UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterquarterly period ended September 30, 20182019
☐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:File Number: 001-38180
HF FOODS GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware | ||
(State or other jurisdiction of | 81-2717873 (I.R.S. Employer |
6001 W. Market Street, Greensboro, NC 27409 | |
(Address of principal executive offices) (Zip Code) |
(Address of principal executive offices)
(336) 268-2080
(Registrant’s telephone number, including area code)
(336) 268-2080
(Issuer’s telephone number)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 |
Check
Indicate by check mark whether the issuerregistrant (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. YesYES ☒ NO ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YesYES ☒ NoNO ☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”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
YES ☐ NoNO ☒
As of November 14, 2018, 22,167,4862019, the registrant had 53,050,211 and 52,145,096 shares of common stock par value $0.0001 per share, were issued and outstanding.outstanding, respectively.
HF Foods group inc.
form 10-q for the quarter ended SEPTEMBER 30, 2019
1
HF FOODS GROUP INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
Description | Page | ||
PART I. | FINANCIAL INFORMATION | ||
Item | 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 | 27 | ||
Item | 36 | ||
Item | 36 | ||
PART II. | OTHER INFORMATION | ||
Item | 36 | ||
Item | 36 | ||
Item | 36 | ||
Item | 37 | ||
Item | 37 | ||
Item | 37 | ||
Item | 37 | ||
SIGNATURE PAGE | 38 |
PART I –I. FINANCIAL STATEMENTSINFORMATION
Item 1. Financial StatementsStatements.
HF FOODS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of | ||||||||||||||||
September 30 | December 31 | As of | ||||||||||||||
2018 | 2017 | September 30 | December 31 | |||||||||||||
2019 | 2018 | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 7,790,951 | $ | 6,086,044 | $ | 6,803,415 | $ | 5,489,404 | ||||||||
Accounts receivable, net | 12,836,682 | 14,700,854 | 13,089,775 | 14,406,476 | ||||||||||||
Accounts receivable - related parties, net | 1,572,100 | 1,586,420 | 2,677,503 | 2,292,151 | ||||||||||||
Inventories, net | 24,124,042 | 22,669,225 | 29,826,054 | 22,175,769 | ||||||||||||
Advances to suppliers, net | 1,258,374 | 1,042,554 | 647,339 | 280,267 | ||||||||||||
Advances to suppliers - related parties, net | 674,893 | 3,248,309 | 990,139 | 1,526,482 | ||||||||||||
Notes receivable | 3,323,962 | — | - | 3,803,826 | ||||||||||||
Notes receivable - related parties, current | 38,049 | — | - | 8,117,686 | ||||||||||||
Income Tax Recoverable | 448,512 | - | ||||||||||||||
Other current assets | 1,150,653 | 554,865 | 1,229,379 | 950,703 | ||||||||||||
TOTAL CURRENT ASSETS | 52,769,706 | 49,888,271 | 55,712,116 | 59,042,764 | ||||||||||||
Property and equipment, net | 22,324,572 | 21,709,467 | 27,096,211 | 22,650,021 | ||||||||||||
Long term notes receivable | — | 764,493 | ||||||||||||||
Operating lease right-of-use assets | 75,169 | - | ||||||||||||||
Deferred tax assets | 81,385 | 117,933 | ||||||||||||||
Long-term notes receivable - related parties | 8,494,317 | 6,860,056 | - | 423,263 | ||||||||||||
Other long-term assets | 171,321 | 1,435,613 | 141,954 | 242,426 | ||||||||||||
TOTAL ASSETS | $ | 83,759,916 | $ | 80,657,900 | From Subject Received Size Categories DiTech XBRL RE: XBRL Delivery: HF FOODS GROUP INC -10Q- s113920 5:24 PM 310 KB | $ | 83,106,834 | $ | 82,476,407 | |||||||
CURRENT LIABILITIES: | ||||||||||||||||
Lines of credit | $ | 12,494,146 | $ | 11,894,146 | $ | 11,864,481 | $ | 8,194,146 | ||||||||
Accounts payable | 17,371,626 | 17,275,485 | 18,728,857 | 17,474,206 | ||||||||||||
Accounts payable - related parties | 3,147,470 | 4,075,927 | 4,279,050 | 3,923,120 | ||||||||||||
Advance from customers | 423,749 | 49,677 | 758,296 | 61,406 | ||||||||||||
Advance from customers - related parties | 349,721 | 1,350,296 | - | 166,490 | ||||||||||||
Current portion of long-term debt, net | 1,339,548 | 1,372,125 | 1,650,898 | 1,455,441 | ||||||||||||
Current portion of obligations under capital leases | 232,901 | 434,003 | 262,904 | 164,894 | ||||||||||||
Current portion of obligations under operating leases | 40,155 | - | ||||||||||||||
Income tax payable | — | 512,415 | 13,343 | - | ||||||||||||
Dividend payable | — | 1,000,000 | ||||||||||||||
Accrued expenses | 2,881,646 | 991,388 | 991,299 | 2,148,602 | ||||||||||||
TOTAL CURRENT LIABILITIES | 38,240,807 | 38,955,462 | 38,589,283 | 33,588,305 | ||||||||||||
Long-term debt, net | 13,381,574 | 14,249,579 | 15,409,535 | 13,109,854 | ||||||||||||
Obligations under capital leases, non-current | — | 118,535 | 1,139,964 | 120,705 | ||||||||||||
Obligations under operating leases, non-current | 35,014 | - | ||||||||||||||
Deferred tax liabilities | 267,344 | 436,212 | 1,306,630 | 1,196,061 | ||||||||||||
TOTAL LIABILITIES | 51,889,725 | 53,759,788 | 56,480,426 | 48,014,925 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
EQUITY: | ||||||||||||||||
Common Stock, $.0001 par value, 30,000,000 shares authorized, 22,167,486 and 19,969,831 common stock issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 2,217 | 1,997 | ||||||||||||||
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 | 22,920,602 | 21,549,703 | 10,882,646 | 22,920,603 | ||||||||||||
Retained earnings | 8,187,789 | 4,255,213 | 14,477,257 | 10,433,984 | ||||||||||||
Treasury Stock | (91 | ) | - | |||||||||||||
Total shareholders’ equity | 31,110,608 | 25,806,913 | 25,362,048 | 33,356,804 | ||||||||||||
Noncontrolling interest | 759,583 | 1,091,199 | 1,264,360 | 1,104,678 | ||||||||||||
TOTAL EQUITY | 31,870,191 | 26,898,112 | 26,626,408 | 34,461,482 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 83,759,916 | $ | 80,657,900 | $ | 83,106,834 | $ | 82,476,407 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
