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Item 7. Management’s Discussion and Analysis

2023-01-31 compared with 2021-03-16 · 274 added, 335 removed, 49 unchanged (93% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following description of our results of operations and financial condition in conjunction with our audited consolidated financial statements for the years ended December 31, 2020 and 2019.

The Company was originally incorporated in Delaware on May 19, 2016 as a special purpose acquisition company under the name Atlantic Acquisition Corp.

in order to acquire, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination, one or more businesses or entities.

Effective August 22, 2018, Atlantic consummated the transactions contemplated by the Atlantic Merger Agreement, dated as of March 28, 2018, by and among Atlantic, HF Merger Sub, a Delaware subsidiary formed by Atlantic, HF Holding, the stockholders of HF Holding, and Zhou Min Ni, as representative of the stockholders of HF Holding.

Pursuant to the Atlantic Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the surviving entity and a wholly-owned subsidiary of Atlantic.

Additionally, upon the closing of the transactions contemplated by the Atlantic Merger Agreement, the stockholders of HF Holding became the holders of a majority of the shares of common stock of Atlantic, and Atlantic changed its name to HF Foods Group Inc.

Effective November 4, 2019, HF Group consummated the transactions contemplated by the B&R Global Merger Agreement, dated as of June 21, 2019, by and among the Company, Merger Sub, B&R Global, the B&R Global Stockholders, and Xiao Mou Zhang, as representative of the B&R Global Stockholders (the "Business Combination").

Upon the closing of the transactions contemplated by the B&R Global Merger Agreement, Merger Sub merged with and into B&R Global, resulting in

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B&R Global becoming a wholly owned subsidiary of HF Group.

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 approximately $576,699,494, based on the closing share price of HF Group at the date of Closing.

On January 17, 2020, B&R Global acquired all equity membership interests in nine real estate holding companies, which own warehouse facilities that were being leased to the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana.

Xiao Mou Zhang, managed and owned an 8.91% interest in the acquired entities.

The total purchase price for the acquisition was $101,269,706, which was based on third-party fair market value appraisals of the properties acquired.

The Company notes that substantially all of the fair value of the gross assets acquired is concentrated in a group of similar assets (land and buildings used for warehousing and distribution purposes).

As such, the acquisition of the nine real estate holdings companies would not be deemed a business combination under ASC 805 but as an asset acquisition.

The total purchase price is allocated on a relative fair value basis to the net assets acquired.

Due to timing of the acquisition of B&R Global, the financial information of the Company for the twelve month period ended December 31, 2020 is not comparable to the same period of 2019.

As such, the Company has presented our results of operations for the twelve month period ended December 31, 2020 and 2019, as well as the unaudited pro forma combined results of operations for the twelve month period ended December 31, 2019.

For more information, see section titled “Supplemental Unaudited Pro Forma Combined Financial Information”.

Financial Overview

Our net revenue for the twelve months ended December 31, 2020 was $566.8 million, an increase of $178.6 million, or 46.0%, from $388.2 million for the twelve months ended December 31, 2019.

The increase was attributed primarily to additional $259.4 million net revenues generated from the B&R Global reporting segment, which was acquired on November 4, 2019.

Offsetting the increase was legacy HF segment's 26.7% loss in business volume, or $80.8 million in 2020 as a result of the COVID-19 pandemic.

Net loss attributable to HF Group’s stockholders for the twelve months ended December 31, 2020 was $343.0 million, a decrease of $348.4 million, or 6,463.5%, compared to net income attributable to HF Group’s stockholders of $5.4 million for the twelve months ended December 31, 2019.

This is mainly due to a significant goodwill impairment of $338.2 million taken in the first quarter of 2020 (see Note 9 to our financial statements for additional information) prompted by the impact of the COVID-19 pandemic.

There were also new charges in other non-cash items, such as amortization of intangible assets resulting from the acquisition of B&R Global, which did not exist before the Business Combination.

Adjusted EBITDA for the twelve months ended December 31, 2020 was $19.7 million, an increase of $2.8 million, or 16.9%, from $16.9 million for the twelve months ended December 31, 2019.

For additional information on Adjusted EBITDA, see the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— EBITDA and Adjusted EBITDA” below.

On a pro-forma basis, assuming that the Business Combination took place on January 1, 2019, comparing with the actual results of fiscal year 2020, our net revenue for the twelve months ended December 31, 2020 was $566.8 million, a decrease of $261.2 million, or 31.5% from $828.0 million for the twelve months ended December 31, 2019.

