HF Foods Group Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report. HF Foods distributes Asian specialty foods and other products primarily to Asian restaurants across the United States. It reported 18 distribution centers serving 46 states and more than 15,000 restaurants.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net revenue | $1,170.5 million | $796.9 million | +46.9% |
| Gross profit / margin | $205.5 million / 17.6% | $151.5 million / 19.0% | Profit +35.6%; margin down 1.4 percentage points |
| Distribution, selling and administrative expenses | $195.0 million / 16.7% of revenue | $122.0 million / 15.3% | +59.8% |
| Operating income | $10.6 million | $29.5 million | −64.2% |
| Net income attributable to HF Foods | $0.5 million; $0.01 per diluted share | $22.1 million; $0.43 per diluted share | −97.9% |
| Adjusted EBITDA and margin | $40.1 million / 3.4% | $50.8 million / 6.4% | −21.1%; margin down 3.0 percentage points |
| Cash provided by operating activities | $31.3 million | $17.5 million | +$13.8 million |
| Cash used in investing activities | $50.8 million | $41.1 million | More cash used, primarily reflecting acquisitions |
| Cash provided by financing activities | $29.0 million | $28.8 million | Broadly unchanged |
Revenue growth reflected $121.1 million of organic growth and $252.5 million from acquisitions, alongside product-cost inflation and recovering restaurant demand. Seafood increased to 30% of sales from 16%, contributing to the lower gross margin, as did fuel costs, lower-margin acquired customers, inventory-purchase timing and commodity-price volatility. Higher labor, professional and delivery costs pushed operating expenses up faster than revenue.
Net income for the consolidated group was $0.2 million; net income attributable to HF Foods was $0.5 million because noncontrolling interests recorded a net loss. Interest expense rose 82.3% to $7.5 million, reflecting higher borrowing and rates. The company recorded a $5.7 million lease-guarantee expense and a $0.4 million impairment of acquired developed technology. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Balance sheet, debt and liquidity
- Cash at year-end was $24.3 million. Checks issued but not yet presented for payment were $21.9 million.
- Borrowings included $53.1 million drawn on a $100 million asset-secured revolving facility and $122.0 million of long-term mortgage and equipment debt principal. The company reported $46.9 million of additional revolver availability, subject to borrowing-base calculations.
- Total liabilities were $341.3 million and shareholders’ equity was $296.2 million. Current assets were $197.9 million and current liabilities were $163.9 million.
- Management said operating cash flow was expected to cover normal working-capital needs and debt obligations for at least the next 12 months, while noting dependence on sales, economic conditions, competition, and continued bank and supplier support.
- About 94.1% of aggregate floating-rate debt was unhedged at year-end. A hypothetical 1 percentage-point rate change was estimated to change annual interest expense by approximately $1.6 million. A $120 million amortizing interest-rate swap became effective March 1, 2023.
Material developments, outlook and risks
- Acquisitions: HF Foods acquired Sealand’s operating assets on April 29, 2022, expanding its East Coast reach. The cash purchase price was $20.0 million, with approximately $14.4 million of acquired inventory and $0.5 million of additional fixed assets. Sealand contributed $55.6 million of revenue and $0.7 million of operating income after acquisition through year-end. The Great Wall acquisition, completed at the end of 2021, also contributed to 2022 comparisons.
- Outlook: Management expressed optimism about long-term prospects and cited recovery in restaurant demand, but did not provide numerical revenue, earnings or margin guidance. It intends to pursue geographic growth, primarily through acquisitions, while investing in technology and operational efficiency.
- Costs and execution: The company cited low industry margins, inflation, fuel and commodity costs, labor availability, competitive pricing, supply-chain disruption, and the ability to pass cost increases on to customers as important risks. It also depends on key personnel and successful integration and financing of acquisitions.
- Controls and reporting: Management concluded that internal control over financial reporting and disclosure controls were ineffective at December 31, 2022 because of continuing material weaknesses, including entity-level controls, IT general controls, complex accounting, review procedures and monitoring. BDO issued an adverse opinion on internal control but an unqualified opinion on the 2022 and 2021 financial statements. The company is working on remediation; effectiveness has not yet been established.
- Regulatory and litigation matters: A non-public SEC investigation remained ongoing, and the company said it was cooperating. The SEC had made no demand; potential fines or penalties could not be estimated. A shareholder derivative action alleging officer and director misconduct was stayed while a special committee evaluated the claims. The earlier putative class actions were dismissed and closed.
- Listing status and restatement: The company disclosed Nasdaq noncompliance related to the delayed annual meeting and said it intended to hold the meeting by June 2023 to regain compliance; failure could lead to delisting. It also restated 2020 financial statements for material errors involving leases, related parties, revenue timing, self-insurance, compensation, classifications and earnings per share.
- Other items: Goodwill testing following a share-price decline found fair value above carrying value, so no 2022 goodwill impairment was recorded. The company reported related-party transactions and a $7.2 million warehouse sale to a related party. It does not anticipate paying dividends in the foreseeable future.
Key facts for investors to verify
- Whether margins and earnings recover as acquisition-related, labor, fuel, compliance and professional costs evolve.
- Actual revolver availability, debt amortization, covenant compliance and sensitivity to floating interest rates.
- Progress and independent evidence of remediation of the reported material weaknesses, and timely filing of subsequent reports.
- Developments in the SEC investigation, shareholder derivative action and the AnHeart lease guarantee, including any financial exposure.
- Nasdaq listing compliance and the status and timing of the annual meeting.
- Acquisition integration, acquired-business profitability and the assumptions underlying goodwill and intangible-asset valuations.