HF Foods Reports First Quarter 2020 Financial Results

CITY OF INDUSTRY, Calif., May 18, 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 first quarter and pro forma financial results for the three months ended March 31, 2020.

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

First Quarter 2020 Financial Summary (which includes the B&R transaction in Q1 2020 but not Q1 2019)

• Net revenue increased 135% to $175.8 million compared to $74.8 million in the first quarter of 2019.
• Gross profit was $29.0 million, or 16.5% of total revenue, compared to $12.7 million, or 17.0% of total revenue, in the first quarter of 2019.
• Net loss was $339.9 million, or $(6.52) per diluted share, and included a one-time goodwill impairment charge of $338.2 million. This compares to net income of $1.7 million, or $0.08 per diluted share, in the first quarter of 2019.
• Adjusted EBITDA increased 25% to $4.3 million compared to $3.5 million in the first quarter of 2019.

Pro Forma First Quarter 2020 Financial Summary

• Pro forma net revenue decreased to $175.8 million from $209.0 million.
• Pro forma gross profit was $29.0 million, or 16.5% of total revenue, compared to $34.5 million, or 16.5% of total revenue, in the first quarter of 2019.
• Pro forma net loss was $339.9 million, or $(6.52) per diluted share, compared to net income of $2.7 million, or $0.05 per diluted share, in the first quarter of 2019.
• Pro forma adjusted EBITDA was $4.3 million compared to $10.0 million in the first quarter of 2019.

“During the first two months of 2020, our business was relatively well-insulated from the COVID-19 pandemic,” said Zhou Min Ni, chairman and Co-CEO of HF Foods. “But we began to experience a gradual decline in sales towards the end of February, which intensified in the last two weeks of March as stay-at-home orders were instituted almost ubiquitously across the United States. Due to the forced closure or conversion to an exclusively take-out model for our restaurant clients, our pro forma sales declined approximately 67% in the last two weeks of March versus the same time last year, which rippled through to our bottom line and resulted in a net loss for the quarter.

“These trends have persisted into the second quarter, and we expect them to continue impacting our financial performance to some degree in the near-term. However, towards the end of April, we began to see evidence of the trend reversing, and our weekly sales in May have already recovered to over 50% of pre-COVID-19 levels. We are optimistic the magnitude of headwinds impacting our customers will subside as the country adjusts to the current and post-pandemic world, allowing us to return to our long-term growth path.”

Cost Containment and Liquidity
At the end of the first quarter of 2020, HF Foods had $12.7 million in cash and access to approximately $57 million in additional liquidity through its $100 million line of credit, subject to a borrowing base calculation. In late March 2020, HF Foods swiftly pivoted its business strategy and cost structure to reduce operating costs, strengthen its liquidity position, and secure new revenue sources in response to the COVID-19 pandemic. Some of the notable actions include:

• actively managing variable costs to better align with current sales volumes by instituting temporary furloughs, reducing delivery schedules and temporarily shutting down select distribution centers, resulting in more than a 40% reduction in overall costs in the month of April 2020;
  
• improving working capital by extending terms with vendors while focusing on collecting receivables;     
  
• suspending capital expenditures and limiting maintenance and information technology projects;
  
• developing a proprietary e-commerce platform (www.rongchengmarkets.com) at minimal cost in order to cater to consumers and meet the increasing demand for online grocery shopping; and
  
• securing new partnerships with other online grocery retailers.

Peter Zhang, Co-CEO, commented, “In light of the challenges we faced towards the end of the first quarter, we have taken the necessary measures to fortify our company and ensure we’re well-positioned to support our customers as they begin to return to their businesses. We’ve reduced our operating costs, and we’ve pivoted our business strategy to open new sources of revenue that are less impaired by the current pandemic. Additionally, we are exploring various means of improving our liquidity position to ensure we have the necessary tools at our disposal to more effectively navigate the current economic environment and emerge in a position of strength.”

Pro Forma Results for the First Quarter of 2020
On a pro forma basis, revenue in the first quarter of 2020 decreased to $175.8 million compared to $209.0 million in the same period last year. The change in revenue was due to a decline in sales to independent restaurants as many experienced forced closures or the conversion to a take-out only model in response to the COVID-19 pandemic.

Pro forma gross profit was $29.0 million (16.5% of total revenue) compared to $34.5 million (16.5% of total revenue) in the first quarter of 2019. The consistency in gross profit margin was primarily due to reductions in the costs of revenue, which moved in tandem with the change in revenues.

Pro forma distribution, selling and administrative expenses for the first quarter were $29.4 million compared to $29.0 million in the same period last year. The increase was mainly attributed to an increase in non-cash depreciation and amortization. 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.

As of December 31, 2019, the Company had booked approximately $406.7 million of goodwill from the business combination with B&R. HF Foods’ policy is to test goodwill for impairment annually in the fourth quarter or when extraordinary events or circumstances during the year indicate that it could be impaired. During the first quarter of fiscal 2020, as a result of significant declines in its business due to the COVID-19 pandemic, HF Foods reassessed the fair value of the B&R reporting unit using the discounted cash flow method. Based on this analysis, the Company determined that $338.2 million should be recorded as a goodwill impairment charge during the first quarter of fiscal 2020.

Excluding this one-off goodwill impairment charge, pro forma net loss for the first quarter of 2020 was $1.7 million, or $(0.03) per diluted share, compared to net income of $2.7 million, or $0.05 per diluted share, in the first quarter of 2019.

Adjusted EBITDA on a pro forma basis in the first quarter of 2020 was $4.3 million compared to $10.0 million in the same year-ago period. The decline was primarily due to the change in pro forma net loss.

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 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 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 March 31,								Change
		2020				2019				Amount				%
Net income (loss)		$	(339,686,532	)		$	1,793,571			$	(341,480,103	)			(19039.1	)%
Interest expenses			1,951,569				336,958				1,614,611				479.2	%
Income tax provision (benefit)			(482,211	)			647,639				(1,129,850	)			(174.5	)%
Depreciation & Amortization			4,374,080				707,396				3,666,684				518.3	%
Goodwill impairment loss			338,191,407				-				338,191,407				100	%
Adjusted EBITDA		$	4,348,313				3,485,564				862,749				24.8	%
Percentage of revenue			2.5	%			4.7	%			(2.2	)%

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, 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 [phone]
[e-mail]

HF Foods Group Inc.
Consolidated Balance Sheets

		As of
		March 31				December 31
		2020				2019
ASSETS
CURRENT ASSETS:
Cash		$	12,690,265			$	14,538,286
Accounts receivable, net			26,210,460				50,027,134
Accounts receivable - related parties, net			5,987,632				4,202,870
Inventories, net			75,704,474				77,531,854
Advances to suppliers - related parties, net			864,816				745,135
Other current assets			3,872,326				4,374,338
TOTAL CURRENT ASSETS			125,329,973				151,419,617
Property and equipment, net			139,941,393				37,538,147
Security deposits-related parties			-				591,380
Operating lease right-of-use assets			883,552				17,155,584
Long-term investments			2,331,337				2,296,276
Intangible assets, net			183,965,375				186,687,950
Goodwill			68,511,941				406,703,348
Deferred tax assets			69,236				78,993
Other long-term assets			379,599				372,499
TOTAL ASSETS		$	521,412,406			$	802,843,794
CURRENT LIABILITIES:
Bank overdraft		$	13,474,772			$	14,952,510
Lines of credit			43,101,338				41,268,554
Accounts payable			32,456,258				39,689,911
Accounts payable - related parties			3,738,202				4,521,356
Advances from customers - related parties			213,354				-
Current portion of long-term debt, net			6,941,738				2,726,981
Current portion of obligations under finance leases			288,101				280,243
Current portion of obligations under operating leases			333,180				4,322,503
Accrued expenses and other liabilities			2,960,084				2,683,696
TOTAL CURRENT LIABILITIES			103,507,027				110,445,754
Long-term debt, net			90,151,208				18,535,016
Promissory note payable - related party			7,000,000				-
Obligations under finance leases, non-current			979,782				1,053,166
Obligations under operating leases, non-current			550,372				12,833,081
Deferred tax liabilities			51,378,817				52,320,045
TOTAL LIABILITIES			253,567,206				195,187,062
SHAREHOLDERS’ EQUITY:
Preferred Stock, $0.0001 par value, 1,000,000 shares authorized , no shares issued and outstanding as of March 31, 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 March 31, 2020 and December 31, 2019, respectively			5,305				5,305
Treasury Stock, at cost, 905,115 shares as of March 31, 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)			(324,060,281	)			15,823,661
Total shareholders’ equity attributable to HF Foods Group, Inc.			263,524,003				603,407,945
Noncontrolling interest			4,321,197				4,248,787
TOTAL SHAREHOLDERS’ EQUITY			267,845,200				607,656,732
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	521,412,406			$	802,843,794

HF Foods Group Inc.
Consolidated Statements of Income

		For the three months Ended Mar 31,
		2020				2019
Net revenue - third parties			170,640,014			$	70,303,911
Net revenue - related parties			5,163,322				4,497,111
TOTAL NET REVENUE			175,803,336				74,801,022
Cost of revenue - third parties			141,904,237				57,725,355
Cost of revenue - related parties			4,924,054				4,368,811
TOTAL COST OF REVENUE			146,828,291				62,094,166
GROSS PROFIT			28,975,045				12,706,856
DISTRIBUTION, SELLING AND ADMINISTRATIVE EXPENSES			29,406,593				10,365,172
INCOME (LOSS) FROM OPERATIONS			(431,548	)			2,341,684
Other Income (Expenses)
Interest income			131				151,949
Interest expense and bank charges			(1,951,569	)			(336,958	)
Goodwill impairment loss			(338,191,407	)			-
Other income			405,650				284,535
Total Other Income (Expenses), net			(339,737,195	)			99,526
INCOME (LOSS) BEFORE INCOME TAX PROVISION			(340,168,743	)			2,441,210
PROVISION (BENEFIT) FOR INCOME TAXES			(482,211	)			647,639
NET INCOME (LOSS)			(339,686,532	)			1,793,571
Less: net income attributable to noncontrolling interest			197,410				120,758
NET INCOME (LOSS) ATTRIBUTABLE TO HF FOODS GROUP INC.			(339,883,942	)		$	1,672,813
Earnings (loss) per common share - basic and diluted			(6.52	)		$	0.08
Weighted average shares - basic and diluted			52,145,096				22,167,486