What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-31 compared with 2023-01-31 · 43 added, 123 removed, 179 unchanged (48% of the section changed)

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On December 30, 2021, HF Group acquired the Great Wall Group, a seafood supplier, resulting in the addition of three distribution centers, located in Illinois and Texas (the “Great Wall Acquisition”).

On April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc.

Subsequent to March 31, 2022, on April 29, 2022, HF Group acquired substantially all of the assets of Sealand Food, Inc.

(the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee.

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Financial Overview

Three Months Ended June 30, Change Six Months Ended June 30, Change

($ in thousands) 2022 2021 Amount % 2022 2021 Amount %

Net revenue $ 299,642 $ 193,546 $ 106,096 54.8 % $ 577,857 $ 352,926 $ 224,931 63.7 %

Net income attributable to HF Foods Group Inc.

$ 4,564 $ 3,407 $ 1,157 34.0 % $ 7,678 $ 4,765 $ 2,913 61.1 %

Adjusted EBITDA $ 13,923 $ 10,532 $ 3,391 32.2 % $ 31,836 $ 17,037 $ 14,799 86.9 %

Our net revenue for the three months ended March 31, 2022 was $278.2 million, an increase of $118.8 million, or 74.6%, from $159.4 million for the three months ended March 31, 2021.

Net income attributable to our shareholders for the three months ended March 31, 2022 was $3.1 million, compared to net income attributable to our shareholders of $1.4 million for the three months ended March 31, 2021.

Adjusted EBITDA for the three months ended March 31, 2022 was $17.9 million, an increase of $11.4 million, or 175.4%, from $6.5 million for the three months ended March 31, 2021.

For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled “EBITDA and Adjusted EBITDA” below.

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For additional information on EBITDA and Adjusted EBITDA, see the table entitled “EBITDA and Adjusted EBITDA” below.

Results of Operations for the Three Months Ended June 30, 2022 and 2021

The following table sets forth a summary of our consolidated results of operations for the three months ended June 30, 2022 and 2021.

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Three Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

Net revenue $ 299,642 $ 193,546 $ 106,096 54.8 %

Cost of revenue 247,072 158,412 88,660 56.0 %

Gross profit 52,570 35,134 17,436 49.6 %

Distribution, selling and administrative expenses 45,843 29,790 16,053 53.9 %

Income from operations 6,727 5,344 1,383 25.9 %

Interest expense 1,549 928 621 66.9 %

Other income, net (163) (428) 265 (61.9) %

Change in fair value of interest rate swap contracts (208) 112 (320) NM

Lease guarantee expense (42) — (42) NM

Income before income tax provision 5,591 4,732 859 18.2 %

Income tax provision 1,097 1,416 (319) (22.5) %

Net income 4,494 3,316 1,178 35.5 %

net loss attributable to noncontrolling interests (70) (91) 21 (23.1) %

Net income attributable to HF Foods Group Inc.

$ 4,564 $ 3,407 $ 1,157 34.0 %

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The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

Three Months Ended June 30,

Net revenue 100.0 % 100.0 %

Cost of revenue 82.5 % 81.8 %

Gross profit 17.5 % 18.2 %

Distribution, selling and administrative expenses 15.3 % 15.4 %

Income from operations 2.2 % 2.8 %

Interest expense 0.5 % 0.5 %

Other income, net (0.1) % (0.2) %

Change in fair value of interest rate swap contracts (0.1) % 0.1 %

Income before income tax provision 1.9 % 2.4 %

Income tax provision 0.4 % 0.7 %

Net income 1.5 % 1.7 %

net income (loss) attributable to noncontrolling interests — % — %

Net income attributable to HF Foods Group Inc.

Net revenue for the three months ended June 30, 2022 increased by $106.1 million or 54.8% compared to the same period in 2021, primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to recent acquisitions and overall product cost inflation.

Recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed $65.8 million and organic growth contributed the remaining $40.3 million.

Gross profit for the three months ended June 30, 2022 increased by $17.4 million or 49.6%, compared to the same period in 2021 mainly due to strong revenue growth and recent acquisitions, which contributed $9.0 million of gross profit for the three months ended June 30, 2022.

Overall gross margin decreased from 18.2% in the three months ended June 30, 2021 to 17.5% in the three months ended June 30, 2022, primarily due to the expected lower gross margin from recent acquisitions due to the lower margin on our increased Seafood sales and higher than expected fluctuation in key commodity pricing, partially offset by increased gross margin due to organic growth.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the three months ended June 30, 2022 increased by $16.1 million, or 53.9%, to $45.8 million compared to $29.8 million for the three months ended June 30, 2021.

Of the distribution, selling and administrative expenses increase, $6.3 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, as more workers were, and will continue to be, required to handle the increasing sales demand, $4.0 million was delivery related cost primarily driven by increasing fuel prices and revenue growth, and an increase of $4.2 million in professional fees primarily driven by legal costs, acquisition-related costs and increased compliance costs as a result of the SEC and SIC investigations and an SEC comment letter inquiry.

Distribution, selling and administrative expenses as a percentage of net revenue was 15.4% for the three months ended June 30, 2021 and 15.3% for the three months ended June 30, 2022 primarily due to strong revenue growth and fixed cost leverage offset by the costs disclosed above.

Interest Expense

Interest expense for the three months ended June 30, 2022 increased by $0.6 million, or 66.9%, compared to the same period in 2021 mainly due to higher utilization of the line of credit coupled with a higher interest rate and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan.

Our average daily line of credit balance increased by $26.7 million, or 246.0%, to $37.5 million for the three months ended June 30, 2022 from $10.9 million for three months ended June 30, 2021.

The average daily interest rate on our line of credit balance increased to 2.16% for the three months ended June 30, 2022 from 1.48% for three months ended June 30, 2021.

Income Tax Provision

Our provision for income taxes decreased by $0.3 million, or 22.5%, from $1.4 million for the three months ended June 30, 2021 to $1.1 million for the three months ended June 30, 2022 primarily due to the reversal of our FIN 48 liability of $0.4 million.

Net Income Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $4.6 million for the three months ended June 30, 2022, compared to $3.4 million for the three months ended June 30, 2021.

The increase of $1.2 million, or 35.5%, is primarily attributable to increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently, partially offset by the increased costs disclosed above.

EBITDA and Adjusted EBITDA

The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:

Three Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

Net income $ 4,494 $ 3,316 $ 1,178 35.5 %

Interest expense 1,549 928 621 66.9 %

Income tax provision 1,097 1,416 (319) (22.5) %

Depreciation and amortization 6,080 4,760 1,320 27.7 %

EBITDA 13,220 10,420 2,800 26.9 %

Lease guarantee expense (42) — (42) NM

Change in fair value of interest rate swap contracts (208) 112 (320) (285.7) %

Stock-based compensation expense 221 — 221 NM

Acquisition and integration costs 310 — 310 NM

Impairment loss 422 — 422 NM

Adjusted EBITDA $ 13,923 $ 10,532 $ 3,391 32.2 %

Adjusted EBITDA margin 4.6 % 5.4 %

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Adjusted EBITDA was $13.9 million for the three months ended June 30, 2022, an increase of $3.4 million, or 32.2%, compared to $10.5 million for the three months ended June 30, 2021.

The $3.4 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels.

Adjusted EBITDA margin decreased by 80 basis points primarily due to a decrease of 70 basis points on gross profit margin.

Results of Operations for the Six Months Ended June 30, 2022 and 2021

The following table sets forth a summary of our consolidated results of operations for the six months ended June 30, 2022 and 2021.

Results of Operations for the Three Months Ended March 31, 2022 and 2021

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2022 and 2021.

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Six Months Ended June 30, Change

Three Months Ended March 31, Change

($ in thousands) 2022 2021 Amount %

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Net income 3,140 1,658 1,482 89.4 %

net income (loss) attributable to noncontrolling interests (44) 209 (253) NM

net income attributable to noncontrolling interests 26 300 (274) (91.3) %

Net income attributable to HF Foods Group Inc.

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The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

Six Months Ended June 30,

Three Months Ended March 31,

Net revenue 100.0 % 100.0 %

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Net income attributable to HF Foods Group Inc.

Net revenue for the six months ended June 30, 2022 increased by $224.9 million, or 63.7% compared to the same period in 2021, primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to recent acquisitions and overall product cost inflation.

Organic growth contributed $111.2 million and recent acquisitions, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed the remaining $113.7 million.

Gross profit for the six months ended June 30, 2022 increased by $38.7 million or 60.0%, compared to the same period in 2021 mainly due to strong revenue growth and recent acquisitions, which contributed $14.7 million of gross profit for the six months ended June 30, 2022.

Overall gross margin decreased from 18.3% in the six months ended June 30, 2021 to 17.9% in the six months ended June 30, 2022, primarily due to lower gross margin from recent acquisitions due to the lower margin on our increased Seafood sales, incremental lower margin sales from newly acquired customers, higher than expected fluctuation in key commodity pricing, partially offset by increased gross margin due to organic growth.

Net revenue for the three months ended March 31, 2022 increased by $118.8 million or 74.6% compared to the same period in 2021.

The increase was primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to the Great Wall Acquisition and overall product cost inflation.

The Great Wall Acquisition, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed $47.9 million and organic growth contributed the remaining $70.9 million.

Gross profit for the three months ended March 31, 2022 increased by $21.3 million or 72.4%, compared to the same period in 2021 mainly due to strong revenue growth and the Great Wall Acquisition, which contributed $6.1 million of gross profit for the three months ended March 31, 2022.

Overall gross margin decreased from 18.5% in the three months ended March 31, 2021 to 18.2% in the three months ended March 31, 2022, primarily due to the expected lower gross margin on our increased Seafood sales, offset by increased gross margin due to organic growth.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the six months ended June 30, 2022 increased by $28.4 million, or 49.0%, to $86.3 million compared to $57.9 million for the six months ended June 30, 2021.

Of the distribution, selling and administrative expenses increase, $16.2 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to recent acquisitions, as more workers were, and will continue to be, required to handle the increasing sales demand, $5.1 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth, and an increase of $2.6 million in professional fees primarily driven by legal costs, acquisition-related costs and increased compliance costs as a result of the SEC and SIC investigations and an SEC comment letter inquiry.

Distribution, selling and administrative expenses as a percentage of net revenue decreased from 16.4% for the six months ended June 30, 2021 to 14.9% for the six months ended June 30, 2022 primarily due to strong revenue growth and fixed cost leverage partially offset by the costs disclosed above.

Distribution, selling and administrative expenses for the three months ended March 31, 2022 increased by $12.3 million, or 43.9%, to $40.4 million compared to $28.1 million for the three months ended March 31, 2021.

Of the distribution, selling and administrative expenses increase, $9.9 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to the Great Wall Acquisition, as more workers were, and will continue to be, required to handle the increasing sales demand and $1.1 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth.

Distribution, selling and administrative expenses as a percentage of net revenue improved from 17.6% in 2021 to 14.5% in 2022 primarily due to strong revenue growth and fixed cost leverage.

Interest Expense

Interest expense for the six months ended June 30, 2022 increased by $1.0 million, or 54.5%, compared to the same period in 2021 mainly due to higher utilization of our line of credit coupled with a higher interest rate and, to a lesser extent, the increase of $46.0 million to our mortgage-secured term loan.

Our average daily line of credit balance increased by $38.0 million, or 295.0%, to $50.9 million for the six months ended June 30, 2022 from $12.9 million for six months ended June 30, 2021.

The average daily interest rate on our line of credit increased to 1.87% for the six months ended June 30, 2022 from 1.49% for six months ended June 30, 2021.

Interest expense for the three months ended March 31, 2022 increased by $0.4 million, or 41.7%, compared to the same period in 2021 mainly due to higher utilization of the line of credit.

Our average daily line of credit balance increased by $48.2 million, or 300.0%, to $64.3 million for the three months ended March 31, 2022 from $16.1 million for three months ended March 31, 2021.

Income Tax Provision

Our provision for income taxes slightly increased by $0.1 million, or 6.7%, from $2.1 million for the six months ended June 30, 2021 to $2.2 million for the six months ended June 30, 2022 primarily due to increasing income before tax, resulting from business expansion and our improved profitability.

Our provision for income taxes increased by $0.5 million, or 70.9%, from $0.6 million for the three months ended March 31, 2021 to $1.1 million for the three months ended March 31, 2022 mainly due to increasing income before tax, resulting from business expansion and our improved profitability.

Net Income Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $7.7 million for the six months ended June 30, 2022, compared to $4.8 million for the six months ended June 30, 2021.

The increase of $2.9 million, or 61.1%, is primarily attributable to increased consumer demand for dine-in/take out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently, partially offset by $5.9 million in lease guarantee expense related to our AnHeart lease guarantee and the increased costs disclosed above.

was $3.1 million for the three months ended March 31, 2022, compared to $1.4 million for the three months ended March 31, 2021.

The year over year change in net income attributable to HF Foods Group Inc.

increased $1.8 million, or approximately 129.3% compared to the three months ended March 31, 2021.

The strong upward-trend is attributable to increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently, partially offset by a one-time lease guarantee expense of $5.9 million (see Note 15 - Commitments and Contingencies for additional information).

EBITDA and Adjusted EBITDA

The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:

Six Months Ended June 30, Change

Three Months Ended March 31, Change

($ in thousands) 2022 2021 Amount %

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Acquisition and integration costs 749 — 749 NM

Impairment loss 422 — 422 NM

Adjusted EBITDA $ 17,913 $ 6,505 $ 11,408 175.4 %

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Adjusted EBITDA was $31.8 million for the six months ended June 30, 2022, an increase of $14.8 million, or 86.9%, compared to $17.0 million for the six months ended June 30, 2021.

The $14.8 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels and an improvement of distribution, selling and administrative expenses as a percentage of net revenue from 16.4% for the six months ended June 30, 2021 to 14.9% for the six months ended June 30, 2022.

In addition, there is a net positive impact of $0.8 million due to the change in fair value of interest rate swap contracts.

Adjusted EBITDA was $17.9 million for the three months ended March 31, 2022, an increase of $11.4 million, or 175.4%, compared to $6.5 million for the three months ended March 31, 2021.

The $11.4 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels and an improvement of distribution, selling and administrative expenses from 17.6% of net revenue in 2021 to 14.5% in 2022.

Liquidity and Capital Resources

As of June 30, 2022, we had cash of approximately $18.8 million, checks issued not presented for payment of $20.2 million and access to approximately $40.0 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

As of March 31, 2022, we had cash of approximately $16.4 million, checks issued not presented for payment of $18.5 million and access to approximately $31.6 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

We have funded working capital and other capital requirements primarily by cash flow from operations and our line of credit.

Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and to service debts.

Based on current sales volume, which has been increasing steadily quarter-on-quarter since the third quarter of fiscal year 2020, we believe that our cash flow generated from operations is sufficient to meet our normal working capital needs and debt obligations for at least the next twelve months.

Based on current sales volume, which has been increasing steadily quarter-on-quarter since the outbreak of COVID-19 in the first half of 2020, we believe that our cash flow generated from operations is sufficient to meet our normal working capital needs and debt obligations for at least the next twelve months.

However, our ability to repay our current obligations will depend on the future realization of our current assets.

Management has taken into consideration historical experience, general economic trends in the United States, and trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of June 30, 2022.

On March 31, 2022, we amended the Credit Agreement with J.P.

Morgan extending our line of credit for five years.