For the three months Ended September 30, | For the nine months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net revenue - third parties | $ | 65,936,159 | 72,365,230 | $ | 203,868,014 | $ | 211,629,726 | |||||||||
Net revenue - related parties | 4,427,639 | 3,230,646 | 13,364,070 | 14,107,311 | ||||||||||||
TOTAL NET REVENUE | 70,363,798 | 75,595,876 | 217,232,084 | 225,737,037 | ||||||||||||
Cost of revenue - third parties | 53,471,081 | 61,302,115 | 167,372,145 | 180,323,210 | ||||||||||||
Cost of revenue - related parties | 4,330,030 | 3,165,334 | 13,069,453 | 13,822,112 | ||||||||||||
TOTAL COST OF REVENUE | 57,801,111 | 64,467,449 | 180,441,598 | 194,145,322 | ||||||||||||
GROSS PROFIT | 12,562,687 | 11,128,427 | 36,790,486 | 31,591,715 | ||||||||||||
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES | 10,385,563 | 8,645,443 | 31,725,945 | 24,030,554 | ||||||||||||
INCOME FROM OPERATIONS | 2,177,124 | 2,482,984 | 5,064,541 | 7,561,161 | ||||||||||||
Other Income (Expenses) | ||||||||||||||||
Interest income | 333,072 | 12,812 | 346,822 | 16,979 | ||||||||||||
Interest expense and bank charges | (270,049 | ) | (409,243 | ) | (1,024,762 | ) | (1,030,523 | ) | ||||||||
Other income | 370,678 | 635,294 | 918,010 | 832,683 | ||||||||||||
Total Other Expenses, net | 433,701 | 238,863 | 240,070 | (180,861 | ) | |||||||||||
INCOME BEFORE INCOME TAX PROVISION | 2,610,825 | 2,721,847 | 5,304,611 | 7,380,300 | ||||||||||||
PROVISION FOR INCOME TAXES | 840,147 | 468,646 | 1,542,207 | 476,624 | ||||||||||||
NET INCOME | 1,770,678 | 2,253,201 | 3,762,404 | 6,903,676 | ||||||||||||
Less: net income (loss) attributable to non-controlling interest | 103,600 | 277,386 | (277,855 | ) | 256,132 | |||||||||||
NET INCOME ATTRIBUTABLE TO HF GROUP HOLDING CORPORATION | $ | 1,667,078 | 1,975,815 | $ | 4,040,259 | $ | 6,647,544 | |||||||||
NET INCOME | 1,770,678 | 2,253,201 | 3,762,404 | 6,903,676 | ||||||||||||
Pro forma adjustment to reflect income tax expenses if taxed under C Corporation | — | (563,216 | ) | (2,367,812 | ) | |||||||||||
Less: net income (loss) attributable to non-controlling interest | 103,600 | 277,386 | (277,855 | ) | 256,132 | |||||||||||
Net income used to compute pro forma net earnings per share | 1,667,078 | 1,412,599 | 4,040,259 | 4,279,732 | ||||||||||||
Earnings per common share - basic and diluted | $ | 0.08 | 0.10 | $ | 0.20 | $ | 0.33 | |||||||||
Pro Forma earnings per common share - basic and diluted | 0.08 | 0.07 | 0.20 | 0.21 | ||||||||||||
Weighted average shares - basic and diluted | 21,364,256 | 19,969,831 | 20,434,639 | 19,969,831 |
HF FOODS GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
For the nine months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net Income | $ | 3,762,404 | $ | 6,903,676 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 1,579,105 | 1,384,871 | ||||||
Provision of doubtful accounts | 62,231 | (412,280 | ) | |||||
Deferred tax benefit | (168,868 | ) | (2,099 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 1,801,941 | (6,732,820 | ) | |||||
Accounts receivable - related parties, net | 14,320 | 3,822,902 | ||||||
Inventories | (1,454,817 | ) | 392,937 | |||||
Advances to suppliers | (215,820 | ) | 983,709 | |||||
Advances to suppliers - related parties, net | 2,573,416 | (1,564,133 | ) | |||||
Other current assets | (421,424 | ) | 1,177,006 | |||||
Other long-term assets | 1,264,289 | 760,651 | ||||||
Accounts payable | 96,141 | (1,314,301 | ) | |||||
Accounts payable - related parties | (928,457 | ) | 3,626,506 | |||||
Advance from customers | 374,072 | 334,390 | ||||||
Advance from customers - related parties | (1,000,575 | ) | (369,604 | ) | ||||
Income tax payable | (745,958 | ) | 200,723 | |||||
Accrued expenses | 1,890,258 | (63,161 | ) | |||||
Net cash provided by operating activities | 8,482,258 | 9,128,973 | ||||||
Cash flows from investing activities: | ||||||||
Cash received from business combination of HG Realty | — | 31,070 | ||||||
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 | (2,194,210 | ) | (2,116,187 | ) | ||||
Cash paid for issuance of long-term notes receivable | (2,559,469 | ) | — | |||||
Cash received from long-term notes receivable to related parties | 316,504 | 3,202,478 | ||||||
Cash paid for issuance of long-term notes receivable to related parties | (1,988,813 | ) | ||||||
Collection from shareholder loan | — | 1,760,258 | ||||||
Net cash used in investing activities | (4,995,690 | ) | 2,877,619 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from lines of credit | 3,600,000 | 1,200,000 | ||||||
Repayment of lines of credit | (3,000,000 | ) | (4,100,000 | ) | ||||
Proceeds from long-term debt | 3,745,048 | 1,300,597 | ||||||
Repayment of long-term debt | (4,965,264 | ) | (1,310,906 | ) | ||||
Cash distribution to shareholders | (1,161,445 | ) | (8,772,255 | ) | ||||
Net cash used in financing activities | (1,781,661 | ) | (11,682,564 | ) | ||||
Net increase (decrease) in cash | 1,704,907 | 324,028 | ||||||
Cash at beginning of period | 6,086,044 | 5,956,145 | ||||||
Cash at end of period | $ | 7,790,951 | $ | 6,280,173 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest | $ | 1,008,666 | $ | 973,381 | ||||
Cash paid for income taxes | $ | 2,413,148 | $ | 278,000 |
HF FOODS GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2019 and 2018
(UNAUDITED)
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 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HF FOODS GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND BUSINESS DESCRIPTION
Organization and General
HF Foods Group Inc. (“HF Foods”, or the “Company”), previously known as “Atlantic Acquisition Corp.” (“Atlantic”), 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 of America (“USA”).States.
The Company was originally incorporated in Delaware on May 19, 2016 as a special purpose acquisition company under the name Atlantic Acquisition Corp. is a Delaware company incorporated on May 19, 2016(“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, what Atlantic refers to as a “target business.”entities.
Business combinationCombination
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.
After giving effect toFollowing the consummation of the Transactions on August 22, 2018, there are currently 22,558,492were 22,567,486 shares of Atlantic’s common stock issued and outstanding, (without giving effectconsisting of (i) 19,969,831 shares issued to HF Holding’s stockholders pursuant to the post closing cancellationMerger Agreement, (ii) 10,000 restricted shares issued to one of 390,000Atlantic’s shareholders in conjunction with the Transactions, pursuant to a pre-Transactions agreement, and (iii) 2,587,655 shares heldissued to the pre-Transaction stockholders of Atlantic. Following the consummation of the Transactions, 400,000 shares were sold back to the Company by an unaffiliated stockholder. Upon the Closing,one of Atlantic’s rights and units ceased trading and Atlantic’s common stock commenced trading on Thursday, August 23, 2018 on the Nasdaq Capital Market under the symbol “HFFG”.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 GAAP.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”) |
● | Truse Trucking, Inc. (“TT”) |
● | 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. 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, 2017. 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 will be 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.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND BUSINESS DESCRIPTION (Continued)(CONTINUED)
Reorganization of HF Group (Continued)
The following table summarizes the entities under HF Group after the above-mentioned reorganization:
Date Of | Place Of | Percentage Of Legal Ownership By | ||||||||
Name |
|
| HF Holding | Principal | ||||||
Parent: | ||||||||||
HF Holding | October 11, 2017 | North Carolina, USA | — | Holding Company | ||||||
Subsidiaries: | ||||||||||
Han Feng | January 14, 1997 | North Carolina, USA | 100 |
% | Distributing food and related products | |||||
TT | August | North Carolina, USA | ||||||||
100 | % | Trucking service | ||||||||
MFD | April 15, 1999 | North Carolina, USA | ||||||||
100 | % | Trucking service | ||||||||
R&N Holdings | November 21, 2002 | North Carolina, USA | 100 | % | Real estate holding | |||||
R&N Lexington | May 27, 2010 | North Carolina, USA | 100 | % | Real estate holding | |||||
Kirnsway | May 24, 2006 | North Carolina, USA | 100 |
% | Design and printing services | |||||
Chinesetg | July 12, 2011 | North Carolina, USA | 100 |
% | Design and printing services | |||||
NSF | December 17, 2008 | Florida, USA | 100 |
% | Distributing food and related products | |||||
BB | September 12, 2001 | |||||||||
Florida, USA | 100 | % | Trucking service | |||||||
Kirnland | April 11, 2006 | Georgia, USA | 66.7 |
% | Distributing food and related products | |||||
HG Realty | May 11, 2012 | Georgia, USA | 100 | % | Real estate holding |
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 wasto 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), to expand the Company’s product line to include Chinese herb supplements..
NOTE 2-2- 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”).GAAP. The unaudited condensed consolidated financial statements include the financial statements of HF FoodsHolding 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, 20182019 and for the three and nine months ended September 30, 20182019 and 20172018 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 the annual financial statements prepared in accordance with U.S. GAAP, may 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, 20172018 and 2016.2017.
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, 2018,2019, its results of operations and its cash flows for the nine months ended September 30, 20182019 and 2017,2018, 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, 20182019, and December 31, 2017,2018, 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, 20182019 and December 31, 2017,2018, the allowances for doubtful accounts were $629,339$576,349 and $567,108,$658,104, respectively.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)(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 | ||
Buildings and improvements (in years) | 7 | - | 39 | |
Machinery and equipment (in years) | 3 | - | 7 | |
Motor vehicles (in years) | 5 |
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, 20182019 and December 31, 2017.2018.
