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Item 2. Management’s Discussion and Analysis

2023-01-31 compared with 2021-11-15 · 243 added, 218 removed, 63 unchanged (88% of the section changed)

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.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements.

When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “possible,” “potential,” “predict,” “project,” “will” and similar expressions, as they relate to us or our management, identify forward-looking statements.

Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the Securities and Exchange Commission (“SEC”).

All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

All forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation:

• The effects of the COVID-19 pandemic or other pandemics;

• Low margins in the foodservice distribution industry and periods of significant or prolonged inflation;

• Qualified labor shortages;

• Unfavorable macroeconomic conditions in the United States;

• Competition in the foodservice distribution industry particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche;

• Increases in fuel costs;

• Disruption of relationships with vendors and increases in product prices;

• Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains;

• Our business has been affected and may in the future be affected by the COVID-19 pandemic and the steps taken by the Chinese government to address the pandemic;

• Disruption of relationships with or loss of customers;

• Changes in consumer eating and dining out habits;

• Related party transactions and possible conflicts of interests;

• Related parties and variable interest entities consolidation;

• Failure to protect our intellectual property rights;

• Our ability to renew or replace our current warehouse leases on favorable terms, or terminations prior to expiration of stated terms;

• Failure to retain our senior management and other key personnel, particularly our CEO, COO, CFO and CCO/General Counsel;

• 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;

• Costs to comply with environmental laws and regulations;

• Litigation;

• Increases in commodity prices;

government tariffs on products imported into the United States, particularly from China;

• Severe weather, natural disasters and adverse climate change;

• Unfavorable geopolitical conditions;

• Any cyber security incident, other technology disruption or delay in implementing our information technology systems;

• Current indebtedness affecting our liquidity and ability of future financing;

• 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;

• Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results;

• Our ability to regain compliance with Securities Exchange Act of 1934 reporting requirements;

• The development of an active trading market for our common stock.

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 risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you.

Factors that might cause or contribute to such differences include, but are not limited to, those contained in Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC.

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

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.

We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States.

HF Group was formed through a merger between two complementary industry participants, HF Foods Group Inc.

and B&R Global.

On December 30, 2021, HF Group acquired the Great Wall Group, a seafood supplier, resulting in the addition of three distribution centers, located in Illinois and Texas (the “Great Wall Acquisition”).

On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc.

(the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

See Note 7 - Acquisitions for additional information regarding recent acquisitions.

Capitalizing on our institutional understanding of the Chinese culture, our over 1,000 employees and subcontractors and our support from two outsourced call centers in China, we serve over 15,000 Asian restaurants in 46 states with 18 distribution centers strategically located throughout the nation, providing round-the-clock sales and service support to customers who mainly converse in Mandarin or other Chinese dialects.

We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices.

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

The fragmented nature of the Asian/Chinese foodservice industry and the current environment creates opportunities for a company that has the necessary expertise and a comprehensive cultural understanding of this 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.

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.

Three Months Ended September 30, Change Nine Months Ended September 30, Change

(In thousands) 2022 2021 Amount % 2022 2021 Amount %

Net revenue $ 300,711 $ 215,542 $ 85,169 39.5 % $ 878,568 $ 568,468 $ 310,100 54.6 %

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

$ (3,864) $ 7,554 $ (11,418) (151.2) % $ 3,814 $ 12,319 $ (8,505) (69.0) %

Adjusted EBITDA $ 3,985 $ 16,555 $ (12,570) (75.9) % $ 35,822 $ 33,592 $ 2,230 6.6 %

For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and 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.

The devastating impact of the COVID-19 pandemic seen in 2020 has generally subsided.

Our net revenue for the fiscal year ended December 31, 2021 recovered to 96% of pre-COVID-19 pandemic levels.

Based on current sales volumes and adjusted cost structures, we continue to generate positive operating cash flows on a weekly basis and do not have immediate liquidity concerns.

We remain optimistic with regards to the long-term prospects for our business although the extent to which the COVID-19 pandemic will impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among other factors.

How to Assess HF Group’s Performance

In assessing our performance, the Company considers a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, EBITDA and adjusted EBITDA.

The key measures that the Company uses to evaluate the performance of our business are set forth below:

Net revenue 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;

In assessing our performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, as well as certain non-GAAP financial measures, including EBITDA and adjusted EBITDA.

The key measures that we use to evaluate the performance of our business are set forth below:

Net revenue is equal to gross sales minus sales returns, sales incentives that we offer 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 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)

Our net revenue is 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 is equal to net revenue minus cost of revenue.

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

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

Distribution, Selling and Administrative 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.

Discussion of our results includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, that we believe 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.

We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede GAAP measures.

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

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

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.

EBITDA and Adjusted EBITDA are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of HF Group’s results as reported under GAAP.

For example, Adjusted EBITDA:

3 unchanged sentences

• 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.

For additional information on EBITDA and Adjusted EBITDA, see the table entitled “EBITDA and Adjusted EBITDA” below.

Results of Operations for the Three Months Ended September 30, 2022 and 2021

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 following table sets forth a summary of our consolidated results of operations for the three months ended September 30, 2022 and 2021.

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 %

Three Months Ended September 30, Change

(In thousands) 2022 2021 Amount %

Net revenue $ 300,711 $ 215,542 $ 85,169 39.5 %

2 unchanged sentences

Distribution, selling and administrative expenses 54,589 31,048 23,541 75.8 %

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 %

(Loss) income from operations (3,096) 10,864 (13,960) (128.5) %

Interest expense 2,274 902 1,372 152.1 %

Other income, net (462) (573) 111 (19.4) %

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 %

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

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

Change in fair value of interest rate swap contracts (284) (52) (232) NM

Lease guarantee expense (58) — (58) NM

(Loss) income before income tax provision (4,566) 10,587 (15,153) (143.1) %

Income tax (benefit) provision (672) 2,676 (3,348) (125.1) %

Net (loss) income (3,894) 7,911 (11,805) (149.2) %

net income (loss) attributable to non-controlling interests (30) 357 (387) NM

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

$ (3,864) $ 7,554 $ (11,418) NM

____________________

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 %

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.

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

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 %

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 %

NM - Not meaningful

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

Three Months Ended September 30,

Net revenue 100.0 % 100.0 %

1 unchanged sentence

Gross profit 17.1 % 19.4 %

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.

Distribution, selling and administrative expenses 18.2 % 14.4 %

(Loss) income from operations (1.1) % 5.0 %

Interest expense 0.8 % 0.4 %

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.

Other income, net (0.2) % (0.3) %

Change in fair value of interest rate swap contracts (0.1) % — %

Income before income tax provision (1.6) % 4.9 %

(Benefit) provision for income taxes (0.2) % 1.2 %

Net (loss) income (1.4) % 3.7 %

net income (loss) attributable to noncontrolling interests — % 0.2 %

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

(1.4) % 3.5 %

Net revenue for the three months ended September 30, 2022 increased by $85.2 million or 39.5% compared to the same period in 2021, primarily due to the additional revenue generated due to recent acquisitions and overall product cost inflation.

Recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed $70.7 million and organic growth contributed the remaining $14.5 million.

Gross profit for the three months ended September 30, 2022 increased by $9.6 million or 22.9%, compared to the same period in 2021 primarily due to recent acquisitions, which contributed $11.1 million of gross profit for the three months ended September 30, 2022.

Overall gross margin decreased from 19.4% in the three months ended September 30, 2021 to 17.1% in the three months ended September 30, 2022, primarily due to the lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales and timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the three months ended September 30, 2022 increased by $23.5 million, or 75.8%, to $54.6 million compared to $31.0 million for the three months ended September 30, 2021.

Of the distribution, selling and administrative expenses increase, $9.3 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, as more workers were, and will continue to be, required to handle the increasing sales demand, $2.5 million was delivery related cost primarily driven by increasing fuel prices and revenue growth, and an increase of $4.9 million in professional fees primarily driven by legal costs, acquisition-related costs and increased compliance costs as a result of the SEC and SIC investigations and an SEC comment letter inquiry.

Distribution, selling and administrative expenses as a percentage of net revenue increased from 14.4% for the three months ended September 30, 2021 to 18.2% for the three months ended September 30, 2022 primarily due to the costs disclosed above.

Interest Expense

Interest expense for the three months ended September 30, 2022 increased by $1.4 million, or 152.1%, compared to the same period in 2021 mainly due to higher utilization of the line of credit coupled with a higher interest rate and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan.

Our average daily line of credit balance increased by $42.2 million, or 259.0%, to $58.5 million for the three months ended September 30, 2022 from $16.3 million for three months ended September 30, 2021.

The average daily interest rate on our line of credit balance increased to 3.61% for the three months ended September 30, 2022 from 1.47% for three months ended September 30, 2021.

Income Tax Provision

Our provision for income taxes decreased by $3.3 million, or 125.1%, from $2.7 million for the three months ended September 30, 2021 to $(0.7) million for the three months ended September 30, 2022 primarily due to a decrease in income before income taxes.

Net (Loss) Income Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc.

was $3.9 million for the three months ended September 30, 2022, compared to net income attributable to HF Foods Group Inc.

of $7.6 million for the three months ended September 30, 2021.

The decrease of $11.4 million, or 151.2%, is primarily attributable to the increased costs disclosed above.

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 %

The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:

Three Months Ended September 30, Change

(In thousands) 2022 2021 Amount %

Net (loss) income $ (3,894) $ 7,911 $ (11,805) (149.2) %

Interest expense 2,274 902 1,372 152.1 %

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 %

Income tax provision (672) 2,676 (3,348) (125.1) %

Depreciation and amortization 6,386 4,743 1,643 34.6 %

EBITDA 4,094 16,232 (12,138) (74.8) %

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 %

Lease guarantee expense (58) — (58) NM

Change in fair value of interest rate swap contracts (284) (52) (232) 446.2 %

Stock-based compensation expense 162 375 (213) (56.8) %

Acquisition and integration costs 71 — 71 NM

Adjusted EBITDA $ 3,985 $ 16,555 $ (12,570) (75.9) %

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.

Adjusted EBITDA margin 1.3 % 7.7 %

____________________

NM - Not meaningful

Adjusted EBITDA was $4.0 million for the three months ended September 30, 2022, a decrease of $12.6 million, or 75.9%, compared to $16.6 million for the three months ended September 30, 2021.

The $12.6 million decrease in Adjusted EBITDA was primarily attributable to the increase in distribution, selling and administrative expenses as well as lower gross profit margin.

Adjusted EBITDA margin decreased by 640 basis points primarily due to the increase in distribution, selling and administrative expenses as a percentage of net revenue of 380 basis points and a decrease of 230 basis points on gross profit margin.

Results of Operations for the Nine Months Ended September 30, 2022 and 2021

1 unchanged sentence

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

For the Nine Months Ended September 30, Changes

2021 2020 Amount %

Nine Months Ended September 30, Change

(In thousands) 2022 2021 Amount %

Net revenue $ 878,568 $ 568,468 $ 310,100 54.6 %

2 unchanged sentences

Distribution, selling and administrative expenses 140,840 88,927 51,913 58.4 %

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 %

Income from operations 13,950 17,547 (3,597) (20.5) %

Interest expense 5,101 2,732 2,369 86.7 %

Other income, net (1,401) (1,437) 36 (2.5) %

Change in fair value of interest rate swap contracts (850) (1,371) 521 (38.0) %

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 %

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.

Lease guarantee expense 5,831 — 5,831 NM

Income before income tax provision 5,269 17,623 (12,354) (70.1) %

Income tax provision 1,529 4,738 (3,209) (67.7) %

Net income 3,740 12,885 (9,145) (71.0) %

net (loss) income attributable to noncontrolling interests (74) 566 (640) (113.1) %

Net income attributable to HF Foods Group Inc.

$ 3,814 $ 12,319 $ (8,505) (69.0) %

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 %

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.

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

____________________

NM - Not meaningful

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

Nine Months Ended September 30,

2021 2020 Amount %

Sales to independent restaurants

Net revenue 100.0 % 100.0 %

1 unchanged sentence

Gross profit 17.6 % 18.7 %

Gross Margin 19.2 % 18.4 % 0.8 % 4.3 %

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 %

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.

Distribution, selling and administrative expenses 16.0 % 15.6 %

Income from operations 1.6 % 3.1 %

Interest expense 0.6 % 0.5 %

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

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

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

Income Tax Provision (Benefit)

Provision for income taxes increased by $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.

