HF Foods Group Inc. - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to __________________.

 

Commission File Number: 001-38180

 

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HF FOODS GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)	81-2717873 (I.R.S. Employer Identification No.)
19319 Arenth Avenue, City of Industry, CA 91748
(Address of principal executive offices) (Zip Code)

 

(626) 338-1090

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	HFFG	Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

As of May 15, 2020, the registrant had 52,145,096 shares of common stock issued and outstanding.

 

 

 

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	31
	Item 3  Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4  Controls and Procedures	40
PART II.	OTHER INFORMATION
	Item 1  Legal Proceedings	41
	Item 1A  Risk Factors	41
	Item 2  Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 3  Defaults Upon Senior Securities	41
	Item 4  Mine Safety Disclosures	41
	Item 5  Other Information	41
	Item 6  Exhibits	42
SIGNATURE PAGE		43

 

 

 

		As of
		March 31				December 31
		2020				2019
ASSETS
CURRENT ASSETS:
Cash		$	12,690,265			$	14,538,286
Accounts receivable, net			26,210,460				50,027,134
Accounts receivable - related parties, net			5,987,632				4,202,870
Inventories, net			75,704,474				77,531,854
Advances to suppliers - related parties, net			864,816				745,135
Other current assets			3,872,326				4,374,338
TOTAL CURRENT ASSETS			125,329,973				151,419,617
Property and equipment, net			139,941,393				37,538,147
Security deposits-related parties			-				591,380
Operating lease right-of-use assets			883,552				17,155,584
Long-term investments			2,331,337				2,296,276
Intangible assets, net			183,965,375				186,687,950
Goodwill			68,511,941				406,703,348
Deferred tax assets			69,236				78,993
Other long-term assets			379,599				372,499
TOTAL ASSETS		$	521,412,406			$	802,843,794
CURRENT LIABILITIES:
Bank overdraft		$	13,474,772			$	14,952,510
Lines of credit			43,101,338				41,268,554
Accounts payable			32,456,258				39,689,911
Accounts payable - related parties			3,738,202				4,521,356
Advances from customers - related parties			213,354				-
Current portion of long-term debt, net			6,941,738				2,726,981
Current portion of obligations under finance leases			288,101				280,243
Current portion of obligations under operating leases			333,180				4,322,503
Accrued expenses and other liabilities			2,960,084				2,683,696
TOTAL CURRENT LIABILITIES			103,507,027				110,445,754
Long-term debt, net			90,151,208				18,535,016
Promissory note payable - related party			7,000,000				-
Obligations under finance leases, non-current			979,782				1,053,166
Obligations under operating leases, non-current			550,372				12,833,081
Deferred tax liabilities			51,378,817				52,320,045
TOTAL LIABILITIES			253,567,206				195,187,062
SHAREHOLDERS’ EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized , no shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively			-				-
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 53,050,211 shares issued, and 52,145,096 shares outstanding as of March 31, 2020 and December 31, 2019, respectively			5,305				5,305
Treasury Stock, at cost, 905,115 shares as of March 31, 2020 and December 31, 2019, respectively			(12,038,030	)			(12,038,030	)
Additional paid-in capital			599,617,009				599,617,009
Retained earnings (accumulated deficit)			(324,060,281	)			15,823,661
Total shareholders’ equity attributable to HF Foods Group, Inc.			263,524,003				603,407,945
Noncontrolling interest			4,321,197				4,248,787
TOTAL SHAREHOLDERS’ EQUITY			267,845,200				607,656,732
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	521,412,406			$	802,843,794

 

		For the three months Ended Mar 31,
		2020				2019
Net revenue - third parties			170,640,014			$	70,303,911
Net revenue - related parties			5,163,322				4,497,111
TOTAL NET REVENUE			175,803,336				74,801,022
Cost of revenue - third parties			141,904,237				57,725,355
Cost of revenue - related parties			4,924,054				4,368,811
TOTAL COST OF REVENUE			146,828,291				62,094,166
GROSS PROFIT			28,975,045				12,706,856
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES			29,406,593				10,365,172
INCOME (LOSS) FROM OPERATIONS			(431,548	)			2,341,684
Other Income (Expenses)
Interest income			131				151,949
Interest expense and bank charges			(1,951,569	)			(336,958	)
Goodwill impairment loss			(338,191,407	)			-
Other income			405,650				284,535
Total Other Income (Expenses), net			(339,737,195	)			99,526
INCOME (LOSS) BEFORE INCOME TAX PROVISION			(340,168,743	)			2,441,210
PROVISION (BENEFIT) FOR INCOME TAXES			(482,211	)			647,639
NET INCOME (LOSS)			(339,686,532	)			1,793,571
Less: net income attributable to noncontrolling interest			197,410				120,758
NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC.			(339,883,942	)		$	1,672,813
Earnings (loss) per common share - basic and diluted			(6.52	)		$	0.08
Weighted average shares - basic and diluted			52,145,096				22,167,486

 

		Common Stock												Additional				Retained Earnings				Total Shareholders’ Equity Attributable								Total
		Number of								Treasury				Paid-in				(Accumulated				to HF				Noncontrolling				Shareholders’
		Shares				Amount				Stock				Capital				Deficit)				Group Inc.				Interest				Equity
Balance at December 31, 2019			52,145,096			$	5,305			$	(12,038,030	)		$	599,617,009			$	15,823,661			$	603,407,945			$	4,248,787			$	607,656,732
Net income (loss)			-				-				-				-				(339,883,942	)			(339,883,942	)			197,410				(339,686,532	)
Distribution to shareholders			-				-				-				-				-				-				(125,000	)			(125,000	)
Balance at March 31, 2020			52,145,096				5,305				(12,038,030	)			599,617,009				(324,060,281	)			263,524,003				4,321,197				267,845,200
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

 

		For the three months Ended Mar 31,
		2020				2019
Cash flows from operating activities:
Net Income (loss)		$	(339,686,532	)		$	1,793,571
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			4,526,277				872,148
Goodwill impairment loss			338,191,407				-
Gain from disposal of equipment			(20,349	)			(39,609	)
Allowance for doubtful accounts			154,365				(103,051	)
Allowance for inventories			46,687				-
Deferred tax expenses (benefit)			(931,471	)			115,769
Income from equity method investment			(35,061	)			-
Changes in operating assets and liabilities:
Accounts receivable, net			23,477,270				(867,080	)
Accounts receivable - related parties, net			(1,784,762	)			147,090
Inventories			1,780,693				(1,501,368	)
Advances to suppliers - related parties, net			(119,681	)			364,892
Other current assets			540,443				331,891
Security deposit - related parties			58,880				-
Other long-term assets			(15,900	)			44,366
Accounts payable			(7,319,101	)			2,266,388
Accounts payable - related parties			(783,154	)			(1,099,978	)
Advance from customers - related parties			213,354				(46,543	)
Operating lease liability			(102,088	)			(164,752	)
Income tax payable			-				296,773
Accrued expenses			436,529				110,871
Net cash provided by operating activities			18,627,806				2,521,378
Cash flows from investing activities:
Purchase of property and equipment			(160,252	)			(1,344,555	)
Proceeds from disposal of equipment			90,879				176,800
Payment made for notes receivable			-				(108,750	)
Proceeds from long-term notes receivable to related parties			-				13,750
Payment made for long-term notes receivable to related parties			-				(117,732	)
Payment made for acquisition of B&R Realty			(94,004,068	)			-
Net cash used in investing activities			(94,073,441	)			(1,380,487	)
Cash flows from financing activities:
Repayment of bank overdraft			(1,477,738	)			-
Proceeds from lines of credit			174,101,782				1,500,000
Repayment of lines of credit			(172,301,798	)			(2,600,000	)
Proceeds from long-term debt			75,600,000				2,144,555
Repayment of long-term debt			(1,346,136	)			(594,985	)
Repayment of long-term debt - related parties			(730,998	)			-
Repayment of obligations under finance leases			(122,498	)			(182,511	)
Cash distribution to shareholders			(125,000	)			-
Net cash provided by financing activities			73,597,614				267,059
Net increase (decrease) in cash			(1,848,021	)			1,407,950
Cash at beginning of the period			14,538,286				5,489,404
Cash at end of the period		$	12,690,265			$	6,897,354

 

 

NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION

 

Organization and General

 

HF Foods Group Inc. (“HF Group”, or the “Company”) markets and distributes fresh produces, frozen and dry food, and non- food products to primarily Asian restaurants and other foodservice customers throughout the Southeast, Pacific and Mountain West regions in 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.

 

Reorganization of HF Holding

 

HF Group Holding Corporation (“HF Holding”) was incorporated in the State of North Carolina on October 11, 2017. Effective January 1, 2018, HF Holding entered into a Share Exchange 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.