Net loss attributable to HF Group’s stockholders for the twelve months ended December 31, 2020 was $343.0 million, a decrease of $348.7 million, or 6,156.9%, from net income attributable to HF Group’s stockholder of $5.7 million for the twelve months ended December 31, 2019.

Adjusted EBITDA for the twelve months ended December 31, 2020 was $19.7 million, a decrease of $13.2 million, or 39.9%, from $32.9 million for the twelve months ended December 31, 2019.

For additional information on our pro-forma results, see the section entitled “SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION” below.

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 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 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.

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.

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.

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

For the first two months of 2020, the outbreak of COVID-19 did not have a significant impact on our business.

However, we began to experience a gradual decline in sales towards the end of February and the impact began to intensify in March, especially in the final two weeks of the month.

By late March, almost all states across the country had issued some form of stay-at-home orders.

As such, the operations of our restaurant customers were severely disrupted due to the “cliff-like” decline in consumer demand for food away from home.

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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 sales the last two weeks of March, negatively impacting our overall net income and adjusted EBITDA for the first quarter ended March 31, 2020.

Our net sales during the last two weeks of the first quarter of 2020 decreased approximately 67% compared to pro-forma sales in the same period ended March 31, 2019.

The impact of COVID-19 continued to worsen in April 2020, resulting in as much as a 75% decrease in net weekly sales compared to pro-forma sales in the comparable prior year period and resulting in the Company making the decision to temporarily shut down the operation of a few distribution centers in North Carolina, Georgia and Florida, which were reopened on April 27, 2020.

In response to the COVID-19 pandemic, beginning in late March 2020, we swiftly pivoted our business strategy and cost structure to reduce operating costs, strengthen our liquidity position, and secure new revenue sources.

Some of the notable actions include:

• actively managing our variable costs to better align with prevailing sales volumes by instituting temporary furloughs, reducing our delivery schedules and temporarily shutting down the operation of several distribution centers, resulting in approximately 40% overall cost reduction since April 2020 as compared to pre-COVID-19 levels;

• improving working capital by focusing on receivables collection efforts while working with our vendors on temporarily extended terms;

• suspending capital expenditures and limiting maintenance and information technology projects;

• developing our proprietary e-commerce platform (www.rongchengmarkets.com) with very minimal investment to cater to consumers and meet the increasing demand for online grocery shopping in larger quantities at wholesale prices;

• securing new partnerships with other online grocery retailers.

The above decisive actions have resulted in an overall improvement of our available line of credit that had enabled the Company to navigate through this unprecedented pandemic.

Cost cutting measures and more efficient operations ensured that the Company had positive cash flow to pay down the revolving credit.

With increased revolving credit availability, the Company is more prepared for future unexpected turns during the pandemic.

Following the lowest monthly sales volume in April, weekly sales recovered to over 50% and 60% of pre-COVID-19 levels in the months of May and June, respectively.

From July 2020 to the time of this report, we have been experiencing relatively stabilized sales volume of about 70% of pre-COVID-19 levels on an aggregated basis.

Based on current sales volumes and adjusted cost structures, the company is generating weekly positive operating cash flows and does not have immediate liquidity concerns, especially if sales volume continues to remain stable or improve further.

The impact of the COVID-19 pandemic continues to evolve and the country recently saw a resurgence of COVID-19 in various areas, therefore, we are currently unable to fully predict the extent to which our business, results of operations, or financial condition, will ultimately be impacted.

We do not expect economic and operating conditions for our business to recover to pre-COVID-19 levels until consumers are once again feeling safe, willing and able to resume consumption of food away from home on a regular basis.

This may not occur until well after the pandemic abates and the broader economy begins to improve.

Any future resurfacing and worsening of the COVID-19 pandemic may adversely impact our sales and liquidity position.

We remain optimistic on the long-term prospects for our business.

Although the timetable for returning to normalcy is unknown, we believe that our current level of sales volume will increase over time as the effects of the COVID-19 pandemic slowly dissipate and consumer demand for food away from home increases.

As the market leader in servicing the Asian/Chinese restaurant sector, we believe we are well-positioned for long-term success.

The fragmented nature of the Asian/Chinese food service industry and the current environment create opportunities for a company like HF Group, which has the necessary expertise and deep understanding of our unique customer base.

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, the Company considers a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, EBITDA and adjusted EBITDA.

The key measures that the Company uses to evaluate the performance of our business are set forth below:

Net revenue is equal to gross sales minus sales returns, sales incentives that the Company offers to our customers, such as rebates and discounts that are offsets to gross sales;

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 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 sales are driven by

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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 is equal to net sales minus cost of revenue.

Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, custom clearance fees and other miscellaneous expenses.

Cost of revenue generally changes as the Company incurs higher or lower costs from suppliers and as the customer and product mix changes.

Distribution, Selling and Administrative Expenses (DSA Expenses)

Distribution, selling and administrative expenses consist primarily of salaries 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.

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 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

The Company uses EBITDA to measure operating performance, defined as net income before interest expense, 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, non-recurring expenses.

Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, extraordinary charges, and other non-cash charges and more reflective of other factors that affect our operating performance.

Management believes that the use of these non-GAAP financial measures 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.

The Company presents EBITDA and Adjusted EBITDA in order to provide supplemental information that the Company considers relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede U.S.

GAAP measures.

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.

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 U.S.

GAAP and are subject to important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of HF Group’s results as reported under U.S.

EBITDA and Adjusted EBITDA are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of HF Group’s results as reported under GAAP.

For example, Adjusted EBITDA:

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

• 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;

1 unchanged sentence

• 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 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — EBITDA and Adjusted EBITDA” below.

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Results of Operations for the years ended December 31, 2020 and 2019

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 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, 2021 and 2020 .

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

For the years ended

December 31 Changes

2020 2019 Amount %

Year Ended December 31, Change

(In thousands) 2021 2020 Amount %

(As Restated)

Net revenue $ 796,884 $ 566,832 $ 230,052 40.6%

2 unchanged sentences

Distribution, selling and administrative expenses 122,030 106,355 15,675 14.7%

Income (loss) from operations (5,834,809) 8,277,366 (14,112,175) (170.5) %

Interest income 529 418,530 (418,001) (99.9) %

Interest expenses (3,922,191) (1,661,454) (2,260,737) 136.1 %

Goodwill impairment loss — 338,191 (338,191) NM

Income (loss) from operations 29,482 (343,799) 373,281 NM

Interest expense (4,091) (4,321) 230 (5.3)%

Other income 508 1,096 (588) (53.6)%

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

Income (loss) before income tax provision 27,324 (347,944) 375,268 NM

Provision (benefit) for income taxes 4,503 (4,725) 9,228 NM

Net income (loss) and comprehensive income (loss) 22,821 (343,219) 366,040 NM

net income attributable to noncontrolling interests 676 293 383 130.4%

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

$ 22,145 $ (343,512) $ 365,657 NM

______________________

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)

Net revenue 100.0 % 100.0 %

Cost of revenue 81.0 % 82.2 %

Gross profit 19.0 % 17.8 %

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 %

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Net income (loss) 2.9 % (60.7) %

net income attributable to noncontrolling interest 293,260 505,609 (212,349) (42.0) %

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

net income attributable to noncontrolling interests 0.1 % 0.1 %

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

2.8 % (60.8) %

Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and wholesale sales to smaller distributors.

The following table sets forth the breakdown of net revenue:

For the years ended December 31,

2020 2019 Changes

Amount % Amount % Amount %

Sales to independent restaurants $ 539,958,127 95.3 % $ 366,432,448 94.4 % $ 173,525,679 47.4 %

Wholesale 26,872,948 4.7 % 21,729,833 5.6 % 5,143,115 23.7 %

Total $ 566,831,075 100.0 % $ 388,162,281 100.0 % $ 178,668,794 46.0 %

Net revenue increased by $178.7 million, or 46.0%, during the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019.

This was attributable primarily to the acquisition of B&R Global, which brought in additional $259.4 million of total revenue comprised of $12.4 million in sales to wholesale customers and $247.0 million in sales to independent restaurants.

The increase was offset by a decrease in revenue of $80.7 million comprised of $73.4 million in sales to independent restaurants and $7.3 million in sales to wholesale customers of legacy HF due to lower sales resulting from COVID-19 pandemic.

The negative impact of the pandemic on our restaurant customers beginning in the last two weeks of March 2020 through the end of December 2020 has led to a significant decline in the net revenue for both HF and B&R Global for the twelve months ended December 31, 2020.

See the section entitled “SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION” below.

We conduct wholesale operations as a supplemental business to foodservice distribution by purchasing full truckloads of products from suppliers and redistributing to smaller distributors who are typically lacking the business volume to place large orders directly with suppliers, or prefer to replenish inventory on an as-needed basis due to space or capital sources limitations.

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Large volume purchases enable the Company to achieve economies of scale and improve overall bargaining power with suppliers.

Net revenue from wholesale for the twelve months ended December 31, 2020 increased by $5.1 million, or 23.7%, as compared to the twelve months ended December 31, 2019, due to the acquisition of B&R Global.

Cost of Revenue and Gross Profit

The following table sets forth the calculation of cost of revenue, gross profit and gross margin for sales to independent restaurants, wholesale, and total net revenue:

For the years ended

December 31, Changes

2020 2019 Amount %

Sales to independent restaurants

Net revenue $ 539,958,127 $ 366,432,448 $ 173,525,679 47.4 %

Cost of revenue 441,164,552 304,139,896 137,024,656 45.1 %

Gross profit $ 98,793,575 $ 62,292,552 $ 36,501,023 58.6 %

Gross Margin 18.3 % 17.0 % 1.3 %

Net revenue $ 26,872,948 $ 21,729,833 $ 5,143,115 23.7 %

Cost of revenue 25,374,940 20,813,862 4,561,078 21.9 %

Gross profit $ 1,498,008 $ 915,971 $ 582,037 63.5 %

Gross Margin 5.6 % 4.2 % 1.4 %

Net revenue $ 566,831,075 $ 388,162,281 $ 178,668,794 46.0 %

Cost of revenue 466,539,492 324,953,758 141,585,734 43.6 %

Gross profit $ 100,291,583 $ 63,208,523 $ 37,083,060 58.7 %

Gross Margin 17.7 % 16.3 % 1.4 %

Cost of revenue was $466.5 million for the twelve months ended December 31, 2020, an increase of $141.5 million, or 43.6%, from $325.0 million for the twelve months ended December 31, 2019.

The increase was mainly attributable to the acquisition of B&R Global, with $203.3 million and $11.6 million in cost of revenue for sales to independent restaurants and wholesale customers, respectively.

This increase was offset by decrease of $73.4 million cost of revenue from legacy HF due to reduced sales resulting from the COVID-19 pandemic.

Gross profit was $100.3 million for the twelve months ended December 31, 2020, an increase of $37.1 million, or 58.7%, from $63.2 million for the twelve months ended December 31, 2019.

The increase was attributable primarily to the acquisition of B&R Global, which contributed $43.7 million and $0.8 million in gross profit derived from sales to independent restaurants and wholesale customers, respectively.

This increase was offset by a decrease of $7.4 million gross profit from legacy HF due to reduced sales resulting from the COVID-19 pandemic.

Gross margin increased from 16.3% for the twelve months ended December 31, 2019 to 17.7% for the twelve months ended December 31, 2020, attributable mainly to margin increase in the second and third quarter of 2020 due to two primary factors:

(1) elimination of lower margin sales to the buffet restaurants still impacted by the outbreak of COVID-19, a segment of our customers on the West Coast region which typically have higher sales volume but at a lower margin;

and (2) sell-through of existing lower cost inventories at a higher gross margin in the second and third quarter of 2020 in line with the general increase in food prices.

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 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 were $106.1 million and $54.9 million for the twelve months ended December 31, 2020 and 2019, respectively, representing a $51.2 million, or 93.2%, increase.

The increase was mainly

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attributable to the Business Combination with B&R Global, which contributed an aggregate cost of $59.8 million comprised of $42.2 million of B&R Global's distribution, selling and administrative expenses, and the amortization expense of $10.9 million relating to the intangible assets acquired from the Business Combination, $6.2 million of non-recurring legal expenses associated with the defense of the securities class action lawsuit (See Note 18 to our financial statements) and special internal investigation, and $0.5 million attributed to special accounts receivable reserve accrual.

The overall increase was offset by a decrease of $8.6 million cost reduction in deliveries charges, contract labor and fuel charges as a result of the outbreak of COVID-19.

Interest Expenses and Bank Charges

Interest expenses are primarily generated from our utilization of lines of credit, capital leases, and long-term debt.

Interest expenses were $3.9 million for the twelve months ended December 31, 2020, an increase of $2.2 million, or 136.1%, compared with $1.7 million for the twelve months ended December 31, 2019.

The increase was mainly attributable to increased lines of credit usage after the Business Combination with B&R Global and additional long-term debt with B&R Realty Subsidiaries, with total interest expenses of $3.0 million for the twelve months ended December 31, 2020.

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 twelve months ended December 31, 2020 and nil for the twelve months ended December 31, 2019.

See Note 9 to our financial statements for additional information.

Other income consists primarily of non-operating income and rental income.

Other income was $1.4 million for the twelve months ended December 31, 2020, an increase of $0.3 million, or 28.1%, compared with $1.1 million for the twelve months ended December 31, 2019.

