HF Foods Group Inc. 10-Q

Item 1. Financial Statements. HF FOODS GROUP INC. AND CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) As of June 30, 2020 December 31, 2019 ASSETS CURRENT ASSETS: Cash $ 8,565,019 $ 14,538,286 Accounts receivable, net 23,166,278 50,027,134 Accounts receivable - related parties, net 1,049,552 4,202,870 Inventories, net 66,783,183 77,531,854 Advances to suppliers - related parties, net 129,632 745,135 Other current assets 3,762,316 4,374,338 TOTAL CURRENT ASSETS 103,455,980 151,419,617 Property and equipment, net 139,272,839 37,538,147 Security deposits - related parties — 591,380 Operating lease right-of-use assets 785,478 17,155,584 Long-term investments 2,346,613 2,296,276 Intangible assets, net 181,242,800 186,687,950 Goodwill 68,511,941 406,703,348 Deferred tax assets 319,320 78,993 Other long-term assets 342,712 372,499 TOTAL ASSETS $ 496,277,683 $ 802,843,794 CURRENT LIABILITIES: Bank overdraft $ 7,584,937 $ 14,952,510 Lines of credit 31,953,659 41,268,554 Accounts payable 30,373,030 39,689,911 Accounts payable - related parties 2,390,482 4,521,356 Current portion of long-term debt, net 7,802,869 2,726,981 Current portion of obligations under finance leases 293,399 280,243 Current portion of obligations under operating leases 299,849 4,322,503 Accrued expenses and other liabilities 3,529,080 2,610,538 Obligations under interest rate swap contracts 1,337,412 73,158 TOTAL CURRENT LIABILITIES 85,564,717 110,445,754 Long-term debt, net 88,728,722 18,535,016 Promissory note payable - related party 7,000,000 — Obligations under finance leases, non-current 904,273 1,053,166 Obligations under operating leases, non-current 485,629 12,833,081 Deferred tax liabilities 50,063,332 52,320,045 TOTAL LIABILITIES 232,746,673 195,187,062 SHAREHOLDERS’ EQUITY: Preferred Stock, $ 0.0001 par value, 1,000,000 shares authorized , no shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively — — Common Stock, $ 0.0001 par value, 100,000,000 shares authorized, 53,050,211 shares issued, and 52,145,096 shares outstanding as of June 30, 2020 and December 31, 2019, respectively 5,305 5,305 Treasury Stock, at cost, 905,115 shares as of June 30, 2020 and December 31, 2019, respectively ( 12,038,030 ) ( 12,038,030 ) Additional paid-in capital 599,617,009 599,617,009 Retained earnings (accumulated deficit) ( 328,119,184 ) 15,823,661 Total shareholders’ equity attributable to HF Foods Group Inc. 259,465,100 603,407,945 Noncontrolling interest 4,065,910 4,248,787 TOTAL SHAREHOLDERS’ EQUITY 263,531,010 607,656,732 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 496,277,683 $ 802,843,794 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents HF FOODS GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended June 30, For the six months ended June 30, 2020 2019 2020 2019 Net revenue - third parties $ 101,103,767 $ 70,648,233 $ 271,743,781 $ 140,952,144 Net revenue - related parties 3,456,329 4,069,973 8,619,651 8,567,084 TOTAL NET REVENUE 104,560,096 74,718,206 280,363,432 149,519,228 Cost of revenue - third parties 80,707,172 58,310,424 222,611,409 116,035,779 Cost of revenue - related parties 3,240,140 3,895,629 8,164,194 8,264,440 TOTAL COST OF REVENUE 83,947,312 62,206,053 230,775,603 124,300,219 GROSS PROFIT 20,612,784 12,512,153 49,587,829 25,219,009 DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES 25,092,568 11,094,041 54,499,161 21,459,213 INCOME (LOSS) FROM OPERATIONS ( 4,479,784 ) 1,418,112 ( 4,911,332 ) 3,759,796 Other Income (Expenses) Interest income 132 152,518 263 304,467 Interest expenses ( 324,319 ) ( 388,160 ) ( 2,275,888 ) ( 725,118 ) Goodwill impairment loss — — ( 338,191,407 ) — Other income 264,730 338,995 670,380 623,530 Change in fair value of interest rate swap contracts ( 1,264,254 ) — ( 1,264,254 ) — Total Other Income (Expenses), net ( 1,323,711 ) 103,353 ( 341,060,906 ) 202,879 INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) ( 5,803,495 ) 1,521,465 ( 345,972,238 ) 3,962,675 PROVISION (BENEFIT) FOR INCOME TAXES ( 1,489,305 ) 460,751 ( 1,971,516 ) 1,108,390 NET INCOME (LOSS) ( 4,314,190 ) 1,060,714 ( 344,000,722 ) 2,854,285 Less: net income (loss) attributable to noncontrolling interest ( 255,287 ) 37,819 ( 57,877 ) 158,577 NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC. $ ( 4,058,903 ) $ 1,022,895 $ ( 343,942,845 ) $ 2,695,708 Earnings (loss) per common share - basic and diluted $ ( 0.08 ) $ 0.05 $ ( 6.60 ) $ 0.12 Weighted average shares - basic and diluted 52,145,096 22,167,486 52,145,096 22,167,486 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the three and six month ended June 30, 2020 and 2019 (UNAUDITED) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Attributable to HF Foods Group, Inc. Noncontrolling Interest Total Shareholders’ Equity Number of Shares Amount Balance at January 1, 2020 52,145,096 $ 5,305 $ ( 12,038,030 ) $ 599,617,009 $ 15,823,661 $ 603,407,945 $ 4,248,787 $ 607,656,732 Net income (loss) — — — — ( 339,883,942 ) ( 339,883,942 ) 197,410 ( 339,686,532 ) Distribution to shareholders — — — — — — ( 125,000 ) ( 125,000 ) Balance at March 31, 2020 52,145,096 5,305 ( 12,038,030 ) 599,617,009 ( 324,060,281 ) 263,524,003 4,321,197 267,845,200 Net loss — — — — ( 4,058,903 ) ( 4,058,903 ) ( 255,287 ) ( 4,314,190 ) Balance at June 30, 2020 52,145,096 $ 5,305 $ ( 12,038,030 ) $ 599,617,009 $ ( 328,119,184 ) $ 259,465,100 $ 4,065,910 $ 263,531,010 Balance at January 1, 2019 22,167,486 $ 2,217 $ — $ 22,920,603 $ 10,433,984 $ 33,356,804 $ 1,104,678 $ 34,461,482 Net income — — — — 1,672,813 1,672,813 120,757 1,793,570 Balance at March 31, 2019 22,167,486 2,217 — 22,920,603 12,106,797 35,029,617 1,225,435 36,255,052 Net income — — — — 1,022,895 1,022,895 37,819 1,060,714 Distribution to shareholders — — — — — — ( 90,000 ) ( 90,000 ) Balance at June 30, 2019 22,167,486 $ 2,217 $ — $ 22,920,603 $ 13,129,692 $ 36,052,512 $ 1,173,254 $ 37,225,766 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents HF FOODS GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the six months ended June 30, 2020 2019 Cash flows from operating activities: Net Income (loss) $ ( 344,000,722 ) $ 2,854,285 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 8,995,488 1,434,819 Goodwill impairment loss 338,191,407 — Gain from disposal of equipment ( 20,349 ) ( 40,594 ) Allowance for doubtful accounts 2,924,148 ( 73,187 ) Allowance for inventories 43,496 — Deferred tax benefit ( 2,497,040 ) ( 97,832 ) Income from equity method investment ( 50,337 ) — Change in fair value of interest rate swap contracts 1,264,254 — Changes in operating assets and liabilities: Accounts receivable, net 23,751,669 791,838 Accounts receivable - related parties, net 3,153,318 ( 397,959 ) Inventories 10,705,175 ( 3,947,104 ) Advances to suppliers - related parties, net 615,503 296,823 Other current assets 649,096 ( 760,104 ) Security deposit - related parties 58,880 — Other long-term assets 12,188 35,763 Accounts payable ( 9,402,330 ) 2,143,481 Accounts payable - related parties ( 2,130,874 ) ( 469,601 ) Operating lease liability ( 200,163 ) — Income tax payable — 12,836 Accrued expenses and other liabilities 354,844 286,844 Net cash provided by operating activities 32,417,651 2,070,308 Cash flows from investing activities: Purchase of property and equipment ( 209,964 ) ( 5,156,772 ) Proceeds from disposal of equipment 90,879 263,699 Cash received from note receivable — 115,305 Payment made for notes receivable — ( 108,750 ) Proceeds from long-term notes receivable to related parties — 316,023 Payment made for long-term notes receivable to related parties — ( 173,806 ) Payment made for acquisition of B&R Realty ( 94,004,068 ) — Net cash used in investing activities ( 94,123,153 ) ( 4,744,301 ) Cash flows from financing activities: Repayment of bank overdraft ( 7,367,573 ) — Proceeds from lines of credit 275,070,371 14,264,481 Repayment of lines of credit ( 284,450,866 ) ( 10,294,146 ) Proceeds from long-term debt 75,614,612 1,625,878 Repayment of long-term debt ( 2,873,572 ) ( 1,101,973 ) Repayment of obligations under finance leases ( 135,737 ) ( 247,662 ) Cash distribution to shareholders ( 125,000 ) ( 90,000 ) Net cash provided by financing activities 55,732,235 4,156,578 Net increase (decrease) in cash ( 5,973,267 ) 1,482,585 Cash at beginning of the period 14,538,286 5,489,404 Cash at end of the period $ 8,565,019 $ 6,971,989 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents HF FOODS GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION Organization and General HF Foods Group Inc. (“HF Group”, or the “Company”) markets and distributes fresh produce, frozen and dry food, and non- food products to primarily Asian restaurants and other food service customers throughout the Southeast, Pacific and Mountain West regions in 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 with, one or more businesses or entities. Reorganization of HF Holding HF Group Holding Corporation (“HF Holding”) was incorporated in the State of North Carolina on October 11, 2017. Effective January 1, 2018, HF Holding entered into a Share Exchange Agreement (the “Agreement”) whereby the controlling shareholders of the following 11 entities contributed their respective stocks to HF Holding in exchange for all of HF Holding’s outstanding shares. Upon completion of the share exchanges, these entities became either wholly-owned or majority-owned subsidiaries of HF Holding. • Han Feng, Inc. (“Han Feng”) • Truse Trucking, Inc. (“TT”) • Morning First Delivery, Inc. (“MFD”) • R&N Holdings, LLC (“R&N Holdings”) • R&N Lexington, LLC (“R&N Lexington”) • Kirnsway Manufacturing, Inc. (“Kirnsway”) • Chinesetg, Inc. (“Chinesetg”) • New Southern Food Distributors, Inc. (“NSF”) • B&B Trucking Services, Inc. (“BB”) • Kirnland Food Distribution, Inc. (“Kirnland”) • HG Realty LLC (“HG Realty”) In accordance with Financial Accounting Standards Board’s (“FASB") Accounting Standards Codification (“ASC”) 805-50-25, the transaction consummated through the Agreement has been accounted for as a transaction among entities under common control since the same shareholders controlled all these 11 entities prior to the execution of the Agreement. The consolidated financial statements of the Company have been prepared to report results of operations for the period in which the transfer occurred as though the transfer of net assets or exchange of equity interests had occurred at the beginning of the period presented, in this case January 1, 2018. Results of operations for the period presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period. By eliminating the effects of intra-entity transactions in determining the results of operations for the period before the combination, those results were on substantially the same basis as the results of operations for the period after the date of combination. The effects of intra-entity transactions on current assets, current liabilities, revenue, and cost of sales for periods presented and on retained earnings at the beginning of the periods presented are eliminated to the extent possible. Furthermore, ASC 805-50-45-5 indicates that the financial 5 Table of Contents statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information. In accordance with ASC 805-50-30-5, when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests should initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of the transfer. If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of the entities under common control, then the financial statements of the receiving entity should reflect the transferred assets and liabilities at the historical cost of the parent of the entities under common control. Accordingly, the Company has recorded the assets and liabilities transferred from the above entities at their carrying amount. The following table summarizes all the existing entities under HF Holding after the above-mentioned reorganization, together with new entities formed after the Atlantic Transactions as described below: Name Date of formation / incorporation Place of formation / incorporation Percentage of legal ownership by HF Group Principal activities Parent: HF Holding October 11, 2017 North Carolina 100 % Holding company Subsidiaries: Han Feng January 14, 1997 North Carolina 100 % Food service distributor TT August 6, 2002 North Carolina 100 % Logistic service provider MFD April 15, 1999 North Carolina 100 % Logistic service provider R&N Holdings November 21, 2002 North Carolina 100 % Real estate holding company R&N Lexington May 27, 2010 North Carolina 100 % Real estate holding company R & N Charlotte, LLC ("R&N Charlotte") July 10, 2019 North Carolina 100 % Real estate holding company Kirnsway May 24, 2006 North Carolina 100 % Design and printing services provider Chinesetg July 12, 2011 New York 100 % Design and printing services provider NSF December 17, 2008 Florida 100 % Food service distributor BB September 12, 2001 Florida 100 % Logistic service provider Kirnland April 11, 2006 Georgia 66.67 % Food service distributor HG Realty May 11, 2012 Georgia 100 % Real estate holding company HF Foods Industrial, L.L.C. ("HF Foods Industrial") December 10, 2019 North Carolina 60 % Food processing company Reverse Acquisition of HF Holding Effective August 22, 2018, Atlantic consummated the transactions contemplated by a merger agreement (the “Atlantic Merger Agreement”), dated as of March 28, 2018, by and among Atlantic, HF Group Merger Sub Inc. ("HF Merger Sub"), a Delaware subsidiary formed by Atlantic, HF Holding, the stockholders of HF Holding, and 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. 6 Table of Contents 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-Transactions stockholders of Atlantic. The Atlantic Acquisition was treated as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, HF Holding was considered to be acquiring Atlantic in this transaction. Therefore, the aggregate consideration paid in connection with the business combination was allocated to Atlantic’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Atlantic were consolidated into the results of operations of HF Holding as of the completion of the business combination. HF Holdings Entities Organized Post-Atlantic Merger On July 10, 2019, the Company, through its subsidiary Han Feng, formed a new real estate holding company, R&N Charlotte. R&N Charlotte owns a 4.66 acre tract of land with appurtenant 115,570 square foot office/warehouse/industrial facility located in Charlotte, North Carolina. On December 10, 2019, the Company, through its subsidiary Han Feng, formed a new food processing company, HF Foods Industrial, as owner of 60 % of member interests. Business Combination with B&R Global Effective November 4, 2019, HF Group consummated the transactions contemplated by a merger agreement (the “B&R Merger Agreement”), dated as of June 21, 2019, by and among the Company, B&R Merger Sub Inc., a Delaware corporation (“Merger Sub”), B&R Global Holdings, Inc. ("B&R Global"), the stockholders of B&R Global (the ”B&R Global Stockholders”), and Xiao Mou Zhang, as representative of the stockholders (the “Business Combination”). Upon the closing of the transactions contemplated by the B&R Merger Agreement (the “Closing”), Merger Sub merged with and into B&R Global, resulting in B&R Global becoming a wholly owned subsidiary of HF Group. HF Group acquired 100 % of the ownership interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. Pursuant to the B&R Merger Agreement, the aggregate fair value of the consideration paid by HF Group in the business combination was $ 576,699,494 , based on the closing share price of the Company’s common stock at the date of Closing. Founded in 1999, B&R Global supplies food items to approximately 6,800 restaurants across 11 Western states, and combined with HF Group, creates what the Company believes the largest food distributor to Asian restaurants in the United States. The combined entity now has 14 distribution centers strategically located in nine states across the Southeast, Pacific and Mountain West regions of the United States and operates a fleet of over 340 refrigerated vehicles. With approximately 960 employees supported by two call centers in China, HF Group now serves over 10,000 restaurants in 21 states and provides round-the-clock sales and service support to its customers, who mainly converse in Mandarin or Chinese dialects. 7 Table of Contents The following table summarizes the entities under B&R Global in the Business Combination: Name Date of formation / incorporation Place of formation / incorporation Percentage of legal ownership by B&R Global Principal activities Parent: B&R Global January 3, 2014 Delaware, USA — Holding Company Subsidiaries: Rongcheng Trading, LLC (“RC”) January 31, 2006 California, USA 100 % Food service distributor Capital Trading, LLC (“UT”) March 10, 2003 Utah, USA 100 % Food service distributor Win Woo Trading, LLC (‘WW”) January 23, 2004 California, USA 100 % Food service distributor Mountain Food, LLC (“MF”) May 2, 2006 Colorado, USA 100 % Food service distributor R & C Trading L.L.C. (“RNC”) November 26, 2007 Arizona, USA 100 % Food service distributor Great Wall Seafood LA, LLC (“GW”) March 7, 2014 California, USA 100 % Food service distributor B&L Trading, LLC (“BNL”) July 18, 2013 Washington, USA 100 % Food service distributor Min Food, Inc. (“MIN”) May 29, 2014 California, USA 60.25 % Food service distributor B&R Group Logistics Holding, LLC (“BRGL”) July 17, 2014 Delaware, USA 100 % Logistic service provider Ocean West Food Services, LLC (“OW”) December 22, 2011 California, USA 67.5 % Food service distributor Monterey Food Service, LLC (“MS”) September 14, 2017 California, USA 65 % Food service distributor Irwindale Poultry, LLC (“IP”) December 27, 2017 California, USA 100 % Poultry processing company Best Choice Trucking, LLC (“BCT”) January 1, 2011 California, USA 100 % Logistic service provider KYL Group, Inc. (“KYL”) April 18, 2014 Nevada, USA 100 % Logistic service provider American Fortune Foods Inc. (“AF”) February 19, 2014 California, USA 100 % Logistic and import service provider Happy FM Group, Inc. (“HFM”) April 9, 2014 California, USA 100 % Logistic service provider GM Food Supplies, Inc. (“GM”) March 22, 2016 California, USA 100 % Logistic service provider Lin’s Distribution Inc., Inc. (“LIN”) February 2, 2010 Utah, USA 100 % Logistic service provider Lin’s Farms, LLC (“LNF”) July 2, 2014 Utah, USA 100 % Poultry processing company New Berry Trading, LLC (“NBT”) September 5, 2012 California, USA 100 % Logistic service provider Hayward Trucking, Inc. (“HRT”) September 5, 2012 California, USA 100 % Logistic service provider Fuso Trucking Corp. (“FUSO”) January 20, 2015 California, USA VIE* Logistic service provider Yi Z Service, LLC (“YZ”) October 2, 2017 California, USA 100 % Logistic service provider Golden Well Inc. (“GWT”) November 8, 2011 California, USA 100 % Logistic service provider Kami Trading Inc. (“KAMI”) November 20, 2013 California, USA 100 % Import service provider Royal Trucking Services, Inc. (“RTS”) May 19, 2015 Washington, USA 100 % Logistic service provider Royal Service Inc. (“RS”) December 29, 2014 Oregon, USA 100 % Logistic service provider MF Food Services, Inc. (“MFS”) December 21, 2017 California, USA 100 % Logistic service provider * At the acquisition date and as of June 30, 2020, B&R Global consolidates FUSO, which is considered as a variable interest entity (“VIE”) under U.S. GAAP, due to its pecuniary and contractual interest in this entity as a result of the funding arrangements outlined in the entity. Acquisition of Real Estate Companies On January 17, 2020, the Company completed the transactions contemplated by that certain membership interest purchase agreement dated the same date (the “Purchase Agreement”) by and among its subsidiary B&R Global, B&R Group Realty Holding, LLC ("BRGR"), and nine subsidiary limited liability companies wholly owned by BRGR (the “BRGR Subsidiaries”) (the “Realty Acquisition”). Pursuant to the Purchase Agreement, B&R Global acquired all equity membership interests in the BRGR Subsidiaries, which own 10 warehouse facilities that were being leased by the Company for its operations in California, 8 Table of Contents Arizona, Utah, Colorado, Washington, and Montana for purchase consideration of $ 101,269,706 . Consideration for Realty Acquisition was funded by (i) $ 75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 11 for additional information), (ii) issuance by B&R Global of a $ 7.0 million Unsecured Subordinated Promissory Note (the “Note”) to BRGR, and (iii) payment of $ 18.7 million from funds drawn from the Company’s revolving credit facility. The following table summarizes B&R Global’s additional wholly owned subsidiaries as a result of the Realty Acquisition: Name Date of formation / incorporation Place of formation / incorporation Percentage of legal ownership by B&R Global Principal activities A & Kie, LLC ("AK") March 26, 2010 Arizona 100 % Real estate holding company B & R Realty, LLC ("BRR") August 28, 2013 California 100 % Real estate holding company Big Sea Realty, LLC ("BSR") April 3, 2013 Washington 100 % Real estate holding company Fortune Liberty, LLC ("FL") November 22, 2006 Utah 100 % Real estate holding company Genstar Realty, LLC ("GSR") February 27, 2012 California 100 % Real estate holding company Hardin St Properties, LLC ("HP") December 5, 2012 Montana 100 % Real estate holding company Lenfa Food, LLC ("LF") February 14, 2002 Colorado 100 % Real estate holding company Lucky Realty, LLC ("LR") September 3, 2003 California 100 % Real estate holding company Murray Properties, LLC ("MP") February 27, 2013 Utah 100 % Real estate holding company NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended December 31, 2019 and 2018. Operating results for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The unaudited condensed consolidated financial statements include the financial statements of HF Group, its subsidiaries and the VIE. The VIE has been accounted for at historical cost and prepared on the basis as if common control had been established as of the beginning of the first period presented in the accompanying unaudited condensed consolidated financial statements. All inter-company balances and transactions have been eliminated upon consolidation. U.S. GAAP provides guidance on the identification of VIE and financial reporting for entities over which control is achieved through means other than voting interests. The Company evaluates each of its interests in an entity to determine whether or not the investee is a VIE and, if so, whether the Company is the primary beneficiary of such VIE. In determining whether the Company is the primary beneficiary, the Company considers if the Company (1) has power to direct the activities that most significantly affect the economic performance of the VIE, and (2) receives the economic benefits of the VIE that could be significant to the VIE. If deemed the primary beneficiary, the Company consolidates the VIE. As of June 30, 2020 and December 31, 2019, FUSO is considered to be a VIE. FUSO was established solely to provide exclusive services to the Company. The entity lacks sufficient equity to finance its activities without additional subordinated financial support from the Company, and the Company has the power to direct the VIE's activities. In addition, the Company receives the economic benefits from the entity and has concluded that the Company is a primary beneficiary. The carrying amounts of the assets, liabilities, the results of operations and cash flows of the VIE included in the Company’s unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows are as follows: 9 Table of Contents June 30, 2020 December 31, 2019 Current assets $ 248,364 $ 158,184 Non-current assets 215,673 301,803 Total assets $ 464,037 $ 459,987 Current liabilities $ 606,491 $ 805,666 Non-current liabilities 173,101 69,321 Total liabilities $ 779,592 $ 874,987 For the three months ended June 30, For the six months ended June 30, 2020 2019 2020 2019 Net revenue $ 415,377 $ — $ 1,081,805 $ — Net income $ 34,667 $ — $ 99,445 $ — For the three months ended June 30, For the six months ended June 30, 2020 2019 2020 2019 Net cash provided by operating activities $ 19,978 $ — $ 334,202 $ — Net cash used in financing activities ( 23,475 ) — ( 245,612 ) — Net increase (decrease) in cash and cash equivalents $ ( 3,497 ) $ — $ 88,590 $ — Noncontrolling Interests U.S. GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the net income (loss) of those subsidiaries are reported separately in the consolidated statements of operations. As of June 30, 2020 and December 31, 2019, noncontrolling interests consisted of the following: Name of Entity Percentage of noncontrolling interest ownership June 30, 2020 December 31, 2019 Kirnland 33.33 % $ 1,313,108 $ 1,292,623 OW 32.50 % 1,602,298 1,600,058 MS 35.00 % 472,323 459,126 MIN 39.75 % 678,181 896,980 Total $ 4,065,910 $ 4,248,787 Uses of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include, but are not limited to, allowance for doubtful accounts, useful lives of property and equipment, lease assumptions, impairment of long-lived assets, long-term investments, goodwill, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, realization of deferred tax assets, and uncertain income tax positions. Cash and Cash Equivalents 10 Table of Contents The Company considers all highly liquid investments purchased with a maturity of three or fewer months to be cash equivalents. As of June 30, 2020 and December 31, 2019, the Company had no cash equivalents. Accounts Receivable Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying unaudited condensed consolidated balance sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When the Company is aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount the Company reasonably expects to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including, e.g., bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due. As of June 30, 2020 and December 31, 2019, the allowances for doubtful accounts were $ 2,283,458 and $ 623,970 , respectively. Inventories The Company’s inventories, consisting mainly of food and other food service-related products, are primarily considered as finished goods. Inventory costs, including the purchase price of the product and freight charges to deliver it to the Company’s warehouses, are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. As of June 30, 2020 and December 31, 2019, the valuation allowance was $ 60,424 and $ 16,928 , respectively. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Following are the estimated useful lives of the Company’s property and equipment: Estimated useful lives (years) Buildings and improvements 7 — 39 Machinery and equipment 3 — 15 Motor vehicles 5 — 7 Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property, plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the unaudited condensed consolidated statements of operations in other income or expenses. Business Combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805 (“ASC 805”), Business Combinations . The purchase method of accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over, (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings. 11 Table of Contents The Company estimates the fair value of assets acquired and liabilities assumed in a business combination. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. Significant estimates in valuing certain intangible assets include, but are not limited to future expected revenues and cash flows, useful lives, discount rates, and selection of comparable companies. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the businesses that the Company acquired are included in the Company’s consolidated financial statements from the date of acquisition. Goodwill The Company opted to early adoption of Accounting Standards Update (“ASU”) 2017-4, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The standard simplifies the subsequent measurement of goodwill by removing Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new standard, an impairment loss will be recognized in the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. The Company tests goodwill for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that goodwill might be impaired. The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350 (“ASC 350”), Intangibles — Goodwill and Other . This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Intangible Assets Intangible assets are carried at cost and amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of its intangible assets by measuring the expected cash flows of acquired assets. The estimated useful lives of intangible assets are as follows: Estimated useful lives (years) Tradenames 10 Customer relationships 20 Long-term Investments The Company’s investments in unconsolidated entities consist of equity investment and investment without readily determinable fair value. The Company follows ASC Topic 321 (“ASC 321”), Investments – Equity Securities , using the measurement alternative to measure investments in investees that do not have readily determinable fair value and over which the Company does not have significant influence at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes a qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the Company has to estimate the investment’s fair value in accordance with the principles of ASC Topic 820 (“ASC 820”), Fair 12 Table of Contents Value Measurements and Disclosures . If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in net income equal to the difference between the carrying value and fair value. Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures . Under the equity method, the Company initially records its investment at cost and the difference between the cost and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The equity method goodwill is not subsequently amortized and is not tested for impairment under ASC 350. The Company subsequently adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Company evaluates the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company did no t record any impairment loss on its long-term investments as of June 30, 2020 and December 31, 2019. Impairment of Long-lived Assets Other Than Goodwill The Company assesses its long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Factors which may indicate potential impairment include a significant underperformance related to the historical or projected future operating results or a significant negative industry or economic trend. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment, and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. The Company did no t record any impairment loss on its long-lived assets as of June 30, 2020 and December 31, 2019. Revenue Recognition The Company recognizes revenue from the sale of products when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales. The Company follows ASU 2014-9, Revenue from Contracts with Customers (“ASC Topic 606”) . The Company recognizes revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The majority of the Company’s contracts have one single performance obligation, as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s revenue streams are recognized at a specific point in time. For the three and six month periods ended June 30, 2020 and 2019, revenue recognized from performance obligations related to prior periods was insignificant. Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant. The following table summarizes disaggregated revenue from contracts with customers by geographic locations: 13 Table of Contents For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 North Carolina $ 21,266,959 $ 35,624,947 $ 50,984,476 $ 70,884,714 Florida 11,309,093 22,753,309 30,394,902 45,884,051 Georgia 8,072,633 16,339,950 22,174,887 32,750,463 Arizona 6,914,288 — 16,926,037 — California 34,492,561 — 102,157,517 — Colorado 7,532,674 — 16,441,667 — Utah 10,294,374 — 25,292,749 — Washington 4,677,514 — 15,991,197 — Total $ 104,560,096 $ 74,718,206 $ 280,363,432 $ 149,519,228 Shipping and Handling Costs Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are presented in distribution, selling and administrative expenses. Shipping and handling costs were $ 3,526,249 and $ 2,078,850 for the six months ended June 30, 2020 and 2019, and $ 968,016 and $ 1,027,730 for the three months ended June 30, 2020 and 2019, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 (“ASC 740”), Income Taxes , on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at June 30, 2020 and December 31, 2019. Leases On January 1, 2019, the Company adopted ASU 2016-2, Leases ("Topic 842") . For all leases that were entered into prior to the effective date of Topic 842, the Company elected to apply the package of practical expedients. Based on this guidance the Company did not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. The adoption of Topic 842 did not have a material impact on the Company’s condensed consolidated statements of operations. The adoption of Topic 842 resulted in the presentation of $ 21.2 million of operating lease assets and operating lease liabilities on the consolidated balance sheet as of January 1, 2019 on a pro forma basis. As a result of the Realty Acquisition (see Note 8 for additional information), nine leases previously included in the operating lease asset and liabilities balance were eliminated during consolidation. As of June 30, 2020 and December 31, 2019, the balances for operating lease assets and liabilities were $ 785,478 and $ 17,155,584 , respectively. See Note 13 for additional information. 14 Table of Contents The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of finance lease liabilities, and finance lease liabilities, non-current on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Earnings Per Share The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260 (“ASC 260”), Earnings per Share . ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There is no anti-dilutive effect for the three and six month periods ended June 30, 2020 and 2019. Fair Value of Financial Instruments The Company follows the provisions of ASC Topic 820 (“ASC 820”), Fair Value Measurements and Disclosures . ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. • Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. • Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein. The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, bank overdraft, income tax payable, current portion of long-term debt, current portion of obligations under finance and operating leases, and accrued expenses and other liabilities approximate their fair value based on the short-term maturity of these instruments. Derivative Financial Instrument In accordance with the guidance in ASC Topic 815 ("ASC 815"), Derivatives and Hedging, d erivative financial instruments are recognized as assets or liabilities on the unaudited condensed consolidated balance sheets at fair value. The Company has not designated its interest rate swap ("IRS") contracts as hedges for accounting treatment. Pursuant to U.S. GAAP, income or loss from fair value changes for derivatives that are not designated as hedges by management are reflected as income or loss on the statement of operations. Net amounts received or paid under the interest rate swap contracts are recognized as an increase or decrease to interest expense when such amounts are incurred. The Company is exposed to credit loss in the event of nonperformance by the counterparty. Concentrations and Credit Risk 15 Table of Contents Credit risk Accounts receivable are typically unsecured and derived from revenue earned from customers, and thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. Concentration risk There were no receivables from any one customer representing more than 10 % of the Company’s consolidated gross accounts receivable at June 30, 2020 and December 31, 2019. For the three months ended June 30, 2020 and 2019, no supplier accounted for more than 10 % of the total cost of revenue. As of June 30, 2020, there were two suppliers that accounted for 16 % and 15 % of total outstanding advance payments, respectively, and one of them accounted for 100 % of advance payments to related parties. As of December 31, 2019, two suppliers accounted for 34 % and 15 % of total outstanding advance payments, respectively, and these two suppliers accounted for 70 % and 30 % of advance payments to related parties, respectively. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments” . ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 was further amended in November 2019 in “Codification Improvements to Topic 326, Financial Instruments-Credit losses”. This guidance is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. For emerging growth companies, the effective date has been extended to fiscal years beginning after December 31, 2022. The Company is currently assessing the impact of adopting this standard, but based upon its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to managerial accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of adopting this standard, but based on its preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. NOTE 3 - ACCOUNTS RECEIVABLE, NET Accounts receivable, net consisted of the following: As of June 30, 2020 As of December 31, 2019 Accounts receivable $ 25,449,736 $ 50,651,104 Less: allowance for doubtful accounts ( 2,283,458 ) ( 623,970 ) Accounts receivable, net $ 23,166,278 $ 50,027,134 16 Table of Contents Movement of allowance for doubtful accounts is as follows: For the Six Months Ended June 30, 2020 June 30, 2019 Beginning balance $ 623,970 $ 658,104 Provision for doubtful accounts 2,924,148 ( 73,187 ) Less: write off/(recovery) ( 1,264,660 ) ( 21,149 ) Ending balance $ 2,283,458 $ 563,768 NOTE 4 - NOTES RECEIVABLE On September 30, 2018, the Company entered into a line of credit promissory note agreement with Feilong Trading, Inc, which is a supplier to the Company. Pursuant to the promissory note agreement, Feilong Trading, Inc. was permitted to borrow up to $ 4,000,000 from time to time. The note bore interest at the rate of 5 % per annum on the unpaid balance, compounded monthly. On September 30, 2019, the entire outstanding balance of $ 3,622,505 was sold to Mr. Zhou Min Ni in exchange for 272,369 shares of common stock of the Company, which shares were received and recorded as treasury stock by the Company as of September 30, 2019. In connection with the sale of this note receivable, the Company also required 89,882 additional shares of common stock of the Company owned by Mr. Ni to be placed in an escrow account for a period of one year (the “Escrow Period”), which will be delivered to the Company in part or in full, if the weighted average closing price of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $ 13.30 . NOTE 5 - LONG-TERM INVESTMENTS Long-term investments consisted of the following: Ownership as of June 30, 2020 As of June 30, 2020 As of December 31, 2019 Pt. Tamron Akuatik Produk Industri 12 % $ 1,800,000 $ 1,800,000 Asahi Food, Inc. 49 % 546,613 496,276 Long-term investments $ 2,346,613 $ 2,296,276 The investment in Pt. Tamron Akuatik Produk Industri is accounted for using the measurement alternative under ASC 321, which is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments, if any. The investment in Asahi Food, Inc. is accounted for under the equity method due to the fact that the Company has significant influence but does not exercise full control over this investee. The Company believes there was no impairment as of June 30, 2020 and December 31, 2019 for these investments. 17 Table of Contents NOTE 6 - PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: As of June 30, 2020 As of December 31, 2019 Land $ 50,744,295 $ 2,010,253 Buildings and improvements 80,707,118 26,903,528 Machinery and equipment 14,998,155 13,412,961 Motor vehicles 24,596,718 23,841,730 Subtotal 171,046,286 66,168,472 Less: accumulated depreciation ( 31,773,447 ) ( 28,630,325 ) Property and equipment, net $ 139,272,839 $ 37,538,147 The Company acquired $ 102,331,567 of property and equipment resulting from an acquisition of assets from B&R Realty Group on January 17, 2020. See Note 8 for additional information. Depreciation expense was $ 3,264,862 and $ 1,428,806 for the six month periods ended June 30, 2020 and 2019, respectively, and $ 1,607,452 and $ 721,410 for the three month periods ended June 30, 2020 and 2019, respectively. NOTE 7 - BUSINESS COMBINATION WITH B&R GLOBAL Effective November 4, 2019, HF Group acquired 100 % of the controlling interest of B&R Global, in exchange for 30,700,000 shares of HF Group Common Stock. HF Group is considered as both the legal and accounting acquirer based on the fact that there was no change of control in connection with this business combination. The aggregate fair value of the consideration paid by HF Group in the business combination was $ 576,699,494 based upon the closing share price of the Company’s common stock at the date of Closing. The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value of assets acquired and liabilities assumed which were determined with the assistance of independent valuations using quoted market prices, discounted cash flow, and estimates made by management. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company, not to exceed one year as permitted under ASC 805. 18 Table of Contents The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Cash $ 7,017,467 Accounts receivable, net 30,934,831 Accounts receivable - related parties, net 3,393,930 Inventories, net 56,451,885 Other current assets 2,332,063 Other current assets - related parties 498,211 Advances to suppliers, net 97,964 Property and equipment, net 11,042,601 Deposit 281,282 Deposit – related parties 591,380 Long-term investments 2,289,389 Right-of-use assets 17,791,681 Total tangible assets acquired 132,722,684 Line of credit 35,567,911 Accounts payable 24,884,247 Accounts payable - related parties 1,528,139 Bank overdraft 12,082,094 Accrued expenses 778,779 Other payables 185,938 Other payables – related party 733,448 Customer deposits 38,510 Long-term debt 3,284,159 Lease liabilities 17,791,680 Deferred tax liabilities arising from acquired intangible assets 51,413,633 Total tangible liabilities assumed 148,288,538 Net tangible liabilities assumed ( 15,565,854 ) Identifiable intangible assets 188,503,000 Goodwill 406,703,348 Intangible assets acquired 595,206,348 Noncontrolling interests 2,941,000 Total consideration $ 576,699,494 The Company recorded acquired intangible assets of $ 188,503,000 . These intangible assets include tradenames valued at $ 29,303,000 and customer relationships valued at $ 159,200,000 . The associated goodwill and intangible assets are not deductible for tax purposes. 19 Table of Contents The amounts of revenue and earnings of B&R Global included in the Company’s consolidated statement of operations for the three and six month periods ended June 30, 2020 are as follows: For the three months ended June 30, 2020 For the six months ended June 30, 2020 Net Revenue $ 63,911,411 $ 176,809,167 Net Loss $ ( 5,541,887 ) $ ( 345,848,729 ) The following table presents the Company’s unaudited pro forma results for the three and six month periods ended June 30, 2019, as if the Business Combination had occurred on January 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes. For the three months ended June 30, 2019 For the six months ended June 30, 2019 Pro forma net revenue $ 208,033,452 $ 416,988,818 Pro forma net income $ 1,660,419 (1) $ 4,584,794 (1) Pro forma net income attributable to HF Group $ 1,370,675 (1) $ 4,049,034 (1) Pro forma earnings per common share - basic and diluted $ 0.03 $ 0.09 Pro forma weighted average shares - basic and diluted 52,867,486 52,867,486 (1) Includes intangibles asset amortization expense of $ 2,722,575 for the three months ended June 30, 2019 and 5,445,150 for the six months ended June 30, 2019, respectively. NOTE 8 - ACQUISITION OF B&R REALTY SUBSIDIARIES On January 17, 2020, B&R Global acquired 100 % equity membership interests of the subsidiaries of BRGR, which own warehouse facilities that were being leased by B&R Global for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. Co-CEO of the Company, Xiao Mou Zhang, managed and owned an 8.91 % interest in BRGR. The total purchase price for the acquisition was $ 101,269,706 , based on independent appraisals of the fair market value of the properties. The Company notes that substantially all of the fair value of the gross assets acquired is concentrated in a group of similar assets (land and buildings all used for warehousing and distribution purposes). As such, the acquisition of BRGR Subsidiaries would be deemed an asset acquisition under ASC 805-10-55, and the total purchase price is allocated on a relative fair value basis to the net assets acquired. Consideration for the acquisition was funded by (i) $ 75.6 million in mortgage-backed term loans financed under the Second Amended Credit Agreement (see Note 12 for additional information), (ii) issuance by B&R Global of a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR maturing on January 17, 2030, and (iii) payment of $ 18.7 million from funds drawn from the Company’s revolving credit facility. The reissuance of the mortgage-backed term loans released BRGR from its obligations to the lenders under the First Amended Credit Agreement (See Note 11 for additional information) and predecessor financing arrangements. 20 Table of Contents The following table presents the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Cash $ 265,639 Automobile 33,690 Prepaids 39,193 Land 48,734,042 Buildings 53,563,835 Total assets acquired 102,636,399 Accounts payable and accrued expenses 1,366,693 Total liabilities assumed 1,366,693 Net assets acquired $ 101,269,706 NOTE 9 - GOODWILL AND ACQUIRED INTANGIBLE ASSETS Goodwill The changes in HF Group’s carrying amount of goodwill by segment are presented below: HF B&R Global Total Balance at December 31, 2019 $ — $ 406,703,348 $ 406,703,348 Impairment charge — ( 338,191,407 ) ( 338,191,407 ) Balance at June 30, 2020 $ — $ 68,511,941 $ 68,511,941 The Company booked approximately $ 406.7 million of goodwill on December 31, 2019, resulting from the completion of business combination with B&R Global, which represents the excess of the purchase price over the fair value of net assets acquired. HF Group acquired 100 % of the controlling interest of B&R Global, in exchange for 30,700,000 consideration shares of HF Group Common Stock, valued at $ 576,699,494 based upon the closing share price of the Company’s common stock at the date of Closing on November 4, 2019. The Company's policy is to test goodwill for impairment annually in the fourth quarter, or more frequently if certain triggering events or circumstances indicate it could be impaired. Potential impairment indicators include (but are not limited to) macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. Towards the end of first quarter of fiscal year 2020, the Company experienced significant decline in business volume due to mandatory stay-at-home orders issued by governmental authorities in response to the intensification of the COVID-19 pandemic. The Company determined that the B&R Global reporting unit was very sensitive to these declines and that it was more likely than not that an impairment may exist. The Company, therefore, performed an analysis of the fair value of the B&R Global reporting unit as of March 31, 2020 using a discounted cash flow method for goodwill impairment testing purposes. Based upon the analysis, the Company concluded that the carrying value of its B&R Global reporting unit exceeded its fair value by $ 338.2 million. As a result, the company recorded the amount as impairment charges during the first quarter of fiscal year 2020. The Company estimated the fair values of the B&R Global reporting unit using the income approach, discounting projected future cash flows based upon management’s expectations of the current and future operating environment. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital ("WACC"), future revenue, profitability, perpetual growth rates and fair values of assets and liabilities. The fair value conclusions as of March 31, 2020 for the reporting unit are highly sensitive to changes in the WACC, which consider observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. The Company also observed the WACC applied on March 31, 2020 increased from its value as of the acquisition date, mainly driven by the increased risk and volatility observed in the market. Volatility has primarily been due to concerns about demand for food distribution services, as restaurant activity in much of the country has been reduced to takeout and delivery offerings. Furthermore, increased uncertainty about the unwinding of these restrictions and levels of consumer spending are driving these concerns and and resulting volatility. 21 Table of Contents In addition, the fair value of the goodwill is sensitive to the changes in the assumptions used in the projected cash flows, which include forecasted revenues and perpetual growth rates, among others, all of which require significant judgment by management. The Company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future conditions, industry and global economic and geo-political factors, and the timing and success of the implementation of current strategic initiatives. Based on the quarterly results ended June 30, 2020 and current sales run rate, which is in line with the forecast and assumptions used in the analysis of the fair value of B&R Global reporting unit as of March 31, 2020, the Company determined that no further impairment is needed for the quarter ended June 30, 2020. The impact of the COVID-19 pandemic on estimated future cash flows is uncertain and will largely depend on the outcome of future events, which could result in further goodwill impairments going forward. The company will complete its annual impairment test in the fourth quarter of fiscal 2020. Acquired Intangible Assets In connection with the Business Acquisition of B&R Global, HF Group acquired $ 188,503,000 of intangible assets, primarily representing tradenames and customer relationships, which have an estimated amortization period of approximately 10 years and 20 years respectively. The components of the intangible assets are as follows: As of June 30, 2020 As of December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Tradenames $ 29,303,000 $ ( 1,953,533 ) $ 27,349,467 $ 29,303,000 $ ( 488,383 ) 28,814,617 Customer relationships 159,200,000 ( 5,306,667 ) 153,893,333 159,200,000 ( 1,326,667 ) 157,873,333 Total $ 188,503,000 $ ( 7,260,200 ) $ 181,242,800 $ 188,503,000 $ ( 1,815,050 ) 186,687,950 Since COVID-19 has had an adverse impact on the Company’s customers, which was a triggering event, the Company performed interim long-lived asset quantitative impairment tests as of June 30, 2020. All intangible assets were tested for recoverability at the asset group level. ASC Topic 360, Property, Plant and Equipment ("ASC 360") defines the recoverability of these assets as measured by comparison of their (or asset group) carrying amounts to future undiscounted cash flows the assets (or asset group) are expected to generate. Based on the test for recoverability using undiscounted cash flows attributable to the asset (or asset group), the sum of the undiscounted cash flows exceeded the carrying value of the measured asset (or asset group). As such, no impairment was recorded for the finite lived assets as of June 30, 2020. HF Group’s amortization expense for intangible assets was $ 2,722,575 and 5,445,150 for the three and six month periods ended June 30, 2020, respectively, and nil for the three and six month periods ended June 30, 2019, respectively. Estimated future amortization expense for intangible assets is presented below: Twelve months ending June 30, Amount 2021 $ 10,890,300 2022 10,890,300 2023 10,890,300 2024 10,890,300 2025 10,890,300 Thereafter 126,791,300 Total $ 181,242,800 NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate swaps for the sole purpose of mitigating interest rate fluctuation risk associated to floating rate debt instruments (as defined in Note 11 Lines of Credit, and Note 12 Long-Term Debt). The Company does not use any other derivative financial instruments for trading or speculative purposes. 22 Table of Contents On August 20, 2019, HF Group entered into two IRS contracts with East West Bank (the "EWB IRS") for initial notional amounts of $ 1.05 million and $ 2.625 million, respectively. The EWB IRS contracts were entered into in conjunction with two mortgage term loans of corresponding amount that were priced at USD 1-month LIBOR (London Interbank Offering Rate) plus 2.25 % per annum for the entire duration of the term loans. The EWB IRS contracts have fixed the two term loans at 4.23 % per annum until maturity in September 2029. On December 19, 2019, HF Group entered into an IRS contract with Bank of America (the "BOA IRS") for an initial notional amount of $ 2.74 million in conjunction with a newly contracted mortgage term loan of corresponding amount. The term loan was contracted at USD 1-month LIBOR plus 2.15 % per annum but was fixed at 4.25 % per annum resulting from the corresponding BOA IRS contract. The term loan and corresponding BOA IRS contract matures in December, 2029. On June 24, 2020, HF Group entered into a forward starting IRS contract with JP Morgan Chase Bank (the "JPM IRS") for a fixed $ 80 million notional amount, effective from June 30, 2021 and expiring on June 30, 2025, as a means to partially hedge its existing floating rate loans exposure. The Company has an existing term loan as of June 30, 2020 of approximately $ 74.1 million which was pegged to a floating rate of 1-month LIBOR plus 1.875 % per annum, as well as a revolving line of credit with an outstanding balance of $ 32 million as of June 30, 2020 that was pegged to 1-month LIBOR plus 1.375 % per annum. Under the terms of the JPM IRS contract, the Company will receive interest at prevailing 1-month LIBOR and pay fixed interest at 0.413 % plus the agreed bank spread starting from July 31, 2021 through July 31, 2025 inclusive. The Company evaluated the above mentioned interest rate swap contracts currently in place and did not designate those as cash flow hedges. Hence, the fair value change on the aforementioned interest rate swap contracts are accounted for and recognized as change in fair value of interest rate swap contracts in the unaudited condensed consolidated statements of operations. As of June 30, 2020 and December 31, 2019, the Company has determined that the fair value of the interest rate swaps was $ 1,337,412 and 73,158 , respectively. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in its assessment of fair value. The interest rate swaps are classified as Level 3 liabilities and fair value was obtained from the respective counterparties. NOTE 11 - LINES OF CREDIT On July 1, 2016, Han Feng, HF Group’s main operating entity, entered into a line of credit agreement with East West Bank. The line of credit agreement provided for a revolving credit in the amount of $ 14,500,000 . The line of credit was secured by virtually all assets of Han Feng, the premises and an adjoining undeveloped parcel of land owned by R&N Holding, and premises owned by R&N Lexington. The principal and all accrued unpaid interest were originally due in May 2018 and then extended to May 27, 2019, in order to provide an uninterrupted credit facility while the renewal of the line of credit was being reviewed by the bank. Interest was based on the prime rate less 0.15 %, but in no event less than 3.25 % per annum, and was payable monthly. On April 18, 2019, this $ 5,156,018 obligation was repaid in full with proceeds from the Credit Agreement with East West Bank entered into on April 18, 2019, as described below. On November 14, 2012, NSF, another operating entity, entered into a line of credit agreement with Bank of America. The line of credit agreement provided for a revolving credit in the amount of $ 4,000,000 . The line of credit was secured by three real properties owned by NSF and guaranteed by the two shareholders of the Company, as well as by BB, a subsidiary of the Company. The maximum borrowings were determined by certain percentages of eligible accounts receivable and inventories. The principal and all accrued unpaid interest were originally due in January 2018 and subsequently extended to February 2020. Interest was based on the LIBOR rate plus 2.75 %. On April 18, 2019, this $ 954,984 obligation was paid off in full with proceeds from the Credit Agreement with East West Bank entered into on April 18, 2019, as described below. On April 18, 2019, the Company, Han Feng, NSF and Kirnland entered into a Credit Agreement (the “Credit Agreement”) with East West Bank. The Credit Agreement provided for a $ 25 million secured line of credit available to be used in one or more revolving loans to the Company’s domestic subsidiaries that were parties to the Credit Agreement for working capital and general corporate purposes. Han Feng, NSF and Kirnland (the “Borrower Subsidiaries”) were the borrowers and the Company and each of its other material subsidiaries were guarantors of all the obligations under the Credit Agreement. The original maturity of the line of credit was August 18, 2021. Contemporaneously with the execution of the Credit Agreement, existing senior debt of the Borrower Subsidiaries in the amount of $ 6,111,692 was paid from revolving loans drawn on the line of credit. Under the Credit Agreement, the Borrower subsidiaries were to pay interest on the principal amounts drawn on the line of credit at a rate per annum equal to (a) 0.375 % below the Prime Rate in effect from time to time, or (b) 2.20 % above the LIBOR Rate in effect from time to time, depending on the rate elected at the time a borrowing request is made, but in no event less than 4.214 % per annum. The Credit Agreement contained certain financial covenants which, among other things, required Han Feng 23 Table of Contents to maintain certain financial ratios. On November 4, 2019, the line of credit was paid off from borrowings under the Amended and Restated Credit Agreement entered into in connection with the closing of the merger with B&R Global as described below. The outstanding balance paid off, including accrued interest, was $ 13,864,481 . On November 4, 2019, the Company entered into an Amended and Restated Credit Agreement (the "First Amended Credit Agreement") with JP Morgan Chase Bank, N.A. (“JP Morgan”). The First Amended Credit Agreement provides for a $ 100 million asset-secured revolving credit facility maturing on November 4, 2022, with an option to renew at the bank’s discretion. The line of credit is collateralized by all assets of the Company and is also guaranteed by B&R Group Realty and B&R Realty Subsidiaries, which B&R Realty Subsidiaries were subsequently acquired by the Company on January 17, 2020 (See Note 8 for additional information). The First Amended Credit Agreement, later superseded by the Second Amended and Restated Credit Agreement ("Second Amended Credit Agreement") on January 17, 2020, contains financial covenants requiring the Company on a consolidated basis to maintain a Fixed Charge Coverage Ratio of 1.10 to 1.00, determined as of the end of each fiscal quarter for the four fiscal quarter periods then ended. On January 17, 2020, the Company, its wholly-owned subsidiary, B&R Global, and certain of the wholly-owned subsidiaries and affiliates of the Company (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into the Second Amended Credit Agreement with JP Morgan, as Administrative Agent, and certain lender parties thereto, including Comerica Bank. The Second Amended Credit Agreement provides 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 amends and restates the existing $ 55.0 million of real estate term loans evidenced by the First Amended Credit Agreement. As of January 17, 2020, the existing balance of revolving debt under the First 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 and B&R 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 ten warehouse facilities owned by the selling BRGR Subsidiaries, which the Company has been leasing for its operations in California, Arizona, Utah, Colorado, Washington, and Montana. The Credit Agreement contained certain financial covenants and, as of June 30, 2020, the Company was in compliance with the covenants under the Second Amended Credit Agreement. The outstanding principal balance on the line of credit as of June 30, 2020 was $ 32.0 million. NOTE 12 - LONG-TERM DEBT Long-term debt at June 30, 2020 and December 31, 2019 is as follows: Bank name Maturity Interest rate as of June 30, 2020 As of June 30, 2020 As of December 31, 2019 East West Bank – (a) August 2027 - September 2029 3.94 % — 4.25 % $ 6,912,246 $ 6,989,016 Capital Bank – (b) October 2027 3.85 % 4,854,756 4,967,075 Bank of America – (c) April 2021 – December 2029 3.84 % — 5.51 % 6,369,850 4,263,663 J.P. Morgan Chase (d) February 2023 – January 2030 2.05 % — 2.17 % 76,573,289 2,702,371 BMO Harris Bank – (e) April 2022 - January 2024 5.87 % — 5.99 % 358,320 508,564 Peoples United Bank – (e) April 2020 – December 2022 5.75 % — 7.53 % 885,002 1,114,993 Other finance companies – (e) August 2020 – March 2024 3.9 % — 6.14 % 578,128 716,315 Total debt 96,531,591 21,261,997 Less: current portion ( 7,802,869 ) ( 2,726,981 ) Long-term debt $ 88,728,722 $ 18,535,016 The terms of the various loan agreements related to long-term bank borrowings require the Company to comply with certain financial covenants. As of June 30, 2020, and December 31, 2019, the Company was in violation of one covenant. On August 7, 2020, the Company obtained waiver from Bank of America for above mentioned covenant violation. The loans outstanding were guaranteed by the following properties, entities or individuals, or otherwise secured as shown: 24 Table of Contents (a) Guaranteed by five subsidiaries of the Company, Han Feng, TT, MFD, R&N Holding and R&N Lexington, and also secured by assets of Han Feng and R&N Lexington and R&N Holding, two real properties of R&N Holding, and a parcel of real property owned by R&N Lexington. Balloon payment of $ 2,293,751 is due in 2027 and another balloon payments of $ 3,007,239 is due in 2029. (b) Guaranteed by two shareholders, as well as Han Feng. Also secured by a real property owned by HG Realty. Balloon payment for this debt is $ 3,116,687 . (c) Guaranteed by two subsidiaries of the Company, NSF and BB and also secured by real property, equipment and fixtures, inventories, receivables and all other personal property owned by NSF. Balloon payment is $ 1,382,046 . (d) Real estate term loan with a principal balance of $ 74,258,993 as of June 30, 2020 is secured by assets held by nine subsidiaries of the Company, AK, BRR, BSR, FL, GSR, HP, LF, LR, and MP. Equipment term loan with a principal balance of $ 2,314,296 as of June 30, 2020 is secured by specific vehicles and equipment as defined in loan agreements. (e) Secured by vehicles. The future maturities of long-term debt as of June 30, 2020 are as follows: Twelve months ending June 30, Amount 2021 $ 7,802,869 2022 5,774,355 2023 4,635,859 2024 3,828,783 2025 3,700,239 Thereafter 70,789,486 Total $ 96,531,591 NOTE 13 - LEASES The Company leases office space and warehouses under non-cancelable operating leases, with terms typically ranging from one to five years , as well as operating and finance leases for vehicles and delivery trucks, forklifts and computer equipment with various expiration dates through 2021. The Company determines whether an arrangement is or includes an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company also recognizes a finance lease asset and finance lease liability at inception, with lease expense recognized as interest expense and amortization of the lease payment. Operating Leases The components of lease expense were as follows: For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Operating lease cost $ 253,820 $ 127,508 $ 756,877 $ 292,260 Weighted Average Remaining Lease Term (Months) Operating leases 34 28 34 28 Weighted Average Discount Rate Operating leases 4.1 % 5.1 % 4.1 % 5.1 % Finance Leases The components of lease expense were as follows: 25 Table of Contents For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Finance leases cost: Amortization of right-of-use assets $ 139,687 $ 145,879 $ 279,373 $ 291,758 Interest on lease liabilities 23,218 28,279 51,120 60,606 Total finance leases cost $ 162,905 $ 174,158 $ 330,493 $ 352,364 Supplemental cash flow information related to finance leases was as follows: For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Operating cash flows from finance leases 23,218 28,279 51,120 60,606 Supplemental balance sheet information related to leases was as follows: June 30, 2020 December 31, 2019 Finance Leases Property and equipment, at cost $ 2,793,731 $ 2,793,731 Accumulated depreciation ( 1,572,503 ) ( 1,293,130 ) Property and equipment, net $ 1,221,228 $ 1,500,601 Weighted Average Remaining Lease Term (Months) Finance leases 49 54 Weighted Average Discount Rate Finance leases 7.53 % 7.51 % Maturities of lease liabilities were as follows: Twelve months ending June 30, Operating Leases Finance Leases 2021 $ 355,148 $ 373,715 2022 285,983 342,278 2023 235,779 334,224 2024 19,696 277,340 2025 — 96,496 Total Lease Payments 896,606 1,424,053 Less Imputed Interest ( 111,128 ) ( 226,381 ) Total $ 785,478 $ 1,197,672 On July 2, 2018, AnHeart Inc. ("AnHeart"), a wholly-owned subsidiary of HF Holding, entered into two separate leases for two properties located in Manhattan, New York, at 273 Fifth Avenue and 275 Fifth Avenue, for 30 years and 15 years, respectively. The leases were on a triple net basis, meaning AnHeart is required to pay all costs associated with the properties, including taxes, insurance, utilities, maintenance and repairs. HF Holding provided a guaranty for all rent and related costs of the leases, including costs associated with the planned construction of a two-story structure at 273 Fifth Avenue and rehabilitation of the building at 275 Fifth Avenue. The Company entered into the leases with the planned purpose of expanding its product lines to include Chinese herb supplements, and to use the sites to develop into a hub for such products. The Company has since determined to cease this business expansion. On February 23, 2019, HF Holding executed an agreement to divest all of its ownership interest in AnHeart to Ms. Jianping An, a resident of New York, for the sum of $ 20,000 . The transfer of ownership was completed on May 2, 2019. However, the divestment does not release HF Holding’s guaranty of AnHeart’s obligations or liabilities under the original lease agreements. Under the terms of the sale of AnHeart stock to Ms. An, and in consideration of the Company’s ongoing guaranty of AnHeart’s 26 Table of Contents performance of the lease obligations, AnHeart granted to the Company a security interest in all AnHeart assets, together with a covenant that the Company will be assigned the leases, to be exercised if AnHeart defaults on the original lease agreements. Further, Ms. An has tendered an unconditional guaranty of all AnHeart liabilities arising from the leases, in favor of the Company, executed by Minsheng Pharmaceutical Group Company, Ltd., a Chinese manufacturer and distributor of herbal medicines. NOTE 14 - SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental cash flow disclosures and noncash investing and financing activities are as follows: For the Six Months Ended June 30, 2020 June 30, 2019 Supplemental disclosure of cash flow data Cash paid for interest $ 2,321,727 $ 746,784 Cash paid for income taxes $ 145,905 $ 1,599,284 Supplemental disclosure of non-cash investing and financing activities Property and equipment purchases from notes payable $ 2,528,554 $ — Issuance of promissory note for the acquisition of B&R Realty Subsidiaries $ 7,000,000 $ — NOTE 15 - TAXES Corporate Income Taxes (“CIT”) On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The Company expects the new federal income tax rate will significantly lower the Company’s income tax expenses going forward. The Company does not expect the repatriation tax and new minimum tax on certain future foreign earnings to have any impact on the Company’s operations since it currently has no foreign income and does not expect to generate any foreign income in the future. (i) The provision for income taxes of the Company for the three and six months ended June 30, 2020 and 2019 consists of the following : For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Current income taxes: Federal $ 40,618 $ 531,491 $ 400,218 $ 923,974 State 35,646 142,860 125,306 282,248 Current income taxes 76,264 674,351 525,524 1,206,222 Deferred income taxes (benefit): Federal ( 1,195,341 ) ( 161,190 ) ( 1,918,683 ) ( 58,129 ) State ( 370,228 ) ( 52,410 ) ( 578,357 ) ( 39,703 ) Deferred income taxes (benefit) ( 1,565,569 ) ( 213,600 ) ( 2,497,040 ) ( 97,832 ) Total provision (benefit) for income taxes $ ( 1,489,305 ) $ 460,751 $ ( 1,971,516 ) $ 1,108,390 (ii) Temporary differences and carryforwards of the Company that created significant deferred tax assets and liabilities are as follows: 27 Table of Contents As of June 30, 2020 As of December 31, 2019 Deferred tax assets: Allowance for doubtful accounts $ 826,586 $ 373,438 Inventories 532,276 594,628 Federal net operating loss 228,637 228,637 State net operating loss 80,673 80,514 Fair value change in interest rate swap contracts 338,131 — Accrued expenses 133,896 80,100 Total deferred tax assets 2,140,198 1,357,317 Deferred tax liabilities: Property and equipment ( 2,995,155 ) ( 3,270,536 ) Intangibles assets ( 48,889,055 ) ( 50,327,833 ) Total deferred tax liabilities ( 51,884,210 ) ( 53,598,369 ) Net deferred tax liabilities $ ( 49,744,012 ) $ ( 52,241,052 ) The net deferred tax liabilities presented in the Company's unaudited condensed consolidated balance sheets are as follows: As of June 30, 2020 As of December 31, 2019 Deferred tax assets $ 319,320 $ 78,993 Deferred tax liabilities ( 50,063,332 ) ( 52,320,045 ) Net deferred tax liabilities $ ( 49,744,012 ) $ ( 52,241,052 ) (iii) Reconciliations of the statutory income tax rate to the effective income tax rate are as follows: For the Six Months Ended June 30, 2020 June 30, 2019 Federal statutory tax rate 21.0 % 21.0 % State statutory tax rate 0.1 % 5.0 % Impact of goodwill impairment loss – permanent difference ( 20.5 ) % 2.0 % Effective tax rate 0.6 % 28.0 % NOTE 16 - RELATED PARTY TRANSACTIONS The Company records transactions with various related parties. The related party transactions as of June 30, 2020 and December 31, 2019 and for the three and six month periodss ended June 30, 2020 and 2019 are identified as follows: Related Party Balances a. Accounts receivable - related parties, net Below is a summary of accounts receivable with related parties as of June 30, 2020 and December 31, 2019, respectively: 28 Table of Contents Name of Related Party As of June 30, 2020 As of December 31, 2019 (a) Allstate Trading Company Inc. $ — $ 11,322 (b) Enson Seafood GA Inc. (formerly “GA-GW Seafood, Inc.”) 68,443 348,833 (c) Eagle Food Service LLC 331,256 979,591 (d) Fortune One Foods Inc. 32,812 53,862 (e) Eastern Fresh LLC 83,050 1,511,075 (f) Enson Trading LLC 57,419 341,200 (g) Hengfeng Food Service Inc. 280,307 477,541 (h) N&F Logistic, Inc. — 119,241 (i) ABC Trading, LLC 119,270 238,513 Others 76,995 121,692 Total $ 1,049,552 $ 4,202,870 (a) Mr. Zhou Min Ni, the Chairman and Co-Chief Executive Officer of the Company, owns 40 % equity interest in this entity; (b) Mr. Zhou Min Ni owns a 50 % equity interest in this entity. (c) Tina Ni, one of Mr. Zhou Min Ni’s family members, owns a 26.5 % equity interest in this entity indirectly through its parent company. (d) Mr. Zhou Min Ni owns a 17.5 % equity interest in this entity. (e) Mr. Zhou Min Ni owns a 30 % equity interest in this entity. (f) Mr. Zhou Min Ni owns a 25 % equity interest in this entity. (g) Mr. Zhou Min Ni owns a 45 % equity interest in this entity. (h) Mr. Zhou Min Ni owns a 25 % equity interest in this entity. (i) Mr. Xiao Mou Zhang, Co-Chief Executive Officer of the Company, owns 10.38 % equity interest in this entity. All accounts receivable from these related parties are current and considered fully collectible. No allowance is deemed necessary as of June 30, 2020 and December 31, 2019. b. Advances to suppliers - related parties, net The Company periodically provides purchase advances to various vendors, including the related party suppliers. These advances are made in the normal course of business and are considered fully realizable. As of June 30, 2020, and December 31, 2019, the Company had total advances to related party suppliers of $ 129,632 and $ 745,135 , respectively. c. Notes receivable - related parties The Company had previously made advances or loans to certain entities that are either owned by the controlling shareholders of the Company or family members of the controlling shareholders. On January 1, 2018, the Company entered into a promissory note agreement with Enson Seafood. Pursuant to the promissory note agreement, the total outstanding balance of $ 550,000 due from Enson Seafood as of December 31, 2017 was converted into promissory notes bearing annual interest of 5 % commencing January 1, 2018. The principal plus interest was due no later than December 31, 2019. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days. On September 30, 2018, the Company signed a promissory note agreement with Enson Seafood in the principal amount of $ 2,000,000 . The note accrued interest at the rate of 5 % per annum on the unpaid balance, compounded monthly. The principal plus all accrued and unpaid interest was initially due no later than September 30, 2019, with an option to renew, and required Enson Seafood to make monthly payments of $ 171,215 for twelve months. On March 1, 2019, the Company and Enson Seafood extended the expiration date of the note until February 29, 2024 and Mr. Zhou Min Ni agreed to personally guarantee the note. On January 1, 2018, the Company signed a promissory note agreement with NSG. Pursuant to the promissory note agreement, the outstanding total outstanding balances of $ 5,993,552 due from NSG as of December 31, 2017 were converted into promissory notes bearing annual interest of 5 % commencing January 1, 2018. The principal plus interest was required to be 29 Table of Contents paid off no later than December 31, 2019. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days. On March 1, 2019, the Company entered into a new five year term promissory note agreement with NSG that comprised a restatement and novation and superseded the note dated January 1, 2018. Pursuant to the new promissory note agreement, the outstanding balance of $ 5,941,031 together with interest at the rate of 5 % per annum became payable in monthly installments until principal and accrued interest was paid in full on or before March 1, 2024. On March 1, 2018, the Company entered into a promissory note agreement by which Revolution Automotive was loaned $ 483,628 . Pursuant to this promissory note agreement, Revolution Automotive was required to make monthly payments of $ 5,000 for 60 months, including interest, with a final payment of $ 284,453 . The loan bore interest of 5 % per annum. Interest was computed on the outstanding balance on the basis of the actual number of days elapsed in a year of 360 days. The principal plus interest was to be paid off no later than April 30, 2023. On March 1, 2019, the Company and each of Enson Seafood and NSG agreed to extend the expiration date of their notes payable until February 29, 2024, and Mr. Zhou Min Ni agreed to personally guarantee these notes. On September 30, 2019, all such notes receivable, having then a combined outstanding balance of $ 8,415,525 , were sold to Mr. Zhou Min Ni in exchange for 632,746 shares of common stock of the Company, which shares were received and recorded in treasury stock by the Company as of September 30, 2019. In connection with the sale of the above notes, the Company also required 208,806 additional shares of common stock of the Company owned by Mr. Ni to be placed in an escrow account for a period of one year (the “Escrow Period”), which will be delivered to the Company in part or in full, if the volume weighted average closing price of the Company’s common stock for the 250-trading-day period immediately preceding the expiration of the Escrow Period is less than $ 13.30 . d. Accounts payable - related parties As of June 30, 2020, and December 31, 2019, the Company had a total accounts payable balances of $ 2,390,482 and $ 4,521,356 , respectively, due to various related parties. All these accounts payable to related parties occurred in the ordinary course of business and are payable upon demand without interest. e. Advances from customers - related parties The Company also periodically receives advances from its related parties for business purposes. These advances are interest free and due upon demand. The balance for advances from customers involving related parties was $ 47,754 as of June 30, 2020 and there were no advances from customers involving related parties as of December 31, 2019. f. Security deposit - related parties The Company made deposits to its related parties for warehouse rental purposes. These deposits are expected to be returned upon termination of the respective leases. Total deposits to related parties amounted to $ 591,380 as of December 31, 2019. As a result of the Realty Acquisition referenced in Note 8, rent deposits previously classified as made by related parties became intercompany balances and were eliminated as of June 30, 2020. There were no related party rent deposits as of June 30, 2020. g. Subordinated debt - related parties B&R Global issued a $ 7.0 million Unsecured Subordinated Promissory Note to BRGR. The note bears an interest rate of 6 % per annum that matures in January 2030. At June 30, 2020, accrued interest payable was nil . Lease Agreements with Related Parties R&N Holding leases a facility to a related party under an operating lease agreement expiring in 2024. The cost of the leased building is $ 400,000 as of June 30, 2020 and December 31, 2019, respectively, and the accumulated depreciation of the leased building is $ 81,923 and $ 78,282 as of June 30, 2020 and December 31, 2019, respectively. Rental income for the three months ended June 30, 2020 and 2019 was $ 11,400 and $ 11,400 , respectively, and the six months ended June 30, 2020 and 2019 was $ 22,800 and $ 22,800 , respectively. 30 Table of Contents R&N Holding also leases a facility to a related party under an operating lease agreement expiring in 2022. Rental income for the three months ended June 30, 2020 and 2019 was $ 10,500 and $ 10,500 , respectively, and the six months ended June 30, 2020 and 2019 was $ 21,000 and $ 21,000 , respectively. In 2017, HG Realty leased a warehouse to a related party under an operating lease agreement expiring on September 21, 2027. The cost of the leased building is $ 3,223,745 and $ 3,223,745 at June 30, 2020 and December 31, 2019, respectively, and the accumulated depreciation of the leased building is $ 537,291 and $ 516,626 as of June 30, 2020 and December 31, 2019, respectively. Rental income for the three months ended June 30, 2020 and 2019 was $ 120,000 and $ 120,000 , respectively, and the six months ended June 30, 2020 and 2019 was $ 240,000 and $ 240,000 , respectively. B&R Global leased warehouses from related parties owned by the majority shareholder of B&R Global prior to the Realty Acquisition on January 17, 2020. Rent incurred to the related parties from January 1, 2020 to January 16, 2020 was $ 187,750 . In 2020, Kirnland renewed a warehouse lease from a related party under an operating lease agreement expiring on December 31, 2020. Rent incurred to the related party was $ 30,000 and $ 30,000 for the three months ended June 30, 2020 and 2019, respectively, and $ 60,000 and $ 60,000 for the six months ended June 30, 2020 and 2019, respectively. Related Party Sales and Purchases Transactions The Company makes regular sales to and purchases from various related parties during the normal course of business. The total sales to related parties were $ 3,456,329 and $ 4,069,973 for the three months ended June 30, 2020 and 2019, respectively, and $ 8,619,651 and $ 8,567,084 for the six months ended June 30, 2020 and 2019, respectively. The total purchases made from related parties were $ 3,310,800 and $ 8,553,875 for the three months ended June 30, 2020 and 2019, respectively, and $ 14,775,292 and $ 17,486,091 for the six months ended June 30, 2020 and 2019, respectively. NOTE 17 - SEGMENT REPORTING ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision makers, reviews operation results by the revenue of different products. After acquiring the business of B&R Global in November 2019, the Company distinguishes revenues, costs and expenses between HF and B&R Global in its internal reporting, and reports costs and expenses by nature in different operating segments. As a result, the Company has two reportable segments, including HF and B&R Global, and has re-presented the segment reporting for the three and six month periods ended June 30, 2019 as follows. The following table presents net sales by segment for the three and six month periods ended June 30, 2020 and 2019, respectively: For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Net revenue HF $ 40,648,685 $ 74,718,206 $ 103,554,265 $ 149,519,228 B&R Global 63,911,411 — 176,809,167 — Total $ 104,560,096 $ 74,718,206 $ 280,363,432 $ 149,519,228 All the Company’s revenue was generated from its business operations in the U.S. 31 Table of Contents For the Three Months Ended June 30, 2020 HF B&R Global Total Revenue $ 40,648,685 $ 63,911,411 $ 104,560,096 Cost of revenue $ 31,555,564 $ 52,391,748 $ 83,947,312 Gross profit $ 9,093,121 $ 11,519,663 $ 20,612,784 Depreciation and amortization $ 762,938 $ 3,720,879 $ 4,483,817 Total capital expenditures $ 29,090 $ 20,622 $ 49,712 For the Three Months Ended June 30, 2019 HF B&R Global Total Revenue $ 74,718,206 $ — $ 74,718,206 Cost of revenue $ 62,206,053 $ — $ 62,206,053 Gross profit $ 12,512,153 $ — $ 12,512,153 Depreciation and amortization $ 727,423 $ — $ 727,423 Total capital expenditures $ 3,812,217 $ — $ 3,812,217 For the Six Months Ended June 30, 2020 HF B&R Global Total Revenue $ 103,554,265 $ 176,809,167 $ 280,363,432 Cost of revenue $ 82,905,852 $ 147,869,751 $ 230,775,603 Gross profit $ 20,648,413 $ 28,939,416 $ 49,587,829 Depreciation and amortization $ 1,518,580 $ 7,491,514 $ 9,010,094 Total capital expenditures $ 50,549 $ 159,415 $ 209,964 For the Six Months Ended June 30, 2019 HF B&R Global Total Revenue $ 149,519,228 $ — $ 149,519,228 Cost of revenue $ 124,300,219 $ — $ 124,300,219 Gross profit $ 25,219,009 $ — $ 25,219,009 Depreciation and amortization $ 1,434,819 $ — $ 1,434,819 Total capital expenditures $ 5,156,772 $ — $ 5,156,772 As of June 30, 2020 As of June 30, 2019 Total assets: HF $ 61,875,975 $ 80,514,529 B&R Global 434,401,708 722,329,265 Total Assets $ 496,277,683 $ 802,843,794 All of the Company’s long-lived assets are located in the US. NOTE 18 - COMMITMENT AND CONTINGENCIES Various labor and employment lawsuits were filed by former employees against FUSO, NBT, and HRT, alleging these entities failed to provide proper meal and rest breaks, as well as other related violations. These entities deny all the allegations. Management believes there is no merit to the cases and will vigorously defend the cases. Therefore, the Company did not accrue any loss contingency for this matter on its consolidated financial statements as of June 30, 2020 and December 31, 2019. On March 29, 2020, plaintiff Jesus Mendoza (“Mendoza”) filed a putative shareholder securities class action lawsuit (the “Class Action Lawsuit”) in the United States District Court for the Central District of California against the Company and certain of its 32 Table of Contents present and former officers (collectively, the “Class Action Defendants”) for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 styled Mendoza v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-2929-ODW-JPR (C.D. Cal.). On April 30, 2020, plaintiff Walter Ponce-Sanchez (“Ponce-Sanchez”) filed a substantially similar putative shareholder securities class action lawsuit (the “Ponce-Sanchez Lawsuit”) in the United States District Court for the Central District of California against the same defendants named in the Class Action Lawsuit (collectively, the “Ponce-Sanchez Defendants” and with the Class Action Defendants, the “Defendants”) styled Ponce-Sanchez v. HF Foods Group Inc., et al. , Civil Action No. 2:20-CV-3967-ODW-JPR (C.D. Cal.). The Ponce-Sanchez Lawsuit has now been consolidated with the Class Action Lawsuit and a motion for lead plaintiff and lead plaintiff’s counsel is pending. The complaints both allege that the Defendants made materially false and (or) misleading statements that caused losses to investors. Additionally, the complaints both allege that the Defendants failed to disclose in public statements that the Company engaged in certain related party transactions, that insiders and related parties were enriching themselves by misusing shareholder funds, and that the Company masked the true number of free-floating shares. Neither complaint quantifies any alleged damages, but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired Company stock during the putative class period from August 23, 2018 through March 23, 2020 at allegedly inflated prices and purportedly suffered financial harm as a result. The Company disputes these allegations and intends to defend the consolidated actions vigorously. At this stage, the Company is unable to determine whether a future loss will be incurred due to the consolidated actions. On June 15, 2020, Mendoza filed a shareholder derivative lawsuit on behalf of the Company as a nominal defendant (the “Mendoza Derivative Lawsuit”) in the United States District Court for the Central District of California against certain of the Company’s present and former directors and officers (collectively, the “Mendoza Derivative Defendants”) styled Mendoza v. Zhou Min Ni, et al., Civil Action No. 2:20-CV-5300-ODW-JPR (C.D. Cal.). The complaint in the Mendoza Derivative Lawsuit is based largely on the same allegations as set forth in the Class Action Lawsuit discussed above and alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties , unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The Mendoza Derivative Lawsuit does not quantify any alleged damages, but, in addition to attorneys’ fees and costs, Mendoza seeks to recover damages on behalf of the Company for purported financial harm and to have the court order changes in the Company’s corporate governance. The Mendoza Derivative Defendants and the Company dispute these allegations and intend to defend the Mendoza Derivative Lawsuit vigorously. At this stage, the Company is unable to determine whether a future loss will be incurred due to the Mendoza Derivative Lawsuit. On July 8, 2020, the Court ordered that all proceedings in the Mendoza Derivative Lawsuit be stayed until such time as the Court has finally resolved the Mendoza Defendants’ anticipated motion to dismiss the Class Action Lawsuit. (See Note 18 for additional information). At this stage, the Company is unable to determine whether a future loss will be incurred due to the Class Action Lawsuit or the Mendoza Derivative Lawsuit, or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s financial statements as of June 30, 2020. NOTE 19 - SUBSEQUENT EVENTS The Company evaluated subsequent events through August 10, 2020, which is the date the financial statements were available to be issued . 33 Table of Contents CAUTIONARY NOTE ABOUT FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q for HF Foods Group Inc. (“HF Foods,” the “Company,” “we,” “us,” or “our”) contains forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation: • Unfavorable macroeconomic conditions in the United States; • Competition in the food service distribution industry, particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche; • Increases in fuel costs; • Increases in commodity prices; • Disruption of relationships with vendors and increases in product prices; • U.S. government tariffs on products imported into the United States, particularly from China; • Changes in consumer eating and dining out habits; • Disruption of relationships with or loss of customers; • Our ability to renew or replace the current lease of our warehouse in Georgia; • Control of the Company by our Co-Chief Executive Officers and principal stockholders; • Failure to retain our senior management and other key personnel, particularly Zhou Min Ni, Xiao Mou Zhang and Kong Hian Lee; • Our ability to attract, train and retain employees; • Changes in and enforcement of immigration laws; • Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws; • Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations; • Failure to protect our intellectual property rights; • Any cyber security incident, other technology disruption or delay in implementing our information technology systems; • The development of an active trading market for our common stock; • Failure to acquire other distributors or wholesalers and enlarge our customer base could negatively impact our results of operations and financial condition; • Scarcity of and competition for acquisition opportunities; • Our ability to obtain acquisition financing; • The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions; • Our ability to identify acquisition candidates; • Increases in debt in order to successfully implement our acquisition strategy; • The effects of the COVID-19 pandemic; • Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results; and • Other factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (the "SEC") and public communications. We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise. Table of Contents