HF Foods Group Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter report. Financial statements were audited and presented fairly under U.S. GAAP; the auditor did not opine on internal control effectiveness.
Business context
HF Foods distributes food and related products primarily to Asian restaurants. On November 4, 2019, it acquired B&R Global in a stock transaction, issuing 30.7 million shares valued at approximately $576.7 million. The combined business reported 14 distribution centers, more than 340 refrigerated vehicles, and service to over 10,000 restaurants in 21 states. Because B&R Global was consolidated only from the acquisition date, reported 2019 and 2018 results are not directly comparable.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net revenue | $388.2 million | $291.0 million | +33.4% |
| Gross profit / margin | $63.2 million / 16.3% | $49.6 million / 17.0% | Margin down 0.7 percentage points |
| Operating income | $8.3 million | $8.5 million | -2.9% |
| Net income attributable to HF Foods | $5.4 million | $6.3 million | -14.3% |
| Diluted EPS | $0.22 | $0.30 | Lower |
| Adjusted EBITDA (non-GAAP) | $16.9 million | $14.2 million | +19.0%; margin 4.3% vs. 4.9% |
| Cash from operating activities | $4.7 million | $12.0 million | Down approximately 61% |
Management attributed reported revenue growth mainly to B&R Global, which contributed $86.1 million after closing, and to higher HF sales, including increased average order sizes and commodity pricing. The lower consolidated gross margin primarily reflected B&R Global’s lower margin. Higher distribution, selling and administrative expenses included acquisition-related costs and acquired intangible amortization.
On an unaudited pro forma basis assuming the merger occurred January 1, 2018, revenue was $828.0 million in 2019 versus $818.0 million in 2018 (+1.2%); net income attributable to HF Foods was $5.7 million versus $15.8 million; and Adjusted EBITDA was $32.9 million versus $38.7 million (-15.1%). These figures are illustrative, not forecasts, and exclude synergies and integration costs.
Financial position, liquidity and debt
At December 31, 2019, cash was $14.5 million, current assets $151.4 million, and current liabilities $110.4 million, implying working capital of approximately $41.0 million and a current ratio of about 1.37. Total assets were $802.8 million, including $406.7 million of goodwill and $186.7 million of acquired intangible assets. Total liabilities were $195.2 million.
Year-end balance sheet amounts included $41.3 million of revolving credit lines, a $15.0 million bank overdraft, and $21.3 million of long-term debt (including current maturities). Finance lease liabilities totaled approximately $1.3 million. The filing’s separate credit agreement disclosure gives a year-end revolving balance of approximately $41.6 million, rather than the balance-sheet figure; investors should reconcile this difference. Operating cash flow fell substantially, with management citing working-capital movements, including receivables and payables.
In January 2020, the company amended its credit agreement to provide a $100 million revolving facility and $75.6 million of mortgage-secured term loans. It used $75.6 million of term borrowing and $18.7 million drawn on the revolver, along with a $7.0 million unsecured subordinated note, to fund a roughly $101.3 million purchase of warehouse-owning subsidiaries from B&R Group Realty. The Co-CEO had an 8.91% interest in the seller. Management stated it expected operating cash flow to meet normal working-capital needs for at least 12 months, while acknowledging that demand, economic conditions and lender or supplier support could affect liquidity.
Outlook, risks and unusual items
- Outlook: Management intends to continue growth through acquisitions, contingent on financing and successful integration. No quantified forward guidance was provided.
- COVID-19: At filing, management said the impact was unknown and could affect restaurant demand, suppliers and service providers, including in China; it was monitoring customers, suppliers and liquidity.
- Key operating risks: Competition, fuel and commodity costs, vendor and customer concentration, tariffs on imports, food safety and recalls, labor availability and costs, severe weather, leases, cybersecurity, and acquisition integration and financing.
- Controls: Management found material weaknesses in financial reporting controls, including insufficient in-house U.S. GAAP/SEC reporting expertise and ineffective IT general controls. Disclosure controls were also deemed ineffective. Remediation efforts were underway, but success was not assured.
- Labor settlement and litigation: In March 2019, a subsidiary paid approximately $1.83 million to resolve a Department of Labor wage investigation involving back wages, liquidated damages and a penalty. Separate employment lawsuits were pending; management disputed the allegations and recorded no loss accrual.
- Related-party exposure: The company disclosed related-party sales of approximately $19.4 million and purchases of approximately $40.4 million in 2019, along with related-party receivables, payables and leases.
Important facts for investors to verify
- Reconcile the year-end revolving debt disclosure ($41.3 million on the balance sheet versus approximately $41.6 million in the credit note) and understand the bank overdraft and covenant headroom.
- Assess the January 2020 related-party warehouse acquisition, purchase-price support, financing terms and resulting leverage.
- Track post-merger comparable revenue, margins, cash conversion, integration expenses and realization of expected operational benefits.
- Review progress in remediating the disclosed internal-control weaknesses and the reliability of future reporting.
- Monitor COVID-19 effects on restaurant demand, supply availability, working capital and liquidity, as well as outcomes of pending employment claims and the continuing AnHeart lease guaranty exposure.