 

●

Han Feng, Inc. (“Han Feng”)

 

●

Truse Trucking, Inc. (“TT”)

 

●

Morning First Delivery, Inc. (“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 Financial Accounting Standards Board’s (“FASB) 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 controlled all these 11 entities prior to the execution of the Agreement. The consolidated financial statements of the Company have been prepared to report results of operations for the period in which the transfer occurred as though the transfer of net assets or exchange of equity interests had occurred at the beginning of the period presented, in this case January 1, 2018. Results of operations for the period presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period. By eliminating the effects of intra-entity transactions in determining the results of operations for the period before the combination, those results were on substantially the same basis as the results of operations for the period after the date of combination. The effects of intra-entity transactions on current assets, current liabilities, revenue, and cost of sales for periods presented and on retained earnings at the beginning of the periods presented are eliminated to the extent possible. Furthermore, ASC 805-50-45-5 indicates that the financial statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information.

 

 

In accordance with ASC 805-50-30-5, when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests should initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of the transfer. If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of the entities under common control, then the financial statements of the receiving entity should reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control. Accordingly, the Company has recorded the assets and liabilities transferred from the above entities at their carrying amount.

 

On July 10, 2019, the Company, through its subsidiary Han Feng, Inc., formed a new real estate holding company, R & N Charlotte, LLC (“R&N Charlotte”). R&N Charlotte owns  a 4.66 acre tract of land with appurtenant 115,570 square foot office/warehouse/industrial facility located in Charlotte, North Carolina.

 

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

 

 

Reverse Acquisition of HF Holding

 

Effective August 22, 2018, Atlantic consummated the transactions contemplated by a merger agreement (the “Atlantic Merger Agreement”), dated as of March 28, 2018, by and among Atlantic, HF Group Merger Sub Inc., a Delaware subsidiary formed by Atlantic, HF Holding, the stockholders of HF Holding, and Zhou Min Ni, as representative of the stockholders of HF Holding. Pursuant to the Atlantic Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the surviving entity (the “Atlantic Merger”) and a wholly owned subsidiary of Atlantic (the “Atlantic Acquisition”). Additionally, upon the closing of the transactions contemplated by the Atlantic Merger Agreement (the “Atlantic 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 “Atlantic 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 entity.

 

Following the consummation of the Atlantic Transactions on August 22, 2018, there were 22,167,486 shares of common stock issued and outstanding, consisting of (i) 19,969,831 shares issued to HF Holding’s stockholders pursuant to the Atlantic Merger Agreement, (ii) 400,000 shares redeemed by one of Atlantic’s shareholders in conjunction with the Atlantic Transactions, (iii) 10,000 restricted shares issued to one of Atlantic’s shareholders in conjunction with the Atlantic Transactions, and (iv) 2,587,655 shares originally issued to the pre-Transactions stockholders of Atlantic.

 

 

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

 

Business Combination with B&R Global

 

Effective November 4, 2019, HF Group consummated the transactions contemplated by a merger agreement (the “B&R Merger Agreement”), dated as of June 21, 2019, by and among the Company, B&R Merger Sub Inc., a Delaware corporation (“Merger Sub”), B&R Global, the stockholders of B&R Global (the ”B&R Global Stockholders”), and Xiao Mou Zhang, as representative of the stockholders (the “Business Combination”). Upon the closing of the transactions contemplated by the B&R Merger Agreement (the “Closing”), Merger Sub merged with and into B&R Global, resulting in B&R Global becoming a wholly owned subsidiary of HF Group. HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. Pursuant to the B&R Merger Agreement, the aggregate fair value of the consideration paid by HF Group in the business combination was $576,699,494, based on the closing share price of the Company’s common stock at the date of Closing.

 

Founded in 1999, B&R Global supplies approximately 6,800 restaurants across 11 Western states, and combined with HF Group, creates what we believe is the largest food distributors to Asian restaurants in the United States. The combined entity now has 14 distribution centers strategically located in nine states across the East and West Coasts of the United States and a fleet of over 340 refrigerated vehicles. With 960 employees supported by two call centers in China, HF Group now serves over 10,000 restaurants in 21 states and provides round-the-clock sales and service support to its customers, who mainly converse in Mandarin or Chinese dialects.

 

 

The following table summarizes the entities under B&R Global in the Business Combination:

 

 

*At the acquisition date and as of March 31, 2020, B&R Global consolidates FUSO, which is considered as a variable interest entity (“VIE”) under U.S. GAAP, due to its pecuniary and contractual interest in this entity as a result of the funding arrangements outlined in the entity.

