HF Foods Group Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report. The filing was signed January 31, 2023, after substantial reporting delays and restatement work. HF Foods distributes food and related products primarily to Asian restaurants across the United States.
Financial performance
| Metric | FY2021 | FY2020, restated | Change |
|---|---|---|---|
| Net revenue | $796.9 million | $566.8 million | +40.6% |
| Gross profit / margin | $151.5 million / 19.0% | $100.7 million / 17.8% | +50.4% gross profit |
| Distribution, selling and administrative expenses | $122.0 million / 15.3% of revenue | $106.4 million / 18.8% | +14.7% expense |
| Operating income (loss) | $29.5 million | $(343.8) million | Improved; 2020 included impairment |
| Net income (loss) attributable to HF Foods | $22.1 million | $(343.5) million | Improved |
| Diluted EPS | $0.43 | $(6.59) | Improved |
| Adjusted EBITDA, non-GAAP | $50.8 million; 6.4% margin | $14.5 million; 2.6% margin | +251.6% |
Revenue and profit rebounded as restaurant activity recovered from COVID-19 restrictions. Gross margin improved, which management attributed mainly to supplier inventory allocation and purchase timing. Lower DSA expense as a share of revenue reflected higher sales and improved operating efficiency. FY2020 included a $338.2 million goodwill impairment; none was recorded in 2021. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow, debt and liquidity
- Operating cash flow was $17.5 million, down from $45.7 million in restated FY2020. Management attributed the decline primarily to increased receivables and inventory as sales recovered.
- Investing cash outflow was $41.1 million, principally reflecting the Great Wall acquisition; financing cash inflow was $28.8 million. Cash increased $5.2 million to $14.8 million.
- At year-end, revolving-credit borrowings were $55.3 million of a $100 million facility; management reported approximately $44.7 million of additional availability, subject to borrowing-base calculations. Checks issued but not presented were $17.8 million.
- Long-term debt was $87.4 million, including $5.6 million current. The company reported compliance with debt covenants at December 31, 2021. Most debt was floating-rate; management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $1.3 million.
- Management said operating cash flow and available resources were expected to cover normal working-capital needs and debt obligations for at least 12 months, while noting that demand, economic conditions, competition and lender or supplier support could affect liquidity.
Material changes and unusual items
- Restatement: Previously issued 2019 and 2020 annual financial statements and interim statements for 2019–2021 were restated and should no longer be relied upon in their prior form. Errors included lease accounting, related-party and VIE identification/disclosures, related-party rental-income timing, auto self-insurance liabilities, classification, EPS, and unrecorded executive compensation. The 2021 statements are presented in this filing; 2020 comparisons are restated.
- Great Wall acquisition: Completed December 30, 2021. Total consideration for operating assets and inventory was approximately $68.2 million, including $30.8 million cash at closing, stock valued at $12.9 million, and acquired inventory. The acquired business contributed immaterial revenue in the reported year due to the closing date.
- Governance and reporting: The independent investigation and a concurrent, non-public SEC investigation contributed to filing delays. The SEC inquiry remained ongoing; no demand had been made and potential fines or penalties could not be estimated. Management identified material weaknesses in internal controls and concluded financial-reporting and disclosure controls were ineffective at year-end 2021.
- Other subsequent events: In March 2022, the credit agreement was amended, extending the revolving facility and increasing the mortgage-secured term loan. The company acquired Sealand in April 2022 for $20.0 million cash plus approximately $14.4 million of inventory. Following a tenant default on a guaranteed lease, the company recorded a $5.9 million lease-guarantee expense and liability after year-end.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expressed optimism about long-term prospects, citing recovery in restaurant demand, its distribution footprint and customer and supplier relationships. Key risks include thin industry margins, inflation and fuel costs, labor availability, supply-chain disruption, competition, restaurant demand, acquisition integration, floating interest rates, related-party dealings and cybersecurity. The company also faced potential Nasdaq listing consequences related to delinquent reports and an overdue annual meeting. A shareholder derivative action and demand concerning alleged director and officer misconduct remained under review; the filing does not provide a clear estimate of any related loss. The SEC investigation was also ongoing.
Investor verification priorities
- Review the restatement tables and quarterly financial information, and confirm which prior-period figures are superseded.
- Track remediation of internal-control weaknesses, timely filing compliance and the status of the SEC investigation.
- Reconcile cash, outstanding checks, borrowing-base availability, debt maturities and covenants against subsequent filings.
- Assess whether the reported margin and cash-flow recovery is sustainable, particularly as inventory and receivables expanded.
- Verify the final accounting and integration results for Great Wall and Sealand, and developments in the lease guarantee and derivative matter.