HF Foods Group Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. HF Foods distributes Asian specialty foods and other products to restaurants and food-service customers in the United States. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $215.5 million (+54.0%) | $139.9 million | $568.5 million (+35.3%) | $420.3 million |
| Gross profit / margin | $41.9 million / 19.4% | $25.2 million / 18.0% | $106.5 million / 18.7% | $74.8 million / 17.8% |
| Operating income (loss) | $10.9 million | $0.1 million | $17.5 million | $(343.0) million |
| Net income (loss) attributable to HF Foods | $7.9 million | $(0.6) million | $13.0 million | $(344.6) million |
| Diluted EPS | $0.15 | $(0.01) | $0.25 | $(6.61) |
| Adjusted EBITDA (non-GAAP) | $17.4 million | $6.0 million | $38.2 million | $13.7 million |
Growth was driven mainly by sales to independent restaurants, up 54.7% in Q3 and 37.0% for the nine-month period. Management attributed recovery to easing COVID-related restrictions and returning dine-in activity. Gross margin gains were attributed to procurement and sales execution despite inflation in product costs. Distribution, selling and administrative expenses rose 23.6% in Q3 and 11.9% year to date, below revenue growth; higher labor and freight/fuel costs contributed. Nine-month 2020 results included a $338.2 million goodwill impairment, which explains much of the reported year-over-year earnings turnaround. Adjusted EBITDA is a company-defined non-GAAP measure; 2021 figures include legal and investigation expenses added back.
Cash flow, balance sheet and liquidity
- Nine-month cash flow: Operating activities provided $10.2 million, versus $44.3 million in 2020. Increased receivables and inventory associated with higher sales were principal working-capital uses. Investing activities used $6.4 million, including $5.0 million to acquire Kirnland’s remaining minority interest. Financing activities provided $2.2 million. Cash increased $6.0 million to $15.5 million.
- September 30, 2021 balance sheet: Current assets were $130.5 million and current liabilities $97.8 million. Total assets were $514.5 million; total liabilities were $241.2 million; shareholders’ equity was $273.3 million.
- Debt and credit: Long-term debt was $89.4 million, including $5.7 million current; revolving credit borrowings were $23.0 million; bank overdraft was $19.4 million; and a related-party promissory note was $5.0 million. The company reported covenant compliance. It said approximately $77.0 million remained available under its $100 million revolving facility, subject to borrowing-base limits. The facility matures November 2022; renewal discussions were underway, with management intending to renew it.
- Interest-rate exposure: Management reported $71.8 million of floating-rate debt and estimated a 1 percentage-point rate change would alter annual interest expense by approximately $0.7 million. Diesel prices were up 38.4% year over year in the quarter; the company does not generally hedge fuel prices.
Outlook, risks and unusual items
- Management said Q3 sales reached approximately 105% of pre-COVID levels and described current operating cash flow as positive, with no immediate liquidity concerns if sales remain stable or improve. It believed cash generation would meet normal working-capital and debt needs for at least 12 months. This outlook is conditional, not formal earnings guidance.
- Management cited potential cash-flow pressures from demand, economic conditions or renewed COVID restrictions, competition, and continued support from banks and suppliers. Failure to renew the revolving facility could constrain operations until replacement financing is obtained.
- The SEC’s formal, non-public investigation and the Special Committee’s independent investigation into allegations raised by a 2020 short-seller report remained ongoing, with no final conclusions. The company warned that findings could affect historical financial statements or disclosures and could lead to fines or penalties. Related-party transactions are among the matters under scrutiny.
- The consolidated securities class actions were dismissed and closed without appeal. Derivative litigation remained: one case was voluntarily dismissed November 5, 2021; proceedings in the second resumed November 12. The company said it would defend the remaining suit.
- Disclosure controls were deemed ineffective at quarter-end due to previously reported material weaknesses in accounting/reporting expertise and IT general controls. Management was implementing remediation but cautioned that success was not assured.
- The company revised prior interim lease accounting, reclassifying a New York property lease from operating to finance and correcting related balances; it judged the revisions not material. It also reclassified the 2020 goodwill impairment within the income statement, with no effect on net income or equity.
- Supply-chain disruption, freight and commodity inflation, fuel costs, food safety and regulatory compliance, customer and vendor relationships, acquisition execution, and COVID-related operating changes remain risks.
Important facts for investors to verify
- Whether revenue growth, gross-margin improvement and cash generation persist after reopening-related comparisons normalize, particularly as inventory and receivables have risen.
- Availability and renewal terms for the revolving credit facility before its November 2022 maturity, including borrowing-base capacity and covenant headroom.
- Any findings or financial-statement consequences from the SEC and Special Committee investigations, and developments in the remaining derivative lawsuit.
- Progress in remediating ineffective disclosure controls and the reported accounting and IT control weaknesses.
- The impact of ongoing product, freight and fuel inflation on margins and operating cash flow, and the company’s ability to pass cost increases through to customers.