What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2023-01-31 · 87 added, 171 removed, 152 unchanged (63% of the section changed)

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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.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021, as filed with the SEC on January 31, 2023.

We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States.

HF Group was formed through a merger between two complementary market leaders, HF Foods Group Inc.

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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.

On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc.

See Note 8 - Acquisitions to the consolidated financial statements in this Annual Report on Form 10-K for additional information regarding recent acquisitions.

We have grown our distribution network to 18 distribution centers servicing 46 states and covering approximately 95% of the contiguous United States with a fleet of over 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.

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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 operations of our restaurant customers were also severely disrupted due to the significant 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.

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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.

Our net revenue for 2021 strongly recovered to 96% of pre-COVID-19 pandemic levels and net revenue for 2022 increased 47% as compared to 2021.

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.

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

The fragmented nature of the Asian/Chinese foodservice industry and the environment during COVID-19 created opportunities for a company with the necessary expertise and a comprehensive cultural understanding of this unique customer base.

How to Assess HF Group’s Performance

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Net revenue was $1,170.5 million in 2022, compared to $796.9 million in 2021, an increase of $373.6 million, or 46.9%.

This increase was primarily attributable to the strong recovery of restaurant demand from the COVID-19 pandemic.

This increase was primarily attributable to recent acquisitions, product cost inflation, and, to a lesser extent, the strong recovery of restaurant demand from the COVID-19 pandemic.

• Gross profit :

Gross profit was $205.5 million in 2022 compared to $151.5 million in 2021, an increase of $54.0 million, or 35.6%.

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.

The increase was primarily attributable to the additional revenue generated due to recent acquisitions.

Gross profit margin for 2022 decreased from 19.0% in 2021 to 17.6% in 2022.

• Distribution, selling and administrative expenses :

Distribution, selling and administrative expenses increased by $72.9 million, or 59.8%, mainly due to an increase in payroll and related labor costs and sales related cost, driven by net revenue growth and recent acquisitions, along with increased professional fees and delivery costs.

Distribution, selling and administrative expenses as a percentage of net revenue increased from 15.3% in 2021 to 16.7% in 2022, primarily due to the costs disclosed above partially offset by strong revenue growth.

• 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.

Net income was $0.5 million in 2022 compared to net income of $22.1 million in 2021.

The decrease of $21.6 million was driven by the decrease in gross profit margin and the increase in distribution, selling and administrative expenses as a percentage of net revenue.

• Sealand Acquisition :

On April 29, 2022, we acquired substantially all of the operating assets of Sealand Food, Inc.

("Sealand") including equipment, machinery and vehicles for an aggregate purchase price of $20.0 million in cash, as well as $14.4 million of acquired saleable inventory and additional fixed assets for approximately $0.5 million.

The acquisition was completed to expand our territory along the East Coast, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

Results of Operations

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(In thousands) 2022 2021 Amount %

(As Restated)

Net revenue $ 1,170,467 $ 796,884 $ 373,583 46.9%

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Distribution, selling and administrative expenses 194,953 122,030 72,923 59.8%

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

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

Income from operations 10,559 29,482 (18,923) (64.2)%

Interest expense 7,457 4,091 3,366 82.3%

Other income (1,829) (508) (1,321) 260.0%

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

Change in fair value of interest rate swap contracts (817) (1,425) 608 (42.7)%

Lease guarantee expense 5,744 — 5,744 100.0%

Income before income tax provision 4 27,324 (27,320) (100.0)%

Income tax (benefit) provision (231) 4,503 (4,734) (105.1)%

Net income and comprehensive income 235 22,821 (22,586) (99.0)%

net (loss) income attributable to noncontrolling interests (225) 676 (901) (133.3)%

Net income and comprehensive income attributable to HF Foods Group Inc.

$ 460 $ 22,145 $ (21,685) (97.9)%

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 %

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Distribution, selling and administrative expenses 16.7 % 15.3 %

Goodwill impairment loss — % 59.7 %

Income (loss) from operations 0.9 % 3.7 %

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Change in fair value of interest rate swap contracts 0.1 % 0.2 %

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

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

Net income (loss) 2.9 % (60.7) %

Lease guarantee expense (0.5) % — %

Income before income tax provision — % 3.4 %

Income tax (benefit) provision — % 0.5 %

Net income — % 2.9 %

net income attributable to noncontrolling interests — % 0.1 %

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

2.8 % (60.8) %

Net income and comprehensive income attributable to HF Foods Group Inc.

Net revenue for the year ended December 31, 2022 increased by $373.6 million or 46.9% compared to the same period in 2021.

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.

The increase was primarily due to the additional revenue generated by recent acquisitions and overall product cost inflation.

Organic growth contributed $121.1 million and recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed the remaining $252.5 million.

Gross profit was $205.5 million for 2022 compared to $151.5 million in the prior year, an increase of $54.0 million, or 35.6%.

The increase was primarily attributable to the additional revenue generated due to recent acquisitions.

Gross profit margin for 2022 decreased from 19.0% in 2021 to 17.6% in 2022.

The decrease was primarily attributable to the shift in product mix to higher Seafood sales, increases in fuel costs, incremental lower margin sales from newly acquired customers, timing of inventory purchases, higher than expected fluctuations in key commodity pricing and a higher-than-normal gross profit margin in the prior year due to our strong sales recovery to above pre-COVID-19 pandemic levels in 2021.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the year ended December 31, 2021 increased by $15.7 million, or 14.7%, to $122.0 million, compared to $106.4 million for the year ended December 31, 2020.

Of the distribution, selling and administrative expenses increase, $17.2 million, primarily came from payroll and related labor costs, as more workers were, and will continue to be, required to handle the increasing sales demand, and $4.3 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth.

Distribution, selling and administrative expenses as a percentage of net revenue improved from 18.8% in 2020 to 15.3% in 2021 primarily due to better cost control measures and higher net revenue.

Goodwill Impairment Loss

Goodwill impairment loss was $338.2 million for the year ended December 31, 2020 primarily due to the negative impact of the COVID-19 pandemic on sales.

No goodwill impairment loss was recorded for year ended December 31, 2021, as our business returned to pre-COVID-19 pandemic levels.

See Note 8 - Goodwill and Acquired Intangible Assets to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

Distribution, selling and administrative expenses increased by $72.9 million, or 60%, primarily due to an increase of $28.8 million in payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, increased professional fees of $14.1 million, from $12.7 million in 2021 to $26.8 million in 2022, primarily driven by legal costs and increased compliance costs as a result of (a) the SEC and SIC investigations and (b) responding to an SEC comment letter and the filing of our delinquent reports, as well as an $8.4 million increase in sales-related costs driven by revenue growth and recent acquisitions.

Distribution, selling and administrative expenses as a percentage of net revenue increased to 16.7% in 2022 from 15.3% in 2021 primarily due to higher professional fees and increased headcount.

Interest Expense and Bank Charges

Interest expense for the year ended December 31, 2021 increased by $0.2 million or 5.3%, compared to the year ended December 31, 2020, primarily due to increased interest expense related to finance leases, partially offset by lower utilization of our line of credit, a reduction of our real estate term loan and a decrease in interest due to the lower interest-rate environment.

Our average daily line of credit balance decreased by $17.9 million, or 52.0%, to $16.5 million in 2021 from $34.4 million in 2020, and our average daily real estate term loan balance decreased by $2.1 million, or 2.9%, to $71.2 million in 2021 from $73.3 million in 2020.

Additionally, average floating interest rates for the year ended December 31, 2021 decreased by approximately 0.52%, compared to the same period in 2020, which further contributed to lower interest expense.

Income Tax Provision (Benefit)

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

Net Income (Loss) Attributable to Our Shareholders

Net income attributable to our shareholders was $22.1 million for the year ended December 31, 2021, versus a net loss attributable to our shareholders of $343.5 million for the year ended December 31, 2020.

The positive trend is attributed to increased consumer demand for dine-in/take out meals as COVID-19 restrictions eased in 2021, thereby prompting restaurants to replenish products at a more frequent rate.

In addition, the year ended December 31, 2020 included the goodwill impairment loss discussed above.

