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MarketScreener Homepage  >  Equities  >  Nasdaq  >  HF Foods Group Inc.    HFFG

HF FOODS GROUP INC.

(HFFG)
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FOODS : Management's Discussion and Analysis of Financial Condition and Results of Operations of HF Foods Group Inc. (form 10-Q)

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05/18/2020 | 07:31am EDT
This discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report. The following discussion contains forward-looking statements that
involve numerous risks and uncertainties. Our actual results could differ
materially from the forward-looking statements as a result of these risks and
uncertainties. See "Cautionary Note About Forward-Looking Statements" for
additional cautionary information.



Overview



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



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




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").



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.



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



The Company notes that substantially all of the fair value of the gross assets
acquired is concentrated in a group of similar assets (land and buildings in
which the buildings are all used for warehousing and distribution purposes). As
such, the acquisition of B&R Global Realty 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 the acquisition of B&R Global, the financial information of the Company
for the quarter ended March 31, 2020 is not comparable to the quarter ended
March 31, 2019. As such, the Company has presented our results of operations for
the quarters ended March 31, 2020 and 2019 as well as the unaudited pro forma
combined results of operations for quarters ended March 31, 2020 and 2019. For
more information, see section titled "Supplemental Unaudited Pro Forma Combined
Financial Information".



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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 its 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 quarter ended March 31, 2020 was $175.8 million, an
increase of $101.0 million, or 135.0%, from $74.8 million for the quarter ended
March 31, 2019, as a result of the business combination with B&R Global
effective November 4, 2019. Net loss attributable to HF Group's stockholders for
the quarter ended March 31, 2020 was $339.9 million, a decrease of $341.6
million, or 20,418.1%, from net income attributable to HF Group's stockholders
of $1.7 million for the quarter ended March 31, 2019, due to the significant
impairment of goodwill ($338.2 million - see Note 9 to our financial statements
for additional information) prompted by the impact of COVID-19 pandemic that
swept through the United States in March 2020. Adjusted EBITDA for the quarter
ended March 31, 2020 was $4.3 million, an increase of $0.8 million, or 24.8%,
from $3.5 million for the quarter ended March 31, 2019. 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, 2019, our net revenue for the quarter ended March 31, 2020 would have
been $175.8 million, a decrease of $33.2 million, or 15.9% from $209.0 million
for the quarter ended March 31, 2019. Net loss attributable to HF Group's
stockholders for the quarter ended March 31, 2020 would have been $339.9
million, a decrease of $342.6 million, or 12,790.0%, from net income
attributable to HF Group's stockholder of $2.7 million for the quarter ended
March 31, 2019. Adjusted EBITDA for the quarter ended March 31, 2020 would have
been $4.3 million, a decrease of $5.7 million, or 56.8%, from $10.0 million for
the quarter ended March 31, 2019. For additional information on our pro-forma
results, see the section entitled "SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION" below.



COVID-19 Update



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 have forced many of our restaurant
customers to temporarily close or convert to take-out or delivery-only
operations. As a result, the last two weeks of March led to a significant
decline in net sales, hence impacting our overall net income and adjusted EBITDA
in the first quarter ended March 31, 2020. Our net sales during the last two
weeks of the first quarter decreased approximately 67% compared to pro-forma
sales in the same period ended March 31, 2019.



The intensification of the COVID-19 pandemic and the resulting sharp slowdown in
overall business activities will continue to adversely impact our sales and
liquidity position. We currently expect that the COVID-19 outbreak will impact
our financial performance for the second quarter ending June 30, 2020 more than
it impacted the first quarter ended March 31, 2020.



The trends that began at the end of March continued to worsen in April 2020,
resulting in as much as a 75% decrease in net sales compared to pro-forma sales
in the comparable prior year period, and took a $338.2 million impairment charge
to goodwill (See Note 9 to our financial statements for additional information).
However, we began to experience a recovery of business volume since the week of
April 27, 2020 as the COVID-19 infection curve began to flatten and fear among
consumers began to subside. Weekly sales in the beginning of May have recovered
to over 50% of pre-COVID-19 levels, and we expect the recovery to continue into
the month of June 2020.



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 in response to the COVID-19 pandemic. Some of the notable
actions include:

•   actively managing our variable costs to better align with current sales
volumes by instituting temporary furloughs, reducing our delivery schedules and
temporary shutting down operation of a few distribution centers, resulting in no
less than 40% overall cost reduction in the month of April 2020;

• improving working capital by extending terms with vendors while focusing on collecting receivables;

• 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 would enable the Company to confidently navigate through this unprecedented "crisis".

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We also have the ability to implement further cost reduction measures as
necessary if the COVID-19 pandemic persists longer than expected. The
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed
into law at the end of March 2020. HF foods may benefit from the refundable
payroll tax credits provided under the CARES. We also expect that many of our
customers will benefit from the federally backed small business loan program,
which in turn will help to speed up our business volume recovery.



The impact of the COVID-19 pandemic continues to evolve and, therefore, we cannot currently predict the extent to which our business, results of operations, or financial condition will ultimately be impacted. The impact of the COVID-19 pandemic on our business will also depend on:

• the resilience of the Asian/Chinese restaurants, and consumer spending more broadly;


•   actions taken by governments to successfully contain the virus or limit its
impact, including travel restrictions, social distancing requirements, required
closures of non-essential businesses, and aid and economic stimulus efforts; and

• any prolonged economic recession resulting from the pandemic.




We do not expect economic and operating conditions for our business to improve
until consumers are once again 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.



We are optimistic about the long-term prospects for our business. Although the
timetable for returning to normalcy is unknown, we believe that our current
level of sales volumes will increase over time as the effects of the COVID-19
pandemic slowly dissipate and consumer demand for food prepared 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 companies like HF Foods, which has the necessary expertise and
deep understanding of our unique customers base. We believe we are
differentiated from many of our competitors given our extensive footprint,
strong vendor and customer relationships, and value-added service offerings, all
of which have allowed us to continue to 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, 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:



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 supersede U.S. GAAP measures.



                                       33
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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 under U.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 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 Adjusted EBITDA, see the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Adjusted EBITDA" below.

Results of Operations for the three months ended March 31, 2020 and 2019




The following table sets forth a summary of our consolidated results of
operations for the three months ended March 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 three months ended
                                                 March 31,                           Changes
                                           2020              2019             Amount             %
Net revenue                           $  175,803,336$ 74,801,022$  101,002,314          135.0 %
Cost of revenue                          146,828,291       62,094,166         84,734,125          136.5 %
Gross profit                              28,975,045       12,706,856         16,268,189          128.0 %
Distribution, selling and
administrative expenses                   29,406,593       10,365,172         19,041,421          183.7 %
Income (loss) from operations               (431,548 )      2,341,684         (2,773,232 )       (118.4 )%
Interest income                                  131          151,949           (151,818 )        (99.9 )%
Interest expenses and bank charges        (1,951,569 )       (336,958 )       (1,614,611 )        479.2 %
Goodwill impairment loss                (338,191,407 )              -       (338,191,407 )          100 %
Other income, net                            405,650          284,535            121,115           42.6 %
Income (loss) before income tax
provision                               (340,168,743 )      2,441,210       (342,609,953 )     (14034.4 )%
Provision (benefit) for income
taxes                                       (482,211 )        647,639         (1,129,850 )       (174.5 )%
Net income (loss)                       (339,686,532 )      1,793,571       (341,480,103 )     (19039.1 )%
Less: net income attributable to
noncontrolling interest                      197,410          120,758             76,652           63.5 %
Net income (loss) attributable to
HF Foods Group Inc.                   $ (339,883,942 )$  1,672,813$ (341,556,755 )     (20418.1 )%




Net Revenue


Net revenue was mainly derived from sales to independent restaurants (Chinese/Asian restaurants) and sales as wholesale to smaller distributors.

The following table sets forth the breakdown of net revenue:



                                               For the three months ended March 31,
                               2020                            2019                            Change
                      Amount             %             Amount            %             Amount             %
Net revenue
Sales to
independent
restaurants        $ 167,272,317           95.1 %   $ 70,123,135           93.7 %   $  97,149,182          138.5 %
Wholesale              8,531,019            4.9 %      4,677,887            6.3 %       3,853,132           82.4 %
Total              $ 175,803,336          100.0 %   $ 74,801,022          100.0 %   $ 101,002,314          135.0 %




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Net revenue increased by $101.0 million, or 135.0%, during the three months
ended March 31, 2020 as compared to the three months ended March 31, 2019. This
was attributable primarily to the acquisition of B&R Global, which contributed
$4.1 million in sales to wholesale customers and $108.7 million in sales to
independent restaurants. The increase was offset by a decrease in revenue of
$11.6 million in sales to independent restaurants of HF and $0.3 million of
sales to wholesale customers. This decrease was due to lower sales as a result
of the COVID-19 pandemic. The negative impact of the COVID-19 pandemic on our
restaurant customers during the last two weeks of March 2020 led to a
significant decline in the net revenue for both HF Foods and B&R Global for the
three months ended March 31, 2020. See the section entitled "SUPPLEMENTAL
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION" below.



We conduct wholesale operations as a supplemental business to our foodservice
distribution to restaurants by purchasing full truckloads of product from
suppliers and redistributing to smaller distributors who are typically not large
enough to order truckload quantities, or do not want to keep inventory for long
periods. The larger purchase can improve overall bargaining power with suppliers
by increasing total order quantity. Net revenue from wholesale for the three
months ended March 31, 2020 increased by $3.9M, or 82.4%, as compared to the
three months ended March 31, 2019, due to the acquisition of B&R Global.



Cost of sales and Gross Profit

The following tables set forth the calculation of gross profit and gross margin for sales to independent restaurants, wholesale and total net revenue:



                                       For the three months ended
                                                March 31,                           Changes
                                          2020              2019            Amount              %
Sales to independent restaurants
Net revenue                          $  167,272,317$ 70,123,135$  97,149,182           138.5 %
Cost of revenue                         138,729,285       57,560,246        81,169,039           141.0 %
Gross profit                         $   28,543,032$ 12,562,889$  15,980,143           127.2 %
Gross Margin                                   17.1 %           17.9 %            (0.8 )%

Wholesale
Net revenue                          $    8,531,019$  4,677,887$   3,853,132            82.4 %
Cost of revenue                           8,099,006        4,533,920         3,565,086            78.6 %
Gross profit                         $      432,013$    143,967$     288,046           200.1 %
Gross Margin                                    5.1 %            3.1 %             2.0 %

Total sales
Net revenue                          $  175,803,336$ 74,801,022$ 101,002,314           135.0 %
Cost of revenue                         146,828,291       62,094,166        84,734,125           136.5 %
Gross profit                         $   28,975,045$ 12,706,856$  16,268,189           128.0 %
Gross Margin                                   16.5 %           17.0 %            (0.5 )%




Cost of revenue was $146.8 million for the three months ended March 31, 2020, an
increase of $84.7 million or 136.5%, from $62.1 million for the three months
ended March 31, 2019. The increase was mainly attributable to the acquisition of
B&R Global, with $91.6 million and $3.9 million in cost of revenue for sales to
independent restaurants and wholesale customers, respectively. This increase was
offset by a decrease of $10.4 million cost of revenue due to reduced sales
resulting from the COVID-19 pandemic.



Gross profit was $29.0 million for the three months ended March 31, 2020, an
increase of $16.3 million, or 128%, from $12.7 million for the three months
ended March 31, 2019. The increase was attributable primarily to B&R Global,
with $17.1 million and $0.3 million in gross profit derived from sales to
independent restaurants and wholesale customers, respectively. This increase was
offset by a decrease $1.1 million cost of revenue for the sales to independent
restaurants of HF driven by the decrease in sales.



Gross margin decreased from 17.0% for the three months ended March 31, 2019 to
16.5% for the three months ended March 31, 2020, primarily attributable to the
lower gross margin of B&R Global. B&R Global's gross margin for the three months
ended March 31, 2020 was 15.4% which resulted in lower gross margin in overall
gross margin.



                                       35
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Distribution, selling and Administrative Expenses




Distribution, selling and administrative expenses were $29.4 million and $10.4
million for the three months ended March 31, 2020 and the three months ended
March 31, 2019, respectively, representing a $19.0 million, or 183.7% increase.
The increase was mainly attributable to the Business Combination with B&R
Global, which contributed $16.6 million, and the amortization expense of $2.7
million relating to the intangible assets acquired from the Business
Combination.



Interest Expense and Bank Charges




Interest expense and bank charges are primarily generated from lines of credit,
capital leases, and long-term debt. Interest expenses and bank charges were $1.9
million for the three months ended March 31, 2020, an increase of $1.6 million,
or 479.2%, compared with $0.3 million for the three months ended March 31, 2019.
The increase was mainly attributable to increased lines of credit after the
business combination with B&R Global and additional long-term debt with B&R
Realty Subsidiaries, with total interest expenses of $1.0 million for the three
months ended March 31, 2020.



Goodwill Impairment Loss


Goodwill impairment loss was $338.2 million for the three months ended March 31, 2020 and nil for the three months ended March 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 $0.4 million, for the three months ended March 31, 2020 an increase
of $0.1 million or 42.6%, compared with $0.3 million for the three months ended
March 31, 2019.



Income taxes Provision


Provision for income taxes decreased by $1.1 million of 174.5%, from $0.6 million for the three months ended March 31, 2019 to a tax benefit of $0.5 million for the three months ended March 31, 2020, as a result of the decrease in income before income tax provision.

Net Income Attributable to Noncontrolling interest




Net income attributable to noncontrolling interest was derived from four
minority owned subsidiaries and increased by $0.1 million, or 63.5% from $0.1
million for the three months ended March 31, 2019 to $0.2 million for the three
months ended March 31, 2020. The increase was due to the Business Combination
with B&R Global, net income attributable to noncontrolling interest of $0.1
million for the three months ended March 31, 2020.



Net Income (Loss) Attributable to Our Stockholders




As a result of all analysis above, net income attributable to our stockholders
was $1.7 million and net loss attributable to our stockholders was $339.9
million for the three months ended March 31, 2019 and for the three months ended
March 31, 2020, respectively.



Adjusted EBITDA


The following table sets forth of the calculation of adjusted EBITDA and reconciliation to net income (loss), the closest U.S. GAAP measure:



                                        For the three months ended
                                                 March 31,                            Change
                                           2020              2019             Amount              %
Net income (loss)                     $  (339,686,532 )$ 1,793,571$ (341,480,103 )      (19039.1 )%
Interest expenses                           1,951,569         336,958          1,614,611           479.2 %
Income tax provision (benefit)               (482,211 )       647,639         (1,129,850 )        (174.5 )%
Depreciation & Amortization                 4,374,080         707,396          3,666,684           518.3 %
Goodwill impairment loss                  338,191,407               -        338,191,407             100 %
Adjusted EBITDA                       $     4,348,313       3,485,564            862,749            24.8 %
Percentage of revenue                             2.5 %           4.7 %             (2.2 )%




Adjusted EBITDA was $4.3 million for the three months ended March 31, 2020, an
increase of $0.8 million, or 24.8%, compared to $3.5 million for the three
months ended March 31, 2019, resulting mainly from the $3.3 million decrease in
net income (excluding goodwill impairment loss), partially offset by $1.6
million increase in interest expense due to increased line of credit and
Long-Term Debt and $3.7 million more depreciation and amortization from
intangible and fixed assets associated with acquisition of B&R Global and B&R
Realty Subsidiaries


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
quarters ended March 31, 2020 and 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.



                                       36
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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:



                                                             Three months ended March 31, 2019
                                                                 B&R                                Pro Forma
                                                HF             Global         Adjustments            Combined

Net revenue                                $ 74,801,022$ 134,154,344     $          -        $  208,955,366
Net income                                    1,793,571         3,853,379       (2,722,575 )(1)        2,924,375
Net Income Attributable to HF Foods
Group Inc.                                 $  1,672,813$   3,728,121$ (2,722,575 )$    2,678,359

(1) Includes intangibles asset amortization expense of $2,722,575 for the three

      months ended March 31, 2019.



Liquidity and Capital Resources




As of March 31, 2020, we had cash of approximately $12.7 million. We have funded
working capital and other capital requirements primarily by equity contribution
from shareholders, cash flow from operations, and bank loans. 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.



On April 18, 2019, we and our operating subsidiaries Han Feng, New Southern Food
Distributers and Kirnland entered into a credit agreement with East West Bank,
which replaced our prior credit agreement with East West Bank. The credit
agreement provides a $25,000,000 revolving credit facility which was 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 Amended and Restated Credit Agreement entered into connection with the
merger with B&R, as described below.



                                       37
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On November 4, 2019, we entered into an Amended and Restated Credit Agreement
with JP Morgan. The Amended and Restated Credit Agreement provides for (a) a
$100 million asset-secured revolving credit facility maturing on November 4,
2022, and (b) mortgage-secured term loans of $55.4 million.



On January 17, 2020, the Company, 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,
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 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 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, trends in the foodservice distribution industry, the
expected collectability of accounts receivable and the realization of the
inventories as of March 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 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 our bank and suppliers
being able to provide continued support. If the future cash flow from operations
and other capital resources are 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, however, 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 sets forth cash flow data for the three months ended March
31, 2020 and 2019:



                                                           For the three months ended
                                                                    March 31,
                                                              2020              2019
Net cash provided by operating activities                $   18,627,806$  2,521,378
Net cash used in investing activities                       (94,073,441 )     (1,380,487 )
Net cash provided by financing activities                    73,597,614     

267,059

Net increase (decrease) in cash and cash equivalents $ (1,848,021 )$ 1,407,950





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 $18.6
million for the quarter ended March 31, 2020, an increase of $16.1 million, or
638.8%, compared to net cash provided by operating activities of $2.5 million
for the quarter ended March 31, 2019. The increase was due primarily result of
newly acquired B&R Global with total net cash provided by operating activities
of $11.4 million. The remaining increase is a combined results of an increase of
$14.3 million from changes in working capital items mainly resulting from
changes in accounts receivable, accrued expenses, advances from customers -
related parties , inventory and depreciation and amortization expense which were
offset by a decrease of $9.2 million in, net income, advances to suppliers -
related parties, other current assets, other long term assets and accounts
payable.



                                       38
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Investing Activities



Net cash used in investing activities was approximately $94.1 million for the
quarter ended March 31, 2020, an increase of $92.7 million, or 6,714.5%,
compared to $1.4 million net cash used investing activities for the quarter
ended March 31, 2019. The increase was primarily due to payment made to acquire
B&R Realty Subsidiaries of $94.1 million. The increase was offset by a combined
result of, decreased cash paid for the purchase of property and equipment of
$1.3 million, cash paid to notes receivable to third parties and related parties
of $0.1 million and $0.1 million, respectively, offset by a decrease in cash
proceeds from the disposal of equipment of $0.1 million.



Financing Activities



Net cash provided by financing activities was approximately $73.6 million for
the quarter ended March 31, 2020, an increase of $73.3 million, or 27458.6%,
compared with $0.3 million of net cash used in financing activities for the
quarter ended March 31, 2019. The increase was due primarily result of newly
acquired $75.6 million in mortgage-backed term loans to fund Realty Acquisition.
The increase was offset by a combined result of , an increase of $170.0 million
in repayment of lines of credit, an increase of $172.6 million in proceeds from
lines of credit, an increase of $0.7 million in repayment of  long term debt ,
an increase of  $1.5 million  in repayment of bank overdrafts and a decrease of
$0.1 million in cash dividend to shareholders.



Commitments and Contractual Obligations




The following table presents the company's material contractual obligations as
of March 31, 2020:



                                                    Less than 1                                       More than 5
    Contractual Obligations           Total             year          1-3 years        3-5 years         years
Lines of credit                   $  43,101,338                -       43,101,338               -                -
Long-term debt                       97,092,946        6,941,738       10,725,978       7,718,680       71,706,550
Promissory note payable -             7,000,000                -                -               -        7,000,000
related party
Finance lease obligations             1,517,482          373,715          686,375         457,392                -
Operating lease obligations           1,008,813          395,354          534,675          78,784                -
Total                             $ 149,720,579        7,710,807       55,048,366       8,254,856       78,706,550




On July 2, 2018, AnHeart, Inc., one of our subsidiaries, entered into two
separate leases for two buildings located in Manhattan, New York, at 273 Fifth
Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively, which are
net leases, meaning that AnHeart is required to pay all costs associated with
the buildings, including utilities, maintenance and repairs. HF Holding provided
a guaranty for all rent and related costs of the leases, including costs
associated with the construction of a two-story structure at 273 Fifth Avenue
and rehabilitation of the building at 275 Fifth Avenue. 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, 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 at 273 Fifth Avenue, and
$115,500 with respect to 275 Fifth Avenue. The Company entered into the leases
for the 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 transfer all of our
ownership interest in AnHeart to 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 transfer of ownership does not release HF Holding's
guaranty of AnHeart's obligations or liabilities under the original lease
agreements. Under the terms of the 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 by Minsheng Pharmaceutical Group
Company, Ltd., a Chinese manufacturer and distributor of herbal medicines.



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 Policies and Estimates




We have prepared the financial information in this Quarterly Report in
accordance with GAAP. Preparing the Company's consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during these reporting periods. We base our estimates and judgments
on historical experience and other factors we believe are reasonable under the
circumstances. These assumptions form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Part II, Item 7-"Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the 2019 Annual Report
includes a summary of the critical accounting policies we believe are the most
important to aid in understanding our financial results. There have been no
changes to those critical accounting policies that have had a material impact on
our reported amounts of assets, liabilities, revenue, or expenses during the
three months ended March 31, 2020.



Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.

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© Edgar Online, source Glimpses

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