What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-09 · 97 added, 137 removed, 184 unchanged (56% of the section changed)

6 unchanged sentences

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.

Our net revenue for the nine months ended September 30, 2021 was $568.5 million, an increase of $148.2 million, or 35.3%, from $420.3 million for the nine months ended September 30, 2020.

Net income attributable to stockholders for the nine months ended September 30, 2021 was $13.0 million, a sharp turnaround compared to net loss of $344.6 million attributable to stockholders for the nine months ended September 30, 2020.

The net loss in the prior comparative period 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 nine months ended September 30, 2021 was $38.2 million, an increase of $24.5 million, or 177.9%, from $13.7 million for the nine months ended September 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 impact of COVID-19 pandemic had an inimical effect on our business, financial condition and operational results in 2020.

All states across the country had issued some form of stay-at-home orders, shutdowns, voluntary containment measures, and social distancing .

The operations of our restaurant customers were severely disrupted too, 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;

• 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

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 a result, there was a significant decline in net sales beginning from the last two weeks of March 2020 through September 2020, negatively impacting our overall financial results in 2020, albeit quarter-on-quarter recovery in sales since third quarter of 2020.

The devastating impact of COVID-19 seen in 2020 has generally subsided, especially since the widespread vaccination effort by most local governments which began in March 2021.

The Company's net sales recovered to about 94% of pre-COVID business volume (based on proforma net revenue for the same period in 2019) in the second quarter of 2021 and had surpassed the pre-COVID level to approximately 105% as of the quarter ended September 30, 2021.

Based on current sales volumes and adjusted cost structures, the company continues to generate 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 restaurant customers' business operations.

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.

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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.

Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.

EBITDA and Adjusted EBITDA

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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 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.

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

The following table sets forth a summary of our consolidated results of operations for the three month periods ended September 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

For the Three Months Ended September 30, Changes

2021 2020 Amount %

3 unchanged sentences

Distribution, selling and administrative expenses 30,972,019 25,050,419 5,921,600 23.6 %

Income (loss) from operations 5,230,545 (4,479,784) 9,710,329 216.8 %

Income from operations 10,939,949 112,439 10,827,510 9,629.7 %

Interest income — 133 (133) 100.0 %

5 unchanged sentences

Net income (loss) 8,209,112 (396,939) 8,606,051 2,168.1 %

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

net income attributable to non-controlling interests 357,345 226,865 130,480 57.5 %

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

$ 7,851,767 $ (623,804) $ 8,475,571 1,358.7 %

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 bulk of net revenue was derived from sales to independent restaurants being the integral part of our business operations, and marginally supplemented by non-core wholesale operations to other smaller distributors.

The revenue split has remained somewhat consistent, regardless of the impact of COVID-19.

The following table sets forth the breakdown of net revenue:

For the Three Months Ended June 30,

For the Three Months Ended September 30,

2021 2020 Changes

3 unchanged sentences

Total $ 215,542,049 100.0 % $ 139,918,942 100.0 % $ 75,623,107 54.0 %

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

Sales to independent restaurants for the three months ended September 30, 2021 increased by approximately 55% compared to same period last year.

This was primarily due to the easing of COVID related restrictions in 2021 that resulted in the return of more dine-in business and a return to normalcy in overall foot traffic to restaurants.

Wholesale operations as a supplemental business registered a growth of about 39% for the three months ended September 30, 2021 as compared to same period last year.

As a result, overall net revenue for the quarter ended September 30, 2021 improved by about $75.6 million or 54% from the comparative period ended September 30, 2020.

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

Three Months Ended September 30, Changes

2021 2020 Amount %

12 unchanged sentences

Gross Margin 19.4 % 18.0 % 1.4 % 7.8 %

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.

Gross profit for the quarter increased by about $16.8 million, or 66.6%, compared to the same period last year, out-pacing net revenue growth of 54.0%.

Overall gross margin improved from 18.0% in the quarter ended September 30, 2020 to 19.4% for the quarter ended September 30, 2021.

The 1.4% incremental margin represented an improvement of about 7.8%, comparatively, and was mainly attributable to better management in procurement and sales operations during an inflationary environment experienced across the industry.

The continuing inflationary impact on newer sourced product cost was also reflected in the increase in cost of revenue.

Gross margin for wholesale customers also increased sharply by 113.8%, further adding to the overall increase in gross 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.

DSA Expenses for the three months ended September 30, 2021 increased by $5.9 million, or 23.6%, significantly below net revenue growth of 54.0% due to better cost control measures and improved operational efficiency.

Of the DSA Expenses increase, 69.2% ($4.1 million) came from payroll and related labor costs, as more workers were (and are) needed to deal with the increasing sales demand, and 17.7% ($1.0 million) was in freight/fuel/diesel costs, which collectively made up the bulk (86.9%) of the increase.

The additional increase ($0.8 million) was the result of other expenses, in line with increasing sales volume.

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.

Interest expenses were $0.7 million for the three months ended September 30, 2021, a decrease of $0.1 million, or about 16.3%, compared with $0.8 million for the three months ended September 30, 2020, due to an overall reduction in Revolving Facility utilization and ongoing principal repayments of Long-Term Debt and Promissory Notes.

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.

Provision for income taxes increased by $2.7 million, or 3,359.7%, from a tax benefit of $0.1 million for the three months ended September 30, 2020 to a tax provision of $2.6 million for the three months ended September 30, 2021, as a result of the increase in income before income tax provision, as compared with a significant loss in the same period of 2020.

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.

As a result of all analysis above, net income attributable to our stockholders was $7.9 million for the three months ended September 30, 2021, and net loss attributable to our stockholders was $0.6 million for the three months ended September 30, 2020.

EBITDA and Adjusted EBITDA

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GAAP measure:

For the Three months ended June 30, Changes

Three Months Ended September 30, Changes

2021 2020 Amount %

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Percentage of revenue 8.1 % 4.3 % 3.8 % 88.8 %

* 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.

* For the three months ended September 30, 2021, non-recurring expenses consisted of $1.6 million for legal fees related to the defense of class action lawsuits and SEC investigation stemming from the lawsuits (see Note 17 to our financial statements for additional information.)

Adjusted EBITDA was $17.4 million for the three months ended September 30, 2021, an increase of $11.4 million, or 190.9%, compared to $6.0 million for the three months ended September 30, 2020, resulting primarily from the $8.6 million increase in net income.

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

Results of Operations for the Nine Months Ended September 30, 2021 and 2020

The following table sets forth a summary of our consolidated results of operations for the nine months ended September 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

For the Nine Months Ended September 30, Changes

2021 2020 Amount %

3 unchanged sentences

Distribution, selling and administrative expenses 89,003,273 79,549,580 9,453,693 11.9 %

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

Income (loss) from operations 17,472,590 (342,990,300) 360,462,890 105.1 %

1 unchanged sentence

Interest expenses (2,155,328) (3,116,739) 961,411 30.8 %

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

Other income, net 1,470,887 940,832 530,055 56.3 %

6 unchanged sentences

$ 12,971,295 $ (344,566,649) $ 357,537,944 103.8 %

Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and wholesale sales to smaller distributors.

The revenue split has remained somewhat consistent, regardless of the impact of COVID-19.

The following table sets forth the breakdown of net revenue:

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

2021 2020 Changes

3 unchanged sentences

Total $ 568,470,113 100.0 % $ 420,282,374 100.0 % $ 148,187,739 35.3 %

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.

Sales to independent restaurants for the nine months ended September 30, 2021 increased by approximately 37.0% compared to same period last year.

This was primarily due to the easing of COVID related restrictions in 2021 that resulted in the return of more dine-in business and a return to normalcy in overall foot traffic to restaurants.

Wholesale operations as a supplemental business, on the other hand, remained constant for the nine months ended September 30, 2021 as compared to same period last year.

As a result, overall net revenue for the nine months ended September 30, 2021 improved by about $148.2 million, or 35.3%, from the comparative period ended September 30, 2020.

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

Nine Months Ended September 30,

2021 2020 Amount %

12 unchanged sentences

Gross Margin 18.7 % 17.8 % 0.9 % 5.1 %

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.

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.

Gross profit for the nine months ended September 30, 2021 increased by about $31.7 million, or 42.4%, compared to the same period last year, out-pacing net revenue growth of 35.3%.

Overall gross margin improved from 17.8% in the nine months ended September 30, 2020 to 18.7% in the nine months ended September 30, 2021.

The 0.9% incremental margin represented an improvement of about 5.1% comparatively, and was mainly attributable to better management in procurement and sales operations during an inflationary environment experienced across the industry.

The continuing inflationary impact on newer sourced product cost was also reflected in the increase in cost of revenue.

Gross margin for wholesale customers remained constant compared to the same period last year.

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.

DSA Expenses for the nine months ended September 30, 2021 increased by $9.5 million, or 11.9%, significantly below net revenue growth of 35.3% due to better cost control measures and improved operational efficiency.

Of the DSA Expenses increase, 43.2.% ($4.1 million) came from payroll and related labor costs, as more workers were (and are) needed to deal with the increasing sales demand and 36.8% ($3.5 million) was in non-recurring legal expenses connected to the ongoing internal and SEC investigation.

The additional 20.0% ($1.9 million) was the result of other expenses, in line with the increasing sales volume.

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 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.

Goodwill impairment loss for the nine months ended September 30, 2021 decreased by $338.2 million or 100% due to the Company recording an impairment in the first quarter of 2020.

There was no impairment indicators identified for the nine months ended September 30, 2021.

Interest Expense

Interest expenses decreased $1.0 million, or about 30.8%, due to lower utilization of the line of credit and a decrease in actual interest due to the floating rate nature of some of our credit facilities.

The Company's floating rate debt decreased $6.3 million (5.8%) from $107.2 million as of September 30, 2020 to $100.9 million as of September 30, 2021.

Average floating interest rates for the nine month period ended September 30 also decreased by approximately 0.65% from 2020 to 2021, hence further contributing to lower interest expense in this period.

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.

Provision for income taxes increased by $6.7 million, or 325.2%, from a tax benefit of $2.1 million for the nine months ended September 30, 2020 to a tax provision of $4.6 million for the nine months ended September 30, 2021, as a result of the increase in income before income tax provision.

Net Income (Loss) Attributable to Our Stockholders

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.

As a result of all analysis above, net income attributable to our stockholders was $13.0 million for the nine months ended September 30, 2021, versus a net loss attributable to our stockholders of $344.6 million for the nine months ended September 30, 2020.

Excluding the goodwill impairment charge in 2020, year over year change in net income increased $19.3 million, or approximately 304% as compared to effective net loss of $6.3 million in 2020.

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

EBITDA and Adjusted EBITDA

1 unchanged sentence

GAAP measure:

For the Six Months Ended June 30, Changes

Nine Months Ended September 30,

2021 2020 Amount %

11 unchanged sentences

Percentage of revenue 6.7 % 3.3 % 3.4 % 105.5 %

* 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.

* For the nine months ended September 30, 2021, non-recurring expenses comprised of $6.6 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 $38.2 million for the nine months ended September 30, 2021, an increase of $24.5 million, or 177.9%, compared to $13.7 million for the nine months ended September 30, 2020.

The $24.5 million increase in Adjusted EBITDA is directly related to the of net income improvement of $19.7 million, as well as a $6.7 million swing in income tax provision.

Liquidity and Capital Resources

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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 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.

As of September 30, 2021, we had cash of approximately $15.5 million and access to approximately $77.0 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.

We have funded working capital and other capital requirements primarily by cash flow from operations and

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 June 30, 2021.

Based on current sales volume which had been increasing steadily quarter-on-quarter since third quarter of 2020, 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.

However, our ability to repay our current obligations will depend on the future realization of our current assets.

Management has considered the historical experience, the economy, the trends in the food service distribution industry to determine the expected collectability of accounts receivable and the realization of the inventories as of September 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,

However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, government intervention in respond to potential resurgence of COVID-19, competitive pricing in the food service distribution industry, and our bank and suppliers being able to provide continued support.

The Company has initiated renewal discussions with JPM and intends to renew the revolving credit facility in the next six months.

In the event that a renewal cannot be secured with JPM, Company's operations may be limited to a reduced capacity until a replacement credit facility is secured.

If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.

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

For the Nine Months Ended September 30,

Net cash provided by operating activities $ 10,158,472 $ 44,311,146

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Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and 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.

Net cash provided by operating activities decreased $34.2 million, or 77.1%, as a result of changes in working capital items due mainly to two factors:

(a) Accounts receivable balance as of September 30, 2020 was significantly lower as the business pivoted to lower sales volume on open credit terms and higher sales volume on Cash on Delivery (COD) in response to the heightened risk from the COVID-19 pandemic.

In 2021, sales increased as the COVID-19 impact began to subside, resulting in normalization of credit terms given to customers, hence a higher accounts receivable balance as of September 30, 2021 compared to September 30, 2020;

(b) Inventory level as of September 30, 2020 was significantly lower due to lower demand in 2020, while inventory level as of September 30, 2021 increased sharply as a direct result of increasing sales volume and the need for more inventory purchases during the period.

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.

Net cash used in investing activities decreased $87.8 million, or 93.2%, primarily due to a one-off payment of $94.0 million in the prior year for the acquisition of the BRGR Subsidiaries.

The decrease was offset by a $5.0 million payment for the purchase of the minority shareholder's interest in Kirnland earlier this year, as well as the purchase of property and equipment for $1.0 million.

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.

Net cash from financing activities decreased $42.3 million, or 95.0%, caused primarily by a non-recurring $75.6 million term loan obtained in the prior year to finance the acquisition of the BRGR Subsidiaries and a $2.0 million increase in repayment of notes payable - related parties.

These changes were offset by a $14.0 million decrease in repayment of bank overdraft and a $20.8 million increase in proceeds from the line of credit.

Commitments and Contractual Obligations

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

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

Contractual Obligations Total Less than 1

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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 six month period ended June 30, 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 nine month period ended September 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