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 ourthe 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 Condensed Consolidated Balance Sheetunaudited condensed consolidated balance sheets as accounts receivable and advance payment from customers as of September 30, 20182019 and December 31, 2017.2018. For the nine and three 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:
For the Three Months Ended | ||||||||
September 30, 2018 | September 30, 2017 | |||||||
North Carolina | $ | 33,693,973 | $ | 36,374,614 | ||||
Florida | 21,156,747 | 22,221,066 | ||||||
Georgia | 15,513,077 | 17,000,196 | ||||||
Total | $ | 70,363,798 | $ | 75,595,876 |
For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
September 30, 2018 | September 30, 2017 | September 30, 2019 | September 30, 2018 | |||||||||||||
North Carolina | $ | 103,262,880 | $ | 108,846,810 | $ | 36,813,987 | 33,693,974 | |||||||||
Florida | 66,282,082 | 65,584,564 | 22,833,584 | 21,156,747 | ||||||||||||
Georgia | 47,687,122 | 51,305,663 | 16,051,306 | 15,513,077 | ||||||||||||
Total | $ | 217,232,084 | $ | 225,737,037 | $ | 75,698,877 | 70,363,798 |
For the Nine Months Ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
North Carolina | $ | 107,698,700 | 103,262,880 | |||||
Florida | 68,717,635 | 66,282,082 | ||||||
Georgia | 48,801,770 | 47,687,122 | ||||||
Total | $ | 225,218,105 | 217,232,084 |
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $3,615,470,$3,093,138 and $3,225,523$3,615,470 for the nine months ended September 30, 2019 and 2018, and 2017,$1,014,288 and $791,016 and $545,130 for the three months ended September 30, 20182019 and 2017,2018, 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 waswere any uncertain tax positions at September 30, 20182019 and December 31, 2017.2018.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CapitalNOTE 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 obligationsclassification 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 has recorded capitaldetermines if an arrangement is a lease obligations for equipment leases at both September 30, 2018 and December 31, 2017. In each case, the Company records the equipment as its own assets under lease accounting guidance. Further, each lease contains provisions indicating continuing involvement with the equipment at the end of the lease period. As a result, in accordance with applicable accounting guidance, related assets subject to theinception. Operating leases are reflectedincluded 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 unaudited condensedour consolidated balance sheetssheets. Finance leases are included in property and depreciated overequipment, 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 lesser of the lease term or their remaining useful lives. The present value of the future minimum lease payments associated withover the equipmentlease 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 recorded as capitalreasonably certain that the Company will exercise that option. Lease expense for minimum lease obligations.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, 20182019 and 2017.2018.
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 and other liabilitiesexpenses 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, 2018 and2019 or December 31, 2017.2018.
For the nine and three months ended September 30, 20182019 and September 30, 2017,2018, no supplier accounted for more than 10% of the total cost of revenue. As of September 30, 2018, one supplier2019, two suppliers accounted for 63%47% and 14% of total third party advance payments. One related party supplierpayments outstanding, respectively, and these two suppliers accounted for 92%77% and 23% of advance payments to related parties.parties, respectively. As of December 31, 2017, one supplier2018, three suppliers accounted for 69%55%, 18% and 12% of total advance payments outstanding, respectively, and this supplierthese three suppliers accounted for 92%65%, 22% and 14% of advance payments to related parties.
HF FOODS GROUP INC. AND SUBSIDIARIESparties, respectively.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet with a corresponding liability and disclosing key information about leasing arrangements. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim reporting periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the impact of the adoption of this revised guidance on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. The amendments affect reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim reporting periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect that adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. The adoption of this guidance will increase cash and cash equivalents by the amount of the restricted cash on the Company’s consolidated statement of cash flows.
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 JulyJanuary 1, 2020. The Company is currently evaluating the impact of its pendingthe 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. TheThis update became effective for the Company has not early adopted this update and it will become effective on JulyJanuary 1, 2019. The Company does not expect that the adoption of this guidance willdid not have a material impact on itsthe Company’s consolidated financial statements.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
As of September 30, 2018 | As of December 31, 2017 | |||||||
Accounts receivable | $ | 13,466,021 | $ | 15,267,962 | ||||
Less: allowance for doubtful accounts | (629,339 | ) | (567,108 | ) | ||||
Accounts receivable, net | $ | 12,836,682 | $ | 14,700,854 |
Movement of allowance for doubtful accounts is as follows:
For the Nine Months Ended | ||||||||
September 30, 2018 | September 30, 2017 | |||||||
Beginning balance | $ | 567,108 | $ | 670,280 | ||||
Provision for doubtful accounts | 89,019 | 55,268 | ||||||
Less: write off/recovery | (26,788 | ) | (23,948 | ) | ||||
Ending balance | $ | 629,339 | $ | 701,600 |
As of | As of | |||||||
September 30, 2019 | December 31, 2018 | |||||||
Accounts receivable | $ | 13,666,124 | $ | 15,064,580 | ||||
Less: allowance for doubtful accounts | (576,349 | ) | (658,104 | ) | ||||
Accounts receivable, net | $ | 13,089,775 | $ | 14,406,476 |
For the Nine Months Ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Beginning balance | $ | 658,104 | $ | 567,108 | ||||
Provision (reversal) for doubtful accounts | (50,090 | ) | 89,019 | |||||
Less: write off/recovery | (31,665 | ) | (26,788 | ) | ||||
Ending balance | $ | 576,349 | $ | 629,339 |
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-4 - 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. TheOn September 30, 2019, the entire amountoutstanding balance of all unpaid principal and accrued interest shall be due and payable$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 fulltreasury stock by the Company as of September 30, 2019. AsIn connection with the sale of September 30, 2018 and December 31, 2017, outstanding balancethis notes receivable, the Company also required additional 89,882 shares of common stock of the notes receivable were $3,323,962 and $nil, respectively.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:
|
As of | As of | |||||||
September 30, 2019 | December 31, 2018 | |||||||
Land | $ | 1,894,253 | $ | 1,608,647 | ||||
Buildings and improvements | 22,201,597 | 18,784,628 | ||||||
Machinery and equipment | 9,587,840 | 10,160,205 | ||||||
Motor vehicles | 11,454,793 | 10,267,095 | ||||||
Subtotal | 45,138,483 | 40,820,575 | ||||||
Less: accumulated depreciation | (18,042,272 | ) | (18,170,554 | ) | ||||
Property and equipment, net | $ | 27,096,211 | $ | 22,650,021 |
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 $1,579,105 and $1,384,871 for the nine months ended September 30, 2018 and 2017, and $537,443 and $475,506 for the three months ended September 30, 2018 and 2017, 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 is 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:
Bank name | Maturity | Interest rate at September 30, 2019 | As of September 30, 2019 | As of December 31, 2018 | |||||||||
East West Bank – (b) | August 2022 - September 2029 | 4.25% | - | 5.75% | $ | 8,600,471 | $ | 5,053,539 | |||||
Capital Bank – (c) | October 2027 | 3.85% | 5,014,605 | 5,138,988 | |||||||||
Bank of America – (d) | April 2021 - February 2023 | 5.07% | - | 5.51% | 1,043,073 | 1,363,211 | |||||||
BMO Harris Bank – (e) | April 2022 - January 2024 | 5.87% | - | 5.99% | 552,764 | 2,256,724 | |||||||
Peoples United Bank – (e) | March 2019-January 2023 | 5.75% | - | 7.53% | 1,245,857 | 752,833 | |||||||
Other finance companies | April 2023 - March 2024 | 5.95% | - | 6.17% | 603,663 | - | |||||||
Total debt | 17,060,433 | 14,565,295 | |||||||||||
Less: current portion | (1,650,898 | ) | (1,455,441 | ) | |||||||||
Long-term debt | $ | 15,409,535 | $ | 13,109,854 |
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 | |
(c) | Guaranteed by
| |
(d) | Guaranteed by | |
(e) | Secured by vehicles. |
The future maturities of long-term debt at September 30, 2019 are as follows:
Twelve months ending September 30, | ||||
2020 | $ | 1,650,898 | ||
2021 | 1,512,541 | |||
2022 | 2,641,941 | |||
2023 | 833,393 | |||
2024 | 517,687 | |||
Thereafter | 9,903,973 | |||
Total | $ | 17,060,433 |
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
Operating lease cost | $ | 184,002 | $ | 476,262 |
Supplemental cash flow information related to leases was as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 184,002 | $ | 476,262 |
Supplemental balance sheet information related to leases was as follows:
As of September 30, 2019 | ||||
Operating Leases | ||||
Operating lease right-of-use assets | $ | 75,169 | ||
Current portion of obligations under operating leases | $ | 40,155 | ||
Obligations under operating leases, non-current | 35,014 | |||
Total operating lease liabilities | $ | 75,169 | ||
Weighted Average Remaining Lease Term (Months) | ||||
Operating leases | 26 | |||
Weighted Average Discount Rate | ||||
Operating leases | 5.09 | % |
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:
Three Months Ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Capital leases cost: | ||||||||
Amortization of right-of-use assets | $ | 139,686 | $ | 64,895 | ||||
Interest on lease liabilities | 25,697 | 11,041 | ||||||
Total capital leases cost | $ | 165,383 | $ | 75,936 |
Nine Months Ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Capital leases cost: | ||||||||
Amortization of right-of-use assets | $ | 431,444 | $ | 194,685 | ||||
Interest on lease liabilities | 86,303 | 44,593 | ||||||
Total capital leases cost | $ | 517,747 | $ | 239,278 |
Supplemental cash flow information related to leases was as follows:
Nine Months Ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from capital leases | 86,303 | 44,593 | ||||||
Financing cash flows from capital leases | 315,393 | 319,637 | ||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||
Capital leases | 1,432,662 | - |
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – LEASES (CONTINUED)
|
September 30, 2019 | December 31, 2018 | |||||||
Capital Leases | ||||||||
Property and equipment, at cost | $ | 2,793,731 | $ | 1,484,911 | ||||
Accumulated depreciation | (1,153,443 | ) | (810,753 | ) | ||||
Property and equipment, net | $ | 1,640,288 | $ | 674,158 | ||||
Current portion of obligations under capital leases | $ | 262,904 | $ | 164,894 | ||||
Obligations under capital leases, non-current | 1,139,964 | 120,705 | ||||||
Total capital leases liabilities | $ | 1,402,868 | $ | 285,599 | ||||
Weighted Average Remaining Lease Term (Months) | ||||||||
Capital leases | 57 | 27 | ||||||
Weighted Average Discount Rate | ||||||||
Capital leases | 7.50 | % | 8.05 | % |
Maturities of lease liabilities were as follows
Twelve months ending September 30 | Operating Leases | Capital Leases | ||||||
2020 | $ | 42,238 | $ | 373,715 | ||||
2021 | 26,043 | 370,309 | ||||||
2022 | 11,641 | 335,812 | ||||||
2023 | - | 331,070 | ||||||
2024 | - | 253,056 | ||||||
Thereafter | - | 40,378 | ||||||
Total Lease Payments | 79,922 | 1,704,340 | ||||||
Less Imputed Interest | (4,753 | ) | (301,472 | ) | ||||
Total | $ | 75,169 | $ | 1,402,868 |
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.
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Bank name | Maturity | Interest rate at December 31, 2017 | As of September 30, 2018 | As of December 31, 2017 | ||||||||||
East West Bank – (b) | June 2022 - August 2027 | 4.25% - 4.75 | % | $ | 5,095,693 | $ | 5,220,809 | |||||||
Capital Bank – (c) | October 2027 | 3.85 | % | 5,199,680 | 5,333,677 | |||||||||
Bank of America – (d) | February 2023 | 4.2095 | % | 1,689,248 | 2,262,500 | |||||||||
Bank of Montreal – (a) | April 2022 - June 2023 | 5.99% - 6.87 | % | 2,278,756 | 1,071,398 | |||||||||
GE Capital – (a) | October 2019 | 5.94 | % | — | 36,359 | |||||||||
Other finance companies – (e) | September 2018 - December 2023 | 3.99% - 6.69 | % | 457,745 | 1,696,961 | |||||||||
Total debt | 14,721,122 | 15,621,704 | ||||||||||||
Less: current portion | (1,339,548) | (1,372,125 | ) | |||||||||||
Long-term debt | $ | 13,381,574 | $ | 14,249,579 |
| (i) | The
|
For the nine months ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Current: | ||||||||
Federal | $ | 1,184,630 | $ | 1,345,253 | ||||
State | 383,782 | 365,822 | ||||||
Current income tax provision | 1,568,412 | 1,711,075 | ||||||
Deferred: | ||||||||
Federal | 159,162 | (120,728 | ) | |||||
State | (12,042 | ) | (48,140 | ) | ||||
Deferred income tax benefit | 147,120 | (168,868 | ) | |||||
Total income tax provision | $ | 1,715,532 | $ | 1,542,207 |
For the three months ended | ||||||||
September 30, 2019 | September 30, 2018 | |||||||
Current: | ||||||||
Federal | $ | 260,656 | $ | 360,016 | ||||
State | 101,534 | 124,118 | ||||||
Current income tax provision | 362,190 | 484,134 | ||||||
Deferred: | ||||||||
Federal | 217,292 | 309,176 | ||||||
State | 27,660 | 46,837 | ||||||
Deferred income tax provision | 244,952 | 356,013 | ||||||
Total income tax provision | $ | 607,142 | $ | 840,147 |
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES
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 construction costs associated with rehabilitation of the two buildings. Under the lease for 273 Fifth Avenue, the fixed rent costs over 30 years commence at $325,000 for the first year and escalate every year during the term to $1,047,000 in year 30. Under the lease for 275 Fifth Avenue, the fixed rent costs over 15 years commence at $462,000 for the first year and escalate every year during the term to approximately $760,878 in year 15. Under the leases, AnHeart delivered two letters of credit in favor of the Landlord as security for the obligations under the leases. With respect t to 273 Fifth Avenue, the letter of credit is in the amount of $213,000. With respect t to 275 Fifth Avenue, the letter of credit is in the amount of $115,500. The Company entered into the leases for the purpose of expanding its product lines to include Chinese herb supplements, and management determined at the time of the execution of the leases to use the sites to develop into a hub for such products. However, management has since determined to cease the said business expansion. As of November 1, 2018, the Company has agreements in principle to sell AnHeart and obtained a sub guarantor. Under the proposed sales agreement, AnHeart would be sold to a third party for a sum of $20,000. The landlords on the leases have tentatively agreed to the transfer of the ownership of AnHeart. Definitive documents are expected to be executed before the year end.
The net deferred tax liabilities presented in the Company's consolidated balance sheets were as follows:
HF FOODS GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – RELATED PARTY TRANSACTIONS
The Company records transactions with various related parties. These related party transactions as of September 30,
Related party balances:
Below is a summary of accounts receivable with related parties as of September 30,
All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary.
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,
HF FOODS GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RELATED PARTY TRANSACTIONS
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,
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
On September 30, 2018, the Company signed a promissory note agreement with Enson Seafood
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
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
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.
As of September 30,
HF FOODS GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)
The Company also periodically receives advances from its related parties for business purposes. These advances are interest free and due upon demand. Lease Agreements with Related Parties: A subsidiary of the Company, RN Holding, leases a facility to 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,
Related party
The Company 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,
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
HF FOODS GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12– CONTINGENCY
NOTE 13 – BUSINESS COMBINATION WITH B&R On June 21, 2019, the Company entered into a Merger Agreement with B&R pursuant to which the two companies agreed to combine their operations. B&R is a leading Chinese food wholesaler and distributor serving approximately 6,800 restaurants in more than ten western states. On November 4, 2019 (the “Acquisition Date”), the Company completed its merger with B&R, which became a wholly owned subsidiary of the Company. Under the terms of the merger agreement, the Company issued 30.7 million shares of common stock to the former shareholders of B&R. As a result, upon completion of the merger, B&R pre-merger shareholders now own approximately 58.9% of the outstanding shares and the Company’s pre-merger shareholders own approximately 41.1%. After giving effect to the merger, there are currently 53,050,211 and 52,145,096 shares of common stock of the Company issued and outstanding, respectively. Zhou Min Ni continues to serve as the Chairman of the Board and remains the largest individual shareholder of the Company.
The Business Combination will be accounted for using the acquisition method of accounting under the provisions of Accounting Standards Codification 805, “Business Combinations”. The Company Due to the limited time since the date of the acquisition, it is impracticable for the Company to make certain business combination disclosures at this time as the Company is still gathering information necessary to provide those disclosures. The Company plans to provide this information in its annual report on Form 10-K for the year ending December 31, 2019. NOTE 14 – SUBSEQUENT EVENTS On November 4, 2019, the Company completed its merger with B&R. Under the terms of the merger agreement, the Company issued 30.7 million shares of common stock to the former shareholders of B&R. 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) a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and (b) mortgage-secured term loans of $55.4 million. 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 period then ended. As of November 4, 2019, $13.91 million outstanding under the Company’s prior line of credit and $1.57 million of prior term loan obligations were paid off with proceeds from the amended and restated credit agreement. CAUTIONARY NOTE ABOUT FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q for HF Foods Group Inc. (“HF Foods,” the “Company,” “we,” “us,” or “our”) contains forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Item 2. Management’s Discussion and
HF Foods Group Inc.
