HF Foods Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison with Q1 2018 unless otherwise noted. HF Foods distributes food and related products primarily to Asian/Chinese restaurants and foodservice customers in the southeastern United States. The company reports approximately 3,200 restaurant customers and three distribution centers.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $74.80 million | $74.58 million | +0.3% |
| Gross profit / margin | $12.71 million / 17.0% | $12.10 million / 16.2% | +5.0%; margin +0.8 percentage points |
| Operating income | $2.34 million | $2.03 million | +15.3% |
| Net income attributable to HF Foods | $1.67 million | $1.35 million | +24.1% |
| Basic and diluted EPS | $0.08 | $0.07 | — |
| Adjusted EBITDA (non-GAAP) | $3.49 million; 4.7% of revenue | $2.79 million; 3.7% of revenue | +24.9% |
| Cash from operations | $2.52 million | $3.60 million | Down about 30% |
Revenue was nearly unchanged: independent-restaurant sales rose 0.4%, while wholesale sales declined 0.6%. Management attributed higher gross margin mainly to lower vendor purchase prices, stronger purchasing leverage, and improved centralized procurement, inventory, and logistics management. Meat and frozen food represented 35% of Q1 2019 sales versus 39% a year earlier; management cited lower purchase prices amid trade tensions between the U.S. and China.
Distribution, selling and administrative expense increased 2.9% to $10.37 million, primarily due to higher senior-management salaries and contract truck-driver costs. Interest expense and bank charges declined 16.9% to $0.34 million. The effective tax rate was 26.5%, compared with 26.6%.
Cash, liquidity and debt
- Cash was $6.90 million at March 31, 2019, up from $5.49 million at year-end. Operating activities provided $2.52 million; investing used $1.38 million, including $1.34 million in property and equipment purchases; financing provided $0.27 million.
- Current assets were $51.84 million and current liabilities $34.40 million. Working-capital cash use included a $1.50 million increase in inventory.
- Debt included $7.09 million drawn on lines of credit, $16.11 million of long-term debt (including $1.71 million current), and $1.54 million of finance-lease liabilities. The company reported compliance with long-term debt covenants at March 31. One subsidiary’s line-of-credit covenant noncompliance at December 31, 2018 was waived by the bank in March; the subsidiary was compliant at March 31.
- Management said operating cash flow was expected to cover normal working-capital needs for at least 12 months and that resources were sufficient for working capital and debt obligations, while cautioning that demand, economic conditions, competition, and continued bank and supplier support could affect that assessment.
Outlook, material developments and risks
- No quantified revenue or earnings guidance was provided. Management’s stated strategy is to acquire distributors and wholesalers, expand geographically, invest in management technology, and develop value-added products. Execution depends on financing and successful integration of acquisitions.
- On April 18, 2019, the company and subsidiaries entered a new $25 million secured revolving credit facility with East West Bank, maturing August 18, 2021. The facility replaced prior senior debt, including $6.11 million repaid from its proceeds, and includes financial covenants. On April 25, the company agreed to buy a vacant Charlotte warehouse for $3.225 million to expand frozen-storage capacity and serve additional markets.
- The company transferred its ownership of AnHeart Inc. for $20,000; the transfer was completed May 2, 2019. HF Foods remains guarantor of AnHeart’s obligations under two Manhattan building leases (initial terms of 30 and 15 years). The filing describes security and a third-party guaranty but does not provide a clear estimate of HF Foods’ maximum exposure.
- Related-party activity is significant: Q1 related-party sales were $4.50 million and purchases were $8.93 million. Related-party notes receivable totaled $8.64 million at quarter-end. Several related-party notes were extended to February 2024 and personally guaranteed by the CEO. Three suppliers represented 54%, 16%, and 15% of total supplier advances at March 31.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness in financial-reporting controls, including insufficient SEC-reporting expertise and documentation of reviews and customer transaction acknowledgments. The company hired an Assistant Controller and continued remediation; management cautioned the weaknesses would remain until remediation was completed and tested.
- Key stated risks include fuel and commodity-price increases, tariffs and vendor disruption, customer losses, competition, food-safety and regulatory compliance, employee retention, acquisition financing and integration, and CEO control. Management reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the new $25 million credit facility’s availability, borrowing costs, collateral terms, and covenant compliance support both operations and planned expansion.
- Cash conversion and working-capital trends, particularly inventory growth and the decline in operating cash flow despite higher earnings.
- Quality, collectability, repayment terms, and governance safeguards for related-party notes receivable, supplier advances, sales, and purchases.
- Potential exposure under the AnHeart lease guarantees and the protections and enforceability of the stated security and third-party guaranty.
- Progress in remediating internal-control weaknesses and whether future filings report effective controls.
- Actual costs, funding, and expected returns from the Charlotte warehouse and any future acquisitions.