Interest expense for the year ended December 31, 2022 increased by $3.4 million or 82.3%, compared to the year ended December 31, 2021, primarily due to higher utilization of our line of credit coupled with the higher interest-rate environment, and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan.

Our average daily line of credit balance increased by $38.5 million, or 233.1%, to $55.0 million in 2022 from $16.5 million in 2021, and our average daily real estate term loan balance increased by $42.2 million, or 59.3%, to $113.4 million in 2022 from $71.2 million in 2021.

Additionally, average floating interest rates for the year ended December 31, 2022 increased by approximately 1.64% on the line of credit and 2.26% on the mortgage-secured term loan, compared to the same period in 2021, which further contributed to higher interest expense.

Income Tax (Benefit) Provision

Income tax (benefit) provision was an income tax benefit of $0.2 million for the year ended December 31, 2022, compared to income tax provision of $4.5 million for the year ended December 31, 2021, primarily due to decreased income before taxes.

Net Income Attributable to Our Shareholders

Net income attributable to our shareholders was $0.5 million for the year ended December 31, 2022, compared to $22.1 million for the year ended December 31, 2021.

The decrease of $21.7 million, or 97.9%, is primarily due to the distribution, selling, and administrative costs and interest expense described above, partially offset by our strong business recovery to above pre-COVID-19 pandemic levels.

In addition, we recorded a non-recurring charge of $5.7 million related to a guarantee of a lease obligation.

EBITDA and Adjusted EBITDA

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(In thousands) 2022 2021 Amount %

(As Restated)

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

Net income (loss) $ 235 $ 22,821 $ (22,586) (99.0)%

Interest expense 7,457 4,091 3,366 82.3%

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

Income tax provision (benefit) (231) 4,503 (4,734) (105.1)%

Depreciation and amortization 24,936 19,126 5,810 30.4%

EBITDA 32,397 50,541 (18,144) (35.9)%

Lease guarantee expense 5,744 — 5,744 100.0%

Change in fair value of interest rate swap contracts (817) (1,425) 608 (42.7)%

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

Stock-based compensation expense 1,257 635 622 98.0%

Acquisition and integration costs 1,130 1,090 40 3.7%

Impairment 422 — 422 100.0%

Adjusted EBITDA $ 40,133 $ 50,841 $ (10,708) (21.1)%

Adjusted EBITDA margin 3.4 % 6.4 %

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NM - Not meaningful

Adjusted EBITDA was $50.8 million for the year ended December 31, 2021, an increase of $36.4 million or 251.6%, compared to $14.5 million for the year ended December 31, 2020.

The increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels and an improvement of 1.2% in gross profit margin, resulting from increased bargaining purchase power.

Adjusted EBITDA was $40.1 million for the year ended December 31, 2022, a decrease of $10.7 million or 21.1%, compared to $50.8 million for the year ended December 31, 2021.

Adjusted EBITDA margin decreased to 3.4% for the year ended December 31, 2022 from 6.4% in the prior year.

The decrease in Adjusted EBITDA margin was primarily attributable to a 150 basis point decrease in gross profit and a 130 bps increase in distribution, selling and administrative expenses.

Liquidity and Capital Resources

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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, 2022.

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.

On March 31, 2022, we amended the Credit Agreement with J.P.

Morgan extending our line of credit for five years.

2 unchanged sentences

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.

See Note 11 - Debt 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.

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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.

As of December 31, 2022, 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, 2022 and 2021:

1 unchanged sentence

(In thousands) 2022 2021 Amount %

(As Restated)

Net cash provided by operating activities $ 31,284 $ 17,509 $ 13,775 78.7%

1 unchanged sentence

Net cash provided by financing activities 28,999 28,784 215 0.7%

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

Net increase in cash and cash equivalents $ 9,497 $ 5,211 $ 4,286 NM

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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.

Net cash provided by operating activities increased by $13.8 million, or 78.7%, primarily due to lower working capital requirements in 2022 compared to increased working capital investment as a direct result of higher sales volume and the need for normal inventory level build up post-COVID-19 in 2021.

Investing Activities

Net cash used in investing activities decreased by $53.3 million, or 56.5%, primarily due to a one-time payment of $94.0 million to acquire 100% equity membership interest in nine subsidiaries of BRGR in 2020 (see Corporate History in Part I.

Item 1), compared to a one-time payment of $37.8 million for the acquisition of Great Wall Group in December 2021.

Net cash used in investing activities increased by $9.7 million, or 23.6%, primarily due to the Sealand Acquisition of $34.9 million and $17.4 million paid for the inventory acquired related to the Great Wall Acquisition in 2022 compared to the Great Wall Acquisition of $37.8 million and $5.0 million paid related to the acquisition of noncontrolling interests in 2021.

Financing Activities

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

Critical Accounting Policies and Estimates

Net cash provided by financing activities increased by $0.2 million, or 0.7%, primarily due to the $46.0 million increase of our mortgage-secured term loan partially offset by the $4.5 million payoff of our related party promissory note payable, the $4.5 million repayment of long-term debt related to a warehouse sale compared to the net impact of $39.0 million on our line of credit from net proceeds of $36.9 million in 2021 to a net repayment of $2.1 million.

Critical Accounting 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.

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

Revenue Recognition

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

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

We follow ASC Topic 606 ("ASC 606") , Revenue from Contracts with Customers .

We recognize revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in such exchange.

This requires us to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer.

Our contracts contain performance obligations which are satisfied when customers have physical possession of each product.

Our revenue streams are recognized at a specific point in time.

For the years ended December 31, 2021, 2020 and 2019, revenue recognized from performance obligations related to prior periods was immaterial.

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

Business Combinations

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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 have concluded we are one aggregated reporting unit for purposes of testing goodwill for impairment due to similar economic characteristics of our businesses reviewed by our segment manager.

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 .

Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or indefinite-lived intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry.

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.

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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.

A quantitative goodwill impairment analysis requires valuation of the respective reporting unit, which requires complex analysis and judgment.

We use a combination of discounted cash flow (“DCF”) models and market data, such as earnings-based multiples for comparable companies.

DCF models require detailed forecasts of cash flows, including assumptions such as revenue growth rates, margin rates and capital investments, and estimates of weighted-average cost of capital which we believe approximates the rate from a market participant’s perspective.

These estimates incorporate many uncertain factors which could be impacted by changes in market conditions, interest rates, growth rate, tax rates, costs, customer behavior, regulatory environment and other macroeconomic changes.

We categorize the fair value determination as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

For the year ended December 31, 2022, we considered the decline of the trading price of our common stock to be a triggering event, performed a quantitative impairment assessment considering expected future cash flows, including consideration of market conditions and expectations of increases in interest rates.

We also prepared a comparable company analysis and comparable acquisition analysis and weighted the income approach and market approaches equally to determine fair value.

The results of testing as of December 31, 2022, concluded that the estimated fair value exceeded carrying value, and no impairment existed as of that date.

In addition, we corroborated the reasonableness of the total fair value of the reporting unit by assessing the implied control premium based on our market capitalization.

Our market capitalization is calculated using the number of common shares outstanding and common stock publicly traded price.

We also consider the amount of headroom for the reporting unit when determining whether an impairment existed.

Headroom is the difference between the fair value of a reporting unit and its carrying value.

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 9 - Goodwill and Acquired Intangible Assets to the consolidated financial statements in this Annual Report on Form 10-K for additional information.

If, in future periods, the financial performance of the reporting unit does not meet forecasted expectations, or a decline occurs in the market price of our common stock, it may cause a change in the results of the impairment assessment and, as such, could result in an impairment of goodwill.

Impairment of Long-lived Assets

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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.

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.

We impaired our acquired developed technology and recognized impairment expense of $0.4 million in distribution, selling and administrative expenses in the consolidated statements of operations during the year ended December 31, 2022 .

We did not record any impairment loss on our long-lived assets during the year ended December 31, 2021.

Recent Accounting Pronouncements

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

Emerging Growth Company Status

We have been an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and may at this time take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards.

We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We took advantage of these exemptions up until December 31, 2022 (the last day of the fiscal year following the fifth anniversary of our IPO).

We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates, or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.

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What changed 10-K

Item 7. Management’s Discussion and Analysis