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
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.
In the past 20 years of operation, we have developed distribution channels throughout the southeastern United States. We have three distribution centers located in Greensboro, North Carolina, Ocala, Florida, and Atlanta Georgia, which comprise 400,000 square feet of total storage space, a fleet of 105 refrigerated vehicles for short-distance delivery, 12 tractors and 17 trailers for long-haul operations, and centralized inventory management and procurement, supported by an outsourced call center located in China for customer relationship management. We offer a variety of high quality products at competitive prices to our customers. Customers can benefit from our efficient supply chain to support such customer’s growth. We offer one-stop service to Chinese restaurants with over 1,000 types of products, including fresh and frozen meats, Chinese specialty vegetables, sauces, and packaging materials for takeout restaurants. Chinese restaurants, especially small or takeout restaurants, can find almost all the products they need in our product lists, which can help them to save their workload to manage their purchase of inventory. We use an outsourced call center in Fuzhou, China, with 24 hour availability for sales and marketing, order placement and post-sales service, which reduces our operating costs, and offers service in Mandarin and Fuzhou dialect, in addition to English. During our 20 years of operations, we have established a large supplier network and we maintain long-term relationships with many major suppliers. The procurement team is led by Zhou Min Ni, CEO of the Company, who has deep insight in the industry. The centralized procurement management system gives us negotiating power given the large procurement quantities, improves our turnover of inventory and account payables, and reduces our operating costs. In furtherance of our strategic plan, on June 21, 2019 we entered into, and on November 4, 2019 we closed, a merger agreement to acquire B&R Global Holdings, Inc. (“B&R”), a California based distributer and wholesaler serving Asian restaurants in the Western United States. We issued 30,700,000 shares of common stock to the
Outlook We plan to continue to expand our business and strategically consolidate our market segment through acquisition of other distributors and wholesalers to expand our business into untapped regions around the United States and to eventually grow into a nationwide foodservice distributor, which depends on access to sufficient capital. If we are unable able to obtain equity or debt financing, or borrowings from bank loans, we may not be able to execute our plan to acquire other distributors and wholesalers. Even if we are able to make such acquisitions, we may not be able to successfully integrate any acquired businesses or improve their profitability, which could have a material adverse effect on our financial condition and future operating performance. We will continue to invest in the management technology system to further improve our operational efficiency, accuracy and customer satisfaction. We are also exploring value-added products such as semi-prepared products to help our customers upgrade their service. How to Assess
In assessing performance,
Net Revenue
Net revenue is equal to gross sales minus sales
Gross Profit
Gross profit is equal to net sales minus cost of goods sold. Cost of goods sold primarily includes inventory costs (net of supplier consideration), inbound freight, custom clearance fees, and other miscellaneous expenses. Cost of goods sold generally changes as
Distribution, General and Administrative Expenses
Distribution, general and administrative expenses consist primarily
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, income taxes,
Results of Operations for the
The following table sets forth a summary of
Net Revenue
Net
The following table sets forth the breakdown of
Net revenue increased by $5.3 million, or 7.6%, during the
Cost of
The following tables set forth the calculation of gross profit and gross margin for
Gross profit was $12.2 million for the three months ended September 30,
Distribution, selling and Administrative Expenses
Distribution, selling and administrative expenses were $10.0 million and $10.4 million for the three months ended September 30, Interest Expense and
Interest
Other Income
Other income consists primarily
Income taxes Provision
Net Income Attributable to Noncontrolling interest
Net Income Attributable to Our Stockholders Net income attributable to our stockholders was $1.7 million and $1.3 million for the three months ended September 30,
Adjusted EBITDA
The following table sets forth of the calculation of
* For the three months ended September 30, 2018, represents labor dispute expenses accrued in connection with United States Department of Labor investigation of our subsidiaryKirnland Food Distribution, Inc. For the three months ended September 30, 2019, represents a non-recurring expense adjustment previously accrued for potential loss contingency relating to negligence claim(s) for damages arising in the ordinary course of business.
Results of Operations for the nine months ended September 30, 2019 and 2018 The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
Net Revenue Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and sales as wholesale to smaller distributors. The following table sets forth the breakdown of net revenue:
Net revenue increased by $8.0 million, or 3.7%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. This was attributable primarily to a $7.5 million increase in sales to independent restaurants resulting primarily from slightly increased commodity prices in the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018. Net revenue from wholesale for the nine months ended September 30, 2019 increased 3.3% compared to the nine months ended September 30, 2018, due primarily to the increase in sales to three wholesale customers and sales to two new customers. Cost of sales and Gross Profit The following tables set forth the calculation of gross profit and gross margin for sales to independent restaurants, wholesale and total net revenue:
Cost of revenue was $187.8 million for the nine months ended September 30, 2019, an increase of $7.4 million, or 4.1%, from $180.4 million for the nine months ended September 30, 2018. The increase was attributable primarily to the increase of $6.6 million in cost of revenue for the sales to independent restaurants, from $167.4 million in the nine months ended September 30, 2018 to $174.0 million for the nine months ended September 30, 2019. The increase was attributable primarily to the increase in net sales. Gross profit was $37.4 million for the nine months ended September 30, 2019, an increase of $0.6 million, or 1.7%, from $36.8 million for the nine months ended September 30, 2018. The increase was attributable primarily to the $1.0 increase in gross profit derived from sales to independent restaurants from $35.8 million in the nine months ended September 30, 2018 to $36.8 million in the nine months ended September 30, 2019. Gross margin decreased from 16.9% for the nine months ended September 30, 2018 to 16.6% for the nine months ended September 30, 2019, representing a 0.3% decrease due primarily to the 0.2% decrease in gross margin from sales to independent restaurants. Distribution, selling and Administrative Expenses Distribution, selling and administrative expenses were $31.4 million for the nine months ended September 30, 2019, a decrease of $0.3 million, or 0.9%, from $31.7 million for the nine months ended September 30, 2018. The increase is within the normal fluctuation of business operations. Interest Expense and Bank Charges Interest expense and bank charges are primarily generated from lines of credit, capital leases and long-term debt. Interest expenses and bank charges were $1.2 million for the nine months ended September 30, 2019, an increase of $0.2 million, or 17.8%, compared with $1.0 million for the nine months ended September 30, 2018, which was due primarily to an increase in the average balance of our lines of credit. Other Income Other income consists primarily of non-operating income and rental income. Other income was $0.9 million for the nine months ended September 30, 2019 and for the nine months ended September 30, 2018. Income taxes Provision Provision for income taxes increased by $0.2 million, or 11.2%, from $1.5 million for the nine months ended September 30, 2018 to $1.7 million for the nine months ended September 30, 2019, as a result of the increase in income before income tax provision. Net Income Attributable to Noncontrolling interest Net income attributable to noncontrolling interest is derived from one minority owned subsidiary and increased by $617,538 or 222.3% from a loss of $277,855 for the nine months ended September 30, 2018 to $339,683 of income for the nine months ended September 30, 2019, as a result of the increase of net income of this subsidiary. Net Income Attributable to Our Stockholders Net income attributable to our stockholders was $4.0 million for the nine months ended September 30, 2019 and for the nine months ended September 30, 2018. Adjusted EBITDA The following table sets forth of the calculation of adjusted EBITDA:
* For the nine months ended September 30, 2018, represents labor dispute expenses accrued in connection with United States Department of Labor investigation of our subsidiaryKirnland Food Distribution, Inc. For the nine months ended September 30, 2019, represents a non-recurring expense accrued for potential loss contingency relating to negligence claim(s) for damages arising in the ordinary course of business. Adjusted EBITDA was $9.8 million for the nine months ended September 30, 2019, a decrease of $0.6 million, or 5.4%, compared to $10.4 million for the nine months ended September 30, 2018 resulting mainly from the decrease of non-recurring expenses of $2.1 million offset by increases in interest expenses of $0.2 million, net income of $0.6 million and depreciation and amortization of $0.6 million. As a percentage of revenue, adjusted EBITDA was 4.4% and 4.8% for the nine months ended September 30, 2019 and 2018, respectively. Liquidity and Capital Resources
As of September 30,
On April 18, 2019, we and our operating subsidiaries Han Feng, New Southern Food Distributers and Kirnland entered into a credit agreement with East West Bank, which replaced our prior credit agreement with East West Bank. The credit agreement provides a $25,000,000 revolving credit facility which is due August 18, 2021, accrues interest based on the prime rate less 0.375% or 2.20% above LIBOR, but in no event less than 4.214% per annum, and is secured by virtually all assets of the Company and our domestic subsidiaries. The outstanding balance on this line of credit at September 30, 2019 was $11.9 million. The credit agreement contains certain financial covenants which, among other things, require us to maintain certain financial ratios. As of the date of this report, we were in compliance with the covenants under the credit agreement. On November 4, 2019, the East West Bank revolving credit facility loan was paid off from borrowings under the Amended and Restated Credit Agreement entered into connection with the merger with B&R, as described below. On November 4, 2019, we entered into an Amended and Restated Credit Agreement with JP Morgan. The Amended and Restated Credit Agreement provides for (a) a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and (b) mortgage-secured term loans of $55.4 million. 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 period then ended. Although However, there is no assurance that management will be successful in
The following table
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and adjusted for the effect of working capital changes. Net cash provided by operating activities was approximately
Investing Activities
Net cash used in investing activities was approximately
Financing Activities
Net cash provided by financing activities was approximately $5.7 million for the nine months ended September 30, 2019, an increase of $7.5 million, or 418.2%, compared with net cash used in financing activities
Commitments and Contractual Obligations
The following table presents the company’s material contractual obligations as of September 30,
On July 2, 2018, AnHeart Inc. (“AnHeart”), our former subsidiary, 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. We 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, we executed an agreement to transfer all of our ownership interest in AnHeart to Jianping An, a resident of New York for a sum of $20,000. We completed the transfer of ownership on May 2, 2019. However, the transfer of ownership did not release our guaranty of AnHeart’s obligations or liabilities under the original lease agreements. Under the terms of the sale of shares, AnHeart executed a security agreement which provides a security interest in AnHeart’s assets and a covenant that the lease will be assigned to us if AnHeart defaults. Further, Minsheng Pharmaceutical Group Company, Ltd., a Chinese manufacturer and distributor of herbal medicines, executed an unconditional guaranty of all AnHeart liabilities arising from the leases.
Off -balance Sheet Arrangements
Critical Accounting Policies and Estimates
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.
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.
Item 3. Quantitative and Qualitative Disclosures about Market
As Item 4. Controls and
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
The measures we have implemented are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to the implementation of remediation efforts to address these material weaknesses. Although we will continue to implement measures to remedy our internal control deficiencies, there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. In addition, until remediation steps have been completed and/or operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weaknesses identified and described above will continue to exist. PART II - OTHER INFORMATION
Item 1. Legal
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered
On September 30, 2019, the Company sold to Unregistered Sales of Equity Securities Between July 2 and July 30, 2019, the Company issued 182,725 shares of common stock upon the cashless exercise of a Unit Purchase Option Agreement issued to one of the underwriters in the Company’s initial public offering. The foregoing securities were issued to one accredited investor in private placement transactions pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended,
Item 3. Defaults Upon Senior
None.
Item 4. Mine Safety
Item 5. Other
None.
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
signatures
Date: November 14,
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