What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 173 added, 110 removed, 148 unchanged (66% of the section changed)

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The Company markets and distributes Asian specialty food products, fresh produce, frozen and dry food, and non-food products to primarily Asian restaurants and other food service customers throughout the Southeast, Pacific and Mountain West regions of the United States.

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

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

On August 22, 2018, Atlantic consummated a reverse acquisition transaction resulting in the stockholders of HF Holding becoming the majority shareholders of Atlantic, and changed its name to HF Foods Group Inc.

On November 4, 2019, the Company consummated a merger transaction, resulting in B&R Global becoming a wholly owned subsidiary of HF Group.

At closing, the Company acquired 100% of the controlling interest of B&R Global, in exchange for the issuance of 30,700,000 shares of Common Stock of the Company to the B&R Global shareholders.

The aggregate fair value of the consideration paid by HF Group in the business combination was approximately $576,699,494, based on the closing share price at the date of Closing.

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

Xiao Mou Zhang, Co-CEO of the Company at the time, managed and owned an 8.91% interest in BRGR.

The total purchase price for the acquisition was $101,269,706, which was based on independent fair market value appraisals of the properties owned by the BRGR Subsidiaries.

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

As such, the acquisition of BRGR Subsidiaries would not be deemed a business combination under ASC 805 but as an asset acquisition.

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

The Company is the result of a successful merger between two complementary market leaders, HF Holding and B&R Global on November 4, 2019.

Financial Overview

Our net revenue for the three months ended March 31, 2021 was $159.4 million, a decrease of $16.4 million, or 9.3%, from $175.8 million for the three months ended March 31, 2020.

Net income attributable to HF Group’s stockholders for the three months ended March 31, 2021 was $1.5 million, an increase of $341.4 million, or 100.4%, compared to net loss attributable to HF Group’s stockholders of $339.9 million for the three months ended March 31, 2020.

The net loss in 2020 is mainly due to a significant goodwill impairment of $338.2 million taken in first quarter of 2020 (see Note 8 to our financial statements for additional information) prompted by the impact of the COVID-19 pandemic.

Adjusted EBITDA for the three months ended March 31, 2021 was $8.9 million, an increase of $4.5 million, or 104.1%, from $4.3 million for the three months ended March 31, 2020.

Our net revenue for the six months ended June 30, 2021 was $352.9 million, an increase of $72.5 million, or 25.9%, from $280.4 million for the six months ended June 30, 2020.

Net income attributable to stockholders for the six months ended June 30, 2021 was $5.1 million, an increase of $348.6 million, or 101.5%, compared to net loss of $343.9 million attributable to stockholders for the six months ended June 30, 2020.

The net loss for the six months ended June 30, 2020 was mainly due to a significant goodwill impairment of $338.2 million taken in first quarter of 2020 (see Note 7 to our financial statements for additional information) as well as sharp declines in sales prompted by the severe impact of the COVID-19 pandemic.

Adjusted EBITDA for the six months ended June 30, 2021 was $20.8 million, an increase of $13.0 million, or 167.9%, from $7.8 million for the six months ended June 30, 2020.

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

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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 sales the last two weeks of March 2020, negatively impacting our overall financial results in the first quarter ended March 31, 2020.

As a result, there was a significant decline in net sales beginning from the last two weeks of March 2020 through June 2020, negatively impacting our overall financial results in the first and second quarter ended March 31, 2020 and June 30, 2020.

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

Some of the notable actions include:

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

Pre-COVID level of revenue is the proforma revenue for the same period in 2019.

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

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

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

• securing new partnerships with other online grocery retailers.

Some of the notable actions included:

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

Pre-COVID level of revenue is based on the proforma revenue for the same period in 2019.

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

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

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

• secured new partnerships with other online grocery retailers.

The above cost cutting measures and more efficient operations ensured that the Company had positive cash flow to pay down the revolving credit line, resulting in an overall improvement of our available line of credit that has enabled the Company to navigate through this unprecedented pandemic.

In the second half of 2020, the Company saw a recovery to about 70% of pre-COVID business volume (proforma net revenue for the three months ended March 31, 2019).

The recovery further increased to 76% of pre-COVID business volume (proforma net revenue for the three months ended March 31, 2019) for the three months ended March 31, 2021.

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

In the second half of 2020, the Company's net sales recovered to about 70% of pre-COVID business volume (based on proforma net revenue for the second half of 2019).

The company's net sales continued to recover strongly in 2021 and the recovery rate further increased to approximately 93% of pre-COVID business volume (based on proforma net revenue for the three months ended June 30, 2019) for the three months ended June 30, 2021.

Based on current sales volumes and adjusted cost

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

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

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

Although we continue to face intermittent government restrictions on our customers' business operations, we believe that our current level of sales volume will increase over time as the effects of the COVID-19 pandemic slowly dissipate and consumer demand for food away from home increases.

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

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

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

Cost of revenue generally changes as the Company incurs higher or lower costs from suppliers, as the customer and product mix changes, and as impact of inflation affects overall business.

Distribution, Selling and Administrative Expenses (DSA Expenses)

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The Company uses EBITDA to measure operating performance, defined as net income before interest expense, income taxes, and depreciation and amortization.

In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non recurring expenses.

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

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

Results of Operations for the Three Months Ended March 31, 2021 and 2020

The following table sets forth a summary of our consolidated results of operations for the three month periods ended March 31, 2021 and 2020.

Results of Operations for the Three Months Ended June 30, 2021 and 2020

The following table sets forth a summary of our consolidated results of operations for the three month periods ended June 30, 2021 and 2020.

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

For the Three Months Ended March 31, Changes

For the Three Months Ended June 30, Changes

2021 2020 Amount %

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Interest expenses (709,342) (324,319) (385,023) (118.7) %

Goodwill impairment loss — (338,191,407) 338,191,407 100.0 %

Other income, net 473,190 264,730 208,460 78.7 %

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Net income (loss) 3,505,039 (4,314,190) 7,819,229 181.2 %

net income (loss) attributable to non-controlling interests (91,557) (255,287) 163,730 64.1 %

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

$ 3,596,596 $ (4,058,903) $ 7,655,499 188.6 %

Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and supplemented by a non-core wholesale operations to smaller distributors.

The following table sets forth the breakdown of net revenue:

For the Three Months Ended June 30,

2021 2020 Changes

Amount % Amount % Amount %

Sales to independent restaurants $ 187,516,460 96.9 % $ 98,620,662 94.3 % $ 88,895,798 90.1 %

Wholesale 6,029,776 3.1 % 5,939,434 5.7 % 90,342 1.5 %

Total $ 193,546,236 100.0 % $ 104,560,096 100.0 % $ 88,986,140 85.1 %

Net revenue derived from sales to independent restaurants increased by $88.9 million, or 90.1%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increase over the same period last year was primarily a result of return of business volume prompted by easing of COVID related restrictions in 2021, as opposed to the severe impact on sales caused by COVID-19 in the same period last year.

We conduct wholesale operations as a supplemental business to our core food service distribution to restaurants by purchasing full truckloads of product from suppliers and redistributing to smaller distributors.

These larger purchases generally help the Company to improve our overall bargaining power with suppliers.

Net revenue from wholesale operations for the three months ended June 30, 2021 remained relatively stable with a marginal increase of $0.1 million, or 1.5%, as compared to the same period last year.

Sales and Gross Profit

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

For the Three Months Ended June 30, Changes

2021 2020 Amount %

Sales to independent restaurants

Net revenue $ 187,516,460 $ 98,620,662 $ 88,895,798 90.1 %

Cost of revenue 152,284,008 78,415,142 73,868,866 94.2 %

Gross profit $ 35,232,452 $ 20,205,520 $ 15,026,932 74.4 %

Gross Margin 18.8 % 20.5 % (1.7) %

Net revenue $ 6,029,776 $ 5,939,434 $ 90,342 1.5 %

Cost of revenue 6,127,924 5,532,170 595,754 10.8 %

Gross profit (loss) $ (98,148) $ 407,264 $ (505,412) (124.1) %

Gross Margin (1.6) % 6.9 % (8.5) %

Net revenue $ 193,546,236 $ 104,560,096 $ 88,986,140 85.1 %

Cost of revenue 158,411,932 83,947,312 74,464,620 88.7 %

Gross profit $ 35,134,304 $ 20,612,784 $ 14,521,520 70.4 %

Gross Margin 18.2 % 19.7 % (1.5) %

Cost of revenue was $158.4 million for the three months ended June 30, 2021, an increase of $74.5 million, or 88.7%, from $83.9 million for the three months ended June 30, 2020.

The increase in cost of revenue outpaced the increase in net revenue this period due to food cost inflation experienced in 2021 in general as opposed to same period last year.

Gross profit for the three months ended June 30, 2021 was $35.1 million, an increase of $14.5 million, or 70.4%, from $20.6 million for the three months ended June 30, 2020.

The increase consisted of a $15.0 million increase in gross profit from sales to independent restaurants, offset by $0.5 million loss from sale of "soon-to-expired" inventories to some wholesale customers.

Excluding the single transaction that generated the loss from "soon-to-expire" inventories, normalized wholesale gross margin is 8.1% for the three months ended June 30, 2021.

Gross margin decreased from 19.7% for the three months ended June 30, 2020 to 18.2% (18.5% normalized for the $0.5 million decrease in gross margin from sale of "soon-to-expire" inventories) for the three months ended June 30, 2021, attributable mainly to higher food cost of about 12% experienced in 2021 in general which were not fully passed on to customers.

In addition, gross margin mix is also affected by gradual recovery in lower margin sales to the buffet restaurants that were practically non-existent in the same period last year during the peak of the COVID-19 pandemic closures, a segment of our customers on the West Coast region which typically have higher sales volume but at lower margin.

Distribution, Selling and Administrative Expenses (DSA Expenses)

DSA Expenses were $29.9 million and $25.1 million for the three months ended June 30, 2021 and 2020, respectively, representing a $4.8 million, or 19.2%, increase despite an increase in sales of 85.1% in the same comparative period.

The increase is comprised of 1) $0.5 million (11% of the total increase) from legal cost arising from the legal defense of class action lawsuits and related internal investigations, 2) Salaries and wages increased by $2.3 million (47% of total increase) due to revenue growth, 3) Truck and fuel costs increased by $1.4 million (29% of total increase) again due to revenue growth, and 4) Equipment repairs and rentals in addition to other expenses increased by $0.6 million (13% of total increase) in operational support of sales growth.

Interest Expense

Interest expenses were $0.7 million for the three months ended June 30, 2021, an increase of $0.4 million, or about 118.7%, compared with $0.3 million for the three months ended June 30, 2020.

However, interest expense of $0.3 million for the three months ended June 30, 2020 was skewed by a reclassification (reduction) of $0.7 million of unrealized mark-to-market (MTM) derivative loss previously captured under interest expense in prior quarter.

Normalized interest expense for the three months ended June 30, 2020 would have been $1.0 million, resulting in an effective $0.3 million decrease for the three months ended June 30, 2021 compared to three months ended June 30, 2020.

The effective decrease in interest expense was attributed to lower utilization of the line of credit and decrease in floating interest rate tie to our credit facilities.

The Company's floating rate debt decreased by $16.6 million (15.3%) from $108.5 million as of June 30, 2020 to $91.9 million as of June 30, 2021.

Correspondingly, the average floating interest rates for the 3 months period ended June 30 also decreased by approximately 0.4% from 2020 to 2021, hence resulting in effective net decrease of about 30%.

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

Other income was $0.5 million for the three months ended June 30, 2021 and $0.3 million June 30, 2020.

Change in Fair Value of Interest Rate Swap Contracts

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

See Note 8 to our financial statements for additional information.

Income Tax Provision (Benefit)

Provision for income taxes increased by $2.9 million, or 192.5%, from a tax benefit of $1.5 million for the three months ended June 30, 2020 to a tax provision of $1.4 million for the three months ended June 30, 2021, as a result of the increase in income before income tax provision, comparing with a significant loss in the same period of 2020.

Net Income Attributable to Noncontrolling interests

Net income attributable to noncontrolling interests was derived from three subsidiaries with minority ownership outside the Company and decreased by $0.2 million, or 64.1%, from net loss of $0.3 million for the three months ended June 30, 2020 to a net loss of $0.1 million for the three months ended June 30, 2021.

The increase was attributed to overall increase in net income attributable to the noncontrolling from all subsidiaries.

Net Income (Loss) Attributable to Our Stockholders

As a result of all analysis above, net income attributable to our stockholders was $3.6 million for the three months ended June 30, 2021, and net loss attributable to our stockholders was $4.1 million for the three months ended June 30, 2020.

EBITDA and Adjusted EBITDA

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

GAAP measure:

For the Three months ended June 30, Changes

2021 2020 Amount %

Net income (loss) $ 3,505,039 $ (4,314,190) $ 7,819,229 181.2 %

Interest expense 709,342 324,319 385,023 118.7 %

Income tax provision (benefit) 1,377,098 (1,489,305) 2,866,403 192.5 %

Depreciation & Amortization 4,259,434 4,335,932 (76,498) (1.8) %

EBITDA 9,850,913 (1,143,244) 10,994,157 961.7 %

Unrealized change in fair value of interest rate swap contracts 112,256 1,264,254 (1,151,998) (91.1) %

COVID-19 bad debt reserve (recovery) — 1,886,781 (1,886,781) (100.0) %

Non-recurring expenses* 1,957,857 1,405,671 552,186 39.3 %

Adjusted EBITDA $ 11,921,026 $ 3,413,462 $ 8,507,564 249.2 %

Percentage of revenue 6.2 % 3.3 % 2.9 % 88.7 %

* For the three months ended June 30, 2021, non-recurring expenses comprised $2.0 million for legal fees related to the defense of class action lawsuits and an internal investigation stemming from the lawsuits (see Note 16 to our financial statements for additional information.).

Adjusted EBITDA was $11.9 million for the three months ended June 30, 2021, an increase of $8.5 million, or 249.2%, compared to $3.4 million for the three months ended June 30, 2020 resulting primarily from the $7.8 million (181.2%) increase in net income.

There was no COVID-19 bad debt reserve in the three months ended June 30, 2021.

Results of Operations for the Six Months Ended June 30, 2021 and 2020

The following table sets forth a summary of our consolidated results of operations for the six month periods ended June 30, 2021 and 2020.

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

For the Six Months Ended June 30, Changes

2021 2020 Amount %

Net revenue $ 352,928,064 $ 280,363,432 $ 72,564,632 25.9 %

Cost of revenue 288,364,169 230,775,603 57,588,566 25.0 %

Gross profit 64,563,895 49,587,829 14,976,066 30.2 %

Distribution, selling and administrative expenses 58,031,254 54,499,161 3,532,093 6.5 %

Income (loss) from operations 6,532,641 (4,911,332) 11,443,973 233.0 %

Interest income — 263 (263) (100.0) %

Interest expenses (1,451,483) (2,275,888) 824,405 (36.2) %

Goodwill impairment loss — (338,191,407) 338,191,407 (100.0) %

Other income, net 912,749 670,380 242,369 36.2 %

Change in fair value of interest rate swap contracts 1,318,636 (1,264,254) 2,582,890 204.3 %

Income (loss) before income tax provision 7,312,543 (345,972,238) 353,284,781 102.1 %

Provision (benefit) for income taxes 1,984,305 (1,971,516) 3,955,821 200.6 %

Net income (loss) 5,328,238 (344,000,722) 349,328,960 101.5 %

net income (loss) attributable to non-controlling interests 208,710 (57,877) 266,587 460.6 %

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

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The following table sets forth the breakdown of net revenue:

For the Three Months Ended March 31,

For the Six Months Ended June 30,

2021 2020 Changes

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Total $ 352,928,064 100.0 % $ 280,363,432 100.0 % $ 72,564,632 25.9 %

Net revenue derived from sales to independent restaurants decreased by $13.7 million, or 8.2%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The decrease over the same period last year was primarily a result of the continued impact of COVID-19 on the business.

Net revenue for the three months ended March 31, 2020 included two months of business volume derived prior to the outbreak of COVID-19 whereas the entire quarter ended March 31, 2021 was impacted by the pandemic.

For comparison purposes, the net revenue for the quarter ended March 31, 2020 was 84% of pre-COVID levels (proforma basis for the three months ended March 31, 2019), while the net revenue for the quarter ended March 31, 2021 was 76% of pre-COVID levels (proforma basis for the three months ended March 31, 2019).

We conduct wholesale operations as a supplemental business to our food service distribution to restaurants by purchasing full truckloads of product from suppliers and redistributing to smaller distributors who are typically not large enough to order truckload quantities, or do not want to keep inventory for long periods.

Net revenue derived from sales to independent restaurants increased by $74.7 million, or 28.1%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase over the same period last year was primarily a result of return of business volume due to easing COVID-19 restrictions in 2021, as opposed to the severe impact on sales caused by COVID-19 in the same period last year.

Net revenue for the six months ended June 30, 2020 included the first two months of business volume derived prior to the outbreak of COVID-19 whereas the remaining months till June 30, 2020 was impacted by the pandemic, however we have seen a gradual and steady recovery in 2021.

These larger purchases can improve overall bargaining power with suppliers by increasing total order quantity.

Net revenue from wholesale for the three months ended March 31, 2021 decreased by $2.7 million, or 31.7%, as compared to the three months ended March 31, 2020, mainly due to continued impact of COVID-19 on business volume.

Cost of Sales and Gross Profit

Net revenue from wholesale for the six months ended June 30, 2021 decreased by $2.1 million, or 14.5%, as compared to the six months ended June 30, 2020, mainly due to continued impact of COVID-19 and a $1.1 million special purchase in April 2020 that did not repeat in 2021.

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

For the Three months ended March 31, Changes

For the six months ended June 30, Changes

2021 2020 Amount %

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Gross Margin 18.3 % 17.7 % 0.6 %

Cost of revenue was $130.0 million for the three months ended March 31, 2021, a decrease of $16.9 million, or 11.5%, from $146.8 million for the three months ended March 31, 2020.

The decrease in cost of revenue outpaced the decrease in net revenue due to successful strategy in increasing overall gross margin.

Despite the drop in net revenue due to COVID-19 impact, gross profit for the three months ended March 31, 2021 was $29.4 million, an increase of $0.5 million, or 1.6%, from $29.0 million for the three months ended March 31, 2020.

Cost of revenue was $288.4 million for the six months ended June 30, 2021, an increase of $57.6 million, or 25.0%, from $230.8 million for the six months ended June 30, 2020.

The increase in cost of revenue is a direct result of increase in net revenue for the period.

Inflation impact on newer sourced product cost is also reflected in the increase in cost of revenue.

Gross profit for the six months ended June 30, 2021 was $64.6 million, an increase of $15.0 million, or 30.2%, from $49.6 million for the six months ended June 30, 2020.

The increase consisted of a $15.6 million increase in gross profit from sales to independent restaurants as direct result of better customer mix with higher margin, and $0.6 million decrease in gross profit from wholesale customers.

Gross margin increased from 16.5% for the three months ended March 31, 2020 to 18.5% for the three months ended March 31, 2021, attributable mainly to the Company's continuous effort to improve gross margin as evidenced by the increased weight in "Sales to independent restaurants" with higher margin rate and the significant drop in lower margin sales to the buffet restaurants still severely impacted by the outbreak of COVID-19, a segment of our customers on the West Coast region which typically have higher sales volume but at lower margin.

Normalized for the $0.5 million decrease in gross margin from sale of "soon-to-expire" inventories, wholesale gross margin is 6.6%

Gross margin increased from 17.7% for the six months ended June 30, 2020 to 18.3% (18.5% normalized for the $0.5 million decrease in gross margin from sale of "soon-to-expire" inventories) for the six months ended June 30, 2021, attributable mainly to the Company's continuous effort to improve gross margin as evidenced by the increased weight in "Sales to independent restaurants" with higher margin rate and a drop in lower margin sales to the buffet restaurants still impacted by the outbreak of COVID-19, a segment of our customers on the West Coast region which typically have higher sales volume but at lower margin.

Distribution, Selling and Administrative Expenses (DSA Expenses)

DSA Expenses were 28.1 million and 29.4 million for the three months ended March 31, 2021 and 2020, respectively, representing a $1.3 million, or 4.3%, decrease.

The decrease was attributable to a cost reduction of $4.4 million in line with decreased business volume while being offset by an increase of $3.1 million primarily stemming from legal cost related to the legal defense of class action lawsuits and internal investigations thereof.

Cost reductions consisted of (1) $1.0 million decrease in payroll expenses, (2) $1.0 million decrease in fulfillment related expense such as outbound freight, auto, fuel, and contract labor, (3) $0.7 million decrease in insurance cost as a result of program consolidation savings realization, (4) $0.3 million decrease in business development expenses such as meals, entertainment, and travel that were largely reduced due to continued COVID restrictions, (5) $0.3 million saving in customer service expense as sales volume deceased and renegotiation of new rate, (6) $0.3 million decrease in donated inventory, (7) $0.2 million decrease in bad debt, and (8) $0.1 million decrease in depreciation expense.

DSA Expenses were and $54.5 million for the six months ended June 30, 2021 and 2020, respectively, representing a $3.5 million, or 6.5%, increase despite an increase in sales of 25.9% in the same comparative period.

The increase is primarily due to an additional $3.5 million in non-recurring legal expenses connected to the ongoing internal and SEC investigation.

Interest Expense

Interest expenses primarily stemmed from utilization of line of credit, finance leases, and long-term debts.

Interest expenses were $0.7 million for the three months ended March 31, 2021, a decrease of $1.3 million, or about 62.0%, compared with $2.0 million for the three months ended March 31, 2020.

The decrease was attributable to significant reduction in utilization of the Company's line of credit and a 50% decrease in actual interest rate due to the floating rate nature of some of our credit facilities.

The Company's floating rate debt decreased $30.2 million from $120.6 million for the three months ended March 31,

2020 to $90.4 million for the same period ended March 31, 2021.

Floating interest rates decreased from 3.0%- 3.5% range for the three months ended March 31, 2020 to 1.5%-2.0% range for the same period ended March 31, 2021.

Interest expenses were $1.5 million for the six months ended June 30, 2021, a decrease of $0.8 million, or about 36.2%, compared with $2.3 million for the six months ended June 30, 2020.

The decrease in interest expense was attributed to lower utilization of the line of credit and decrease in actual interest rate due to the floating rate nature of some of our credit facilities.

The Company's floating rate debt decreased $16.6 million (15.3%) from $108.5 million as of June 30, 2020 to $91.9 million as of June 30, 2021.

Average floating interest rates for the six months period ended June 30 also decreased by approximately 0.97% from 2020 to 2021, hence further contributing to lower interest expense in this period.

Goodwill Impairment Loss

Goodwill impairment loss was $338.2 million for the three months ended March 31, 2020 and nil for the three months ended March 31, 2021.

Goodwill impairment loss was $338.2 million for the six months ended June 30, 2020 and nil for the six months ended June 30, 2021.

See Note 7 to our financial statements for additional information.

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

Other income was $0.4 million for the three months ended March 31, 2021 and 2020.

Other income was $0.9 million for the six months ended June 30, 2021 and $0.7 million for the six months ended June 30, 2020.

Change in Fair Value of Interest Rate Swap Contracts

Change in fair value of interest rate swap contracts stemmed from mark to market fair value change of four interest rate swap contracts and realized gain on the termination of JPM IRS contract.

Change in fair value of interest rate swap contracts stemmed from mark to market fair value unrealized gain of $0.6 million in three interest rate swap contracts and $0.7 million realized gain on the termination of JPM IRS contract.

See Note 8 to our financial statements for additional information.

Income Tax Provision (Benefit)

Provision for income taxes increased by $1.1 million, or 225.9%, from a tax benefit of $0.5 million for the three months ended March 31, 2020 to a tax provision of $0.6 million for the three months ended March 31, 2021, as a result of the increase in income before income tax provision.

Provision for income taxes increased by $4.0 million, or 200.6%, from a tax benefit of $2.0 million for the six months ended June 30, 2020 to a tax provision of $2.0 million for the six months ended June 30, 2021, as a result of the increase in income before income tax provision.

Net Income Attributable to Noncontrolling interests

Net income attributable to noncontrolling interests was derived from four subsidiaries with minority ownership outside the Company and increased by $0.1 million, or 52.1%, from net income of $0.2 million for the three months ended March 31, 2020 to a net income of $0.3 million for the three months ended March 31, 2021.

The increase was attributed to increase in net income attributable to noncontrolling interest from Kirnland for the three months ended March 31, 2021.

Net income attributable to non-controlling interests was derived from three subsidiaries with minority ownership outside the Company and increased by $0.3 million, or 460.6%, from net loss of $0.1 million for the six months ended June 30, 2020 to a net income of $0.2 million for the six months ended June 30, 2021.

The increase was attributed to increase in net income attributable to noncontrolling interest from Kirnland for the six months ended June 30, 2021.

Net Income (Loss) Attributable to Our Stockholders

As a result of all analysis above, net income attributable to our stockholders was $1.5 million for the three months ended March 31, 2021, and net loss attributable to our stockholders was $339.9 million for the three months ended March 31, 2020.

As a result of all analysis above, net income attributable to our stockholders was $5.1 million for the six months ended June 30, 2021, versus a net loss attributable to our stockholders of $343.9 million for the six months ended June 30, 2020.

EBITDA and Adjusted EBITDA

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GAAP measure:

For the Three months ended March 31, Changes

For the Six Months Ended June 30, Changes

2021 2020 Amount %

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Goodwill impairment loss — 338,191,407 (338,191,407) 100.0 %

Change in fair value of interest rate swap contracts (1,430,892) — (1,430,892) (100.0) %

Unrealized Change in fair value of interest rate swap contracts (601,836) 1,264,254 (1,866,090) 100.0 %

Realized gain on termination of interest rate swap contract (716,800) — (716,800) — %

COVID-19 bad debt reserve (recovery) (178,250) 1,886,781 (2,065,031) 100.0 %

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Percentage of revenue 5.9 % 2.8 % 3.1 % 112.8 %

* For the three months ended March 31, 2021, non-recurring expenses comprised of $3.0 million for legal fees related to the defense of class action lawsuits and an internal investigation stemming from the lawsuits (see Note 17 to our financial statements for additional information.).

Adjusted EBITDA was $8.9 million for the three months ended March 31, 2021, an increase of $4.5 million, or 104.1%, compared to $4.4 million for the three months ended March 31, 2020.

* For the six months ended June 30, 2021, non-recurring expenses comprised of $5.0 million for legal fees related to the defense of class action lawsuits and an internal investigation stemming from the lawsuits (see Note 16 to our financial statements for additional information.).

Adjusted EBITDA was $20.8 million for the six months ended June 30, 2021, an increase of $13.0 million, or 167.9%, compared to $7.8 million for the six months ended June 30, 2020.

Goodwill impairment loss was a one time transaction affecting 2020 but not 2021.

Excluding the $338 million of goodwill impairment loss, the increase in Adjusted EBITDA was primarily attributed to a $3.3 million improvement in net income as a result of 2% gross margin improvement, and a $3 million add back of non-recurring expenses related to the legal defense of class action lawsuits and an associated internal investigation, while being offset by a $1.4 million subtraction of change in fair value of interest rate swap contracts.

Excluding the $338.2 million of goodwill impairment loss, the increase in net income was $11.1 million which was primarily attributed to a 0.61% gross margin improvement, income tax provision increased $4.0 million as result of increased income before tax and an additional $3.5 million add back of non-recurring expenses related to the legal defense of class action lawsuits and an associated internal investigation, while being offset by a $0.6 million million subtraction of change in fair value of interest rate swap contracts and $0.7 million subtraction of realized gain on the termination of interest rate swap contract .

The special reserve for doubtful accounts receivable related to COVID-19 saw a recovery of $0.2 million due to Company's effort in collection.

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

As of March 31, 2021, we had cash of approximately $11.3 million and access to approximately $83.4 million in additional funds through our $100 million line of credit, subject to a borrowing base calculation.

The strategic cost management actions undertaken in late March 2020 resulted in an overall increase of the available line of credit over time.

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

As of June 30, 2021, we had cash of approximately $13.4 million and access to approximately $80.9 million in additional funds through our $100 million line of credit, subject to a borrowing base calculation.

The strategic cost management actions undertaken following the outbreak of COVID-19 in late March 2020 resulted in an overall increase of the available line of credit over time.

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.

Although management believes that the cash generated from operations will be sufficient to meet our normal working capital needs for at least the next twelve months, our ability to repay our current obligations will depend on the future realization of our current assets.

Management has considered the historical experience, the economy, the trends in the food service distribution industry, the expected collectability of accounts receivable and the realization of the inventories as of March 31, 2021.

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

Based on the above considerations, management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations in the next 12 months.

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

There are a number of factors that could potentially arise which might result in shortfalls to what is anticipated, such as the demand for our products, economic conditions, competitive pricing in the food service distribution industry, and our bank and suppliers being able to provide continued support.

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 related to COVID-19, competitive pricing in the food service distribution industry, and our bank and suppliers being able to provide continued support.

If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may be forced to reduce or delay our expected acquisition plan, sell assets, obtain additional debt or equity capital, or refinance all or a portion of our debt.

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

The following table sets forth cash flow data for the three months ended March 31, 2021 and 2020:

For the Three Months Ended March 31,

The following table sets forth cash flow data for the six months ended June 30, 2021 and 2020:

For the Six Months Ended June 30,

Net cash provided by operating activities $ 13,270,460 $ 32,417,651

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Net cash provided by (used in) financing activities (3,830,621) 55,732,235

Net increase (decrease) in cash and cash equivalents $ 1,672,668 $ (1,848,021)

Net increase in cash and cash equivalents $ 3,844,939 $ (5,973,267)

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 adjusted for the effect of working capital changes.

Net cash provided by operating activities was approximately $10.6 million for the three months ended March 31, 2021, a decrease of $8.0 million, or 43.3%, compared to net cash provided by operating activities of $18.6 million for the three months ended March 31, 2020.

The decrease was the result of changes in working capital items mainly resulting from decreases in accounts receivable, other current assets, other long term assets, advance from customers - related party, goodwill impairment loss and loss from derivative instrument which were offset by an increase in net income, depreciation and amortization expense, gain from disposal of equipment, inventory, advances to suppliers – related parties, deferred tax benefit, and accrued expenses.

Net cash provided by operating activities was approximately $13.3 million for the six months ended June 30, 2021, a decrease of $19.1 million, or 59.1%, compared to net cash provided by operating activities of $32.4 million for the six months ended June 30, 2020.

The decrease was the result of changes in working capital items mainly resulting from significant decreases in accounts receivable which were due to improved cash collection efforts in 2020 along with increased sales in 2021 resulting in higher accounts receivable balance as of June 30, 2021 compared to June 30, 2020.

Inventory decreased significantly due to lower inventory purchases in 2020 as a result of the pandemic while inventory increased in 2021 due to increased inventory purchases resulting in higher inventory balances as of June 30, 2021 compared to June 30, 2020.

Additionally decrease was due to decreases in other current assets, other long term assets, advance from customers - related party, goodwill impairment loss and loss from derivative instrument which were offset by an increase in net income, depreciation and amortization expense, gain from disposal of equipment, inventory, advances to suppliers – related parties, deferred tax benefit, and accrued expenses.

Investing Activities

Net cash used in investing activities was approximately $0.4 million for the three months ended March 31, 2021, a decrease of $93.7 million, or 99.5%, compared to $94.1 million net cash used in investing activities for the three months ended March 31, 2020.

Net cash used in investing activities was approximately $5.6 million for the six months ended June 30, 2021, a decrease of $88.5 million, or 94.1%, compared to $94.1 million net cash used in investing activities for the six months ended June 30, 2020.

The decrease was primarily due to payment made to acquire B&R Realty Subsidiaries of $94.1 million in prior year.

The decrease was offset by an increase in cash paid for the purchase of property and equipment of $0.3 million and offset by a decrease in cash proceeds from the disposal of equipment of $0.1 million.

The decrease was offset by cash paid for the purchase of noncontrolling interest of $5.0 million in 2021.

Financing Activities

Net cash used in financing activities was approximately $8.5 million for the three months ended March 31, 2021, a change of $82.1 million, or 111.5%, compared with $73.6 million of net cash provided by financing activities for the three months ended March 31, 2020.

The change was caused primarily by a non-recurring $75.6 million term loan proceed in prior year for the B&R Realty Acquisition, $3.7 million increase in repayment of lines of credit and $2.9 million increase in repayment of bank overdrafts,

Net cash used in financing activities was approximately $3.8 million for the six months ended June 30, 2021, a change of $59.6 million, or 106.9%, compared with $55.7 million of net cash provided by financing activities for the six months ended June 30, 2020.

The change was caused primarily by a non-recurring $75.6 million term loan proceed in prior year for the B&R Realty Acquisition and $1.5 million increase in repayment of notes payable - related parties.

These changes were offset by a $7.5 million decrease in repayment of bank overdraft and $10.1 million increase in proceeds from line of credit.

Commitments and Contractual Obligations

The following table presents the Company’s material contractual obligations as of March 31, 2021:

The following table presents the Company’s material contractual obligations as of June 30, 2021:

Contractual Obligations Total Less than 1

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Total $ 138,879,933 $ 7,152,565 $ 31,147,412 $ 9,978,014 $ 90,601,942

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

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

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

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

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

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

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

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

The Company has since determined to cease this business expansion.

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

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

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

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

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

An, and in consideration of the Company’s ongoing guaranty of AnHeart’s performance of the lease obligations, AnHeart executed a security agreement which

grants us a security interest in AnHeart assets and contains a covenant to assign the leases to HF Group if AnHeart defaults on the original lease agreements.

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

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

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

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

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

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

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

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

The Lease Amendment permits subletting of the premises.

Off-Balance Sheet Arrangements

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Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report 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 month period ended March 31, 2021.

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 six month period ended June 30, 2021.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis