HF Foods Group Inc. - Quarter Report: 2019 September (Form 10-Q)

 

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HF Foods group inc.
form 10-q for the quarter ended SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

Description		Page
PART I.	FINANCIAL INFORMATION
	Item 1  Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Income (Unaudited)	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3  Quantitative and Qualitative Disclosures about Market Risk	36
	Item 4  Controls and Procedures	36
PART II.	OTHER INFORMATION
	Item 1  Legal Proceedings	36
	Item 1A  Risk Factors	36
	Item 2  Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3  Defaults Upon Senior Securities	37
	Item 4  Mine Safety Disclosures	37
	Item 5  Other Information	37
	Item 6  Exhibits	37
SIGNATURE PAGE		38

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		As of
		September 30				December 31
		2019				2018
ASSETS
CURRENT ASSETS:
Cash		$	6,803,415			$	5,489,404
Accounts receivable, net			13,089,775				14,406,476
Accounts receivable - related parties, net			2,677,503				2,292,151
Inventories, net			29,826,054				22,175,769
Advances to suppliers, net			647,339				280,267
Advances to suppliers - related parties, net			990,139				1,526,482
Notes receivable			-				3,803,826
Notes receivable - related parties, current			-				8,117,686
Income Tax Recoverable			448,512				-
Other current assets			1,229,379				950,703
TOTAL CURRENT ASSETS			55,712,116				59,042,764
Property and equipment, net			27,096,211				22,650,021
Operating lease right-of-use assets			75,169				-
Deferred tax assets			81,385				117,933
Long-term notes receivable - related parties			-				423,263
Other long-term assets			141,954				242,426
TOTAL ASSETS		$	83,106,834			$	82,476,407
CURRENT LIABILITIES:
Lines of credit		$	11,864,481			$	8,194,146
Accounts payable			18,728,857				17,474,206
Accounts payable - related parties			4,279,050				3,923,120
Advance from customers			758,296				61,406
Advance from customers - related parties			-				166,490
Current portion of long-term debt, net			1,650,898				1,455,441
Current portion of obligations under capital leases			262,904				164,894
Current portion of obligations under operating leases			40,155				-
Income tax payable			13,343				-
Accrued expenses			991,299				2,148,602
TOTAL CURRENT LIABILITIES			38,589,283				33,588,305
Long-term debt, net			15,409,535				13,109,854
Obligations under capital leases, non-current			1,139,964				120,705
Obligations under operating leases, non-current			35,014				-
Deferred tax liabilities			1,306,630				1,196,061
TOTAL LIABILITIES			56,480,426				48,014,925
COMMITMENTS AND CONTINGENCIES
EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively			-				-
Common Stock, $0.0001 par value, 30,000,000 shares authorized, 22,350,211 shares issued, 905,115 treasury shares, and 21,445,096 shares outstanding as of September 30, 2019, and 30,000,000 shares authorized, and 22,167,486 shares issued and outstanding as of December 31, 2018			2,236				2,217
Additional paid-in capital			10,882,646				22,920,603
Retained earnings			14,477,257				10,433,984
Treasury Stock			(91	)			-
Total shareholders’ equity			25,362,048				33,356,804
Noncontrolling interest			1,264,360				1,104,678
TOTAL EQUITY			26,626,408				34,461,482
TOTAL LIABILITIES AND EQUITY		$	83,106,834			$	82,476,407

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		For the three months Ended September 30,								For the nine months Ended September 30,
		2019				2018				2019				2018
Net revenue - third parties		$	70,568,373			$	65,936,159			$	211,520,517			$	203,868,014
Net revenue - related parties			5,130,504				4,427,639				13,697,588				13,364,070
TOTAL NET REVENUE			75,698,877				70,363,798				225,218,105				217,232,084
Cost of revenue - third parties			58,598,428				53,471,081				174,634,207				167,372,145
Cost of revenue - related parties			4,908,301				4,330,030				13,172,741				13,069,453
TOTAL COST OF REVENUE			63,506,729				57,801,111				187,806,948				180,441,598
GROSS PROFIT			12,192,148				12,562,687				37,411,157				36,790,486
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES			9,969,785				10,385,563				31,428,998				31,725,945
INCOME FROM OPERATIONS			2,222,363				2,177,124				5,982,159				5,064,541
Other Income (Expenses)
Interest income			113,930				333,072				418,397				346,822
Interest expense and bank charges			(482,099	)			(270,049	)			(1,207,217	)			(1,024,762	)
Other income			281,619				370,678				905,149				918,010
Total Other Income (Expenses), net			(86,550	)			433,701				116,329				240,070
INCOME BEFORE INCOME TAX PROVISION			2,135,813				2,610,825				6,098,488				5,304,611
PROVISION FOR INCOME TAXES			607,142				840,147				1,715,532				1,542,207
NET INCOME			1,528,671				1,770,678				4,382,956				3,762,404
Less: net income (loss) attributable to noncontrolling interest			181,106				103,600				339,683				(277,855	)
NET INCOME ATTRIBUTABLE TO HF FOODS GROUP INC.		$	1,347,565			$	1,667,078			$	4,043,273			$	4,040,259
Earnings per common share - basic and diluted		$	0.06			$	0.08			$	0.18			$	0.20
Weighted average shares - basic and diluted			22,258,557				21,364,256				22,198,290				20,434,639

