HF Foods Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless noted. HF Foods distributes food and related products primarily to Asian restaurants and other food-service customers across the United States. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $159.4 million | $175.8 million | Down 9.3% |
| Gross profit / margin | $29.4 million / 18.5% | $29.0 million / 16.5% | Profit up 1.6%; margin up 2.0 percentage points |
| Operating income (loss) | $1.3 million | $(0.4) million | Improved by $1.7 million |
| Net income (loss) attributable to HF Foods | $1.5 million | $(339.9) million | Prior-year loss included $338.2 million goodwill impairment |
| Basic and diluted EPS | $0.03 | $(6.52) | Improved |
| Adjusted EBITDA | $8.9 million | $4.3 million | Up 104.1% |
| Cash from operating activities | $10.6 million | $18.6 million | Down $8.0 million |
Restaurant sales were $153.6 million, down 8.2%; wholesale sales were $5.8 million, down 31.7%. Cost of revenue fell faster than sales, which management attributed to improved customer and product mix and lower-margin buffet business remaining more affected by COVID-19. Selling, distribution and administrative expenses declined 4.3% to $28.1 million, despite higher legal and investigation costs. Interest expense fell 62.0% to $0.7 million, reflecting lower borrowings and rates.
At March 31, 2021, cash was $11.3 million, current assets were $103.9 million and current liabilities were $79.3 million, yielding working capital of approximately $24.7 million. Total assets were $500.8 million and total liabilities were $234.2 million. Long-term debt was $92.4 million, including $5.9 million current; the revolving credit balance was $16.4 million. The company reported $83.4 million of additional availability under its $100 million revolving facility, subject to borrowing-base limits. It was in compliance with stated debt covenants.
Investing activities used $0.4 million, versus $94.1 million in Q1 2020, when the company acquired warehouse properties. Financing activities used $8.5 million, compared with $73.6 million provided in the prior-year quarter. Cash increased $1.7 million to $11.3 million. Capital expenditures were $0.4 million.
Material changes and unusual items
- Revenue remained below the prior-year quarter and management’s pre-COVID comparison: Q1 2021 revenue was 76% of Q1 2019 pro forma levels, versus 84% for Q1 2020. Management said Q1 2020 included two months before the pandemic’s major disruption.
- Q1 2020’s $338.2 million goodwill impairment was not repeated. Management reported no further goodwill impairment at March 31, 2021, and no impairment of finite-lived intangible assets in the quarter.
- Q1 2021 included $1.4 million of income from changes in the fair value of interest-rate swaps. The company unwound an $80 million forward-starting swap in March and recorded a $0.7 million realized gain. Swaps are not designated as accounting hedges.
- Adjusted EBITDA is a non-GAAP measure. The company added back $3.0 million of legal and investigation costs and subtracted swap fair-value gains; its reconciliation also included a $0.2 million COVID-related doubtful-account reserve recovery.
- Related-party revenue was $2.4 million, down from $5.2 million; related-party purchases were $4.6 million, down from $10.5 million. The filing says certain related-party transactions are under scrutiny as part of an ongoing internal investigation.
- Management changed its segment reporting to sales to independent restaurants and wholesale following the February 2021 CEO transition. Former co-CEO Zhou Min Ni resigned from all official posts on February 23; Xiao Mou Zhang became sole CEO.
Outlook, risks and contingencies
Management said it was generating positive weekly operating cash flows, had no immediate liquidity concerns if sales remained stable or improved, and expected demand to recover over time as pandemic effects eased. It stated that cash generated from operations should meet normal working-capital needs for at least the next 12 months, while cautioning that this depends on future asset realization, demand, economic conditions, competitive pricing, and continued support from banks and suppliers. The filing provides no numerical revenue or earnings guidance.
Key risks include continuing COVID-19 effects, commodity and fuel price increases, vendor or customer disruption, competition, food-safety and regulatory requirements, acquisition and integration risks, and access to financing. Floating-rate debt was $90.4 million; a hypothetical 1% rate movement would change annual interest expense by approximately $0.9 million. Diesel prices were 6% higher than in the comparable quarter; the company does not generally hedge fuel prices.
Two putative class actions and two derivative actions allege securities-law violations or fiduciary-duty breaches relating to alleged disclosure failures, related-party transactions, and public-float information. The company intends to defend the cases; a motion to dismiss the amended securities complaint was pending, derivative cases were stayed, and the SEC was investigating the underlying events. Management said it did not expect reasonably possible losses from outstanding legal matters to have a material adverse effect, but noted litigation outcomes are uncertain. Potential losses are unspecified in the filing.
Disclosure controls and procedures were not effective as of March 31, 2021 because of previously reported material weaknesses, including limited in-house U.S. GAAP and SEC-reporting expertise and insufficient IT general controls. Management continued remediation efforts but said there was no assurance they would succeed. The company also assumed the 273 Fifth Avenue lease: a 30-year term with escalating rent and a minimum $2.5 million construction commitment.
Most important facts for investors to verify
- Whether restaurant sales recover from the reported 76% of pre-COVID levels and whether margin improvement is sustainable.
- Cash generation, working-capital movements, borrowing-base availability, debt maturities, and compliance with facility covenants.
- Developments and any financial consequences from the SEC investigation, related-party review, and pending lawsuits.
- Progress in remediating the material weaknesses in financial reporting and IT controls.
- Assumptions supporting goodwill and intangible-asset valuations, and the costs and obligations associated with the 273 Fifth Avenue lease.