HF FOODS GROUP INC. 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. 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
EffectiveAugust 22, 2018 ,Atlantic consummated the transactions contemplated by a merger agreement (the "Atlantic Merger Agreement"), dated as ofMarch 28, 2018 , by and amongAtlantic ,HF Group Merger Sub Inc. , aDelaware subsidiary formed byAtlantic ,HF Group Holding Corporation , aNorth Carolina corporation ("HF Holding "), the stockholders ofHF Holding , andZhou Min Ni , as representative of the stockholders ofHF Holding . Pursuant to theAtlantic Merger Agreement,HF Holding merged withHF Merger Sub and HF Holding became the surviving entity (the "Atlantic Merger") and a wholly-owned subsidiary ofAtlantic (the "Atlantic Acquisition"). Additionally, upon the closing of the transactions contemplated by the Atlantic Merger Agreement (the "Atlantic Closing"), (i) the stockholders ofHF Holding became the holders of a majority of the shares of common stock ofAtlantic , and (ii)Atlantic changed its name toHF Foods Group Inc. (Collectively, these transactions are referred to as the "Atlantic Transactions"). EffectiveNovember 4, 2019 , HF Group consummated the transactions contemplated by a merger agreement (the "B&R Global Merger Agreement"), dated as ofJune 21, 2019 , by and among the Company,B&R Global Merger Sub Inc. , aDelaware corporation ("Merger Sub"), B&R Global, the stockholders of B&R Global (the "B&R Global Stockholders"), andXiao 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. OnJanuary 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 inCalifornia ,Arizona ,Utah ,Colorado ,Washington , andMontana . Co-CEO of the Company,Xiao Mou Zhang , managed and owned an 8.91% interest inB&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 ofB&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 endedMarch 31, 2020 is not comparable to the quarter endedMarch 31, 2019 . As such, the Company has presented our results of operations for the quarters endedMarch 31, 2020 and 2019 as well as the unaudited pro forma combined results of operations for quarters endedMarch 31, 2020 and 2019. For more information, see section titled "Supplemental Unaudited Pro Forma Combined Financial Information". 31
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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 endedMarch 31, 2020 was$175.8 million , an increase of$101.0 million , or 135.0%, from$74.8 million for the quarter endedMarch 31, 2019 , as a result of the business combination with B&R Global effectiveNovember 4, 2019 . Net loss attributable to HF Group's stockholders for the quarter endedMarch 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 endedMarch 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 throughthe United States inMarch 2020 . Adjusted EBITDA for the quarter endedMarch 31, 2020 was$4.3 million , an increase of$0.8 million , or 24.8%, from$3.5 million for the quarter endedMarch 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 onJanuary 1, 2019 , our net revenue for the quarter endedMarch 31, 2020 would have been$175.8 million , a decrease of$33.2 million , or 15.9% from$209.0 million for the quarter endedMarch 31, 2019 . Net loss attributable to HF Group's stockholders for the quarter endedMarch 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 endedMarch 31, 2019 . Adjusted EBITDA for the quarter endedMarch 31, 2020 would have been$4.3 million , a decrease of$5.7 million , or 56.8%, from$10.0 million for the quarter endedMarch 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 endedMarch 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 endedMarch 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 endingJune 30, 2020 more than it impacted the first quarter endedMarch 31, 2020 . The trends that began at the end of March continued to worsen inApril 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 ofApril 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 ofJune 2020 . In lateMarch 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 ofApril 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".
32
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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 likeHF 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
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 supersedeU.S. GAAP measures. 33 -------------------------------------------------------------------------------- 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.
Results of Operations for the three months ended
The following table sets forth a summary of our consolidated results of operations for the three months endedMarch 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 %
34-------------------------------------------------------------------------------- Net revenue increased by$101.0 million , or 135.0%, during the three months endedMarch 31, 2020 as compared to the three months endedMarch 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 ofMarch 2020 led to a significant decline in the net revenue for bothHF Foods and B&R Global for the three months endedMarch 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 endedMarch 31, 2020 increased by$3.9M , or 82.4%, as compared to the three months endedMarch 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--------------------------------------------------------------------------------
Distribution, selling and Administrative Expenses
Distribution, selling and administrative expenses were$29.4 million and$10.4 million for the three months endedMarch 31, 2020 and the three months endedMarch 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 endedMarch 31, 2020 , an increase of$1.6 million , or 479.2%, compared with$0.3 million for the three months endedMarch 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 endedMarch 31, 2020 . Goodwill Impairment Loss
Other Income Other income consists primarily of non-operating income and rental income. Other income was$0.4 million , for the three months endedMarch 31, 2020 an increase of$0.1 million or 42.6%, compared with$0.3 million for the three months endedMarch 31, 2019 . Income taxes Provision
Provision for income taxes decreased by
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 endedMarch 31, 2019 to$0.2 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2019 and for the three months endedMarch 31, 2020 , respectively. Adjusted EBITDA
The following table sets forth of the calculation of adjusted EBITDA and
reconciliation to net income (loss), the closest
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 onNovember 4, 2019 . For comparative purposes, the Company is presenting supplemental unaudited pro forma combined statements of operations for the quarters endedMarch 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 onJanuary 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 -------------------------------------------------------------------------------- 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
months ended March 31, 2019 .
Liquidity and Capital Resources
As ofMarch 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. OnApril 18, 2019 , we and our 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, as described below. 37 -------------------------------------------------------------------------------- OnNovember 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 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. 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 ofMarch 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 endedMarch 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
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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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$0.1 million in cash dividend to shareholders.
Commitments and Contractual Obligations
The following table presents the company's material contractual obligations as ofMarch 31, 2020 : Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Lines of credit$ 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 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 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. 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 the sum of$20,000 . The transfer of ownership was 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
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 endedMarch 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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