Other income, net (0.2) % (0.3) %

Change in fair value of interest rate swap contracts (0.1) % (0.2) %

Lease guarantee expense 0.7 % — %

Income before income tax provision 0.6 % 3.1 %

Provision for income taxes 0.2 % 0.8 %

Net income 0.4 % 2.3 %

net income attributable to noncontrolling interests — % 0.1 %

Net income attributable to HF Foods Group Inc.

Net revenue for the nine months ended September 30, 2022 increased by $310.1 million, or 54.6% compared to the same period in 2021, primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to recent acquisitions and overall product cost inflation.

Organic growth contributed $125.7 million and recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed the remaining $184.4 million.

Gross profit for the nine months ended September 30, 2022 increased by $48.3 million or 45.4%, compared to the same period in 2021 mainly due to strong revenue growth and recent acquisitions, which contributed $26.0 million of gross profit for the nine months ended September 30, 2022.

Overall gross margin decreased from 18.7% in the nine months ended September 30, 2021 to 17.6% in the nine months ended September 30, 2022, primarily due to lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales, increases in fuel costs, incremental lower margin sales from newly acquired customers, timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the nine months ended September 30, 2022 increased by $51.9 million, or 58.4%, to $140.8 million compared to $88.9 million for the nine months ended September 30, 2021.

Of the distribution, selling and administrative expenses increase, $25.5 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, as more workers were, and will continue to be, required to handle the increasing sales demand, $7.5 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth, and an increase of $7.5 million in professional fees primarily driven by legal costs, acquisition-related costs and increased compliance costs as a result of the SEC and SIC investigations and an SEC comment letter inquiry.

Distribution, selling and administrative expenses as a percentage of net revenue increased from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022 primarily due to the costs disclosed above partially offset by strong revenue growth and fixed cost leverage.

Interest Expense

Interest expense for the nine months ended September 30, 2022 increased by $2.4 million, or 86.7%, compared to the same period in 2021 mainly due to higher utilization of our line of credit coupled with a higher interest rate and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan.

Our average daily line of credit balance increased by $39.1 million, or 271.0%, to $53.5 million for the nine months ended September 30, 2022 from $14.4 million for nine months ended September 30, 2021.

The average daily interest rate on our line of credit increased to 2.45% for the nine months ended September 30, 2022 from 1.48% for nine months ended September 30, 2021.

Income Tax Provision

Our provision for income taxes slightly decreased by $3.2 million, or 67.7%, from $4.7 million for the nine months ended September 30, 2021 to $1.5 million for the nine months ended September 30, 2022 primarily due to decreased profitability.

Net Income Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $3.8 million for the nine months ended September 30, 2022, compared to $12.3 million for the nine months ended September 30, 2021.

The decrease of $8.5 million, or 69.0%, is primarily attributable to the $5.8 million in lease guarantee expense related to our AnHeart lease guarantee and the increased costs disclosed above, partially offset by the increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently.

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 %

The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:

Nine Months Ended September 30, Change

($ in thousands) 2022 2021 Amount %

Net income $ 3,740 $ 12,885 $ (9,145) (71.0) %

Interest expense 5,101 2,732 2,369 86.7 %

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 %

Income tax provision 1,529 4,738 (3,209) (67.7) %

Depreciation and amortization 18,245 14,233 4,012 28.2 %

EBITDA 28,615 34,588 (5,973) (17.3) %

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 %

Lease guarantee expense 5,831 — 5,831 NM

Change in fair value of interest rate swap contracts (849) (1,371) 522 (38.1) %

Stock-based compensation expense 673 375 298 79.5 %

Acquisition and integration costs 1,130 — 1,130 NM

Impairment loss 422 — 422 NM

Adjusted EBITDA $ 35,822 $ 33,592 $ 2,230 6.6 %

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 margin 4.1 % 5.9 %

____________________

NM - Not meaningful

Adjusted EBITDA was $35.8 million for the nine months ended September 30, 2022, an increase of $2.2 million, or 6.6%, compared to $33.6 million for the nine months ended September 30, 2021.

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.

The $2.2 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels partially offset by the increase of distribution, selling and administrative expenses as a percentage of net revenue from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022.

Adjusted EBITDA margin decreased by 180 basis points primarily due to the decrease of 110 basis points on gross profit margin.

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

As of September 30, 2022, we had cash of approximately $17.8 million, checks issued not presented for payment of $18.5 million and access to approximately $28.7 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

We have funded working capital and other capital requirements primarily by cash flow from operations and our line of credit.

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.

Based on current sales volume, which has been increasing steadily quarter-on-quarter since the third quarter of fiscal year 2020, we believe that our cash flow generated from operations is sufficient to meet our normal working capital needs and debt obligations 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.

Management has taken into consideration historical experience, general economic trends in the United States, and trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of September 30, 2022.

On March 31, 2022, we amended the Credit Agreement with J.P.

Morgan extending our line of credit for five years.

The amendment provided for a $100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1% plus 1.375% per annum, as well as an increase to our mortgage-secured term loan from $69.0 million to $115.0 million.

In April of 2022, the $46.0 million increase to the mortgage-secured term loan was used to pay down our $100.0 million line of credit.

We also received a waiver through January 31, 2023 related to the timing of our filing of our 2021 audited financial statements.

On April 29, 2022, we completed the Sealand Acquisition for cash consideration of $20.0 million plus approximately $14.4 million of inventory.

We financed the Sealand Acquisition through our $100.0 million line of credit.

See Note 7 - Acquisitions for additional information regarding the Sealand Acquisition.

During the three months ended June 30, 2022, we sold a warehouse to a related party for approximately $7.2 million and used a portion of the proceeds to pay the outstanding balance of our $4.5 million loan with First Horizon Bank.

See Note 10 - Debt for additional information.

During the three months ended June 30, 2022, we paid the remaining $4.5 million of our related party promissory note payable.

See Note 13 - Related Party Transactions for additional information.

Based on the above considerations, management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve 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 response to a potential resurgence of COVID-19, competitive pricing in the foodservice distribution industry, and our bank and suppliers being able to provide continued support.

If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may 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,

As of September 30, 2022, 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.

The following table summarizes cash flow data for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, Change

(In thousands) 2022 2021 Amount %

Net cash provided by operating activities $ 6,932 $ 11,333 $ (4,401) (38.8)%

Net cash used in investing activities (50,234) (6,444) (43,790) 679.5%

Net cash provided by (used in) financing activities 2,247,791 44,584,579

Net cash provided by (used in) financing activities 46,316 1,073 45,243 NM

Net increase in cash and cash equivalents $ 3,014 $ 5,962 $ (2,948) (49.4)%

____________________

NM - Not meaningful

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.

Net cash provided by operating activities decreased to $6.9 million for the nine months ended September 30, 2022, compared to $11.3 million for the nine months ended September 30, 2021 primarily due to lower net income partially offset by changes in working capital items.

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.

Net cash used in investing activities was $50.2 million for the nine months ended September 30, 2022, compared to net cash used in investing activities of $6.4 million for the nine months ended September 30, 2021, an increase of $43.8 million primarily due to the Sealand Acquisition of $34.9 million and the $17.4 million paid for the inventory acquired related to the Great Wall Acquisition partially offset by proceeds from the $7.2 million sale of a warehouse.

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.

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

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.

Net cash provided by financing activities was $46.3 million for the nine months ended September 30, 2022, compared to net cash used in financing activities of $1.1 million for the nine months ended September 30, 2021, primarily due to the $46.0 million increase of our mortgage-secured term loan and the net impact of $15.4 million on our line of credit from net proceeds of $0.8 million for the nine months ended September 30, 2021 to net proceeds of $16.2 million for the nine months ended September 30, 2022, partially offset by the $4.5 million payoff of our related party p romissory note payable and the $4.5 million repayment of long-term debt related to our warehouse sale mentioned above.

Critical Accounting Policies and Estimates

We have prepared the financial information in this Quarterly Report in accordance with U.S.

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 have prepared the financial information in this Quarterly Report in accordance with GAAP.

Preparing our 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.

Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2021 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results.

Our policy is to test goodwill for impairment annually in the fourth quarter or more frequently if certain triggering events or circumstances indicate it could be impaired.

We are monitoring the decline in our stock price and the potential for this to impact our recorded goodwill.

While we have determined there to be no triggering events at September 30, 2022, a sustained decline in our stock price could result in a quantitative test of impairment in the fourth quarter.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.

For a discussion of recent accounting pronouncements, refer to Recent Accounting Pronouncements in Note 2 - Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis