What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2023-01-31 · 89 added, 105 removed, 117 unchanged (62% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements.

When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “possible,” “potential,” “predict,” “project,” “will” and similar expressions, as they relate to us or our management, identify forward-looking statements.

Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the Securities and Exchange Commission (“SEC”).

All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

All forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

This Quarterly Report on Form 10-Q for HF Foods Group Inc.

(“HF Group,” “HF Foods”, the “Company,” “we,” “us,” or “our”) contains forward-looking statements.

Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

Words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions.

While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation:

• The effects of the COVID-19 pandemic or other pandemics;

• Low margins in the foodservice distribution industry and periods of significant or prolonged inflation;

• Low margins in the foodservice distribution industry and periods of significant or prolonged inflation or deflation;

• Qualified labor shortages;

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• Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains;

• Our business has been affected and may in the future be affected by the COVID-19 pandemic and the steps taken by the Chinese government to address the pandemic;

• The steps taken by the governments where our suppliers are located, including the People’s Republic of China, to address the COVID-19 pandemic;

• Disruption of relationships with or loss of customers;

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• Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results;

• Our ability to regain compliance with Securities Exchange Act of 1934 reporting requirements;

• The development of an active trading market for our common stock.

• Our ability to regain compliance with Nasdaq listing requirements;

• The impact on the price and demand for our common stock resulting from the relative illiquidity of the market for our common stock and the as yet resolved Nasdaq delisting determination;

• Significant stockholders’ ability to significantly influence the Company;

• The impact of state antitakeover laws and related provision in our governance documents.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications.

We caution you that the important factors referenced above may not contain all of the risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you.

Factors that might cause or contribute to such differences include, but are not limited to, those contained in Item 1A.

These risks and uncertainties include, but are not limited to, those factors described under Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC.

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

Company Background and Overview

In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect.

The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.

Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise.

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 industry participants, HF Foods Group Inc.

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 the Great Wall Group, a seafood supplier, resulting in the addition of three distribution centers, located in Illinois and Texas (the “Great Wall Acquisition”).

Subsequent to March 31, 2022, on April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc.

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 7 - Acquisitions for additional information regarding recent acquisitions.

Capitalizing on our institutional understanding of the Chinese culture, our over 1,000 employees and subcontractors and our support from two outsourced call centers in China, we serve over 15,000 Asian restaurants in 46 states with 18 distribution centers strategically located throughout the nation, providing round-the-clock sales and service support to customers who mainly converse in Mandarin or other Chinese dialects.

See Note 6 - Acquisitions to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.

We have grown our distribution network to 18 distribution centers nationwide with a fleet of over 400 refrigerated vehicles.

Capitalizing on our deep understanding of the Chinese culture, we have become a trusted partner serving Asian and Chinese restaurants and other foodservice customers throughout the United States, 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.

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.

Financial Overview

Our net revenue for the three months ended March 31, 2022 was $278.2 million, an increase of $118.8 million, or 74.6%, from $159.4 million for the three months ended March 31, 2021.

Net income attributable to our shareholders for the three months ended March 31, 2022 was $3.1 million, compared to net income attributable to our shareholders of $1.4 million for the three months ended March 31, 2021.

Adjusted EBITDA for the three months ended March 31, 2022 was $17.9 million, an increase of $11.4 million, or 175.4%, from $6.5 million for the three months ended March 31, 2021.

For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below.

COVID-19 Impact

The devastating impact of the COVID-19 pandemic seen in 2020 has generally subsided.

Our net revenue for the fiscal year ended December 31, 2021 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 flows on a weekly basis and do not have immediate liquidity concerns.

We remain optimistic with regards to the long-term prospects for our business although the extent to which the COVID-19 pandemic will impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among other factors.

How to Assess HF Group’s Performance

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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, income taxes, and depreciation and amortization.

We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our condensed 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.

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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;

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• 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 table entitled “EBITDA and Adjusted EBITDA” below.

Results of Operations for the Three Months Ended March 31, 2022 and 2021

For additional information on EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2023 and 2022 .

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Distribution, selling and administrative expenses 52,929 40,408 12,521 31.0%

Income from operations 10,319 1,339 8,980 670.6 %

(Loss) income from operations (2,757) 10,319 (13,076) (126.7)%

Interest expense 2,868 1,278 1,590 124.4%

Other income, net (776) (436) (340) 78.0 %

Other income (228) (776) 548 (70.6)%

Change in fair value of interest rate swap contracts 2,746 (358) 3,104 (867.0)%

Lease guarantee expense 5,931 — 5,931 NM

Income before income tax provision 4,244 2,304 1,940 84.2 %

Income tax provision 1,104 646 458 70.9 %

Net income 3,140 1,658 1,482 89.4 %

Lease guarantee expense (120) 5,931 (6,051) (102.0)%

(Loss) income before income tax provision (8,023) 4,244 (12,267) (289.0)%

Income (benefit) tax provision (2,226) 1,104 (3,330) (301.6)%

Net (loss) income and comprehensive (loss) income (5,797) 3,140 (8,937) (284.6)%

net income attributable to noncontrolling interests 136 26 110 423.1%

Net income attributable to HF Foods Group Inc.

$ 3,114 $ 1,358 $ 1,756 129.3 %

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

$ (5,933) $ 3,114 $ (9,047) (290.5)%

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The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

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Distribution, selling and administrative expenses 18.0 % 14.5 %

Income from operations 3.7 % 0.9 %

Income (loss) from operations (0.9) % 3.7 %

Interest expense 1.0 % 0.5 %

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Lease guarantee expense — % 2.1 %

Income before income tax provision 1.5 % 1.5 %

Income tax provision 0.4 % 0.4 %

Net income 1.1 % 1.1 %

(Loss) income before income tax provision (2.7) % 1.5 %

Income tax (benefit) provision (0.8) % 0.4 %

Net (loss) income and comprehensive (loss) income (1.9) % 1.1 %

net income attributable to noncontrolling interests 0.1 % — %

Net income attributable to HF Foods Group Inc.

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

(2.0) % 1.1 %

Net revenue for the three months ended March 31, 2023 increased by $15.6 million or 6% compared to the same period in 2022.

The increase was primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to the Great Wall Acquisition and overall product cost inflation.

The Great Wall Acquisition, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed $47.9 million and organic growth contributed the remaining $70.9 million.

Gross profit for the three months ended March 31, 2022 increased by $21.3 million or 72.4%, compared to the same period in 2021 mainly due to strong revenue growth and the Great Wall Acquisition, which contributed $6.1 million of gross profit for the three months ended March 31, 2022.

Overall gross margin decreased from 18.5% in the three months ended March 31, 2021 to 18.2% in the three months ended March 31, 2022, primarily due to the expected lower gross margin on our increased Seafood sales, offset by increased gross margin due to organic growth.

This increase was attributable to the additional Seafood revenue generated due to the Sealand Acquisition and product cost inflation, partially offset by a decrease in Meat and Poultry revenue compared to the same period in 2022.

Gross profit was $50.2 million for three months ended March 31, 2023 compared to $50.7 million in the same period in 2022 , a decrease of $0.6 million, or 1% .

The decrease was primarily attributable to a decrease in Meat and Poultry revenue, partially offset by the additional Seafood revenue generated due to the Sealand Acquisition.

Gross profit margin for three months ended March 31, 2023 decreased from 18.2% in 2022 to 17.1% for the same period in 2023.

The decrease was primarily attributable to the shift in product mix to higher Seafood sales, timing of inventory purchases, increases in key commodity pricing and a higher than normal gross profit margin in the prior year due to our sales recovery to above pre-COVID-19 pandemic levels during the three months ended March 31, 2022.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the three months ended March 31, 2022 increased by $12.3 million, or 43.9%, to $40.4 million compared to $28.1 million for the three months ended March 31, 2021.

Of the distribution, selling and administrative expenses increase, $9.9 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to the Great Wall Acquisition, as more workers were, and will continue to be, required to handle the increasing sales demand and $1.1 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 17.6% in 2021 to 14.5% in 2022 primarily due to strong revenue growth and fixed cost leverage.

Distribution, selling and administrative expenses increased by $12.5 million, or 31%, primarily due to an increase of $2.8 million in payroll and related labor costs, inclusive of the additional costs due to the Sealand Acquisition, increased professional fees of $4.2 million, from $2.9 million for the three months ended March 31, 2022 to $7.1 million for the three months ended March 31, 2023, primarily driven by legal costs and increased compliance costs as a result of the SEC and Special Investigation Committee investigations, as well as a $0.8 million increase in sales-related costs driven primarily by the Sealand Acquisition.

Distribution, selling and administrative expenses as a percentage of net revenue increased to 18.0% for the three months ended March 31, 2023 from 14.5% in the same period in 2022 primarily due to higher professional fees and increased headcount.

Interest Expense

Interest expense for the three months ended March 31, 2022 increased by $0.4 million, or 41.7%, compared to the same period in 2021 mainly due to higher utilization of the line of credit.

Our average daily line of credit balance increased by $48.2 million, or 300.0%, to $64.3 million for the three months ended March 31, 2022 from $16.1 million for three months ended March 31, 2021.

Income Tax Provision

Our provision for income taxes increased by $0.5 million, or 70.9%, from $0.6 million for the three months ended March 31, 2021 to $1.1 million for the three months ended March 31, 2022 mainly due to increasing income before tax, resulting from business expansion and our improved profitability.

Net Income Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $3.1 million for the three months ended March 31, 2022, compared to $1.4 million for the three months ended March 31, 2021.

The year over year change in net income attributable to HF Foods Group Inc.

increased $1.8 million, or approximately 129.3% compared to the three months ended March 31, 2021.

The strong upward-trend is attributable to increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently, partially offset by a one-time lease guarantee expense of $5.9 million (see Note 15 - Commitments and Contingencies for additional information).

Interest expense for the three months ended March 31, 2023 increased by $1.6 million or 124% , compared to the three months ended March 31, 2022, primarily due to the increase of $46.0 million to our JPMorgan Chase mortgage-secured term loan on March 31, 2022 coupled with a sharply higher interest-rate environment.

Our average daily line of credit balance decreased by $19.4 million, or 31% , to $42.6 million for the three months ended March 31, 2023 from $62.0 million for the three months ended March 31, 2022, and our average daily JPMorgan Chase mortgage-secured term loan balance increased by $41.2 million, or 59% , to $110.5 million for the three months ended March 31, 2023 from $69.3 million for the three months ended March 31, 2022.

Average floating interest rates for the three months ended March 31, 2023 increased by approximately 4.41% on the line of credit and 4.41% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2022, which further contributed to higher interest expense.

Income Tax (Benefit) Provision

Income tax (benefit) provision was an income tax benefit of $2.2 million for the three months ended March 31, 2023 , compared to income tax provision of $1.1 million for the three months ended March 31, 2022, primarily due to decreased income before taxes.

Net (Loss) Income Attributable to HF Foods Group Inc.

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

was a net loss of $5.9 million for the three months ended March 31, 2023 , compared to net income of $3.1 million for the three months ended March 31, 2022.

The decrease of $9.0 million, or 291% , is primarily due to the increased distribution, selling, and administrative costs and interest expense described above as well as the year-over-year change in fair value of interest rate swap contracts of $3.1 million.

EBITDA and Adjusted EBITDA

The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:

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

Three Months Ended March 31, Change

(In thousands) 2023 2022 Amount %

Net income $ 3,140 $ 1,658 $ 1,482 89.4 %

Net (loss) income $ (5,797) $ 3,140 $ (8,937) (284.6)%

Interest expense 2,868 1,278 1,590 124.4%

Income tax provision 1,104 646 458 70.9 %

Income tax (benefit) provision (2,226) 1,104 (3,330) (301.6)%

Depreciation and amortization 6,689 5,779 910 15.7%

EBITDA 1,534 11,301 (9,767) (86.4)%

Lease guarantee expense 5,931 — 5,931 NM

Change in fair value of interest rate swap contracts (358) (1,431) 1,073 (75.0) %

Stock-based compensation expense 290 — 290 NM

Lease guarantee expense (120) 5,931 (6,051) (102.0)%

Change in fair value of interest rate swap contracts 2,746 (358) 3,104 NM

Stock-based compensation expense 1,096 290 806 277.9%

Acquisition and integration costs — 749 (749) NM

Adjusted EBITDA $ 5,256 $ 17,913 $ (12,657) (70.7)%

Adjusted EBITDA margin 6.4 % 4.1 %

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Adjusted EBITDA was $17.9 million for the three months ended March 31, 2022, an increase of $11.4 million, or 175.4%, compared to $6.5 million for the three months ended March 31, 2021.

The $11.4 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels and an improvement of distribution, selling and administrative expenses from 17.6% of net revenue in 2021 to 14.5% in 2022.

Adjusted EBITDA was $5.3 million for the three months ended March 31, 2023, a decrease of $12.7 million or 71% , compared to $17.9 million for the three months ended March 31, 2022.

The decrease in Adjusted EBITDA was attributable to the lower gross profit and higher distribution, selling and administrative costs as described above.

Liquidity and Capital Resources

As of March 31, 2023, we had cash of approximately $17.5 million, checks issued not presented for payment of $14.1 million and access to approximately $55.5 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 our line of credit.

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 and debt obligations for at least the next twelve months.

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 taken into consideration historical experience, general economic trends in the United States, and trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of March 31, 2022.

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

Morgan extending our line of credit for 5 years.

The amendment provides 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.

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 related to the timing of our filing of our 2021 audited financial statements.

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.

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 March 31, 2023.

On March 15, 2023, we entered into an amortizing IRS contract with J.P.

Morgan Chase Bank for an initial notional amount of $120.0 million, effective from March 1, 2023 and expiring on March 2028, as a means to partially hedge its existing floating rate loans exposure.

Pursuant to the agreement, we will pay the swap counterparty a fixed rate of 4.11% in exchange for floating payments based on CME Term SOFR.

Subsequent to March 31, 2023, effective as of April 20, 2023, we and certain parties to the Delaware Action reached an agreement to settle the Delaware Action on the terms and conditions set forth in a binding term sheet (the “Binding Term Sheet”), which was incorporated into a long-form settlement agreement on May 5, 2023 and filed with the Court of Chancery on May 8, 2023.

The Binding Term Sheet provided for, among other things, the dismissal of the Delaware Action with prejudice in exchange for Zhou Min Ni, a former Chairman and Chief Executive Officer of the Company, and Chan Sin Wong, a former President and Chief Operating Officer of the Company, making a payment to the Company in the sum of $9.25 million.

The full terms of the settlement of the Delaware Action were incorporated into the long-form settlement agreement, which is subject to approval of the Court of Chancery.

Please refer to Note 14 - Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.

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, 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 March 31, 2023, 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 three months ended March 31, 2022 and 2021:

The following table summarizes cash flow data for the years ended March 31, 2023 and 2022:

Three Months Ended March 31, Change

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Net cash provided by operating activities $ 12,570 $ 10,113 $ 2,457 24.3%

Net cash used in investing activities (19,932) (440) (19,492) NM

Net cash provided by (used in) financing activities 11,453 (8,889) 20,342 NM

Net increase in cash and cash equivalents $ 1,634 $ 1,674 $ (40) (2.4)%

Net cash used in investing activities (629) (19,932) 19,303 (96.8)%

Net cash (used in) provided by financing activities (18,753) 11,453 (30,206) (263.7)%

Net (decrease) increase in cash and cash equivalents $ (6,812) $ 1,634 $ (8,446) NM

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Operating Activities

Net cash provided by operating activities was $10.1 million for the three months ended March 31, 2022, compared to $11.0 million for the three months ended March 31, 2021, a decrease of $0.9 million, as a result of changes in working capital items primarily due to two factors:

(a) Our accounts receivable balance as of March 31, 2022 was significantly higher as a result of both the increased sales generated related to the Great Wall Acquisition as well as increasing sales volume, and (b) compared to March 31, 2021, our inventory level as of March 31, 2022 increased sharply as a direct result of increasing sales volume and the need for normal inventory level build up during the period, partially offset by an increase in net income of $1.5 million.

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 $2.5 million, or 24% , primarily due to lower working capital requirements for the three months ended March 31, 2023 compared to increased working capital investment as a direct result of increasing sales volume and the need for normal inventory level build up post-COVID-19 for the same period in 2022.

Investing Activities

Net cash used in investing activities increased by $19.5 million primarily due to the $17.4 million paid for the inventory acquired related to the Great Wall Acquisition and, to a lesser extent, the purchase of property and equipment for our expanding business.

Net cash used in investing activities decreased by $19.3 million, or 97% , primarily due to the inventory acquired related to the Great Wall Acquisition in the three months ended March 31, 2022.

Financing Activities

Net cash provided by financing activities was $11.5 million for the three months ended March 31, 2022, compared to net cash used in financing activities of $8.9 million for the three months ended March 31, 2021, an increase of $20.3 million, primarily due to the net impact of $15.2 million on our line of credit from an increase in net repayments of $1.9 million in 2021 to net proceeds of $13.3 million in 2022 as well as the net impact of $5.1 million on our checks issued not presented for payment from net repayments of $4.4 million in 2021 to net proceeds of $0.7 million in 2022.

Net cash used in financing activities increased by $30.2 million, or 264% , primarily due to the net impact of our line of credit from net proceeds of $13.3 million for the three months ended March 31, 2022 to a net repayment of $8.6 million for the three months ended March 31, 2023, as well as the net impact of $7.6 million on our checks issued not presented for payment from net proceeds of $0.7 million for the three months ended March 31, 2022 to net repayments of $7.6 million for the three months ended March 31, 2023.

Critical Accounting Policies and Estimates

We have prepared the financial information in this Quarterly Report in accordance with GAAP.

Preparing our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods.

Preparing our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods.

We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances.

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Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results.

There have been

no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months ended March 31, 2022.

There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months ended March 31, 2023.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Recent Accounting Pronouncements in Note 2 - Summary of Significant Accounting Policies, in our unaudited condensed consolidated financial statements.

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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis