EDGAR 10-K Filing

Company CIK: 1680873
Filing Year: 2021
Filename: 1680873_10-K_2021_0001680873-21-000006.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS.
Overview
HF Foods Group Inc. acting through its subsidiaries (“HF Group,” the “Company,” “we,” “us,” or “our”), is a leading food service distributor to Asian restaurants, primarily Chinese restaurants located in the Southeastern, Pacific and Mountain West regions of the United States. HF Group is the result of a merger between two complementary market leaders, HF Foods Group Inc. and B&R Global Holdings, Inc. ("B&R Global") on November 4, 2019.
We currently have 13 distribution centers strategically located across the east and west coasts of the United States in California, Arizona, Colorado, Florida, Georgia, Nevada, North Carolina, Oregon, Utah, and Washington, and a fleet of over 300 refrigerated vehicles. Capitalizing on our deep understanding of the Chinese culture and with over 780 employees and subcontractors, and supported by two call centers in China, we have become a trusted partner serving approximately 10,000 Asian restaurants in 22 states, providing round-the-clock sales and service support to customers who mainly converse in Mandarin or Chinese dialects. Operating through its subsidiaries, the Company is dedicated to serve the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices.
We are committed to providing excellent customer service by delivering a distinctive product portfolio built from an indelible partnership with both foreign and domestic suppliers. These relationships, coupled with our proprietary centralized inventory procurement system, ensure that we deliver an outstanding array of products at competitive prices. The centralized procurement system provides the Company with great negotiating power with suppliers resulting in competitive prices for our customers. This proprietary system also helps to better manage customer relationships and inventory while providing a solid platform for expansion from acquisition of smaller companies in this fast growing yet fragmented niche market.
Recent Developments
Business Combination with B&R Global
On November 4, 2019, the Company completed the transactions contemplated by that certain merger agreement dated as of June 21, 2019 (the “Merger Agreement”) by and among the Company, B&R Merger Sub Inc., a Delaware corporation (“Merger Sub”), B&R Global, the stockholders of B&R Global (the “B&R Global Stockholders”), and Xiao Mou Zhang (aka Peter Zhang), as representative of the stockholders (the “Business Combination”). Capitalized terms used herein without definition have the meaning given to them in the Merger Agreement.
Pursuant to the Merger Agreement, Merger Sub merged with and into B&R Global, resulting in B&R Global becoming a wholly owned subsidiary of HF Group. In connection with the closing, HF Group issued 30.7 million of its shares of common stock to the B&R Global Stockholders.
Pursuant to the Amendment to HF Group’s certificate of incorporation, HF Group currently has authorized share capital of 101,000,000 shares consisting of 100,000,000 shares of common stock with a par value of $0.0001 per share and 1,000,000 shares of preferred stock with a par value of $0.0001 per share.
Immediately after the Business Combination, HF Group’s pre-Business Combination public shareholders owned approximately 12% of HF Group, HF Group’s pre-Business Combination directors, officers and affiliates owned approximately 29.1% of HF Group, and the B&R Global Stockholders owned approximately 58.9% of HF Group.
In connection with the Business Combination:
•HF Group, Xiao Mou Zhang, as representative of the stockholders of B&R Group, and Loeb & Loeb LLP, as escrow agent, entered into an Escrow Agreement pursuant to which HF Group deposited shares of HF Group common stock representing 5% of the aggregate amount of shares issued to the B&R Global Stockholders pursuant to the Merger, to secure the indemnification obligations of the B&R Global Stockholders as contemplated by the Merger Agreement ("Escrow Shares"). The Escrow Shares have since been released on November 25, 2020, one year after the closing of the Business Combination.
•Certain shareholders of HF Group and certain of the B&R Global Stockholders entered into a Tag-Along Agreement, which provides the stockholder parties thereto with tag-along rights in the event any such stockholder desires to sell his or her HF Group securities in a private transaction, or enter into any transaction that would have the same effect as a sale, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such shares, or to enter into any transaction, swap, hedge or other arrangement, or engage in any short sales with respect to any such securities ("Tag-Along Agreement"). The Tag-Along Agreement has since been rescinded in May 2020.
•HF Group and the B&R Global Stockholders entered into a Registration Rights Agreement to provide for the registration of the common stock issued to the B&R Global Stockholders in connection with the Business Combination. The B&R Global Stockholders will be entitled to “piggy-back” registration rights with respect to registration statements filed following the consummation of the Business Combination, and will have certain demand rights for registration. HF Group will bear the expenses incurred in connection with the filing of any such registration statements.
•HF Group, B&R Global, and certain of the B&R Global Stockholders entered into a five year Voting Agreement, which provided that, immediately after the closing of the Business Combination, (i) Zhou Min Ni, the former Chief Executive Officer of HF Group, would continue to serve as a director and the chairman of the board of the Company and as Co-CEO; (ii) Xiao Mou Zhang, the pre-Business Combination Chief Executive Officer of B&R Global, would begin serving as a director of HF Group and Co-CEO; (iii) Zhou Min Ni would select one person to serve as an independent director of the Company, (iv) Xiao Mou Zhang would select one person to serve as an independent director, and (v) Zhou Min Ni and Xiao Mou Zhang would jointly select one person to serve as an independent director.
•Pursuant to our 8-K filing on February 25, 2021, Zhou Min Ni has voluntarily resigned as the chairman of the board of directors, Co-CEO and any positions he holds with any of the Company's subsidiaries, effective February 23, 2021. The Company entered into a separation agreement with Zhou Min Ni which amended certain terms of the Voting Agreement mentioned above. In particular, Zhou Min Ni has agreed on behalf of himself and the other parties related to him and which he controls, that the provisions of Sections 2.1(b) (naming Mr. Ni to the Board as the Company Designee), 2.1(d) (allowing Mr. Ni to designate the Company Independent Designee) and 2.1(e) (allowing Mr. Ni to join in the nomination of the Joint Independent Designee) and Section 2.4 (requiring Mr. Ni to be named to the position of Co-Chief Executive Officer) of the Voting Agreement (as it relates only to Mr. Ni and not Xiao Mou Zhang) are no longer applicable or enforceable. On the same date, Xiao Mou Zhang has been promoted to become the sole CEO of Company. The board of directors have also appointment Russell Libby as the new chair of the Company's board of directors. See Note 19 Subsequent Events.
Acquisition of Warehouse Facilities
On January 17, 2020, the Company completed the transactions contemplated by that certain membership interest purchase agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, B&R Group Realty, and nine subsidiary limited liability companies wholly owned by B&R Group Realty (the “B&R Realty Subsidiaries”) (the “Acquisition”). Capitalized terms used herein without definition have the meaning given to them in the Purchase Agreement.
Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the B&R Realty Subsidiaries, which own warehouse facilities that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. Co-CEO of the Company, Peter Zhang, managed and owned an 8.91% interest in B&R Group Realty. The total purchase price for the Acquisition was set at $101,269,706. Financing for the Acquisition was provided under the Second Amended and Restated Credit Agreement, the terms of which are set forth below, and the lender parties thereto relied upon the appraisals in determining to provide such financing. Based in part on the foregoing, the special transactions review committee, composed of the Company’s independent directors, reviewed and approved the Acquisition and the related financing on behalf of HF Group’s board.
Consideration for the Acquisition was funded by (i) $75.6 million in mortgage-backed term loans financed under the Second Amended and Restated Credit Agreement, (ii) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note (the “Note”) to B&R Group Realty, and (iii) payment of $18.7 million from funds drawn from the Company’s revolving credit facility. The restatement of the mortgage-backed term loans released B&R Group Realty from its obligations to the lenders under the First Amended Credit Agreement and predecessor financing arrangements.
Amendment to Credit Facility
On November 4, 2019, the Company, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as
guarantors, entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto. The Amended Credit Agreement provided 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, and amended and restated the existing $75 million secured revolving credit facility and $60 million of real estate term loans evidenced by that certain Credit Agreement, dated as of November 6, 2017, among B&R Global, its affiliates and JP Morgan Chase Bank, N.A., as the sole lender.
On January 17, 2020, the Borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) by and among JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement provided for (a) a $100 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Facility”), and (b) mortgage-secured Term Loans of $75.6 million. The Second Amended Credit Agreement amended and restated the existing $55.0 million of real estate term loans under the Amended Credit Agreement. As of January 17, 2020, the existing balance of revolving debt under the Amended Credit Agreement, $41.2 million, was rolled over, and an additional $18.7 million available to the Company under the Facility was drawn. The Company used the $75.6 million in mortgage-secured term loans and $18.7 million drawn from the revolving credit facility to fund in part the Acquisition.
Borrowings under the Second Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions). The Borrowers have the ability to increase the amount of the Facility, which increases may take the form of increases to the revolving credit commitments, by an aggregate amount of up to $30 million upon satisfaction of customary conditions precedent for such increases, or incremental loans and receipt of additional commitments by one or more existing or new lenders.
Borrowings under the Facility bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.375%, or a base rate of prime rate minus 1.125%. The Term Loans bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.875%, or a base rate of prime rate minus 0.625%. A commitment fee of 0.15% is payable monthly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility.
Business Model and Competitive Advantage
We are committed to providing our customers with a wide range of products at competitive prices. Since inception, we have differentiated ourselves from our competitors with our distinctive product portfolio, supplier relationships, strategic locations, and technology. Our wide range of Asian Specialty product offerings sets us apart from other mainstream competitors such as Sysco Corporation and US Foods Holding Corp., as many of the items we offer are specific to the Chinese restaurant industry. More importantly, our relationships with our suppliers allow us to procure a large variety of products in volume at a low cost. We also import specialized items that would be difficult to procure domestically. With fourteen warehouses and over three hundred trucks executing daily routes within 300 miles of our distribution centers, we offer our customers prompt delivery of high-quality products.
We believe that the following elements of our business model provide us with a competitive advantage and has contributed greatly to our success:
•We offer a wide array of specialty products that are not commonly provided by large distributors serving the mainstream market.
•We have a deep understanding of Chinese culture and most of our employees can speak the native language of our customers.
•We lower our sales and administrative expenses by outsourcing our telephone-based sales and customer service directly to two call centers located in China, which serves our customers with Mandarin and Chinese dialects (Fuzhounese) speaking agents.
•We capitalize on economies of scale and have strong negotiating power with our suppliers.
•We have strategically located distribution centers supported by trucking fleets with most routes limited to 3 to 5 hours driving time, ensuring prompt delivery of our customers orders.
•With our self-developed proprietary inventory management system, we are able to manage our customer relationships and inventory efficiently and reduce operating expenses.
•Employees’ bilingual capabilities provide a competitive advantage against other major providers in the industry.
We aim to be a nationwide foodservice supplier by expanding geographically into new key markets in the United States where we currently do not have a presence, as well as to strategically consolidate our market leadership position in existing markets through acquisitions. We will also explore potential vertical expansion, both upstream and downstream of the foodservice value chain, including providing value-added items such as semi-prepared food products to help our customers upgrade their service. We continue to build on technological advancement to develop state-of-the-art management information and operating systems to further improve our operational efficiency, accuracy and customer satisfaction.
Industry and Market Analysis
We distribute food and supplies to Asian/Chinese restaurants, primarily Chinese restaurants that mainly serve non-Chinese Americans, which is a niche market segment of the foodservice distribution industry. The U.S. Food Service Market is one of the largest, valued at USD $3.1 Trillion in 2018 and is projected to reach USD 4.5 Trillion by 2026 (www.verifiedmarketresearch.com). There are several large distributors such as Sysco Corporation, US Foods Holding Corp. and Performance Food Group Company, each capturing a significant market share of the industry by offering food related products and services, or carrying specific products for large chains. However, the Chinese restaurant segment is unique and the restaurants are generally not well served by these mainstream players, thereby create opportunities for specialty players like HF Foods Group to fill the gap.
Features of Chinese Restaurants
Set forth below are the principal characteristics of the Asian/Chinese restaurants we serve.
Primarily Serving Non-Chinese Americans. There are tens of thousands of Chinese restaurants spread throughout the U.S., primarily serving non-Chinese American customers. Although the dishes they serve cater to the preferences of American mainstream customers and are more simply and quickly prepared as compared to traditional full-service Chinese restaurant cuisine, they still require specialized and unique Chinese ingredients with traditional Chinese cooking styles.
Operated by Chinese Individual Families. Most Chinese restaurants serviced by HF Group are generally family-owned with very few workers, who are usually immigrants from China or second generation Chinese Americans. These restaurant owners, especially the founders are generally less sophisticated, with limited education and very limited resources and appreciate value-added services from suppliers to help them improve their operational efficiency. The owners and workers in the Chinese restaurants usually speak Mandarin or other regional dialects of the Chinese language. Understanding the Chinese culture and language is paramount to facilitating efficient communications with customers.
Close-Knit Chinese American Community. Second or third generation Chinese Americans living in the U.S. inherit their traditional cultural, and ethnic languages, and our experience has been that people in these communities prefer to do business with Chinese Americans as opposed to other ethnic groups.
Unique Cooking Style and Ingredients for Chinese Cuisines. Chinese cuisine requires unique cooking techniques such as steaming and stir-frying in Chinese wok, and requires specialty ingredients and vegetables such as bitter melons, Chinese yams, vine spinach, Chinese cabbage and winter melon. It also requires Chinese and Asian seasonings and spices, including peanut oil, cooking wine, vinegar, dark soy source, black bean sauce, pepper oil and chili oil. Most of the unique ingredients for Chinese cuisine are staple supplies of HF Group that are not widely available from mainstream U.S. suppliers.
Growth Potential
Growing Consumption Trend for Food-Away-from-Home (FAFH). According to U.S. Department of Agriculture (USDA), the percentage of Consumers' spending on FAFH increased dramatically from approximately 27% in 1950 to about 52% in 2015, outpacing spending on Food-At-Home (FAH) for the first time in America history. This powerful trend continued through 2019 which saw FAFH spending accounted for 54.8% of total food expenditures. Although it reversed in 2020 due to the outbreak of COVID-19, we believe this long-term trend of increasing FAFH consumption will resume and continue to be the key driver of demand for Asian/Chinese restaurants.
Increased Recognition of Chinese Cuisines by Americans. With the growing influence of China’s economy and the Chinese culture globally, and increased tourism and investment into Asia and China from the Western world, more and more Americans are exposed to, and have shown an increased preference for Chinese and Asian cuisine. According to Euromonitor and article published by The Washington Post, Asian food is the fastest growing cuisine in U.S., registering a blistering cumulative growth rate of 135% since 1999 to 2014, outpacing others like Latino and Middle Eastern cuisines.
We believe that the above-mentioned powerful trends will result in expanded opportunities for Asian/Chinese restaurants, and thus represent tremendous growth opportunity for specialized Asian food distributors like HF Group.
Current Industry Landscape and Opportunities
Natural Culture Barriers to Entry. Understanding Chinese cooking culture is important to run a Chinese restaurant and, therefore, most Chinese restaurants are operated by Chinese Americans. It is very difficult for mainstream food distributors to serve these restaurants because of various cultural and language barriers.
Highly Fragmented Market Segment. The market is currently highly fragmented with many unsophisticated competitors. Most participants are small players such as wholesalers, specialty import brokers, farmers markets, and local produce retailers without the support of sophisticated logistics infrastructure. We believe we are the only Chinese food distributor operating in the United States with such a well-developed logistics infrastructure and experienced management team and that the fragmented market gives us the opportunity to consolidate supply and further develop a dominant market position.
Infrastructure Barriers for New Entrants. The food distribution industry requires large capital investments and resources to build the necessary logistics infrastructure including warehouses and a fleet of trucks to cover its distribution network. In addition, the size of HF Group gives us greater negotiating power with vendors, resulting in price advantages for our customers which we believe are simply not easily achievable by smaller suppliers.
Demand for Value-Added Services. Our customers are Asian/Chinese restaurants, primarily takeout restaurants. These customers are price and quality sensitive and prefer large suppliers with economies of scale to provide them with competitive prices and quality products. Given the limited labor forces and resources of these restaurants, most desire to have more value-added services from the suppliers to help them to operate more efficiently.
In summary, we believe we have numerous advantages to address the current market imperfections and become a national leader in this unique market. With economies of scale, we can provide high quality products at competitive prices in an efficient way.
Business Model
Our business model features an integrated structure with thirteen distribution centers with over one million square feet of total storage space, a fleet of over 300 vehicles for primarily short-distance delivery, and a centralized inventory management and procurement system, supported by two outsourced call centers 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 their own growth.
We offer one-stop service to Chinese restaurants with over 1,500 types of products, including mainstream products like fresh and frozen meats, frozen seafoods and general commodities, as well as Chinese specialty products like Chinese vegetables, sauces, and packaging materials for takeout restaurants. Chinese restaurants, especially small or takeout restaurants, can find virtually all the products they needed in our product offerings, which can help minimize the effort involved in managing their purchase of inventory. We utilize outsourced call centers 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 to our customers in Mandarin, Cantonese and regional Chinese dialects, in addition to English.
We have established a large supplier network and we continue to maintain long-term relationships with many major suppliers. The procurement team was led by Zhou Min Ni and Peter Zhang, co-CEOs of the Company in both 2019 and 2020, who have a deep insight of the industry. Since assuming the role of sole CEO in 2021, Peter Zhang continues to oversee the procurement team. The centralized procurement management system gives us increased negotiating power given the large procurement quantities, improves our turnover of inventory and account payables, and reduces our operating costs.
Products
We offer over 1,500 different products for our clients, which includes virtually all items needed to operate their business. Products range from perishable produce to takeout food packaging materials. To meet our customers’ demands, we have a large variety and a complete line of products in our inventory. Eighty percent of our sales volume currently consists of domestic goods such as frozen meat and vegetables, which are procured through large suppliers or directly from the producers. The remaining twenty percent are imported specialty products. We provide a full service one-stop-shop for our customers by providing most or all of the products they need, from order placement to delivery and post-sales services. Services to customers are supported by our plentiful physical facilities, vehicles, material handling equipment and techniques, and administrative and operating staffs.
The products we distribute include:
•Asian specialty food items: Asian specialty encompasses any product that has an Asian flair or flavor, including noodles, rice, dry goods (such as dried mushrooms, and dried beans), specialty sauces/ seasonings, spring rolls, and canned products (such as preserved vegetables, bamboo shoots and water chestnut).
•Meat and Poultry: We provide our customers with a variety of beef, pork, chicken and duck products with different brands to choose from, such as Smithfield, Teys Australia and Tyson.
•Seafood: We are committed to providing our customers with the freshest possible seafood. We provide our clients with a variety of seafood including lobster, shrimp, crab, scallops and flavorful fish such as tuna and Alaskan salmon, with different brands to choose from, like Asian Star and Atlantic Bay.
•Fresh Produce: We offer fresh, seasonal fruits and vegetables such as celery, Chinese cabbage, and winter melon, which are widely used in Chinese cuisines.
•Packaging and Other Items: We offer a wide range of take-out accessories for customers, from bamboo chopsticks to takeout containers, plastic cups and sushi combo boxes.
•Commodities: True commodity products such as regular rice, flour, sugar and oil are classified as “commodity”.
The following table sets forth sales percentage by category for the year ended December 31, 2020:
Category Percentage
Asian Specialty 30 %
Meat and Poultry 26 %
Seafood 14 %
Fresh Produce 13 %
Packaging and Others 11 %
Commodity 6 %
Customer Service
We utilize outsourced call centers located in China to manage our sales order, customer development, sales promotion and post-sales services. The outsourced call centers are located in Fuzhou, the capital city of Fujian Province of China, with local employees speaking Mandarin, Cantonese, regional Chinese dialects (Fuzhounese) and English. By offering the customer service in their native language, the sales staff can communicate smoothly and efficiently with our clients and understand their needs. With cultural understanding and a common language, the sales team can design a product portfolio for our customers and use a precision marketing strategy to promote our products. China, where our two call centers are located, has lower prevailing wages compared to the US. The strategic decision to outsource customer service to China not only enables the Company to provide around the clock service in our customer's native tongue, but also allows the Company to better manage costs. One of the call centers, Hanfeng (Fujian) Information Technology Co., Ltd ("HFFIT"), is a related party to our former Chairman and Co-CEO, Zhou Min Ni. Refer to Note 16 for more details.
We also have a domestic sales team in the U.S., with sales agents that make on-site visits to customers’ restaurants, in order to gain a better understanding of customers’ operations and needs.
Currently, we maintain our sales department, which involves decision-making for sales strategies and supervision of sales performance by our key sales managers, in our corporate headquarters in City of Industry, California and regional office in
Greensboro, North Carolina. The sales managers work closely with the sales staff in China to ensure our market strategies are implemented effectively. Our plan is to further integrate our operating model with the outsourced call centers to expand our business and operate even more efficiently.
A proprietary information system is used to maintain each customer’s records, including location, size, contact information, purchasing history, preferences, orders and payment records. Customers can directly call the outsourced call centers in China or our domestic sales team to inquire about products and to place orders. Once orders are confirmed, electronic sales orders are generated by the information system and sent to the distribution center designated to the customer. Upon receipt of the sales orders, products are pulled from the shelves and moved to a staging area at the loading docks. Products are then loaded into delivery vehicles in preparation for delivery. Products are generally delivered to customers within only two days of an order. Customer analysis can be generated through the information system and prompts the salesperson to follow up with customers for product promotion, post-sales services and the taking of new orders.
We offer a refund policy for non-satisfaction without penalty, which many of our small competitors in the market segment are unable to provide. We provide a 100% satisfaction guarantee to our customer. When a shipment is made and the products are not to the standards of the customer, we allow our customers to reject the order in whole or in part with no penalty within 24 hours. The non-penalty refund policy works to help us earn the trust and loyalty of our customers.
Inventory Procurement
The Company utilizes centralized procurement on bulk and frequently sold items. Subsidiaries send their inventory procurement requests to headquarters and regional offices where the operation team is responsible for fulfillment in the most cost-effective way. The centralized procurement allows HF Group to establish a meaningful vendor relationship under one brand.
We maintain a large supplier network through a vendor pool with a carefully selected group of suppliers to ensure product quality, availability and competitive pricing. Eighty percent of sales volume currently consists of domestic goods such as frozen meat and vegetables, which are procured through large suppliers or directly from the producers. The remaining twenty percent are imported specialty products. To minimize costs, the procurement team directly manages our major vendors for large and frequent purchases and engages brokers for our smaller suppliers of specialty goods. Utilizing brokers allows us to maintain lower costs due to the brokers’ volume.
The key procurement team members closely monitor the supply market for seasonal products such as vegetables and make procurement adjustments according to market conditions. In addition, they use a dual-sourcing method for their suppliers and can negotiate lower prices for comparable products.
Each distribution center reviews the inventory level in the information system daily and submits purchase requests as needed to the procurement team at headquarters and regional offices. The procurement team at headquarter and regional office also can alter or adjust purchasing decisions based on an analysis of the inventory data in the system. Upon receipt of ordered products, the delivery schedule is determined based on the needs of each location. The lead-time for products is dependent on the product category and need. For perishable goods, products are usually delivered by suppliers within 72 hours of placing the order. Products that are ordered through import brokers have lead times of up to seven days.
None of our suppliers accounted for more than 10% of our aggregate purchases during the years ended December 31, 2019 and December 31, 2020.
Warehousing
We use our information system for warehouse management with daily inventory monitoring. The system allows us to manage our inventory in an efficient way. It optimizes the inventory level and turnover, reducing waste, and helps to reduce labor costs to track and record the inventory.
Inventory levels are maintained based on the category of products. Perishable goods are kept in the refrigerated warehouse for a period of no more than 7 days. This includes fresh produce and fresh meat products. Frozen produce, seafood and meat products are kept in the freezer to extend shelf life. Frozen products usually turn over between 30 and 60 days. Non-perishable goods are held in greater quantities of inventory based on the pricing of the market. Non-perishable items are carefully monitored for pricing changes. As they have an extended shelf life, there is an advantage to ordering larger quantities of stock. Non-perishable goods generally turn over in approximately 3 weeks, which we believe is average for distributors of similar size. Maintaining this level of inventory allows us to manage any surges in demand.
Products are stored in warehouses through our various distribution centers. A routine inventory count is taken to ensure stock quantity and replenishment needs. Forty percent of the inventory consists of fresh meats and produce, of which is counted daily. The other sixty percent consists of frozen and dry goods with cycle counts every two weeks. Non-perishable items are stored on racks until their shelf life is reached or the product is sold, whichever comes first. Products are broken down from their pallets and sold in their original packaging. Items stored in the warehouses are not removed from their original packaging. Each package is sold as one unit and priced accordingly.
Locations
We currently have thirteen distribution centers with a total of over one million square feet of storage, including refrigerated storage of over 320,000 square feet. The distribution centers are located on the route of many of our suppliers; product delivery can be made seamlessly to each location with one large order. Each warehouse is equipped with multiple loading docks, allowing simultaneous parallel loading of products onto the trucks. Warehouse locations are also located in industrial regions, allowing large delivery trucks to enter without the need of acquiring permits.
It is important for us to strategically place our warehouses within certain markets to maximize our market share. We currently strategically place our warehouses within markets that are not saturated and have limited competitors. This allows us to quickly penetrate the market and develop customer relationships that will assist in promotion of products and provide post-sales services. Upon penetrating the market, we seek to expand our warehouses into regional areas in order to streamline our distribution network. This strategy is designed to improve the delivery routes and maximize the utilization of our delivery vehicles.
The table below summarizes certain details of our distribution centers:
Location Total Size
(Square
Feet) Size of Cooler and
Refrigerated Storage
(Square Feet) Year
Established Number of
Trucks
Phoenix, AZ 68,000 14,000 2011 17
City of Industry, CA 128,000 35,000 2013 52
Fresno, CA 10,000 3,000 2011 9
Hayward, CA 108,000 36,000 2012 27
Irwindale, CA 85,000 45,000 2006 17
West Sacramento, CA 25,000 8,000 2011 17
Aurora, CO 55,000 16,000 2010 21
Ocala, FL 130,000 30,000 2008 39
Atlanta, GA 100,000 25,000 2006 20
Greensboro, NC 170,000 45,000 2002 46
Murray, UT 59,000 14,000 2013 29
West Jordan, UT 34,000 10,000 2006 -
Renton, WA 70,000 40,000 2015 19
Total: 1,042,000 321,000 313
Fleet Management
We currently operate a fleet of over 300 refrigerated vehicles. Vehicles range from vans, 16-foot semi-delivery trucks, to 53-foot refrigerated trucks and trailer units. These vehicles are maintained by both in-house and external mechanics and follow a strict maintenance schedule. Each vehicle has a 7-year life cycle of approximately 250,000 miles. Each vehicle is refueled daily upon return from its delivery route.
Promotion and Marketing
We do not advertise in the media or magazines. We believe that it is more efficient and cost effective to promote our business through telemarketing, online platform and have our drivers promote our business while executing deliveries. Our drivers visit the Chinese/Asian restaurants along their delivery routes and are trained to market our products and our online ordering
platform to both existing customers and non-customers along their routes. Telemarketing is conducted by salespersons from the outsourced call centers in China.
Competitive Strengths
•A Large Array of Products to Meet the Demands of Customers.
•Cultural Understanding and Language Advantages.
•Outsourced Customer Call Centers with Low Costs.
•Cost Efficiency with Economies of Scale.
•Strong Negotiation Power with Vendors.
•Developed Logistics Infrastructure.
•Proprietary Information System.
•Experienced Management and Proven Growth.
Competition
The foodservice distribution industry is large and highly competitive. There are a few very large distributors serving the mainstream U.S. market. However, with natural cultural and language barriers, it has been a challenge for the the mainstream foodservice distributors to capture a meaningful market share for Chinese restaurants. Management believes that the market participants in the niche market segment that we are serving is highly fragmented and immature. With the continuing growth of demand for Chinese cuisine, we believe that this industry sector has significant opportunity for consolidation.
The competitors serving the industry sector for Chinese restaurants include a large number of small wholesalers, some medium-sized distributors, as well as large established market players. However, we believe there is no dominating market provider in this segment. Our customers also make purchases from local farms, retailers and grocery stores. Small wholesalers sometimes supply the same specialized items such as spices, specialized sauces, and specialty foods, which we carry, but these small suppliers are not able to offer the same broad base and wide array of products that we do. Compared with the medium-sized distributors and large mainstream market players, we have the advantages of offering a broad line of both staple and niche products, efficient operation infrastructure, and cultural understanding to maintain our market position and continue to grow our business.
Trademarks and Other Intellectual Property
We own several registered trademarks, including the following design/combined marks. Trademarks registrations are subject to renewal. Below is a summary of the Company's trademarks.
Trademark U.S. Registration Number Next Renewal Date
<333> 5543532 8/20/2023
HF [B/W Logo] 5985676 2/9/2025
HF [Color Logo] 5888817 10/10/2024
Rong 5619958 12/3/2023
Rong GREEN LEAF 5609442 11/19/2023
SEA333 5713248 3/31/2024
SEA888 5520118 7/16/2023
Insurance
We use insurance to provide coverage for potential liability for workers compensation, automobile and general liability, product liability, director and officer’s liability, employee health care benefits and other casualty and property risks coverage. Changes
in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency or insurance carriers, and changes in discount rates could all affect the ultimate settlements of various claims. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.
Employees
As of December 31, 2020, we had a workforce over 780 persons, including both our employees and workers engaged through agency placements. Over 99% are full-time associates and over 5% of our employees have worked for the Company for ten or more years. Our workforce is not unionized and we are not aware of any plans for them to unionize. We have never experienced a strike or significant work stoppage. We regard our employee relations to be good.
Government Regulation
Legal compliance is important to our operations. We are required to comply, and it is our policy to comply, with all applicable laws in the numerous jurisdictions in which we do business.
As a marketer and distributor of food products in the United States, we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (FDA). The FDA regulates food safety and quality through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point (HACCP) requirements for certain foods, and the food and color additive approval process. The agency also specifies the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the U.S. Department of Agriculture (USDA) to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program. The USDA reviews and approves the labeling of these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.
The recently published and pending rules under the Food Safety Modernization Act (FSMA) will significantly expand food safety requirements, including those of the Company. Among other things, FDA regulations implementing the FSMA require us to establish and maintain comprehensive, prevention-based controls across the food supply chain that are both verified and validated. The FSMA also imposes new requirements for food products imported into the U.S. and provides the FDA with mandatory recall authority.
The Company and our products are also subject to state and local regulation through such measures as the licensing of our facilities; enforcement by state and local health agencies of state and local standards for our products; and regulation of our trade practices in connection with the sale of our products. Our facilities are subject to regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor. These regulations require us to comply with certain manufacturing, health and safety standards to protect employees from accidents and to establish hazard communication programs to transmit information on the hazards of certain chemicals which may be present in products that we distribute.
Our distribution facilities must be registered with the FDA biennially and are subject to periodic government agency inspections by the FDA and USDA. Our facilities are generally inspected at least annually by federal and/or state authorities. Further, we are required to establish communication programs to transmit information about the hazards of certain chemicals present in some of the products we distribute.
Our business and employment practices are also subject to regulation by numerous federal, state and local regulatory agencies, including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. Department of Transportation, as well as its agencies, the Surface Transportation Board, the Federal Highway Administration, the Federal Motor Carrier Safety Administration, and the National Highway Traffic Safety Administration, which collectively regulate our trucking business through the regulation of operations, safety, insurance and hazardous materials. We must comply with the safety and fitness regulations promulgated by the Federal Motor Carrier Safety Administration, including those relating to drug and alcohol testing and hours-of service. Such matters as weight and dimension of equipment also fall under federal and state regulations. In addition, we are subject to the U.S. False Claims Act, and similar
state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments.
Our operations are also subject to a broad range of U.S. federal, state, and local environmental laws and regulations, as well as zoning and building regulations. Environmental laws and regulations cover a variety of procedures, including appropriately managing wastewater and stormwater; complying with clean air laws, including those governing vehicle emissions; properly handling and disposal of solid and hazardous wastes; protecting against and appropriately investigating and remediating spills and releases; and monitoring and maintaining underground and aboveground storage tanks for diesel fuel and other petroleum products. As of December 31, 2020, the costs of managing our compliance with environmental laws and regulations was nominal.
The U.S. Foreign Corrupt Practices Act (FCPA) prohibits bribery of public officials to obtain or retain business in foreign jurisdictions. The FCPA also requires us to keep accurate books and records and to maintain internal accounting controls to detect and prevent bribery and to ensure that transactions are properly authorized. We have implemented appropriate policy and will continue to maintain a robust anti-corruption compliance program applicable to our operations.
For the purchase of items produced, harvested or manufactured outside of the United States, we are subject to applicable customs laws regarding the import and export of various products. Certain activities, including working with customs brokers and freight forwarders, are subject to applicable regulation by U.S. Customs and Border Protection, which is a part of the Department of Homeland Security.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS.
The following are significant factors known to us that could materially adversely affect our business, reputation, operating results, industry, financial position and/or future financial performance.
Risk Factors Relating to Our Business
Global health developments and economic uncertainty resulting from the COVID-19 pandemic have adversely affected,
and are expected to continue to adversely affect, our business, financial condition and results of operations.
Public health crises, pandemics and epidemics, such as the recent outbreak of COVID-19, have impacted our operations directly and are expected to continue to impact us directly, or may continue to disrupt the operations of our business partners, suppliers and customers in ways that could have an adverse effect on our business, results of operations and financial condition. Fear of such events may further alter consumer confidence, behavior and spending patterns, and could adversely affect the economies and financial markets of many countries (or globally), resulting in an economic downturn that could affect customers’ demand for our products.
In response to the recent outbreak of COVID-19 and its development into a pandemic, governmental authorities have imposed mandatory closures, sought voluntary closures and imposed restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions. Among other matters, these actions have required or strongly urged various venues where foodservice products are served, including restaurants, schools, hotels and cruise liners, to reduce or discontinue
operations, which have adversely affected and will continue to adversely affect demand in the foodservice industry, including demand for our products and services.
In addition, some consumers are choosing to stay home due to the perceived risk of infection and health risk associated with COVID-19, which is adversely affecting demand in the food service industry, including demand for our products and services.These events have had, and could continue to have, an adverse impact on numerous aspects of our business, financial condition and results of operations including, but not limited to, our growth, product costs, supply chain disruptions, labor shortages, logistics constraints, customer demand for our products and industry demand generally, difficulties in collecting our accounts receivables and corresponding increases in our bad debt exposure, consumer spending, our liquidity, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally.
A prolonged or deeper economic downturn that adversely affects our business, financial condition or results of operations could affect our ability to access the credit markets for additional liquidity. Adverse conditions may increase the cost of borrowing for us or limit our access to capital. As a result, we may be unable to continue to comply with the debt covenants, which could result in an event of default.
Unfavorable macroeconomic conditions in the U.S. may adversely affect the results of operations and financial condition of the Company.
The operating results of the Company are substantially affected by the operating and economic conditions in the regions in which we operate. Economic conditions can affect us in the following ways:
•A reduction in discretionary spending by consumers could adversely impact sales of Chinese/Asian restaurants, and their purchases from us. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending.
•Food cost and fuel cost inflation experienced by consumers can lead to reductions in the frequency of and the amount spent by consumers for food-away-from-home purchases, which could negatively impact our business by reducing demand for our products.
•Heightened uncertainty in the financial markets negatively affects consumer confidence and discretionary spending, which can cause disruptions with our customers and suppliers.
•Liquidity issues and the inability of our customers to consistently access credit markets to obtain cash to support their operations can cause temporary interruptions in our ability to conduct day-to-day transactions involving the collection of funds from such customers.
•Liquidity issues and the inability of suppliers to consistently access credit markets to obtain cash to support their operations can cause temporary interruptions in our ability to obtain the foodservice products and supplies needed by us in the quantities and at the prices requested.
In addition, our existing operations are mainly located in the Southeastern and Western United States. The geographic concentration of our operations creates an exposure to the economic conditions in those regions and any financial downturn in these areas could materially adversely affect our financial condition and results of operations.
Competition may increase intensively in the future, which may adversely impact our margins and ability to retain customers, and make it difficult to maintain our market share, growth rate and profitability.
The foodservice distribution industry in the United States is fragmented and highly competitive, with local, regional, multi-regional distributors, and specialty competitors. However, we believe that the market participants serving Chinese restaurants are highly fragmented. Currently, we face competition from smaller and/or dispersed competitors focusing on the niche market serving Chinese/Asian restaurants, especially Chinese takeout restaurants. However, with the growing demand for Chinese cuisines, others may also begin operating in this niche market in the future. Those potential competitors include: (i) national and regional foodservice distributors, (ii) local wholesalers and brokers, (iii) food retailers, and (iv) farmers’ markets. The national and regional distributors are experienced in operating multiple distribution locations and expanding management, and they have greater marketing and financial resources than we do. Even though they currently offer only a limited selection of Chinese and Asian specialty foods, they may be able to devote greater resources to sourcing, promoting and selling their products if they choose to do so. Conversely, the local wholesalers and brokers are small in size with a deep understanding of local preferences, but their lack of scale results in high risk and limited growth potential.
If more competitors enter this market segment aiming to serve Chinese/Asian restaurants in the future, our operating results may be negatively impacted through a loss of sales, reduction in margins from competitive price changes, and/or greater operating costs, such as marketing costs, due to the increase of competition.
We may not be able to fully compensate for increases in fuel costs when fuel prices experience high volatility, and our operating results would be adversely affected.
Volatile fuel prices have a direct impact on the industry served by us. We require significant quantities of fuel for delivery vehicles and are exposed to the risk associated with fluctuations in the market price for fuel. The price and supply of fuel can fluctuate significantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns. The cost of fuel affects the price paid by us for products, as well as the costs we incur to deliver products to the customers. Although we have been able to pass along a portion of increased fuel costs to our customers in the past, there is no guarantee that we will be able to do so in the future. If fuel costs
increase in the future, we may experience difficulties in passing all or a portion of these costs along to our customers, which may have a negative impact on our results of operations.
Disruption of relationships with vendors could negatively affect our business. Suppliers may increase product prices, which could increase our product costs.
We purchase our food items and related products from third-party suppliers. Although our purchasing volume can provide benefits when dealing with suppliers, suppliers may not provide the products and supplies needed by us in the quantities and at the prices requested. The cancellation of our supply arrangement with any of our suppliers or the disruption, delay and/or inability to supply the requested products by our suppliers could adversely affect our sales. If our suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms.
In addition, we purchase seasonal Chinese vegetables and fruits from farms and other vendors. Increased frequency or duration of extreme weather conditions could impair production capabilities, disrupt our supply chain or impact demand for our products. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Our inability to obtain adequate supplies of food items and related products as a result of any of the foregoing factors or otherwise could mean that we are unable to fulfill our obligations to customers, and customers may turn to other distributors.
The purchase prices of our products vary from time to time, which is subject to market conditions and negotiation with our suppliers. The prices of some of our products, especially seasonal products, such as vegetables and fruits, have significant fluctuation. We can mitigate the risk of fluctuation in the purchasing and distribution costs by either fixing a price for a certain supply period through negotiation with our suppliers, streamlining our inventory turnover, and passing portions of the price fluctuation to our customers. However, we may not always be able to do that if there are significant and frequent fluctuations. If we are unable to mitigate these price fluctuations, our performance results will be adversely affected.
As a foodservice distributor, it is necessary for us to maintain an inventory of products that may have declines in product pricing levels between the time we purchase the product from suppliers and the time we sell the product to customers, which could reduce the margin on that inventory, adversely affecting our results of operations.
Our relationships with customers may be materially diminished or terminated. The loss of customers could adversely affect our business, financial condition, and results of operations.
We have maintained long-standing relationships with a number of our customers. However, those customers could unilaterally terminate their relationship with us or materially reduce the amount of business they conduct with us at any time. Our customers may shift their purchase orders from us to other competitors due to market competition, change of customer requirements and preferences, or because of the customer’s financial condition. There is no guarantee that we will be able to maintain relationships with any of our customers on acceptable terms, or at all. The loss of a number of customers could adversely affect our business, financial condition, and results of operations.
Changes in consumer eating habits could materially and adversely affect our business, financial condition, and results of operations.
We provide foodservice distribution to Chinese/Asian restaurants, primarily Chinese takeout restaurants, which focus on serving Chinese food to non-Chinese Americans. Changes in consumer eating habits (such as a decline in consuming food away from home, a decline in portion sizes, or a shift in preferences toward western foods) could reduce demand for our products. Consumer eating habits could be affected by a number of factors, including attitudes regarding diet and health or new information regarding the health effects of consuming certain foods. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio, and we may experience higher costs and/or supply shortages associated with our efforts to accommodate those changes as our suppliers adapt to new eating preferences. Additionally, changes in consumer eating habits may result in the enactment or amendment of laws and regulations that impact the ingredients and nutritional content of our food products, or laws and regulations requiring us to disclose the nutritional content of our food products. Compliance with these laws and regulations, as well as others regarding the ingredients and nutritional content of food products, may be costly and time-consuming. We cannot make any assurances regarding our ability to effectively respond to changes in consumer culture preference, health perceptions or resulting new laws or regulations or to adapt our product offerings to trends in eating habits.
We may be unable to protect or maintain our intellectual property, which could result in customer confusion, a negative perception of our brand and adversely affect our business.
We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. In particular, our “HF” logo trademarks and the name “Han Feng,” are valuable assets that reinforce our customers’ favorable perception of our products. Our trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect our trademark rights could cause customer confusion or negatively affect customers’ perception of our brand and products, and eventually adversely affect our sales and profitability. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether we are successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liability, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences may have a material adverse effect on our business, results of operations and financial condition.
If we are unable to renew or replace our current leases on favorable terms, or any of our current leases are terminated prior to expiration of their stated terms, and we cannot find suitable alternate locations, our operations and profitability could be negatively impacted.
We currently have leases for some of our warehouses. Our ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and our ability to negotiate favorable lease terms for additional locations, could depend on conditions in the real estate market, competition for desirable properties, our relationships with current and prospective landlords, and/or other factors that are not within our control. Any or all of these factors and conditions could negatively impact our growth and profitability.
Failure to retain our senior management and other key personnel may adversely affect our operations.
Our success is substantially dependent on the continued service of our senior management and other key personnel. These executives have been primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture, and the reputation the Company enjoys with suppliers and consumers. The loss of the services of any of these executives and other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause our stock price to decline. The loss of key employees could negatively affect our business.
If we are unable to attract, train and retain employees, we may not be able to grow or successfully operate our business.
The foodservice distribution industry is labor intensive. Our success depends in part upon our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and customers. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the regions in which we are located, unemployment levels within those regions, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our profits to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.
Changes in and enforcement of immigration laws could increase our costs and adversely affect our ability to attract and retain qualified employees.
Federal and state governments from time to time implement immigration laws, regulations or programs that regulate our ability to attract or retain qualified foreign employees. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome or reduce the availability of potential employees. Although we have implemented, and are in the process of enhancing, procedures to ensure our compliance with the employment eligibility verification requirements, there can be no assurance that these procedures are adequate and some of our employees may, without our knowledge, be unauthorized workers. The employment of unauthorized workers may subject us to fines or civil or criminal penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and makes it more difficult to hire and keep qualified
employees. We may be required to terminate the employment of certain of our employees who are determined to be unauthorized workers. The termination of a significant number of employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in adverse publicity. Our financial performance could be materially harmed as a result of any of these factors.
Potential labor disputes with employees and increases in labor costs could adversely affect our business.
A considerable amount of our operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage and benefit costs. As a result, we are exposed to risks associated with a competitive labor market. Rising health care costs and the nature and structure of work rules will always be important issues. Any work stoppages or labor disturbances as a result of employee dissatisfaction with their current employment terms could have a material adverse effect on our financial condition, results of operations and cash flows. We also expect that in the event of a work stoppage or labor disturbance, we could incur additional costs and face increased competition.
If we fail to comply with requirements imposed by applicable law and other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.
We are subject to regulation by various federal, state, and local governments, applicable to food safety and sanitation, ethical business practices, transportation, minimum wage, overtime, other wage payment requirements, employment discrimination, immigration, and human health and safety. While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations. If we fail to comply with applicable laws and regulations, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, and prohibitions on exporting. The cost of compliance or the consequences of non-compliance, including debarments, could have an adverse effect on our results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require us to incur substantial increases in costs in order to comply with such laws and regulations.
If the products distributed by us are alleged to have caused injury or illness, or to have failed to comply with governmental regulations, we may need to recall our products and may experience product liability claims.
We, like any other foodservice distributor, may be subject to product recalls, including voluntary recalls or withdrawals, if the products we distribute are alleged to have caused injury or illness, to have been mislabeled, misbranded, or adulterated or to otherwise have violated applicable governmental regulations. We may also choose to voluntarily recall or withdraw products that we determine do not satisfy our quality standards, whether for taste, appearance, or otherwise, in order to protect our brand and reputation. Any future product recall or withdrawal that results in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation, and/or lost sales due to the unavailability of the product for a period of time, could materially adversely affect our results of operations and financial condition.
We also face the risk of exposure to product liability claims in the event that the use of products sold by us are alleged to have caused injury or illness. We cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Further, even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
With respect to product liability claims, we believe we have sufficient insurance coverage. However, this insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying products to us, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by such suppliers. If we do not have adequate insurance or contractual indemnification available, product liability relating to defective products could materially adversely affect our results of operations and financial condition.
We may incur significant costs to comply with environmental laws and regulations, and we may be subject to substantial fines, penalties and/or third-party claims for non-compliance.
Our operations are subject to various federal, state, and local laws, rules and regulations relating to the protection of the environment, including those governing:
•the discharge of pollutants into the air, soil, and water;
•the management and disposal of solid and hazardous materials and wastes;
•employee exposure to hazards in the workplace; and
•the investigation and remediation of contamination resulting from releases of petroleum products and other regulated materials.
In the course of business, we operate, maintain, and fuel vehicles; store fuel in on-site above ground containers; operate refrigeration systems; and use and dispose of hazardous substances and food waste. We could incur substantial costs, including fines or penalties and third-party claims for property damage or personal injury, as a result of any violations of environmental or workplace safety laws and regulations or releases of regulated materials into the environment. In addition, we could incur investigation, remediation and/or other costs related to environmental conditions at our currently or formerly owned or operated properties.
Litigation may materially adversely affect our business, financial condition and results of operations.
Our operations carry an exposure to litigation risk from consumers, customers, our labor force and others, and may be a party to individual personal injury, product liability and/or other legal actions in the ordinary course of our business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in our businesses, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may materially adversely affect our businesses, financial condition, results of operations and cash flows.
Increased commodity prices and availability may impact profitability.
Many of our products include ingredients such as wheat, corn, oils, sugar, and other commodities. Commodity prices worldwide have been increasing. While commodity price inputs do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our vendors to seek price increases from us. Although we are typically able to mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part. In the event we are unable to continue mitigating potential vendor price increases, we may in turn consider raising our prices, and our customers may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may affect our gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.
The U.S. government is currently imposing increased tariffs on certain products imported into the U.S., including products imported from China, which may have an adverse impact on our future operating results.
We sell our products based on the cost of such products plus a percentage markup. We import approximately 20% of our products from other countries, including China. The U.S. government is currently imposing and proposing increased tariffs on certain products imported into the U.S., including products imported from China. Some of our imported products may be subject to these increased tariffs and accordingly, our purchase costs will be increased. We may determine to increase our sales prices in order to pass these increased costs to our customers. In the event we determine to take such action, our customers may reduce their orders from us, which could negatively affect our profitability and operating results.
Severe weather, natural disasters and adverse climate changes may materially adversely affect our financial condition and results of operations.
Severe weather conditions and other natural disasters in areas where our distribution network covers or from which we obtain the products we sell may materially adversely affect our operations and our product offerings and, therefore, our results of operations. Such conditions may result in physical damage to, or temporary or permanent closure of, one or more of our distribution centers, an insufficient work force in our market regions and/or temporary disruption in the supply of products, including delays in the delivery of goods to our warehouses and/or a reduction in the availability of products in our offerings. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect the availability or cost of certain products within our supply
chain. Any of these factors may disrupt our businesses and materially adversely affect our financial condition, results of operations and cash flows.
We rely on technology in our business and any cybersecurity incident, other technology disruption or delay in implementing new technology could negatively affect our business and our relationships with customers.
We use technology in our business operations, and our ability to serve customers most effectively depends on the reliability of our technology systems. We use software and other technology systems, among other things, to generate and select orders, to make purchases, to manage warehouses and to monitor and manage our business on a day-to-day basis. Further, our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers’ personal information, private information about employees, and financial and strategic information about the company and its business partners.
These technology systems are vulnerable to disruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, espionage, cyber-attacks, viruses, theft and inadvertent releases of information. Any such disruption to these software and other technology systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage, any or all of which could potentially adversely affect our customer service, decrease the volume of our business and/or result in increased costs and lower profits.
Further, as we pursue our strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, we are also expanding and improving our information technology, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Information technology systems continue to evolve and, in order to remain competitive, we need to implement new technologies in a timely and efficient manner. If our competitors implement new technologies more quickly or successfully than we do, such competitors may be able to provide lower cost or enhanced services of superior quality compared to those we provide, which could have an adverse effect on our results of operations.
Our current indebtedness may adversely affect our liquidity position and ability of future financing.
As of December 31, 2020, we have $18.3 million of debt borrowed from bank credit lines, $100.7 million of long-term mortgage and equipment loans, which could adversely affect our cash flow, our ability to raise additional capital or obtain financing in the future, react to changes in business and repay other debts. These bank loans contain covenants that restrict our ability to incur additional debt and operate our business. We may not be able to generate a sufficient amount of cash needed to pay interest and principal on our debt facilities or refinance all or a portion of our indebtedness, due to a number of factors, including significant change of economic conditions, market competition, weather conditions, natural disaster, and failure to execute our business plan.
Risk Factors Relating to our Acquisition Strategy
Our continued growth depends on future acquisitions of other distributors or wholesalers and enlarging our customer bases. The failure to achieve these goals could negatively impact our results of operations and financial condition.
Historically, a portion of our growth has come through acquisitions, and our growth strategy depends, in large part, on acquiring other distributors or wholesalers to access untapped market regions and enlarge our customer base. Successful implementation of this strategy is dependent on sufficient capital support from financing, finding suitable targets to acquire, identifying suitable locations and negotiating acceptable acquisition prices and terms. There can be no assurance that we will continue to grow through acquisitions. We may not be able to obtain sufficient capital support for our expansion plan, or successfully implement the plan to acquire other competitors timely or within budget or operate those businesses successfully.
If we are unable to integrate acquired businesses successfully (including B&R Global) or realize anticipated economic, operational and other benefits and synergies in a timely manner, our earnings may be materially adversely affected. A significant expansion of our business and operations, in terms of geography or magnitude (such as with the Business Combination), could strain our administrative and operational resources. Significant acquisitions may also require the issuance of material additional amounts of debt or equity, which could materially alter our debt-to-equity ratio, increase our interest
expense and decrease net income, and make it difficult for us to obtain favorable financing for other acquisitions or capital investments.
Our operating results will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of operating companies available for acquisition that we deem to be desirable targets. In addition, there is a very high level of competition among companies seeking to acquire these operating companies. Many established and well-financed entities are active in acquiring interests in companies that we may find to be desirable acquisition candidates. Many of these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do. Consequently, we will be at a competitive disadvantage in negotiating and executing possible acquisitions of such businesses. Even if we are able to successfully compete with these larger entities, this competition may affect the terms of the transactions we are able to negotiate and, as a result, we may pay more or receive less favorable terms than we expected for potential acquisitions. We may not be able to identify operating companies that complement our strategy, and even if we identify a company that does so, we may be unable to complete an acquisition of such a company for many reasons, including:
•failure to agree on necessary terms, such as the purchase price;
•incompatibility between our operational strategies and management philosophies with those of the potential acquiree;
•competition from other acquirers of operating companies;
•lack of sufficient capital to acquire a profitable company; and
•unwillingness of a potential acquiree to work with our management.
Risks related to acquisition financing.
We have a limited amount of financial resources and our ability to make additional acquisitions without securing additional financing from outside sources is limited. In order to continue to pursue our acquisition strategy, we may be required to obtain additional financing. We may obtain such financing through a combination of traditional debt financing and/or the placement of debt and equity securities. We may finance some portion of our future acquisitions by either issuing equity or by using shares of our common stock for all or a portion of the purchase price for such businesses. In the event that our common stock does not attain or maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our common stock as part of the purchase price for the sale of their businesses, we may be required to use more of our cash resources, if available, in order to maintain our acquisition program. If we do not have sufficient cash resources, we will not be able to complete acquisitions and our growth could be limited unless we are able to obtain additional capital through debt or equity financings. The terms of our credit facility require that we obtain the consent of our lenders prior to securing additional debt financing. There could be circumstances in which our ability to obtain additional debt financing could be constrained if we are unable to secure such consent.
To the extent we make any material acquisitions, our earnings may be adversely affected by non-cash charges relating to the amortization of intangible assets.
Under applicable accounting standards, purchasers are required to allocate the total consideration paid in a business combination to the identified acquired assets and liabilities based on their fair values at the time of acquisition. The excess of the consideration paid to acquire a business over the fair value of the identifiable tangible assets acquired must be allocated among identifiable intangible assets including goodwill. The amount allocated to goodwill is not subject to amortization. However, it is tested at least annually for impairment. The amount allocated to identifiable intangible assets, such as customer relationships and the like, is amortized over the life of these intangible assets. We expect that this will subject us to periodic charges against our earnings to the extent of the amortization incurred for that period. Because our business strategy focuses, in part, on growth through acquisitions, our future earnings may be subject to greater non-cash amortization charges than a company whose earnings are derived solely from organic growth. As a result, we may experience an increase in non-cash charges related to the amortization of intangible assets acquired in our acquisitions. Our financial statements will show that our intangible assets are diminishing in value, even if the acquired businesses are increasing (or not diminishing) in value.
We are not obligated to follow any particular criteria or standards for identifying acquisition candidates.
We are not obligated to follow any particular operating, financial, geographic or other criteria in evaluating candidates for potential acquisitions or business combinations. We will determine the purchase price and other terms and conditions of acquisitions. Our stockholders will not have the opportunity to evaluate the relevant economic, financial and other information that our management team will use and consider in deciding whether or not to enter into a particular transaction.
We may be required to incur a significant amount of indebtedness in order to successfully implement our acquisition strategy.
Subject to the restrictions contained under our current credit facilities, we may be required to incur a significant amount of indebtedness in order to complete future acquisitions. If we are not able to generate sufficient cash flow from the operations of acquired businesses to make scheduled payments of principal and interest on the indebtedness, then we will be required to use our capital for such payments. This will restrict our ability to make additional acquisitions. We may also be forced to sell an acquired business in order to satisfy indebtedness. We cannot be certain that we will be able to operate profitably once we incur this indebtedness or that we will be able to generate a sufficient amount of proceeds from the ultimate disposition of such acquired businesses to repay the indebtedness incurred to make these acquisitions.
We may experience difficulties in integrating the operations, personnel and assets of acquired businesses that may disrupt our business, dilute stockholder value and adversely affect our operating results.
A core component of our business plan is to acquire businesses and assets in the food distribution industry. There can be no assurance that we will be able to identify, acquire or profitably manage businesses or successfully integrate acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Such acquisitions also involve numerous operational risks, including:
•difficulties in integrating operations, technologies, services and personnel;
•the diversion of financial and management resources from existing operations;
•the risk of entering new markets;
•the potential loss of existing or acquired strategic operating partners following an acquisition;
•the potential loss of key employees following an acquisition and the associated risk of competitive efforts from such departed personnel;
•possible legal disputes with the acquired company following an acquisition; and
•the inability to generate sufficient revenue to offset acquisition or investment costs.
As a result, if we fail to properly evaluate and execute any acquisitions or investments, our business and prospects may be seriously harmed.
Risk Factors Relating to our Common Stock
A trading market for our common stock may not be sustained and our common stock prices could decline.
Although our common stock is listed on the Nasdaq Capital Market under the symbol “HFFG”, an active trading market for the shares of our common stock may not be sustained. Accordingly, no assurance can be given as to the following:
•the likelihood that an active trading market for shares of our common stock will be sustained;
•the liquidity of any such market;
•the ability of our stockholders to sell their shares of common stock; or
•the price that our stockholders may obtain for their common stock.
In addition, our common stock has experienced price and volume volatility over the past year. The market price and volume of our common stock may continue to experience fluctuations not only due to general stock market conditions but also due to
government regulatory action, tax laws, interest rates, the condition of the U.S. economy and a change in sentiment in the market regarding our industry, operations or business prospects. In addition to other factors, the price and volume volatility of our common stock may be affected by:
•factors influencing consumer food choices;
•the operating and securities price performance of companies that investors consider comparable to us;
•announcements of strategic developments, acquisitions and other material events by us or our competitors;
•changes in global financial markets and global economies and general market conditions, such as tariffs, interest rates, commodity and equity prices and the value of financial assets;
•additions or departures of key personnel;
•operating results that vary from the expectations of securities analysts and investors;
•sales of our equity securities by stockholders or management or sales of additional equity securities by us;
•actions by stockholders; and
•passage of legislation or other regulatory developments that adversely affect us or our industry.
If an active market is not maintained, or if our common stock continues to experience price and volume volatility, the market price of our common stock may decline.
Stockholders of a public company sometimes bring securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our results of operations and financial condition.
Furthermore, our ability to raise funds through the issuance of equity securities or otherwise by using our common stock as consideration is impacted by the price of our common stock. A low stock price may adversely impact our ability to reduce our financial leverage, as measured by the ratio of total debt to total capital. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.
Our current management does not have extensive corporate governance experience, and we may need to recruit expertise on corporate governance to comply with the regulations and effectively communicate with the capital markets, which may increase our operating expenses.
We have identified material weaknesses in our internal control over financial reporting, which could affect our ability to ensure timely and reliable financial reports, affect the ability of our auditors to attest to the effectiveness of our internal controls, and weaken investor confidence in our financial reporting.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we design, implement and maintain adequate internal controls and procedures over financial reporting. Our management has concluded that (1) our internal controls over financial reporting were not effective as of December 31, 2020, (2) there existed material weaknesses in our internal control over financial reporting as of December 31, 2020, and (3) our disclosure controls and procedures were not effective as of December 31, 2020. Please see the discussion of these conclusions below under Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K.
We have taken and will continue to take appropriate actions to remediate such material weakness and inadequate disclosure controls and procedures; however, such measures may not be sufficient to address the material weaknesses identified or ensure that our disclosure controls and procedures are effective. We may also discover other material weaknesses in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation of
such controls, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements and affect the ability of our auditors to attest to the effectiveness of our internal controls over financing reporting. In addition, substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business and financial condition could be adversely affected.
We are not required to obtain an attestation report on our assessment of our internal control over financial reporting from an independent registered public accounting firm, which may cause investors to lose confidence in us and cause the price of our common stock to be negatively impacted.
Under rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are not required to obtain from our independent registered public accounting firm an attestation report on our assessment of our internal control over financial reporting, and we have not voluntarily sought such a report in the past. If we do not voluntarily seek to obtain an unqualified attestation report on our assessment of our internal control over financial reporting from our independent registered public accounting firm in the future, or if we seek to obtain such a report but our independent registered public accounting firm is unable to provide one to us, investors may have less confidence in us and the price of our common stock may be negatively impacted.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company”, as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies which do not meet the definition of an “emerging growth company”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company for up to five years, until such time when we have more than $1.07 billion of revenues in a fiscal year, have more than $700 million in market value of our common stock held by non-affiliates as of any June 30 or issue more than $1.0 billion of non-convertible debt over a rolling three-year period, whichever is earlier.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies.
Future sales of our common stock may cause our stock price to decline.
As of March 15, 2021, there were [51,193,411] shares of our common stock outstanding. Of this number, approximately 37.7 million shares of common stock were freely tradable without restriction, unless the shares are purchased by our affiliates. The remaining shares of common stock were “restricted securities” as that term is defined under Rule 144 of the Securities Act. None of our directors, executive officers or employees are subject to lock-up agreements or market stand-off provisions that limit their ability to sell shares of our common stock. The sale of a large number of shares of our common stock, or the belief that such sales may occur, could cause a drop in the market price of our common stock.
If securities analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, the price of our common stock and trading volume could decline.
The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us, our business or our market. If one or more of the analysts who covers us downgrades our common stock or
publishes inaccurate or unfavorable research about us, our business or our market, the price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause the price of our common stock and trading volume to decline.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have not declared or paid dividends on our common stock and we do not intend to do so in the near term. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock in the near term, and capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2 PROPERTIES.
We utilize a mix of leased (23%) and owned (77%) properties for distribution, warehousing inventory, service and administrative functions. Our real estate includes our corporate headquarters in City of Industry, California, which is owned. Below is a summary of distribution centers by geographical location, number of facilities, total square feet, and trucks servicing the site as of December 31, 2020.
Location Number of Facilities Total Square Feet Number of Trucks
Arizona 1 68,000 17
California 5 356,000 122
Colorado 1 55,000 21
Florida 2 130,000 39
Georgia 1 100,000 20
North Carolina 1 170,000 46
Utah 2 93,000 29
Washington 1 70,000 19
Totals 14 1,042,000 313
For additional information about our material properties, please see section entitled “BUSINESS - Locations” above.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
A labor and employment lawsuit was filed by a former employee against FUSO, alleging it failed to provide proper meal and rest breaks, as well as other related violations. FUSO believes there is no merit to the case and vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020. The Court has entered orders dismissing the claim in 2021. See Note 19 - Subsequent Events, for additional information concerning this lawsuit.
On March 29, 2020, plaintiff Jesus Mendoza (“Mendoza”) filed a putative shareholder securities class action lawsuit (the Class Action Lawsuit”) in the United States District Court for the Central District of California against the Company and certain of its present and former officers (collectively, the “Class Action Defendants”) for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 styled Mendoza v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-2929-ODW-JPR (C.D. Cal.).
On April 30, 2020, plaintiff Walter Ponce-Sanchez (“Ponce-Sanchez”) filed a substantially similar putative shareholder securities class action lawsuit (the “Ponce-Sanchez Lawsuit”) in the United States District Court for the Central District of California against the same defendants named in the Class Action Lawsuit (collectively, the “Ponce-Sanchez Defendants” and with the Class Action Defendants, the “Defendants”) styled Ponce-Sanchez v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-3967-ODW-JPR (C.D. Cal.). The Ponce-Sanchez Lawsuit has now been consolidated with the Class Action Lawsuit and both cases will proceed under the Class Action Lawsuit docket. The complaints both allege that the Defendants made
materially false and or misleading statements that caused losses to investors. Additionally, the complaints both allege that the Defendants failed to disclose in public statements that the Company engaged in certain related party transactions, that insiders and related parties were enriching themselves by misusing shareholder funds, and that the Company masked the true number of free-floating shares. Neither complaint quantifies any alleged damages, but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired Company stock during the putative class period from August 23, 2018 through March 23, 2020 at allegedly inflated prices and purportedly suffered financial harm as a result. On October 13, 2020, the Court appointed Yun F. Yee as lead plaintiff and approved Mr. Yee’s counsel as lead counsel in the consolidated Class Action Lawsuit. On October 28, 2020, the Court entered a scheduling order setting December 4, 2020 as the deadline for lead plaintiff to file the Consolidated Amended Complaint and setting a schedule for Defendants' anticipated motion to dismiss. Thereafter, an amended complaint was filed, which purports to expand the putative class period from August 23, 2018 to November 9, 2020. The Defendants filed their motion to dismiss the amended complaint on January 19, 2021, which is pending. The Class Action Lawsuit does not quantify any alleged damages. The Company intends to defend the consolidated Class Action Lawsuit vigorously.
On June 15, 2020, Mendoza filed a shareholder derivative lawsuit on behalf of the Company as a nominal defendant (the “Mendoza Derivative Lawsuit”) in the United States District Court for the Central District of California against certain of the Company’s present and former directors and officers (collectively, the “Mendoza Derivative Defendants”) styled Mendoza v. Zhou Min Ni, et al., Civil Action No. 2:20-CV-5300-ODW-JPR (C.D. Cal.). The complaint in the Mendoza Derivative Lawsuit is based largely on the same allegations as set forth in the Class Action Lawsuit discussed above and alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties , unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The Mendoza Derivative Lawsuit does not quantify any alleged damages, but, in addition to attorneys’ fees and costs, Mendoza seeks to recover damages on behalf of the Company for purported financial harm and to have the court order changes in the Company’s corporate governance. The Mendoza Derivative Defendants and the Company intend to defend the Mendoza Derivative Lawsuit vigorously. On July 8, 2020, the Court ordered that all proceedings in the Mendoza Derivative Lawsuit be stayed until such time as the Court has finally resolved the Defendants’ motion to dismiss the Class Action Lawsuit.
At this stage, the Company is unable to determine whether a future loss will be incurred due to the consolidated Class Action Lawsuit or the Mendoza Derivative Lawsuit, or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s financial statements as of December 31, 2020.
On August 21, 2020, plaintiff Jim Bishop ("Bishop") filed a putative shareholder derivative lawsuit (the “Bishop Lawsuit”) in the United States District Court for the District of Delaware against certain of the Company’s present and former directors and officers, as well as the Company (collectively, the “Bishop Defendants”) styled Jim Bishop v. Zhou Min Ni, et al., Civil Action No. 1:20-cv-01103-RGA (D. Del.). The Bishop Lawsuit complaint alleges claims that are virtually the same as those alleged in the Mendoza Derivative Lawsuit. The Bishop Lawsuit does not quantify any alleged damages. But in addition to attorneys’ fees and costs, Bishop seeks to recover damages on behalf of the Company for purported financial harm and to have the Court order changes to the Company’s corporate governance.
The Bishop Defendants and the Company intend to defend vigorously the allegations in the Bishop Lawsuit, assuming it proceeds. On October 20, 2020, Bishop and the Bishop Defendants filed a Joint Stipulation to Stay Litigation with the Court. On November 19, 2020, the Bishop Lawsuit was transferred to the United Stated District Court for the Central District of California, as case number 2:20-CV-10657-ODW-JPR (C.D.Cal.). Motions to consolidate the Mendoza Derivative Lawsuit and the Bishop Lawsuit, and to designate a lead plaintiff and lead plaintiff’s counsel in the consolidated cases are pending in both cases . The Court further ordered that the Bishop Defendants do not need to respond to the complaint until the consolidation and appointment of lead plaintiff/lead plaintiff's counsel are resolved. The Bishop Defendants will seek to have the Bishop Lawsuit stayed until such time as the Court has finally resolved the Mendoza Defendants’ anticipated motion to dismiss the claims in the consolidated Class Action Lawsuit. This case remains in early procedural stage. At this stage, the Company is unable to determine whether a future loss will be incurred due to the Bishop Lawsuit or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s consolidated financial statements as of December 31, 2020.
The United States Securities and Exchange Commission (“SEC”) has initiated a formal, non-public investigation of the Company, and the SEC issued a subpoena for a variety of documents and other information. The subpoena relates to a range of matters including, but not limited to, the matters identified in the Class Action Lawsuit, the Mendoza Derivative Lawsuit, and the Bishop Lawsuit. The Company is cooperating with the SEC in its investigation.
Prior to receiving the document request from the SEC, the Company's board of directors appointed a special committee of independent directors to investigate the matters identified in the Class Action Lawsuit and the Mendoza Derivative Lawsuit.
The SEC and independent committee investigations are ongoing.
On October 14, 2020, a labor and employment lawsuit was filed by a former employee against Happy FM Group, Inc., alleging it engaged in unlawful discrimination and wrongfully discharged the employee, as well as other related violations. We believe there is no merit to the case and are vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020.
On October 19, 2020, a purported class action labor and employment lawsuit was filed by a former employee against Happy FM Group, Inc., alleging it failed to provide minimum wages and overtime wages, proper meal and rest breaks, as well as other related violations. We believe there is no merit to the case and are vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Shares of our common stock are listed for trading on The Nasdaq Capital Market (“Nasdaq”) under the symbol “HFFG,” and have been publicly traded since August 8, 2017. Prior to that date, there was no public market for our stock.
Holders of Record
As of March 15, 2021, there were 51,193,411 shares of our common stock outstanding and held by 57 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividends
We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and our general financial condition. The payment of any dividends will be within the discretion of our board of directors at such time. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends in the foreseeable future. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future. Further, if we incur any indebtedness, our ability to declare dividends may be limited by restrictive covenants we may agree to in connection therewith.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated statements of operations data for fiscal years 2020 and 2019 and the related selected consolidated balance sheet data as of the end of fiscal years 2020 and 2019, have been derived from our consolidated financial statements and related notes contained elsewhere in this Form 10-K. The selected historical consolidated statements of operations data for fiscal years 2018, 2017 and 2016, and the related selected consolidated balance sheet data as of the end of fiscal years 2018, 2017, and 2016, have been derived from our consolidated financial statements not included in this Form 10-K Report.
The following selected consolidated financial data should be read together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included in Item 8.
The following tables set forth our selected financial data for the periods and as of the dates indicated:
For the twelve months ended December 31,
2020 2019 (2) 2018 2017 (1) 2016 (1)
Net Revenue $ 566,831,075 $ 388,162,281 $ 291,006,698 295,549,980 $ 279,500,235
Net Income (Loss) (342,680,799) 5,895,286 6,353,695 10,078,070 4,831,285
Net Income (Loss) Attributable to HF Foods Group Inc. (342,974,059) 5,389,677 6,286,455 9,646,071 4,715,163
Earnings (Loss) per common share - basic and diluted $ (6.58) $ 0.22 $ 0.30 $ 0.48 $ -
As of December 31,
Balance Sheet Data: 2020 2019 2018 2017 2016
Cash $ 9,580,853 $ 14,538,286 $ 5,489,404 $ 6,086,044 $ 5,956,145
Working Capital 22,343,869 40,973,863 25,454,459 10,932,809 13,199,477
Total Assets 484,285,083 802,843,794 82,476,407 80,657,900 72,616,118
Non Current Liabilities
Long-term debt, net 88,008,803 18,535,016 13,109,854 14,249,579 9,889,198
Promissory note payable - related party 7,000,000 - - - -
Obligations under finance leases, non-current 766,885 1,053,166 120,705 118,535 -
Obligations under operating leases, non-current 623,482 12,833,081 - - -
Deferred tax liabilities 46,382,704 52,320,045 1,196,061 436,212 26,236
Total Stockholders' equity $ 264,801,432 $ 607,656,732 $ 34,461,482 $ 26,898,112 $ 24,358,220
(1) Financial data for the years ended December 31, 2016 and 2017 derived from legacy HF's books and records and were not part of the Company's previous 10-K filings. The Company previously filed under the name Atlantic Acquisition Corp., a special acquisition company.
(2) The Company completed business combination with B&R Global Holdings, Inc. on November 4, 2019. Net revenue, net income, net income attributable to HF Foods Group, Inc. included operating results from B&R Global Holdings, Inc. from November 4, 2019 to December 31, 2019.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following description of our results of operations and financial condition in conjunction with our audited consolidated financial statements for the years ended December 31, 2020 and 2019.
Overview
The Company was originally incorporated in Delaware on May 19, 2016 as a special purpose acquisition company under the name Atlantic Acquisition Corp. in order to acquire, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination, one or more businesses or entities.
Effective August 22, 2018, Atlantic consummated the transactions contemplated by the Atlantic Merger Agreement, dated as of March 28, 2018, by and among Atlantic, HF Merger Sub, a Delaware subsidiary formed by Atlantic, HF Holding, the stockholders of HF Holding, and Zhou Min Ni, as representative of the stockholders of HF Holding. Pursuant to the Atlantic Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the surviving entity and a wholly-owned subsidiary of Atlantic. Additionally, upon the closing of the transactions contemplated by the Atlantic Merger Agreement, the stockholders of HF Holding became the holders of a majority of the shares of common stock of Atlantic, and Atlantic changed its name to HF Foods Group Inc.
Effective November 4, 2019, HF Group consummated the transactions contemplated by the B&R Global Merger Agreement, dated as of June 21, 2019, by and among the Company, Merger Sub, B&R Global, the B&R Global Stockholders, and Xiao Mou Zhang, as representative of the B&R Global Stockholders (the "Business Combination"). Upon the closing of the transactions contemplated by the B&R Global Merger Agreement, Merger Sub merged with and into B&R Global, resulting in
B&R Global becoming a wholly owned subsidiary of HF Group. HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. The aggregate fair value of the consideration paid by HF Group in the Business Combination was approximately $576,699,494, based on the closing share price of HF Group at the date of Closing.
On January 17, 2020, B&R Global acquired all equity membership interests in nine real estate holding companies, which own warehouse facilities that were being leased to the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. Xiao Mou Zhang, managed and owned an 8.91% interest in the acquired entities. The total purchase price for the acquisition was $101,269,706, which was based on third-party fair market value appraisals of the properties acquired.
The Company notes that substantially all of the fair value of the gross assets acquired is concentrated in a group of similar assets (land and buildings used for warehousing and distribution purposes). As such, the acquisition of the nine real estate holdings companies would not be deemed a business combination under ASC 805 but as an asset acquisition. The total purchase price is allocated on a relative fair value basis to the net assets acquired.
Due to timing of the acquisition of B&R Global, the financial information of the Company for the twelve month period ended December 31, 2020 is not comparable to the same period of 2019. As such, the Company has presented our results of operations for the twelve month period ended December 31, 2020 and 2019, as well as the unaudited pro forma combined results of operations for the twelve month period ended December 31, 2019. For more information, see section titled “Supplemental Unaudited Pro Forma Combined Financial Information”.
Financial Overview
Our net revenue for the twelve months ended December 31, 2020 was $566.8 million, an increase of $178.6 million, or 46.0%, from $388.2 million for the twelve months ended December 31, 2019. The increase was attributed primarily to additional $259.4 million net revenues generated from the B&R Global reporting segment, which was acquired on November 4, 2019. Offsetting the increase was legacy HF segment's 26.7% loss in business volume, or $80.8 million in 2020 as a result of the COVID-19 pandemic.
Net loss attributable to HF Group’s stockholders for the twelve months ended December 31, 2020 was $343.0 million, a decrease of $348.4 million, or 6,463.5%, compared to net income attributable to HF Group’s stockholders of $5.4 million for the twelve months ended December 31, 2019. This is mainly due to a significant goodwill impairment of $338.2 million taken in the first quarter of 2020 (see Note 9 to our financial statements for additional information) prompted by the impact of the COVID-19 pandemic. There were also new charges in other non-cash items, such as amortization of intangible assets resulting from the acquisition of B&R Global, which did not exist before the Business Combination. Adjusted EBITDA for the twelve months ended December 31, 2020 was $19.7 million, an increase of $2.8 million, or 16.9%, from $16.9 million for the twelve months ended December 31, 2019. For additional information on Adjusted EBITDA, see the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- EBITDA and Adjusted EBITDA” below.
On a pro-forma basis, assuming that the Business Combination took place on January 1, 2019, comparing with the actual results of fiscal year 2020, our net revenue for the twelve months ended December 31, 2020 was $566.8 million, a decrease of $261.2 million, or 31.5% from $828.0 million for the twelve months ended December 31, 2019. Net loss attributable to HF Group’s stockholders for the twelve months ended December 31, 2020 was $343.0 million, a decrease of $348.7 million, or 6,156.9%, from net income attributable to HF Group’s stockholder of $5.7 million for the twelve months ended December 31, 2019. Adjusted EBITDA for the twelve months ended December 31, 2020 was $19.7 million, a decrease of $13.2 million, or 39.9%, from $32.9 million for the twelve months ended December 31, 2019. For additional information on our pro-forma results, see the section entitled “SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION” below.
COVID-19 Impact
For the first two months of 2020, the outbreak of COVID-19 did not have a significant impact on our business. However, we began to experience a gradual decline in sales towards the end of February and the impact began to intensify in March, especially in the final two weeks of the month.
By late March, almost all states across the country had issued some form of stay-at-home orders. As such, the operations of our restaurant customers were severely disrupted due to the “cliff-like” decline in consumer demand for food away from home. The
government mandates forced many of our restaurant customers to temporarily close or convert to take-out or delivery-only operations. As a result, there was a significant decline in net sales the last two weeks of March, negatively impacting our overall net income and adjusted EBITDA for the first quarter ended March 31, 2020. Our net sales during the last two weeks of the first quarter of 2020 decreased approximately 67% compared to pro-forma sales in the same period ended March 31, 2019.
The impact of COVID-19 continued to worsen in April 2020, resulting in as much as a 75% decrease in net weekly sales compared to pro-forma sales in the comparable prior year period and resulting in the Company making the decision to temporarily shut down the operation of a few distribution centers in North Carolina, Georgia and Florida, which were reopened on April 27, 2020. In response to the COVID-19 pandemic, beginning in late March 2020, we swiftly pivoted our business strategy and cost structure to reduce operating costs, strengthen our liquidity position, and secure new revenue sources. Some of the notable actions include:
•actively managing our variable costs to better align with prevailing sales volumes by instituting temporary furloughs, reducing our delivery schedules and temporarily shutting down the operation of several distribution centers, resulting in approximately 40% overall cost reduction since April 2020 as compared to pre-COVID-19 levels;
•improving working capital by focusing on receivables collection efforts while working with our vendors on temporarily extended terms;
•suspending capital expenditures and limiting maintenance and information technology projects;
•developing our proprietary e-commerce platform (www.rongchengmarkets.com) with very minimal investment to cater to consumers and meet the increasing demand for online grocery shopping in larger quantities at wholesale prices; and
•securing new partnerships with other online grocery retailers.
The above decisive actions have resulted in an overall improvement of our available line of credit that had enabled the Company to navigate through this unprecedented pandemic. Cost cutting measures and more efficient operations ensured that the Company had positive cash flow to pay down the revolving credit. With increased revolving credit availability, the Company is more prepared for future unexpected turns during the pandemic. Following the lowest monthly sales volume in April, weekly sales recovered to over 50% and 60% of pre-COVID-19 levels in the months of May and June, respectively. From July 2020 to the time of this report, we have been experiencing relatively stabilized sales volume of about 70% of pre-COVID-19 levels on an aggregated basis. Based on current sales volumes and adjusted cost structures, the company is generating weekly positive operating cash flows and does not have immediate liquidity concerns, especially if sales volume continues to remain stable or improve further.
The impact of the COVID-19 pandemic continues to evolve and the country recently saw a resurgence of COVID-19 in various areas, therefore, we are currently unable to fully predict the extent to which our business, results of operations, or financial condition, will ultimately be impacted. We do not expect economic and operating conditions for our business to recover to pre-COVID-19 levels until consumers are once again feeling safe, willing and able to resume consumption of food away from home on a regular basis. This may not occur until well after the pandemic abates and the broader economy begins to improve. Any future resurfacing and worsening of the COVID-19 pandemic may adversely impact our sales and liquidity position.
We remain optimistic on the long-term prospects for our business. Although the timetable for returning to normalcy is unknown, we believe that our current level of sales volume will increase over time as the effects of the COVID-19 pandemic slowly dissipate and consumer demand for food away from home increases.
As the market leader in servicing the Asian/Chinese restaurant sector, we believe we are well-positioned for long-term success. The fragmented nature of the Asian/Chinese food service industry and the current environment create opportunities for a company like HF Group, which has the necessary expertise and deep understanding of our unique customer base. We believe we are differentiated from our competitors given our extensive footprint, strong vendor and customer relationships, and value-added service offerings, all of which have allowed and will continue to allow us to better serve our customers in these unprecedented conditions.
How to Assess HF Group’s Performance
In assessing our performance, the Company considers a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, EBITDA and adjusted EBITDA. The key measures that the Company uses to evaluate the performance of our business are set forth below:
Net Revenue
Net revenue is equal to gross sales minus sales returns, sales incentives that the Company offers to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net sales are driven by
changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold.
Gross Profit
Gross profit is equal to net sales minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, custom clearance fees and other miscellaneous expenses. Cost of revenue generally changes as the Company incurs higher or lower costs from suppliers and as the customer and product mix changes.
Distribution, Selling and Administrative Expenses (DSA Expenses)
Distribution, selling and administrative expenses consist primarily of salaries and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.
EBITDA and Adjusted EBITDA
The Company uses EBITDA to measure operating performance, defined as net income before interest expense, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non-recurring expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, extraordinary charges, and other non-cash charges and more reflective of other factors that affect our operating performance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. The Company presents EBITDA and Adjusted EBITDA in order to provide supplemental information that the Company considers relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede U.S. GAAP measures.
The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA are not defined under U.S. GAAP and are subject to important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of HF Group’s results as reported under U.S. GAAP. For example, Adjusted EBITDA:
•excludes certain tax payments that may represent a reduction in cash available to the Company;
•does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•does not reflect changes in, or cash requirements for, our working capital needs; and
•does not reflect the significant interest expense, or the cash requirements, necessary to service our debt.
For additional information on EBITDA and Adjusted EBITDA, see the section entitled “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - EBITDA and Adjusted EBITDA” below.
Results of Operations for the years ended December 31, 2020 and 2019
The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
For the years ended
December 31 Changes
2020 2019 Amount %
Net revenue $ 566,831,075 $ 388,162,281 $ 178,668,794 46.0 %
Cost of revenue 466,539,492 324,953,758 141,585,734 43.6 %
Gross profit 100,291,583 63,208,523 37,083,060 58.7 %
Distribution, selling and administrative expenses 106,126,392 54,931,157 51,195,235 93.2 %
Income (loss) from operations (5,834,809) 8,277,366 (14,112,175) (170.5) %
Interest income 529 418,530 (418,001) (99.9) %
Interest expenses (3,922,191) (1,661,454) (2,260,737) 136.1 %
Goodwill impairment loss (338,191,407) - (338,191,407) 100.0 %
Other income, net 1,355,706 1,057,936 297,770 28.1 %
Change in fair value of interest rate swap contracts (920,358) - (920,358) 100.0 %
Income (loss) before income tax provision (347,512,530) 8,092,378 (355,604,908) (4,394.3) %
Provision (benefit) for income taxes (4,831,731) 2,197,092 (7,028,823) (319.9) %
Net income (loss) (342,680,799) 5,895,286 (348,576,085) (5,912.8) %
Less: net income attributable to noncontrolling interest 293,260 505,609 (212,349) (42.0) %
Net income (loss) attributable to HF Foods Group Inc. $ (342,974,059) $ 5,389,677 $ (348,363,736) (6,463.5) %
Net Revenue
Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and wholesale sales to smaller distributors.
The following table sets forth the breakdown of net revenue:
For the years ended December 31,
2020 2019 Changes
Amount % Amount % Amount %
Net revenue
Sales to independent restaurants $ 539,958,127 95.3 % $ 366,432,448 94.4 % $ 173,525,679 47.4 %
Wholesale 26,872,948 4.7 % 21,729,833 5.6 % 5,143,115 23.7 %
Total $ 566,831,075 100.0 % $ 388,162,281 100.0 % $ 178,668,794 46.0 %
Net revenue increased by $178.7 million, or 46.0%, during the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019. This was attributable primarily to the acquisition of B&R Global, which brought in additional $259.4 million of total revenue comprised of $12.4 million in sales to wholesale customers and $247.0 million in sales to independent restaurants. The increase was offset by a decrease in revenue of $80.7 million comprised of $73.4 million in sales to independent restaurants and $7.3 million in sales to wholesale customers of legacy HF due to lower sales resulting from COVID-19 pandemic. The negative impact of the pandemic on our restaurant customers beginning in the last two weeks of March 2020 through the end of December 2020 has led to a significant decline in the net revenue for both HF and B&R Global for the twelve months ended December 31, 2020. See the section entitled “SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION” below.
We conduct wholesale operations as a supplemental business to foodservice distribution by purchasing full truckloads of products from suppliers and redistributing to smaller distributors who are typically lacking the business volume to place large orders directly with suppliers, or prefer to replenish inventory on an as-needed basis due to space or capital sources limitations.
Large volume purchases enable the Company to achieve economies of scale and improve overall bargaining power with suppliers. Net revenue from wholesale for the twelve months ended December 31, 2020 increased by $5.1 million, or 23.7%, as compared to the twelve months ended December 31, 2019, due to the acquisition of B&R Global.
Cost of Revenue and Gross Profit
The following table sets forth the calculation of cost of revenue, gross profit and gross margin for sales to independent restaurants, wholesale, and total net revenue:
For the years ended
December 31, Changes
2020 2019 Amount %
Sales to independent restaurants
Net revenue $ 539,958,127 $ 366,432,448 $ 173,525,679 47.4 %
Cost of revenue 441,164,552 304,139,896 137,024,656 45.1 %
Gross profit $ 98,793,575 $ 62,292,552 $ 36,501,023 58.6 %
Gross Margin 18.3 % 17.0 % 1.3 %
Wholesale
Net revenue $ 26,872,948 $ 21,729,833 $ 5,143,115 23.7 %
Cost of revenue 25,374,940 20,813,862 4,561,078 21.9 %
Gross profit $ 1,498,008 $ 915,971 $ 582,037 63.5 %
Gross Margin 5.6 % 4.2 % 1.4 %
Total sales
Net revenue $ 566,831,075 $ 388,162,281 $ 178,668,794 46.0 %
Cost of revenue 466,539,492 324,953,758 141,585,734 43.6 %
Gross profit $ 100,291,583 $ 63,208,523 $ 37,083,060 58.7 %
Gross Margin 17.7 % 16.3 % 1.4 %
Cost of revenue was $466.5 million for the twelve months ended December 31, 2020, an increase of $141.5 million, or 43.6%, from $325.0 million for the twelve months ended December 31, 2019. The increase was mainly attributable to the acquisition of B&R Global, with $203.3 million and $11.6 million in cost of revenue for sales to independent restaurants and wholesale customers, respectively. This increase was offset by decrease of $73.4 million cost of revenue from legacy HF due to reduced sales resulting from the COVID-19 pandemic.
Gross profit was $100.3 million for the twelve months ended December 31, 2020, an increase of $37.1 million, or 58.7%, from $63.2 million for the twelve months ended December 31, 2019. The increase was attributable primarily to the acquisition of B&R Global, which contributed $43.7 million and $0.8 million in gross profit derived from sales to independent restaurants and wholesale customers, respectively. This increase was offset by a decrease of $7.4 million gross profit from legacy HF due to reduced sales resulting from the COVID-19 pandemic.
Gross margin increased from 16.3% for the twelve months ended December 31, 2019 to 17.7% for the twelve months ended December 31, 2020, attributable mainly to margin increase in the second and third quarter of 2020 due to two primary factors: (1) elimination of lower margin sales to the buffet restaurants still impacted by the outbreak of COVID-19, a segment of our customers on the West Coast region which typically have higher sales volume but at a lower margin; and (2) sell-through of existing lower cost inventories at a higher gross margin in the second and third quarter of 2020 in line with the general increase in food prices.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses were $106.1 million and $54.9 million for the twelve months ended December 31, 2020 and 2019, respectively, representing a $51.2 million, or 93.2%, increase. The increase was mainly
attributable to the Business Combination with B&R Global, which contributed an aggregate cost of $59.8 million comprised of $42.2 million of B&R Global's distribution, selling and administrative expenses, and the amortization expense of $10.9 million relating to the intangible assets acquired from the Business Combination, $6.2 million of non-recurring legal expenses associated with the defense of the securities class action lawsuit (See Note 18 to our financial statements) and special internal investigation, and $0.5 million attributed to special accounts receivable reserve accrual. The overall increase was offset by a decrease of $8.6 million cost reduction in deliveries charges, contract labor and fuel charges as a result of the outbreak of COVID-19.
Interest Expenses and Bank Charges
Interest expenses are primarily generated from our utilization of lines of credit, capital leases, and long-term debt. Interest expenses were $3.9 million for the twelve months ended December 31, 2020, an increase of $2.2 million, or 136.1%, compared with $1.7 million for the twelve months ended December 31, 2019. The increase was mainly attributable to increased lines of credit usage after the Business Combination with B&R Global and additional long-term debt with B&R Realty Subsidiaries, with total interest expenses of $3.0 million for the twelve months ended December 31, 2020.
Goodwill Impairment Loss
Goodwill impairment loss was $338.2 million for the twelve months ended December 31, 2020 and nil for the twelve months ended December 31, 2019. See Note 9 to our financial statements for additional information.
Other Income
Other income consists primarily of non-operating income and rental income. Other income was $1.4 million for the twelve months ended December 31, 2020, an increase of $0.3 million, or 28.1%, compared with $1.1 million for the twelve months ended December 31, 2019.
Change in Fair Value of Interest Rate Swap Contracts
Change in fair value of interest rate swap contracts stemmed from mark to market fair value change of four interest rate swap contracts. See note 10 to our financial statements for more detail.
Income Tax Provision (Benefit)
Provision(benefit) for income taxes decreased by $7.0 million, or 319.9%, from income tax expenses of $2.2 million for the twelve months ended December 31, 2019 to a tax benefit of $4.8 million for the twelve months ended December 31, 2020, as a result of lower taxable income and the amortization of deferred tax liabilities related to the intangible assets in the twelve months ended December 31, 2020.
Net Income Attributable to Noncontrolling interests
Net income attributable to noncontrolling interests was derived from four minority owned subsidiaries and decreased by $0.2 million, or 42.0%, from $0.5 million for the twelve months ended December 31, 2019 to $0.3 million for the twelve months ended December 31, 2020. The decrease was mainly due to the $0.3 million decrease of net income attributable to noncontrolling interest from Kirnland for the twelve months ended December 31, 2020.
Net Income (Loss) Attributable to Our Stockholders
As a result of all analysis above, net loss attributable to our stockholders was $343.0 million and net income attributable to our stockholders was $5.4 million for the twelve months ended December 31, 2020 and 2019, respectively.
EBITDA and Adjusted EBITDA
The following table sets forth of the calculation of EBITDA and adjusted EBITDA and reconciliation to net income (loss), the closest U.S. GAAP measure:
For the years ended
December 31, Changes
2020 2019 Amount %
Net income (loss) (342,680,799) 5,895,286 (348,576,085) (5,912.8) %
Interest expense 3,922,191 1,661,454 2,260,737 136.1 %
Income tax provision (benefit) (4,831,731) 2,197,092 (7,028,823) (319.9) %
Depreciation & Amortization 17,483,346 6,754,508 10,728,838 158.8 %
EBITDA (326,106,993) 16,508,340 (342,615,333) (2,075.4) %
Goodwill and asset impairment charges
338,191,407 - 338,191,407 100.0 %
Change in fair value of interest rate swap contracts 920,358 - 920,358 100.0 %
COVID-19 bad debt reserve 544,672 - 544,672 100.0 %
Non-recurring expenses* 6,179,956 375,000 5,804,956 1,548.0 %
Adjusted EBITDA $ 19,729,400 $ 16,883,340 $ 2,846,060 16.9 %
Percentage of revenue 3.5 % 4.3 % (0.9) %
*For the twelve months ended December 31, 2019, non-recurring expenses represented an expense accrued for potential loss contingency relating to negligence claim(s) for damages. This claim was settled in November 2019 in the amount of $0.4 million. For the twelve months ended December 31, 2020, non-recurring expenses comprised of $6.2 million of legal fees related to the defense of the class action lawsuit and internal investigation stemming from the lawsuit (see Note 18 to our financial statements for additional information).
Adjusted EBITDA was $19.7 million for the twelve months ended December 31, 2020, an increase of 16.9%, or $2.8 million, compared to $16.9 million for the twelve months ended December 31, 2019. Primary contributors for the movement in Adjusted EBITDA are goodwill and asset impairment charges due to COVID-19 impact to business, acquisition of B&R Global and BRGR subsidiaries, legal defense of class action lawsuit and associated internal investigation, and fair value change in interest rate swap contracts.
Business restrictions stemming out of the COVID-19 outbreak, which started in late March of 2020 and is still ongoing, caused severe detrimental impact to our customers and consequently our business volumes, resulting in a $10.4 million decrease in net income (excluding goodwill impairment loss), a $7.0 million decrease in income tax provision due to the Company reflecting an income tax benefit as a result of lower taxable income and the amortization of deferred tax liabilities related to the intangible assets, and an increase of $0.5 million in reserve for doubtful accounts receivable related to COVID-19.(see COVID-19 impact section under Overview of this section.)
The Company's recent acquisitions of B&R Global and BRGR subsidiaries resulted in a $10.7 million increase in depreciation and amortization from intangible and fixed assets, and $2.3 million in interest expenses.
There is a $6.2 million increase in non-recurring expenses associated with the legal defense of the class action lawsuit and related internal investigation. Change in fair value of interest rate swaps resulted in a $0.9 million add back to the adjusted EBITDA.
Supplemental Unaudited Pro Forma Combined Financial Information
As described above, the Company completed the Business Combination with B&R Global on November 4, 2019. For comparative purposes, the Company is presenting supplemental unaudited pro forma combined statements of operations for the twelve month period ended December 31, 2019. The unaudited pro forma combined statements of operations for these periods present our consolidated results of operations giving pro forma effect to the Business Combination as if it had occurred on January 1, 2019. The pro forma combined adjustments give effect to the items identified in the unaudited pro forma combined tables below in connection with the Business Combination.
The unaudited pro forma combined adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma combined basis, the impact of the Business Combination on our historical financial information, as applicable.
The B&R Global financial statements and our financial statements have been adjusted in the pro forma financial information to give effect to events that are (1) directly attributable to the Business Combination, (2) factually supportable, and (3) expected to have a continuing impact on the combined company.
The unaudited pro forma combined financial information has been prepared for informational purposes only and is not necessarily indicative of or intended to represent what the combined company’s financial position or results of operations actually would have been had the Business Combination occurred as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company. The unaudited pro forma adjustments are based on information available at the time of the preparation of the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information does not reflect cost savings, synergies or revenue enhancements that the Company may achieve with respect to combining the companies or costs to integrate the B&R Global business or the impact of any non-recurring activity and any one-time transaction related costs. Synergies and integration costs have been excluded from consideration because they do not meet the criteria for unaudited pro forma adjustments.
Unaudited Pro Forma Results of Operations
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma financial statements:
For the year ended December 31, 2019
HF B&R
Global Adjustments Pro Forma Combined
Net revenue $ 302,103,038 $ 525,942,665 $ - $ 828,045,703
Net income 5,864,471 11,825,523 (10,890,300) (1) 6,799,694
Net Income Attributable to HF Foods Group Inc. $ 5,406,526 $ 11,146,273 $ (10,890,300) $ 5,662,499
(1)Includes intangible asset amortization expense of $10,890,300 for the year ended December 31, 2019
Liquidity and Capital Resources
As of December 31, 2020, we had cash of approximately $9.6 million. We have funded working capital and other capital requirements primarily by equity contributions from shareholders, cash flow from operations, and bank loans. Cash is required to pay cost of inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, professional fees, other operating expenses and to service debts.
On April 18, 2019, we and our operating subsidiaries Han Feng, NSF and Kirnland entered into a credit agreement with East West Bank, which provided a $25,000,000 revolving credit facility due August 18, 2021, accrued 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 was secured by virtually all assets of the Company and our domestic subsidiaries. On November 4, 2019, the East West Bank revolving credit facility loan was paid off from borrowings under the First Amended and Restated Credit Agreement entered into in connection with the merger with B&R, as described below.
On November 4, 2019, we entered into the First Amended Credit Agreement with JP Morgan. The First Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured term loans of $55.4 million.
On January 17, 2020, the Company, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement by and among JP Morgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement provided for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, and mortgage-secured Term Loans of $75.6 million. The Second Amended Credit Agreement amended and restated the existing $55.0 million of real estate term loans under the First Amended Credit Agreement. As of January 17, 2020, the existing balance of revolving debt under the First Amended Credit Agreement in the amount of $41.2 million was rolled over and an additional $18.7 million available to the Company under the
Facility was drawn. The Company used the $75.6 million in mortgage-secured term loans and $18.7 million drawn from the revolving credit facility to fund in part the acquisition of the B&R Realty Subsidiaries, as noted above. Borrowings under the Second Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions). As of December 31, 2020, $91.0 million was outstanding under the Second Amended Credit Agreement. Borrowings under the Facility bear interest at a floating rate, which will be, at the Borrowers’ option, either LIBOR plus 1.375%, or a base rate of prime rate minus 1.125%. The mortgage-secured Term Loans bear interest at a floating rate which will be, at the Borrowers’ option, either LIBOR plus 1.875%, or a base rate of prime rate minus 0.625%. A commitment fee of 0.15% is payable monthly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility. The Borrowers are obligated to pay monthly installments on the mortgage-secured Term Loans in the amount of $252,000, with a final installment of the remaining principal balance of the Term Loans due on January 17, 2030, the Term Loan Maturity Date.
Although management believes that the cash generated from operations will be sufficient to meet our normal working capital needs for at least the next twelve months, our ability to repay our current obligations will depend on the future realization of our current assets. Management has considered the historical experience, the economy, the trends in the food service distribution industry, the expected collectability of accounts receivable and the realization of the inventories as of December 31, 2020. Based on the above considerations, management is of the opinion that we have sufficient funds to meet our working capital requirements and debt obligations as they become due. However, there is no assurance that management will be successful in our plan. There are a number of factors that could potentially arise which might result in shortfalls to what is anticipated, such as the demand for our products, economic conditions, competitive pricing in the food service distribution industry, and our bank and suppliers being able to provide continued support. If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may be forced to reduce or delay our expected acquisition plan, sell assets, obtain additional debt or equity capital, or refinance all or a portion of our debt.
We, however, make no assurance that we will be able to raise any additional capital in the future on satisfactory terms or at all. Our continued access to sources of liquidity depends on multiple factors, including economic conditions, the condition of financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings. In addition, the effect of COVID-19 on the capital markets could significantly impact our cost of borrowing and the availability of capital to us.
The following table summarizes cash flow data for the years ended December 31, 2020 and 2019:
For the years ended
December 31,
2020 2019
Net cash provided by operating activities $ 44,131,286 $ 4,666,528
Net cash provided by (used) in investing activities (94,411,446) 2,775,115
Net cash provided by in financing activities 45,322,727 1,607,239
Net increase (decrease) in cash and cash equivalents $ (4,957,433) $ 9,048,882
Operating Activities
Net cash provided by operating activities consists primarily of net income (loss) adjusted for non-cash items, including goodwill impairment loss, 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 $44.1 million for the twelve months ended December 31, 2020, an increase of $39.4 million, or 845.7%, compared to net cash provided by operating activities of $4.7 million for the twelve months ended December 31, 2019. The increase was primarily the result of newly acquired B&R Global with total net cash provided by operating activities of $20.6 million. The remaining increase is a combined result of an increase of $27.8 million from changes in working capital items mainly resulting from changes in gain from disposal of equipment, loss from derivative instruments, accounts receivable, inventories, income tax recoverable, accrued expenses, income tax payable and depreciation and amortization expense which were offset by a decrease of $8.9 million in net income, advances to suppliers - related parties,deferred tax benefit, other current other long term assets, accounts payable, and accounts payable - related parties.
Investing Activities
Net cash used in investing activities was approximately $94.4 million for the twelve months ended December 31, 2020, an increase of $97.2 million or 3,502.1%, compared to $2.8 million net cash provided by investing activities for the twelve months
ended December 31, 2019. The increase was primarily due to the payment made to acquire B&R Realty Subsidiaries of $94.0 million. The increase was offset by a combined result of a decrease in cash paid for the purchase of property and equipment of $4.2 million, decrease in cash received from notes receivable to third parties and related parties of $0.3 million.
Financing Activities
Net cash provided by financing activities was approximately $45.3 million for the twelve months ended December 31, 2020, an increase of $43.7 million, or 2,719.9%, compared with $1.6 million of net cash provided by financing activities for the twelve months ended December 31, 2019. The increase was a result of the newly acquired $75.6 million in mortgage-backed term loans to fund B&R Realty Acquisition. The increase was offset by a net decrease of $20.5 million utilization of lines of credit, a decrease in proceeds of $8.1 million of long term debt, and an increase of $2.98 million in repayment of bank overdrafts.
Commitments and Contractual Obligations
The following table presents our material contractual obligations as of December 31, 2020:
Contractual Obligations Total Less than 1
year 1-3 years 3-5 years More than 5
Years
Lines of credit $ 18,279,062 $ 18,279,062 $ - $ - $ -
Long-term debt 93,650,062 5,641,259 9,607,982 7,418,242 70,982,579
Promissory note payable - related party 7,000,000 - - - 7,000,000
Finance lease liabilities 1,210,060 359,635 635,061 215,364 -
Operating lease obligations 1,090,262 382,047 555,687 152,528 -
Total $ 121,229,446 121229446 $ 24,662,003 $ 10,798,730 $ 7,786,134 $ 77,982,579
On July 2, 2018, AnHeart Inc., a wholly-owned subsidiary of HF Holding ("AnHeart"), entered into two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. The leases were on triple net basis, meaning AnHeart is required to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. HF Holding provided a guaranty for all rent and related costs of the leases, including costs associated with the planned construction of a two-story structure at 273 Fifth Avenue and rehabilitation of the building at 275 Fifth Avenue. 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. The 275 Fifth Avenue lease includes an option to extend the term for an additional 10 years. Under the leases, HF Holding delivered two letters of credit in favor of the Landlord, one in the amount of $213,000 as security for AnHeart’s obligations under the lease at 273 Fifth Avenue, and the second in the amount of $115,500 with respect to 275 Fifth Avenue. The Company entered into the leases with the planned purpose of expanding its product lines to include Chinese herb supplements and to use the sites to develop into a hub for such products. The Company has since determined to cease this business expansion.
On February 23, 2019, the Company executed an agreement to divest all of the ownership interest in AnHeart to Ms. Jianping An, a resident of New York, for the sum of $20,000. The transfer of ownership was disclosed and landlord consent was obtained. However, the divestment of ownership did not release HF Holding’s guaranty of AnHeart’s obligations or liabilities under the original lease agreements. Under the terms of the sale of AnHeart stock to Ms. An, and in consideration of the Company’s ongoing guaranty of AnHeart’s performance of the lease obligations, AnHeart executed a security agreement which grants HF Holding a security interest in AnHeart assets and contains a covenant to assign the leases to HF Group if AnHeart defaults on the original lease agreements. Further, Ms. An has tendered an unconditional guaranty of all liabilities arising under the leases, in favor of the Company, executed by Minsheng Pharmaceutical Group Company, Ltd., a Chinese manufacturer and distributor of herbal medicines.
On February 10, 2021, 273 Co, a newly established Delaware limited liability company and wholly owned subsidiary of the Company, completed the closing of an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, pursuant to which it has assumed the lease of the premises at 273 Fifth Avenue, New York, New York (the “273 Lease Agreement”) dated as of July 2, 2018, by and between AnHeart and Premier 273 Fifth, LLC ("Landlord"). On the same date, the closing documents were delivered to effectuate the amendment of the 273 Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the 273 Lease Amendment were negotiated pursuant to guarantee obligations of the Company’s wholly owned subsidiary, HF Holding as guarantor under the Lease Agreement. 273
Co has agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due. Under the terms of the Lease Agreement and the Assignment, 273 Co has undertaken to construct, at Company’s expense, a building on the premises, at a minimum cost of $2,500,000. The 273 Lease Agreement and the Lease Amendment provide for a term of 30 years, with option to renew for 10 additional years, at an annual rent starting at $325,000 and escalating annually throughout the term, with the annual rent in the final year of the initial term of $1,047,974. The 273 Lease Amendment further granted certain rent abatement to the premises for 2020 and 2021, including a 20% reduction of annual rent in 2021. The Lease Amendment permits subletting of the premises.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require our management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, cash flow and related disclosure of contingent assets and liabilities. The estimates include, but are not limited to, accounts receivable, revenue recognition, impairment of long-lived assets and income taxes. The Company bases our estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and the actual results, future financial statements will be affected.
The Company believes that among our significant accounting policies, which are described in Note 2 to the audited consolidated financial statements included in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, the Company believes these are the most critical to fully understand and evaluate our financial condition and results of operations.
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 our accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company becomes 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 when uncollectible receivables are to be written off, including, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of December 31, 2020, and December 31, 2019, the allowances for doubtful accounts were $909,182 and $623,970, respectively.
Revenue recognition
The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.
The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The majority of the Company’s contracts have one single performance obligation, as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a specific point in time.
For the years ended December 31, 2020 and 2019, revenue recognized from performance obligations related to prior periods was insignificant. Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant.
Impairment of Long-lived Assets
The Company assesses our 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 which 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.
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 the Company 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 our deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at December 31, 2020, and 2019.
Recent accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 16-13 was further amended in November 2019, Codification Improvements to Topic 326, Financial Instruments-Credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 31, 2022. The Company will adopt this ASU within the annual reporting period of December 31, 2023. The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company will adopt this ASU within the annual reporting period of December 31, 2021. The Company is currently assessing the impact of adopting this standard, but based on its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Our debt exposes us to risk of fluctuations in interest rates. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the
instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at higher rates. We manage our debt portfolio to achieve an overall desired proportion of fixed and floating rate debts and may employ interest rate swaps as a tool from time to time to achieve that position.
As of September 30, 2020, our aggregate floating rate debt’s outstanding principal balance was $100.8 million, consisting of long-term debt and revolving lines of credit (See Notes 11 and 12). Given the historically low interest rate environment triggered by the COVID-19 pandemic, the Company adopted a more active cash flow hedge strategy to capitalize on the multi-year low interest rate and to mitigate potential rate increases through an interest rate swap contract executed with JP Morgan Chase Bank on June 24, 2020 (the "JPM IRS"). The JPM IRS contract effectively locked in the Company's future interest rate expense at aggregate rate of 2.288% per annum on the prevailing balance of the above-mentioned term loan and 1.788% per annum for a portion of the revolving line of credit up to an aggregate amount of $80 million during the contract period (see Note 11 and 12). As of December 31, 2020, 100% of our floating rate debts have been effectively hedged for the period from June 30, 2021 to June 30, 2025, inclusive (See Note 10).
Fuel Price Risk
We are also exposed to fluctuations risk in the price and availability of diesel fuel. We require significant quantities of diesel fuel for our vehicle fleet, and the inbound delivery of the products we sell is also dependent upon shipment by diesel-fueled vehicles. We currently are able to obtain adequate supplies of diesel fuel, and prices in the current quarter are lower than in the comparable period of 2019. However, it is impossible to predict the future availability or price of diesel fuel. The price and supply of diesel fuel fluctuates based on external factors not within our control, including geopolitical developments, supply and demand for oil and gas, regional production patterns, weather conditions and environmental concerns. Increases in the cost of diesel fuel could increase our cost of goods sold and operating costs to deliver products to our customers. The Company does not actively hedge the price fluctuation of diesel fuel in general. Instead, we seek to minimize fuel cost risk through delivery route optimization and improving fleet utilization.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HF Foods Group Inc.
Consolidated Financial Statements
For the Fiscal Years Ended December 31, 2020 and December 31, 2019
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
HF Foods Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HF Foods Group Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2017.
New York, New York
March 16, 2021
HF Foods Group Inc.
Consolidated Balance Sheets
As of
December 31,
2020 December 31,
ASSETS
CURRENT ASSETS:
Cash $ 9,580,853 $ 14,538,286
Accounts receivable, net 24,852,212 50,027,134
Accounts receivable - related parties, net 1,266,573 4,202,870
Inventories, net 58,535,040 77,531,854
Advances to suppliers - related parties 196,803 745,135
Other current assets 4,614,164 4,374,338
TOTAL CURRENT ASSETS 99,045,645 151,419,617
Property and equipment, net 136,869,085 37,538,147
Security deposits - related parties - 591,380
Operating lease right-of-use assets 931,630 17,155,584
Long-term investments 2,377,164 2,296,276
Intangible assets, net 175,797,650 186,687,950
Goodwill 68,511,941 406,703,348
Deferred tax assets 57,478 78,993
Other long-term assets 694,490 372,499
TOTAL ASSETS $ 484,285,083 $ 802,843,794
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 14,839,747 $ 14,952,510
Lines of credit 18,279,062 41,268,554
Accounts payable 28,391,136 39,689,911
Accounts payable - related parties 1,783,861 4,521,356
Current portion of long-term debt, net 5,641,259 2,726,981
Current portion of obligations under finance leases 286,903 280,243
Current portion of obligations under operating leases 308,148 4,322,503
Accrued expenses and other liabilities 6,178,144 2,610,538
Obligation under interest rate swap contracts 993,516 73,158
TOTAL CURRENT LIABILITIES 76,701,776 110,445,754
Long-term debt, non-current 88,008,803 18,535,016
Promissory note payable - related party 7,000,000 -
Obligations under finance leases, non-current 766,885 1,053,166
Obligations under operating leases, non-current 623,482 12,833,081
Deferred tax liabilities 46,382,704 52,320,045
TOTAL LIABILITIES 219,483,650 195,187,062
SHAREHOLDERS’ EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
- -
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 51,913,411 shares issued and outstanding as of December 31, 2020, and 53,050,211 shares issued and 52,145,096 shares outstanding as of December 31, 2019, respectively
5,191 5,305
Treasury Stock, at cost, - shares as of December 31, 2020, and 905,115 shares at December 31, 2019, respectively
- (12,038,030)
Additional paid-in capital 587,579,093 599,617,009
Retained earnings (accumulated deficit) (327,150,398) 15,823,661
TOTAL SHAREHOLDER'S EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC. 260,433,886 603,407,945
Noncontrolling interest 4,367,547 4,248,787
TOTAL SHAREHOLDERS’ EQUITY 264,801,433 607,656,732
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 484,285,083 $ 802,843,794
The accompanying notes are an integral part of these consolidated financial statements.
HF Foods Group Inc.
Consolidated Statements of Operations
For the years ended December 31
2020 2019
Net revenue - third parties $ 553,408,528 $ 368,809,865
Net revenue - related parties 13,422,547 19,352,416
TOTAL NET REVENUE 566,831,075 388,162,281
Cost of revenue - third parties 453,706,426 306,370,972
Cost of revenue - related parties 12,833,066 18,582,786
TOTAL COST OF REVENUE 466,539,492 324,953,758
GROSS PROFIT 100,291,583 63,208,523
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES 106,126,392 54,931,157
INCOME (LOSS) FROM OPERATIONS (5,834,809) 8,277,366
Other Income (Expenses)
Interest income 529 418,530
Interest expense (3,922,191) (1,661,454)
Goodwill impairment loss (338,191,407) -
Other income 1,355,706 1,057,936
Change in fair value of interest rate swap contracts (920,358) -
Total Other Income (Expenses), net (341,677,721) (184,988)
INCOME (LOSS) BEFORE INCOME TAX PROVISION (347,512,530) 8,092,378
PROVISION (BENEFIT) FOR INCOME TAXES (4,831,731) 2,197,092
NET INCOME (LOSS) (342,680,799) 5,895,286
Less: net income attributable to noncontrolling interest 293,260 505,609
NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC. $ (342,974,059) $ 5,389,677
Earnings (loss) per common share - basic and diluted $ (6.58) $ 0.22
Weighted average shares - basic and diluted 52,095,585 27,113,288
The accompanying notes are an integral part of these consolidated financial statements.
HF Foods Group Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
2020 2019
Cash flows from operating activities:
Net Income (Loss) $ (342,680,799) $ 5,895,286
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense 17,868,596 6,754,508
Goodwill impairment loss 338,191,407 -
Gain (loss) from disposal of equipment (151,676) 65,624
Allowance for doubtful accounts 1,564,321 72,359
Allowance for inventory obsolescence 129,150 (16,928)
Deferred tax benefit (5,915,827) (250,705)
Income from equity method investment (80,888) (6,886)
Change in fair value of interest rate swap contracts 920,358 -
Changes in operating assets and liabilities:
Accounts receivable, net 23,425,562 (4,758,186)
Accounts receivable - related parties, net 2,936,297 1,483,211
Inventories, net 18,867,664 1,112,728
Advances to suppliers - related parties 548,332 781,347
Other current assets (204,859) (271,098)
Other long-term assets (298,209) 142,426
Accounts payable (11,391,797) (2,668,541)
Accounts payable - related parties (2,737,495) (929,903)
Operating lease liability (385,250) (1,601,678)
Accrued expenses and other liabilities 3,526,399 (1,137,036)
Net cash provided by operating activities 44,131,286 4,666,528
Cash flows from investing activities:
Cash received from acquisition of B&R Global - 7,017,467
Purchase of property and equipment (664,750) (4,835,929)
Proceeds from disposal of equipment 257,372 286,831
Cash received from long-term notes receivable - 290,071
Payment made for notes receivable - (108,750)
Proceeds from long-term notes receivable to related parties - 386,358
Payment made for long-term notes receivable to related parties - (260,933)
Payment made for acquisition of B&R Realty (94,004,068) -
Net cash provided by (used in) investing activities (94,411,446) 2,775,115
Cash flows from financing activities:
Proceeds from bank overdraft 5,367,468 2,870,416
Repayment of bank overdraft (5,480,231) -
Proceeds from lines of credit 553,192,068 144,045,699
Repayment of lines of credit (576,312,758) (146,661,467)
Proceeds from long-term debt 75,600,006 8,378,467
Repayment of long-term debt (6,589,704) (6,338,525)
Repayment of obligations under finance leases (279,622) (384,851)
Cash distribution paid to shareholders (174,500) (302,500)
Net cash provided by financing activities 45,322,727 1,607,239
Net increase (decrease) in cash (4,957,433) 9,048,882
Cash at beginning of the year 14,538,286 5,489,404
Cash at end of the year $ 9,580,853 $ 14,538,286
The accompanying notes are an integral part of these consolidated financial statements.
HF Foods Group Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2020 and 2019
Common Stock Treasury Stock
Number of
Shares Amount Number of
Shares Amount Additional
Paid-in
Capital Retained
Earnings (Accumulated Deficit) Total
Shareholders’
Equity
Attributable to
HF Foods
Group Inc Noncontrolling
Interest Total
Shareholders’
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 - - - - - 5,389,677 5,389,677 505,609 5,895,286
Exercise of Stock Options 182,725 18 - (18) - - - -
Buyback of common stock from a shareholder in exchange for notes receivable - - (905,115) (12,038,030) - - (12,038,030) - (12,038,030)
Acquisition of B&R Global by issuance of common stock 30,700,000 3,070 - - 576,696,424 - 576,699,494 2,941,000 579,640,494
Distribution to shareholders - - - - - - - (302,500) (302,500)
Balance at December 31, 2019 53,050,211 $ 5,305 (905,115) $ (12,038,030) $ 599,617,009 $ 15,823,661 $ 603,407,945 $ 4,248,787 $ 607,656,732
Net income (loss) - - - - - (342,974,059) (342,974,059) 293,260 (342,680,799)
Escrow shares transferred to and recorded as treasury stock by the Company - - (231,685) - - - - - -
Retirement of treasury stock (1,136,800) (114) 1,136,800 12,038,030 (12,037,916) - - - -
Distribution to shareholders - - - - - - - (174,500) (174,500)
Balance at December 31, 2020 51,913,411 $ 5,191 - $ - $ 587,579,093 $ (327,150,398) $ 260,433,886 $ 4,367,547 $ 264,801,433
The accompanying notes are an integral part of these consolidated financial statements.
HF FOODS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION
Organization and General
HF Foods Group Inc. and subsidiaries (collectively “HF Group”, or the “Company”) markets and distributes fresh produce, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the Southeast, Pacific and Mountain West regions of the United States.
The Company was originally incorporated in Delaware on May 19, 2016 as a special purpose acquisition company ("SPAC") under the name Atlantic Acquisition Corp. (“Atlantic”), in order to acquire, through merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities.
Reorganization of HF Holding
HF Group Holding Corporation (“HF Holding”) was incorporated in the State of North Carolina on October 11, 2017. Effective January 1, 2018, HF Holding entered into a Share Exchange Agreement (the “Agreement”) whereby the controlling shareholders of the following eleven entities contributed their respective stocks to HF Holding in exchange for all of HF Holding’s outstanding shares. Upon completion of the share exchanges, these entities became either wholly-owned or majority-owned subsidiaries of HF Holding.
•Han Feng, Inc. (“Han Feng”)
•Truse Trucking, Inc. (“TT”)
•Morning First Delivery, Inc. (“MFD”)
•R&N Holdings, LLC (“R&N Holdings”)
•R&N Lexington, LLC (“R&N Lexington”)
•Kirnsway Manufacturing, Inc. (“Kirnsway”)
•Chinesetg, Inc. (“Chinesetg”)
•New Southern Food Distributors, Inc. (“NSF”)
•B&B Trucking Services, Inc. (“BB”)
•Kirnland Food Distribution, Inc. (“Kirnland”)
•HG Realty, LLC (“HG Realty”)
In accordance with Financial Accounting Standards Board’s (“FASB") Accounting Standards Codification (“ASC”) 805-50-25, the transaction consummated through the Agreement has been accounted for as a transaction among entities under common control since the same shareholders controlled all these eleven entities prior to the execution of the Agreement. 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.
The following table summarizes the entities under HF Foods Group Inc. after the above-mentioned reorganization, together with new entities formed after the Atlantic Transactions as described below:
Name Date of formation /
incorporation Place of formation /
incorporation Percentage
of legal
ownership
by HF
Group Principal activities
Parent:
HF Holding October 11, 2017 North Carolina, USA 100% Holding Company
Subsidiaries:
Han Feng January 14, 1997 North Carolina, USA 100% Foodservice distributor
TT August 6, 2002 North Carolina, USA 100% Logistic service provider
MFD April 15, 1999 North Carolina, USA 100% Logistic service provider
R&N Holdings November 21, 2002 North Carolina, USA 100% Real estate holding company
R&N Lexington May 27, 2010 North Carolina, USA 100% Real estate holding company
R&N Charlotte, LLC
("R&N Charlotte") July 10, 2019 North Carolina, USA 100% Real estate holding company
Kirnsway May 24, 2006 North Carolina, USA 100% Design and printing services provider
Chinesetg July 12, 2011 New York, USA 100% Design and printing services provider
NSF December 17, 2008 Florida, USA 100% Foodservice distributor
BB September 12, 2001 Florida, USA 100% Logistic service provider
Kirnland April 11, 2006 Georgia, USA 66.7% Foodservice distributor
HG Realty May 11, 2012 Georgia, USA 100% Real estate holding company
HF Foods Industrial, L.L.C. ("HF Foods Industrial") December 10, 2019 North Carolina, USA 60.0% Food processing company
273 Fifth Avenue, L.L.C. ("273 Co") October 10, 2020 Delaware, USA 100% Real estate lease holding company
Reverse Acquisition of HF Holding
Effective August 22, 2018, Atlantic consummated the transactions contemplated by a merger agreement (the “Atlantic Merger Agreement”), dated as of March 28, 2018, by and among Atlantic, HF Group Merger Sub, Inc. ("HF Merger Sub"), a Delaware subsidiary formed by Atlantic, HF Holding, the stockholders of HF Holding, and Company's former director and Co-CEO, Zhou Min Ni, as representative of the stockholders of HF Holding. Pursuant to the Atlantic Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the surviving entity (the “Atlantic Merger”) and a wholly-owned subsidiary of Atlantic (the “Atlantic Acquisition”). Additionally, upon the closing of the transactions contemplated by the Atlantic Merger Agreement, the stockholders of HF Holding became the holders of a majority of the shares of common stock of Atlantic, and Atlantic changed its name to HF Foods Group, Inc. (Collectively, these transactions are referred to as the “Atlantic Transactions”).
At closing on August 22, 2018, Atlantic issued the HF Holding stockholders an aggregate of 19,969,831 shares of its common stock, equal to approximately 88.5% of the aggregate issued and outstanding shares of Atlantic’s common stock. The pre-Atlantic Transactions' stockholders owned the remaining 11.5% of the issued and outstanding shares of common stock of the combined entity.
Following the consummation of the Atlantic Transactions on August 22, 2018, there were 22,167,486 shares of common stock issued and outstanding, consisting of (i) 19,969,831 shares issued to HF Holding’s stockholders pursuant to the Atlantic Merger Agreement, (ii) 400,000 shares redeemed by one of Atlantic’s shareholders in conjunction with the Atlantic Transactions, (iii)
10,000 restricted shares issued to one of Atlantic’s shareholders in conjunction with the Atlantic Transactions, and (iv) 2,587,655 shares originally issued to the pre-Atlantic Transactions stockholders of Atlantic.
The Atlantic Transactions was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction. Therefore, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic were consolidated into the results of operations of HF Holding as of the completion of the Atlantic Transactions.
HF Holding Entities Organized Post-Atlantic Transactions
On July 10, 2019, the Company, through its subsidiary Han Feng, formed a new real estate holding company, R&N Charlotte. R&N Charlotte owns a 4.66 acre tract of land with appurtenant 115,570 square foot of office, warehouse, and industrial facility located in Charlotte, North Carolina.
On December 10, 2019, the Company, through its subsidiary Han Feng, formed a new food processing company, HF Foods Industrial, as owner of 60% of membership interest.
On October 1, 2020, the Company, through its subsidiary HF Group Holding, formed a wholly-owned new real estate lease holding company, 273 Co.
Business Combination with B&R Global
Effective November 4, 2019, HF Group consummated the transactions contemplated by a merger agreement (the “B&R Merger Agreement”), dated as of June 21, 2019, by and among the Company, B&R Merger Sub, Inc., a Delaware corporation (“Merger Sub”), B&R Global Holdings, Inc. ("B&R Global"), the stockholders of B&R Global (the ”B&R Global Stockholders”), and Xiao Mou Zhang, as representative of the stockholders (the “Business Combination”). Upon the closing of the transactions contemplated by the B&R Merger Agreement (the “Closing”), Merger Sub merged with and into B&R Global, resulting in B&R Global becoming a wholly owned subsidiary of HF Group. HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. Pursuant to the B&R Merger Agreement, the aggregate fair value of the consideration paid by HF Group in the Business Combination was $576,699,494, based on the closing share price of the Company’s common stock at the date of Closing.
Formed in 2014 as a holding company to acquire and consolidate the various operating entities (listed below) under one roof, B&R Global, through its subsidiaries, supplies foodservice items to approximately 5,000 restaurants across 11 Western states, and combined with HF Group, creates what the Company believes is the largest food distributor to Asian restaurants in the United States. The combined entity now has 13 distribution centers strategically located in 8 states across the Southeast, Pacific and Mountain West regions of the United States and operates a fleet of over 300 refrigerated vehicles. With over 780 employees and subcontractors supported by two call centers in China, HF Group now serves around 10,000 restaurants in 22 states and provides round-the-clock sales and service support to its customers, who mainly converse in Mandarin or Chinese dialects.
The following table summarizes the entities under B&R Global in the Business Combination:
Name Date of formation /
incorporation Place of formation /
incorporation Percentage of legal
ownership by B&R
Global Principal activities
Parent:
B&R Global January 3, 2014 Delaware, USA - Holding Company
Subsidiaries:
Rongcheng Trading, LLC (“RC”) January 31, 2006 California, USA 100% Foodservice distributor
Capital Trading, LLC (“UT”) March 10, 2003 Utah, USA 100% Foodservice distributor
Win Woo Trading, LLC (‘WW”) January 23, 2004 California, USA 100% Foodservice distributor
Mountain Food, LLC (“MF”) May 2, 2006 Colorado, USA 100% Foodservice distributor
R & C Trading L.L.C. (“RNC”) November 26, 2007 Arizona, USA 100% Foodservice distributor
Great Wall Seafood LA, LLC (“GW”) March 7, 2014 California, USA 100% Foodservice distributor
B&L Trading, LLC (“BNL”) July 18, 2013 Washington, USA 100% Foodservice distributor
Min Food, Inc. (“MIN”) May 29, 2014 California, USA 60.25% Foodservice distributor
B&R Group Logistics Holding, LLC (“BRGL”) July 17, 2014 Delaware, USA 100% Logistic service provider
Ocean West Food Services, LLC (“OW”) December 22, 2011 California, USA 67.5% Foodservice distributor
Monterey Food Service, LLC (“MS”) September 14, 2017 California, USA 65% Foodservice distributor
Irwindale Poultry, LLC (“IP”) December 27, 2017 California, USA 100% Poultry processing company
Best Choice Trucking, LLC (“BCT”) January 1, 2011 California, USA 100% Logistic service provider
KYL Group, Inc. (“KYL”) April 18, 2014 Nevada, USA 100% Logistic service provider
American Fortune Foods Inc. (“AF”) February 19, 2014 California, USA 100% Logistic and import service provider
Happy FM Group, Inc. (“HFM”) April 9, 2014 California, USA 100% Logistic service provider
GM Food Supplies, Inc. (“GM”) March 22, 2016 California, USA 100% Logistic service provider
Lin’s Distribution, Inc., Inc. (“LIN”) February 2, 2010 Utah, USA 100% Logistic service provider
Lin’s Farms, LLC (“LNF”) July 2, 2014 Utah, USA 100% Poultry processing company
New Berry Trading, LLC (“NBT”) September 5, 2012 California, USA 100% Logistic service provider
Hayward Trucking, Inc. (“HRT”) September 5, 2012 California, USA 100% Logistic service provider
Fuso Trucking Corp. (“FUSO”) January 20, 2015 California, USA VIE* Logistic service provider
Yi Z Service LLC (“YZ”) October 2, 2017 California, USA 100% Logistic service provider
Golden Well Inc. (“GWT”) November 8, 2011 California, USA 100% Logistic service provider
Kami Trading Inc. (“KAMI”) November 20, 2013 California, USA 100% Import service provider
Royal Trucking Services, Inc. (“RTS”) May 19, 2015 Washington, USA 100% Logistic service provider
Royal Service Inc. (“RS”) December 29, 2014 Oregon, USA 100% Logistic service provider
MF Food Services Inc. (“MFS”) December 21, 2017 California, USA 100% Logistic service provider
*At the acquisition date and as of December 31, 2020, B&R Global consolidates FUSO, which is considered as a variable interest entity (“VIE”) under U.S. GAAP, due to its pecuniary and contractual interest in this entity as a result of the funding arrangements outlined in the entity.
Acquisition of Real Estate Companies
On January 17, 2020, the Company completed the transactions contemplated by that certain membership interest purchase agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, B&R Group Realty
Holding, LLC ("BRGR"), and nine subsidiary limited liability companies wholly owned by BRGR (the “BRGR Subsidiaries”) (the “Realty Acquisition”). Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the BRGR Subsidiaries, which own 10 warehouse facilities that were being leased by the Company for its operations in California, Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $101,269,706. Consideration for Realty Acquisition was funded by (1) $75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 11 for additional information), (2) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note (the “Note”) to BRGR, and (iii) payment of $18.7 million from funds drawn from the Company’s revolving credit facility.
The following table summarizes B&R Global’s additional wholly owned subsidiaries as a result of the Realty Acquisition:
Name Date of formation /
incorporation Place of formation /
incorporation Percentage of legal
ownership by B&R Global Principal activities
A & Kie, LLC ("AK") March 26, 2010 Arizona, USA 100% Real estate holding company
B & R Realty, LLC ("BRR") August 28, 2013 California, USA 100% Real estate holding company
Big Sea Realty, LLC ("BSR") April 3, 2013 Washington, USA 100% Real estate holding company
Fortune Liberty, LLC ("FL") November 22, 2006 Utah, USA 100% Real estate holding company
Genstar Realty, LLC ("GSR") February 27, 2012 California, USA 100% Real estate holding company
Hardin St Properties, LLC ("HP") December 5, 2012 Montana, USA 100% Real estate holding company
Lenfa Food, LLC ("LF") February 14, 2002 Colorado, USA 100% Real estate holding company
Lucky Realty, LLC ("LR") September 3, 2003 California, USA 100% Real estate holding company
Murray Properties, LLC ("MP") February 27, 2013 Utah, USA 100% Real estate holding company
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of HF Group, its subsidiaries and the VIE. The VIE has been accounted for at historical cost and prepared on the basis as if common control had been established as of the beginning of the first period presented in the accompanying consolidated financial statements. All inter-company balances and transactions have been eliminated upon consolidation.
U.S. GAAP provides guidance on the identification of VIE and financial reporting for entities over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) receives the economic benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE.
As of December 31, 2020 and 2019, FUSO is considered to be a VIE. FUSO was established solely to provide exclusive services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIEs’ activities. In addition, the Company receives the economic benefits from the entity and has concluded that the Company is a primary beneficiary.
The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE is included in the Company’s consolidated balance sheets, statements of income (loss) and statements of cash flows are as follows:
December 31, 2020 December 31, 2019
Current assets $ 47,822 $ 158,184
Non-current assets 115,934 301,803
Total assets $ 163,756 $ 459,987
Current liabilities $ 496,234 $ 805,666
Non-current liabilities 39,475 69,321
Total liabilities $ 535,709 $ 874,987
For the year ended December 31
2020 2019
Net revenue $ 2,020,416 $ 420,163
Net income $ 43,046 $ 68,449
For the year ended December 31
2020 2019
Net cash provided by operating activities $ 246,153 $ 201,885
Net cash used in financing activities (265,004) (207,159)
Net decrease in cash and cash equivalents $ (18,851) $ (5,274)
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.
As of December 31, 2020 and 2019, noncontrolling interest equity consisted of the following:
Name of Entity Percentage of
Ownership of
noncontrolling interest December 31, 2020 December 31, 2019
Kirnland 33.33 % $ 1,384,780 $ 1,292,623
MIN 39.75 % 889,596 896,980
MS 35.00 % 459,816 459,126
OW 32.50 % 1,633,355 1,600,058
Total $ 4,367,547 $ 4,248,787
Uses of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, allowance for doubtful accounts, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, long-term investments, goodwill, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, realization of deferred tax assets, and uncertain income tax positions.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three or fewer months to be cash equivalents. As of December 31, 2020 and 2019, the Company had no cash equivalents.
Accounts Receivable
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company is aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount the Company reasonably expects to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of December 31, 2020 and 2019, allowances for doubtful accounts were $909,182 and $623,970, respectively.
Inventories
The Company’s inventories, consisting mainly of food and other food service-related products, are primarily considered as finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. As of December 31, 2020 and 2019, the valuation allowance was $146,078 and $16,928, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment:
Estimated useful lives (years)
Automobiles 3 - 7
Buildings and improvements 7 - 39
Furniture and fixtures 4 - 10
Machinery and equipment 3 - 10
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 in other income or expenses.
Business Combinations
The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC 805 (“ASC 805”), Business Combinations. The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.
The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its
estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
Transaction costs associated with business combinations are expensed as incurred, and are included in distribution, selling and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired.
The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350 (“ASC 350”), Intangibles - Goodwill and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The Company opted the early adoption of Accounting Standards Update (“ASU”) 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement of goodwill by removing Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new standard, an impairment loss will be recognized in the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Intangible Assets
Intangible assets are carried at cost and amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows:
Estimated useful lives (years)
Tradenames 10
Customer relationships 20
Long term investments
The Company’s investments in unconsolidated entities consist of equity investments and investment without readily determinable fair value.
The Company follows ASC Topic 321 (“ASC 321”), Investments - Equity Securities, using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair
Value Measurements and Disclosures. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in net income equal to the difference between the carrying value and fair value.
Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures. Under the equity method, the Company initially records its investment at cost and the difference between the cost and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.
The Company did not record any impairment loss on its long term investments as of December 31, 2020 and 2019.
Impairment of Long-lived Assets other than goodwill
The Company assesses its long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. The Company did not record any impairment loss on its long-lived assets as of December 31, 2020 and 2019.
Revenue Recognition
The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.
The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The majority of the Company’s contracts have one single performance obligation, as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a specific point in time.
For the years ended December 31, 2020 and 2019, revenue recognized from performance obligations related to prior periods was insignificant. Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant.
The following table summarizes disaggregated revenue from contracts with customers by geographic locations:
For the Years Ended
December 31,
2020 December 31,
Arizona $ 34,952,390 $ 7,196,217
California 192,998,208 54,877,209
Colorado 34,908,440 6,658,931
Florida 65,415,191 91,173,814
Georgia 46,985,078 65,173,052
North Carolina 108,954,235 145,756,172
Utah 52,458,685 8,249,684
Washington 30,158,848 9,077,202
Total $ 566,831,075 $ 388,162,281
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 $6,813,693 and $4,443,967 for the years ended December 31, 2020 and 2019, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 (“ASC 740”), Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at December 31, 2020 and 2019.
Leases
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) ("Topic 842"). For all leases that were entered into prior to the effective date of ASC 842, the Company elected to apply the package of practical expedients. Based on this guidance the Company will not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. The adoption of Topic 842 did not have a material impact on the Company’s consolidated balance sheets or on its consolidated statements of operations.
The adoption of Topic 842 resulted in the presentation of $21.2 million of operating lease assets and operating lease liabilities on the consolidated balance sheet as of January 1, 2019. See Note 11 for additional information. As a result of the Realty Acquisition (see Note 8 for additional information), nine leases previously included in the operating lease asset and liabilities balance were eliminated during consolidation. As of December 31, 2020 and 2019, the balances for operating lease assets and liabilities were $931,630 and $17,155,584, respectively. See Note 13 for additional information.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of finance lease liabilities, and finance lease liabilities, non-current on the consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Earnings Per Share
The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There is no anti-dilutive effect for the years ended December 31, 2020 and 2019.
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 about what assumptions market participants would use in pricing the asset or liability based on the best available information.
Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein.
The carrying amounts reported in the balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, bank overdraft, income tax payable, current portion of long-term debt, current portion of obligations under finance and operating leases, and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments.
Derivative Financial Instrument
In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, derivative financial instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment. Pursuant to U.S. GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the statement of operations. Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty.
Concentrations and Credit Risk
Credit risk
Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Concentration risk
There were no receivables from any one customer representing more than 10% of the Company’s consolidated gross accounts receivable at December 31, 2020 and 2019.
For the years ended December 31, 2020 and 2019, no supplier accounted for more than 10% of the total cost of revenue. As of December 31, 2020, two suppliers accounted for 22% and 18% of total advance payments outstanding and one suppliers accounted for 96% of advance payments to related parties, respectively. As of December 31, 2019, two suppliers accounted for 34% and 15% of total advance payments outstanding and these two suppliers accounted for 70% and 30% of advance payments to related parties, respectively.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 31, 2022. The Company will adopt this ASU within the annual reporting period of December 31, 2023. The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to managerial accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company will adopt this ASU within the annual reporting period of December 31, 2021. The Company is currently assessing the impact of adopting this standard, but based on its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
As of December 31,
2020 As of December 31,
Accounts receivable $ 25,761,394 $ 50,651,104
Less: allowance for doubtful accounts (909,182) (623,970)
Accounts receivable, net $ 24,852,212 $ 50,027,134
Movement of allowance for doubtful accounts is as follows:
For the Years Ended
December 31,
2020 December 31,
Beginning balance $ 623,970 $ 658,104
Provision for doubtful accounts 1,337,820 (4,515)
Less: write off/recovery (1,052,608) (29,619)
Ending balance $ 909,182 $ 623,970
NOTE 4 - NOTES RECEIVABLE
As of December 31, 2018, the Company's records reflected that there was a promissory note agreement with Feilong Trading, Inc, ("Feilong"). The relationship between Feilong and HF is within the scope of our internal investigation. Pursuant to the promissory note agreement, Feilong was permitted to borrow up to $4,000,000 from time to time. The note bore interest at the rate of 5% per annum on the unpaid balance, compounded monthly. The Company’s former Chairman and Co-CEO, Zhou Min Ni agreed to personally guarantee the repayment of all outstanding balances relating to this note receivable.
On September 30, 2019, the Company and Mr. Ni entered into a Loan Purchase and Sale Agreement (the "Loan Sale Agreement"). Pursuant to the Loan Sale Agreement, the entire outstanding balance of $3,622,505 owed by Feilong to the Company was sold to Mr. Ni in exchange for 272,369 shares of common stock of the Company, which shares were received and recorded as treasury stock by the Company as of September 30, 2019. In connection with the sale of this note receivable, the Company also required 89,882 additional shares of common stock of the Company owned by Mr. Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Escrow Period”), which would then be delivered to the Company in part or in full, if the volume weighted average price ("VWAP") of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period was less than $13.30.
On October 9, 2020, in accordance with the terms of the Loan Sale Agreement, the Company and Mr. Ni determined and agreed that the 250-day VWAP immediately preceding September 30, 2020 was $10.59, and consequently, 69,719 of the Escrow Shares were transferred to and recorded as treasury stock by the Company, and the remaining 20,163 Escrow Shares were returned to Mr. Ni. Following this event, the balance due from Feilong to the Company is considered fully settled. The Company has retired all treasury stocks as of December 31, 2020.
NOTE 5 - LONG TERM INVESTMENTS
Long term investments consisted of the following:
Ownership as of December 31,
2020 As of December 31, 2020 As of December 31, 2019
Asahi Food, Inc. 49% $ 577,164 $ 496,276
Pt. Tamron Akuatik Produk Industri 12% 1,800,000 1,800,000
Long term investments $ 2,377,164 $ 2,296,276
The investment in Pt. Tamron Akuatik Produk Industri is accounted for using the measurement alternative under ASC321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi Food, Inc. is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise full control over this investee. The Company believes there was no impairment as of December 31, 2020 and 2019 for these investments.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
As of December 31,
2020 As of December 31,
Automobiles $ 24,544,094 $ 24,340,652
Building 71,285,127 17,721,292
Building improvements 9,807,234 9,079,737
Furniture and fixtures 223,996 220,169
Land 52,125,900 3,391,858
Machinery and equipment 13,498,211 11,414,764
Subtotal 171,484,562 66,168,472
Less: accumulated depreciation (34,615,477) (28,630,325)
Property and equipment, net $ 136,869,085 $ 37,538,147
The Company acquired $102,331,567 of property and equipment resulting from an acquisition of assets from B&R Realty Group on January 17, 2020. See Note 8 for additional information.
Depreciation expense was $6,393,309 and $3,251,162 for the years ended December 31, 2020 and 2019, respectively.
NOTE 7 - BUSINESS COMBINATION WITH B&R GLOBAL
Effective November 4, 2019, HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. HF Group is considered as both the legal and accounting acquirer based on the fact that there was no change of control in connection with this Business Combination. The aggregate fair value of the consideration paid by HF Group in the Business Combination is $576,699,494 and is based on the closing share price of the Company’s common stock at the date of Closing.
The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined using quoted market prices, discounted cash flow, and estimates made by management. The purchase price allocation was subject to further adjustment until all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company, not to exceed one year as permitted under ASC 805.
The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Cash $ 7,017,467
Accounts receivable, net 30,934,831
Accounts receivable - related parties, net 3,393,930
Inventories, net 56,451,885
Other current assets 2,332,063
Other current assets - related parties 498,211
Advances to suppliers, net 97,964
Property and equipment, net 11,042,601
Deposit 281,282
Deposit - related parties 591,380
Long-term investments 2,289,389
Right-of-use assets 17,791,681
TANGIBLE ASSETS ACQUIRED 132,722,684
Line of credit 35,567,911
Accounts payable 24,884,247
Accounts payable - related parties 1,528,139
Bank overdraft 12,082,094
Accrued expenses 778,779
Other payables 185,938
Other payables - related party 733,448
Customer deposits 38,510
Long-term debt 3,284,159
Lease liabilities 17,791,680
Deferred tax liabilities arising from acquired intangible assets 51,413,633
TANGIBLE LIABILITIES ASSUMED 148,288,538
NET TANGIBLE LIABILITIES ASSUMED (15,565,854)
Identifiable intangible assets 188,503,000
Goodwill 406,703,348
INTANGIBLE ASSETS ACQUIRED 595,206,348
Noncontrolling interests 2,941,000
Total consideration $ 576,699,494
The Company recorded acquired intangible assets of $188,503,000. These intangible assets include tradenames valued at $29,303,000 and customer relationships valued at $159,200,000. The associated goodwill and intangible assets are not deductible for tax purposes.
The following table presents the Company’s unaudited pro forma results for the year ended December 31, 2019, as if the B&R Global Acquisition had occurred on January 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets, and excludes other non-recurring transaction
costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.
For the Year Ended December 31, 2019
Pro forma net revenue $ 828,045,703
Pro forma net income 6,799,694 (1)
Pro forma net income attributable to HF Group 5,662,499 (1)
Pro forma earnings per common share - basic and diluted $ 0.11
Pro forma weighted average shares - basic and diluted 53,293,566
(1)Includes intangibles asset amortization expense of $10,890,300 for the year ended December 31, 2019.
NOTE 8 - ACQUISITION OF B&R REALTY SUBSIDIARIES
On January 17, 2020, B&R Global acquired 100% equity membership interests of the subsidiaries of BRGR, which own warehouse facilities that were being leased to B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. Co-CEO of the Company, Xiao Mou Zhang, managed and owned an 8.91% interest in BRGR. The total purchase price for the acquisition was $101,269,706, based on independent appraisals of the fair market value of the properties.
The Company notes that substantially all of the fair value of the gross assets acquired is concentrated in a group of similar assets (land and buildings all used for warehousing and distribution purposes). As such, the acquisition of BRGR Subsidiaries would be deemed an asset acquisition under ASC 805-10-55, and the total purchase price is allocated on a relative fair value basis to the net assets acquired.
Consideration for the acquisition was funded by (1) $75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 12 for additional information), (2) issuance by B&R Global of a $7.0 million Unsecured Subordinated Promissory Note to BRGR maturing on January 17, 2030, and (3) payment of $18.7 million from funds drawn from the Company’s revolving credit facility. The reissuance of the mortgage-backed term loans released BRGR from its obligations to the lenders under the First Amended Credit Agreement (See Note 11 for additional information) and predecessor financing arrangements.
Capitalizable tangible net assets acquired are depreciated on a straight-line basis over the estimated useful lives, ranges from 3 years to 39 years. Depreciation expense for property and equipment acquired was $1,268,753 for the year ended December 31, 2020.
The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Cash $ 265,639
Automobile 33,690
Prepaids 39,193
Land 48,734,042
Buildings 53,563,835
Total assets acquired 102,636,399
Accounts payable and Accrued Expenses 1,366,693
Total liabilities assumed 1,366,693
Net assets acquired $ 101,269,706
NOTE 9 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill
The changes in HF Group’s carrying amount of goodwill by segment are presented below:
HF B&R Global Total
Balance at December 31, 2019 $ - $ 406,703,348 $ 406,703,348
Impairment Loss - (338,191,407) (338,191,407)
Balance at December 31, 2020 $ - $ 68,511,941 $ 68,511,941
The Company recorded approximately $406.7 million of goodwill on December 31, 2019, resulting from the completion of the Business Combination with B&R Global, which represents the excess of the purchase price over the fair value of net assets acquired. HF Group acquired 100% of the controlling interest of B&R Global, in exchange for 30,700,000 consideration shares of HF Group Common Stock, valued at $576,699,494 based upon the closing share price of the Company’s common stock at the date of Closing on November 4, 2019. The Company's policy is to test goodwill for impairment annually in the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price.
Towards the end of first quarter of fiscal year 2020, the Company experienced significant decline in business volume due to mandatory stay-at-home orders issued by governmental authorities in response to the intensification of the COVID-19 pandemic. The Company determined that the B&R Global reporting unit was very sensitive to these declines and that it was more likely than not that an impairment may exist. The Company, therefore, performed an analysis of the fair value of the B&R Global reporting unit as of March 31, 2020 using a discounted cash flow method for goodwill impairment testing purposes. Based upon the analysis, the Company concluded that the carrying value of its B&R Global reporting unit exceeded its fair value by approximately $338.2 million. As a result, the company recorded the amount as impairment loss during the first quarter of fiscal year 2020.
The Company estimated the fair values of the B&R Global reporting unit using the income approach, discounting projected future cash flows based upon management’s expectations of the current and future operating environment. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital ("WACC"), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities. The fair value conclusions as of March 31, 2020 for the reporting unit are highly sensitive to changes in the WACC, which consider observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. The Company also observed that the WACC applied on March 31, 2020 increased significantly from the original WACC value as of the acquisition date, mainly driven by the increased risk and volatility observed in the market. Volatility has primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country has been reduced to takeout and delivery offerings. Continued uncertainty about the removal or perpetuation of these restrictions and levels of consumer spending cause ongoing volatility.
In addition, the fair value of the goodwill is sensitive to the changes in the assumptions used in the projected cash flows, which include forecasted revenues and perpetual growth rates, among others, all of which require significant judgment by management. The Company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future conditions, industry and global economic and geo-political factors, and the timing and success of the Company's implementation of current strategic initiatives.
Using historic monthly sales run rate and forecasted sales run rates for the next year, the Company performed goodwill impairment assessment and concluded no further impairment is required as of December 31, 2020.
Acquired Intangible Assets
In connection with the Business Acquisition, HF Group acquired $188,503,000 of intangible assets, primarily representing tradenames and customer relationships, which have an estimated amortization period of approximately 10 years and 20 years respectively. The components of the intangible assets are as follows:
As of December 31, 2020 As of December 31, 2019
Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount
Tradenames $ 29,303,000 $ (3,418,683) $ 25,884,317 $ 29,303,000 $ (488,383) $ 28,814,617
Customer relationships 159,200,000 (9,286,667) 149,913,333 159,200,000 (1,326,667) 157,873,333
Total $ 188,503,000 $ (12,705,350) $ 175,797,650 $ 188,503,000 $ (1,815,050) $ 186,687,950
Since COVID-19 has had an adverse impact on the Company’s business volume, which was a triggering event, the Company performed long-lived asset quantitative impairment tests as of December 31, 2020. All intangible assets were tested for recoverability at the asset group level. ASC Topic 360, Property, Plant and Equipment ("ASC 360") defines the recoverability of these assets as measured by comparison of their (or asset group) carrying amounts to future undiscounted cash flows the assets (or asset group) are expected to generate. Based on the test for recoverability using undiscounted cash flows attributable to the asset (or asset group), the sum of the undiscounted cash flows exceeded the carrying value of the measured asset (or asset group). As such, no impairment was recorded for the finite lived assets as of December 31, 2020.
HF Group’s amortization expense for intangible assets was $10,890,300 in 2020 and $1,815,050 in 2019, respectively. Estimated future amortization expense for intangible assets is presented below:
Twelve months ending December 31, Amount
2021 $ 10,890,300
2022 10,890,300
2023 10,890,300
2024 10,890,300
2025 10,890,300
Thereafter 121,346,150
Total $ 175,797,650
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps for the sole purpose of mitigating interest rate fluctuation risk associated to floating rate debt instruments (as defined in Note 11 Lines of Credit, and Note 12 Long-Term Debt). The Company does not use any other derivative financial instruments for trading or speculative purposes.
On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $1.05 million and $2.625 million, respectively. The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amount that were priced at USD 1-month LIBOR (London Interbank Offering Rate) plus
2.25% per annum for the entire duration of the term loans. The EWB IRS contracts have fixed the two term loans at 4.23% per annum until maturity in September 2029.
On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $2.74 million in conjunction with a newly contracted mortgage term loan of corresponding amount. The term loan was contracted at USD 1-month LIBOR plus 2.15% per annum but was fixed at 4.25% per annum resulting from the corresponding BOA IRS contract. The term loan and corresponding BOA IRS contract matures in December, 2029.
On June 24, 2020, HF Group entered into a forward starting IRS contract with JP Morgan Chase Bank (the "JPM IRS") for a fixed $80 million notional amount, effective from June 30, 2021 and expiring on June 30, 2025, as a means to partially hedge its existing floating rate loans exposure. The Company has an existing term loan as of December 31, 2020 of approximately $73.5 million which was pegged to a floating rate of 1-month LIBOR plus 1.875% per annum, as well as a revolving line of credit with an outstanding balance of $18.3 millions as of December 31, 2020 that was pegged to 1-month LIBOR plus 1.375% per annum. Under the terms of the JPM IRS contract, the Company will receive interest at prevailing 1-month LIBOR and pay fixed interest at 0.413% plus the agreed bank spread starting from July 31, 2021 through July 31, 2025 inclusive.
On March 3, 2021, the Company unwind the JPM IRS. The contract was unwound with a view that 1-month LIBOR will continue to remain low in the foreseeable future despite the spike at the long end of the yield curve. The Company recorded a gain of $718,600 in the first quarter of 2021.
The Company evaluated the above mentioned interest rate swap contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value change on the aforementioned interest rate swap contracts are accounted for and recognized as change in fair value of interest rate swap contracts in the unaudited condensed consolidated statements of operations.
As of December 31, 2020 and December 31, 2019, the Company has determined that the fair value of the interest rate swap obligations was $993,516 and $73,158, respectively. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in its assessment of fair value. The interest rate swaps are classified as Level 3 liabilities and fair value was obtained from the respective counterparties.
NOTE 11 - LINES OF CREDIT
On April 18, 2019, the Company, Han Feng, NSF and Kirnland entered into a Credit Agreement with East West Bank (the "EWB Credit Agreement"). The EWB Credit Agreement provided for a $25 million secured line of credit available to be used in one or more revolving loans to the Company’s domestic subsidiaries that were parties to the EWB Credit Agreement for working capital and general corporate purposes. Han Feng, NSF and Kirnland (the “Borrowing Subsidiaries”) were the borrowers and the Company and each of its other material subsidiaries were guarantors of all the obligations under the EWB Credit Agreement. The original maturity of the line of credit was August 18, 2021. Under the EWB Credit Agreement, the Borrowing Subsidiaries were to pay interest on the principal amounts drawn on the line of credit at a rate per annum equal to (a) 0.375% below the Prime Rate in effect from time to time, or (b) 2.20% above the LIBOR Rate in effect from time to time, depending on the rate elected at the time a borrowing request is made, but in no event less than 4.214% per annum. The EWB Credit Agreement contained certain financial covenants which, among other things, required Han Feng to maintain certain financial ratios. On November 4, 2019, the outstanding balance of $13,864,481 (including accured interest) under the EWB Credit Agreement was fully paid off from borrowings under a Credit Agreement entered into with JPMorgan Chase Bank, N.A. (“JPMorgan”) in connection with the closing of the merger with B&R Global as described below (the "JPM Credit Agreement").
The JPM Credit Agreement provides for a $100 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. The credit facility was collateralized by all assets of the Company and was also guaranteed by B&R Group Realty and B&R Realty Subsidiaries, which B&R Realty Subsidiaries were subsequently acquired by the Company on January 17, 2020 (See Note 8 for additional information). The JPM Credit Agreement was later superseded by a Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") as described below.
On January 17, 2020, the Company, its wholly-owned subsidiary, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company as borrowers (collectively with the Company, the “Borrowers”), and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement with JPMorgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement, provides for (i) a $100 million asset-secured revolving credit facility maturing on November 4, 2022 (the “Revolving Facility”), and (ii) mortgage-secured term loan of $75.6 million ("Term Loan").
The existing revolving credit facility balance of $41.2 million under the First Amended Credit Agreement, was rolled over to the Revolving Facility on January 17, 2020. On the same day, B&R Global utilized the $75.6 million Term Loan and additional $18.7 million drawdown from the Revolving Facility to fund in part the acquisition of ten warehouse facilities owned by the selling BRGR Subsidiaries, which B&R Global had been leasing for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. The Second Amended Credit Agreement contained certain financial covenants and as of December 31, 2020, the Company was in compliance with the covenants. The outstanding principal balance on the line of credit as of December 31, 2020 was $18.3 million.
NOTE 12 - LONG-TERM DEBT
Long-term debt at December 31, 2020 and 2019 is as follows:
Bank name Maturity Interest rate at December 31,
2020 As of December 31,
2020 As of December 31,
Bank of America - (a) April 2021 - December 2029 3.73% - 5.51% $ 5,905,472 $ 4,263,663
BMO Harris Bank N.A. - (b) April 2022 - January 2024 5.87% - 5.99% 280,164 508,564
East West Bank - (c) August 2027 - September 2029 3.83% - 4.25% 6,802,271 6,989,016
First Horizon Bank - (d) October 2027 3.85% 4,773,378 4,967,075
J.P. Morgan Chase - (e) February 2023 - January 2030 2.02% - 2.15% 74,687,806 2,702,371
Peoples United Bank - (b) December 2022 - January 2023 6.69% - 7.53% 725,282 1,114,993
Other finance institutions - (b) March 2021 - March 2024 3.90% - 6.14% 475,689 716,315
Total debt 93,650,062 21,261,997
Less: current portion (5,641,259) (2,726,981)
Long-term debt $ 88,008,803 $ 18,535,016
The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants. As of December 31, 2020, the Company was in compliance. As of December 31, 2019, the Company was in violation of one covenant and a waiver was obtained from Bank of America for the covenant violation.
The loans outstanding were guaranteed by the following properties, entities or individuals, or otherwise secured as shown:
(a)Guaranteed by two subsidiaries of the Company, NSF and BB, and also secured by real property, equipment and fixtures, inventories, receivables and all other personal property owned by NSF. Balloon payment for this long-term debt is $1,382,046.
(b)Secured by vehicles.
(c)Guaranteed by five subsidiaries of the Company, Han Feng, TT, MFD, R&N Holdings and R&N Lexington, in part by one shareholder and spouse, and also secured by assets of Han Feng and R&N Lexington and R&N Holdings, two real properties of R&N Holdings, and a parcel of real property owned by R&N Lexington. Balloon payment of $2,293,751 is due in 2027 and another balloon payments of $3,007,239 is due in 2029.
(d)Guaranteed by one shareholder and spouse, as well as Han Feng. Also secured by a real property owned by HG Realty. Balloon payment for this debt is $3,116,687.
(e)Real estate term loan with a principal balance of $72,761,598 as of December 31, 2020 is secured by assets held by nine subsidiaries of the Company, AK, BRR, BSR, FL, GSR, HP, LF, LR, and MP. Equipment term loan with a principal balance of $1,926,208 as of December 31, 2020 is secured by specific vehicles and equipment as defined in loan agreements.
The future maturities of long-term debt as of December 31, 2020 are as follows:
Twelve months ending December 31, Amount
2021 $ 5,641,259
2022 5,347,017
2023 4,260,965
2024 3,706,449
2025 3,711,793
Thereafter 70,982,579
Total $ 93,650,062
NOTE 13 - LEASES
The Company leases office space and warehouses under non-cancelable operating leases, with terms typically ranging from one to five years, as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment with various expiration dates through 2021. The Company determines whether an arrangement is or includes an embedded lease at contract inception.
Operating lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company also recognizes finance lease assets and finance lease liabilities 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:
For the Year Ended
December 31,
2020 December 31,
Operating lease cost $ 1,326,746 $ 1,601,678
Weighted Average Remaining Lease Term (Months)
Operating leases 39 51
Weighted Average Discount Rate
Operating leases 4.0 % 4.0 %
Finance Leases
The components of lease expense were as follows:
For the Year Ended
December 31,
2020 December 31,
Finance leases cost:
Amortization of right-of-use assets $ 538,188 $ 571,130
Interest on lease liabilities 94,093 110,274
Total finance leases cost $ 632,281 $ 681,404
Supplemental cash flow information related to finance leases was as follows:
For the Year Ended
December 31,
2020 December 31,
Operating cash flows from finance leases $ 94,093 $ 110,274
Supplemental balance sheet information related to leases was as follows:
December 31,
2020 December 31,
Finance Leases
Property and equipment, at cost $ 2,793,731 $ 2,793,731
Accumulated depreciation (1,831,318) (1,293,130)
Property and equipment, net $ 962,413 $ 1,500,601
Weighted Average Remaining Lease Term (Months)
Finance leases 43 54
Weighted Average Discount Rate
Finance leases 7.56 % 7.51 %
Maturities of lease liabilities were as follows:
Twelve months ending December 31, Operating
Leases Finance
Leases
2021 $ 382,047 $ 359,635
2022 336,103 322,456
2023 219,584 312,605
2024 85,797 215,364
2025 66,731 -
Total Lease Payments 1,090,262 1,210,060
Less Imputed Interest (158,632) (156,272)
Total $ 931,630 $ 1,053,788
On July 2, 2018, AnHeart Inc. ("AnHeart"), a former wholly-owned subsidiary of HF Holding, entered into two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. The leases were on a triple net basis, meaning AnHeart is required to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. HF Holding provided a corporate guaranty for all rent and related costs of the leases, including costs associated with the planned construction of a two-story structure at 273 Fifth Avenue and rehabilitation of the building at 275 Fifth Avenue. The Company entered into the leases back then with the planned purpose of expanding its product lines to include Chinese herb supplements, and to use the sites to develop into a hub for such products. The Company has since determined to cease this business expansion in early 2019.
On February 23, 2019, HF Holding executed an agreement to divest all of its ownership interest in AnHeart to Ms. Jianping An, a resident of New York, for the sum of $20,000. The transfer of ownership was completed on May 2, 2019. However, the divestment does not release HF Holding’s guaranty of AnHeart’s obligations or liabilities under the original lease agreements. Under the terms of the sale of AnHeart stock to Ms. An, and in consideration of the Company’s ongoing guaranty of AnHeart’s performance of the lease obligations, AnHeart granted to the Company a security interest in all AnHeart assets, together with a covenant that the Company will be assigned the leases, to be exercised if AnHeart defaults on the original lease agreements. Further, Ms. An 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. See Note 19 - Subsequent Events for additional information concerning the AnHeart leases.
In January 2021, the Company's subsidiary, Kirnland signed a new 5-year operating lease agreement with a related party, Yoan to continue to lease the warehouse space that Kirnland has been operating in at 36 - 40 Enterprise Blvd, Atlanta, Georgia
("Warehouse Lease"). Pursuant to the Warehouse Lease, effective January 1, 2021 and maturing on December 31, 2025, Kirnland will pay an initial monthly rental rate of $23,495 with standard annual rent escalation of 3% per annum. See Note 19 - Subsequent Events.
NOTE 14 - SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental cash flow disclosures and noncash investing and financing activities are as follows:
For the Years Ended
December 31,
2020 December 31,
Supplemental disclosure of cash flow data:
Cash paid for interest $ 4,123,832 $ 1,520,545
Cash paid for income taxes $ 804,147 $ 2,677,205
Supplemental disclosure of non-cash investing and financing activities
Right of use assets obtained in exchange for operating lease liabilities $ 331,239 $ 767,323
Property and equipment obtained in exchange for finance lease liabilities $ - $ 1,432,662
Property and equipment purchases from notes payable $ 2,528,554 $ 1,080,153
Notes receivable sold to shareholder in exchange of common stock $ - $ 12,038,030
Common Stock issued for consideration of acquisition of B&R Global $ - $ 576,699,494
Issuance of promissory note for the acquisition of B&R Realty Subsidiaries $ 7,000,000 $ -
NOTE 15 - TAXES
Corporate Income Taxes (“CIT”)
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company expects the new federal income tax rate will significantly lower the Company’s income tax expenses going forward. The Company does not expect the repatriation tax and new minimum tax on certain future foreign earnings to have any impact on the Company’s operations since it currently has no foreign income and does not expect to generate any foreign income in the future.
(i)The provision for income taxes of the Company for the years ended December 31, 2020 and 2019 consists of the following:
For the Years Ended
December 31,
2020 December 31,
Current:
Federal $ 1,138,966 $ 1,907,309
State (54,870) 540,488
Current income taxes 1,084,096 2,447,797
Deferred income taxes (benefit):
Federal (2,916,501) (156,892)
State (2,999,326) (93,813)
Deferred income taxes (benefit) (5,915,827) (250,705)
Total provision (benefit) for income taxes $ (4,831,731) $ 2,197,092
(ii)Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows:
As of December 31,
2020 As of December 31,
Deferred tax assets:
Allowance for doubtful accounts $ 443,151 $ 373,438
Inventories 481,016 594,628
Federal net operating loss 101,828 228,637
State net operating loss 257,490 80,514
Fair value change in interest rate swap contracts 244,622 -
Accrued expenses 268,813 80,100
Total deferred tax assets 1,796,920 1,357,317
Deferred tax liabilities:
Property and equipment (2,660,874) (3,270,536)
Intangibles assets (45,461,272) (50,327,833)
Total deferred tax liabilities (48,122,146) (53,598,369)
Net deferred tax liabilities $ (46,325,226) $ (52,241,052)
The net deferred tax liabilities presented in the Company's Consolidated Balance Sheets were as follows:
As of December 31,
2020 As of December 31,
Deferred tax assets $ 57,478 $ 78,993
Deferred tax liabilities (46,382,704) (52,320,045)
Net deferred tax liabilities $ (46,325,226) $ (52,241,052)
(iii)Reconciliations of the statutory income tax rate to the effective income tax rate are as follows:
For the Years Ended
December 31,
2020 December 31,
Federal statutory tax rate 21.0 % 21.0 %
State statutory tax rate 0.7 % 4.0 %
Impact of goodwill impairment loss - permanent difference (20.5) % 1.0 %
Other 0.2 % 1.2 %
Effective tax rate 1.4 % 27.2 %
NOTE 16 - RELATED PARTY TRANSACTIONS
The Company makes regular purchases from and sales to various related parties. Related party affiliations were attributed to transactions conducted between the Company and those business entities partially or wholly owned by Company officers. The related party affiliations described in this note, including the bona fides and fairness of certain transactions with related parties, are among the issues that are being scrutinized as part of an ongoing internal investigation, and disclosures concerning particular transactions are subject to the outcome of, and conclusions that may ultimately be reached in, this ongoing investigation. Mr. Zhou Min Ni and Mr. Xiao Mou Zhang were the Co-Chief Executive Officers as of December 31, 2020 and 2019. Mr. Ni subsequently resigned from all of his official posts on February 23, 2021. Upon resignation, Mr. Ni owned 10.7% of outstanding shares of common stock. Mr. Xiao Mou Zhang became the sole Chief Executive Officer on February 23, 2021. (See subsequent event section). The related party transactions as of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019 are identified as follows:
a.Purchase - related parties
Below is a summary of purchases of goods and services from related parties recorded for the year ended December 31, 2020 and 2019, respectively:
For the Years Ended
Name of Related Party December 31,
2020 December 31,
(a) Allstate Trading Company, Inc. $ 308,865 $ 111,213
(b) Best Food Services, LLC 5,829,680 2,136,388
(c) Eagle Food Service, LLC 100,892 232,566
(d) Eastern Fresh NJ, LLC 4,508,507 6,678,704
(e) Enson Group, Inc. (formerly "Enson Group, LLC") 142,711 174,711
(f) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) - 181,985
(g) First Choice Seafood, Inc. 454,606 2,092,599
(h) Fujian RongFeng Plastic Co., Ltd 3,617,121 6,207,379
(i) Hanfeng (Fujian) Information Technology Co., Ltd. 997,395 3,032,984
(j) Hanfeng Information Technology (Jinhua), Inc. 1,134,620 -
(k) N&F Logistics, Inc. 368,529 1,428,294
(l) North Carolina Good Taste Noodle, Inc. - 4,607,652
(m) Ocean Pacific Seafood Group, Inc. 567,836 598,286
(n) Revolution Industry, LLC 2,362,131 2,822,561
(o) UGO USA, Inc. 644,410 724,486
(p) Union Foods, LLC 1,246,720 9,003,455
(q) Winfar Foods, Inc. 622,417 -
Others 84,965 354,737
Total $ 22,991,405 $ 40,388,000
(a)Mr. Zhou Min Ni owns 40% equity interest in this entity.
(b)Mr. Xiao Mou Zhang previously owns 10.38% equity interest in this entity indirectly through its parent company as of 10/31/2020. Mr. Zhang's children owns 10.38% equity interest in this entity indirectly from 11/1/2020.
(c)Tina Ni, one of Mr. Zhou Min Ni’s family members, owns 26.5% equity interest in this entity indirectly through its parent company.
(d)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(e)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(f)Mr. Zhou Min Ni owns 50% equity interest in this entity.
(g)Mr. Zhou Min Ni owns 25% equity interest in this entity indirectly through its parent company.
(h)Mr. Zhou Min Ni owns 40% equity interest in this entity indirectly through its parent company.
(i)Mr. Zhou Min Ni owns 100% equity interest in this entity.
(j)Mr. Zhou Min Ni owns 37% equity interest in this entity.
(k)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(l)Mr. Jian Ming Ni, former Chief Financial Officer owns 29% equity interest in this entity. Mr. Zhou Min Ni previously owned 37.34% equity in this entity as of 12/31/2019. We have been told that Mr Ni's equity interest was disposed of on 1/1/2020. For comparison purpose, the total purchase in year 2020 was $3,986,069.
(m)Mr. Zhou Min Ni owns 26% equity interest in this entity.
(n)Raymond Ni, one of Mr. Zhou Min Ni’s family members, owns 100% equity interest in this entity. On 2/25/2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment from Revolution Industry, LLC. Going forward, Han Feng takes the egg roll production business in house and ceases vendor relationship with Revolution Industry, LLC. See Footnote 19 Subsequent Events for additional Information.
(o)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(p)Tina Ni, one of Mr. Zhou Min Ni’s family members, owns 30% equity interest in this entity. Anthony Zhang, one of Mr. Xiao Mou Zhang's family member, owns 10% of equity interest in this entity.
(q)Mr. Xiao Mou Zhang owns 5.2% equity interest in this entity indirectly through its parent company.
b. Sales - related parties
Below is a summary of sales to related parties recorded for the year ended December 31, 2020 and 2019, respectively:
For the Years Ended
Name of Related Party December 31,
2020 December 31,
(a) ABC Food Trading, LLC $ 1,870,728 $ 416,392
(b) Asahi Food, Inc. 465,069 70,700
(c) Best Food Services, LLC 336,800 -
(d) Eagle Food Service, LLC 4,604,894 7,172,063
(e) Eastern Fresh NJ, LLC 1,602,479 4,470,618
(f) Enson Group, Inc. (formerly "Enson Group, LLC") 307,585 635,078
(g) Enson Philadelphia, Inc. 125,684 142,193
(h) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) 492,679 1,481,776
(i) First Choice Seafood, Inc. 1,378,207 -
(j) Fortune One Foods, Inc. 310,635 787,700
(k) Heng Feng Food Services, Inc. 668,844 1,601,546
(l) N&F Logistics, Inc. 1,027,427 2,364,820
(m) The Big Catch Alhambra, LLC 57,048 60,842
(n) UGO USA, Inc. 66,448 75,393
Others 108,020 73,295
Total $ 13,422,547 $ 19,352,416
(a)Mr. Xiao Mou Zhang previously owns 10.38% equity interest in this entity indirectly through its parent company as of 10/31/2020. Mr. Zhang's children owns 10.38% equity interest in this entity indirectly from 11/1/2020.
(b)The Company, through its subsidiary MF, owns 49% equity interest in this entity.
(c)Mr. Xiao Mou Zhang previously owns 10.38% equity interest in this entity indirectly through its parent company as of 10/31/2020. Mr. Zhang's children owns 10.38% equity interest in this entity indirectly from 11/1/2020.
(d)Tina Ni, one of Mr. Zhou Min Ni’s family members, owns 26.5% equity interest in this entity indirectly through its parent company.
(e)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(f)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(g)Mr. Zhou Min Ni owns 23.33% equity interest in this entity.
(h)Mr. Zhou Min Ni owns 50% equity interest in this entity.
(i)Mr. Zhou Min Ni owns 25% equity interest in this entity indirectly through its parent company.
(j)Mr. Zhou Min Ni owns 17.5% equity interest in this entity indirectly through its parent company.
(k)Mr. Zhou Min Ni owns 45% equity interest in this entity.
(l)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(m)Mr. Xiao Mou Zhang owns 10% equity interest in this entity.
(n)Mr. Zhou Min Ni owns 30% equity interest in this entity.
c. Lease Agreements - Related Parties
The Company leases various facilities to related parties.
R&N Holdings leases a facility to North Carolina Good Taste Noodle Inc under an operating lease agreement expiring in 2024. Rental income for the year ended December 31, 2019 was 45,600. We have been told that Mr. Ni disposed his equity interest on January 1, 2020. Therefore, North Carolina Good Taste Noodle Inc is no longer a related party as of January 1, 2020. For comparison purpose, the rental income for the years ended December 31, 2020 was $45,600.
R&N Holdings also leases a facility to UGO USA Inc. under an operating lease agreement expiring in 2022. Rental income recorded for the year ended December 31, 2020 and 2019 was $161,000 and nil, respectively. Rental income recorded for 2020 represented $119,000 of retroactive billing from March 1, 2017 to December 31, 2019, and $42,000 for the year ended December 31, 2020.
HG Realty leases a warehouse to Enson Seafood GA Inc. (formerly “GA-GW Seafood, Inc.”) under an operating lease agreement expiring on September 21, 2027. Rental income recorded for the years ended December 31, 2020 and 2019 was $480,000 and $480,000, respectively.
Han Feng leases a production area to Revolution Industry, LLC under a $3,000 month-to-month lease agreement. Rental income recorded for the years ended December 31, 2020 and 2019 was $39,000 and $33,000, respectively. The lease agreement was terminated as a result of the asset purchase agreement executed on February 25, 2021. See Footnote 19 Subsequent Events for additional Information.
B&R Global leased warehouses from related parties owned by the majority shareholder of B&R Global prior to the Realty Acquisition on January 17, 2020. Rent to the related parties recorded from January 1, 2020 to January 16, 2020 was $187,750.
In 2020, Kirnland renewed a warehouse lease from Yoan Chang Trading, Inc. ("Yoan") under an operating lease agreement expiring on December 31, 2020. Rent incurred to the related party was $120,000 and $120,000 recorded for the years ended December 31, 2020 and 2019, respectively.
In February 2021, Kirnland executed a new 5-year operating lease agreement with Yoan effective January 1, 2021 and expiring on December 31, 2025. See Note 19 - Subsequent Events for more details of the operating lease
Related Party Balances
a.Accounts receivable - related parties, net
Below is a summary of accounts receivable with related parties recorded as of December 31, 2020 and 2019, respectively:
Name of Related Party As of December 31,
2020 As of December 31,
(a) ABC Food Trading, LLC $ 18,816 $ 238,513
(b) Asahi Food, Inc. 68,766 34,265
(c) Eagle Food Service, LLC 697,538 979,591
(d) Eastern Fresh NJ, LLC - 1,511,075
(e) Enson Group, Inc. (formerly "Enson Group, LLC") - 341,200
(f) Enson Seafood GA, Inc. (formerly “GA-GW Seafood, Inc.”) 325,596 348,833
(g) Fortune One Foods, Inc. 36,250 53,862
(h) Heng Feng Food Services, Inc. - 477,541
(i) N&F Logistics, Inc. 113,247 119,241
(j) The Big Catch Alhambra, LLC 2,292 89,249
Others 4,068 9,500
Total $ 1,266,573 $ 4,202,870
(a)Mr. Xiao Mou Zhang previously owns 10.38% equity interest in this entity indirectly through its parent company as of 10/31/2020. Mr. Zhang's children owns 10.38% equity interest in this entity indirectly from 11/1/2020.
(b)The Company, through its subsidiary MF, owns 49% equity interest in this entity.
(c)Tina Ni, one of Mr. Zhou Min Ni’s family members, owns 26.5% equity interest in this entity indirectly through its parent company.
(d)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(e)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(f)Mr. Zhou Min Ni owns 50% equity interest in this entity.
(g)Mr. Zhou Min Ni owns 17.5% equity interest in this entity indirectly through its parent company.
(h)Mr. Zhou Min Ni owns 45% equity interest in this entity.
(i)Mr. Zhou Min Ni owns 25% equity interest in this entity.
(j)Mr. Xiao Mou Zhang owns 10% equity interest in this entity.
All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary as of December 31, 2020 and December 31, 2019.
b. Accounts payable - related parties, net
All the accounts payable to related parties are payable upon demand without interest. Below is a summary of accounts payable with related parties recorded as of December 31, 2020 and 2019, respectively:
Name of Related Party As of December 31,
2020 As of December 31,
(a) Best Food Services, LLC $ 588,920 $ 987,487
(b) Eastern Fresh NJ, LLC 427,795 -
(c) Fujian RongFeng Plastic Co., Ltd 69,429 1,684,192
(d) Hanfeng (Fujian) Information Technology Co., Ltd. 175,657 -
(e) Hanfeng Information Technology (Jinhua), Inc. 107,258 166,971
(f) Heng Feng Food Services, Inc. 116,436 -
(g) North Carolina Good Taste Noodle, Inc. - 992,353
(h) UGO USA, Inc. 211,003 340,087
(i) Union Foods, LLC - 248,901
Others 87,363 101,365
Total $ 1,783,861 $ 4,521,356
(a)Mr. Xiao Mou Zhang previously owns 10.38% equity interest in this entity indirectly through its parent company as of 10/31/2020. Mr. Zhang's children owns 10.38% equity interest in this entity indirectly from 11/1/2020.
(b)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(c)Mr. Zhou Min Ni owns 40% equity interest in this entity indirectly through its parent company.
(d)Mr. Zhou Min Ni owns 100% equity interest in this entity.
(e)Mr. Zhou Min Ni owns 37% equity interest in this entity.
(f)Mr. Zhou Min Ni owns 45% equity interest in this entity.
(g)Mr. Jian Ming Ni, former Chief Financial Officer owns 29% equity interest in this entity. Mr. Zhou Min Ni previously owned 37.34% equity in this entity as of 12/31/2019. We have been told that Mr Ni's equity interest was disposed of on 1/1/2020. For comparison purpose, accounts payable as of 12/31/2020 is $554,156.
(h)Mr. Zhou Min Ni owns 30% equity interest in this entity.
(i)Tina Ni, one of Mr. Zhou Min Ni’s family members, owns 30% equity interest in this entity. Anthony Zhang, one of Mr. Xiao Mou Zhang's family member, owns 10% of equity interest in this entity.
c. Advances to suppliers - related parties, net
The Company periodically provides purchase advances to various vendors, including the related party suppliers.
Below is a summary of advances to related party suppliers recorded as of December 31, 2020 and December 31, 2019, respectively:
Name of Related Party As of December 31,
2020 As of December 31,
(a) Ocean Pacific Seafood Group, Inc. $ 7,101 $ 223,303
(b) Revolution Industry, LLC 189,702 521,832
Total $ 196,803 $ 745,135
(a)Mr. Zhou Min Ni owns 26% equity interest in this entity.
(b)Raymond Ni, one of Mr. Zhou Min Ni’s family members, owns 100% equity interest in this entity. On 2/25/2021, Han Feng executed an asset purchase agreement to acquire the machinery and equipment from Revolution Industry, LLC. Going forward, Han Feng takes the egg roll production business in house and ceases vendor relationship with Revolution Industry, LLC. See Footnote 19 Subsequent Events for additional Information.
d. Promissory note payable - related party
B&R Global issued a $7.0 million Unsecured Subordinated Promissory Note to BRGR. The note bears an interest rate of 6% per annum that matures in January 2030.
e. Security deposit - related parties
The Company made deposits to its related parties for warehouse rental purposes. These deposits are expected to be returned upon termination of the respective leases. Total deposits to related parties amounted to $591,380 as of December 31, 2019. As a result of the Realty Acquisition referenced in Note 8, rent deposits previously classified as made by related parties became intercompany balances and were eliminated as of December 31, 2020. There were no related party rent deposits as of December 31, 2020.
f. Notes Receivable - Related Parties
The Company had previously made advances or loans to certain entities that are either owned by our former Chairman and Co-CEO of the Company, Mr. Zhou Min Ni or family members of Mr. Ni.
On January 1, 2018, the Company entered into a promissory note agreement with Enson Seafood GA Inc. (Enson Seafood) . Pursuant to the promissory note agreement, the total outstanding balance of $550,000 due from Enson Seafood as of December 31, 2017 was converted into promissory notes bearing annual interest of 5% commencing January 1, 2018. The principal plus interest was due no later than December 31, 2019. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days.
On September 30, 2018, the Company signed a promissory note agreement with Enson Seafood in the principal amount of $2,000,000. The note accrued interest at the rate of 5% per annum on the unpaid balance, compounded monthly. The principal plus all accrued and unpaid interest was initially due no later than September 30, 2019, with an option to renew, and required Enson Seafood to make monthly payments of $171,215 for twelve months. On March 1, 2019, the Company and Enson Seafood extended the expiration date of the note until February 29, 2024 and Mr. Zhou Min Ni agreed to personally guarantee the note.
On January 1, 2018, the Company signed a promissory note agreement with Han Feng Global Inc. dba NSG International, Inc. (NSG). Pursuant to the promissory note agreement, the outstanding total outstanding balances of $5,993,552 due from NSG as of December 31, 2017 were converted into promissory notes bearing annual interest of 5% commencing January 1, 2018. The principal plus interest was required to be paid off no later than December 31, 2019. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days.
On March 1, 2019, the Company entered into a new five year term promissory note agreement with NSG that comprised a restatement and novation and superseded the note dated January 1, 2018. Pursuant to the new promissory note agreement, the outstanding balance of $5,941,031 together with interest at the rate of 5% per annum became payable in monthly installments until principal and accrued interest was paid in full on or before March 1, 2024.
On March 1, 2018, the Company entered into a promissory note agreement by which Revolution Automotive, LLC (Revolution Automotive) was loaned $483,628. Pursuant to this promissory note agreement, Revolution Automotive was required to make monthly payments of $5,000 for 60 months, including interest, with a final payment of $284,453. The loan bore interest of 5%
per annum. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days. The principal plus interest was to be paid off no later than April 30, 2023.
On March 1, 2019, the Company and each of Enson Seafood and NSG agreed to extend the expiration date of their notes payable until February 29, 2024, and Mr. Zhou Min Ni agreed to personally guarantee these notes.
On September 30, 2019, the Company and Mr. Ni entered into a Loan Purchase and Sale Agreement (the "Loan Sale Agreement"). Pursuant to the Loan Sale Agreement, all such notes receivable stated above, having then a combined outstanding balance of $8,415,525 ("Total Notes Receivable"), were sold to Mr. Zhou Min Ni in exchange for 632,746 shares of common stock of the Company, which shares were received and recorded in treasury stock by the Company as of September 30, 2019. In connection with the sale of the above notes, the Company also required 208,806 additional shares of common stock of the Company owned by Mr. Ni to be placed in an escrow account for a period of one year until September 30, 2020 (the “Escrow Period”), which will then be delivered to the Company in part or in full, if the volume weighted average price ("VWAP") 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.
On October 9, 2020, in accordance with the terms of the Loan Sale Agreement, the Company and Mr. Ni determined and agreed that the 250-day VWAP was $10.59, and that, therefore, 161,966 of the Escrow Shares would be transferred to and recorded as treasury stock by the Company and the remaining 46,840 Escrow Shares would be returned to Mr. Ni. Following which, the Total Notes Receivable guaranteed by Mr. Ni is considered fully settled. The Company has retired all treasury stock as of December 31, 2020.
NOTE 17 - 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 operating decision makers for making operational decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the operating decision makers, review operation results by the revenue of different distribution centers. After acquiring B&R Global in November 2019, the Company distinguishes revenues, costs and expenses between HF and B&R Global in its internal reporting. As a result, the Company has two reportable segments, HF covering Southeastern Coast of U.S. and B&R Global covering the Pacific and Mountain West regions of U.S.
The following table presents net sales by segment for the years ended December 31, 2020 and 2019, respectively:
For the Year Ended
December 31, 2020 December 31, 2019
Net revenue
HF $ 221,354,504 $ 302,103,038
B&R Global 345,476,571 86,059,243
Total $ 566,831,075 $ 388,162,281
All the Company’s revenue was generated from its business operations in the U.S.
For the Year Ended December 31, 2020
HF B&R Global Total
Revenue $ 221,354,504 $ 345,476,571 $ 566,831,075
Cost of revenue 178,777,382 287,762,110 466,539,492
Gross profit 42,577,122 57,714,461 100,291,583
Depreciation and amortization 2,971,777 14,896,819 17,868,596
Cash capital expenditures 244,255 420,495 664,750
For the Year Ended December 31, 2019
HF B&R Global Total
Revenue $ 302,103,038 $ 86,059,243 $ 388,162,281
Cost of revenue 252,078,738 72,875,020 324,953,758
Gross profit 50,024,300 13,184,223 63,208,523
Depreciation and amortization 5,487,027 1,267,481 6,754,508
Cash capital expenditures 4,681,404 154,525 4,835,929
The following table presents total assets by reportable segment as of December 31, 2020 and 2019, respectively:
As of December 31,
2020 As of December 31,
Total assets:
HF $ 58,620,619 $ 80,514,529
B&R Global 425,664,464 722,329,265
Total Assets $ 484,285,083 $ 802,843,794
All of the Company’s long-lived assets are located in the U.S.
NOTE 18 - COMMITMENT AND CONTINGENCIES
Various labor and employment lawsuits were filed by former employees against FUSO, NBT, and HRT, alleging these entities failed to provide proper meal and rest breaks, as well as other related violations. These entities deny all the allegations. Management believes there is no merit to the cases and will vigorously defend the cases. Therefore, the Company did not accrue any loss contingency for this matter on its consolidated financial statements as of December 31, 2020 and 2019. FUSO's case was dismissed on January 25, 2021. No class was certified and no class relief was granted. The individual plaintiff's claims were resolved under the terms of a confidential settlement agreement providing that no party admitted any liability or wrongdoing and that the individual plaintiff would receive a payment in an amount having no material impact on the financial condition or results of operations of the FUSO operating unit and the Company as a whole.
Various labor and employment claims have been filed or asserted against Happy FM Group Inc., alleging that this subsidiary failed to pay all wages owed to one or more employees under the California Labor Code as well as other related violations. These allegations all have been denied. These cases are in the earliest stages of litigation and the parties have not commenced discovery. Management believes there is no merit to the cases and will vigorously defend the cases. Therefore, the Company did not accrue any loss contingency for this matter on its consolidated financial statements as of December 31, 2020.
On March 29, 2020, plaintiff Jesus Mendoza (“Mendoza”) filed a putative shareholder securities class action lawsuit (the "Class Action Lawsuit”) in the United States District Court for the Central District of California against the Company and certain of its present and former officers (collectively, the “Class Action Defendants”) for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 styled Mendoza v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-2929-ODW-JPR (C.D. Cal.).
On April 30, 2020, plaintiff Walter Ponce-Sanchez (“Ponce-Sanchez”) filed a substantially similar putative shareholder securities class action lawsuit (the “Ponce-Sanchez Lawsuit”) in the United States District Court for the Central District of California against the same defendants named in the Class Action Lawsuit (collectively, the “Ponce-Sanchez Defendants” and with the Class Action Defendants, the “Defendants”) styled Ponce-Sanchez v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-3967-ODW-JPR (C.D. Cal.). The Ponce-Sanchez Lawsuit has now been consolidated with the Class Action Lawsuit and both cases will proceed under the Class Action Lawsuit docket. The complaints both allege that the Defendants made materially false and or misleading statements that caused losses to investors. Additionally, the complaints both allege that the Defendants failed to disclose in public statements that the Company engaged in certain related party transactions, that insiders and related parties were enriching themselves by misusing shareholder funds, and that the Company masked the true number of free-floating shares. Neither complaint quantifies any alleged damages, but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired Company stock during the
putative class period from August 23, 2018 through March 23, 2020 at allegedly inflated prices and purportedly suffered financial harm as a result. On October 13, 2020, the Court appointed Yun F. Yee as lead plaintiff and approved Mr. Yee’s counsel as lead counsel in the consolidated Class Action Lawsuit. Thereafter, an amended complaint was filed, which purports to expand the putative class period from August 23, 2018 to November 9, 2020. The Defendants filed their motion to dismiss the amended complaint on January 19, 2021, which is pending. The Class Action Lawsuit does not quantify any alleged damages. The Company intends to defend the consolidated Class Action Lawsuit vigorously.
On June 15, 2020, Mendoza filed a shareholder derivative lawsuit on behalf of the Company as a nominal defendant (the “Mendoza Derivative Lawsuit”) in the United States District Court for the Central District of California against certain of the Company’s present and former directors and officers (collectively, the “Mendoza Derivative Defendants”) styled Mendoza v. Zhou Min Ni, et al., Civil Action No. 2:20-CV-5300-ODW-JPR (C.D. Cal.). The complaint in the Mendoza Derivative Lawsuit is based largely on the same allegations as set forth in the Class Action Lawsuit discussed above and alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties , unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The Mendoza Derivative Lawsuit does not quantify any alleged damages, but, in addition to attorneys’ fees and costs, Mendoza seeks to recover damages on behalf of the Company for purported financial harm and to have the court order changes in the Company’s corporate governance. The Mendoza Derivative Defendants and the Company intend to defend the Mendoza Derivative Lawsuit vigorously. On July 8, 2020, the Court ordered that all proceedings in the Mendoza Derivative Lawsuit be stayed until such time as the Court has finally resolved the Defendants’ motion to dismiss the Class Action Lawsuit.
At this stage, the Company is unable to determine whether a future loss will be incurred due to the consolidated Class Action Lawsuit or the Mendoza Derivative Lawsuit, or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s consolidated financial statements as of December 31, 2020.
On August 21, 2020, plaintiff Jim Bishop ("Bishop") filed a putative shareholder derivative lawsuit (the “Bishop Lawsuit”) in the United States District Court for the District of Delaware against certain of the Company’s present and former directors and officers, as well as the Company (collectively, the “Bishop Defendants”) styled Jim Bishop v. Zhou Min Ni, et al., Civil Action No. 1:20-cv-01103-RGA (D. Del.). The Bishop Lawsuit complaint alleges claims that are virtually the same as those alleged in the Mendoza Derivative Lawsuit. The Bishop Lawsuit does not quantify any alleged damages. But in addition to attorneys’ fees and costs, Bishop seeks to recover damages on behalf of the Company for purported financial harm and to have the Court order changes to the Company’s corporate governance.
The Bishop Defendants and the Company intend to defend vigorously the allegations in the Bishop Lawsuit, assuming it proceeds. On October 20, 2020, Bishop and the Bishop Defendants filed a Joint Stipulation to Stay Litigation with the Court. On November 19, 2020, the Bishop Lawsuit was transferred to the United Stated District Court for the Central District of California, as case number 2:20-CV-10657-ODW-JPR(C.D.Cal.). Motions to consolidate the Mendoza Derivative Lawsuit and the Bishop Lawsuit, and to designate a lead plaintiff and lead plaintiff’s counsel, are pending in both cases. The Court further ordered that the Bishop Defendants do not need to respond to the complaint until the consolidation and appointment of lead plaintiff's counsel are resolved. This case remains in early procedural stage. At this stage, the Company is unable to determine whether a future loss will be incurred due to the Bishop Lawsuit or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s consolidated financial statements as of December 31, 2020.
NOTE 19 - SUBSEQUENT EVENTS
On February 22, 2021, the Board of Directors approved the terms of a Separation Agreement pursuant to which Zhou Min Ni has voluntarily resigned from his position as co-Chief Executive Officer and director and any position he holds with any of the Company’s subsidiaries, effective February 23, 2021 (“Separation Date”).
On February 23, 2021, Xiao Mou Zhang became the sole Chief Executive Officer of the Company (he was previously co-Chief Executive Officer).
On February 22, 2021, the Board of Directors of the Company appointed Russell Libby as the new Chair of the Company’s Board of Directors.
On February 10, 2021, 273 Co, a newly established Delaware limited liability company and wholly owned subsidiary of the Company, completed the closing of an Assignment and Assumption of Lease Agreement (“Assignment”), dated effective as of January 21, 2021, pursuant to which it has assumed the lease of the premises at 273 Fifth Avenue, New York, New York (the “273 Lease Agreement”) dated as of July 2, 2018, by and between AnHeart, a former subsidiary of the Company, and Premier 273 Fifth, LLC ("Landlord"). On the same date, the closing documents were delivered to effectuate the amendment of the 273
Lease Agreement pursuant to an Amendment to Lease (the “Lease Amendment”). The Assignment and the 273 Lease Amendment were negotiated pursuant to guarantee obligations of the Company’s wholly owned subsidiary, HF Holding as guarantor under the Lease Agreement. See Note 13, above, for additional information regarding the AnHeart leases. 273 Co has agreed to observe all the covenants and conditions of the Lease Agreement, as amended, including the payment of all rents due. Under the terms of the Lease Agreement and the Assignment, 273 Co has undertaken to construct, at Company’s expense, a building on the premises, at a minimum cost of $2,500,000. The 273 Lease Agreement and the Lease Amendment provide for a term of 30 years, with option to renew for 10 additional years, at an annual rent starting at $325,000 and escalating annually throughout the term, with the annual rent in the final year of the initial term of $1,047,974. The 273 Lease Amendment further granted certain rent abatement to the premises for 2020 and 2021, including a 20% reduction of annual rent in 2021. The Lease Amendment permits subletting of the premises.
In January 2021, one of the Company's subsidiary, Kirnland signed a new 5-year operating lease agreement with a related party, Yoan to continue to lease the warehouse space that Kirnland has been operating in at 36 - 40 Enterprise Blvd, Atlanta, Georgia ("Warehouse Lease"). Pursuant to the Warehouse Lease, effective January 1, 2021 and maturing on December 31, 2025, Kirnland will pay an initial monthly rental rate of $23,495 with standard annual rent escalation of 3% per annum. See Note 13 - Leases.
On February 25, 2021, the Company entered into an Asset Purchase Agreement with Revolution Industry, LLC ("Revolution"), a company owned by the son of Company's former Chairman and Co-CEO. Pursuant to the Asset Purchase Agreement, the Company has acquired substantially all of the operating assets used or held for use in such business operation for an amount of $250,000 plus the fair market wholesale value of all verified, useable cabbage and egg roll mix inventory of Revolution. Advances due from Revolution at the time of transaction were an offset to the purchase payment made to Revolution. See Note 16 - Related Parties Transaction.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES.
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 such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the fiscal year ended December 31, 2020. Based on this evaluation, our principal executive officers and principal financial and accounting officers have concluded that as a result of the material weakness in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of December 31, 2020. Notwithstanding the material weakness, our management has concluded that the financial statements included elsewhere in this report present fairly, and in all materials respects, our financial position on results of operation and cash flow in conformity with GAAP.
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.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officers and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In connection with this review and the audit of our consolidated financial statements for the year ended December 31, 2020, we identified material weaknesses and control deficiencies in our internal control over financial reporting. The material weaknesses related to (1) the Company does not have in-house accounting personnel with sufficient knowledge of US GAAP and SEC reporting experiences, especially related to complex transactions and new accounting pronouncements; and (2) The Company failed to maintain effective IT General Controls, including missing certain entity level controls in IT management, lack of segregation of duties in IT functions, proper review of the operation of application systems, and measures to protect data security and maintain business sustainability. Control deficiencies are related to the lack of proper documentation to evidence the management review in various business processes. Due to the foregoing material weakness and control deficiencies, management concluded that as of December 31, 2020, our internal control over financial reporting was ineffective.
In order to address and resolve the foregoing material weakness, we have begun to implement measures designed to improve our internal control over financial reporting to remediate this material weakness, including hiring additional financial personnel with requisite training and experience in the preparation of financial statements in compliance with applicable SEC requirements, formalizing our processes to generate documentation sufficient to support customer orders and purchase orders, and implementing controls to obtain documentation evidencing customer agreements to transaction amounts and account balances. System integration on accounting and procurement software were substantially completed in March 2021. Operating on the same system strengthened internal control over financial reporting and IT general control by providing a seamless environment to perform operational and reporting functions.
The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to ongoing efforts to address this material weakness. 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 weakness. 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 weakness identified and described above will continue to exist.
Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting, and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting for the year ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
None.
PART III.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item will be set forth under “Proposal No. 1: Election of Directors” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
The information required by this item regarding Section 16(a) beneficial ownership reporting compliance will be set forth under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be set forth under “Executive and Director Compensation” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
The Equity Compensation Plan Information table required pursuant to Item 201(d) of Regulation S-K will be set forth in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be set forth under “Stock Ownership” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item will be set forth under “Transactions with Related Persons” and “Determination of Independence” in the Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be set forth under “Ratification of Friedman LLP as Independent Registered Public Accounting Firm for 2021” in Company’s Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are incorporated herein by reference or are filed or furnished with this report as indicated below:
Exhibit Number Description
2.1 Merger Agreement dated March 27, 2018, by and among Atlantic Acquisition Corp., HF Group Merger Sub Inc., HF Group Holding Corporation, the stockholders of HF Group Holding Corporation and Zhou Min Ni, as the stockholders’ representative (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on July 18, 2018)
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2017)
3.2 Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2018)
3.3 Bylaws (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 28, 2017)
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 28, 2017)
4.2 Form of Rights Agreement, dated August 8, 2017, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2017)
4.3 Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 28, 2017)
10.1 Investment Management Trust Account Agreement, dated August 8, 2017, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2017)
10.2 Registration Rights Agreement, dated August 8, 2017, by and among the Registrant and the initial stockholders (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2017)
10.3 Stock Escrow Agreement dated August 8, 2017 among the Registrant, American Stock Transfer & Trust Company, LLC, and the initial stockholders (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2017)
10.4 Form of Letter Agreement by and between the Registrant, the initial stockholders and the officers and directors of the Company (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 28, 2017)
10.5 HF Food Group Inc. 2018 Omnibus Equity Incentive Plan (incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on July 18, 2018)*
10.6 Form of Escrow Agreement between Atlantic Acquisition Corp., Loeb and Loeb L.P. as escrow agent and HF Group and Zhou Min Ni, as representative of the stockholders of HF Group (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2018)
10.7 Form of Registration Rights Agreement between the Company, HF Group Holdings Corporation and Zhou Min Ni, as representative of the stockholders of HF Group (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2018)
10.8 Form of Lock Up Agreement dated August 22, 2018 between Atlantic Acquisition Corp. and the stockholders of HF Group (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2018)
10.9 Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Zhou Min Ni (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2018)*
10.10 Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Chan Sin Wong (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2018)*
10.11 Employment Agreement as amended dated as of August 22, 2018 between HF Foods Group Inc. and Jian Ming Ni (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2018)*
10.12 Credit Agreement dated as of January 5, 2012 between Han Feng, Inc. and East West Bank (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.13 Amendment to Credit Agreement dated as of May 21, 2013 by and between Han Feng, Inc. and East West Bank (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.14 Second Amendment to Credit Agreement dated as of December 10, 2013 by and between Han Feng, Inc. and East West Bank (filed herewith) (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.15 Third Amendment to Credit Agreement dated as of July 1, 2016 between Han Feng, Inc. and East West Bank (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.16 Fourth Amendment to Credit Agreement dated July 18, 2017 between Han Feng, Inc. and East West Bank (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.17 Credit Agreement dated as of February 26, 2018 between New Southern Food Distributors, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.18 Warehouse Lease Agreement dated as January 7, 2019 between Yoan Chang Trading and Kirnland Food Service (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019)
10.19 Letter Agreement with Kong Hian Victor Lee dated December 6, 2019 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2020)`
10.20 Amendment to Letter Agreement with Kong Hian Victor Lee dated October 1, 2020 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2020)
10.21 Membership Interest Purchase Agreement among B&R Global Holdings, Inc., B&R Group Realty Holding, LLC, and subsidiaries of B&R Group Realty Holding, LLC, dated January 17, 2020 (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 18, 2020)
10.22 Second Amended and Restated Credit Agreement among HF Foods Group Inc. B&R Global Holdings, Inc., subsidiaries of the Company, JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto, dated January 17, 2020 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 18, 2020)
10.23 Letter Agreement between HF Foods Group Inc. and Russell T. Libby (incorporated by reference to Exhibit 10.2 to to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 18, 2020)
10.24 Mutual Rescission Agreement between HF Group and Rescinding Shareholders dated April 1, 2020 (incorporated by reference to Exhibit 10.3 to to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 18, 2020)
10.25
Assignment and Assumption of Lease Agreement, dated as of January 21, 2021 between Anheart, Inc. and 273 Fifth Avenue, L.L.C.
10.26
Lease dated July 2, 2018, between Anheart Inc. and Premier 273 Fifth, LLC
10.27
Amendment of Lease, dated as of January 21, 2021, between Anheart, Inc. and Premier 273 Fifth, LLC
10.28
Separation Agreement between HF Foods Group Inc. and Zhou Min Ni, dated February 23, 2021
10.29
Lease Agreement between Yoan Chang Trading, Inc. and Kirnland Food Distribution, Inc., dated as of January 1, 2021
Subsidiaries of Registrant (filed herewith)
23.1
Consent of Friedman
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended (filed herewith)
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended (filed herewith)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement.