HF Foods Group Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis provides information about our business, the results of operations, financial condition, liquidity and capital resources of HF Foods Group Inc. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our results of operations and financial condition. This discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K. 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. Overview We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States. HF Group was formed through a merger between two complementary 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”). On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc. (the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. See Note 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. We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices. COVID-19 Impact The impact of the COVID-19 pandemic had an adverse effect on our business, financial condition and operational results in 2020. All states across the country issued some form of stay-at-home orders, shutdowns, voluntary containment measures, and social distancing . The operations of our restaurant customers were also severely disrupted due to the 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. 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 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 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. 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. 28 How to Assess HF Group’s Performance In assessing our performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, as well as certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA. The key measures that we use to evaluate the performance of our business are set forth below: Net Revenue Net revenue is equal to gross sales minus sales returns, sales incentives that we offer to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net revenue is driven by changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold. Gross Profit Gross profit is equal to net revenue minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, customs clearance fees and other miscellaneous expenses. Cost of revenue generally changes as we incur higher or lower costs from suppliers and as the customer and product mix changes. Distribution, Selling and Administrative Expenses Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses. EBITDA and Adjusted EBITDA Discussion of our results includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, that we believe provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede GAAP measures. Management uses EBITDA to measure operating performance, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, or non-recurring expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, and other non-cash charges and is more reflective of other factors that affect our operating performance. The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of HF Group’s results as reported under GAAP. For example, Adjusted EBITDA: • excludes certain tax payments that may represent a reduction in cash available; • does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future; • does not reflect changes in, or cash requirements for, our working capital needs; and • does not reflect the significant interest expense, or the cash requirements, necessary to service our debt. For additional information on EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below. 29 Financial Review Highlights for 2022 included: • Net revenue: 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 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 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 $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 The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2022 and 2021 . The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Year Ended December 31, Change (In thousands) 2022 2021 Amount % Net revenue $ 1,170,467 $ 796,884 $ 373,583 46.9% Cost of revenue 964,955 645,372 319,583 49.5% Gross profit 205,512 151,512 54,000 35.6% Distribution, selling and administrative expenses 194,953 122,030 72,923 59.8% 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 (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)% Less: 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)% 30 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, 2022 2021 Net revenue 100.0 % 100.0 % Cost of revenue 82.4 % 81.0 % Gross profit 17.6 % 19.0 % Distribution, selling and administrative expenses 16.7 % 15.3 % Income (loss) from operations 0.9 % 3.7 % Interest expense (0.6) % (0.5) % Other income, net 0.2 % — % Change in fair value of interest rate swap contracts 0.1 % 0.2 % Lease guarantee expense (0.5) % — % Income before income tax provision — % 3.4 % Income tax (benefit) provision — % 0.5 % Net income — % 2.9 % Less: net income attributable to noncontrolling interests — % 0.1 % Net income and comprehensive income attributable to HF Foods Group Inc. — % 2.8 % Net Revenue 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 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 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 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, 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. 31 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 The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure: Year Ended December 31, Change (In thousands) 2022 2021 Amount % Net income (loss) $ 235 $ 22,821 $ (22,586) (99.0)% Interest expense 7,457 4,091 3,366 82.3% 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)% 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 % 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 As of December 31, 2022, we had cash of approximately $24.3 million, checks issued not presented for payment of $21.9 million and access to approximately $46.9 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, 2022. 32 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 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. 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, 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: Years Ended December 31, Change (In thousands) 2022 2021 Amount % Net cash provided by operating activities $ 31,284 $ 17,509 $ 13,775 78.7% Net cash used in investing activities (50,786) (41,082) (9,704) 23.6% Net cash provided by financing activities 28,999 28,784 215 0.7% Net increase in cash and cash equivalents $ 9,497 $ 5,211 $ 4,286 NM ____________________ NM - Not meaningful Operating Activities Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes. Net cash provided by operating activities 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 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 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. 33 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. These principles require management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. The estimates include, but are not limited to, accounts receivable, impairment of long-lived assets and income taxes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and the actual results, future financial statements will be affected. We believe that among our significant accounting policies, which are described in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations. Business Combinations We account for our business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities we acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. We estimate the fair value of assets acquired and liabilities assumed in a business combination. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations and comprehensive income (loss). Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We test goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. We 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. 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. 34 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. 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 We assess our long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows which the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. 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.