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		Ordinary Shares								Additional
										Paid-in				Retained				Shareholders'				Noncontrolling				Total
		Shares				Amount				Capital				Earnings				Equity				Interest				Equity
Balance at December 31, 2018			22,167,486			$	2,217			$	22,920,603			$	10,433,984			$	33,356,804			$	1,104,678			$	34,461,482
Net income			-				-				-				1,672,813				1,672,813				120,759				1,793,572
Balance at March 31, 2019			22,167,486			$	2,217			$	22,920,603			$	12,106,797			$	35,029,617			$	1,225,437			$	36,255,054
Net income			-				-				-				1,022,895				1,022,895				37,817				1,060,712
Distribution to shareholders			-				-				-				-				-				(90,000	)			(90,000	)
Balance at June 30, 2019			22,167,486			$	2,217			$	22,920,603			$	13,129,692			$	36,052,512			$	1,173,254			$	37,225,766
Net income			-				-				-				1,347,565				1,347,565				181,107				1,528,672
Exercise of Stock Options			182,725				18				(18	)			-				-				-				-
Treasury Stock			(905,115	)			(91	)			(12,037,939	)			-				(12,038,030	)			-				(12,038,030	)
Distribution to shareholders			-				-				-				-				-				(90,000	)			(90,000	)
Balance at September 30, 2019			21,445,096			$	2,144			$	10,882,646			$	14,477,257			$	25,362,047			$	1,264,361			$	26,626,408
Balance at December 31, 2017			19,969,831			$	1,997			$	21,549,703			$	4,255,213			$	25,806,913			$	1,091,199			$	26,898,112
Net income			-				-				-				1,347,950				1,347,950				38,525				1,386,475
Distribution to shareholders			-				-				-				(180,089	)			(180,089	)			(89,911	)			(270,000	)
Balance at March 31, 2018			19,969,831			$	1,997			$	21,549,703			$	5,423,074			$	26,974,774			$	1,039,813			$	28,014,587
Net income			-				-				-				1,025,231				1,025,231				(419,980	)			605,251
Distribution to shareholders			-				-				-				(180,091	)			(180,091	)			(89,909	)			(270,000	)
Balance at June 30, 2018			19,969,831			$	1,997			$	21,549,703			$	6,268,214			$	27,819,914			$	529,924			$	28,349,838
Net income			-				-				-				1,667,078				1,667,078				103,600				1,770,678
Effective of reverse acquisition			2,197,655				220				1,370,900				-				1,371,120				-				1,371,120
Distribution to shareholders			-				-				-				252,497				252,497				126,059				378,556
Balance at September 30, 2018			22,167,486			$	2,217			$	22,920,603			$	8,187,789			$	31,110,609			$	759,583			$	31,870,192

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		For the nine months Ended September 30,
		2019				2018
Cash flows from operating activities:
Net Income		$	4,382,956			$	3,762,404
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization expense			2,173,723				1,579,105
Gain from disposal of equipment			(68,626	)			-
Provision of doubtful accounts			(50,090	)			62,231
Deferred tax benefits			147,117				(168,868	)
Changes in operating assets and liabilities:
Accounts receivable, net			1,366,791				1,801,941
Accounts receivable - related parties, net			(385,352	)			14,320
Inventories			(7,650,285	)			(1,454,817	)
Advances to suppliers, net			(367,072	)			(215,820	)
Advances to suppliers - related parties, net			536,343				2,573,416
Income tax recoverable			(448,512	)			-
Other current assets			(291,864	)			(421,424	)
Other long-term assets			100,472				1,264,289
Accounts payable			1,254,651				96,141
Accounts payable - related parties			355,930				(928,457	)
Advance from customers			696,890				374,072
Advance from customers - related parties			(166,490	)			(1,000,575	)
Income tax payable			13,343				(745,958	)
Accrued expenses			(1,157,301	)			1,890,258
Net cash provided by operating activities			442,624				8,482,258
Cash flows from investing activities:
Cash acquired from acquisition of Atlantic Acquisition			-				5,550,298
Cash paid for redemption of Atlantic Acquisition’s stock in connection of reverse acquisition			-				(4,120,000	)
Purchase of property and equipment			(5,381,138	)			(2,194,210	)
Proceeds from disposal of equipment			275,699				-
Cash received from long-term notes receivable			290,071				-
Cash paid for issuance of long-term notes receivable			(108,750	)			(2,559,469	)
Cash received from long-term notes receivable to related parties			386,358				316,504
Cash paid for issuance of long-term notes receivable to related parties			(260,933	)			(1,988,813	)
Net cash used in investing activities			(4,798,693	)			(4,995,690	)
Cash flows from financing activities:
Proceeds from lines of credit			15,364,481				3,600,000
Repayment of lines of credit			(11,694,146	)			(3,000,000	)
Proceeds from long-term debt			6,100,878				3,745,048
Repayment of long-term debt			(3,605,740	)			(4,965,264	)
Repayment of capital lease			(315,393	)			-
Cash distribution paid to shareholders			(180,000	)			(1,161,445	)
Net cash provided by (used in) financing activities			5,670,080				(1,781,661	)
Net increase in cash			1,314,011				1,704,907
Cash at beginning of the period			5,489,404				6,086,044
Cash at end of the period		$	6,803,415			$	7,790,951
Supplemental cash flow information
Cash paid for interest		$	1,021,687			$	1,008,666
Cash paid for income taxes		$	1,692,927			$	2,413,148

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NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION

 

Organization and General

 

HF Foods Group Inc. (“HF Foods”, or the “Company”) markets and distributes fresh produces, frozen and dry food, and non-food products to primarily Asian/Chinese restaurants and other foodservice customers throughout the Southeast region of the United States.

 

The Company was originally incorporated in Delaware on May 19, 2016 as a special purpose acquisition company under the name Atlantic Acquisition Corp. (“Atlantic”), in order to acquire, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities.

 

Business Combination

 

Effective August 22, 2018, Atlantic consummated the transactions contemplated by a merger agreement (the “Merger Agreement”), dated as of March 28, 2018, by and among Atlantic, HF Group Merger Sub Inc., a Delaware subsidiary formed by Atlantic, HF Group Holding Corporation, a North Carolina corporation (“HF Holding”), the stockholders of HF Holding, and Zhou Min Ni, as representative of the stockholders of HF Holding. Pursuant to the Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the surviving entity (the “Merger”) and a wholly-owned subsidiary of Atlantic (the “Acquisition”). Additionally, upon the closing of the transactions contemplated by the Merger Agreement (the “Closing”), (i) the stockholders of HF Holding became the holders of a majority of the shares of common stock of Atlantic, and (ii) Atlantic changed its name to HF Foods Group Inc. (Collectively, these transactions are referred to as the “Transactions”).

 

At closing on August 22, 2018, Atlantic issued the HF Holding stockholders an aggregate of 19,969,831 shares of its common stock, equal to approximately 88.5% of the aggregate issued and outstanding shares of Atlantic’s common stock. The pre-Transaction stockholders of Atlantic owned the remaining 11.5% of the issued and outstanding shares of common stock of the combined entities.

 

Following the consummation of the Transactions on August 22, 2018, there were 22,567,486 shares of common stock issued and outstanding, consisting of (i) 19,969,831 shares issued to HF Holding’s stockholders pursuant to the Merger Agreement, (ii) 10,000 restricted shares issued to one of Atlantic’s shareholders in conjunction with the Transactions, pursuant to a pre-Transactions agreement, and (iii) 2,587,655 shares issued to the pre-Transaction stockholders of Atlantic. Following the consummation of the Transactions, 400,000 shares were sold back to the Company by one of Atlantic’s pre-Transaction shareholders, pursuant to a pre-Transaction agreement. 

 

The Acquisition is treated by Atlantic as a reverse business combination under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, HF Holding is considered to be acquiring Atlantic in this transaction. Therefore, the aggregate consideration paid in connection with the business combination will be allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic will be consolidated into the results of operations of HF Holding as of the completion of the business combination.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION （CONTINUED）

 

Reorganization of HF Group

 

HF Holding was incorporated in the State of North Carolina on October 11, 2017. Effective January 1, 2018, HF Holding entered into a Contribution Agreement (the “Agreement”) whereby the controlling shareholders of the following 11 entities contributed their respective stocks to HF Holding in exchange for all of HF Holding’s outstanding shares. Upon completion of the share exchanges, these entities became either wholly-owned or majority-owned subsidiaries of HF Holding (hereafter collectively referred to as “HF Group”).

 

●

Han Feng, Inc. (“Han Feng”)

 

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Truse Trucking, Inc. (“TT”)

 

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Morning First Delivery (“MFD”)

 

●

R&N Holdings, LLC (“R&N Holdings”)

 

●

R&N Lexington, LLC (“R&N Lexington”)

 

●

Kirnsway Manufacturing Inc. (“Kirnsway”)

 

●

Chinesetg, Inc. (“Chinesetg”)

 

●

New Southern Food Distributors, Inc. (“NSF”)

 

●

B&B Trucking Services, Inc. (“BB”)

 

●

Kirnland Food Distribution, Inc. (“Kirnland”)

 

●

HG Realty LLC (“HG Realty”)

 

In accordance with Accounting Standards Codification (“ASC”) 805-50-25, the transaction consummated through the Agreement has been accounted for as a transaction among entities under common control since the same shareholders control all these 11 entities prior to the execution of the Agreement.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION （CONTINUED）

 

Reorganization of HF Group （Continued）

 

The following table summarizes the entities under HF Group after the above-mentioned reorganization:

 

 

On June 5, 2018, AnHeart Inc. (“AnHeart”) was incorporated and 100% owned by HF Holding. On February 23, 2019, HF Holding transferred all of its ownership interest in AnHeart to Jianping An, a resident of New York. AnHeart had no activities since inception other than being formed solely to enter into lease agreements for two premises in New York City, NY (Note 8).

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements include the financial statements of HF Holding and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

 

The unaudited interim condensed consolidated financial information as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal years ended December 31, 2018 and 2017.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of the Company’s financial position as of September 30, 2019, its results of operations and its cash flows for the nine months ended September 30, 2019 and 2018, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Noncontrolling interests

 

U.S. GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the net income (loss) of those subsidiaries are reported separately in the consolidated statements of income.

 

Uses of estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include the allowances for doubtful accounts, estimated useful lives and fair value in connection with the impairment of property and equipment. Actual results could differ from these estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with a maturity of three or fewer months to be cash equivalents. As of September 30, 2019, and December 31, 2018, the Company had no cash equivalents.

 

Accounts Receivable

 

Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying unaudited condensed consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company is aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount the Company reasonably expects to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods. As of September 30, 2019 and December 31, 2018, the allowances for doubtful accounts were $576,349 and $658,104, respectively.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Inventories

 

The Company’s inventories, consisting mainly of food and other food service-related products, are primarily considered as finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. No inventory reserves were recorded as of September 30, 2019 and December 31, 2018.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment:

 

Estimated useful lives

 

 

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property, plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of income and comprehensive income in other income or expenses.

 

Impairment of Long-lived Assets

 

The Company assesses its long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. The Company did not record any impairment loss on its long-lived assets as of September 30, 2019 and December 31, 2018.

 

Business Combinations

 

The Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date.

 

Revenue recognition

 

The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.

 

On January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. The results of applying Topic 606 using the modified retrospective approach were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The majority of the Company’s contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a point in time.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue recognition (Continued)

 

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of September 30, 2019 and December 31, 2018. For the nine months ended September 30, 2019 and 2018, revenue recognized from performance obligations related to prior periods was insignificant.

 

Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant. The following table summarizes disaggregated revenue from contracts with customers by geographic locations:

 

 

 

 

Shipping and handling costs

 

Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are presented in distribution, selling and administrative expenses. Shipping and handling costs were $3,093,138 and $3,615,470 for the nine months ended September 30, 2019 and 2018, and $1,014,288 and $791,016 for the three months ended September 30, 2019 and 2018, respectively.

 

Income taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at September 30, 2019 and December 31, 2018.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Leases

 

On January 1, 2019 the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, the Company elected to apply the package of practical expedients. Based on this guidance the Company will not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. The new standard was adopted in the current quarter and did not have a material impact on our consolidated balance sheets or on our consolidated income statements. 

 

The adoption of Topic 842 resulted in the presentation of $75,169 of operating lease assets and operating lease liabilities on the consolidated balance sheet as of September 30, 2019. See Note 8 for additional information.

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on our consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

Earnings per Share

 

The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There is no anti-dilutive effect for the nine months ended September 30, 2019 and 2018.

 

Fair value of financial instruments

 

The Company follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, income tax payable, advance from customers, accrued expenses approximate their fair value based on the short-term maturity of these instruments.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentrations and credit risk

 

Credit risk

 

Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

 

Concentration risk

 

There were no receivables from any one customer representing more than 10% of the Company’s consolidated gross accounts receivable at September 30, 2019 or December 31, 2018.

 

For the nine and three months ended September 30, 2019 and 2018, no supplier accounted for more than 10% of the total cost of revenue. As of September 30, 2019, two suppliers accounted for 47% and 14% of total advance payments outstanding, respectively, and these two suppliers accounted for 77% and 23% of advance payments to related parties, respectively. As of December 31, 2018, three suppliers accounted for 55%, 18% and 12% of total advance payments outstanding, respectively, and these three suppliers accounted for 65%, 22% and 14% of advance payments to related parties, respectively.

 

Recent accounting pronouncements

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The amendments also re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company has not early adopted this update and it will become effective on January 1, 2020. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on its consolidated financial statements and does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the United States Tax Cuts and Jobs Act (the “Act”) and will improve the usefulness of information reported to financial statement users. ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. This update became effective for the Company on January 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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NOTE 3 - ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following:

 

 

 

NOTE 4 - NOTES RECEIVABLE

 

On September 30, 2018, the Company entered into a line of credit promissory note agreement with Feilong Trading, Inc, which is a supplier to the Company. Pursuant to the promissory note agreement, Feilong Trading, Inc could borrow up to $4,000,000 from time to time. The note bears interest at the rate of 5% per annum on the unpaid balance, compounded monthly. On September 30, 2019, the entire outstanding balance of $3,622,505 was sold to Mr. Zhou Min Ni. Accordingly, Mr. Zhou Min Ni has delivered to HF Group Holding Corp. 272,369 shares of common stock of the Company at $13.30 per share, which were recorded in treasury stock by the Company as of September 30, 2019. In connection with the sale of this notes receivable, the Company also required additional 89,882 shares of common stock of the Company owned by Mr. Ni being placed in an escrow account for a period of one year (the “Escrow Period”), which will be delivered to the Company in part or in full, if the weighted average closing price of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $13.30.

 

 

NOTE 5 - PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

 

 

Depreciation expense was $2,160,538 and $1,579,105 for the nine months ended September 30, 2019 and 2018, respectively, and $731,731 and $537,443 for the three months ended September 30, 2019 and 2018, respectively.

 

NOTE 6 - LINES OF CREDIT

 

On July 1, 2016, Han Feng, the Company’s main operating entity, entered into a line of credit agreement with East West Bank. The line of credit agreement provided for a revolving credit of $14,500,000. The line of credit was secured by virtually all assets of Han Feng, premises and an adjoining undeveloped parcel of land owned by R&N Holding, and premises owned by R&N Lexington. The principal and all accrued unpaid interest were originally due in May 2018 and was extended to May 27, 2019, to provide uninterrupted credit facility while the renewal of the line of credit is being reviewed by the bank. Interest is based on the prime rate less 0.15%, but in no event less than 3.25% per annum, and is payable monthly. On April 18, 2019, this $5,156,018 obligation was repaid in full with proceeds from the Credit Agreement with East West Bank entered into on April 18, 2019, as described below.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 - LINES OF CREDIT (CONTINUED)

 

On April 18, 2019, the Company, Han Feng, NSF and Kirnland entered into a Credit Agreement (the “Credit Agreement”) with East West Bank. The Credit Agreement provides for a $25 million secured line of credit facility available to be used in one or more revolving loans to the Company’s domestic subsidiaries that are parties to the Credit Agreement for working capital and general corporate purposes. Han Feng, NSF and Kirnland (the “Borrower Subsidiaries”) are the borrowers and the Company and each of its other material subsidiaries are guarantors of all the obligations under the Credit Agreement. The line of credit matures on August 18, 2021. Contemporaneously with the execution of the Credit Agreement, existing senior debt of the Borrower Subsidiaries in the amount of $6,111,692 was paid from revolving loans drawn on the line of credit. Under the Credit Agreement, the Borrower subsidiaries will pay interest on the principal amounts drawn on the line of credit at a rate per annum equal to (a) 0.375% below the Prime Rate in effect from time to time, or (b) 2.20% above the LIBOR Rate in effect from time to time, depending on the rate elected at the time a borrowing request is made, but in no event shall the interest rate of any revolving loan at any time be less than 4.214% per annum (4.625% at September 30, 2019). The outstanding balance on the line of credit at September 30, 2019 was $11,864,481. The line of credit agreement contains certain financial covenants which, among other things, require Han Feng to maintain certain financial ratios. As of September 30, 2019, the Company was in compliance with such covenants. On November 4, 2019, the line of credit was paid off from borrowings under the Amended and Restated Credit Agreement entered into in connection with the closing of the merger with B&R Global Holdings, Inc. (“B&R”) (Note 14). The outstanding balance paid off including accrued interest was $13,864,481.

 

On November 14, 2012, NSF, another operating entity, entered into a line of credit agreement with Bank of America. The line of credit agreement provided for a revolving credit of $4,000,000. The line of credit was secured by three real properties owned by NSF, and guaranteed by the two shareholders of the Company, as well as BB, a subsidiary of the Company. The maximum borrowings are determined by certain percentages of eligible accounts receivable and inventories. The principal and all accrued unpaid interest were originally due in January 2018 and subsequently extended to February 2020. Interest is based on the LIBOR rate plus 2.75%. On April 18, 2019, this $954,984 obligation was paid off in full with proceeds from the Credit Agreement with East West Bank entered into on April 18, 2019, as described above.

 

NOTE 7 - LONG-TERM DEBT

 

Long-term debt at September 30, 2019 and December 31, 2018 is as follows:

 

 

The terms of the various loan agreements relating to long-term bank borrowings contain certain restrictive financial covenants which, among other things, require the Company to maintain specified levels of debt to tangible net worth and debt service coverage. As of September 30, 2019, and December 31, 2018, the Company was in compliance with such covenants. On November 4, 2019, one of the East West Bank term loans was paid off from borrowings under the Amended and Restated Credit Agreement entered into in connection with the closing of the merger with B&R (Note 14). The outstanding balance paid off including accrued interest was $1,561,126.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 - LONG-TERM DEBT (CONTINUED)

 

The loans outstanding were guaranteed by the following properties, entities or individuals:

 

	(a)	Not collateralized or guaranteed.
	(b)	Guaranteed by the Company, nine subsidiaries of the Company, TT, MFD, R&N Holding, R&N Lexington, Kirnsway, Chinesetg, BB, Kirnland and HG Realty, and by two shareholders of the Company. Secured by assets of Han Feng, New Southern Foods, R&N Lexington and R&N Holding, two real properties of R&N Holding, two real properties of New Southern Foods, and a real property of R&N Lexington. Balloon payments of these long-term debts are $6,590,710.
	(c)	Guaranteed by two shareholders of the Company, as well as Han Feng, a subsidiary of the Company. Secured by a real property owned by HG Realty. Balloon payment of this long-term debt is $3,116,687.
	(d)	Guaranteed by two shareholders of the Company, as well as two subsidiaries of the Company, NSF and BB. Secured by vehicles.
	(e)	Secured by vehicles.

 

The future maturities of long-term debt at September 30, 2019 are as follows:

 

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NOTE 8 - LEASES

 

The Company has operating and finance leases for vehicles or delivery trucks, forklifts and computer equipment with various expiration dates through 2021. The Company determines whether an arrangement is or includes an embedded lease at contract inception.

 

Operating lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company also recognizes a finance lease asset and finance lease liability at inception, with lease expense recognized as interest expense and amortization of the lease payment.

 

Operating Leases

 

The components of lease expense were as follows:

 

 

Supplemental cash flow information related to leases was as follows:

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – LEASES (CONTINUED)

 

Capital Leases

The components of lease expense were as follows: 

 

 

 

Supplemental cash flow information related to leases was as follows: 

 

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – LEASES (CONTINUED)

 

Supplemental balance sheet information related to leases was as follows:

 

 

Maturities of lease liabilities were as follows

 

 

 

On July 2, 2018, AnHeart entered into two separate leases for two buildings located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively, which are net leases, meaning that AnHeart is required to pay all costs associated with the buildings, including utilities, maintenance and repairs. HF Holding provided a guaranty for all rent and related costs of the leases, including costs associated with the construction of a two-story structure at 273 Fifth Avenue and rehabilitation of the building at 275 Fifth Avenue.

 

On February 23, 2019, the Company executed an agreement to transfer all of its ownership interest in AnHeart to Jianping An, a resident of New York for a sum of $20,000. The transfer of ownership was complete on May 2, 2019. However, the transfer of ownership does not release HF Holding’s guaranty of AnHeart’s obligations or liabilities under the original lease agreements. Under the terms of the sale of shares, AnHeart has executed a security agreement which provides a security interest in AnHeart assets and a covenant that the Company will be assigned the leases if AnHeart defaults. Further, AnHeart has tendered an unconditional guaranty of all AnHeart liabilities arising from the leases, in favor of the Company, executed by Minsheng Pharmaceutical Group Company, Ltd., a Chinese manufacturer and distributor of herbal medicines.

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NOTE 9 - TAXES

 

A.

