HF Foods Reports Second Quarter 2020 Financial Results

Rhea-AI Summary

HF Foods Group Inc. (NASDAQ: HFFG) reported second quarter 2020 results with a 40% increase in net revenue, totaling $104.6 million, compared to $74.7 million in Q2 2019. However, the company faced a net loss of $4.1 million or $(0.08) per diluted share, contrasting with a net income of $1.0 million in the previous year. Pro forma results showed a significant revenue decrease from $208.0 million to $104.6 million. Despite challenges, the company improved its liquidity position, recovering sales to approximately 65% of pre-COVID-19 levels.

Positive

• Net revenue increased 40% to $104.6 million compared to $74.7 million in Q2 2019.
• Sales volumes recovered to approximately 65% of pre-COVID-19 levels.

Negative

• Net loss of $4.1 million in Q2 2020 compared to net income of $1.0 million in Q2 2019.
• Pro forma revenue decreased significantly from $208.0 million to $104.6 million.

CITY OF INDUSTRY, Calif., Aug. 10, 2020 (GLOBE NEWSWIRE) -- HF Foods Group Inc. (NASDAQ: HFFG), a leading food distributor to Asian restaurants across the Southeast, Pacific and Mountain West regions of the United States, reported second quarter and pro forma financial results for the period ended June 30, 2020.

As previously announced in a press release on November 4, 2019, HF Foods merged with B&R Global Holdings (“B&R”). The pro forma results reflect the combined results of HF Foods Group and B&R as if the transaction had occurred on the first day of the prior period presented.

Second Quarter 2020 Financial Summary (which includes the B&R transaction in Q2 2020 but not Q2 2019)

• Net revenue increased 40% to $104.6 million compared to $74.7 million in the second quarter of 2019.
• Gross profit was $20.6 million, or 19.7% of total revenue, compared to $12.5 million, or 16.7% of total revenue, in the second quarter of 2019.
• Net loss was $4.1 million, or $(0.08) per diluted share. This compares to net income of $1.0 million, or $0.05 per diluted share, in the second quarter of 2019.
• Adjusted EBITDA was $3.4 million compared to $3.6 million in the second quarter of 2019.

Pro Forma Second Quarter 2020 Financial Summary

• Pro forma net revenue decreased to $104.6 million from $208.0 million.
  
• Pro forma gross profit was $20.6 million, or 19.7% of total revenue, compared to $33.7 million, or 16.2% of total revenue, in the second quarter of 2019.
  
• Pro forma net loss was $4.1 million, or $(0.08) per diluted share, compared to net income of $1.4 million, or $0.03 per diluted share, in the second quarter of 2019.
  
• Pro forma adjusted EBITDA was $3.4 million compared to $8.9 million in the second quarter of 2019.

“Following the initial shock of the COVID-19 pandemic, we swiftly adjusted our delivery operations to better align with the needs of our customers, and we improved our cost structure to ensure the business’s long-term viability,” said Zhou Min Ni, chairman and Co-CEO of HF Foods. “The decisive actions we took in April improved our liquidity position and ensured that we could continue supporting our customers’ and our communities’ essential needs during an unprecedented time in which our customers’ traditional means of doing business were upended. Since May, our sales have increased each month as consumers and our customers have adapted to the current environment. We are optimistic that our strong financial position and market expertise will allow us to continue operating effectively and eventually result in renewed success as the difficulties impacting our customers subside.”

Liquidity
At the end of the second quarter of 2020, HF Foods had $8.6 million in cash and access to approximately $68 million in additional funds through its $100 million line of credit, subject to a borrowing base calculation. The strategic cost management actions undertaken in late March and April 2020 resulted in an overall improvement of the available line of credit and ensured the Company could confidently navigate through the unconventional operating environment created by the COVID-19 pandemic.

The Company has experienced a steady recovery of business volume since late April as fear among consumers began to subside. Weekly sales recovered to over 50% and 60% of pre-COVID-19 levels in the months of May and June, respectively. The recovery trend continued into the month of July, and the Company is now experiencing relatively stabilized sales volumes equivalent to approximately 65% of pre-COVID-19 levels. With current sales volumes and its adjusted cost structure, the Company has been able to generate positive operating cash flows on a weekly basis and does not have immediate liquidity concerns. Any potential concerns related to liquidity are expected to be further mitigated should sales volumes remain stable or improve further.

Peter Zhang, Co-CEO, commented, “The measures we took to fortify the business in late March and April ensured that we were well-positioned to support our customers as they began reopening their businesses in the second quarter. To date, our sales volumes have recovered to approximately 65% of our pre-COVID-19 levels, and even at these lower levels, we are generating positive cash flow on a weekly basis. The events of the past few months clearly demonstrate that HF is a remarkably flexible organization capable of molding our operations to fit the demands of the market. With the Company stable and evidence of economic activities returning to more normal levels, we remain optimistic about returning to our long-term growth path.”

Pro Forma Results for the Second Quarter of 2020
On a pro forma basis, revenue in the second quarter of 2020 decreased to $104.6 million compared to $208.0 million in the same period last year. The decrease in revenue was due to a decline in sales to independent restaurants as many experienced forced closures or conversion to a take-out only model in response to the COVID-19 pandemic.

Pro forma gross profit was $20.6 million (19.7% of total revenue) compared to $33.7 million (16.2% of total revenue) in the second quarter of 2019. The improvement in gross margin was primarily attributable to the elimination of lower margin sales to buffet restaurants, many of which are still severely impacted by the outbreak of COVID-19, as well as the sell-through of existing lower cost inventory at higher gross margins in line with the general increase in food prices.

Pro forma distribution, selling and administrative expenses for the second quarter were $25.1 million compared to $30.3 million in the same period last year. The $5.2 million decrease was mainly attributed to a corresponding $7.5 million reduction in distribution and selling costs. Distribution, selling and administrative expenses also included a substantial straight-line amortization of $2.7 million on intangibles, including tradenames and customer relationships associated with the B&R merger transaction based on U.S. accounting GAAP rules.

Pro forma net loss for the second quarter of 2020 was $4.1 million, or $(0.08) per diluted share, compared to net income of $1.4 million, or $0.03 per diluted share, in the second quarter of 2019.

Adjusted EBITDA on a pro forma basis in the second quarter of 2020 was $3.4 million compared to $8.9 million in the same year-ago period. The decline was primarily due to reduced revenues, as described above.  

About HF Foods Group Inc.
HF Foods Group Inc., headquartered in City of Industry, California, is a leading marketer and distributor of fresh produce, frozen and dry food, and non-food products to primarily Asian/Chinese restaurants and other foodservice customers throughout the Southeast, Pacific and Mountain West regions of the United States. With 14 distribution centers along the U.S. eastern and western seaboards, HF Foods aims to supply the increasing demand for Asian American restaurant cuisine. With an in-house proprietary ordering and inventory control network, more than 10,000 established customers in 21 states, and strong relations with growers and suppliers of food products in the US and China, HF Foods Group is able to offer fresh, high-quality specialty restaurant foods and supplies at economical prices to its large and growing base of customers. For more information, please visit hffoodsgroup.com.

Non-GAAP Financial Measures
Adjusted EBITDA: The Company believes that adjusted EBITDA is a useful performance measure and can be used to facilitate a comparison of the Company’s operating performance on a consistent basis from period to period and to provide for a more complete understanding of factors and trends affecting the business than GAAP measures alone can provide. Management believes that adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that directly affect our operating performance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial performance with that of other companies in the same industry, many of which present similar non-GAAP financial measures to investors. The Company presents adjusted EBITDA in order to provide supplemental information that the Company considers relevant for the readers of our consolidated financial statements included elsewhere in its reports filed with the SEC, including its current Quarterly Report on Form 10Q, and such information is not meant to replace or supersede U.S. GAAP measures.

The following table sets forth of the calculation of adjusted EBITDA and reconciliation to net income (loss), the closest U.S. GAAP measure:

	For the three months ended June 30,									Change
	2020					2019				Amount					%
Net income (loss)	$	(4,314,190	)			$	1,060,714			$	(5,374,904	)			(506.7	)	%
Interest expenses	324,319					388,160				(63,841		)			(16.4	)	%
Income tax provision (benefit)	(1,489,305		)			460,751				(1,950,056		)			(423.2	)	%
Depreciation and amortization	4,335,932					727,423				3,608,509					496.1		%
Change in fair value of interest rate swap contracts	1,264,254					—				1,264,254					100.0		%
COVID-19 bad debt reserve	1,886,781					—				1,886,781					100.0		%
Non-recurring expenses	1,405,671					1,000,000				405,671					40.6		%
Adjusted EBITDA	$	3,413,462				$	3,637,048			$	(223,586	)			(6.1	)	%
Percentage of revenue	3.3			%		4.9		%		(1.6		)	%		(32.7	)	%

 

Forward-Looking Statements

All statements in this news release other than statements of historical facts are forward-looking statements which contain our current expectations about our future results. We have attempted to identify any forward-looking statements by using words such as “anticipates,” “believes,” “could,” “expects,” “intends,” “may,” “should” and other similar expressions. Although we believe that the expectations reflected in all of our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Such statements are not guarantees of future performance or events and are subject to known and unknown risks and uncertainties that could cause the Company’s actual results, events or financial positions to differ materially from those included within or implied by such forward-looking statements. Such factors include, but are not limited to, unfavorable macroeconomic conditions in the United States, competition in the food service distribution industry, particularly the entry of new competitors into the Chinese/Asian restaurant market niche, increases in fuel costs or commodity prices, disruption of relationships with vendors and increases in product prices, U.S. government tariffs on products imported into the United States, particularly from China, changes in consumer eating and dining out habits, disruption of relationships with or loss of customers, our ability to execute our acquisition strategy, availability of financing to execute our acquisition strategy, control of the Company by our Chief Executive Officer and principal stockholder, failure to retain our senior management and other key personnel, our ability to attract, train and retain employees, changes in and enforcement of immigration laws, failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws, product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations, failure to protect our intellectual property rights, any cyber security incident, other technology disruption, or delay in implementing our information technology systems, statements of assumption underlying any of the foregoing, the continuing impact of the Covid-19 pandemic, and other factors disclosed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by law, we undertake no obligation to disclose any revision to these forward-looking statements.

Investor Relations Contact:
Gateway Investor Relations
Cody Slach
Tel 1-949-574-3860
HFFG@gatewayir.com

HF Foods Group Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

	As of
	June 30, 2020				December 31, 2019
ASSETS
CURRENT ASSETS:
Cash	$	8,565,019			$	14,538,286
Accounts receivable, net	23,166,278				50,027,134
Accounts receivable - related parties, net	1,049,552				4,202,870
Inventories, net	66,783,183				77,531,854
Advances to suppliers - related parties, net	129,632				745,135
Other current assets	3,762,316				4,374,338
TOTAL CURRENT ASSETS	103,455,980				151,419,617
Property and equipment, net	139,272,839				37,538,147
Security deposits-related parties	—				591,380
Operating lease right-of-use assets	785,478				17,155,584
Long-term investments	2,346,613				2,296,276
Intangible assets, net	181,242,800				186,687,950
Goodwill	68,511,941				406,703,348
Deferred tax assets	319,320				78,993
Other long-term assets	342,712				372,499
TOTAL ASSETS	$	496,277,683			$	802,843,794
CURRENT LIABILITIES:
Bank overdraft	$	7,584,937			$	14,952,510
Lines of credit	31,953,659				41,268,554
Accounts payable	30,373,030				39,689,911
Accounts payable - related parties	2,390,482				4,521,356
Current portion of long-term debt, net	7,802,869				2,726,981
Current portion of obligations under finance leases	293,399				280,243
Current portion of obligations under operating leases	299,849				4,322,503
Accrued expenses and other liabilities	3,529,080				2,610,538
Obligations under interest rate swap contracts	1,337,412				73,158
TOTAL CURRENT LIABILITIES	85,564,717				110,445,754
Long-term debt, net	88,728,722				18,535,016
Promissory note payable - related party	7,000,000				—
Obligations under finance leases, non-current	904,273				1,053,166
Obligations under operating leases, non-current	485,629				12,833,081
Deferred tax liabilities	50,063,332				52,320,045
TOTAL LIABILITIES	232,746,673				195,187,062
SHAREHOLDERS’ EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized , no shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively	—				—
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 53,050,211 shares issued, and 52,145,096 shares outstanding as of June 30, 2020 and December 31, 2019, respectively	5,305				5,305
Treasury Stock, at cost, 905,115 shares as of June 30, 2020 and December 31, 2019, respectively	(12,038,030		)		(12,038,030		)
Additional paid-in capital	599,617,009				599,617,009
Retained earnings (accumulated deficit)	(328,119,184		)		15,823,661
Total shareholders’ equity attributable to HF Foods Group Inc.	259,465,100				603,407,945
Noncontrolling interest	4,065,910				4,248,787
TOTAL SHAREHOLDERS’ EQUITY	263,531,010				607,656,732
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	496,277,683			$	802,843,794

HF Foods Group Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

	For the three months Ended June 30,									For the Six months ended June 30,
	2020				2019					2020					2019
Net revenue - third parties	$	101,103,767			$	70,648,233				$	271,743,781				$	140,952,144
Net revenue - related parties	3,456,329				4,069,973					8,619,651					8,567,084
TOTAL NET REVENUE	104,560,096				74,718,206					280,363,432					149,519,228
Cost of revenue - third parties	80,707,172				58,310,424					222,611,409					116,035,779
Cost of revenue - related parties	3,240,140				3,895,629					8,164,194					8,264,440
TOTAL COST OF REVENUE	83,947,312				62,206,053					230,775,603					124,300,219
GROSS PROFIT	20,612,784				12,512,153					49,587,829					25,219,009
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES	25,092,568				11,094,041					54,499,161					21,459,213
INCOME (LOSS) FROM OPERATIONS	(4,479,784		)		1,418,112					(4,911,332		)			3,759,796
Other Income (Expenses)
Interest income	132				152,518					263					304,467
Interest expenses	(324,319		)		(388,160			)		(2,275,888		)			(725,118		)
Goodwill impairment loss	—				—					(338,191,407		)			—
Other income	264,730				338,995					670,380					623,530
Change in fair value of interest rate swap contracts	(1,264,254		)		—					(1,264,254		)			—
Total Other Income (Expenses), net	(1,323,711		)		103,353					(341,060,906		)			202,879
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)	(5,803,495		)		1,521,465					(345,972,238		)			3,962,675
PROVISION (BENEFIT) FOR INCOME TAXES	(1,489,305		)		460,751					(1,971,516		)			1,108,390
NET INCOME (LOSS)	(4,314,190		)		1,060,714					(344,000,722		)			2,854,285
Less: net income (loss) attributable to noncontrolling interest	(255,287		)		37,819					(57,877		)			158,577
NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC.	$	(4,058,903	)		$	1,022,895				$	(343,942,845	)			$	2,695,708
Earnings (loss) per common share - basic and diluted	$	(0.08	)		$	0.05				$	(6.60	)			$	0.12
Weighted average shares - basic and diluted		52,145,096					22,167,486				52,145,096					22,167,486

FAQ

What were HF Foods Group's second quarter 2020 financial results?

HF Foods reported a net revenue of $104.6 million, a net loss of $4.1 million, and adjusted EBITDA of $3.4 million.

How did the COVID-19 pandemic impact HF Foods Group's revenue?

The pandemic led to a decrease in sales, causing pro forma revenue to drop from $208.0 million to $104.6 million.

What is HF Foods Group's outlook after the second quarter of 2020?

The company reports a recovery in sales volumes to approximately 65% of pre-COVID-19 levels and expresses optimism for a return to long-term growth.

How did HF Foods manage its liquidity during the pandemic?

The company improved its liquidity position with $8.6 million in cash and access to $68 million in additional funds through its line of credit.

What were the gross profit margins for HF Foods in Q2 2020?

HF Foods recorded a gross profit of $20.6 million, representing 19.7% of total revenue.