Change in Fair Value of Interest Rate Swap Contracts

Change in fair value of interest rate swap contracts stemmed from mark to market fair value change of four interest rate swap contracts.

See note 10 to our financial statements for more detail.

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)

Provision(benefit) for income taxes decreased by $7.0 million, or 319.9%, from income tax expenses of $2.2 million for the twelve months ended December 31, 2019 to a tax benefit of $4.8 million for the twelve months ended December 31, 2020, as a result of lower taxable income and the amortization of deferred tax liabilities related to the intangible assets in the twelve months ended December 31, 2020.

Net Income Attributable to Noncontrolling interests

Net income attributable to noncontrolling interests was derived from four minority owned subsidiaries and decreased by $0.2 million, or 42.0%, from $0.5 million for the twelve months ended December 31, 2019 to $0.3 million for the twelve months ended December 31, 2020.

The decrease was mainly due to the $0.3 million decrease of net income attributable to noncontrolling interest from Kirnland for the twelve months ended December 31, 2020.

Net Income (Loss) Attributable to Our Stockholders

As a result of all analysis above, net loss attributable to our stockholders was $343.0 million and net income attributable to our stockholders was $5.4 million for the twelve months ended December 31, 2020 and 2019, respectively.

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 sets forth of the calculation of EBITDA and adjusted EBITDA and reconciliation to net income (loss), the closest U.S.

GAAP measure:

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For the years ended

December 31, Changes

2020 2019 Amount %

Net income (loss) (342,680,799) 5,895,286 (348,576,085) (5,912.8) %

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

Year Ended December 31, Change

(In thousands) 2021 2020 Amount %

(As Restated)

Net income (loss) $ 22,821 $ (343,219) $ 366,040 NM

Interest expense 4,091 4,321 (230) (5.3)%

Income tax provision (benefit) (4,831,731) 2,197,092 (7,028,823) (319.9) %

Depreciation & Amortization 17,483,346 6,754,508 10,728,838 158.8 %

Income tax provision (benefit) 4,503 (4,725) 9,228 NM

Depreciation and amortization 19,126 18,923 203 1.1%

EBITDA 50,541 (324,700) 375,241 (115.6)%

Goodwill and asset impairment charges

338,191,407 — 338,191,407 100.0 %

Change in fair value of interest rate swap contracts (1,425) 920 (2,345) (254.9)%

COVID-19 bad debt reserve 544,672 — 544,672 100.0 %

Non-recurring expenses* 6,179,956 375,000 5,804,956 1,548.0 %

Goodwill impairment charges — 338,191 (338,191) NM

Stock-based compensation expense 635 — 635 NM

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

Adjusted EBITDA $ 50,841 $ 14,458 $ 36,383 251.6%

Percentage of revenue 3.5 % 4.3 % (0.9) %

* For the twelve months ended December 31, 2019, non-recurring expenses represented an expense accrued for potential loss contingency relating to negligence claim(s) for damages.

This claim was settled in November 2019 in the amount of $0.4 million.

For the twelve months ended December 31, 2020, non-recurring expenses comprised of $6.2 million of legal fees related to the defense of the class action lawsuit and internal investigation stemming from the lawsuit (see Note 18 to our financial statements for additional information).

Adjusted EBITDA was $19.7 million for the twelve months ended December 31, 2020, an increase of 16.9%, or $2.8 million, compared to $16.9 million for the twelve months ended December 31, 2019.

Primary contributors for the movement in Adjusted EBITDA are goodwill and asset impairment charges due to COVID-19 impact to business, acquisition of B&R Global and BRGR subsidiaries, legal defense of class action lawsuit and associated internal investigation, and fair value change in interest rate swap contracts.

Business restrictions stemming out of the COVID-19 outbreak, which started in late March of 2020 and is still ongoing, caused severe detrimental impact to our customers and consequently our business volumes, resulting in a $10.4 million decrease in net income (excluding goodwill impairment loss), a $7.0 million decrease in income tax provision due to the Company reflecting an income tax benefit as a result of lower taxable income and the amortization of deferred tax liabilities related to the intangible assets, and an increase of $0.5 million in reserve for doubtful accounts receivable related to COVID-19.(see COVID-19 impact section under Overview of this section.)

The Company's recent acquisitions of B&R Global and BRGR subsidiaries resulted in a $10.7 million increase in depreciation and amortization from intangible and fixed assets, and $2.3 million in interest expenses.

There is a $6.2 million increase in non-recurring expenses associated with the legal defense of the class action lawsuit and related internal investigation.

Change in fair value of interest rate swaps resulted in a $0.9 million add back to the adjusted EBITDA.

Supplemental Unaudited Pro Forma Combined Financial Information

As described above, the Company completed the Business Combination with B&R Global on November 4, 2019.

For comparative purposes, the Company is presenting supplemental unaudited pro forma combined statements of operations for the twelve month period ended December 31, 2019.

The unaudited pro forma combined statements of operations for these periods present our consolidated results of operations giving pro forma effect to the Business Combination as if it had occurred on January 1, 2019.

The pro forma combined adjustments give effect to the items identified in the unaudited pro forma combined tables below in connection with the Business Combination.

The unaudited pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of the Business Combination on our historical financial information, as applicable.

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The B&R Global financial statements and our financial statements have been adjusted in the pro forma financial information to give effect to events that are (1) directly attributable to the Business Combination, (2) factually supportable, and (3) expected to have a continuing impact on the combined company.

The unaudited pro forma combined financial information has been prepared for informational purposes only and is not necessarily indicative of or intended to represent what the combined company’s financial position or results of operations actually would have been had the Business Combination occurred as of the dates indicated.

In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma adjustments are based on information available at the time of the preparation of the unaudited pro forma combined financial information.

The unaudited pro forma combined financial information does not reflect cost savings, synergies or revenue enhancements that the Company may achieve with respect to combining the companies or costs to integrate the B&R Global business or the impact of any non-recurring activity and any one-time transaction related costs.

Synergies and integration costs have been excluded from consideration because they do not meet the criteria for unaudited pro forma adjustments.

Unaudited Pro Forma Results of Operations

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change.

The following adjustments have been reflected in the unaudited pro forma financial statements:

For the year ended December 31, 2019

Global Adjustments Pro Forma Combined

Net revenue $ 302,103,038 $ 525,942,665 $ — $ 828,045,703

Net income 5,864,471 11,825,523 (10,890,300) (1) 6,799,694

Net Income Attributable to HF Foods Group Inc.

Adjusted EBITDA margin 6.4 % 2.6 %

____________________

(1) Includes intangible asset amortization expense of $10,890,300 for the year ended December 31, 2019

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, 2020, we had cash of approximately $9.6 million.

We have funded working capital and other capital requirements primarily by equity contributions from shareholders, cash flow from operations, and bank loans.

Cash is required to pay cost of inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, professional fees, other operating expenses and to service debts.

On April 18, 2019, we and our operating subsidiaries Han Feng, NSF and Kirnland entered into a credit agreement with East West Bank, which provided a $25,000,000 revolving credit facility due August 18, 2021, accrued interest based on the prime rate less 0.375%, or 2.20% above LIBOR, but in no event less than 4.214% per annum, and was secured by virtually all assets of the Company and our domestic subsidiaries.

On November 4, 2019, the East West Bank revolving credit facility loan was paid off from borrowings under the First Amended and Restated Credit Agreement entered into in connection with the merger with B&R, as described below.

On November 4, 2019, we entered into the First Amended Credit Agreement with JP Morgan.

The First Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured term loans of $55.4 million.

On January 17, 2020, the Company, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement by and among JP Morgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank.

The Second Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured Term Loans of $75.6 million.

The Second Amended Credit Agreement amended and restated the existing $55.0 million of real estate term loans under the First Amended Credit Agreement.

As of January 17, 2020, the existing balance of revolving debt under the First Amended Credit Agreement in the amount of $41.2 million was rolled over and an additional $18.7 million available to the Company under the

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Facility was drawn.

The Company used the $75.6 million in mortgage-secured term loans and $18.7 million drawn from the revolving credit facility to fund in part the acquisition of the B&R Realty Subsidiaries, as noted above.

Borrowings under the Second Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions).

As of December 31, 2020, $91.0 million was outstanding under the Second Amended Credit Agreement.

Borrowings under the Facility bear interest at a floating rate, which will be, at the Borrowers’ option, either LIBOR plus 1.375%, or a base rate of prime rate minus 1.125%.

The mortgage-secured Term Loans bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.875%, or a base rate of prime rate minus 0.625%.

A commitment fee of 0.15% is payable monthly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility.

The Borrowers are obligated to pay monthly installments on the mortgage-secured Term Loans in the amount of $252,000, with a final installment of the remaining principal balance of the Term Loans due on January 17, 2030, the Term Loan Maturity Date.

Although management believes that the cash generated from operations will be sufficient to meet our normal working capital needs for at least the next twelve months, 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 food service distribution industry, the expected collectability of accounts receivable and the realization of the inventories as of December 31, 2020.

Based on the above considerations, management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due.

However, there is no assurance that management will be successful in our plan.

There are a number of factors that could potentially arise which might result in shortfalls to what is anticipated, such as the demand for our products, economic conditions, competitive pricing in the food service 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 be forced to reduce or delay our expected acquisition plan, sell assets, obtain additional debt or equity capital, or refinance all or a portion of our debt.

We, however, make no assurance that we will be able to raise any additional capital in the future on satisfactory terms or at all.

Our continued access to sources of liquidity depends on multiple factors, including economic conditions, the condition of financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings.

In addition, the effect of COVID-19 on the capital markets could significantly impact our cost of borrowing and the availability of capital to us.

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, 2021 and 2020:

For the years ended

Years Ended December 31, Change

(In thousands) 2021 2020 Amount %

(As Restated)

Net cash provided by operating activities $ 17,509 $ 45,693 $ (28,184) (61.7)%

Net cash provided by (used) in investing activities (94,411,446) 2,775,115

Net cash provided by in financing activities 45,322,727 1,607,239

Net increase (decrease) in cash and cash equivalents $ (4,957,433) $ 9,048,882

Net cash used in investing activities (41,082) (94,411) 53,329 (56.5)%

Net cash provided by financing activities 28,784 43,761 (14,977) (34.2)%

Net increase (decrease) in cash and cash equivalents $ 5,211 $ (4,957) $ 10,168 NM

____________________

NM - Not meaningful

Operating Activities

Net cash provided by operating activities consists primarily of net income (loss) adjusted for non-cash items, including goodwill impairment loss, depreciation and amortization, changes in deferred income taxes and others, and adjusted for the effect of working capital changes.

Net cash provided by operating activities was approximately $44.1 million for the twelve months ended December 31, 2020, an increase of $39.4 million, or 845.7%, compared to net cash provided by operating activities of $4.7 million for the twelve months ended December 31, 2019.

The increase was primarily the result of newly acquired B&R Global with total net cash provided by operating activities of $20.6 million.

The remaining increase is a combined result of an increase of $27.8 million from changes in working capital items mainly resulting from changes in gain from disposal of equipment, loss from derivative instruments, accounts receivable, inventories, income tax recoverable, accrued expenses, income tax payable and depreciation and amortization expense which were offset by a decrease of $8.9 million in net income, advances to suppliers – related parties,deferred tax benefit, other current other long term assets, accounts payable, and accounts payable - related parties.

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 was approximately $94.4 million for the twelve months ended December 31, 2020, an increase of $97.2 million or 3,502.1%, compared to $2.8 million net cash provided by investing activities for the twelve months

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ended December 31, 2019.

The increase was primarily due to the payment made to acquire B&R Realty Subsidiaries of $94.0 million.

The increase was offset by a combined result of a decrease in cash paid for the purchase of property and equipment of $4.2 million, decrease in cash received from notes receivable to third parties and related parties of $0.3 million.

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 was approximately $45.3 million for the twelve months ended December 31, 2020, an increase of $43.7 million, or 2,719.9%, compared with $1.6 million of net cash provided by financing activities for the twelve months ended December 31, 2019.

The increase was a result of the newly acquired $75.6 million in mortgage-backed term loans to fund B&R Realty Acquisition.

The increase was offset by a net decrease of $20.5 million utilization of lines of credit, a decrease in proceeds of $8.1 million of long term debt, and an increase of $2.98 million in repayment of bank overdrafts.

Commitments and Contractual Obligations

The following table presents our material contractual obligations as of December 31, 2020:

Contractual Obligations Total Less than 1

year 1-3 years 3-5 years More than 5

Lines of credit $ 18,279,062 $ 18,279,062 $ — $ — $ —

Long-term debt 93,650,062 5,641,259 9,607,982 7,418,242 70,982,579

Promissory note payable - related party 7,000,000 — — — 7,000,000

Finance lease liabilities 1,210,060 359,635 635,061 215,364 —

Operating lease obligations 1,090,262 382,047 555,687 152,528 —

Total $ 121,229,446 121229446 $ 24,662,003 $ 10,798,730 $ 7,786,134 $ 77,982,579

On July 2, 2018, AnHeart Inc., a wholly-owned subsidiary of HF Holding ("AnHeart"), entered into two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively.

The leases were on triple net basis, meaning AnHeart is required to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs.

HF Holding provided a guaranty for all rent and related costs of the leases, including costs associated with the planned construction of a two-story structure at 273 Fifth Avenue and rehabilitation of the building at 275 Fifth Avenue.

