HF Foods Group Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. HF Foods distributes food and related products primarily to Asian and Chinese restaurants in the U.S. The year includes a full year of B&R Global results, acquired November 4, 2019, while 2019 includes B&R Global only from the acquisition date; reported year-over-year growth is therefore not directly comparable. The financial statements received an unqualified audit opinion.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $566.8 million | $388.2 million |
| Gross profit / gross margin | $100.3 million / 17.7% | $63.2 million / 16.3% |
| Operating income (loss) | $(5.8) million | $8.3 million |
| Net income (loss) attributable to HF Foods | $(343.0) million; $(6.58) per share | $5.4 million; $0.22 per share |
| Adjusted EBITDA | $19.7 million; 3.5% of revenue | $16.9 million; 4.3% of revenue |
| Cash from operating activities | $44.1 million | $4.7 million |
| Cash and working capital at year-end | $9.6 million; $22.3 million | $14.5 million; $41.0 million |
- Revenue and margins: Reported revenue increased 46.0%, principally because B&R Global contributed $259.4 million, partly offset by an $80.8 million decline in legacy HF business attributed to COVID-19. Gross margin improved 1.4 percentage points, which management attributed mainly to customer and inventory mix.
- Comparable performance: On the company’s unaudited pro forma basis, assuming B&R Global was included for all of 2019, FY2020 revenue decreased 31.5% from $828.0 million and adjusted EBITDA decreased 39.9% from $32.9 million. This comparison better reflects pandemic-related business deterioration than reported growth.
- Profit and unusual items: The $343.0 million attributable net loss was driven primarily by a $338.2 million goodwill impairment recorded in Q1 2020. The impairment followed COVID-19-related deterioration in B&R Global’s outlook; year-end testing found no further impairment. Distribution, selling and administrative expenses were $106.1 million, including $10.9 million of acquired-intangible amortization and $6.2 million of legal and investigation costs.
- Cash flow: Operating cash flow was $44.1 million, aided by noncash impairment and working-capital movements. Investing cash outflow was $94.4 million, primarily the $94.0 million payment for warehouse properties. Financing cash inflow was $45.3 million. Cash decreased $5.0 million during the year.
- Debt and liquidity: At year-end, the company reported $18.3 million drawn on its revolving facility, $93.7 million of long-term debt including current maturities, a $7.0 million related-party subordinated note, and a $14.8 million bank overdraft. The $100 million revolving facility matures November 2022; mortgage term loans mature in 2030. The company reported compliance with credit covenants at December 31, 2020. Management said it expected operating cash generation to cover normal working capital and debt needs for at least 12 months, while acknowledging this depended on business conditions and continued lender and supplier support.
Material developments, outlook and risks
- COVID-19: Restaurant restrictions sharply reduced demand. Sales in the last two weeks of Q1 were about 67% below pro forma prior-year levels; weekly sales fell as much as 75% in April. Several southeastern distribution centers were temporarily closed and reopened April 27. Management reported sales at about 70% of pre-pandemic levels from July onward and positive weekly operating cash flows, but no immediate recovery timetable or formal numerical guidance was provided.
- Acquisition and related-party transaction: In January 2020, the company acquired warehouse properties previously leased from B&R Group Realty for $101.3 million. The transaction was funded with $75.6 million of mortgage loans, an issued $7.0 million note to the seller, and $18.7 million drawn from the revolver. B&R Global’s CEO had an 8.91% ownership interest in the seller; the company said an independent-director committee reviewed and approved the transaction.
- Governance and controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses, including insufficient in-house U.S. GAAP/SEC reporting expertise and deficient IT general controls. Remediation efforts were underway; effectiveness was not yet established. The independent auditor did not audit internal-control effectiveness.
- Legal and regulatory matters: Securities class and derivative actions allege misleading disclosures and related-party transactions; the company could not estimate potential losses and recorded no accrual. A formal, non-public SEC investigation and an independent committee investigation were ongoing. The company incurred $6.2 million of related legal and investigation expenses. Certain labor claims were also pending; the filing reports no accrual for these matters.
- Other risks and subsequent events: Key risks include further pandemic disruption, restaurant demand, food and fuel costs, tariffs, vendor and customer concentration, acquisition integration, and floating-rate debt. A $80 million interest-rate swap was unwound in March 2021, with a reported $718,600 gain in Q1 2021. In February 2021, co-CEO Zhou Min Ni resigned; Xiao Mou Zhang became sole CEO and Russell Libby became board chair.
Investor verification priorities
- Reconcile reported FY2020 growth with the pro forma comparison and segment-level sales, especially the steep decline in legacy HF and combined-company revenue.
- Review the assumptions and valuation sensitivity behind the $338.2 million goodwill impairment and the remaining $68.5 million goodwill balance.
- Assess liquidity, working-capital trends, debt maturities, covenant headroom, and the effect of the 2021 swap unwind under changing rates.
- Monitor the SEC and internal investigations, securities and derivative litigation, related-party transactions, and any resulting financial or governance consequences.
- Track remediation of the disclosed material weaknesses and verify that controls operate effectively over a sufficient period.
- Check share-count disclosures: the filing gives inconsistent figures in different passages, including 51,913,411 shares at December 31, 2020 and conflicting March 2021 counts.