Item 2. Management’s Discussion and Analysis
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of HF Foods Group Inc.
This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties. See “ Cautionary Note About Forward-Looking Statements” for additional cautionary information.
Company Background and Overview
The Company markets and distributes Asian specialty food products, fresh produce, frozen and dry food, and non-food products to primarily Asian restaurants and other food service customers throughout the Southeast, Pacific and Mountain West regions of the United States.
Financial Overview
Our net revenue for the nine months ended September 30, 2021 was $568.5 million, an increase of $148.2 million, or 35.3%, from $420.3 million for the nine months ended September 30, 2020. Net income attributable to stockholders for the nine months ended September 30, 2021 was $13.0 million, a sharp turnaround compared to net loss of $344.6 million attributable to stockholders for the nine months ended September 30, 2020. The net loss in the prior comparative period was mainly due to a significant goodwill impairment of $338.2 million taken in first quarter of 2020 (see Note 7 to our financial statements for additional information) as well as sharp declines in sales prompted by the severe impact of the COVID-19 pandemic. Adjusted EBITDA for the nine months ended September 30, 2021 was $38.2 million, an increase of $24.5 million, or 177.9%, from $13.7 million for the nine months ended September 30, 2020. For additional information on Adjusted EBITDA, see the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Adjusted EBITDA” below.
COVID-19 Impact
The impact of COVID-19 pandemic had an inimical effect on our business, financial condition and operational results in 2020. All states across the country had issued some form of stay-at-home orders, shutdowns, voluntary containment measures, and social distancing . The operations of our restaurant customers were severely disrupted too, due to the “cliff-like” decline in consumer demand for food away from home. The government mandates forced many of our restaurant customers to temporarily close or convert to take-out or delivery-only operations. As a result, there was a significant decline in net sales beginning from the last two weeks of March 2020 through September 2020, negatively impacting our overall financial results in 2020, albeit quarter-on-quarter recovery in sales since third quarter of 2020.
The devastating impact of COVID-19 seen in 2020 has generally subsided, especially since the widespread vaccination effort by most local governments which began in March 2021. The Company's net sales recovered to about 94% of pre-COVID business volume (based on proforma net revenue for the same period in 2019) in the second quarter of 2021 and had surpassed the pre-COVID level to approximately 105% as of the quarter ended September 30, 2021. Based on current sales volumes and adjusted cost structures, the company continues to generate positive operating cash flows on a weekly basis and does not have immediate liquidity concerns, especially if sales volume continues to remain stable or improve further. We remain optimistic on the long-term prospects for our business although we continue to face intermittent government restrictions on our restaurant customers' business operations.
As the market leader in servicing the Asian/Chinese restaurant sector, we believe we are well-positioned for long-term success. The fragmented nature of the Asian/Chinese food service industry and the current environment create opportunities for a company like HF Group, which has the necessary expertise and a deep understanding of our unique customer base. We believe we are differentiated from our competitors given our extensive footprint, strong vendor and customer relationships, and value-added service offerings, all of which have allowed and will continue to allow us to better serve our customers in these unprecedented conditions.
How to Assess HF Group’s Performance
In assessing our performance, the Company considers a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, EBITDA and adjusted EBITDA. The key measures that the Company uses to evaluate the performance of our business are set forth below:
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Net Revenue
Net revenue is equal to gross sales minus sales returns, sales incentives that the Company offers to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net sales are driven by changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold.
Gross Profit
Gross profit is equal to net sales minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, custom clearance fees and other miscellaneous expenses. Cost of revenue generally changes as the Company incurs higher or lower costs from suppliers, as the customer and product mix changes, and as impact of inflation affects overall business.
Distribution, Selling and Administrative Expenses (DSA Expenses)
Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.
EBITDA and Adjusted EBITDA
The Company uses EBITDA to measure operating performance, defined as net income before interest expense, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non recurring income or expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, extraordinary charges, and other non-cash charges and more reflective of other factors that affect our operating performance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. The Company presents EBITDA and Adjusted EBITDA in order to provide supplemental information that the Company considers relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede U.S. GAAP measures.