 

Acquisition of Real Estate Companies

 

On January 17, 2020, the Company completed the transactions contemplated by that certain membership interest purchase agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, B&R Group Realty Holding, LLC ("B&R Group Realty"), and nine subsidiary limited liability companies wholly owned by B&R Group Realty (the “B&R Realty Subsidiaries”) (the “Realty Acquisition”). Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the B&R Realty Subsidiaries, which own warehouse facilities that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $101,269,706. Consideration for the Acquisition was funded by (i) $75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (Note 10), (ii) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note (the “Note”) to B&R Group Realty, and (iii) payment of $18.7 million from funds drawn from the Company’s revolving credit facility.

 

The following table summarizes B&R Global’s additional wholly owned subsidiaries as a result of Realty Acquisition:

 

 

 

 

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements include the financial statements of HF Group, its subsidiaries and the VIE. The VIE has been accounted for at historical cost and prepared on the basis as if common control had been established as of the beginning of the first period presented in the accompanying unaudited condensed consolidated financial statements. All inter-company balances and transactions have been eliminated upon consolidation.

 

U.S. GAAP provides guidance on the identification of VIE and financial reporting for entities over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) receives the economic benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE.

 

As of March 31, 2020 and December 31, 2019, FUSO is considered to be a VIE. FUSO was established solely to provide exclusive services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIEs’ activities. In addition, the Company receives the economic benefits from the entity and has concluded that the Company is a primary beneficiary.

 

The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE is included in the Company’s consolidated balance sheets, statements of income and statements of cash flows are as follows:

 

 

 

 

 

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 operations.

 

As of March 31, 2020 and December 31, 2019, noncontrolling interest consisted of the following:

 

 

Uses of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include, but are not limited to, allowance for doubtful accounts, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, long-term investments, goodwill, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, realization of deferred tax assets, and uncertain income tax positions.

 

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 March 31, 2020 and December 31, 2019, 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, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of March 31, 2020 and December 31, 2019, the allowances for doubtful accounts were $819,807 and $623,970, respectively.

 

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. As of March 31, 2020, and December 31, 2019, the valuation allowance was $316,368 and $16,928, respectively.

 

 

Property and Equipment

 

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

 

 

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 unaudited condensed consolidated statements of operations in other income or expenses.

 

Business Combinations

 

The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”)- Business Combinations. The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.

 

The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

 

Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition.

 

Goodwill

 

The Company opted to early adoption of Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement of goodwill by removing Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new standard, an impairment loss will be recognized in the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired.

 

 

The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350 (“ASC 350”), Intangibles — Goodwill and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

 

Intangible Assets

 

Intangible assets are carried at cost and amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows:

 

 

Long-term Investments

 

The Company’s investments in unconsolidated entities consist of equity investment and investment without readily determinable fair value.

 

The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities, using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in net income equal to the difference between the carrying value and fair value.

 

Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures. Under the equity method, the Company initially records its investment at cost and the difference between the cost and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

 

The Company did not record any impairment loss on its long-term investments as of March 31, 2020 and December 31, 2019.

 

Impairment of Long-lived Assets Other Than Goodwill

 

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, and intangible assets 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 March 31, 2020 and December 31, 2019.

 

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 occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.

 

 

The Company follows ASU 2014-09 Revenue from Contracts with Customers (“ASC Topic 606”). The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The majority of the Company’s contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a specific point in time.

 

The contract assets and contract liabilities are recorded on the consolidated balance sheets as accounts receivable and advances from customers as of March 31, 2020 and December 31, 2019. For three months ended March 31, 2020 and 2019, 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 $2,558,233 and $1,051,120 for the three months ended March 31, 2020 and 2019, respectively.

 

Income Taxes

 

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

 

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

 

The Company records uncertain tax positions in accordance with ASC 740 (“ASC 740”), Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition 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 March 31, 2020 and December 31, 2019.

 

 

Leases

 

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). For all leases that were entered into prior to the effective date of Topic 842, the Company elected to apply the package of practical expedients. Based on this guidance the Company did 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 adoption of Topic 842 did not have a material impact on the Company’s consolidated statements of operations. 

 

The adoption of Topic 842 resulted in the presentation of $21.2 million of operating lease assets and operating lease liabilities on the consolidated balance sheet as of January 1, 2019. See Note 12 for additional information. 

  

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

 

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

 

Earnings Per Share

 

The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options 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 three months ended March 31, 2020 and 2019.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, bank overdraft, income tax payable, advances from customers – related parties, current portion of long-term debt, current portion of obligations under finance and operating leases, and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments.

 

Concentrations and Credit Risk

 

Credit risk

 

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

 

 

Concentration risk

 

There were no receivables from any one customer representing more than 10% of the Company’s consolidated gross accounts receivable at March 31, 2020 and December 31, 2019.

 

For the three months ended March 31, 2020 and 2019, no supplier accounted for more than 10% of the total cost of revenue. As of March 31, 2020, two suppliers accounted for 56% and 15% of total advance payments outstanding and these two suppliers accounted for 79% and 21% of advance payments to related parties, respectively. As of December 31, 2019, two suppliers accounted for 34% and 15% of total advance payments outstanding and these two suppliers accounted for 70% and 30% of advance payments to related parties, respectively.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 16-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date is has been extended to fiscal years beginning after December 31, 2022. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning January 1, 2020. The Company adopted ASU 2018-13 on January 1, 2020 and the adoption did not have any material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to managerial accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

NOTE 3 - ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consisted of the following:

 

 

Movement of allowance for doubtful accounts is as follows:

 

 

 

 

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. was permitted to borrow up to $4,000,000 from time to time. The note bore 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 in exchange for 272,369 shares of common stock of the Company, which shares were received and recorded as treasury stock by the Company as of September 30, 2019. In connection with the sale of this note receivable, the Company also required 89,882 additional shares of common stock of the Company owned by Mr. Ni to be 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 – LONG-TERM INVESTMENTS

 

Long-term investments consisted of the following:

 

 

The investment in Pt. Tamron Akuatik Produk Industri is accounted for using the measurement alternative under ASC 321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi Food, Inc. is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise full control over this investee. The Company believes there was no impairment as of March 31, 2020 and December 31, 2019 for these investments.

 

NOTE 6 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

 

The Company acquired $102,331,567 of property and equipment from acquisition of assets from B&R Realty Group on January 17, 2020. See Note 8 for additional information.

 

Depreciation expense was $1,651,505 and $707,396 for the three months ended March 31, 2020 and 2019, respectively.

 

NOTE 7 – BUSINESS COMBINATION WITH B&R GLOBAL

 

Effective November 4, 2019, HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. HF Group is considered as both the legal and accounting acquirer based on the fact that there was no change of control in connection with this business combination. The aggregate fair value of the consideration paid by HF Group in the business combination is $576,699,494 and is based on the closing share price of the Company’s common stock at the date of Closing.

 

The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined with the assistance of independent valuations using quoted market prices, discounted cash flow, and estimates made by management. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company, not to exceed one year as permitted under ASC 805.

  

 

The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

 

The Company recorded acquired intangible assets of $188,503,000. These intangible assets include tradenames of $29,303,000 and customer relationships of $159,200,000. The associated goodwill and intangible assets are not deductible for tax purposes.

 

The amounts of revenue and earnings of B&R Global included in the Company’s consolidated statement of income for the three months ended March 31, 2020 are as follows:

 

 

 

The following table presents the Company’s unaudited pro forma results for the three months ended March 31, 2019, as if the Business Combination had occurred on January 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.

 

 

(1)	Includes intangibles asset amortization expense of $2,722,575 for the three months ended March 31, 2019.

 

NOTE 8 – ACQUISITION OF B&R REALTY SUBSIDIARIES

 

On January 17, 2020, B&R Global acquired all equity membership interests in the B&R Realty subsidiaries, which own warehouse facilities that were being leased by B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. Co-CEO of the Company, Xiao Mou Zhang, managed and owned an 8.91% interest in B&R Group Realty. The total purchase price for the acquisition was $101,269,706, which is based on fair market value appraisals of the properties owned by the B&R Realty subsidiaries.

 

The Company notes that substantially all of the fair value of the gross assets acquired is concentrated in a group of similar assets (land and buildings in which the buildings are all used for warehousing and distribution purposes). As such, the acquisition of Selling B&R Global Realty Subsidiaries would be deemed an asset acquisition under ASC 805-10-55, and the total purchase price is allocated on a relative fair value basis to the net assets acquired.

 

Consideration for the acquisition was funded by (i) $75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 11 for additional information), (ii) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note to B&R Group Realty maturing on January 17, 2030, and (iii) payment of $18.7 million from funds drawn from the Company’s revolving credit facility. The reissuance of the mortgage-backed term loans released B&R Group Realty from its obligations to the lenders under the First Amended Credit Agreement (See Note 10 for additional information) and predecessor financing arrangements.

 

The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

NOTE 9 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS

 

Goodwill

 

The changes in HF Group’s carrying amount of goodwill by segment are presented below:

 

 

The Company had booked approximately $406.7 million of goodwill from business combination with B&R Global on December 31, 2019. The Company tests goodwill for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate it could be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price.

 

During the first quarter of fiscal 2020, as a result of significant declines in the Company’s business due to COVID-19 pandemic, the Company determined that B&R Global reporting unit was very sensitive to these declines and that it was more likely than not that an impairment may exist. The Company, therefore, performed an analysis of the fair value of B&R Global reporting unit as of March 31, 2020 using a discounted cash flow for goodwill impairment testing purposes. Based on this analysis, the Company determined that the carrying value of its B&R Global reporting unit exceeded its fair value by $338.2 million. As a result, the company recorded the amount as impairment charges during the first quarter of fiscal 2020.

 

The Company estimated the fair values of B&R Global reporting unit using the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital (WACC), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities. The fair value conclusions as of March 31, 2020 for the reporting unit are highly sensitive to changes in the WACC, which considered observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. The Company also observed the WACC applied on March 31, 2020 increased from the one on acquisition date, mainly driven by the increased risk and volatility observed in the market. Volatility has primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country has been reduced to takeout and delivery offerings. Furthermore, increased uncertainty about the unwinding of these restrictions and levels of consumer spending are driving the uncertainty and subsequent volatility. 

 

In addition, the fair value of the goodwill is sensitive to the changes in the assumptions used in the projected cash flows, which include forecasted revenues, perpetual growth rates, among others, all of which require significant judgments by management. The company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future changes, industry and global economic and geo-political conditions, and the timing and success of the implementation of current strategic initiatives. The impact of the COVID-19 pandemic on estimated future cash flows is uncertain and will largely depend on the outcome of future events, which could result in further goodwill impairments going forward. The company will complete its annual impairment test in the fourth quarter of fiscal 2020.

 

Acquired Intangible Assets

 

In connection with the Business Acquisition of B&R Global, HF Group acquired $188,503,000 of intangible assets, primarily representing tradenames and customer relationships, which have an estimated weighted-average amortization period of approximately 10 years and 20 years respectively. The components of the intangible assets are as follows:

 

 

Since COVID-19 has had a adverse impact on the Company’s customers, which was a triggering event, the Company performed interim long-lived asset quantitative impairment tests as of March 30, 2020. All intangible assets were tested for recoverability at the asset group level. ASC 360 defines the recoverability of these assets as measured by comparison of their (or asset group) carrying amounts to future undiscounted cash flows the assets (or asset group) are expected to generate. Based on the test for recoverability using undiscounted cash flows attributable to the asset (or asset group), the sum of the undiscounted cash flows exceeded the carrying value of the measured asset (or asset group). As such, no impairment was recorded for the finite lived assets. 

 

HF Group’s amortization expense for intangible assets was $2,722,575 for the three months ended March 31, 2020 and nil for the three months ended March 31, 2019, respectively. Estimated future amortization expense for intangible assets is presented below:

 

 

 

 

NOTE 10 - LINES OF CREDIT

 

On July 1, 2016, Han Feng, HF Group’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, the 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 then extended to May 27, 2019, in order to provide an uninterrupted credit facility while the renewal of the line of credit is being reviewed by the bank. Interest was based on the prime rate less 0.15%, but in no event less than 3.25% per annum, and was 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.

 

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 were 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 was 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 below.

 

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 provided 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 were parties to the Credit Agreement for working capital and general corporate purposes. Han Feng, NSF and Kirnland (the “Borrower Subsidiaries”) were the borrowers and the Company and each of its other material subsidiaries were guarantors of all the obligations under the Credit Agreement. The original maturity of the line of credit was 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 were to 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 would 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 Credit Agreement contained certain financial covenants which, among other things, required Han Feng to maintain certain financial ratios. 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 as described below. The outstanding balance paid off, including accrued interest, was $13,864,481.

 

On November 4, 2019, the Company entered into an Amended and Restated Credit Agreement with JP Morgan Chase Bank, N.A. (“JP Morgan”). The Amended and Restated Credit Agreement provides for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. The line of credit is collateralized by all assets of the Company and is also guaranteed by B&R Group Realty and B&R Realty Subsidiaries, which are related parties of the Company. The Amended and Restated Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain a Fixed Charge Coverage Ratio of 1.10 to 1.00, determined as of the end of each fiscal quarter for the four fiscal quarter periods then ended. As of March 31, 2020, the Company was in compliance with the covenants under the credit agreement.

 

On January 17, 2020, the Company, its wholly-owned subsidiary, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto, including Comerica Bank.  The Second Amended Credit Agreement provides for (a) a $100 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Facility”), and (b) mortgage-secured Term Loans of $75.6 million. The Second Amended Credit Agreement amends and restates the existing $55.0 million of real estate term loans evidenced by that certain Amended and Restated Credit Agreement, dated as of November 4, 2019, among the Company, B&R Global, its affiliates and JP Morgan Chase Bank, N.A., as Administrative Agent and sole lender (the “First Amended Credit Agreement”). As of January 17, 2020, the existing balance of revolving debt under the First Amended Credit Agreement, $41.2 million, was rolled over, and an additional $18.7 million available to the Company under the Facility was drawn. The Company and B&R used the $75.6 million in mortgage-secured term loans and $18.7 million drawn from the revolving credit facility to fund in part the acquisition of 10 warehouse facilities owned by the Selling B&R Group Realty Subsidiaries, which the Company has been leasing for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. The outstanding principal balance on the line of credit as of March 31, 2020 was $43.1 million.

 

NOTE 11 - LONG-TERM DEBT

 

Long-term debt at March 31, 2020 and December 31, 2019 is as follows:

 

 

The terms of the various loan agreements related to long-term bank borrowings contain certain restrictive financial covenants which, among other things, require the Company to maintain specified ratios of debt to tangible net assets and debt service coverage. As of March 31, 2020, and December 31, 2019, the Company was in compliance with such covenants.

 

The loans outstanding were guaranteed by the following properties, entities or individuals, or otherwise secured as shown:

 

(a)

Guaranteed by two shareholders of the Company, as well as five subsidiaries of the Company, Han Feng, TT, MFD, R&N Holding and R&N Lexington. Also secured by assets of Han Feng and R&N Lexington and R&N Holding, two real properties of R&N Holding, and a parcel of real property owned by R&N Lexington. Balloon payment of $2,293,751 is due in 2027 and another balloon payments of $3,007,239 is due in 2029.

(b)	Guaranteed by two shareholders, as well as Han Feng, a subsidiary of the Company. Also secured by a real property owned by HG Realty. Balloon payment for this debt is $3,116,687.

(c)	Guaranteed by two shareholders, as well as two subsidiaries of the Company, NSF and BB. Secured by real property, equipment and fixtures, inventories, receivables and all other personal property owned by NSF. Balloon payment for this long-term debt is $1,382,046.

(d)

Real estate term loan with a principal balance of $75,007,690 is secured by assets held by nine subsidiaries of the Company, AK, BRR, BSR, FL, GSR, HP, LF, LR, and MP.  Equipment term loan with a principal balance of $2,508,340 is secured by specific vehicles and equipment as defined in loan agreements.

(e)	Secured by vehicles.

 

The future maturities of long-term debt as of March 31,2020 are as follows: 

 

 

 

 

NOTE 12 - LEASES

 

On January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). For all leases that were entered into prior to the effective date of Topic 842, the Company elected to apply the package of practical expedients. The Company leases office space and warehouses under non-cancelable operating leases, with terms typically ranging from one to five years, as well as operating and finance leases for vehicles and 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:

 

 

Finance Leases

 

The components of lease expense were as follows: 

 

 

Supplemental cash flow information related to finance leases was as follows: 

 

 

 

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, HF Group 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 completed 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 AnHeart stock to Ms. An, and in consideration of the Company’s ongoing guaranty of AnHeart’s performance of the lease obligations, AnHeart granted to the Company a security interest in all AnHeart assets, together with a covenant that the Company will be assigned the leases, to be exercised if AnHeart defaults. 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.

 

 

NOTE 13 – SUPPLEMENTAL CASH FLOWS INFORMATION

 

Supplemental cash flow disclosures and noncash investing and financing activities are as follows:

 

 

 

NOTE 14 - TAXES

 

A.

Corporate Income Taxes (“CIT”)

 

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company 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 provision for income taxes of the Company for the three months ended March 31, 2020 and 2019 consists of the following:

 

 

 

(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 unaudited condensed consolidated balance sheets were as follows：

 

 

(iii)

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

 

 

 

 

NOTE 15 – RELATED PARTY TRANSACTIONS

 

The Company records transactions with various related parties. The related party transactions as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 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 March 31, 2020 and December 31, 2019, respectively:

 

 

(a)	Mr. Zhou Min Ni, the Chairman and Co-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. Xiaomou Zhang, Co-Chief Executive Officer of the Company, owns 10.38% equity interest in this entity.
(j)	Mr. Zhou Min Ni owns a 30% equity interest in this entity.
(k)	Mr. Xiaomou Zhang owns 10.38% 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 March 31, 2020 and December 31, 2019, 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.

 

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.

 

On January 1, 2018, the Company entered into 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 was due no later than December 31, 2019. Interest was 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 accrued 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 twelve 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 was required to be paid off no later than December 31, 2019. Interest was 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 entered into 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 became payable in monthly installments until principal and accrued interest was paid in full on or before March 1, 2024.

 

On March 1, 2018, the Company entered into a promissory note agreement by which Revolution Automotive was loaned $483,628. Pursuant to this promissory note agreement, Revolution Automotive was required to make monthly payments of $5,000 for 60 months, including interest, with final payment of $284,453. The loan bore interest of 5% per annum. Interest was 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 was to 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 until February 29, 2024, and Mr. Zhou Min Ni agreed to personally guarantee these notes. 

 

On September 30, 2019, the entire outstanding balance of all the above notes of $8,415,525 was sold to Mr. Zhou Min Ni in exchange for 632,746 shares of common stock of the Company, which shares were received and 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 208,806 additional shares of common stock of the Company owned by Mr. Ni to be 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 March 31, 2020, and December 31, 2019, the Company had a total accounts payable balance of $3,738,202 and $4,521,356 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.

 

e.	Advances 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. The balance for advances from customers involving related parties was $213,354 at March 31, 2020 and there were no advances from customers involving related parties at December 31, 2019.

 

f.	Security deposit - related parties

 

The Company made deposits to its related parties for warehouse rental purposes. These deposits are expected to be returned upon termination of the respective leases. Total deposits to related parties amounted to $591,380 at December 31, 2019. As a result of the Realty Acquisition referenced in Footnote 8, rent deposits previously classified as related party became intercompany balances and were eliminated as of March 31, 2020. There was no related party rent deposit as of March 31, 2020.

 

g.	Term Loan guaranty - related parties

 

B&R Global issued a $7.0 million Unsecured Subordinated Promissory Note to B&R Group Realty. The note bears an interest rate of 6% per annum that matures in January 2030. At March 31, 2020, accrued interest payable was $87,500. The term loan is collateralized by all assets of the Company.

 

Lease Agreements with Related Parties:

 

A subsidiary of the Company, R&N 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 March 31, 2020 and December 31, 2019, and the accumulated depreciation of the leased building is $80,102 and $78,282 at March 31, 2020 and December 31, 2019, respectively. Rental income for the three months ended March 31, 2020 and 2019 was $11,400 and $11,400, respectively.

 

A subsidiary of the Company, R&N Holding, leases a facility to a related party under an operating lease agreement expiring in 2022. Rental income for the three months ended March 31, 2020 and 2019 was $10,500 and $10,500, 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 March 31, 2020 and December 31, 2019, and the accumulated depreciation of the leased building is $537,291 and $516,626 as of March 31, 2020 and December 31, 2019, respectively. Rental income for the three months ended March 31, 2020 and 2019 was $120,000 and $120,000, respectively.

 

B&R Global leased warehouses from related parties owned by the majority shareholder of B&R Global prior to Realty Acquisition on January 17, 2020. Rent incurred to the related parties from January 1, 2020 to January 16, 2020 was $187,750.

 

In 2020, a subsidiary of the Company, Kirnland, leased a warehouse from a related party under an operating lease agreement expiring on December 31, 2020. Rent incurred to the related party was $30,000 and $30,000 for the three months ended March 31, 2020 and 2019, respectively.

 

Related party sales and purchases transactions:

 

The Company makes regular sales to and purchases from various related parties during the normal course of business. The total sales to related parties were $5,163,322 and $4,497,111 for the three months ended March 31, 2020 and 2019, respectively. The total purchases made from related parties were $10,492,252 and $8,932,217 for the three months ended March 31, 2020 and 2019, respectively.