HF FOODS GROUP INC. 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
OverviewHF Foods Group Inc. ("HF Group ", or the "Company") markets and distributes fresh produces, frozen and dry food, and non- food products to primarily Asian restaurants and other foodservice customers throughout the Southeast, Pacific and Mountain West regions region ofthe United States .
The Company was originally incorporated in
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Effective August 22, 2018 , Atlantic consummated the transactions contemplated by
a merger agreement (the "Atlantic Merger Agreement"), dated as of March 28,
2018 , by and among Atlantic , HF Group Merger Sub Inc. , a Delaware subsidiary
formed by Atlantic , HF Group Holding Corporation , a North Carolina corporation
("HF Holding "), the stockholders of HF Holding , and Zhou Min Ni , as
representative of the stockholders of HF Holding . Pursuant to the Atlantic
Merger Agreement, HF Holding merged with HF Merger Sub and HF Holding became the
surviving entity (the "Atlantic Merger") and a wholly-owned subsidiary of
Atlantic (the "Atlantic Acquisition"). Additionally, upon the closing of the
transactions contemplated by the Atlantic Merger Agreement (the "Atlantic
Closing"), (i) the stockholders of HF Holding became the holders of a majority
of the shares of common stock of Atlantic , and (ii) Atlantic changed its name to
HF Foods Group Inc. (Collectively, these transactions are referred to as the
"Atlantic Transactions").
At closing on August 22, 2018 , Atlantic issued the HF Holding stockholders an
aggregate of 19,969,831 shares of its common stock, equal to approximately 88.5%
of the aggregate issued and outstanding shares of Atlantic's common stock. The
pre- Transaction stockholders of Atlantic owned the remaining 11.5% of the
issued and outstanding shares of common stock of the combined entity.
Following the consummation of the Atlantic Transactions on August 22, 2018 ,
there were 22,167,486 shares of common stock issued and outstanding, consisting
of (i) 19,969,831 shares issued to HF Holding's stockholders pursuant to the
Atlantic Merger Agreement, (ii) 400,000 shares redeemed by one of Atlantic's
shareholders in conjunction with the Atlantic Transactions, (iii) 10,000
restricted shares issued to one of Atlantic's shareholders in conjunction with
the Atlantic Transactions, and (iv) 2,587,655 shares originally issued to the
pre-Transaction stockholders of Atlantic .
Effective November 4, 2019 , HF Group consummated the transactions contemplated
by a merger agreement (the "B&R Global Merger Agreement"), dated as of June 21,
2019 , by and among the Company, B&R Global Merger Sub Inc. , a Delaware
corporation ("Merger Sub"), B&R Global, the stockholders of B&R Global (the "B&R
Global Stockholders"), and Xiao Mou Zhang , as representative of the stockholders
(the "Business Combination"). Upon the closing of the transactions contemplated
by the B&R Global 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. The aggregate fair
value of the consideration paid by HF Group in the business combination is
approximately $576,699,494 and is based on the closing share price at the date
of Closing.
Due to the acquisition of B&R Global, the financial information of the Company
for the year ended December 31, 2019 is not comparable to the full year ended
December 31, 2018 . As such, the Company has presented our results of operations
for the years ended December 31, 2019 and 2018 as well as the unaudited pro
forma combined results of operations for years ended December 31, 2019 and 2018.
For more information, see section titled "Supplemental Unaudited Pro Forma
Combined Financial Information".
Outlook
The Company plans to continue to expand our business through acquisition of
other distributors and wholesalers, which depends on access to sufficient
capital. If the Company is unable to obtain equity or debt financing, or
borrowings from bank loans, the Company may not be able to execute our plan to
acquire other distributors and wholesalers. Even if the Company is able to make
such acquisitions, the Company may not be able to successfully integrate any
acquired businesses or improve their profitability, which could have a material
adverse effect on our financial condition and future operating performance.
Our net revenue for the year ended December 31, 2019 was $388.2 million , an
increase of $97.2 million , or 33.4%, from $291.0 million for the year ended
December 31, 2018 . Net income attributable to HF Group's stockholders for the
year ended December 31, 2019 was $5.39 million , a decrease of $0.9 million , or
14.3%, from $6.3 million for the year ended December 31, 2018 . Adjusted EBITDA
for the year ended December 31, 2019 was $16.9 million , an increase of $2.7
million , or 19.0%, from $14.2 million for the year ended December 31, 2018 . For
additional information on Adjusted EBITDA, see the section entitled
"MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- Adjusted EBITDA"
below.
On a pro-forma basis, assuming that the Business Combination took place on
January 1, 2018 , our net revenue for the year ended December 31, 2019 would have
been $828.0 million , an increase of $10.0 million , or 1.2% from $818.0 million
for the year ended December 31, 2018 . Net income attributable to HF Group's
stockholders for the year ended December 31, 2019 would have been $5.7 million ,
a decrease of $10.1 million , or 64.1%, from net income attributable to HF
Group's stockholder of $15.8 million for the year ended December 31, 2018 .
Adjusted EBITDA for the year ended December 31, 2019 would have been $32.9
million , a decrease of $5.8 million , or 15.1%, from $38.7 million for the year
ended December 31, 2018 . For additional information on our pro-forma results,
see the section entitled "SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION" below.
The COVID-19 epidemic may pose significant risks to our business. It is too
early to quantify the impact this situation will have on company revenue and
profits at this time, but the public health actions being undertaken to reduce
spread of the virus are capable of creating uncertainties regarding consumer
demand for meals away from home and regarding reliability of our supply chain.
Accordingly, management is evaluating the Company's liquidity position,
communicating with and monitoring customers and suppliers, and reviewing our
analysis of our financial performance as we seek to position the Company to
withstand the uncertainty related to the coronavirus.
How to
In assessing our performance, the Company considers a variety of performance and
financial measures, including principal growth in net revenue, gross profit,
distribution, general and administrative expenses, and adjusted EBITDA. The key
measures that the Company uses to evaluate the performance of our business are
set forth below:
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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 its 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
Distribution, selling and administrative expenses primarily consist 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. Adjusted EBITDA The Company believes that Adjusted EBITDA is a useful performance measure and can be used to facilitate a comparison of the Company's operating performance on a consistent basis from period to period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone can provide. Our management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect our operating performance. Our 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 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 supersedeU.S. GAAP measures. The Company defines Adjusted EBITDA as net income (loss) before interest expense, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items. The definition of Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. Adjusted EBITDA is not defined underU.S. GAAP and is subject to important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of HF Group's results as reported underU.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 Adjusted EBITDA, see the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Adjusted EBITDA" below.
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Results of Operations for the years ended
The following table sets forth a summary of our consolidated results of
operations for the years ended
For the years ended
December 31 Changes
2019 2018 Amount %
Net revenue $ 388,162,281 $ 291,006,698 $ 97,155,583 33.4 %
Cost of revenue 324,953,758 241,441,149 83,512,609 34.6 %
Gross profit 63,208,523 49,565,549 13,642,974 27.5 %
Distribution, selling and administrative
expenses 54,931,157 41,039,438 13,891,719 33.8 %
Income from operations 8,277,366 8,526,111 (248,745 ) (2.9 )%
Interest income 418,530 493,358 (74,828 ) (15.2 )%
Interest expenses and bank charges (1,661,454 ) (1,372,508 ) (288,946 ) 21.1 %
Other income 1,057,936 1,196,989 (139,053 ) (11.6 )%
Income before income tax provision 8,092,378 8,843,950 (751,572 ) (8.5 )%
Provision for income taxes 2,197,092 2,490,255 293,163 (11.8 )%
Net income 5,895,286 6,353,695 (458,409 ) (7.2 )%
Less: net income attributable to
noncontrolling interest 505,609 67,240 438,369 651.9 %
Net income attributable to HF Foods
Group Inc. $ 5,389,677 $ 6,286,455 $ (896,778 ) (14.3 )%
Net Revenue
Our net revenue was $388.2 million for the year ended December 31, 2019 , which
consisted of $366.4 million , or 94.4% of net revenue, of sales to independent
restaurants and $21.7 million , or 5.6% of net revenue, of sales to wholesale
distributors. Net revenue was $291.0 million for the year ended December 31,
2018 , which consisted of $272.2 million , or 93.5% of net revenue, of sales to
independent restaurants and $18.8 million , or 6.5% of net revenue, of sales to
wholesale distributors.
The following table sets forth the breakdown of net revenue:
For the years ended December 31,
2019 2018 Changes
Amount % Amount % Amount %
Net revenue
Sales to independent
restaurants $ 366,432,448 94.4 % $ 272,172,106 93.5 % $ 94,260,342 34.6 %
Wholesale 21,729,833 5.6 % 18,834,592 6.5 % 2,895,241 15.4 %
Total $ 388,162,281 100.0 % $ 291,006,698 100.0 % $ 97,155,583 33.4 %
Compared with the year ended December 31, 2018 , net revenue increased by $97.2
million , or 33.4%, for the year ended December 31, 2019 , primarily attributable
to the acquisition of B&R Global, which contributed $1.8 million in sales to
wholesale customers and $84.3 million in sales to independent restaurants. The
increase in revenue is also due to a $10.0 million increase in sales to
independent restaurants of HF, resulting primarily from slightly increased
commodity prices in 2019 and increases in the average order size of existing
customers by introducing new products during the year. Additionally, HF sales to
wholesale customers increased $1.1 million primarily due to the increase in
sales to three wholesale customers and sales to two new customers.
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--------------------------------------------------------------------------------Cost of Revenue and Gross Profit
The following table sets forth the calculation of gross profit and gross margin for sales to independent restaurants, wholesalers, and total net revenue:
For the years ended
December 31, Changes
2019 2018 Amount %
Sales to independent restaurants
Net revenue $ 366,432,448 $ 272,172,106 $ 94,260,342 34.6 %
Cost of revenue 304,139,896 223,535,244 80,604,652 36.1 %
Gross profit $ 62,292,552 $ 48,636,862 $ 13,655,690 28.1 %
Gross Margin 17.0 % 17.9 % (0.9 )%
Wholesale
Net revenue $ 21,729,833 $ 18,834,592 $ 2,895,241 15.4 %
Cost of revenue 20,813,862 17,905,905 2,907,957 16.2 %
Gross profit $ 915,971 $ 928,687 $ (12,716 ) (1.4 )%
Gross Margin 4.2 % 4.9 % (0.7 )%
Total sales
Net revenue $ 388,162,281 $ 291,006,698 $ 97,155,583 33.4 %
Cost of revenue 324,953,758 241,441,149 83,512,609 34.6 %
Gross profit $ 63,208,523 $ 49,565,549 $ 13,642,974 27.5 %
Gross Margin 16.3 % 17.0 % (0.7 )%
Cost of revenue was $325.0 million for the year ended December 31, 2019 , an
increase of $83.5 million , or 34.6%, from $241.4 million for the year ended
December 31, 2018 , attributable primarily to the acquisition of B&R Global, with
$71.2 million and $1.7 million in cost of revenue for sales to independent
restaurants and wholesale customers, respectively. The remaining increase is
attributable to the $9.4 million increase in cost of revenue for the sales to
independent restaurants of HG driven by the increase in sales.
Gross profit was $63.2 million for the year ended December 31, 2019 , an increase
of $13.6 million , or 27.5%, from $49.6 million for the year ended December 31,
2018 , attributable primarily to B&R Global, with $13.1 million and $0.1 million
in gross profit derived from sales to independent restaurants and wholesale
customers, respectively.
Gross margin decreased from 17.0% for the year ended December 31, 2018 to 16.3%
for the year ended December 31, 2019 , primarily attributable to the lower gross
margin of B&R Global. B&R Global's gross margin for 2019 was 15.3%.
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--------------------------------------------------------------------------------Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses were$54.9 million for the year endedDecember 31, 2019 , an increase of$13.9 million , or 33.8%, from$41.0 million for the year endedDecember 31, 2018 . The increase was mainly attributable to the Business Combination with B&R Global of$10.1 million , the amortization expense of$1.8 million relating to the intangible assets acquired from the Business Combination, and$0.8 million of professional fees associated with the Business Combination.
Interest Expenses and Bank Charges
Interest expenses and bank charges are generated primarily from lines of credit, long-term debt, and finance leases. Interest expenses and bank charges were$1.7 million and$1.4 million for the years endedDecember 31, 2019 and 2018, respectively. The increase was mainly attributable to B&R Global, with interest expenses of$0.2 million for the two months endedDecember 31, 2019 . Other Income Other income consists primarily of non-operating income and rental income. Other income was$1.1 million for the year endedDecember 31, 2019 as compared to$1.2 million for the year endedDecember 31, 2018 , representing a decrease of$0.1 million , or 11.6%. Income taxes Provision Provision for income taxes decreased by$0.3 million , or 11.8%, from$2.5 million for the year endedDecember 31, 2018 to$2.2 million for the year endedDecember 31, 2019 . The decrease is mainly attributable to lower income before tax provision for HF Group from$8.8 million for the year endedDecember 31, 2018 to$8.0 million for the year endedDecember 31, 2019 .
Net Income Attributable to Noncontrolling interest
Net income attributable to noncontrolling interest was derived from four minority owned subsidiaries and increased by$438,370 , or 652.0%, from$67,240 for the year endedDecember 31, 2018 to$505,608 for the year endedDecember 31, 2019 , as a result of the increase of net income of the subsidiaries which are partially owned by noncontrolling interest shareholders. 32 --------------------------------------------------------------------------------
Net Income Attributable to
As a result of above, net income attributable to our stockholders decreased by$0.9 million , or 14.3%, from$6.3 million for the year endedDecember 31, 2018 to$5.4 million for the year endedDecember 31, 2019 . Adjusted EBITDA
The following table sets forth of the calculation of our Adjusted EBITDA and reconciliation to Net Income, the closest US GAAP measure:
For the years ended December 31, Changes
2019 2018 Amount %
Net income $ 5,895,286 $ 6,353,695 $ (458,409 ) (7.2 )%
Interest expense 1,661,454 1,372,508 288,946 21.1 %
Income tax provision 2,197,092 2,490,255 (293,163 ) (11.8 %)
Depreciation & Amortization 6,754,508 2,134,832 4,619,676 216.4 %
Non-recurring expenses* 375,000 1,831,167 (1,456,167 ) (79.5 %)
Adjusted EBITDA $ 16,883,340 $ 14,182,457 $ 2,700,883 19.0 %
Percentage of revenue 4.3 % 4.9 % (0.6 )%
* For the year ended December 31, 2018 , represents labor dispute expenses
accrued in connection with United States Department of Labor investigation of
our subsidiary Kirnland Food Distribution, Inc. For the year ended December 31,
2019 , represents a non-recurring expense for a loss related to negligence
claim(s) for damages arising in the ordinary course of business.
Adjusted EBITDA was $16.9 million for the year ended December 31, 2019 , an
increase of $2.7 million , or 19.0%, compared to $14.2 million for the year ended
December 31, 2018 , resulting mainly from the acquisition of B&R Global, totaled
$2.5 million . Excluding the B&R Global impact, the increase is offset by $1.4
million decrease in non-recurring expenses, $0.5 million decrease in net income,
$0.3 million decrease in income tax provision and $0.8 million increase in
depreciation and amortization.
Supplemental Unaudited Pro Forma Combined Financial Information
As described above, the Company completed the Business Combination with B&R Global onNovember 4, 2019 . For comparative purposes, the Company is presenting supplemental unaudited pro forma combined statements of operations for the years endedDecember 31, 2019 and 2018, and the Company discusses such unaudited pro forma combined results as well as our actual results of operations for the years endedDecember 31, 2019 and 2018. 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 onJanuary 1, 2018 . 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. 33 --------------------------------------------------------------------------------
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:
Year ended December 31, 2019
B&R Pro Forma
HF Global Adjustments 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
Year ended December 31, 2018
B&R Pro Forma
HF Global Adjustments Combined
Net revenue $ 291,006,698 $ 526,974,506 $ - $ 817,981,204
Net income 6,353,695 20,650,852(10,890,300 )(1) 16,114,247
Net Income Attributable to
$ (10,890,300 ) $ 15,774,413 (1) Includes intangibles asset amortization expense of$10,890,300 and
respectively.
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Liquidity and Capital Resources
As ofDecember 31, 2019 , the Company had cash of approximately$14.5 million . The Company funded working capital and other capital requirements primarily by equity contribution from shareholders, cash flows from operations, and bank loans and lines of credit. Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and repay debts. OnApril 18, 2019 , the Company and its operating subsidiariesHan Feng , New Southern Food Distributers and Kirnland entered into a credit agreement withEast West Bank , which replaced our prior credit agreement withEast West Bank . The credit agreement provides a$25,000,000 revolving credit facility which was dueAugust 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. OnNovember 4, 2019 , theEast West Bank revolving credit facility loan was paid off from borrowings under the Amended and Restated Credit Agreement entered into connection with the merger with B&R Global, as described below. OnNovember 4, 2019 , the Company entered into an Amended and Restated Credit Agreement with JP Morgan. The Amended and Restated Credit Agreement provides for (a) a$100 million asset-secured revolving credit facility maturing onNovember 4, 2022 , and (b) mortgage-secured term loans of$55.4 million . OnJanuary 17, 2020 , theCompany, B &R Global, and 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, includingComerica Bank . The Second Amended Credit Agreement provided for (a) a$100 million asset-secured revolving credit facility maturing onNovember 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 ofJanuary 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 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). 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$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 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$252,000.00 , with a final installment of the remaining principal balance of the Term Loans due onJanuary 17, 2030 , the Term Loan Maturity Date. 35 -------------------------------------------------------------------------------- Although management believes that the cash generated from operations will be sufficient to meet our normal working capital needs for at least the next twelve months, our ability to repay our current obligations will depend on the future realization of our current assets. Management has considered the historical experience, the economy, trends in the foodservice distribution industry, the expected collectability of accounts receivable and the realization of the inventories as ofDecember 31, 2019 . Based on the above considerations, management is of the opinion that the Company has sufficient funds to meet our working capital requirements and debt obligations as they become due. However, there is no assurance that the Company will be successful in our plan. There are a number of factors that could potentially arise that could result in shortfalls to our plan, such as the demand for our products, economic conditions, the competitive pricing in the foodservice distribution industry and the ability of our banks and suppliers to provide continued support. If the future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, the Company may be forced to reduce or delay our acquisition plan, sell assets, obtain additional debt or equity capital which may not be available on terms acceptable to us, if at all, or refinance all or a portion of our debt. The following table summarizes cash flow data for the years endedDecember 31, 2019 and 2018: For the years ended December 31, 2019 2018 Net cash provided by operating activities$ 4,666,528 $ 11,953,466 Net cash provided by (used) in investing activities 2,775,115 (6,365,313 ) Net cash provided by (used) in financing activities 1,607,239 (6,184,793 )
Net increase (decrease) in cash and cash equivalents
$ (596,640 ) Operating Activities Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and adjusted for the effect of working capital changes. Net cash provided by operating activities was approximately$4.7 million for the year endedDecember 31, 2019 , a decrease of$7.3 million , or 61%, compared to net cash provided by operating activities of$12.0 million for the year endedDecember 31, 2018 . The decrease was a combined results of a decrease of$10.5 million from changes in working capital items mainly resulting from changes in accounts receivable, inventory, accounts payable, advances to suppliers, accrued expenses, other long- term assets and net income which were offset by an increase of$1.8 million in depreciation and amortization expense, and advances from customers - related parties. In addition, the decrease was offset by an increase from newly acquired B&R Global with total net cash provided by operating activities of$3.2 million . Investing Activities Net cash provided in investing activities was approximately$2.8 million for the year endedDecember 31, 2019 , an increase of$9.1 million , or 144%, compared to$6.4 million net cash used investing activities for the year endedDecember 31, 2018 . The increase was a combined result of cash acquired of$7.0 million from the merger with B&R Global, decreased cash paid for notes receivable to third parties and related parties of$2.9 million and$1.4 million , respectively, offset by increased cash paid for the purchase of property and equipment of$1.6 million and decrease of cash acquired from the reverse merger withAtlantic Acquisition Corp. of$1.4 million . Financing Activities Net cash provided in financing activities was approximately$1.6 million for the year endedDecember 31, 2019 , an increase of$7.8 million , or 126%, compared with$6.2 million of net cash used in financing activities for the year endedDecember 31, 2018 . The increase was a combined result of increase in proceeds from lines of credit and long term debt of$38.2 million and a decrease of$0.9 million in cash dividend to shareholders, offset by an increase of$28.4 million in repayment of lines of credit, long term debt and finance leases and newly acquired B&R Global with cash provided by financing activities of$2.9 million . 36
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Commitments and Contractual Obligations
The following table presents our material contractual obligations as ofDecember 31, 2019 : Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years Years Lines of credit$ 41,268,554 $ -$ 41,268,554 $ - $ - Long-term debt 21,261,997 2,726,981 4,668,439 1,886,975 11,979,602 Finance lease liabilities 1,610,911 373,715 696,248 540,948 - Operating lease obligations 18,684,526 4,930,181 8,239,473 5,514,872 - Total$ 82,825,987 $ 8,030,876 $ 54,872,714 $ 7,942,795 $ 11,979,601 OnJuly 2, 2018 ,AnHeart, Inc. , one of our subsidiaries, entered into two separate leases for two buildings located inManhattan, New York , at273 Fifth Avenue and275 Fifth Avenue , for 30 years and 15 years, respectively, which are net leases, meaning that AnHeart is required to pay all costs associated with the buildings, including utilities, maintenance and repairs.HF Holding provided a guaranty for all rent and related costs of the leases, including costs associated with the construction of a two-story structure at273 Fifth Avenue and rehabilitation of the building at275 Fifth Avenue . Under the lease for273 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 for275 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. The275 Fifth Avenue lease includes an option to extend the term for an additional 10 years. Under the leases, AnHeart delivered a letter of credit in favor of the Landlord in the amount of$213,000 as security for AnHeart's obligations under the lease at273 Fifth Avenue , and$115,500 with respect to275 Fifth Avenue . The Company entered into the leases for the purpose of expanding our 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. OnFebruary 23, 2019 , the Company executed an agreement to transfer all of our ownership interest in AnHeart to Jianping An, a resident ofNew York , for a sum of$20,000 . The transfer of ownership has been disclosed and landlord consent was obtained. However, the transfer of ownership does not releaseHF Holding's guaranty of AnHeart's obligations or liabilities under the original lease agreements. Under the terms of the transfer agreement, AnHeart executed a security agreement which grants us a security interest in AnHeart assets and a covenant to assign the leases to HF Group if AnHeart defaults. Further, AnHeart has tendered an unconditional guaranty of all liabilities arising under the leases, in favor of the Company, executed byMinsheng Pharmaceutical Group Company, Ltd. , a Chinese manufacturer and distributor of herbal medicines.
Off -balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
Critical Accounting Policies
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.
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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 ofDecember 31, 2019 , andDecember 31, 2018 , the allowances for doubtful accounts were$623,970 and$658,104 , 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. OnJanuary 1, 2018 the Company adopted Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as ofJanuary 1, 2018 . The results of applying Topic 606 using the modified retrospective approach were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems. The core principle underlying the referenced ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require us to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The majority of our 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. Our revenue streams are recognized at a specific point in time.
The contract assets and contract liabilities are recorded on the Condensed
Consolidated Balance Sheet as accounts receivable and advance payments from
customers as of
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, December 31,
2019 2018
North Carolina $ 145,756,172 $ 138,790,263
Florida 91,173,814 88,670,044
Georgia 65,173,052 63,546,391
Arizona 7,196,217 -
California 54,877,209 -
Colorado 6,658,931 -
Utah 8,249,684 -
Washington 9,077,202 -
Total $ 388,162,281 $ 291,006,698
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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 atDecember 31, 2019 , and 2018.
Recent accounting pronouncements
InJune 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 inNovember 2019 , Codification Improvements to Topic 326, Financial Instruments-Credit losses. This guidance is effective for fiscal years beginning afterDecember 15, 2019 , including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 "Fair Value Measurement". ASU 2018-13 eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginningJanuary 1, 2020 . The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements. InDecember 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 afterDecember 15, 2020 , with early adoption permitted. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. 39
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