HF Foods Group Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. HF Foods distributes Asian specialty food and other products primarily to restaurants across U.S. regions. Comparisons with 2020 reflect the severe pandemic-related sales decline in that period.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $193.5 million | $104.6 million | $352.9 million | $280.4 million |
| Gross profit / margin | $35.1 million / 18.2% | $20.6 million / 19.7% | $64.6 million / 18.3% | $49.6 million / 17.7% |
| Operating income (loss) | $5.2 million | $(4.5) million | $6.5 million | $(4.9) million |
| Net income (loss) attributable to HF Foods | $3.6 million | $(4.1) million | $5.1 million | $(343.9) million |
| Adjusted EBITDA | $11.9 million | $3.4 million | $20.8 million | $7.8 million |
| Operating cash flow | Not separately stated | Not separately stated | $13.3 million | $32.4 million |
Q2 revenue rose 85.1% year over year; six-month revenue rose 25.9%. Independent-restaurant sales drove growth, while wholesale revenue declined 14.5% for the six-month period. Q2 gross margin fell 1.5 percentage points year over year, which management attributed mainly to food-cost inflation (about 12%) not fully passed on to customers and a changing customer mix. The company also recorded a $0.5 million loss on a sale of soon-to-expire inventory; management said normalized Q2 gross margin was 18.5%.
Six-month 2021 net income compares with a substantial 2020 loss that included a $338.2 million goodwill impairment and pandemic-related sales weakness. Adjusted EBITDA is a non-GAAP measure; the filing reports $20.8 million for the first half, including adjustments for legal costs and other items.
Liquidity, debt and balance sheet
- Cash was $13.4 million at June 30, 2021, up from $9.6 million at December 31, 2020. Current assets were $113.5 million and current liabilities $90.0 million.
- The $100 million revolving credit facility had $19.1 million outstanding; management reported approximately $80.9 million of additional availability, subject to borrowing-base calculations. The facility matures in November 2022.
- Long-term debt totaled $90.9 million, including $5.8 million current and $85.1 million non-current. The company also reported a $5.5 million related-party promissory note and a $15.0 million bank overdraft.
- Total liabilities were $242.2 million and shareholders’ equity $265.0 million. Operating lease liabilities totaled $16.5 million.
- Six-month investing cash use was $5.6 million, including the $5.0 million purchase of Kirnland’s non-controlling interest. Financing cash use was $3.8 million. Cash increased $3.8 million during the period.
Operating cash flow declined $19.1 million year over year, which management attributed primarily to working-capital changes, including higher receivables and inventory. Management stated it expected operating cash generation to cover normal working capital and debt needs for at least 12 months, while noting that this depends on sales, economic conditions, COVID-related restrictions, and continued support from banks and suppliers.
Management commentary, risks and unusual items
- Management said Q2 sales had recovered to approximately 93% of the comparable 2019 pre-pandemic level. It cited easing restrictions and recovery in restaurant demand, while noting intermittent restrictions remained.
- Management reported higher food costs and diesel fuel prices; diesel prices were up 36.5% versus the comparable 2020 quarter. The company does not generally hedge fuel-price risk.
- The company unwound an $80 million forward-starting interest-rate swap in March 2021 and recorded a gain of approximately $0.7 million. At June 30, floating-rate debt was approximately $92.2 million; management estimated a 1% rate change would alter annual interest expense by about $0.9 million.
- Related-party transactions remain under scrutiny in an ongoing Special Committee investigation and a formal, non-public SEC investigation. Securities and derivative lawsuits are pending; the company says it intends to defend them. The filing does not quantify a clear potential loss amount.
- Disclosure controls were deemed ineffective as of June 30 because of material weaknesses, including limited accounting/reporting expertise and deficiencies in IT general controls and documentation. Remediation efforts were underway; management cautioned they may not be successful.
- No specific financial guidance was provided. The filing describes outlook as dependent on sales recovery and broader economic and operating conditions.
Investor facts to verify
- Whether restaurant sales and margins can sustain recovery amid inflation and changing customer mix.
- Revolver availability, borrowing-base constraints, covenant compliance, and the company’s ability to service and refinance debt.
- Developments and potential financial effects of the SEC and Special Committee investigations and related litigation.
- Progress and effectiveness of remediation of the disclosed internal-control material weaknesses.
- The composition and recurring nature of Adjusted EBITDA adjustments, including legal expenses.