What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-31 compared with 2023-01-31 · 68 added, 72 removed, 234 unchanged (37% of the section changed)

64 unchanged sentences

Financial Overview

Three Months Ended September 30, Change Nine Months Ended September 30, Change

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 (loss) attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

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

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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 September 30, 2022 and 2021

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

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 September 30, Change

Three Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

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

(Loss) income from operations (3,096) 10,864 (13,960) (128.5) %

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

Interest expense 1,549 928 621 66.9 %

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Lease guarantee expense (42) — (42) NM

(Loss) income before income tax provision (4,566) 10,587 (15,153) (143.1) %

Income tax (benefit) provision (672) 2,676 (3,348) (125.1) %

Net (loss) income (3,894) 7,911 (11,805) (149.2) %

net income (loss) attributable to non-controlling interests (30) 357 (387) NM

Net (loss) income attributable to HF Foods Group Inc.

$ (3,864) $ 7,554 $ (11,418) 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 September 30,

Three Months Ended June 30,

Net revenue 100.0 % 100.0 %

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Distribution, selling and administrative expenses 15.3 % 15.4 %

(Loss) income from operations (1.1) % 5.0 %

Income from operations 2.2 % 2.8 %

Interest expense 0.5 % 0.5 %

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Income before income tax provision 1.9 % 2.4 %

(Benefit) provision for income taxes (0.2) % 1.2 %

Net (loss) income (1.4) % 3.7 %

Income tax provision 0.4 % 0.7 %

Net income 1.5 % 1.7 %

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

Net (loss) income attributable to HF Foods Group Inc.

(1.4) % 3.5 %

Net revenue for the three months ended September 30, 2022 increased by $85.2 million or 39.5% compared to the same period in 2021, primarily due to the additional revenue generated due to recent acquisitions and overall product cost inflation.

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 September 30, 2022 increased by $9.6 million or 22.9%, compared to the same period in 2021 primarily due to recent acquisitions, which contributed $11.1 million of gross profit for the three months ended September 30, 2022.

Overall gross margin decreased from 19.4% in the three months ended September 30, 2021 to 17.1% in the three months ended September 30, 2022, primarily due to the lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales and timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

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 September 30, 2022 increased by $23.5 million, or 75.8%, to $54.6 million compared to $31.0 million for the three months ended September 30, 2021.

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 increased from 14.4% for the three months ended September 30, 2021 to 18.2% for the three months ended September 30, 2022 primarily due to the costs disclosed above.

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 September 30, 2022 increased by $1.4 million, or 152.1%, 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 $42.2 million, or 259.0%, to $58.5 million for the three months ended September 30, 2022 from $16.3 million for three months ended September 30, 2021.

The average daily interest rate on our line of credit balance increased to 3.61% for the three months ended September 30, 2022 from 1.47% for three months ended September 30, 2021.

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 $3.3 million, or 125.1%, from $2.7 million for the three months ended September 30, 2021 to $(0.7) million for the three months ended September 30, 2022 primarily due to a decrease in income before income taxes.

Net (Loss) Income Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc.

was $3.9 million for the three months ended September 30, 2022, compared to net income attributable to HF Foods Group Inc.

of $7.6 million for the three months ended September 30, 2021.

The decrease of $11.4 million, or 151.2%, is primarily attributable to the increased costs disclosed above.

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 September 30, Change

Three Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

Net (loss) income $ (3,894) $ 7,911 $ (11,805) (149.2) %

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

Interest expense 1,549 928 621 66.9 %

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

Stock-based compensation expense 162 375 (213) (56.8) %

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 %

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Adjusted EBITDA was $4.0 million for the three months ended September 30, 2022, a decrease of $12.6 million, or 75.9%, compared to $16.6 million for the three months ended September 30, 2021.

The $12.6 million decrease in Adjusted EBITDA was primarily attributable to the increase in distribution, selling and administrative expenses as well as lower gross profit margin.

Adjusted EBITDA margin decreased by 640 basis points primarily due to the increase in distribution, selling and administrative expenses as a percentage of net revenue of 380 basis points and a decrease of 230 basis points on gross profit margin.

Results of Operations for the Nine Months Ended September 30, 2022 and 2021

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

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.

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

Nine Months Ended September 30, Change

Six Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

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Net income 7,634 4,974 2,660 53.5 %

net (loss) income attributable to noncontrolling interests (74) 566 (640) (113.1) %

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

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:

Nine Months Ended September 30,

Six Months Ended June 30,

Net revenue 100.0 % 100.0 %

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Income before income tax provision 1.8 % 2.0 %

Provision for income taxes 0.2 % 0.8 %

Income tax provision 0.4 % 0.6 %

Net income 1.4 % 1.4 %

1 unchanged sentence

Net income attributable to HF Foods Group Inc.

Net revenue for the nine months ended September 30, 2022 increased by $310.1 million, or 54.6% 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.

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 nine months ended September 30, 2022 increased by $48.3 million or 45.4%, compared to the same period in 2021 mainly due to strong revenue growth and recent acquisitions, which contributed $26.0 million of gross profit for the nine months ended September 30, 2022.

Overall gross margin decreased from 18.7% in the nine months ended September 30, 2021 to 17.6% in the nine months ended September 30, 2022, primarily due to lower gross margin from recent acquisitions due to the expected lower margin on our increased Seafood sales, increases in fuel costs, incremental lower margin sales from newly acquired customers, timing of inventory purchases and higher than expected fluctuations in key commodity pricing.

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.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses for the nine months ended September 30, 2022 increased by $51.9 million, or 58.4%, to $140.8 million compared to $88.9 million for the nine months ended September 30, 2021.

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 increased from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022 primarily due to the costs disclosed above partially offset by strong revenue growth and fixed cost leverage.

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.

Interest Expense

Interest expense for the nine months ended September 30, 2022 increased by $2.4 million, or 86.7%, 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 $39.1 million, or 271.0%, to $53.5 million for the nine months ended September 30, 2022 from $14.4 million for nine months ended September 30, 2021.

The average daily interest rate on our line of credit increased to 2.45% for the nine months ended September 30, 2022 from 1.48% for nine months ended September 30, 2021.

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.

Income Tax Provision

Our provision for income taxes slightly decreased by $3.2 million, or 67.7%, from $4.7 million for the nine months ended September 30, 2021 to $1.5 million for the nine months ended September 30, 2022 primarily due to decreased profitability.

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.

Net Income Attributable to HF Foods Group Inc.

Net income attributable to HF Foods Group Inc.

was $3.8 million for the nine months ended September 30, 2022, compared to $12.3 million for the nine months ended September 30, 2021.

The decrease of $8.5 million, or 69.0%, is primarily attributable to the $5.8 million in lease guarantee expense related to our AnHeart lease guarantee and the increased costs disclosed above, partially offset by the increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently.

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.

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:

Nine Months Ended September 30, Change

Six Months Ended June 30, Change

($ in thousands) 2022 2021 Amount %

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Change in fair value of interest rate swap contracts (566) (1,319) 753 (57.1) %

Stock-based compensation expense 673 375 298 79.5 %

Stock-based compensation expense 511 — 511 NM

Acquisition and integration costs 1,059 — 1,059 NM

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Adjusted EBITDA was $35.8 million for the nine months ended September 30, 2022, an increase of $2.2 million, or 6.6%, compared to $33.6 million for the nine months ended September 30, 2021.

The $2.2 million increase in Adjusted EBITDA was primarily attributable to our strong business recovery to pre-COVID-19 pandemic levels partially offset by the increase of distribution, selling and administrative expenses as a percentage of net revenue from 15.6% for the nine months ended September 30, 2021 to 16.0% for the nine months ended September 30, 2022.

Adjusted EBITDA margin decreased by 180 basis points primarily due to the decrease of 110 basis points on gross profit margin.

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.

Liquidity and Capital Resources

As of September 30, 2022, we had cash of approximately $17.8 million, checks issued not presented for payment of $18.5 million and access to approximately $28.7 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

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.

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

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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 September 30, 2022.

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

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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 September 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 nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, Change

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

($ in thousands) 2022 2021 Amount %

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Operating Activities

Net cash provided by operating activities decreased to $6.9 million for the nine months ended September 30, 2022, compared to $11.3 million for the nine months ended September 30, 2021 primarily due to lower net income partially offset by changes in working capital items.

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.

Investing Activities

Net cash used in investing activities was $50.2 million for the nine months ended September 30, 2022, compared to net cash used in investing activities of $6.4 million for the nine months ended September 30, 2021, an increase of $43.8 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 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.

Financing Activities

Net cash provided by financing activities was $46.3 million for the nine months ended September 30, 2022, compared to net cash used in financing activities of $1.1 million for the nine months ended September 30, 2021, primarily due to the $46.0 million increase of our mortgage-secured term loan and the net impact of $15.4 million on our line of credit from net proceeds of $0.8 million for the nine months ended September 30, 2021 to net proceeds of $16.2 million for the nine months ended September 30, 2022, 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 warehouse sale mentioned above.

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.

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 nine months ended September 30, 2022.

Our policy is to test goodwill for impairment annually in the fourth quarter or more frequently if certain triggering events or circumstances indicate it could be impaired.

We are monitoring the decline in our stock price and the potential for this to impact our recorded goodwill.

While we have determined there to be no triggering events at September 30, 2022, a sustained decline in our stock price could result in a quantitative test of impairment in the fourth quarter.

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.

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