The amendment provided for a $100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1% plus 1.375% per annum, as well as an increase to our mortgage-secured term loan from $69.0 million to $115.0 million.

Morgan extending our line of credit for 5 years.

The amendment provides for a $100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1% plus 1.375% per annum.

In April of 2022, the $46.0 million increase to the mortgage-secured term loan was used to pay down our $100.0 million line of credit.

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We financed the Sealand Acquisition through our $100.0 million line of credit.

See Note 7 - Acquisitions for additional information regarding the Sealand Acquisition.

During the three months ended June 30, 2022, we sold a warehouse to a related party for approximately $7.2 million and used a portion of the proceeds to pay the outstanding balance of our $4.5 million loan with First Horizon Bank.

See Note 10 - Debt for additional information.

During the three months ended June 30, 2022, we paid the remaining $4.5 million of our related party promissory note payable.

See Note 13 - Related Party Transactions for additional information.

We also paid the remaining $4.5 million of our related party promissory note payable.

Based on the above considerations, management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months.

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If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.

As of June 30, 2022, we have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes cash flow data for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30, Change

As of March 31, 2022, we have no off balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

The following table summarizes cash flow data for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, Change

($ in thousands) 2022 2021 Amount %

Net cash provided by operating activities $ 10,113 $ 11,003 $ (890) (8.1)%

Net cash used in investing activities (48,655) (5,595) (43,060) 769.6%

Net cash used in investing activities (19,932) (440) (19,492) NM

Net cash provided by (used in) financing activities 11,453 (8,889) 20,342 NM

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Operating Activities

Net cash provided by operating activities decreased to $13.7 million for the six months ended June 30, 2022, compared to $14.2 million for the six months ended June 30, 2021.

Net cash provided by operating activities was $10.1 million for the three months ended March 31, 2022, compared to $11.0 million for the three months ended March 31, 2021, a decrease of $0.9 million, as a result of changes in working capital items primarily due to two factors:

(a) Our accounts receivable balance as of March 31, 2022 was significantly higher as a result of both the increased sales generated related to the Great Wall Acquisition as well as increasing sales volume, and (b) compared to March 31, 2021, our inventory level as of March 31, 2022 increased sharply as a direct result of increasing sales volume and the need for normal inventory level build up during the period, partially offset by an increase in net income of $1.5 million.

Investing Activities

Net cash used in investing activities was $48.7 million for the six months ended June 30, 2022, compared to net cash used in investing activities of $5.6 million for the six months ended June 30, 2021, an increase of $43.1 million primarily due to the Sealand Acquisition of $34.9 million and the $17.4 million paid for the inventory acquired related to the Great Wall Acquisition partially offset by proceeds from the $7.2 million sale of a warehouse.

Net cash used in investing activities increased by $19.5 million primarily due to the $17.4 million paid for the inventory acquired related to the Great Wall Acquisition and, to a lesser extent, the purchase of property and equipment for our expanding business.

Financing Activities

Net cash provided by financing activities was $39.0 million for the six months ended June 30, 2022, compared to net cash used in financing activities of $4.7 million for the six months ended June 30, 2021, primarily due to the $46.0 million increase of our mortgage-secured term loan, partially offset by the $4.5 million payoff of our related party p romissory note payable and the $4.5 million repayment of long-term debt related to our related party warehouse sale mentioned above.

Net cash provided by financing activities was $11.5 million for the three months ended March 31, 2022, compared to net cash used in financing activities of $8.9 million for the three months ended March 31, 2021, an increase of $20.3 million, primarily due to the net impact of $15.2 million on our line of credit from an increase in net repayments of $1.9 million in 2021 to net proceeds of $13.3 million in 2022 as well as the net impact of $5.1 million on our checks issued not presented for payment from net repayments of $4.4 million in 2021 to net proceeds of $0.7 million in 2022.

Critical Accounting Policies and Estimates

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Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2021 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results.

There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the six months ended June 30, 2022.

There have been

no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months ended March 31, 2022.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis