Item 2. Management’s Discussion and Analysis
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of HF Foods Group Inc.
This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties. See “ Cautionary Note About Forward-Looking Statements” for additional cautionary information.
Company Background and Overview
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 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 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.
COVID-19 Impact
In March 2020, due to the COVID-19 outbreak, almost all states across the country had issued some form of stay-at-home orders. As such, the operations of our restaurant customers were severely disrupted due to the “cliff-like” decline in consumer demand for food away from home. 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 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 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; and
• 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'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
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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 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. The fragmented nature of the Asian/Chinese food service industry and the current environment create opportunities for a company like HF Group, which has the necessary expertise and deep understanding of our unique customer base. We believe we are differentiated from our competitors given our extensive footprint, strong vendor and customer relationships, and value-added service offerings, all of which have allowed and will continue to allow us to better serve our customers in these unprecedented conditions.
How to Assess HF Group’s Performance
In assessing our performance, the Company considers a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, EBITDA and adjusted EBITDA. The key measures that the Company uses to evaluate the performance of our business are set forth below:
Net Revenue
Net revenue is equal to gross sales minus sales returns, sales incentives that the Company offers to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net sales are 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 sales minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, custom clearance fees and other miscellaneous expenses. Cost of revenue generally changes as the Company incurs higher or lower costs from suppliers, as the customer and product mix changes, and as impact of inflation affects overall business.
Distribution, Selling and Administrative Expenses (DSA Expenses)
Distribution, selling and administrative expenses consist primarily of salaries and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.
EBITDA and Adjusted EBITDA
The Company uses EBITDA to measure operating performance, defined as net income before interest expense, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non recurring income or expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, extraordinary charges, and other non-cash charges and more reflective of other factors that affect our operating performance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. The Company presents EBITDA and Adjusted EBITDA in order to provide supplemental information that the Company considers relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede U.S. GAAP measures.
The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under U.S. GAAP and is subject to important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of HF Group’s results as reported under U.S. GAAP. For example, Adjusted EBITDA:
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• excludes certain tax payments that may represent a reduction in cash available to the Company;
• 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 “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 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 June 30, Changes
2021 2020 Amount %
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 %
Distribution, selling and administrative expenses 29,903,759 25,092,568 4,811,191 19.2 %
Income (loss) from operations 5,230,545 (4,479,784) 9,710,329 216.8 %
Interest income — 132 (132) 100.0 %
Interest expenses (709,342) (324,319) (385,023) (118.7) %
Other income, net 473,190 264,730 208,460 78.7 %
Change in fair value of interest rate swap contracts (112,256) (1,264,254) 1,151,998 91.1 %
Income (loss) before income tax provision 4,882,137 (5,803,495) 10,685,632 184.1 %
Provision (benefit) for income taxes 1,377,098 (1,489,305) 2,866,403 192.5 %
Net income (loss) 3,505,039 (4,314,190) 7,819,229 181.2 %
Less: 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
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 %
Net revenue
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 %
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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) %
Wholesale
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) %
Total sales
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)
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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
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:
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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 %
Less: 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. $ 5,119,528 $ (343,942,845) $ 349,062,373 101.5 %
Net Revenue
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Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and wholesale sales to smaller distributors.
The following table sets forth the breakdown of net revenue:
For the Six Months Ended June 30,
2021 2020 Changes
Amount % Amount % Amount %
Net revenue
Sales to independent restaurants $ 340,557,245 96.5 % $ 265,892,978 94.8 % $ 74,664,267 28.1 %
Wholesale 12,370,819 3.5 % 14,470,454 5.2 % (2,099,635) (14.5) %
Total $ 352,928,064 100.0 % $ 280,363,432 100.0 % $ 72,564,632 25.9 %
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.
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. These larger purchases can improve overall bargaining power with suppliers by increasing total order quantity. 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 six months ended June 30, Changes
2021 2020 Amount %
Sales to independent restaurants
Net revenue $ 340,557,245 $ 265,892,978 $ 74,664,267 28.1 %
Cost of revenue 276,225,791 217,144,426 59,081,365 27.2 %
Gross profit $ 64,331,454 $ 48,748,552 $ 15,582,902 32.0 %
Gross Margin 18.9 % 18.3 % 0.6 %
Wholesale
Net revenue $ 12,370,819 $ 14,470,454 $ (2,099,635) (14.5) %
Cost of revenue 12,138,378 13,631,177 (1,492,799) (11.0) %
Gross profit $ 232,441 $ 839,277 $ (606,836) (72.3) %
Gross Margin 1.9 % 5.8 % (3.9) %
Total sales
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 %
Gross Margin 18.3 % 17.7 % 0.6 %
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.
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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. 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 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 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 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
Other income consists primarily of non-operating income and rental income. 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 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 $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 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
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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
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 Six Months Ended June 30, Changes
2021 2020 Amount %
Net income (loss) $ 5,328,238 $ (344,000,722) $ 349,328,960 101.5 %
Interest expense 1,451,483 2,275,888 (824,405) (36.2) %
Income tax provision (benefit) 1,984,305 (1,971,516) 3,955,821 200.6 %
Depreciation & Amortization 8,557,554 8,710,012 (152,458) (1.8) %
EBITDA 17,321,580 (334,986,338) 352,307,918 (105.2) %
Goodwill impairment loss — 338,191,407 (338,191,407) 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 %
Non-recurring expenses* 4,970,477 1,405,671 3,564,806 253.6 %
Adjusted EBITDA $ 20,795,171 $ 7,761,775 $ 13,033,396 167.9 %
Percentage of revenue 5.9 % 2.8 % 3.1 % 112.8 %
* 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 $338.2 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.
Liquidity and Capital Resources
On January 17, 2020, the Company entered into the Second Amended Credit Agreement by and among JP Morgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured Term Loans of $75.6 million.
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.
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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 June 30, 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 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 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.
We, however, make no assurance that we will be able to raise any additional capital in the future on satisfactory terms or at all. Our continued access to sources of liquidity depends on multiple factors, including economic conditions, the condition of financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings. In addition, the effect of COVID-19 on the capital markets could significantly impact our cost of borrowing and the availability of capital to us.
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,
2021 2020
Net cash provided by operating activities $ 13,270,460 $ 32,417,651
Net cash used in investing activities (5,594,900) (94,123,153)
Net cash provided by (used in) financing activities (3,830,621) 55,732,235
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 $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 $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 cash paid for the purchase of noncontrolling interest of $5.0 million in 2021.
Financing Activities
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.
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Commitments and Contractual Obligations
The following table presents the Company’s material contractual obligations as of June 30, 2021:
Contractual Obligations Total Less than 1
year 1-3 years 3-5 years More than 5
years
Line of credit $ 19,111,822 $ — $ 19,111,822 $ — $ —
Long-term debt 90,946,565 5,804,100 9,334,933 8,101,945 67,705,587
Promissory note payable - related party 5,500,000 — — — 5,500,000
Finance lease obligations 1,029,992 336,501 596,995 96,496 —
Operating lease obligations 22,291,554 1,011,964 2,103,662 1,779,573 17,396,355
Total $ 138,879,933 $ 7,152,565 $ 31,147,412 $ 9,978,014 $ 90,601,942
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in accordance with U.S. GAAP. Preparing the Company's 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. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. 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 six month period ended June 30, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.