Corporate Income Taxes (“CIT”)

 

Prior to January 1, 2018, Han Feng, TT, MFD, Kirnsway, Chinesetg, NSF and BB elected under the Internal Revenue Code to be S corporations. R&N Holdings, R&N Lexington and HG Realty are formed as partnerships. An S corporation or partnership is considered a flow-through entity and is generally not subject to federal or state income tax on the corporate level. In lieu of corporate income taxes, the stockholders and members of these entities are taxed on their proportionate share of the entities’ taxable income. Kirnland did not elect to be treated as an S corporation and is the only entity that is subject to corporate income taxes under this report.

 

Effective January 1, 2018, all of the above-listed S corporation and partnership entities have been converted to C corporations and will be taxed at the corporate level going forward. Accordingly, the Company shall account for income taxes of all these entities under ASC 740.

 

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company expects the new federal income tax rate will significantly lower the Company’s income tax expenses going forward. The Company does not expect the repatriation tax and new minimum tax on certain future foreign earnings to have any impact on the Company’s operations since it currently has no foreign income and does not expect to generate any foreign income in the future.

 

(i)

The Income tax provision (benefit) of the Company for the nine and three months ended September 30, 2019 and 2018 consists of the following:

 

 

 

 

 

 HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - TAXES

 

A.

Corporate Income Taxes (“CIT”) (Continued)

 

(ii)

Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows:

 

 

The net deferred tax liabilities presented in the Company's consolidated balance sheets were as follows:

 

 

(iii)

Reconciliations of the statutory income tax rate to the effective income tax rate are as follows:

 

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NOTE 10 – RELATED PARTY TRANSACTIONS

 

The Company records transactions with various related parties. These related party transactions as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and, 2018 are identified as follows:

 

Related party balances:

 

a.	Accounts receivable - related parties, net

 

Below is a summary of accounts receivable with related parties as of September 30, 2019 and December 31, 2018, respectively:

 

 

	(a)	Mr. Zhou Min Ni, the Chairman and Chief Executive Officer of the Company, owns a 40% equity interest in this entity;
	(b)	Mr. Zhou Min Ni owns a 50% equity interest in this entity.
	(c)	Tina Ni, one of Mr. Zhou Min Ni’s family members, owns a 50% equity interest in this entity.
	(d)	Mr. Zhou Min Ni owns a 17.5% equity interest in this entity.
	(e)	Mr. Zhou Min Ni owns a 30% equity interest in this entity.
	(f)	Mr. Zhou Min Ni owns a 25% equity interest in this entity.
	(g)	Mr. Zhou Min Ni owns a 45% equity interest in this entity.
	(h)	Mr. Zhou Min Ni owns a 25% equity interest in this entity.
	(i)	Mr. Zhou Min Ni owns a 25% equity interest in this entity.
	(j)	Mr. Zhou Min Ni owns a 40% equity interest in this entity.

 

All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary.

 

b.	Advances to suppliers - related parties, net

 

The Company periodically provides purchase advances to various vendors, including the related party suppliers. These advances are made in the normal course of business and are considered fully realizable.

 

Below is a summary of advances to related party suppliers as of September 30, 2019 and December 31, 2018, respectively:

 

 

	(1)	Mr. Zhou Min Ni owns a 25% equity interest in this entity.
	(2)	The son of Mr. Zhou Min N, Raymond Ni, owns 100% of Revolution Industry LLC.
	(3)	First Choice Seafood is owned by Enson Seafood GA Inc. of which Mr. Zhou Min Ni owns a 50% equity interest.

 

 

HF FOODS GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

c.	Notes receivable - related parties

 

The Company had previously made advances or loans to certain entities that are either owned by the controlling shareholders of the Company or family members of the controlling shareholders.

 

As of September 30, 2019, and December 31, 2018, the outstanding loans to various related parties consist of the following:

 

 

	(1)	Mr. Zhou Min Ni owns a 30% equity interest in this entity.
	(2)	The son of Mr. Zhou Min Ni, Raymond Ni, owns 100% of Revolution Automotive LLC.

 

On January 1, 2018, the Company signed a promissory note agreement with Enson Seafood. Pursuant to the promissory note agreement, the outstanding balances of $550,000 due from Enson Seafood as of December 31, 2017 were converted into promissory notes bearing annual interest of 5% commencing January 1, 2018. The principal plus interest is due no later than December 31, 2019. Interest is computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days.

 

On September 30, 2018, the Company signed a promissory note agreement with Enson Seafood in the principal amount of $2,000,000. The note accrues interest at the rate of 5% per annum on the unpaid balance, compounded monthly. The principal plus all accrued and unpaid interest was initially due no later than September 30, 2019, with an option to renew, and required Enson Seafood to make monthly payments of $171,215 for 12 months. On March 1, 2019, the Company and Enson Seafood extended the expiration date of the note until February 29, 2024 and Mr. Zhou Min Ni agreed to personally guarantee the note. 

 

On January 1, 2018, the Company signed a promissory note agreement with NSG. Pursuant to the promissory note agreement, the outstanding balances of $5,993,552 due from NSG as of December 31, 2017 were converted into promissory notes bearing annual interest of 5% commencing January 1, 2018. The principal plus interest shall be paid off no later than December 31, 2019. Interest is computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days.

 

On March 1, 2019 the Company signed a new five year-term promissory note agreement with NSG that comprised a restatement and novation and superseded the note dated January 1, 2018. Pursuant to the new promissory note agreement, the outstanding balance of $5,941,031 together with interest at the rate of 5% per annum is payable in monthly installments until principal and accrued interest is paid in full March 1, 2024.

 

On March 1, 2018, the Company signed promissory note agreement with Revolution Automotive for $483,628. Pursuant to the promissory note agreement, Revolution Automotive will make monthly payments of $5,000 for 60 months, including interest, with final payment of $284,453. The loan bears interest of 5% per annum. Interest is computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days. The principal plus interest shall be paid off no later than April 30, 2023.

 

On March 1, 2019, the Company and each of Enson Seafood and NSG agreed to extend the expiration date of their notes payable to February 29, 2024 and Mr. Zhou Min Ni agreed to personally guarantee these notes. 

 

On September 30, 2019, the entire outstanding balance of the above notes of $8,415,525 was sold to Mr. Zhou Min Ni . Accordingly, Mr. Zhou Min Ni has delivered to HF Group Holding Corp. 632,746 shares of common stock of the Company at $13.30 per share, which were recorded in treasury stock by the Company as of September 30, 2019. In connection with the sale of the above notes, the Company also required additional 208,806 shares of common stock of the Company owned by Mr. Ni being placed in an escrow account for a period of one year (the “Escrow Period”), which will be delivered to the Company in part or in full, if the volume weighted average closing price of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $13.30. 

 

d.	Accounts payable - related parties

 

As of September 30, 2019, and December 31, 2018, the Company had a total accounts payable balance of $4,279,050 and $3,923,120 due to various related parties, respectively. All these accounts payable to related parties occurred in the ordinary course of business and are payable upon demand without interest.

 

 

HF FOODS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

e.	Advance from customers - related parties

 

The Company also periodically receives advances from its related parties for business purposes. These advances are interest free and due upon demand. There was no balance for advance from customers involving related parties at September 30, 2019 and $166,490 as of December 31, 2018.

 

Lease Agreements with Related Parties:

 

A subsidiary of the Company, RN Holding, leases a facility to a related party under an operating lease agreement expiring in 2024. The cost of the leased building is $400,000 at September 30, 2019 and December 31, 2018, and the accumulated depreciation of the leased building is $107,692 and $100,000 at September 30, 2019 and December 31, 2018, respectively. Rental income for the nine months ended September 30, 2019 and September 30, 2018 was $34,200 and $34,200, respectively, and for the three months ended September 30, 2019 and September 30, 2018 was $11,400 and $11,400, respectively.

 

In 2017, a subsidiary of the Company, HG Realty, leased a warehouse to a related party under an operating lease agreement expiring on September 21, 2027. The cost of the leased building is $3,223,745 at September 30, 2019 and December 31, 2018, and the accumulated depreciation of the leased building is $495,961 and $433,966 as at September 30, 2019 and December 31, 2018, respectively. Rental income for the nine months ended September 30, 2019 and September 30, 2018 was $360,000 and $360,000, respectively, and for the three months ended September 30, 2019 and September 30, 2018 was $120,000 and $120,000, respectively.

 

Related party purchases transactions:

 

The Company purchases from various related parties during the normal course of business. The total purchases made from related parties were $25,998,461 and $26,882,395 for the nine months ended September 30, 2019 and 2018, respectively, and $8,512,370 and $13,871,903 for the three months ended September 30, 2019 and 2018, respectively.

 

NOTE 11 - SEGMENT REPORTING

 

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different products. Based on management’s assessment, the Company has determined that it has two operating segments: sales to independent restaurants and wholesale.

 

The following table presents net sales by segment for the nine and three months ended September 30, 2019 and 2018, respectively:

 

 

 

 

All the Company’s revenue was generated from its business operation in the U.S.

 

 

HF FOODS GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 - SEGMENT REPORTING (CONTINUED)