NOTE

- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements include the financial statements of HF Holding and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

The unaudited interim condensed consolidated financial information as of

September 30, 2019

and for the

nine

months ended

September 30, 2019

and

2018

have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal years ended

December 31, 2018

and

2017.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of the Company’s financial position as of

September 30, 2019,

its results of operations and its cash flows for the

nine

months ended

September 30, 2019

and

2018,

as applicable, have been made. The unaudited interim results of operations are

not

necessarily indicative of the operating results for the full fiscal year or any future periods.

Noncontrolling interests

U.S. GAAP requires that noncontrolling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the net income (loss) of those subsidiaries are reported separately in the consolidated statements of income.

Uses of estimates

The preparation of the unaudited condensed 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 unaudited condensed 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 the allowances for doubtful accounts, estimated useful lives and fair value in connection with the impairment of property and equipment. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of

three

or fewer months to be cash equivalents. As of

September 30, 2019,

and

December 31, 2018,

the Company had

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 bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods. As of

September 30, 2019

and

December 31, 2018,

the allowances for doubtful accounts were

$576,349

and

$658,104,

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.

inventory reserves were recorded as of

September 30, 2019

and

December 31, 2018.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization 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

Buildings and improvements (in years)	7	-	39
Machinery and equipment (in years)	3	-	7
Motor vehicles (in years)		5

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extends the useful lives of property, plant and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in the consolidated statements of income and comprehensive income in other income or expenses.

Impairment of Long-lived Assets

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 are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair value. The Company did

not

record any impairment loss on its long-lived assets as of

September 30, 2019

and

December 31, 2018.

Business Combinations

The Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

805

“Business Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date.

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 generally occurs at delivery. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.

January 1, 2018

the Company adopted Accounting Standards Update (“ASU”)

2014

Revenue from Contracts with Customers (FASB ASC Topic

606

) using the modified retrospective method for contracts that were

not

completed as of

January 1, 2018.

The results of applying Topic

606

using the modified retrospective approach were insignificant and did

not

have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require 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 transfers 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 point in time.

Revenue recognition (Continued)

The contract assets and contract liabilities are recorded on the unaudited condensed consolidated balance sheets as accounts receivable and advance from customers as of

September 30, 2019

and

December 31, 2018.

For the

nine

months ended

September 30, 2019

and

2018,

revenue recognized from performance obligations related to prior periods was insignificant.

Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant. The following table summarizes disaggregated revenue from contracts with customers by geographic locations:

	For the Three Months Ended
	September 30, 2019		September 30, 2018
North Carolina	$	36,813,987		33,693,974
Florida		22,833,584		21,156,747
Georgia		16,051,306		15,513,077
Total	$	75,698,877		70,363,798

	For the Nine Months Ended
	September 30, 2019		September 30, 2018
North Carolina	$	107,698,700		103,262,880
Florida		68,717,635		66,282,082
Georgia		48,801,770		47,687,122
Total	$	225,218,105		217,232,084

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

$3,093,138

and

$3,615,470

for the

nine

months ended

September 30, 2019

and

2018,

and

$1,014,288

and

$791,016

for the

three

months ended

September 30, 2019

and

2018,

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

on the basis of a

two

-step process in which (

) 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 (

) 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

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

September 30, 2019

and

December 31, 2018.

Leases

January 1, 2019

the Company adopted Accounting Standards Update (“ASU”)

2016

02.

For all leases that were entered into prior to the effective date of ASC

842,

the Company elected to apply the package of practical expedients. Based on this guidance the Company will

not

reassess the following: (

) whether any expired or existing contracts are or contain leases; (

) the lease classification for any expired or existing leases; and (

) initial direct costs for any existing leases. The new standard was adopted in the current quarter and did

not

have a material impact on our consolidated balance sheets or on our consolidated income statements.

The adoption of Topic

842

resulted in the presentation of

$75,169

of operating lease assets and operating lease liabilities on the consolidated balance sheet as of

September 30, 2019.

See Note

for additional information.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on our consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our 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 our 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. Our 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

260,

“Earnings per Share” (“ASC

260”

). 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

anti-dilutive effect for the

nine

months ended

September 30, 2019

and

2018.

Fair value of financial instruments

The Company follows the provisions of FASB ASC

820,

Fair Value Measurements and Disclosures. ASC

820

clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level

- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level

- 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

- Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, advances to suppliers, other current assets, accounts payable, income tax payable, advance from customers, accrued expenses approximate their fair value based on the short-term maturity of these instruments.

Concentrations and credit risk

Credit risk

Accounts receivable are typically unsecured and derived from revenue earned from customers, 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

receivables from any

one

customer representing more than

10%

of the Company’s consolidated gross accounts receivable at

September 30, 2019

December 31, 2018.

For the

nine

and

three

months ended

September 30, 2019

and

2018,

supplier accounted for more than

10%

of the total cost of revenue. As of

September 30, 2019,

two

suppliers accounted for

47%

and

14%

of total advance payments outstanding, respectively, and these

two

suppliers accounted for

77%

and

23%

of advance payments to related parties, respectively. As of

December 31, 2018,

three

suppliers accounted for

55%,

18%

and

12%

of total advance payments outstanding, respectively, and these

three

suppliers accounted for

65%,

22%

and

14%

of advance payments to related parties, respectively.

Recent accounting pronouncements

July 2017,

the FASB issued ASU

No.

2017

11,

Earnings Per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

), and Derivatives and Hedging (Topic

815

). The guidance of Part I is to clarify accounting for certain financial instruments with down round feature in a financial instrument that reduces the strike price of an issued financial instrument if the issuer sells shares of its stock for an amount less than the currently stated strike price of the issued financial instrument or issues an equity-linked financial instrument with a strike price below the currently stated strike price of the issued financial instrument. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic

260

to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The amendments also re-characterize the indefinite deferral of certain provisions of Topic

480

that now are presented as pending content in the Codification, to a scope exception. Those amendments do

not

have an accounting effect. The amendments in Part I of ASU

No.

2017

are effective for fiscal years beginning after

December 15, 2019,

and interim periods within fiscal years beginning after

December 15, 2020.

Early adoption is permitted for all entities, including adoption in an interim period. The amendments in Part II of this Update do

not

require any transition guidance because those amendments do

not

have an accounting effect. The Company has

not

early adopted this update and it will become effective on

January 1, 2020.

The Company is currently evaluating the impact of the adoption of ASU

2017

on its consolidated financial statements and does

not

expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

February 2018,

the FASB issued ASU

No.

2018

02,

“Income Statement—Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments eliminate the stranded tax effects resulting from the United States Tax Cuts and Jobs Act (the “Act”) and will improve the usefulness of information reported to financial statement users. ASU

No.

2018

is effective for all entities for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years. This update became effective for the Company on

January 1, 2019.

The adoption of this guidance did

not

have a material impact on the Company’s consolidated financial statements.