The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under U.S. GAAP and is subject to important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of HF Group’s results as reported under U.S. GAAP. For example, Adjusted EBITDA:
• excludes certain tax payments that may represent a reduction in cash available to the Company;
• does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
• does not reflect changes in, or cash requirements for, our working capital needs; and
• does not reflect the significant interest expense, or the cash requirements, necessary to service our debt.
For additional information on EBITDA and Adjusted EBITDA, see the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — EBITDA and Adjusted EBITDA” below.
Results of Operations for the Three Months Ended September 30, 2021 and 2020
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The following table sets forth a summary of our consolidated results of operations for the three month periods ended September 30, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
For the Three Months Ended September 30, Changes
2021 2020 Amount %
Net revenue $ 215,542,049 $ 139,918,942 $ 75,623,107 54.0 %
Cost of revenue 173,630,081 114,756,084 58,873,997 51.3 %
Gross profit 41,911,968 25,162,858 16,749,110 66.6 %
Distribution, selling and administrative expenses 30,972,019 25,050,419 5,921,600 23.6 %
Income from operations 10,939,949 112,439 10,827,510 9,629.7 %
Interest income — 133 (133) 100.0 %
Interest expenses (703,845) (840,851) 137,006 16.3 %
Other income, net 558,138 270,452 287,686 106.4 %
Change in fair value of interest rate swap contracts 52,314 (20,022) 72,336 361.3 %
Income (loss) before income tax provision 10,846,556 (477,849) 11,324,405 2,369.9 %
Provision (benefit) for income taxes 2,637,444 (80,910) 2,718,354 3,359.7 %
Net income (loss) 8,209,112 (396,939) 8,606,051 2,168.1 %
Less: net income attributable to non-controlling interests 357,345 226,865 130,480 57.5 %
Net income (loss) attributable to HF Foods Group Inc. $ 7,851,767 $ (623,804) $ 8,475,571 1,358.7 %
Net Revenue
The bulk of net revenue was derived from sales to independent restaurants being the integral part of our business operations, and marginally supplemented by non-core wholesale operations to other smaller distributors. The revenue split has remained somewhat consistent, regardless of the impact of COVID-19.
The following table sets forth the breakdown of net revenue:
For the Three Months Ended September 30,
2021 2020 Changes
Amount % Amount % Amount %
Net revenue
Sales to independent restaurants $ 207,559,475 96.3 % $ 134,167,324 95.9 % $ 73,392,151 54.7 %
Wholesale 7,982,574 3.7 % 5,751,618 4.1 % 2,230,956 38.8 %
Total $ 215,542,049 100.0 % $ 139,918,942 100.0 % $ 75,623,107 54.0 %
Sales to independent restaurants for the three months ended September 30, 2021 increased by approximately 55% compared to same period last year. This was primarily due to the easing of COVID related restrictions in 2021 that resulted in the return of more dine-in business and a return to normalcy in overall foot traffic to restaurants. Wholesale operations as a supplemental business registered a growth of about 39% for the three months ended September 30, 2021 as compared to same period last year. As a result, overall net revenue for the quarter ended September 30, 2021 improved by about $75.6 million or 54% from the comparative period ended September 30, 2020.
Gross Profit
The following tables set forth the calculation of gross profit and gross margin for sales to independent restaurants, wholesale and total net revenue:
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Three Months Ended September 30, Changes
2021 2020 Amount %
Sales to independent restaurants
Net revenue $ 207,559,475 $ 134,167,324 $ 73,392,151 54.7 %
Cost of revenue 166,638,813 109,339,945 57,298,868 52.4 %
Gross profit $ 40,920,662 $ 24,827,379 $ 16,093,283 64.8 %
Gross Margin 19.7 % 18.5 % 1.2 % 6.5 %
Wholesale
Net revenue $ 7,982,574 $ 5,751,618 $ 2,230,956 38.8 %
Cost of revenue 6,991,268 5,416,139 1,575,129 29.1 %
Gross profit (loss) $ 991,306 $ 335,479 $ 655,827 195.5 %
Gross Margin 12.4 % 5.8 % 6.6 % 113.8 %
Total sales
Net revenue $ 215,542,049 $ 139,918,942 $ 75,623,107 54.0 %
Cost of revenue 173,630,081 114,756,084 58,873,997 51.3 %
Gross profit $ 41,911,968 $ 25,162,858 $ 16,749,110 66.6 %
Gross Margin 19.4 % 18.0 % 1.4 % 7.8 %
Gross profit for the quarter increased by about $16.8 million, or 66.6%, compared to the same period last year, out-pacing net revenue growth of 54.0%. Overall gross margin improved from 18.0% in the quarter ended September 30, 2020 to 19.4% for the quarter ended September 30, 2021. The 1.4% incremental margin represented an improvement of about 7.8%, comparatively, and was mainly attributable to better management in procurement and sales operations during an inflationary environment experienced across the industry. The continuing inflationary impact on newer sourced product cost was also reflected in the increase in cost of revenue. Gross margin for wholesale customers also increased sharply by 113.8%, further adding to the overall increase in gross margin.
Distribution, Selling and Administrative Expenses (DSA Expenses)
DSA Expenses for the three months ended September 30, 2021 increased by $5.9 million, or 23.6%, significantly below net revenue growth of 54.0% due to better cost control measures and improved operational efficiency. Of the DSA Expenses increase, 69.2% ($4.1 million) came from payroll and related labor costs, as more workers were (and are) needed to deal with the increasing sales demand, and 17.7% ($1.0 million) was in freight/fuel/diesel costs, which collectively made up the bulk (86.9%) of the increase. The additional increase ($0.8 million) was the result of other expenses, in line with increasing sales volume.
Interest Expense
Interest expenses were $0.7 million for the three months ended September 30, 2021, a decrease of $0.1 million, or about 16.3%, compared with $0.8 million for the three months ended September 30, 2020, due to an overall reduction in Revolving Facility utilization and ongoing principal repayments of Long-Term Debt and Promissory Notes.
Income Tax Provision (Benefit)
Provision for income taxes increased by $2.7 million, or 3,359.7%, from a tax benefit of $0.1 million for the three months ended September 30, 2020 to a tax provision of $2.6 million for the three months ended September 30, 2021, as a result of the increase in income before income tax provision, as compared with a significant loss in the same period of 2020.
Net Income (Loss) Attributable to Our Stockholders
As a result of all analysis above, net income attributable to our stockholders was $7.9 million for the three months ended September 30, 2021, and net loss attributable to our stockholders was $0.6 million for the three months ended September 30, 2020.
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EBITDA and Adjusted EBITDA
The following table sets forth of the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income (loss), the closest U.S. GAAP measure:
Three Months Ended September 30, Changes
2021 2020 Amount %
Net income (loss) $ 8,209,112 $ (396,939) $ 8,606,051 2,168.1 %
Interest expense 703,845 840,851 (137,006) 16.3 %
Income tax provision (benefit) 2,637,444 (80,910) 2,718,354 3,359.7 %
Depreciation & Amortization 4,249,496 4,474,892 (225,396) 5.0 %
EBITDA 15,799,897 4,837,894 10,962,003 226.6 %
Unrealized change in fair value of interest rate swap contracts (52,314) 20,022 (72,336) 361.3 %
COVID-19 bad debt reserve (recovery) — (750,945) 750,945 100.0 %
Non-recurring expenses* 1,628,098 1,866,415 (238,317) 12.8 %
Adjusted EBITDA $ 17,375,681 $ 5,973,386 $ 11,402,295 190.9 %
Percentage of revenue 8.1 % 4.3 % 3.8 % 88.8 %
* For the three months ended September 30, 2021, non-recurring expenses consisted of $1.6 million for legal fees related to the defense of class action lawsuits and SEC investigation stemming from the lawsuits (see Note 17 to our financial statements for additional information.)
Adjusted EBITDA was $17.4 million for the three months ended September 30, 2021, an increase of $11.4 million, or 190.9%, compared to $6.0 million for the three months ended September 30, 2020, resulting primarily from the $8.6 million increase in net income.
There was no COVID-19 bad debt reserve or recovery in the three months ended September 30, 2021.
Results of Operations for the Nine Months Ended September 30, 2021 and 2020
The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
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For the Nine Months Ended September 30, Changes
2021 2020 Amount %
Net revenue $ 568,470,113 $ 420,282,374 $ 148,187,739 35.3 %
Cost of revenue 461,994,250 345,531,687 116,462,563 33.7 %
Gross profit 106,475,863 74,750,687 31,725,176 42.4 %
Distribution, selling and administrative expenses 89,003,273 79,549,580 9,453,693 11.9 %
Goodwill impairment loss — 338,191,407 (338,191,407) 100.0 %
Income (loss) from operations 17,472,590 (342,990,300) 360,462,890 105.1 %
Interest income — 396 (396) 100.0 %
Interest expenses (2,155,328) (3,116,739) 961,411 30.8 %
Other income, net 1,470,887 940,832 530,055 56.3 %
Change in fair value of interest rate swap contracts 1,370,950 (1,284,276) 2,655,226 206.7 %
Income (loss) before income tax provision 18,159,099 (346,450,087) 364,609,186 105.2 %
Provision (benefit) for income taxes 4,621,749 (2,052,426) 6,674,175 325.2 %
Net income (loss) 13,537,350 (344,397,661) 357,935,011 103.9 %
Less: net income (loss) attributable to non-controlling interests 566,055 168,988 397,067 235.0 %
Net income (loss) attributable to HF Foods Group Inc. $ 12,971,295 $ (344,566,649) $ 357,537,944 103.8 %
Net Revenue
The bulk of net revenue was derived from sales to independent restaurants being the integral part of our business operations, and marginally supplemented by non-core wholesale operations to other smaller distributors. The revenue split has remained somewhat consistent, regardless of the impact of COVID-19.
The following table sets forth the breakdown of net revenue:
For the Nine Months Ended September 30,
2021 2020 Changes
Amount % Amount % Amount %
Net revenue
Sales to independent restaurants $ 548,116,720 96.4 % $ 400,060,302 95.2 % $ 148,056,418 37.0 %
Wholesale 20,353,393 3.6 % 20,222,072 4.8 % 131,321 0.6 %
Total $ 568,470,113 100.0 % $ 420,282,374 100.0 % $ 148,187,739 35.3 %
Sales to independent restaurants for the nine months ended September 30, 2021 increased by approximately 37.0% compared to same period last year. This was primarily due to the easing of COVID related restrictions in 2021 that resulted in the return of more dine-in business and a return to normalcy in overall foot traffic to restaurants. Wholesale operations as a supplemental business, on the other hand, remained constant for the nine months ended September 30, 2021 as compared to same period last year. As a result, overall net revenue for the nine months ended September 30, 2021 improved by about $148.2 million, or 35.3%, from the comparative period ended September 30, 2020.
Gross Profit
The following tables set forth the calculation of gross profit and gross margin for sales to independent restaurants, wholesale and total net revenue:
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Nine Months Ended September 30,
2021 2020 Amount %
Sales to independent restaurants
Net revenue $ 548,116,720 $ 400,060,302 $ 148,056,418 37.0 %
Cost of revenue 442,864,604 326,484,372 116,380,232 35.6 %
Gross profit $ 105,252,116 $ 73,575,930 $ 31,676,186 43.1 %
Gross Margin 19.2 % 18.4 % 0.8 % 4.3 %
Wholesale
Net revenue $ 20,353,393 $ 20,222,072 $ 131,321 0.6 %
Cost of revenue 19,129,646 19,047,315 82,331 0.4 %
Gross profit $ 1,223,747 $ 1,174,757 $ 48,990 4.2 %
Gross Margin 6.0 % 5.8 % 0.2 % 3.4 %
Total sales
Net revenue $ 568,470,113 $ 420,282,374 $ 148,187,739 35.3 %
Cost of revenue 461,994,250 345,531,687 116,462,563 33.7 %
Gross profit $ 106,475,863 $ 74,750,687 $ 31,725,176 42.4 %
Gross Margin 18.7 % 17.8 % 0.9 % 5.1 %
Gross profit for the nine months ended September 30, 2021 increased by about $31.7 million, or 42.4%, compared to the same period last year, out-pacing net revenue growth of 35.3%. Overall gross margin improved from 17.8% in the nine months ended September 30, 2020 to 18.7% in the nine months ended September 30, 2021. The 0.9% incremental margin represented an improvement of about 5.1% comparatively, and was mainly attributable to better management in procurement and sales operations during an inflationary environment experienced across the industry. The continuing inflationary impact on newer sourced product cost was also reflected in the increase in cost of revenue. Gross margin for wholesale customers remained constant compared to the same period last year.
Distribution, Selling and Administrative Expenses (DSA Expenses)
DSA Expenses for the nine months ended September 30, 2021 increased by $9.5 million, or 11.9%, significantly below net revenue growth of 35.3% due to better cost control measures and improved operational efficiency. Of the DSA Expenses increase, 43.2.% ($4.1 million) came from payroll and related labor costs, as more workers were (and are) needed to deal with the increasing sales demand and 36.8% ($3.5 million) was in non-recurring legal expenses connected to the ongoing internal and SEC investigation. The additional 20.0% ($1.9 million) was the result of other expenses, in line with the increasing sales volume.
Goodwill Impairment Loss
Goodwill impairment loss for the nine months ended September 30, 2021 decreased by $338.2 million or 100% due to the Company recording an impairment in the first quarter of 2020. There was no impairment indicators identified for the nine months ended September 30, 2021.
Interest Expense
Interest expenses decreased $1.0 million, or about 30.8%, due to lower utilization of the line of credit and a decrease in actual interest due to the floating rate nature of some of our credit facilities. The Company's floating rate debt decreased $6.3 million (5.8%) from $107.2 million as of September 30, 2020 to $100.9 million as of September 30, 2021. Average floating interest rates for the nine month period ended September 30 also decreased by approximately 0.65% from 2020 to 2021, hence further contributing to lower interest expense in this period.
Income Tax Provision (Benefit)
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Provision for income taxes increased by $6.7 million, or 325.2%, from a tax benefit of $2.1 million for the nine months ended September 30, 2020 to a tax provision of $4.6 million for the nine months ended September 30, 2021, as a result of the increase in income before income tax provision.
Net Income (Loss) Attributable to Our Stockholders
As a result of all analysis above, net income attributable to our stockholders was $13.0 million for the nine months ended September 30, 2021, versus a net loss attributable to our stockholders of $344.6 million for the nine months ended September 30, 2020. Excluding the goodwill impairment charge in 2020, year over year change in net income increased $19.3 million, or approximately 304% as compared to effective net loss of $6.3 million in 2020. The positive trend is attributed to increased consumer demand for dine-in/take out meals as COVID-19 restrictions eased in 2021, thereby prompting restaurants to replenish products at a more frequent rate.
EBITDA and Adjusted EBITDA
The following table sets forth of the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income (loss), the closest U.S. GAAP measure:
Nine Months Ended September 30,
2021 2020 Amount %
Net income (loss) $ 13,537,350 $ (344,397,661) $ 357,935,011 103.9 %
Interest expense 2,155,328 3,116,739 (961,411) 30.8 %
Income tax provision (benefit) 4,621,749 (2,052,426) 6,674,175 325.2 %
Depreciation & Amortization 12,807,049 13,184,904 (377,855) 2.9 %
EBITDA 33,121,476 (330,148,444) 363,269,920 110.0 %
Goodwill impairment loss — 338,191,407 (338,191,407) 100.0 %
Unrealized Change in fair value of interest rate swap contracts (654,150) 1,284,276 (1,938,426) 150.9 %
Realized gain on termination of interest rate swap contract (716,800) — (716,800) 100.0 %
COVID-19 bad debt reserve (recovery) (178,250) 1,135,836 (1,314,086) 115.7 %
Non-recurring expenses* 6,598,575 3,272,086 3,326,489 101.7 %
Adjusted EBITDA $ 38,170,851 $ 13,735,161 $ 24,435,690 177.9 %
Percentage of revenue 6.7 % 3.3 % 3.4 % 105.5 %
* For the nine months ended September 30, 2021, non-recurring expenses comprised of $6.6 million for legal fees related to the defense of class action lawsuits and an internal investigation stemming from the lawsuits (see Note 17 to our financial statements for additional information.).
Adjusted EBITDA was $38.2 million for the nine months ended September 30, 2021, an increase of $24.5 million, or 177.9%, compared to $13.7 million for the nine months ended September 30, 2020. The $24.5 million increase in Adjusted EBITDA is directly related to the of net income improvement of $19.7 million, as well as a $6.7 million swing in income tax provision.
Liquidity and Capital Resources
On January 17, 2020, the Company entered into the Second Amended Credit Agreement by and among JP Morgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured Term Loans of $75.6 million.
As of September 30, 2021, we had cash of approximately $15.5 million and access to approximately $77.0 million in additional funds through our $100 million line of credit, subject to a borrowing base calculation. The strategic cost management actions undertaken following the outbreak of COVID-19 in late March 2020 resulted in an overall increase of the available line of credit over time. We have funded working capital and other capital requirements primarily by cash flow from operations and
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bank loans. Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and to service debts.
Based on current sales volume which had been increasing steadily quarter-on-quarter since third quarter of 2020, management believes that the cash generated from operations will be sufficient to meet our normal working capital needs for at least the next twelve months. However, our ability to repay our current obligations will depend on the future realization of our current assets. Management has considered the historical experience, the economy, the trends in the food service distribution industry to determine the expected collectability of accounts receivable and the realization of the inventories as of September 30, 2021. Based on the above considerations, management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations in the next 12 months. However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, government intervention in respond to potential resurgence of COVID-19, competitive pricing in the food service distribution industry, and our bank and suppliers being able to provide continued support. The Company has initiated renewal discussions with JPM and intends to renew the revolving credit facility in the next six months. In the event that a renewal cannot be secured with JPM, Company's operations may be limited to a reduced capacity until a replacement credit facility is secured. If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.
The following table sets forth cash flow data for the nine months ended September 30, 2021 and 2020:
For the Nine Months Ended September 30,
2021 2020
Net cash provided by operating activities $ 10,158,472 $ 44,311,146
Net cash used in investing activities (6,443,939) (94,253,697)
Net cash provided by (used in) financing activities 2,247,791 44,584,579
Net increase in cash and cash equivalents $ 5,962,324 $ (5,357,972)
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and adjusted for the effect of working capital changes. Net cash provided by operating activities decreased $34.2 million, or 77.1%, as a result of changes in working capital items due mainly to two factors: (a) Accounts receivable balance as of September 30, 2020 was significantly lower as the business pivoted to lower sales volume on open credit terms and higher sales volume on Cash on Delivery (COD) in response to the heightened risk from the COVID-19 pandemic. In 2021, sales increased as the COVID-19 impact began to subside, resulting in normalization of credit terms given to customers, hence a higher accounts receivable balance as of September 30, 2021 compared to September 30, 2020; (b) Inventory level as of September 30, 2020 was significantly lower due to lower demand in 2020, while inventory level as of September 30, 2021 increased sharply as a direct result of increasing sales volume and the need for more inventory purchases during the period.
Investing Activities
Net cash used in investing activities decreased $87.8 million, or 93.2%, primarily due to a one-off payment of $94.0 million in the prior year for the acquisition of the BRGR Subsidiaries. The decrease was offset by a $5.0 million payment for the purchase of the minority shareholder's interest in Kirnland earlier this year, as well as the purchase of property and equipment for $1.0 million.
Financing Activities
Net cash from financing activities decreased $42.3 million, or 95.0%, caused primarily by a non-recurring $75.6 million term loan obtained in the prior year to finance the acquisition of the BRGR Subsidiaries and a $2.0 million increase in repayment of notes payable - related parties. These changes were offset by a $14.0 million decrease in repayment of bank overdraft and a $20.8 million increase in proceeds from the line of credit.
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Commitments and Contractual Obligations
The following table presents the Company’s material contractual obligations as of September 30, 2021:
Contractual Obligations Total Less than 1
year 1-3 years 3-5 years More than 5
years
Line of credit $ 23,020,114 $ — $ 23,020,114 $ — $ —
Long-term debt 89,385,697 5,677,453 8,898,221 8,118,740 66,691,283
Promissory note payable - related party 5,000,000 — — — 5,000,000
Finance lease obligations 19,239,341 728,921 1,457,096 988,340 16,064,984
Operating lease obligations 3,084,389 798,451 1,294,810 991,128 —
Total $ 139,729,541 $ 7,204,825 $ 34,670,241 $ 10,098,208 $ 87,756,267
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in accordance with U.S. GAAP. Preparing the Company's consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the nine month period ended September 30, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.
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