HF Foods Group Inc. 10-Q

Item 1. Financial Statements. HF FOODS GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of September 30, 2021 December 31, 2020 ASSETS CURRENT ASSETS Cash $ 15,543,177 $ 9,580,853 Accounts receivable, net 34,103,832 24,857,322 Accounts receivable - related parties 954,230 1,261,463 Inventories 77,239,478 58,535,040 Advances to suppliers - related parties — 196,803 Other current assets 2,640,233 4,614,164 TOTAL CURRENT ASSETS 130,480,950 99,045,645 Property and equipment, net 141,740,117 136,869,085 Operating lease right-of-use assets 2,551,286 931,630 Long-term investments 2,443,885 2,377,164 Intangible assets, net 167,629,925 175,797,650 Goodwill 68,511,941 68,511,941 Other long-term assets 1,145,167 694,490 TOTAL ASSETS $ 514,503,271 $ 484,227,605 CURRENT LIABILITIES Bank overdraft $ 19,422,811 $ 14,839,747 Line of credit 23,020,114 18,279,062 Accounts payable 42,044,350 28,602,570 Accounts payable - related parties 2,499,872 1,572,427 Current portion of long-term debt, net 5,677,453 5,641,259 Current portion of obligations under finance leases 270,160 286,903 Current portion of obligations under operating leases 687,040 308,148 Accrued expenses and other liabilities 3,841,327 6,178,144 Obligations under interest rate swap contracts 341,165 993,516 TOTAL CURRENT LIABILITIES 97,804,292 76,701,776 Long-term debt, net of current portion 83,708,244 88,008,803 Promissory note payable - related party 5,000,000 7,000,000 Obligations under finance leases, non-current 8,448,619 766,885 Obligations under operating leases, non-current 2,010,664 623,482 Deferred tax liabilities 44,199,536 46,325,226 TOTAL LIABILITIES 241,171,355 219,426,172 SHAREHOLDERS’ EQUITY Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively — — Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 51,913,411 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively 5,191 5,191 Additional paid-in capital 583,928,639 587,579,093 Accumulated deficit ( 314,179,103 ) ( 327,150,398 ) TOTAL SHAREHOLDERS' EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 269,754,727 260,433,886 Non-controlling interests 3,577,189 4,367,547 TOTAL SHAREHOLDERS’ EQUITY 273,331,916 264,801,433 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 514,503,271 $ 484,227,605 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents HF FOODS GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Net revenue - third parties $ 213,178,708 $ 137,631,565 $ 560,630,604 $ 409,446,496 Net revenue - related parties 2,363,341 2,287,377 7,839,509 10,835,878 TOTAL NET REVENUE 215,542,049 139,918,942 568,470,113 420,282,374 Cost of revenue - third parties 171,431,310 112,535,923 453,990,363 335,202,455 Cost of revenue - related parties 2,198,771 2,220,161 8,003,887 10,329,232 TOTAL COST OF REVENUE 173,630,081 114,756,084 461,994,250 345,531,687 GROSS PROFIT 41,911,968 25,162,858 106,475,863 74,750,687 Distribution, selling and administrative expenses 30,972,019 25,050,419 89,003,273 79,549,580 Goodwill impairment loss — — — 338,191,407 TOTAL OPERATING EXPENSES 30,972,019 25,050,419 89,003,273 417,740,987 INCOME (LOSS) FROM OPERATIONS 10,939,949 112,439 17,472,590 ( 342,990,300 ) Other Income (Expenses) Interest income — 133 — 396 Interest expense ( 703,845 ) ( 840,851 ) ( 2,155,328 ) ( 3,116,739 ) Other income 558,138 270,452 1,470,887 940,832 Change in fair value of interest rate swap contracts 52,314 ( 20,022 ) 1,370,950 ( 1,284,276 ) Total Other Income (Expenses), net ( 93,393 ) ( 590,288 ) 686,509 ( 3,459,787 ) INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) 10,846,556 ( 477,849 ) 18,159,099 ( 346,450,087 ) PROVISION (BENEFIT) FOR INCOME TAXES 2,637,444 ( 80,910 ) 4,621,749 ( 2,052,426 ) NET INCOME (LOSS) 8,209,112 ( 396,939 ) 13,537,350 ( 344,397,661 ) Less: net income attributable to non-controlling interests 357,345 226,865 566,055 168,988 NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC. $ 7,851,767 $ ( 623,804 ) $ 12,971,295 $ ( 344,566,649 ) Earnings (loss) per common share - basic and diluted $ 0.15 $ ( 0.01 ) $ 0.25 $ ( 6.61 ) Weighted average shares - basic 51,913,411 52,145,096 51,913,411 52,145,096 Weighted average shares - diluted 51,932,712 52,145,096 51,919,932 52,145,096 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents HF FOODS GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Attributable to HF Foods Group Inc. Non-controlling Interests Total Shareholders’ Equity Number of Shares Amount Number of Shares Amount Balance at January 1, 2021 51,913,411 $ 5,191 — $ — $ 587,579,093 $ ( 327,150,398 ) $ 260,433,886 $ 4,367,547 $ 264,801,433 Net income — — — — — 1,522,932 1,522,932 300,267 1,823,199 Distribution to shareholders — — — — — — — ( 73,000 ) ( 73,000 ) Balance at March 31, 2021 51,913,411 5,191 — — 587,579,093 ( 325,627,466 ) 261,956,818 4,594,814 266,551,632 Net income (loss) — — — — — 3,596,596 3,596,596 ( 91,557 ) 3,505,039 Acquisition of non-controlling interest — — — — ( 3,855,887 ) — ( 3,855,887 ) ( 1,144,113 ) ( 5,000,000 ) Distribution to shareholders — — — — — — — ( 77,550 ) ( 77,550 ) Balance at June 30, 2021 51,913,411 5,191 — — 583,723,206 ( 322,030,870 ) 261,697,527 3,281,594 264,979,121 Net income — — — — — 7,851,767 7,851,767 357,345 8,209,112 Distribution to shareholders — — — — — — — ( 61,750 ) ( 61,750 ) Stock-based compensation — — — — 205,433 — 205,433 — 205,433 Balance at September 30, 2021 51,913,411 $ 5,191 — $ — $ 583,928,639 $ ( 314,179,103 ) $ 269,754,727 $ 3,577,189 $ 273,331,916 Balance at January 1, 2020 53,050,211 $ 5,305 ( 905,115 ) $ ( 12,038,030 ) $ 599,617,009 $ 15,823,661 $ 603,407,945 $ 4,248,787 $ 607,656,732 Net income (loss) — — — — — ( 339,883,942 ) ( 339,883,942 ) 197,410 ( 339,686,532 ) Distribution to shareholders — — — — — — — ( 125,000 ) ( 125,000 ) Balance at March 31, 2020 53,050,211 5,305 ( 905,115 ) ( 12,038,030 ) 599,617,009 ( 324,060,281 ) 263,524,003 4,321,197 267,845,200 Net loss — — — — — ( 4,058,903 ) ( 4,058,903 ) ( 255,287 ) ( 4,314,190 ) Balance at June 30, 2020 53,050,211 5,305 ( 905,115 ) ( 12,038,030 ) 599,617,009 ( 328,119,184 ) 259,465,100 4,065,910 263,531,010 Net income (loss) — — — — — ( 623,804 ) ( 623,804 ) 226,865 ( 396,939 ) Balance at September 30, 2020 53,050,211 $ 5,305 ( 905,115 ) $ ( 12,038,030 ) $ 599,617,009 $ ( 328,742,988 ) $ 258,841,296 $ 4,292,775 $ 263,134,071 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents HF FOODS GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net Income (Loss) $ 13,537,350 $ ( 344,397,661 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 13,624,838 13,479,736 Goodwill impairment loss — 338,191,407 Gain from disposal of equipment ( 33,049 ) ( 24,681 ) Allowance for doubtful accounts ( 374,431 ) 2,024,471 Deferred tax benefit ( 2,125,690 ) ( 3,172,293 ) Income from equity method investment ( 66,721 ) ( 65,612 ) Unrealized change in fair value of interest rate swap contracts ( 652,351 ) 1,284,276 Stock-based compensation 205,433 — Changes in operating assets and liabilities: Accounts receivable ( 8,872,079 ) 23,306,471 Accounts receivable - related parties 307,233 3,319,539 Inventories ( 18,704,438 ) 15,840,459 Advances to suppliers - related parties 196,803 447,287 Other current assets 1,973,931 ( 294,372 ) Security deposit — 58,880 Other long-term assets ( 475,487 ) ( 3,512 ) Accounts payable 13,441,780 ( 6,097,690 ) Accounts payable - related parties 927,445 ( 1,858,101 ) Operating lease liability ( 415,278 ) ( 291,659 ) Accrued expenses and other liabilities ( 2,336,817 ) 2,564,201 Net cash provided by operating activities 10,158,472 44,311,146 Cash flows from investing activities: Purchase of property and equipment ( 1,520,887 ) ( 410,288 ) Proceeds from disposal of equipment 76,948 160,659 Payment made for acquisition of B&R Realty — ( 94,004,068 ) Payment made for acquisition of non-controlling interest ( 5,000,000 ) — Net cash used in investing activities ( 6,443,939 ) ( 94,253,697 ) Cash flows from financing activities: Proceeds from bank overdraft 4,583,064 — Repayment of bank overdraft — ( 9,403,540 ) Net proceed (repayment) from (of) line of credit 4,642,652 ( 16,158,014 ) Proceeds from long-term debt — 75,600,006 Repayment of long-term debt ( 4,543,724 ) ( 5,121,353 ) Repayment of promissory note payable - related party ( 2,000,000 ) — Repayment of obligations under finance leases ( 221,901 ) ( 207,520 ) Cash distribution to shareholders ( 212,300 ) ( 125,000 ) Net cash provided by financing activities 2,247,791 44,584,579 Net increase (decrease) in cash 5,962,324 ( 5,357,972 ) Cash at beginning of the period 9,580,853 14,538,286 Cash at end of the period $ 15,543,177 $ 9,180,314 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents HF FOODS GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION Organization and General HF Foods Group Inc. and subsidiaries (collectively “HF Group”, or the “Company”) is a leading Asian food service distributor that markets and distributes 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 in the United States. The Company is the result of a successful merger between two complementary market leaders, HF Group Holding Corporation ("HF Holding") and B&R Global Holdings, Inc. ("B&R Global") on November 4, 2019. 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 with, 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. On January 17, 2020, B&R Global acquired all the equity membership interests of the subsidiaries under B&R Group Realty Holding, LLC ("BRGR"), which owned warehouse facilities that were being leased to B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. See further transaction details below. Formation of HF Holding HF Holding was incorporated in the State of North Carolina on October 11, 2017 as a holding company to acquire and consolidate the various pre-merger operating entities under one roof. On January 1, 2018, HF Holding entered into a Share Exchange Agreement (the “Exchange Agreement”) with the controlling shareholders of the 11 entities listed below in exchange for all of HF Holding’s outstanding shares. Upon completion of the share exchanges, these entities became either wholly-owned or majority-owned subsidiaries of HF Holding. • Han Feng, Inc. (“Han Feng”) • Truse Trucking, Inc. (“TT”) • Morning First Delivery, Inc. (“MFD”) • R&N Holdings, LLC (“R&N Holdings”) • R&N Lexington, L.L.C. (“R&N Lexington”) • Kirnsway Manufacturing, Inc. (“Kirnsway”) • ChineseTG, Inc. (“Chinesetg”) • New Southern Food Distributors, Inc. (“NSF”) • B&B Trucking Services, Inc. (“BB”) • Kirnland Food Distribution, Inc. (“Kirnland”) • HG Realty, LLC (“HG Realty”) In accordance with Financial Accounting Standards Board’s (“FASB") Accounting Standards Codification (“ASC”) 805-50-25, the transaction consummated through the Exchange Agreement was accounted for as a transaction among entities under common control since the same shareholders controlled all 11 entities prior to the execution of the Agreement. Furthermore, ASC 805-50-45-5 indicates that the financial statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information. In accordance with ASC 805-50-30-5, when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests should initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of the transfer. If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of the entities under common control, then the financial statements of the receiving entity should reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control. Accordingly, the Company recorded the assets and liabilities transferred from the above entities at their carrying amount. Reverse Acquisition of HF Holding 5 Table of Contents On August 22, 2018, Atlantic consummated a reverse acquisition transaction resulting in HF Holding becoming the surviving entity (the “Atlantic Merger”) and a wholly owned subsidiary of Atlantic (the “Atlantic Acquisition”). The stockholders of HF Holding became the majority shareholders of Atlantic, and the Company changed its name to HF Foods Group Inc. (collectively, these transactions are referred to as the “Atlantic Transactions”). At closing, Atlantic issued the HF Holding stockholders an aggregate of 19,969,831 shares of its common stock, equal to approximately 88.5 % of the aggregate issued and outstanding shares of Atlantic’s common stock. The pre-Transaction stockholders of Atlantic owned the remaining 11.5 % of the issued and outstanding shares of common stock of the combined entity. Following the consummation of the Atlantic Transactions on August 22, 2018, there were 22,167,486 shares of common stock issued and outstanding, consisting of (i) 19,969,831 shares issued to HF Holding’s stockholders pursuant to the Atlantic Merger Agreement, (ii) 10,000 restricted shares issued to one of Atlantic’s shareholders in conjunction with the Atlantic Transactions, and (iii) 2,587,655 shares originally issued to the pre-Transactions stockholders of Atlantic, less 400,000 shares sold back to Atlantic by one of Atlantic’s pre-Transactions shareholders in conjunction with the Atlantic Transactions. The Atlantic Acquisition was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction. Therefore, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic were consolidated into the results of operations of HF Holding as of the completion of the Atlantic Transactions. HF Holding Entities Organized or Acquired Post-Atlantic Merger On July 10, 2019, the Company, through its subsidiary Han Feng, formed a new real estate holding company, R&N Charlotte, L.L.C. ("R&N Charlotte"). R&N Charlotte owns a 4.66 acre tract of land with appurtenant 115,570 square foot office/warehouse/industrial facility located in Charlotte, North Carolina. On December 10, 2019, the Company, through its subsidiary Han Feng, established a new entity, HF Foods Industrial, L.L.C. ("HFFI"), as owner of 60 % of member interests, to operate as a food processing company. On October 10, 2020, the Company, through its subsidiary HF Group Holding, formed a wholly-owned new real estate lease holding company, 273 Fifth Avenue, L.L.C. ("273 Co"). On May 28, 2021, the Company, through its subsidiary HF Group Holding, purchased the 33.33 % non-controlling interest of the stock in Kirnland from the previous minority shareholder. The following table summarizes all the existing entities under HF Holding after the above-mentioned reorganization, together with the new entities formed or acquired after the Atlantic Transactions: 6 Table of Contents Name Date of Formation / Incorporation Place of Formation / Incorporation Percentage of Legal Ownership by HF Group Principal Activities Parent: HF Holding October 11, 2017 North Carolina, USA 100 % Holding Company Subsidiaries: Han Feng January 14, 1997 North Carolina, USA 100 % Foodservice distributor Kirnland April 11, 2006 Georgia, USA 100 % Foodservice distributor NSF December 17, 2008 Florida, USA 100 % Foodservice distributor HFFI December 10, 2019 North Carolina, USA 60 % Food processing company Chinesetg July 12, 2011 New York, USA 100 % Design and printing services provider Kirnsway May 24, 2006 North Carolina, USA 100 % Design and printing services provider BB September 12, 2001 Florida, USA 100 % Logistic service provider MFD April 15, 1999 North Carolina, USA 100 % Logistic service provider TT August 6, 2002 North Carolina, USA 100 % Logistic service provider HG Realty May 11, 2012 Georgia, USA 100 % Real estate holding company R&N Charlotte July 10, 2019 North Carolina, USA 100 % Real estate holding company R&N Holdings November 21, 2002 North Carolina, USA 100 % Real estate holding company R&N Lexington May 27, 2010 North Carolina, USA 100 % Real estate holding company 273 Co October 10, 2020 Delaware, USA 100 % Real estate lease holding company Merger with B&R Global On November 4, 2019, HF Group consummated a merger transaction resulting in B&R Global becoming a wholly owned subsidiary of the Company (the "Business Combination"). 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 shareholders of B&R Global. Pursuant to the B&R Merger Agreement, the aggregate fair value of the consideration paid by the Company in the Business Combination was $ 576,699,494 , based on the closing share price of the Company’s common stock at the date of Closing. B&R Global was formed in 2014 as a holding company to acquire and consolidate the various related operating entities (listed below) under one roof. Through its subsidiaries, B&R Global supplies foodservice items to approximately 5,000 restaurants across 11 Western states. 7 Table of Contents The following table summarizes the entities under B&R Global in the Business Combination: Name Date of Formation / Incorporation Place of Formation / Incorporation Percentage of Legal Ownership by B&R Global Principal Activities Parent: B&R Global January 3, 2014 Delaware, USA — Holding Company Subsidiaries: B&L Trading, LLC (“BNL”) July 18, 2013 Washington, USA 100 % Foodservice distributor Capital Trading, LLC (“UT”) March 10, 2003 Utah, USA 100 % Foodservice distributor Great Wall Seafood LA, LLC (“GW”) March 7, 2014 California, USA 100 % Foodservice distributor Min Food Inc. (“MIN”) May 29, 2014 California, USA 60.25 % Foodservice distributor Monterey Food Service, LLC (“MS”) September 14, 2017 California, USA 65 % Foodservice distributor Mountain Food, LLC (“MF”) May 2, 2006 Colorado, USA 100 % Foodservice distributor Ocean West Food Services, LLC (“OW”) December 22, 2011 California, USA 67.5 % Foodservice distributor R & C Trading, L.L.C. (“RNC”) November 26, 2007 Arizona, USA 100 % Foodservice distributor Rongcheng Trading, LLC (“RC”) January 31, 2006 California, USA 100 % Foodservice distributor Win Woo Trading, LLC (‘WW”) January 23, 2004 California, USA 100 % Foodservice distributor Irwindale Poultry, LLC (“IP”) December 27, 2017 California, USA 100 % Poultry processing company Lin’s Farms, LLC (“LNF”) July 2, 2014 Utah, USA 100 % Poultry processing company Kami Trading Inc. (“KAMI”) November 20, 2013 California, USA 100 % Import service provider American Fortune Foods Inc. (“AF”) February 19, 2014 California, USA 100 % Logistic and import service provider B&R Group Logistics Holding LLC (“BRGL”) July 17, 2014 Delaware, USA 100 % Logistic service provider Best Choice Trucking, LLC (“BCT”) January 1, 2011 California, USA 100 % Logistic service provider Fuso Trucking Corp. (“FUSO”) January 20, 2015 California, USA VIE* Logistic service provider GM Food Supplies, Inc. (“GM”) March 22, 2016 California, USA 100 % Logistic service provider Golden Well Inc. (“GWT”) November 8, 2011 California, USA 100 % Logistic service provider Happy FM Group, Inc. (“HFM”) April 9, 2014 California, USA 100 % Logistic service provider Hayward Trucking, Inc. (“HRT”) September 5, 2012 California, USA 100 % Logistic service provider KYL Group, Inc. (“KYL”) April 18, 2014 Nevada, USA 100 % Logistic service provider Lin’s Distribution Inc., Inc. (“LIN”) February 2, 2010 Utah, USA 100 % Logistic service provider MF Food Services, Inc. (“MFS”) December 21, 2017 California, USA 100 % Logistic service provider New Berry Trading, LLC (“NBT”) September 5, 2012 California, USA 100 % Logistic service provider Royal Service, Inc. (“RS”) December 29, 2014 Oregon, USA 100 % Logistic service provider Royal Trucking Services, Inc. (“RTS”) May 19, 2015 Washington, USA 100 % Logistic service provider Yi Z Service LLC (“YZ”) October 2, 2017 California, USA 100 % Logistic service provider * On November 4, 2019 and as of September 30, 2021, B&R Global consolidated FUSO, which is considered as a variable interest entity (“VIE”) under U.S. GAAP, due to its pecuniary and contractual interest in this entity. Acquisition of Real Estate Companies On January 17, 2020, the Company completed the transactions contemplated by that certain Membership Interest Purchase Agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, BRGR, and nine subsidiary limited liability companies wholly owned by BRGR (the “BRGR Subsidiaries”) (the “Realty Acquisition”). Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the BRGR Subsidiaries, which own 10 warehouse facilities that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana, in exchange for purchase consideration of $ 101,269,706 . Before the acquisition of the BRGR Subsidiaries, the CEO of the Company, Xiao Mou Zhang, managed and owned 8.91 % interest in BRGR. Consideration for the 8 Table of Contents Realty Acquisition was funded by (i) $ 75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 10 for additional information), (ii) issuance by B&R Global of a $ 7.0 million Unsecured Subordinated Promissory Note (the “Note”) to BRGR, and (iii) payment of $ 18.7 million from funds drawn from the Company’s revolving credit facility. The following table summarizes B&R Global’s additional wholly owned subsidiaries as a result of the Realty Acquisition: Name Date of Formation / Incorporation Place of Formation / Incorporation Percentage of Legal Ownership by B&R Global Principal Activities A & Kie, LLC ("AK") March 26, 2010 Arizona, USA 100 % Real estate holding company B & R Realty, LLC ("BRR") August 28, 2013 California, USA 100 % Real estate holding company Big Sea Realty, LLC ("BSR") April 3, 2013 Washington, USA 100 % Real estate holding company Fortune Liberty, LLC ("FL") November 22, 2006 Utah, USA 100 % Real estate holding company Genstar Realty, LLC ("GSR") February 27, 2012 California, USA 100 % Real estate holding company Hardin St Properties, LLC ("HP") December 5, 2012 Montana, USA 100 % Real estate holding company Lenfa Food, LLC ("LF") February 14, 2002 Colorado, USA 100 % Real estate holding company Lucky Realty, LLC ("LR") September 3, 2003 California, USA 100 % Real estate holding company Murray Properties, LLC ("MP") February 27, 2013 Utah, USA 100 % Real estate holding company The combined entity, resulting from the merger of B&R Global and HF Group, has 13 distribution centers strategically located in 8 states across the Southeast, Pacific and Mountain West regions of the United States and serves over 10,000 restaurants across 22 states with a fleet of over 300 refrigerated vehicles, and a workforce of over 780 employees and subcontractors. The Company is also supported by two call centers in China which provide round-the-clock sales and service support to its customers, who mainly converse in Mandarin or Chinese dialects. Independent Investigation Update In March 2020, an analyst report suggested certain improprieties in the Company’s operations. These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company, and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”). After the second putative stockholder class action was filed, the Class Actions were consolidated. In response to the allegations in the analyst report, the Company's Board of Directors appointed a Special Committee of Independent Directors to conduct an independent investigation with the assistance of counsel (the “Special Committee”). In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions. The Special Committee and the Company are cooperating with the SEC. The SEC and the Special Committee investigations are ongoing. To date, the Special Committee has reached no final conclusions in conjunction with its investigation. The investigation is focused primarily on related party transactions that occurred in periods prior to December 31, 2020 with entities that are/were owned by certain former executives and officers (including family members), of the Company, as well as other matters. It is possible that future findings of the independent investigation could result in a determination that acts occurred, which might impact the Company’s historical consolidated financial statements and/or associated disclosures. Such impacts could potentially include, but are not limited to, historical misstatement of assets, liabilities, equity and earnings, the evaluation and potential consolidation of variable interest entities into the Company’s consolidated financial statements, the recording of additional compensation expense and related payroll taxes associated with certain of the Company’s former executive officers. Even if these impacts occur, they may or may not have been material. As with any SEC investigation, there is also the possibility of potential fines and penalties. At this time, however, the Special Committee has not made any conclusions about what, if any, conduct occurred and the impact, if any, of that conduct on historical consolidated financial statements. 9 Table of Contents Please refer to Note 17 – Commitments and Contingencies – for additional information. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended December 31, 2020 and 2019. Operating results for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. All inter-company balances and transactions have been eliminated upon consolidation. U.S. GAAP provides guidance on the identification of VIE and financial reporting for entities over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) receives the economic benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. As of September 30, 2021 and December 31, 2020, FUSO is considered to be a VIE. FUSO was established solely to provide exclusive services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIE's activities. In addition, the Company receives the economic benefits from the entity and has concluded that the Company is a primary beneficiary. The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE included in the Company’s unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows are as follows: September 30, 2021 December 31, 2020 Current assets $ 84,742 $ 47,822 Non-current assets 10,885 115,934 Total assets $ 95,627 $ 163,756 Current liabilities $ 369,356 $ 496,234 Non-current liabilities — 39,475 Total liabilities $ 369,356 $ 535,709 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Net revenue $ 681,539 $ 531,194 $ 1,882,544 $ 1,612,999 Net income (loss) $ ( 78,454 ) $ 16,157 $ 98,224 $ 115,602 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Net cash provided by (used in) operating activities $ 12,646 $ 32,697 $ 65,158 $ 366,899 Net cash provided by (used in) financing activities ( 26,547 ) ( 15,359 ) ( 16,692 ) ( 260,971 ) Net increase (decrease) in cash and cash equivalents $ ( 13,901 ) $ 17,338 $ 48,466 $ 105,928 Non-controlling Interests 10 Table of Contents U.S. GAAP requires that non-controlling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the net income (loss) of those subsidiaries are reported separately in the consolidated statements of operations. On May 28, 2021, the Company, through its subsidiary HF Group Holding, purchased the 33.33 % noncontrolling interest of the stock in Kirnland for $ 5,000,000 , making Kirnland a wholly owned subsidiary. In accordance with ASC 810-10-45-23, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. Therefore, no gain or loss shall be recognized. As a result of this transaction, noncontrolling interests were reduced by $ 1,144,113 and the remaining difference of $ 3,855,887 was charged to additional paid-in capital. As of September 30, 2021 and December 31, 2020, non-controlling interests consisted of the following: Name of Entity Percentage of Non-controlling Interest Ownership September 30, 2021 December 31, 2020 Kirnland — % $ — $ 1,384,780 HFFI 40.00 % ( 977 ) — MIN 39.75 % 1,268,809 889,596 MS 35.00 % 452,677 459,816 OW 32.50 % 1,856,680 1,633,355 Total $ 3,577,189 $ 4,367,547 Uses of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include, but are not limited to, allowance for doubtful accounts, inventory reserves, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, long-term investments, impairment of goodwill, the purchase price allocation and fair value of non-controlling interests with respect to business combinations, realization of deferred tax assets, stock-based compensation, and uncertain income tax positions. Cash The Company considers all highly liquid investments purchased with an original maturity of three months or shorter to be cash equivalents. As of September 30, 2021 and December 31, 2020, the Company had no cash equivalents. Accounts Receivable, net Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company is aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount the Company reasonably expects to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of September 30, 2021 and December 31, 2020, allowances for doubtful accounts were $ 349,311 and $ 909,182 , respectively. Inventories The Company’s inventories, consisting mainly of food and other food service-related products, are considered as finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash or non-cash consideration received from vendors. The Company adjusts its inventory balances for slow-moving, excess and obsolete inventories to their net realizable value based upon inventory category, 11 Table of Contents inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment: Estimated Useful Lives (Years) Automobiles 3 — 7 Buildings and improvements 7 — 39 Furniture and fixtures 4 — 10 Machinery and equipment 3 — 10 Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of operations in other income or expenses. Business Combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. The Company reviews the carrying value of goodwill whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350 12 Table of Contents (“ASC 350”), Intangibles — Goodwill and Other . This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Intangible Assets Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows: Estimated Useful Lives (Years) Tradenames 10 Customer relationships 20 Long-term Investments The Company’s investments in unconsolidated entities consist of an equity investment and an investment without readily determinable fair value. The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities , using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures . If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in earnings equal to the difference between the carrying value and fair value. Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures . Under the equity method, the Company initially records its investment at cost and the difference between the cost and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company did no t record any impairment loss on its long-term investments as of September 30, 2021 and December 31, 2020. Impairment of Long-lived Assets Other Than Goodwill The Company assesses its long-lived assets such as property and equipment and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets or asset group exceeds their fair value. The Company did no t record any impairment loss on its long-lived assets other than goodwill as of September 30, 2021 and December 31, 2020. Revenue Recognition 13 Table of Contents The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales. The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The majority of the Company’s contracts have one single performance obligation, as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a specific point in time. For the three and nine month periods ended September 30, 2021 and 2020, revenue recognized from performance obligations related to prior periods was insignificant. Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant. The following table summarizes disaggregated revenue from customers by geographic locations: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Arizona $ 13,241,260 $ 8,418,352 $ 36,757,835 $ 25,344,389 California 80,777,266 43,159,185 205,560,026 145,316,702 Colorado 12,468,369 9,177,067 32,971,787 25,618,734 Florida 24,289,395 17,167,155 66,900,082 47,562,057 Georgia 18,148,570 12,524,287 49,390,449 34,699,175 North Carolina 37,161,307 28,688,103 100,378,085 79,672,578 Utah 16,167,635 13,717,413 43,087,364 39,010,162 Washington 13,288,247 7,067,380 33,424,485 23,058,577 Total $ 215,542,049 $ 139,918,942 $ 568,470,113 $ 420,282,374 Shipping and Handling Costs Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are included in distribution, selling and administrative expenses. Shipping and handling costs were $ 7,103,131 and $ 5,167,163 for the nine months ended September 30, 2021 and 2020, and $ 2,703,921 and $ 1,640,914 for the three months ended September 30, 2021 and 2020, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 (“ASC 740”), Income Taxes , on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition 14 Table of Contents threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at September 30, 2021 and December 31, 2020. The Company adopted ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , on January 1, 2021. ASU 2019-12 is intended to simplify various aspects related to managerial accounting for income taxes. The adoption had no material impact on the Company's consolidated financial statements. Leases The Company accounts for leases following ASU 2016-02, Leases (Topic 842) ("Topic 842"). As a result of the Realty Acquisition (see Note 6 for additional information), nine leases previously included in the operating lease asset and liabilities balance were eliminated during consolidation. As of September 30, 2021, the balances for operating lease assets were $ 2,551,286 and liabilities were $ 2,697,704 . As of December 31, 2020, the balances for operating lease assets were $ 931,630 and liabilities were $ 931,630 (see Note 11 for additional information). The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of finance lease liabilities, and finance lease liabilities, non-current on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Earnings Per Share The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, warrants and stock based compensation) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were 6,687 potential common shares that were excluded from the calculation of diluted EPS for the three month period ended September 30, 2021 because their effect would have been anti-dilutive. There are no anti-dilutive potential common shares for the nine month periods ended September 30, 2021 and 2020, and the three month period ended September 30, 2020. Fair Value of Financial Instruments The Company follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures . ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. 15 Table of Contents Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, bank overdraft, current portion of long-term debt, current portion of obligations under finance and operating leases, accrued expenses and other liabilities, and obligations under interest rate swap contracts approximate their fair value based on the short-term maturity of these instruments. The carrying value of long-term debt approximates fair value because of the variability of interest costs associated with these instruments and the consistency in market conditions since the loans were entered into. Derivative Financial Instrument In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, d erivative financial instruments are recognized as assets or liabilities on the unaudited condensed consolidated balance sheets at fair value. The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment. Pursuant to U.S. GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the statement of operations. Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty. Concentrations and Credit Risk Credit risk Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. Concentration risk There were no receivables from any one customer representing more than 10% of the Company’s consolidated gross accounts receivable at September 30, 2021 and December 31, 2020. For the nine months ended September 30, 2021 and 2020, no supplier accounted for more than 10% of the total cost of revenue. As of September 30, 2021, there were two suppliers that accounted for a combined 33 % of total outstanding advance payments. As of December 31, 2020, two suppliers accounted for a combined 40 % of total outstanding advance payments, and one supplier accounted for 96 % of advance payments to related parties, respectively. Immaterial Revision to Prior Period Financial Statements During the three months ended September 30, 2021, the Company identified errors in its accounting for the January 21, 2021 lease described in Note 10 as the 273 Lease Agreement. In its original accounting, the Company concluded that the lease was an operating lease and used an incorrect discount rate to calculate the Right of Use Asset and Obligation under operating lease balances. The Company subsequently changed the discount rate on the lease and classified the lease as a finance lease as the present value of the future cash flows associated with the lease exceeded substantially all of the fair value of the property. The Company adjusted the balances associated with the lease from Operating Lease Right-of-Use Assets to Property and Equipment and from Obligations Under Operating Leases to Obligations Under Finance Leases. The revision to the March 31, 2021 and June 30, 2021 condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statement of cash flows were as follows: • The Operating lease right of use asset was reduced by $ 13,675,884 from $ 15,993,197 to $ 2,317,313 as of March 31, 2021 and reduced by $ 13,582,834 from $ 16,326,011 to $ 2,743,177 as of June 30, 2021. • Property and equipment, net was increased by $ 7,770,225 from $ 136,043,983 to $ 143,814,208 as of March 31, 2021 and increased by $ 7,698,938 from $ 134,755,748 to $ 142,454,686 as of June 30, 2021. 16 Table of Contents • The impact to total assets was a reduction of $ 5,905,659 from $ 500,800,583 to $ 494,894,924 as of March 31, 2021 and a reduction of $ 5,883,896 from $ 507,220,995 to $ 501,337,099 as of June 30, 2021. • The impact to the current portion of obligations under finance lease and current portion of obligations under operating lease are insignificant as of March 31, 2021 and June 30, 2021. • Obligations under finance lease, non-current was an increase of $ 7,834,773 from $ 703,648 to $ 8,538,421 as of March 31, 2021 and an increase of $ 7,860,634 from $ 630,774 to $ 8,491,408 as of June 30, 2021. • Obligations under operating lease, non-current was a reduction of $ 13,764,121 from $ 15,459,667 to $ 1,695,546 as of March 31, 2021 and a reduction of $ 13,745,066 from $ 15,930,735 to $ 2,185,669 as of June 30, 2021. • The impact to total liabilities was a reduction of $ 5,937,684 from $ 234,248,951 to $ 228,311,267 as of March 31, 2021 and a reduction of $ 5,915,347 from $ 242,241,874 to $ 236,326,527 as of June 30, 2021. • The impact to Net cash provided by operating activities and Net cash provided by financing activities is insignificant as of March 31, 2021 and June 30, 2021. Revisions were also made to the lease footnote in the condensed consolidated financial statements. Operating lease costs for the three months ended March 31, 2021, three months ended June 30, 2021 and six months ended June 30, 2021 were revised to $ 410,561 , $ 340,551 , and $ 751,112 , respectively. The revised weighted average remaining lease term, in months, for operating leases was 48 months and 50 months as of March 31, 2021 and June 30, 2021 respectively. The revised weighted average discount rate for operating leases as of March 31, 2021 and June 30, 2021 was 2.80 % and 3.15 %, respectively. Finance lease costs for the three months ended March 31, 2021, three months ended June 30, 2021 and six months ended June 30, 2021 were revised to $ 234,849 , $ 288,599 , and $ 523,448 , respectively. Gross Property and equipment under finance lease as of March 31, 2021 and June 30, 2021 was revised to $ 10,611,480 with accumulated depreciation being revised to $ 1,966,019 and $ 2,118,289 as of March 31, 2021 and June 30, 2021, respectively. The weighted average remaining lease term, in months, for finance leases was revised to 295 as of March 31, 2021 and June 30, 2021. The weighted average discount rate for finance leases was revised to 6.18 % as of March 31, 2021 and June 30, 2021. Lastly, the revised maturities are as follows: Operating Leases Twelve months ending As reported March 31, 2021 As revised March 31, 2021 As reported June 30, 2021 As revised June 30, 2021 2022 $ 999,730 $ 717,230 $ 1,011,964 $ 706,964 2023 985,718 629,468 1,139,353 776,853 2024 856,936 475,686 964,309 576,809 2025 816,708 410,458 987,997 575,497 2026 723,859 292,609 791,576 354,076 Thereafter 17,466,321 — 17,396,355 42,534 Total Lease Payments 21,849,272 2,525,451 22,291,554 3,032,733 Less Imputed Interest ( 5,752,558 ) ( 201,194 ) ( 5,750,563 ) ( 267,723 ) Total $ 16,096,714 $ 2,324,257 $ 16,540,991 $ 2,765,010 17 Table of Contents Finance Leases Twelve months ending As reported March 31, 2021 As revised March 31, 2021 As reported June 30, 2021 As revised June 30, 2021 2022 $ 424,308 $ 805,558 $ 336,501 $ 724,001 2023 320,868 739,618 322,569 747,569 2024 288,572 732,322 274,426 724,426 2025 165,248 625,373 96,496 559,996 2026 — 473,929 — 477,405 Thereafter — 16,307,267 — 16,187,916 Total Lease Payments 1,198,996 19,684,067 1,029,992 19,421,313 Less Imputed Interest ( 218,012 ) ( 10,868,310 ) ( 126,570 ) ( 10,657,257 ) Total $ 980,984 $ 8,815,757 $ 903,422 $ 8,764,056 In addition, the Company also identified an error in the classification of the Goodwill impairment loss recorded during the nine months ended September 30, 2020 of $ 338,191,407 and adjusted it from the section Other Income (Expenses) to Total Operating Expenses in the condensed consolidated statements of operations. The Company has assessed the materiality of these errors considering both the qualitative and quantitative factors and determined that as of and for the year ended December 31, 2020, the three-month period ended March 31, 2021, and the six-month period ended June 30, 2021, the adjustments were not material. The Company has decided to correct the prior period presentation to provide comparability to the 2020 financial statements. Corresponding footnotes have been adjusted accordingly. The adjustments had no impacted on the consolidated statements of income and shareholders’ equity for the periods discussed. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments” . ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 31, 2022. The Company will adopt this ASU within the annual reporting period of December 31, 2023. The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. NOTE 3 - ACCOUNTS RECEIVABLE, NET Accounts receivable, net consisted of the following: As of September 30, 2021 As of December 31, 2020 Accounts receivable $ 34,453,143 $ 25,766,504 Less: allowance for doubtful accounts ( 349,311 ) ( 909,182 ) Accounts receivable, net $ 34,103,832 $ 24,857,322 18 Table of Contents Movement of allowance for doubtful accounts is as follows: For the Nine Months Ended September 30, 2021 September 30, 2020 Beginning balance $ 909,182 $ 623,970 Increase (decrease) in provision for doubtful accounts ( 374,433 ) 2,024,471 Less: write off/ (recovery) ( 185,438 ) ( 1,274,520 ) Ending balance $ 349,311 $ 1,373,921 NOTE 4 - LONG-TERM INVESTMENTS Long-term investments consisted of the following: Ownership as of September 30, 2021 As of September 30, 2021 As of December 31, 2020 Asahi Food, Inc. 49 % $ 643,885 $ 577,164 Pt. Tamron Akuatik Produk Industri ("Tamron") 12 % 1,800,000 1,800,000 Total $ 2,443,885 $ 2,377,164 The investment in Tamron is accounted for using the measurement alternative under ASC 321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi Food, Inc. is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise control over this investee. The Company determined there was no impairment as of September 30, 2021 and December 31, 2020 for these investments. NOTE 5 - PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: As of September 30, 2021 As of December 31, 2020 Automobiles $ 22,976,513 $ 24,544,094 Building 77,437,589 71,285,127 Building improvements 11,426,172 9,807,234 Furniture and fixtures 195,285 223,996 Land 52,208,061 52,125,900 Machinery and equipment 14,710,723 13,498,211 Subtotal 178,954,343 171,484,562 Less: accumulated depreciation ( 37,214,226 ) ( 34,615,477 ) Property and equipment, net $ 141,740,117 $ 136,869,085 The Company acquired $ 102,331,567 of property and equipment resulting from an acquisition of assets from B&R Realty Group on January 17, 2020. See Note 6 for additional information. Depreciation expense was $ 4,489,389 and $ 4,870,523 for the nine months ended September 30, 2021 and 2020, respectively, and $ 1,476,852 and $ 1,605,661 for the three months ended September 30, 2021 and 2020, respectively. NOTE 6 - ACQUISITION OF B&R REALTY SUBSIDIARIES On January 17, 2020, B&R Global acquired 100 % of the equity membership interests of the then subsidiaries of BRGR, which own warehouse facilities that were being leased to B&R Global for its operations in California, Arizona, Utah, Colorado, 19 Table of Contents Washington, and Montana. Before the acquisition of BRGR Subsidiaries, the CEO of the Company, Xiao Mou Zhang, managed and owned an 8.91 % interest in BRGR. The total purchase price for the acquisition was $ 101,269,706 , based on independent appraisals of the fair market value of the properties. 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 all used for warehousing and distribution purposes). As such, the acquisition of the BRGR Subsidiaries would be deemed an asset acquisition under ASC 805-10-55, and the total purchase price is allocated on a relative fair value basis to the net assets acquired. The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Cash $ 265,639 Automobile 33,690 Prepaids 39,193 Land 48,734,042 Buildings 53,563,835 Total assets acquired 102,636,399 Accounts payable and accrued expenses 1,366,693 Total liabilities assumed 1,366,693 Net assets acquired $ 101,269,706 NOTE 7 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS Goodwill The changes in HF Group’s carrying amount of goodwill are presented below: Total Balance at December 31, 2020 $ 68,511,941 Impairment loss — Balance at September 30, 2021 $ 68,511,941 The Company booked approximately $ 406.7 million of goodwill on December 31, 2019, resulting from the completion of the Business Combination with B&R Global, which represents the excess of the purchase price over the fair value of net assets acquired. HF Group acquired 100 % of the controlling interest of B&R Global, in exchange for 30,700,000 consideration shares of HF Group Common Stock, valued at $ 576,699,494 based upon the closing share price of the Company’s common stock at the date of Closing on November 4, 2019. The Company's policy is to test goodwill for impairment at least annually, as of December 31, or whenever events or changes in circumstances indicate that goodwill might be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. Towards the end of first quarter of fiscal year 2020, the Company experienced a significant decline in business volume due to mandatory stay-at-home orders issued by governmental authorities in response to the escalation of the COVID-19 pandemic. The Company determined that the B&R Global reporting unit was very sensitive to these declines and that it was more likely than not that an impairment may exist. The Company, therefore, performed an analysis of the fair value of the B&R Global reporting unit as of March 31, 2020 using a discounted cash flow method for goodwill impairment testing purposes. Based upon the analysis, the Company concluded that the carrying value of its B&R Global reporting unit exceeded its fair value by approximately $ 338.2 million. As a result, the company recorded the amount as impairment loss during the first quarter of fiscal year 2020. The Company estimated the fair values of the B&R Global reporting unit using the income approach, discounting projected future cash flows based upon management’s expectations of the current and future operating environment. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital 20 Table of Contents ("WACC"), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities. The fair value conclusions as of March 31, 2020 for the reporting unit are highly sensitive to changes in the WACC, which consider observable data about guidelines on publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. The Company also observed that the WACC applied on March 31, 2020 increased significantly from the original WACC value as of the acquisition date, mainly driven by the increased risk and volatility observed in the market. Volatility had primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country had been reduced to takeout and delivery offerings. Continued uncertainty about the removal or perpetuation of these restrictions and levels of consumer spending cause ongoing volatility. In addition, the fair value of the goodwill is sensitive to the changes in the assumptions used in the projected cash flows, which include forecasted revenues and perpetual growth rates, among others, all of which require significant judgment by management. The Company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future conditions, industry and global economic and geo-political factors, and the timing and success of the Company's implementation of current strategic initiatives. The Company performed a qualitative goodwill impairment assessment and concluded no further impairment is required as of September 30, 2021. Acquired Intangible Assets In connection with the Business Acquisition of B&R Global, HF Group acquired $ 188,503,000 of intangible assets, representing tradenames and customer relationships, which have an estimated amortization period of approximately 10 years and 20 years, respectively. The components of the intangible assets are as follows: As of September 30, 2021 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Tradenames $ 29,303,000 $ ( 5,616,408 ) $ 23,686,592 $ 29,303,000 $ ( 3,418,683 ) $ 25,884,317 Customer relationships 159,200,000 ( 15,256,667 ) 143,943,333 159,200,000 ( 9,286,667 ) 149,913,333 Total $ 188,503,000 $ ( 20,873,075 ) $ 167,629,925 $ 188,503,000 $ ( 12,705,350 ) $ 175,797,650 The Company performed a qualitative long-lived asset impairment assessment and concluded no further impairment is required as of September 30, 2021. HF Group’s amortization expense for intangible assets was $ 2,722,575 and $ 8,167,725 for the three and nine month periods ended September 30, 2021 and September 30, 2020, respectively. Estimated future amortization expense for intangible assets is presented below: Twelve months ending September 30, Amount 2022 $ 10,890,300 2023 10,890,300 2024 10,890,300 2025 10,890,300 2026 10,890,300 Thereafter 113,178,425 Total $ 167,629,925 NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate swaps ("IRS") for the sole purpose of mitigating interest rate fluctuation risk associated to floating rate debt instruments (as defined in Note 9 Line of Credit, and Note 10 Long-Term Debt). The Company does not use any other derivative financial instruments for trading or speculative purposes. 21 Table of Contents On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $ 1.05 million and $ 2.63 million, respectively. The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amount that were priced at USD 1-month LIBOR (London Interbank Offering Rate) plus 2.25 % per annum for the entire duration of the term loans. The EWB IRS contracts fixed the two term loans at 4.40 % per annum until maturity in September 2029. On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $ 2.74 million in conjunction with a newly contracted mortgage term loan of corresponding amount. The term loan was contracted at USD 1-month LIBOR plus 2.15 % per annum but was fixed at 5.80 % per annum resulting from the corresponding BOA IRS contract. The term loan and corresponding BOA IRS contract matures in December 2029. On June 24, 2020, HF Group entered into a forward starting IRS contract with JP Morgan Chase Bank (the "JPM IRS") for a fixed $ 80 million notional amount, effective from June 30, 2021 and expiring on June 30, 2025, as a means to partially hedge its existing floating rate loans exposure. On March 3, 2021, the Company unwound the JPM IRS. The contract was unwound with a view that 1-month LIBOR will continue to remain low in the foreseeable future despite the spike at the long end of the yield curve. The Company recorded a gain of approximately $ 718,600 in the first quarter of 2021. The Company evaluated the above mentioned interest rate swap contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value change on the aforementioned interest rate swap contracts are accounted for and recognized as change in fair value of interest rate swap contracts in the unaudited condensed consolidated statements of operations. As of September 30, 2021 and December 31, 2020, the Company has determined that the fair value of the interest rate swap obligations was $ 341,165 and $ 993,516 , respectively. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in its assessment of fair value. The interest rate swaps are classified as Level 3 liabilities and fair value was obtained from the respective counterparties. NOTE 9 - LINE OF CREDIT The JPM Credit Agreement provides for a $ 100 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. The revolving credit facility carries a floating interest rate that is pegged to 1-Month LIBOR + 1.375 % per annum, and was collateralized by all assets of the Company and was also guaranteed by BRGR and the BRGR Subsidiaries, which BRGR Subsidiaries were subsequently acquired by the Company on January 17, 2020 (See Note 6 for additional information). The JPM Credit Agreement was later superseded by a Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") as described below. On January 17, 2020, the Company, its wholly-owned subsidiary, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company as borrowers (collectively with the Company, the “Borrowers”), and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement with JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement, provides for (i) a $ 100 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), and (ii) a mortgage-secured term loan of $ 75.6 million ("Term Loan"). The existing revolving credit facility balance of $ 41.2 million under the First Amended Credit Agreement, was rolled over to the Revolving Facility on January 17, 2020. On the same day, B&R Global utilized the $ 75.6 million Term Loan and additional $ 18.7 million drawdown from the Revolving Facility to fund in part the acquisition of the BRGR Subsidiaries which owned the ten warehouse facilities which B&R Global had been leasing for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. The Second Amended Credit Agreement contained certain financial covenants and as of September 30, 2021, the Company was in compliance with the covenants under the Second Amended Credit Agreement. The outstanding principal balance on the line of credit as of September 30, 2021 was $ 23.0 million. 22 Table of Contents NOTE 10 - LONG-TERM DEBT Long-term debt at September 30, 2021 and December 31, 2020 is as follows: Bank name Maturity Interest rate as of September 30, 2021 As of September 30, 2021 As of December 31, 2020 Bank of America – (a) October 2021 - December 2029 3.73 % — 5.80 % $ 5,374,589 $ 5,905,472 BMO Harris Bank N.A. – (b) April 2022 - January 2024 5.96 % — 5.99 % 153,991 280,164 East West Bank – (c) August 2027 - September 2029 4.25 % — 4.40 % 6,656,129 6,802,271 First Horizon Bank – (d) October 2027 3.85 % 4,622,762 4,773,378 J.P. Morgan Chase – (e) February 2023 - January 2030 1.96 % — 2.09 % 71,759,021 74,687,806 Peoples United Bank – (b) December 2022 - January 2023 7.44 % — 7.53 % 473,967 725,282 Other finance institutions – (b) July 2022 - March 2024 3.90 % — 6.14 % 345,238 475,689 Total debt 89,385,697 93,650,062 Less: current portion ( 5,677,453 ) ( 5,641,259 ) Long-term debt $ 83,708,244 $ 88,008,803 The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants. As of September 30, 2021 and December 31, 2020, the Company was in compliance. The loans outstanding were guaranteed by the following properties, entities or individuals, or otherwise secured as shown: (a) Loan balance consists of real estate term loan, equipment term loans, and vehicle term loans. Collateral is provided by one real property owned by RNCH, specific equipment and vehicles owned by HFFI, RNCH, and BB. (b) Secured by vehicles. (c) Real estate term loans with East West Bank are collateralized by four real properties owned by R&N Holdings, R&N Lexingto n, and NSF. The loan to R&N Holdings is guaranteed b y four subsidiaries of the Company, Han Feng, TT, MFD, and R&N Lexington. The loan to R&N Lexington is guaranteed by four subsidiaries of the Company, Han Feng, TT, MFD, and R&N Holdings. The NSF loans are guaranteed by the Company. The R&N Holdings and R&N Lexington loans are also guaranteed by one shareholder and spouse. Balloon payments of 2,208,797 and 2,948,495 are due at maturity in 2027 and 2029, respectively. (d) Guaranteed by Han Feng and the Company. Also secured by a real property owned by HG Realty. Balloon payment for this debt is $ 3,116,687 at maturity. (e) Real estate term loan with a principal balance of $ 70,515,521 as of September 30, 2021 is secured by assets held by nine subsidiaries of the Company, AK, BRR, BSR, FL, GSR, HP, LF, LR and MP. Equipment term loan with a principal balance of $ 1,243,500 as of September 30, 2021 is secured by specific vehicles and equipment as defined in loan agreements. The future maturities of long-term debt as of September 30, 2021 are as follows: Twelve months ending September 30, Amount 2022 $ 5,677,453 2023 4,810,956 2024 4,087,265 2025 4,040,985 2026 4,077,755 Thereafter 66,691,283 Total $ 89,385,697 NOTE 11 - LEASES 23 Table of Contents The Company leases office space, warehouses and vacant land for building development under non-cancelable operating leases, with terms ranging from one to thirty years , as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment, with various expiration dates through 2050. The Company determines whether an arrangement is or includes an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company also recognizes finance lease assets and finance lease liabilities at inception, with lease expense recognized as interest expense and amortization of the lease payment. Operating Leases The components of lease expense were as follows: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Operating lease cost $ 648,979 $ 301,734 $ 1,120,526 $ 1,058,611 Weighted Average Remaining Lease Term (Months) Operating leases 48 32 48 32 Weighted Average Discount Rate Operating leases 3.11 % 4.05 % 3.11 % 4.05 % Finance Leases The components of lease expense were as follows: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Finance leases cost Amortization of right-of-use assets $ 80,984 $ 139,687 $ 242,952 $ 419,060 Interest on lease liabilities 16,687 21,647 54,030 72,767 Total finance leases cost $ 97,671 $ 161,334 $ 296,982 $ 491,827 Supplemental cash flow information related to finance leases was as follows: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Operating cash flows from finance leases $ 16,687 $ 21,647 $ 54,030 $ 72,767 Supplemental balance sheet information related to leases was as follows: 24 Table of Contents September 30, 2021 December 31, 2020 Finance Leases Property and equipment, at cost $ 10,421,383 $ 2,793,731 Accumulated depreciation ( 2,030,594 ) ( 1,831,318 ) Property and equipment, net $ 8,390,789 $ 962,413 Weighted Average Remaining Lease Term (Months) Finance leases 294 43 Weighted Average Discount Rate Finance leases 6.17 % 7.56 % Maturities of lease liabilities were as follows: Twelve months ending September 30, Operating Leases Finance Leases 2022 $ 798,451 $ 728,921 2023 737,858 750,665 2024 556,952 706,431 2025 575,350 507,354 2026 415,778 480,986 Thereafter — 16,064,984 Total Lease Payments 3,084,389 19,239,341 Less Imputed Interest ( 386,685 ) ( 10,520,562 ) Total $ 2,697,704 $ 8,718,779 On July 2, 2018, AnHeart Inc. ("AnHeart"), a former wholly-owned subsidiary of HF Holding, 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 a triple net basis, meaning AnHeart is required to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. HF Holding provided a corporate 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. 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 in early 2019. On February 23, 2019, HF Holding executed an agreement to divest all of its ownership interest in AnHeart to Ms. Jianping An, a resident of New York, for the sum of $ 20,000 . The transfer of ownership was completed on May 2, 2019. However, the divestment does 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 granted to the Company a security interest in all AnHeart assets, together with a covenant that the Company will be assigned the leases, to be exercised if AnHeart defaults on the original lease agreements. Further, Ms. An has tendered an unconditional guaranty of all AnHeart liabilities arising from 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, entered into an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, with AnHeart and Premier 273 Fifth, LLC ("Landlord"), pursuant to which it assumed the lease of the premises at 273 Fifth Avenue, New York, New York signed on July 2, 2018 (the “273 Lease Agreement”). At the same time, 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 in light of 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 its own 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 an option to renew for 10 additional years, at an annual rent starting at $ 325,000 and escalating annually throughout the term, with 25 Table of Contents the annual rent in the final year of the initial term of $ 1,047,974 . The 273 Lease Amendment granted certain rent abatement to the premises for 2020 and 2021, including a 20 % reduction of annual rent in 2021 subject to meeting certain conditions. The Lease Amendment permits subletting of the premises. The lease agreement related to 275 Fifth Avenue in the name of AnHeart and guaranteed by HF Holding, has a lease term of 15 years with the option to renew for 5 years on the 16th year and the 21st year at 3 % annual rent increment. Annual rent started at $ 462,000 and escalating throughout the term, with annual rent in the final year of the initial term of $ 760,878 . Annual property tax was estimated to be about $ 81,530 . A total of $ 81,000 rent abatement related to Covid-19 was granted from April 2020 to December 2020. NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures and noncash investing and financing activities are as follows: For the Nine Months Ended September 30, 2021 September 30, 2020 Supplemental disclosure of cash flow data Cash paid for interest $ 2,947,834 $ 3,220,447 Cash paid for income taxes $ 5,680,155 $ 517,573 Supplemental disclosure of non-cash investing and financing activities Right of use assets obtained in exchange for operating lease liabilities $ 2,161,442 $ — Property acquired via a finance lease $ 7,627,652 $ — Property and equipment purchases from notes payable $ 257,450 $ 2,528,554 Issuance of promissory note for the acquisition of B&R Realty Subsidiaries $ — $ 7,000,000 NOTE 13 - TAXES Corporate Income Taxes (“CIT”) On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company does not expect the repatriation tax and new minimum tax on certain future foreign earnings to have any impact on the Company’s operations since it currently has no foreign income and does not expect to generate any foreign income in the future. 26 Table of Contents (i) The provision for income taxes of the Company for the three and nine months ended September 30, 2021 and 2020 consists of the following : For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Current income taxes Federal $ 2,721,816 $ 465,519 $ 5,571,759 $ 865,736 State 735,920 128,825 1,175,680 254,131 Current income taxes 3,457,736 594,344 6,747,439 1,119,867 Deferred income taxes (benefit) Federal ( 662,283 ) ( 411,044 ) ( 1,925,015 ) ( 2,329,726 ) State ( 158,009 ) ( 264,210 ) ( 200,675 ) ( 842,567 ) Deferred income taxes (benefit) ( 820,292 ) ( 675,254 ) ( 2,125,690 ) ( 3,172,293 ) Total provision (benefit) for income taxes $ 2,637,444 $ ( 80,910 ) $ 4,621,749 $ ( 2,052,426 ) (ii) Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows: As of September 30, 2021 As of December 31, 2020 Deferred tax assets Allowance for doubtful accounts $ 296,081 $ 443,151 Inventories 680,411 481,016 Federal net operating loss 128 101,828 State net operating loss 5,203 257,490 Fair value change in interest rate swap contracts 81,628 244,622 Leases 104,503 — Accrued expenses 265,407 268,813 Total deferred tax assets 1,433,361 1,796,920 Deferred tax liabilities Property and equipment ( 2,314,639 ) ( 2,660,874 ) Intangibles assets ( 43,318,258 ) ( 45,461,272 ) Total deferred tax liabilities ( 45,632,897 ) ( 48,122,146 ) Net deferred tax liabilities $ ( 44,199,536 ) $ ( 46,325,226 ) (iii) Reconciliations of the statutory income tax rate to the effective income tax rate are as follows: For the Nine Months Ended September 30, 2021 September 30, 2020 Federal statutory tax rate 21.0 % 21.0 % State statutory tax rate 4.2 % 0.1 % Impact of goodwill impairment loss - permanent difference — % ( 20.5 ) % U.S. permanent difference 0.1 % — % Others 0.1 % — % Effective tax rate 25.5 % 0.6 % 27 Table of Contents NOTE 14 - RELATED PARTY TRANSACTIONS The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by the Company, the Company officers and/or major shareholders. Certain related party transactions described in this note are among the issues that are being scrutinized as part of an ongoing internal investigation, and disclosures concerning particular transactions are subject to the outcome of, and conclusions that may ultimately be reached in, this ongoing investigation. Mr. Zhou Min Ni ("Mr. Ni") and Mr. Xiao Mou Zhang ("Mr. Zhang") were the Co-Chief Executive Officers as of December 31, 2020. Mr. Ni resigned from all of his official posts on February 23, 2021. Upon resignation, Mr. Ni directly owned 10.7 % of outstanding shares of common stock of the Company. Mr. Zhang became the sole Chief Executive Officer on February 23, 2021. Mr. Ni and his immediate family members are treated as related parties for purposes of this report because Mr. Ni is a holder of more than 10 % of the Company's securities. The Company has recently evaluated Mr. Zhang's ownership interest and his relationship with certain entities that were previously classified as related parties in prior financial statements. The Company noted that four entities with ownership ranging from 5.0 % to 10 %, mainly restaurants, were deemed not to be related parties. The Company noted that neither Mr. Zhang nor his family members manage or participate in daily operations of those entities, and exercise no influence over them. Hence, the Company concluded that those entities do not fall under the definition of related party and were excluded from the classification accordingly. The Company also determined that its 12 % ownership in Tamron (Note 4), accounted for using alternative measurement under ASC 321, did not meet the definition of related party due to the fact that the Company does not participate in Tamron's daily operations and holds no influence over it. Further, the Company evaluated Mr. Ni's ownership interest and his relationship with certain entities that were previously classified as related parties in prior financial statements. The Company was informed that two entities that were previously owned by Mr. Ni, North Carolina Good Taste Noodle, Inc.( 37.67 %) and Hanfeng (Fujian) Information Technology Co., Ltd. ( 100 %), were no longer related parties in nature. The Company was informed that (a) Mr. Ni had disposed of all his equity interests in North Carolina Good Taste Noodle, Inc. on January 1, 2020, and Hanfeng (Fujian) Information Technology Co., Ltd. on September 29, 2020, and (b) neither Mr. Ni nor his family members manage or participate in daily operations of those entities and exercise no influence over them after the disposal. Hence, the Company concluded that those entities no longer fall under the definition of a related party and were excluded from the classification accordingly. However, the Company has determined it is appropriate to disclose transactions with these entities until the conclusion of the independent investigation. Total purchases made by the Company from North Carolina Good Taste Noodle, Inc. during the three months ended September 30, 2021 and 2020, were $ 1.3 million and $ 1.0 million, respectively, and total purchases were $ 3.9 million and $ 2.7 million for the nine months ended September 30, 2021 and 2020, respectively. Accounts payable at September 30, 2021 and December 31, 2020 to North Carolina Good Taste Noodle, Inc. were $ 0.4 million and $ 0.6 million, respectively. The related party transactions as of September 30, 2021 and December 31, 2020 and for the three and nine month periods ended September 30, 2021 and 2020 are identified as follows: Related Party Sales and Purchases Transactions The Company makes regular sales to and purchases from various related parties. a. Purchase - related parties Below is a summary of purchases of goods and services from related parties recorded for the three months ended September 30, 2021 and 2020, respectively: 28 Table of Contents Name of Related Party Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 (a) Allstate Trading Company, Inc. $ — $ 23,897 (b) Best Food Services, LLC 2,737,885 1,231,399 (c) Eastern Fresh NJ, LLC 1,456,623 1,185,398 (d) Fujian RongFeng Plastic Co., Ltd 807,665 753,997 (e) Hanfeng (Fujian) Information Technology Co., Ltd. — 556,238 (f) Ocean Pacific Seafood Group, Inc. 113,886 150,035 (g) Revolution Industry, LLC — 655,789 (h) UGO USA, Inc. — 208,333 Others 161,408 107,359 Total $ 5,277,467 $ 4,872,445 (a) Mr. Ni owns 40 % equity interest in this entity. (b) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (c) Mr. Ni owns a 30 % equity interest in this entity. (d) Mr. Ni owns a 40 % equity interest in this entity indirectly through its parent company. (e) Mr. Ni previously owned 100 % equity interest in this entity. Mr Ni disposed of his equity interest on September 29, 2020. Purchases for the three months ended September 30, 2021 were $ 0.4 million. (f) Mr. Ni owns a 26 % equity interest in this entity. (g) Raymond Ni, one of Mr. Ni’s family members, owns 100 % equity interest in this entity. On February 25, 2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL"). Han Feng has acquired substantially all of the operating assets used or held for use in such business operation for the amount of $ 250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from RIL at the time of the transaction were an offset to the purchase price paid to RIL. Going forward, Han Feng has taken the egg roll production business in house and ceased its vendor relationship with RIL. (h) Mr. Ni owns a 30 % equity interest in this entity. Below is a summary of purchases from related parties for the nine months ended September 30, 2021 and 2020, respectively: Name of Related Party Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 (a) Allstate Trading Company, Inc. $ — $ 308,865 (b) Best Food Services, LLC 6,225,024 4,204,084 (c) Eastern Fresh NJ, LLC 4,425,286 3,240,575 (d) Enson Group, Inc. (formerly "Enson Group, LLC") 127,577 58,515 (e) First Choice Seafood, Inc. 265,934 355,261 (f) Fujian RongFeng Plastic Co., Ltd 2,397,794 2,598,952 (g) Hanfeng (Fujian) Information Technology Co., Ltd. — 1,581,450 (h) N&F Logistics, Inc. 2,646 368,529 (i) Ocean Pacific Seafood Group, Inc. 452,312 383,211 (j) Revolution Industry, LLC 189,701 1,701,490 (k) UGO USA, Inc. 212,384 429,073 (l) Union Foods, LLC — 1,246,720 Others 216,192 122,073 Total $ 14,514,850 $ 16,598,798 29 Table of Contents (a) Mr. Ni owns a 40 % equity interest in this entity. (b) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to three Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (c) Mr. Ni owns a 30 % equity interest in this entity. (d) Mr. Ni owns a 25 % equity interest in this entity. (e) Mr. Ni owns a 25 % equity interest in this entity indirectly through its parent company. (f) Mr. Ni owns a 40 % equity interest in this entity indirectly through its parent company. (g) Mr. Ni previously owned a 100 % equity interest in this entity. Mr Ni disposed of his equity interest on September 29, 2020. Purchases for the nine months ended September 30, 2021 were $ 1.1 million. (h) Mr. Ni owns a 25 % equity interest in this entity. (i) Mr. Ni owns a 26 % equity interest in this entity. (j) Raymond Ni, one of Mr. Ni’s family members, owns 100 % equity interest in this entity. On February 25, 2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL"). Han Feng has acquired substantially all of the operating assets used or held for use in such business operation for the amount of $ 250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from RIL at the time of transaction were an offset to the purchase price paid to RIL. Going forward, Han Feng has taken the egg roll production business in house and ceased its vendor relationship with RIL. (k) Mr. Ni owns a 30 % equity interest in this entity. (l) Tina Ni, one of Mr. Ni’s family members, owns a 30 % equity interest in this entity. Anthony Zhang, one of Mr. Xiao Mou Zhang's family member, owns a 10 % of equity interest in this entity. b. Sales - related parties Below is a summary of sales to related parties recorded for the three months ended September 30, 2021 and 2020, respectively: Name of Related Party Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 (a) ABC Food Trading, LLC $ 714,819 $ 371,162 (b) Asahi Food, Inc. 185,437 144,479 (c) Best Food Services, LLC 308,516 77,357 (d) Eagle Food Service, LLC 744,592 1,067,890 (e) Eastern Fresh NJ, LLC 55,398 134,549 (f) Enson Group, Inc. (formerly "Enson Group, LLC") — 29,608 (g) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) 17,676 9,097 (h) First Choice Seafood, Inc. 7,222 — (i) Heng Feng Food Services, Inc. 22,723 113,546 (j) N&F Logistics, Inc. 163,890 293,100 Others 143,068 46,589 Total $ 2,363,341 $ 2,287,377 (a) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (b) The Company, through its subsidiary MF, owns a 49 % equity interest in this entity. (c) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (d) Tina Ni, one of Mr. Ni’s family members, owns a 26.5 % equity interest in this entity indirectly through its parent company. (e) Mr. Ni owns a 30 % equity interest in this entity. (f) Mr. Ni owns a 25 % equity interest in this entity. 30 Table of Contents (g) Mr. Ni owns a 50 % equity interest in this entity. (h) Mr. Ni owns a 25 % equity interest in this entity indirectly through its parent company. (i) Mr. Ni owns a 45 % equity interest in this entity. (j) Mr. Ni owns a 25 % equity interest in this entity. Below is a summary of sales to related parties recorded for the nine months ended September 30, 2021 and 2020, respectively: Name of Related Party Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 (a) ABC Food Trading, LLC $ 1,935,031 $ 1,419,460 (b) Asahi Food, Inc. 526,570 365,669 (c) Best Food Services, LLC 709,308 258,046 (d) Eagle Food Service, LLC 2,820,613 3,504,915 (e) Eastern Fresh NJ, LLC 154,736 1,583,842 (f) Enson Group, Inc. (formerly "Enson Group, LLC") 53,113 302,360 (g) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) 572,625 49,313 (h) First Choice Seafood, Inc. 89,366 1,378,208 (i) Heng Feng Food Services, Inc. 127,577 640,732 (j) N&F Logistics, Inc. 531,023 846,342 Others 319,547 486,991 Total $ 7,839,509 $ 10,835,878 (a) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (b) The Company, through its subsidiary MF, owns a 49 % equity interest in this entity. (c) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (d) Tina Ni, one of Mr. Ni’s family members, owns a 26.5 % equity interest in this entity indirectly through its parent company. (e) Mr. Ni owns a 30 % equity interest in this entity. (f) Mr. Ni owns a 25 % equity interest in this entity. (g) Mr. Ni owns a 50 % equity interest in this entity. (h) Mr. Ni owns a 25 % equity interest in this entity indirectly through its parent company. (i) Mr. Ni owns a 45 % equity interest in this entity. (j) Mr. Ni owns a 25 % equity interest in this entity. c. Lease agreements - related parties The Company leases various facilities to related parties. R&N Holdings leased a facility to UGO USA Inc. under an operating lease agreement which was mutually terminated by both parties effective April 1, 2021. Rental income for the three months ended September 30, 2021 and 2020 was nil and $ 10,500 , respectively, and the nine months ended September 30, 2021 and 2020 was $ 7,000 and $ 31,500 , respectively. HG Realty leases a warehouse to Enson Seafood GA Inc. (formerly “GA-GW Seafood, Inc.”) under an operating lease agreement expiring on September 21, 2027. Rental income for the three months ended September 30, 2021 and 2020 was $ 120,000 and $ 120,000 , respectively, and the nine months ended September 30, 2021 and 2020 was $ 360,000 and $ 360,000 , respectively. B&R Global leased warehouses from related parties owned by the majority shareholder of B&R Global prior to the Realty Acquisition on January 17, 2020. Before the acquisition of the BRGR Subsidiaries, the CEO of the Company, Xiao Mou Zhang, 31 Table of Contents managed and owned 8.91 % interest in BRGR. Rent incurred to the related parties from January 1, 2020 to January 16, 2020 was $ 187,750 . In 2020, Kirnland renewed a warehouse lease from Yoan Chang Trading Inc. ("Yoan") under an operating lease agreement expiring on December 31, 2020. In February 2021, Kirnland executed a new 5-year operating lease agreement with Yoan effective January 1, 2021 and expiring on December 31, 2025. Rent incurred to the related party was $ 77,428 and $ 40,000 for the three months ended September 30, 2021 and 2020, respectively, and $ 232,284 and $ 100,000 for the nine months ended September 30, 2021 and 2020, respectively. Related Party Balances a. Accounts receivable - related parties, net Below is a summary of accounts receivable with related parties recorded as of September 30, 2021 and December 31, 2020, respectively: Name of Related Party As of September 30, 2021 As of December 31, 2020 (a) ABC Food Trading, LLC $ 326,093 $ 18,816 (b) Asahi Food, Inc. 130,946 68,766 (c) Best Food Services, LLC — 1,250 (d) Eagle Food Service, LLC 250,054 697,538 (e) Eastern Fresh NJ, LLC 58,500 — (f) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) 82,816 325,596 (g) Fortune One Foods, Inc. 48,352 36,250 (h) N&F Logistics, Inc. 56,891 113,247 Others 578 — Total $ 954,230 $ 1,261,463 (a) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effectiveNovember 1, 2020. (b) The Company, through its subsidiary MF, owns a 49 % equity interest in this entity. (c) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. This equity interest was transferred to 3 Irrevocable Trusts for the benefit of Mr. Zhang's children effective November 1, 2020. (d) Tina Ni, one of Mr. Ni’s family members, owns a 26.5 % equity interest in this entity indirectly through its parent company. (e) Mr. Ni owns a 30 % equity interest in this entity. (f) Mr. Ni owns a 50 % equity interest in this entity. (g) Mr. Ni owns a 17.5 % equity interest in this entity indirectly through its parent company. (h) Mr. Ni owns a 25 % equity interest in this entity. All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary as of September 30, 2021 and December 31, 2020. b. Accounts payable - related parties, net All the accounts payable to related parties are payable upon demand without interest. Below is a summary of accounts payable with related parties recorded as of September 30, 2021 and December 31, 2020, respectively: 32 Table of Contents Name of Related Party As of September 30, 2021 As of December 31, 2020 (a) Best Food Services, LLC $ 737,432 $ 588,920 (b) Eastern Fresh NJ, LLC 523,734 427,795 (c) Enson Group, Inc. (formerly "Enson Group, LLC") — 25,368 (d) Fujian RongFeng Plastic Co., Ltd 1,183,655 69,429 (e) Hanfeng Information Technology (Jinhua), Inc. — 107,258 (f) Heng Feng Food Services, Inc. — 116,436 (g) UGO USA, Inc. — 211,003 Others 55,051 26,218 Total $ 2,499,872 $ 1,572,427 (a) Mr. Zhang previously owned a 10.38 % equity interest in this entity indirectly through its parent company as of October 31, 2020. Thod equity interest was transferred to 3 Irrevocable Trusts for the benefits of Mr. Zhang's children effective November 1, 2020. (b) Mr. Ni owns a 30 % equity interest in this entity. (c) Mr. Ni owns a 25 % equity interest in this entity. (d) Mr. Ni owns a 40 % equity interest in this entity indirectly through its parent company. (e) Mr. Ni owns a 37 % equity interest in this entity. (f) Mr. Ni owns a 45 % equity interest in this entity. (g) Mr. Ni owns a 30 % equity interest in this entity. c. Advances to suppliers - related parties, net The Company periodically provides purchase advances to various vendors, including the related party suppliers. Below is a summary of advances to related party suppliers recorded as of September 30, 2021 and December 31, 2020, respectively: Name of Related Party As of September 30, 2021 As of December 31, 2020 (a) Ocean Pacific Seafood Group, Inc. $ — $ 7,101 (b) Revolution Industry, LLC — 189,702 Total $ — $ 196,803 (a) Mr. Ni owns a 26 % equity interest in this entity. (b) Raymond Ni, one of Mr. Ni’s family members, owns 100 % equity interest in this entity. On February 25, 2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment of Revolution Industry, LLC ("RIL"). Han Feng has acquired substantially all of the operating assets used or held for use in such business operation for the amount of $ 250,000 plus the original wholesale purchase value of all verified, useable cabbage and egg roll mix inventory of RIL. Advances due from Revolution at the time of transaction were an offset to the purchase price paid to RIL. Going forward, Han Feng has taken the egg roll production business in house and ceased its vendor relationship with RIL. d. Promissory note payable - related party B&R Global issued a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR in January 2020 as part of the payment for the acquisition of the BRGR Subsidiaries (Refer to Note 6). The note matures in January 2030 and carries a fixed interest rate of 6 % per annum. There is no requirement to make principal repayments until maturity. There is no prepayment penalty should the Company elect to prepay the principal prior to maturity, subject to meeting certain repayment provisions as defined in the JPM Credit Agreement. At September 30, 2021, the outstanding balance was $ 5.0 million and accrued interest payable was nil . Principal and interest payments made were $ 500,000 and $ 84,333 for the three months ended September 30, 2021, and $ 2,000,000 and $ 281,825 for the nine months ended September 30, 2021, respectively. 33 Table of Contents NOTE 15 - STOCK-BASED COMPENSATION The Company has a stock-based employee compensation plan, known as the HF Foods Group Inc. 2018 Omnibus Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan caters for up to 3,000,000 shares of common stock reserved for issuance of awards to employees, non-employee directors, and consultants. The Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, other stock awards, and performance awards that may be settled in stock, or other property. The Company began issuing awards under the Plan in July of 2021. As of September 30, 2021, the Company had 350,439 time-based vesting restricted stock units (“RSUs”) outstanding, 143,277 performance-based restricted stock units (“PSUs”) outstanding, and 2,506,284 shares remaining available for future awards under the Plan. RSUs granted to employees vest over time based on continued service (vesting over a period between one to three years in equal installments). PSUs granted to employees vest based on (i) the attainment of certain financial metrics, as defined by the Company's compensation committee (“Financial PSUs”) and (ii) total shareholder return of the Company’s common stock (“TSR PSUs”). Both types of PSUs vest over 3 equal installments beginning from April 1, 2022 to April 1, 2024 based on the performance metrics established for each year and also require continued service for vesting. A summary of RSU and PSU activity for the three-month period ended September 30, 2021 is as follows: Shares Weighted Average Grant Date Fair Value Unvested RSUs at June 30, 2021 — $ — Granted 352,761 5.17 Forfeited 2,322 5.17 Vested — — Unvested RSUs at September 30, 2021 350,439 $ 5.17 Shares Weighted Average Grant Date Fair Value Unvested PSUs at June 30, 2021 — $ — Granted 143,277 3.82 Forfeited — — Vested — — Unvested PSUs at September 30, 2021 143,277 $ 3.82 The Company accounts for stock-based compensation in accordance with ASC 718 Compensation - Stock Compensation (“ASC 718”). ASC 718 addresses all forms of share-based payment awards including shares issued under employee stock purchase plans and stock incentive shares. The fair value of the RSUs and Financial PSUs are measured using the closing price of the Company’s common stock on NASDAQ Global Capital Market on the date preceding grant date. The fair value of the TSR PSUs are determined using the Monte-Carlo simulation model. The assumptions used to estimate the fair value of the TSR PSUs granted during the three months ended September 30, 2021 and valued under the Monte Carlo simulation model were as follows: 34 Table of Contents PSUs awarded July 8, 2021 PSUs awarded September 8, 2021 Risk-free interest rate 0.32 % - 0.34 % Expected dividend yield — % Expected term (years) 2.56 - 2.73 Expected volatility (1) 64.26 % - 65.74 % (1) Expected volatility is based on a 50/50 blending of (i) the average historical volatility of a select group of industry peers with a look-back period equal to the expected term, and (ii) the historical volatility of the Company with a look-back period of 1.17 years, the time from the valuation date to the date six months after the completion of the merger with B&R Global, using daily stock prices. The expected volatility of peer companies was 62.42 % – 63.45 %. The expected volatility of our common stock was 66.10 % – 68.03 %. We amortize the fair value of RSUs on a straight-line basis over the requisite service period for each award. For the PSUs, the Company recognizes stock-based compensation expenses on a straight-line basis for each vesting tranche over the longer of the derived, explicit, or implicit service period for the vesting tranche. As of interim and annual reporting periods, the Financial PSUs stock-based compensation expense is adjusted based on expected achievement of performance targets, while TSR PSUs stock-based compensation expense is not adjusted. The Company recognizes forfeitures as they occur. Stock-based compensation is included in distribution, selling and administrative expenses in our Condensed Consolidated Statements of Operations. The components of stock-based compensation for the three-month periods ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Stock-based compensation (RSUs) expense Ocean Pacific Seafood Group, Inc. $ 159,078 $ — Stock-based compensation (PSUs) expense Revolution Industry, LLC 46,355 — Total stock-based compensation expense $ 205,433 $ — Tax Benefit of stock-based compensation expense $ 50,282 $ — As of September 30, 2021, there was $ 2,045,560 of total unrecognized compensation cost related to all non-vested outstanding RSUs and PSUs outstanding under the Plan. Of the total unrecognized compensation cost, $ 1,544,447 is related to RSUs with time-based vesting provisions and $ 501,113 is related to PSUs with performance and market-based vesting provisions. NOTE 16 - SEGMENT REPORTING ASC 280, Segment Reporting establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the operating decision makers, review operation results by the revenue of different customers. On February 23, 2021, former co-CEO Zhou Min Ni resigned and Xiao Mou Zhang assumed the role of sole CEO. As a result, the Company reassessed its performance evaluation process and determined two relevant reporting segments - sales to independent restaurants and wholesale. Frequency, volume and profit margins are uniquely different between the two reporting segments. Segment reporting for the three and nine months ended September 30, 2020 were recast below. 35 Table of Contents All the Company's revenue was generated from its business operation in the U.S. The following table presents net sales by segment for the three and nine month periods ended September 30, 2021 and 2020, respectively: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Net revenue Sales to independent restaurants $ 207,559,475 $ 134,167,324 $ 548,116,720 $ 400,060,302 Wholesale 7,982,574 5,751,618 20,353,393 20,222,072 Total $ 215,542,049 $ 139,918,942 $ 568,470,113 $ 420,282,374 For the Three Months Ended September 30, 2021 Sales to Independent Restaurants Wholesale Total Revenue $ 207,559,475 $ 7,982,574 $ 215,542,049 Cost of revenue $ 166,638,813 $ 6,991,268 $ 173,630,081 Gross profit $ 40,920,662 $ 991,306 $ 41,911,968 Depreciation and amortization $ 4,879,618 $ 187,666 $ 5,067,284 Cash capital expenditures $ 825,473 $ 31,747 $ 857,220 For the Three Months Ended September 30, 2020 Sales to Independent Restaurants Wholesale Total Revenue $ 134,167,324 $ 5,751,618 $ 139,918,942 Cost of revenue $ 109,339,945 $ 5,416,139 $ 114,756,084 Gross profit $ 24,827,379 $ 335,479 $ 25,162,858 Depreciation and amortization $ 4,285,909 $ 183,733 $ 4,469,642 Cash capital expenditures $ 192,089 $ 8,235 $ 200,324 For the Nine Months Ended September 30, 2021 Sales to Independent Restaurants Wholesale Total Revenue $ 548,116,720 $ 20,353,393 $ 568,470,113 Cost of revenue $ 442,864,604 $ 19,129,646 $ 461,994,250 Gross profit $ 105,252,116 $ 1,223,747 $ 106,475,863 Depreciation and amortization $ 13,137,213 $ 487,625 $ 13,624,838 Cash capital expenditures $ 1,465,877 $ 55,010 $ 1,520,887 36 Table of Contents For the Nine Months Ended September 30, 2020 Sales to Independent Restaurants Wholesale Total Revenue $ 400,060,302 $ 20,222,072 $ 420,282,374 Cost of revenue $ 326,484,372 $ 19,047,315 $ 345,531,687 Gross profit $ 73,575,930 $ 1,174,757 $ 74,750,687 Depreciation and amortization $ 12,831,153 $ 648,583 $ 13,479,736 Cash capital expenditures $ 391,216 $ 19,072 $ 410,288 The following table presents total assets by reportable segment as of September 30, 2021 and December 31, 2020, respectively: As of September 30, 2021 As of December 31, 2020 Total assets: Sales to independent restaurants $ 496,082,096 $ 456,721,529 Wholesale 18,421,175 27,506,076 Total Assets $ 514,503,271 $ 484,227,605 All of the Company’s long-lived assets are located in the US. NOTE 17 - COMMITMENT AND CONTINGENCIES From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. With respect to our outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of litigation is inherently uncertain. Therefore, if one or more of these ordinary-course legal matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected. As previously disclosed and also highlighted in Note 1, in March 2020, a short-seller report suggested certain improprieties in the Company’s operations. These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”). After the second putative stockholder class action was filed, the Class Actions were consolidated. On January 19, 2021, the Company and the director and officer defendants filed a Motion to Dismiss the consolidated Class Actions. On August 25, 2021, the Court granted the Motion to Dismiss with leave to amend the complaint. The Plaintiff elected not to amend his complaint, and the Court entered Judgment in favor of the Company and the director and officer defendants on September 20, 2021. The Court’s decision was not appealed, and the Class Actions are now closed. The Company was likewise named a nominal defendant and certain of the Company's current and former directors and officers were named as defendants in a shareholder derivative lawsuit filed on June 15, 2020, in the United States District Court for the Central District of California. The complaint makes similar allegations as the Class Actions and alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. A second virtually identical shareholder derivative lawsuit was filed on August 21, 2020 in the United States District Court for the District of Delaware. On November 19, 2020, the District Court for the District of Delaware transferred the second-filed derivative lawsuit to the District Court for the Central District of California. The derivative lawsuits were stayed pending the deadline to file a notice of appeal in the Class Actions. The Company intends to vigorously defend the derivative lawsuits. See Note 18-Subsequent Events 37 Table of Contents In response to the allegations in the March 2020 short-seller report, the Company's Board of Directors appointed a Special Committee of Independent Directors to conduct an internal independent investigation with the assistance of counsel (the “Special Committee”). In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information. The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions. The Special Committee and the Company are cooperating with the SEC. The SEC and the Special Committee investigations are ongoing. There have been no changes to the status of these proceedings as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Refer to Independent Investigation Update in Note 1. While the Special Committee has reached no final conclusions in conjunction with its investigation, it has made a number of recommendations to management regarding improvements to Company operations and structure, including but not limited to its dealings with related parties. The Company has also instituted structural changes including the retirement of the former Co-Chief Executive Officer and Chairman of the Board. The Company now has an independent Chairman of the Board. In addition, the Company hired an in-house General Counsel and Chief Compliance Officer who joined the Company on September 8, 2021 and who reports to the Chief Executive Officer and the Chairman of the Board. NOTE 18 - SUBSEQUENT EVENTS The Company evaluated subsequent events through November 15, 2021, which is the date the financial statements were available to be issued. On November 5, 2021, the first of the two derivative shareholder lawsuits described in Note 17, above, was dismissed voluntarily by the plaintiff. On November 12, 2021, the stay of the proceedings in the second shareholder derivative case was lifted by the District Court and the case will move forward with the filing of defendants' response to the complaint. The Company intends to vigorously defend the shareholder derivative lawsuit. 38 Table of Contents CAUTIONARY NOTE ABOUT FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q for HF Foods Group Inc. (“HF Foods,” “HF Group,” the “Company,” “we,” “us,” or “our”) contains forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation: • Unfavorable macroeconomic conditions in the United States; • Competition in the food service distribution industry, particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche; • Increases in fuel costs; • Increases in commodity prices; • Disruption of relationships with vendors and increases in product prices; • U.S. government tariffs on products imported into the United States, particularly from China; • Changes in consumer eating and dining out habits; • Disruption of relationships with or loss of customers; • Failure to retain our senior management and other key personnel, particularly Xiao Mou Zhang and Kong Hian Lee; • Our ability to attract, train and retain employees; • Changes in and enforcement of immigration laws; • Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws; • Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations; • Failure to protect our intellectual property rights; • Any cyber security incident, other technology disruption or delay in implementing our information technology systems; • The development of an active trading market for our common stock; • Failure to acquire other distributors or wholesalers and enlarge our customer base could negatively impact our results of operations and financial condition; • Scarcity of and competition for acquisition opportunities; • Our ability to obtain acquisition financing; • The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions; • Our ability to identify acquisition candidates; • Increases in debt in order to successfully implement our acquisition strategy; • The effects of the COVID-19 or other pandemic; • Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results; and • Other factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications. We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise. Table of Contents