2018, Atlantic Acquisition Corp. ("Atlantic") consummated a reverse acquisition transaction resulting in HF Holding becoming the surviving entity and a wholly owned subsidiary of Atlantic (the “Atlantic Acquisition”). The shareholders of HF Holding became the majority shareholders of Atlantic, and the Company changed its name to HF Foods Group Inc. (collectively, these transactions are referred to as the “Atlantic Transactions”).

The Atlantic Acquisition was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction, as such, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic were consolidated into the balance sheet and results of operations of HF Holding as of the completion of the Atlantic Transactions.

On November 4, 2019, HF Group consummated a merger transaction resulting in B&R Global Holdings, Inc. ("B&R Global") becoming a wholly-owned subsidiary of the Company (the "Business Combination"). At closing, the Company issued 30,700,000 shares of Common Stock of the Company to the shareholders of B&R Global in exchange for the 100% equity interest of B&R Global.

On January 17, 2020, the Company acquired 100% equity membership interest in nine subsidiaries under B&R Group Realty Holding, LLC ("BRGR"), which owned ten warehouses that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $101.3 million.

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.

See Note 7 - Acquisitions for 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.

Restatement of Previously Issued Consolidated Financial Statements

During 2022, the Company identified certain errors impacting the financial statements, including disclosures, for the years ended December 31, 2020 and 2019 and each interim quarterly period for 2021, 2020, and 2019 related to the identification of and accounting for operating and finance leases, the incorrect identification and disclosure of certain related party relationships including the identification of VIEs, the timing of revenue recognition for rental income received from a related party, the accounting for the self-insurance liability for automobile insurance beginning in 2020, classification errors in the financial statements, and an error in the calculation of earnings per share for 2020 and 2019. In addition, certain errors were identified based on the factual findings of the Special Investigation Committee such as unrecorded executive compensation to a certain executive and immediate family members, and related party disclosures. The Company analyzed the errors using Staff Accounting Bulletin (“SAB”) No. 99, “Materiality” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and determined the errors were material. Accordingly, the Company has restated herein the consolidated financial statements as of December 31, 2020 and for the years ended December 31, 2020 and 2019, and the related interim financial statements periods within the years ended December 31, 2021, 2020, and 2019 in accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections. Any adjustments prior to 2019 are not quantitatively material, are consistent with the adjustments discussed within this Note and have been presented as an adjustment as of December 31, 2018 in the accompanying Statement of Changes in Stockholders’ Equity. The nature of these error corrections is as follows:

a.Certain operating and finance leases were not properly identified and accounted for upon the adoption of ASC Topic 842 (“ASC 842”), Leases on January 1, 2019 and during the years ended December 31, 2020 and 2019 and adjustments have been made to correct these errors. The errors primarily resulted in an understatement of property and equipment, right-of-use assets, and the current and long-term liabilities associated with operating and finance leases. In addition, the errors resulted in an understatement in cash flows from operations and an overstatement in cash flows from financing activities within the respective consolidated statements of cash flows.

b.Four entities previously disclosed as related parties were determined not to be related parties. The four related party entities that were reclassified in the financial statements from related party to third party for 2020 and 2019 were EMC Rowland, LLC; The Big Catch Alhambra, LLC; Winfar Foods, Inc; and Wokcano Carlsbad Partner LLP.

c.The Company identified an error related to the timing of revenue recognition for rental income received from UGO (a related party) during the years ended December 31, 2018, 2019, and 2020. Rental income received from UGO, which was previously recognized in error, in full in 2020, was recognized in the appropriate accounting period as part of the error corrections. Please refer to Note 15 - Related Party Transactions for additional information on the lease arrangement with UGO.

d.As a result of the findings from the independent investigation, the Company determined that certain payments made by the Company in prior years to related parties should now be accounted for in the Company's consolidated financial statements as executive compensation. The Company made payments for inventory to Revolution Industry, which were diverted to Revolution Automotive to make car lease payments for the benefit of Mr. Ni and his family. Amounts paid by Revolution Automotive for car lease payments for the years ended December 31, 2018, 2019 and 2020 were $1.7 million, $1.0 million, and $0.5 million, respectively. The Company reclassified these amounts from cost of

revenue – third parties to distribution, selling, and administrative expense. The Company also made payments to UGO for marketing services, which services were determined as part of the independent investigation to have not been received commensurate to the amounts paid. Those payments amounted to $0.5 million, $0.4 million, $0.5 million and $0.1 million in the years ended December 31, 2018, 2019, 2020 and 2021, respectively. The Company did not reclassify these payments in the historical consolidated financial statements because both marketing services and executive compensation are recorded within the distribution, selling, and administrative expense financial statement line. Please refer to Note 15 - Related Party Transactions for further details on Revolution Automotive, Revolution Industry and UGO. The Company has recorded an uncertain tax position liability associated with the reclassification of certain amounts as executive compensation as discussed further in j. below.

e.The Company had not previously recorded a liability (including incurred but not reported "IBNR") related to the self-insured portion of its automobile insurance policy, which started in April 2020. The error resulted in an understatement of accrued expenses and other liabilities at December 31, 2020 and impacted quarterly periods, and has been corrected.

f.The Company determined certain staffing agencies were VIEs and should have been consolidated into the previously-filed financial statements. As further disclosed in Note 3 - Variable Interest Entities, the result of the errors to the historical financial statements was primarily related to disclosure errors and did not result in significant changes to the consolidated balance sheets, or consolidated statements of operations and comprehensive income (loss), cash flows and shareholders’ equity. There were certain misclassifications between accounts payable and accrued expenses and other liabilities on the consolidated balance sheets specific to the staffing agency VIEs. See further discussion in Note 3 - Variable Interest Entities.

g.The 2020 goodwill impairment loss, which was previously misclassified as other income (expense) in the consolidated statements of operations and comprehensive income (loss), was revised to be included in income (loss) from operations.

h.The gain/loss on sale of fixed assets, which was previously misclassified in other income (expense), net was revised to be included in distribution, selling and administrative expenses.

i.The earnings per share for 2019 was previously incorrectly computed at $0.22 per share in prior Form 10-K filings instead of at $0.20 per share based on the originally reported net income attributable to HF Foods Group, Inc. As part of the error corrections being made, the resultant earnings per share for 2019 is $0.18 per share. The loss per share for 2020 was previously incorrectly computed at $6.58 per share in prior Form 10-K filings and was corrected to $6.59 per share.

j.As a result of the executive compensation described in d. above, the Company recorded an uncertain tax position liability to account for potential implications to previously filed tax returns. The correction resulted in an increase of $0.8 million, $0.6 million, and $0.4 million in accrued expenses and other liabilities as of December 31, 2020, 2019, and 2018, respectively, compared to previously reported amounts. The quarterly impacts of the uncertain tax position have also been corrected.

k.In the Company’s December 31, 2020 financial statements, the Company did not disclose NC Good Taste Noodle, Inc. as a related party since Mr. Zhou Min Ni reported that he sold his ownership effective January 1, 2020. However, the Company’s former Chief Financial Officer, Mr. Jian Ming Ni, continues to own a portion of NC Good Taste Noodle, Inc. and as a result, the Company has concluded that NC Good Taste Noodle, Inc. still meets the definition of a related party. The Company has corrected the classification of balances associated with NC Good Taste Noodle, Inc. in the consolidated balance sheets, consolidated statements of cash flows and notes to consolidated financial statements in the affected annual and quarterly periods. See Note 15 – Related Party Transactions for additional information.

l.Certain capital contributions from a noncontrolling shareholder were incorrectly recorded as other payables were reclassified to noncontrolling interest.

The corresponding footnotes have been restated for the adjustments noted above.

The following tables summarize the effect of the restatements on each affected financial statement line item as of the dates as indicated, impacting the consolidated balance sheets. The footnotes correspond to the error descriptions above:

Consolidated Balance Sheet

(In thousands) As Previously Reported Reclass Adjustments As Restated

Accounts receivable, net $ 24,852 — $ 5 (b)

Accounts receivable - related parties 1,267 — (5) (b)

Operating lease right-of-use assets 932 — 525 (a) 1,457

Trademarks and other intangibles, net — 25,884 — 25,884

Deferred tax assets 58 (58) — —

Accounts payable - related parties 1,783 — (35) (b)

Current portion of obligations under finance leases 287 — 1,719 (a) 2,006

Current portion of obligations under operating leases 308 — 162 (a) 470

Accrued expenses and other liabilities 6,178 994 391 (e)

Obligation under interest rate swap contracts 994 (994) — —

Obligations under finance leases, non-current 767 — 4,245 (a) 5,012

Obligations under operating leases, non-current 623 — 373 (a) 996

Note: Amounts presented in the "Reclass" column above represent reclassifications to conform the prior year financial statements to the current year presentation.

The following tables summarize the effect of the restatements on each affected financial statement line item for the periods ended as indicated, impacting the consolidated statements of operations and comprehensive income (loss). The footnotes correspond to the error descriptions above:

Consolidated Statement of Operations and Comprehensive Income (Loss)

Cost of revenue - third parties 453,706 94 (b)

Distribution, selling and administrative expenses 106,126 (476) (a)

EARNINGS (LOSS) PER COMMON SHARE - BASIC (6.58) (0.01) (6.59)

EARNINGS (LOSS) PER COMMON SHARE - DILUTED (6.58) (0.01) (6.59)

Consolidated Statement of Operations and Comprehensive Income (Loss)

Distribution, selling and administrative expenses 54,931 — 128 (a)

Total other income (expense), net (185) — (121) (306)

NET INCOME (LOSS) AND OTHER COMPREHENSIVE INCOME (LOSS) 5,896 — (416) 5,480

EARNINGS (LOSS) PER COMMON SHARE - BASIC 0.22 — (0.04) 0.18

EARNINGS (LOSS) PER COMMON SHARE - DILUTED 0.22 — (0.04) 0.18

Note: Amounts presented in the "Reclass" column above represent reclassifications to conform the prior year financial statements to the current year presentation.

The following tables summarize the effect of the restatements on each category of cash flow for the periods ended as indicated, impacting the consolidated statements of cash flows:

Consolidated Statement of Cash Flows

(In thousands) As Previously Reported Adjustment As Restated

Net cash provided by operating activities $ 44,131 $ 1,562 (a) $ 45,693

Net cash used in investing activities (94,411) — (94,411)

Consolidated Statement of Cash Flows

(In thousands) As Previously Reported Adjustment As Restated

Net cash provided by operating activities $ 4,667 $ 141 (a) $ 4,808

Net cash provided by investing activities 2,775 — 2,775

Net cash provided by financing activities 1,607 (141) (a) 1,466

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands, except share data) Shares Amount Shares Amount

As Previously Reported

Distribution to shareholders — — — — — — — (175) (175)

Restatement Impacts

Net (loss) income — — — — — (538) (538) — (538)

Escrow shares transferred to and recorded as treasury stock — — — — — — — — —

Retirement of treasury stock — — — — — — — — —

Distribution to shareholders — — — — — — — — —

As Restated

Distribution to shareholders — — — — — — — (175) (175)

HF FOODS GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands, except share data) Shares Amount Shares Amount

As Previously Reported

Exercise of stock options 182,725 — — — — — — — —

Distribution to shareholders — — — — — — — (303) (303)

Restatement Impacts

Net (loss) income — — — — — (416) (416) — (416)

Exercise of stock options — — — — — — — — —

Acquisition of B&R Global by issuance of common stock — — — — — — — — —

Distribution to shareholders — — — — — — — — —

As Restated

Exercise of stock options 182,725 — — — — — — — —

Distribution to shareholders — — — — — — — (303) (303)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the financial statements of HF Group, its subsidiaries and FUSO Trucking LLC ("FUSO") and the Staffing Agencies, which the Company has determined to be VIEs that requires consolidation. All inter-company balances and transactions have been eliminated upon consolidation.

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 the economic benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. See Note 3 - Variable Interest Entities for additional information.

Noncontrolling Interests

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

On May 28, 2021, the Company purchased the remaining 33.33% noncontrolling equity interests in Kirnland Food Distribution, Inc. ("Kirnland") for $5.0 million, making Kirnland a wholly-owned subsidiary. In accordance with ASC 810, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. No gain or loss was recognized. As a result of this transaction, noncontrolling interests and additional paid-in capital were reduced by $1.1 million and $3.9 million, respectively.

As of December 31, 2021 and 2020, noncontrolling interest equity consisted of the following:

Kirnland — % $ — $ 1,385

HF Foods Industrial, LLC ("HFFI") 40.00 % 462 —

Uses of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, allowance for doubtful accounts, 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or shorter as cash equivalents. As of December 31, 2021 and 2020, the Company had no cash equivalents. Accounts at banks with an aggregate excess of the amount of outstanding checks over the cash balances are included in checks issued not presented for payment in current liabilities in the consolidated balance sheets.

Accounts Receivable, net

Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company is aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount the Company reasonably expects to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of December 31, 2021 and 2020, allowances for doubtful accounts were $0.8 million and $0.9 million, respectively.

Inventories

The Company’s inventories, consisting mainly of food and other foodservice-related products, are considered finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash consideration received from vendors, primarily in the form of rebates. The Company adjusted its inventory balance for slow-moving, excess and obsolete inventories to the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method.

Property and Equipment, net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment:

Estimated useful lives

Automobiles 3 to 7 years

Buildings and improvements 7 to 39 years

Furniture and fixtures 4 to 10 years

Machinery and equipment 3 to 10 years

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations and comprehensive income (loss) in distribution, selling and administrative expenses.

Business Combinations

The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations. The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive income (loss).

Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired.

The Company reviews the carrying value of goodwill whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350 (“ASC 350”), Intangibles — Goodwill and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. As of December 31, 2021, the Company has one reporting unit. See Note 8 - Goodwill and Acquired Intangible Assets for additional information.

Intangible Assets

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows:

Estimated Useful Lives

Non-competition agreement 3 years

Tradenames 10 years

Customer relationships 10 to 20 years

Long term Investments

The Company’s investments in unconsolidated entities consist of an equity investment and an investment without readily determinable fair value.

The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities, using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in earnings equal to the difference between the carrying value and fair value.

Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures. Under the equity method, the Company initially records its investment at cost, which is included in the equity method investment on the consolidated balance sheets. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

The Company did not record any impairment loss on its long term investments during the years ended December 31, 2021, 2020 and 2019.

Impairment of Long-lived Assets

The Company assesses its long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets or asset group exceeds their fair value. The Company did not record any impairment loss on its long-lived assets during the years ended December 31, 2021, 2020 and 2019.

Insurance and Claim Costs

The Company maintains workers compensation and general liability insurance with licensed insurance carriers. Beginning in April 2020, the Company is self-insured for auto claims less than $100,000 per claim. Insurance and claims expense represent premiums the Company paid and the accruals made for claims within the Company’s self-insured retention amounts. A liability is recognized for the estimated cost of all self-insured claims including an estimate of incurred but not reported claims based on historical experience and for claims expected to exceed the Company's policy limits.

The Company establishes reserves for anticipated losses and expenses related to auto liability claims. The reserves consist of specific reserves for all known claims and an estimate for claims incurred but not reported, and losses arising from known claims ultimately settling in excess of insurance coverage using loss development factors based upon industry data and past experience. In determining the liability, the Company specifically reviews all known claims and records a liability based upon the Company’s best estimate of the amount to be paid. In making the estimate, the Company considers the amount and validity of the claim, as well as the Company’s past experience with similar claims. In establishing the reserve for claims incurred but not reported, the Company considers its past claims history, including the length of time it takes for claims to be reported to the Company. These reserves are periodically reviewed and adjusted to reflect the Company’s experience and updated information relating to specific claims. As of December 31, 2021 and 2020, the Company has recorded a self-insurance liability of $1.0 million and $0.4 million, respectively, which is included in accrued expenses and other liabilities on the consolidated balance sheets.

Revenue Recognition

The Company recognizes revenue from the sale of products when control of each product passes to the customer and the customer accepts the goods, which occurs at delivery. 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.

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

($ in thousands) Year Ended December 31, 2021

Due to system constraints prior to the year ended December 31, 2021, the Company did not present net revenue by principal product categories.

Cost of Revenue

Cost of revenue primarily includes inventory costs (net of vendor consideration, primarily in the form of rebates), inbound freight, customs clearance fees and other miscellaneous expenses.

Distribution, Selling and Administrative Expenses

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

Shipping and Handling Costs

Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are included in distribution, selling and administrative expenses. Shipping and handling costs were $50.2 million, $32.1 million and $43.1 million for the years ended December 31, 2021, 2020 and 2019, respectively, and includes estimates for labor associated with shipping and handling activities.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2021, the Company does not have a deferred tax asset valuation allowance.

The Company records uncertain tax positions in accordance with ASC Topic 740 (“ASC 740”), Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 14 - Income Taxes for additional information.

The Company adopted ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, on January 1, 2021. ASU 2019-12 is intended to simplify various aspects related to managerial accounting for income taxes. The adoption had no material impact on the Company's consolidated financial statements.

Leases

The Company accounts for leases following ASC 842, Leases ("ASC 842"). As of December 31, 2021, the balances for operating lease right-of-use ("ROU") assets and liabilities were $11.7 million and $11.7 million, respectively. As of December 31, 2020, the balances for operating lease ROU assets and liabilities were $1.5 million and $1.5 million, respectively. See Note 12 - Leases for additional information.

The Company determines if an arrangement is a lease at inception and also considers classification of leases as operating or finance. Operating leases are included in operating lease ROU assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under finance leases, and obligations under finance leases, non-current on the consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company's variable lease payments primarily consist of real estate, maintenance and usage charges.

The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. The Company has also elected to combine lease and non-lease components when measuring lease liabilities for vehicle and equipment leases.

Fair Value of Financial Instruments

The Company follows the provisions of ASC Topic 820 ("ASC 820"), Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

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

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

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

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

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, 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.

The carrying value of the variable rate debt approximates its fair value because of the variability of interest rates associated with these instruments and the consistency in market conditions since the loans were entered into. 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 December 31, 2021, the carrying value of the fixed rate debt was $15.0 million and the fair value was $12.2 million. The variable and fixed rate debt are both classified as Level 2.

Of the $15.0 million of fixed rate debt, $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 11 - Long-Term Debt and Note 15 - Related Party Transactions for additional information regarding the Company's debt.

Please refer to Note 9 - Derivative Financial Instruments for additional information regarding the fair value of the Company's derivative financial instruments which are classified as Level 2.

Derivative Financial Instruments

In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, derivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment. Pursuant to GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the consolidated statements of operations and comprehensive income (loss). Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty.

Supplemental Cash Flow Information

Year Ended December 31,

(As Restated) (As Restated)

Supplemental disclosure of cash flow data:

Supplemental disclosure of non-cash investing and financing activities:

Notes payable related to property and equipment purchases 257 2,529 1,080

Notes receivable sold to shareholder in exchange of common stock — — 12,038

Common stock issued for consideration of acquisition of B&R Global — — 576,697

Deferred consideration from Great Wall Acquisition 17,330 — —

Concentrations and Credit Risk

Credit risk

Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

Concentration risk

There were no receivables from any one customer representing more than 10% of the Company’s consolidated gross accounts receivable at December 31, 2021 and 2020. No single customer accounted for 10% or more of the Company's consolidated net revenue for the years ended December 31, 2021, 2020 and 2019.

Segment Reporting

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. In 2021, former co-CEO Zhou Min Ni resigned, and Xiao Mou Zhang assumed the role of sole CEO and sole Chief Operating Decision Maker ("CODM"). The Company reassessed how the CODM makes operational decisions and assesses performance and concluded it has one operating and reporting segment. Management, including the CODM, reviews operating results and makes resource allocations on a consolidated basis and thus the Company has concluded it has one operating and reportable segment. Previously the Company had two reportable segments. Management has revised its segment disclosure for earlier periods accordingly.

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. The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after 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. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company adopted ASU 2020-04 during 2021. The ASU has not and is currently not expected to have a material impact on the Company's 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 future consolidated financial statements, but does not expect it to have a material impact.

NOTE 3 - VARIABLE INTEREST ENTITIES

The Company has five VIEs for which the Company is not the primary beneficiary and therefore does not consolidate, and 14 VIEs for which the Company is the primary beneficiary and consolidates. The VIEs are summarized as follows:

•Unconsolidated VIEs (collectively "Unconsolidated VIEs"):

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

•Revolution Automotive – Acquirer of luxury vehicles (until September 2019)

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

•BRGR

•AnHeart, Inc.

•Consolidated VIEs (collectively "Consolidated VIEs"):

•FUSO

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

•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 operations 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, or liabilities owed by the Staffing Agencies and immaterial equity. The Company has determined it is the primary beneficiary for the Staffing Agencies as it controlled how and when the labor force would be utilized. The Company consolidates the Staffing Agencies, recognizing compensation expense within distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss), and the related accrued expenses in the consolidated balance sheets. The Company did not have any guarantees, commitments or other forms of financing to the Staffing Agencies. As of December 31, 2021, the Company no longer has involvement with any of the Staffing Agencies.

Unconsolidated VIEs

See Note 12 - Leases for additional information on AnHeart.

Revolution Industry, Revolution Automotive and UGO

Revolution Industry was established to produce egg roll mix for the Company and to create and provide funding to Revolution Automotive. Revolution Automotive was set up to acquire luxury vehicles for the benefit of the former Co-CEO (Mr. Ni) and his son. UGO was originally designed to be an online marketplace for various Asian goods. Revolution Industry, Revolution Automotive 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 and Revolution Automotive, had unilateral control over the ongoing activities of Revolution Industry and Revolution Automotive and significantly benefited from their operations. Therefore, the Company is not the primary beneficiary for Revolution Industry and Revolution Automotive. The former Co-CEO (Mr. Ni) and certain family members, as equity holders of UGO, 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, which is included in Accounts receivable – related parties. The Company did not have any guarantees, commitments, or other forms of financing with these entities. Related party transactions with Revolution Industry and UGO are disclosed in Note 15 - Related Party Transactions.

Below is a summary of purchases of goods and services from the unconsolidated VIEs and related parties:

Year Ended December 31,

The Company recognized the following activity with UGO:

Year Ended December 31,

BRGR

The Company determined BRGR to be a VIE. BRGR was established to hold real estate for rent primarily for the Company and BRGR was financed primarily through this rental income and proceeds from the real estate loan for which the Company was guarantor. The Company was not the primary beneficiary of BRGR as the Company did not have the power to direct or control the activities which most significantly influenced the performance of BRGR. On January 17, 2020, the Company acquired 100% equity membership interests of certain real estate subsidiaries of BRGR, as discussed in Note 7 - Acquisitions. The Company also entered into the Second Amended Credit Agreement, as discussed in Note 10 - Line of Credit, which removed BRGR as a guarantor of its revolving credit facility and as a borrower under its real estate term loans. Related party transactions with BRGR related parties is disclosed in Note 15 - Related Party Transactions.

For the period from January 1, 2020 through January 17, 2020 and the period from November 4, 2019 through December 31, 2019, the Company recorded rent expense of $0.2 million and $0.8 million, respectively, related to its lease agreements with the realty subsidiaries of BRGR, which is included in distribution, selling, and administrative expenses in the consolidated statements of operations and comprehensive income (loss). As of December 31, 2019, the Company was a guarantor of BRGR and its subsidiaries’ mortgage-secured real estate term loan, which had an unpaid principal balance of $53.3 million. As of January 17, 2020, the Company had no remaining involvement with BRGR.

AnHeart

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 12 - Leases, 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 has 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. Please refer to Note 12 - Leases for additional information regarding the Company's maximum exposure to loss to AnHeart.

The Company did not have any sales to or rental income from any of the other VIEs during the three years ended December 31, 2021.

NOTE 4 - ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consisted of the following:

(As Restated)

Less: allowance for doubtful accounts (840) (909)

Movement of allowance for doubtful accounts was as follows:

Year Ended December 31,

(As Restated) (As Restated)

Increase (decrease) in provision for doubtful accounts (433) 1,338 (5)

NOTE 5 - LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

Asahi Food, Inc. ("Asahi") 49% $ 662 $ 577

Pt. Tamron Akuatik Produk Industri ("Tamron") 12% 1,800 1,800

The investment in Tamron is accounted for using the measurement alternative under ASC 321, 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. There was no impairment during the years ended December 31, 2021, 2020 and 2019 for these investments.

NOTE 6 - PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

(As Restated)

Depreciation expense was $8.1 million, $8.0 million and $3.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

NOTE 7 - ACQUISITIONS

Acquisition of B&R Global

On November 4, 2019, HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. The aggregate fair value of the consideration paid by HF Group in the Business Combination was $576.7 million based on the closing share price of the Company’s common stock at the date of Closing.

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 quoted market prices, discounted cash flow, and estimates made by management.

Purchase Price Allocation

The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

(In thousands) Amount

Accounts receivable, net 30,935

Accounts receivable - related parties, net 3,394

Other current assets 2,333

Other current assets - related parties 498

Advances to suppliers, net 98

Property and equipment, net 11,043

Deposit – related parties 591

Long-term investments 2,289

Right-of-use assets 17,792

TANGIBLE ASSETS ACQUIRED 132,723

Accounts payable - related parties 1,528

Accrued expenses 779

HFFG US Equity

HFFG · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION ANDANALYSISOF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

HFFG US Equity☆

HFFG · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION ANDANALYSISOF FINANCIAL CONDITION ANDRESULTSOF OPERATIONS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

HFFG US Equity