Under the lease for 273 Fifth Avenue, the fixed rent costs over 30 years commence at $325,000 for the first year and escalate every year during the term to $1,047,000 in year 30.

Under the lease for 275 Fifth Avenue, the fixed rent costs over 15 years commence at $462,000 for the first year and escalate every year during the term to approximately $760,878 in year 15.

The 275 Fifth Avenue lease includes an option to extend the term for an additional 10 years.

Under the leases, HF Holding delivered two letters of credit in favor of the Landlord, one in the amount of $213,000 as security for AnHeart’s obligations under the lease at 273 Fifth Avenue, and the second in the amount of $115,500 with respect to 275 Fifth Avenue.

The Company entered into the leases with the planned purpose of expanding its product lines to include Chinese herb supplements and to use the sites to develop into a hub for such products.

The Company has since determined to cease this business expansion.

On February 23, 2019, the Company executed an agreement to divest all of the ownership interest in AnHeart to Ms.

Jianping An, a resident of New York, for the sum of $20,000.

The transfer of ownership was disclosed and landlord consent was obtained.

However, the divestment of ownership did not release HF Holding’s guaranty of AnHeart’s obligations or liabilities under the original lease agreements.

Under the terms of the sale of AnHeart stock to Ms.

An, and in consideration of the Company’s ongoing guaranty of AnHeart’s performance of the lease obligations, AnHeart executed a security agreement which grants HF Holding a security interest in AnHeart assets and contains a covenant to assign the leases to HF Group if AnHeart defaults on the original lease agreements.

An has tendered an unconditional guaranty of all liabilities arising under the leases, in favor of the Company, executed by Minsheng Pharmaceutical Group Company, Ltd., a Chinese manufacturer and distributor of herbal medicines.

On February 10, 2021, 273 Co, a newly established Delaware limited liability company and wholly owned subsidiary of the Company, completed the closing of an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, pursuant to which it has assumed the lease of the premises at 273 Fifth Avenue, New York, New York (the “273 Lease Agreement”) dated as of July 2, 2018, by and between AnHeart and Premier 273 Fifth, LLC ("Landlord").

On the same date, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”).

The Assignment and the 273 Lease Amendment were negotiated pursuant to guarantee obligations of the Company’s wholly owned subsidiary, HF Holding as guarantor under the Lease Agreement.

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Co has agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due.

Under the terms of the Lease Agreement and the Assignment, 273 Co has undertaken to construct, at Company’s expense, a building on the premises, at a minimum cost of $ 2,500,000 .

The 273 Lease Agreement and the Lease Amendment provide for a term of 30 years, with option to renew for 10 additional years, at an annual rent starting at $ 325,000 and escalating annually throughout the term, with the annual rent in the final year of the initial term of $ 1,047,974 .

The 273 Lease Amendment further granted certain rent abatement to the premises for 2020 and 2021, including a 20 % reduction of annual rent in 2021.

The Lease Amendment permits subletting of the premises.

Off Balance Sheet Arrangements

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.

Critical Accounting Estimates

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 our 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, revenue recognition, impairment of long-lived assets and income taxes.

The Company bases our estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances.

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.

The Company believes that among our significant accounting policies, which are described in Note 2 to the audited consolidated financial statements included in this report, the following accounting policies involve a greater degree of judgment and complexity.

Accordingly, the Company believes these are the most critical to fully understand and evaluate our financial condition and results of operations.

Accounts receivable

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 unaudited condensed consolidated balance sheets.

The Company evaluates the collectability of our accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors.

When the Company becomes 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 when uncollectible receivables are to be written off, including, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.

As of December 31, 2020, and December 31, 2019, the allowances for doubtful accounts were $909,182 and $623,970, respectively.

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

The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which occurs at delivery.

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.

The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

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 majority of the Company’s contracts have one single performance obligation, as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct.

The Company’s revenue streams are recognized at a specific point in time.

For the years ended December 31, 2020 and 2019, revenue recognized from performance obligations related to prior periods was insignificant.

Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant.

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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 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

The Company assesses our long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

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 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.

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.

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.

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.

The Company recognizes deferred tax assets to the extent that the Company 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.

If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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

The Company does not believe that there were any uncertain tax positions at December 31, 2020, and 2019.

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

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

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 16-13 was further amended in November 2019, 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 31, 2022.

The Company will adopt this ASU within the annual reporting period of December 31, 2023.

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 December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company will adopt this ASU within the annual reporting period of December 31, 2021.

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

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis