What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 133 added, 55 removed, 171 unchanged (52% of the section changed)

2 unchanged sentences

This Quarterly Report on Form 10-Q for HF Foods Group Inc.

(“HF Foods”, the “Company,” “we,” “us,” or “our”) contains forward-looking statements.

Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

(“HF Foods”, the “Company,” “we,” “us,” or “our”) contains certain statements that are, or may deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

Words or phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

61 unchanged sentences

• Centralized Purchasing:

We began the roll out of our centralized purchasing program with seafood products and have yielded significant positive results with respect to margin expansion for the product category.

We began the roll out of our centralized purchasing program with seafood products and have yielded positive results with respect to margin expansion for the product category.

We are now focusing on expanding the program to other categories.

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We have established a national fleet maintenance program.

Within this, we plan to define new truck specifications, initiate a replacement program for 50% of our current fleet, implement a national fuel savings program to maximize efficiency, and outsource domestic inbound freight logistics to a third-party partner to adopt a cohesive national approach to its supply chain.

Within this, we have defined new truck specifications, initiated a replacement program for 50% of our current fleet, implemented a national fuel savings program to maximize efficiency, and plan to outsource domestic inbound freight logistics to a third-party partner to adopt a cohesive national approach to our supply chain.

This is expected to deliver substantial improvements to our transportation system.

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Financial Overview

Three Months Ended March 31, Change

($ in thousands) 2024 2023 Amount %

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

($ in thousands) 2024 2023 Change 2024 2023 Change

Net revenue $ 302,342 $ 292,312 $ 10,030 $ 597,996 $ 586,167 $ 11,829

Net loss $ (559) $ (5,797) $ 5,238 NM

Net income (loss) $ 235 $ (1,560) $ 1,795 $ (324) $ (7,357) $ 7,033

Adjusted EBITDA $ 10,561 $ 8,357 $ 2,204 $ 19,263 $ 14,106 $ 5,157

_________________

NM Not meaningful

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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Results of Operations

Comparison of Three Months Ended March 31, 2024 to Three Months Ended March 31, 2023

The following table sets forth a summary of our consolidated results of operations for the three months ended March 31, 2024 and 2023 .

Comparison of Three Months Ended June 30, 2024 to Three Months Ended June 30, 2023

The following table sets forth a summary of our consolidated results of operations for the three months ended June 30, 2024 and 2023 .

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

Three Months Ended March 31,

Three Months Ended June 30,

($ in thousands) 2024 2023 Change

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Distribution, selling and administrative expenses 49,840 52,243 (2,403)

Loss from operations (85) (2,757) 2,672

Income (loss) from operations 2,625 (1,577) 4,202

Interest expense 3,119 2,847 272

Other income (94) (228) 134

Other expense (income), net 3,466 (127) 3,593

Change in fair value of interest rate swap contracts (361) (2,856) 2,495

Lease guarantee income (5,433) (90) (5,343)

Loss before income taxes (740) (8,023) 7,283

Income tax benefit (181) (2,226) 2,045

Income (loss) before income taxes 1,834 (1,351) 3,185

Income tax expense 1,599 209 1,390

Net income (loss) and comprehensive loss 235 (1,560) 1,795

net income (loss) attributable to noncontrolling interests 218 (710) 928

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

$ 17 $ (850) $ 867

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 82.6 % 82.7 %

Gross profit 17.4 % 17.3 %

Distribution, selling and administrative expenses 16.5 % 17.9 %

Income (loss) from operations 0.9 % (0.5) %

Interest expense 0.9 % 1.0 %

Other expense (income), net 1.1 % — %

Change in fair value of interest rate swap contracts (0.1) % (1.0) %

Lease guarantee income (1.8) % — %

Income (loss) before income taxes 0.6 % (0.5) %

Income tax expense 0.5 % 0.1 %

Net income (loss) and comprehensive income (loss) 0.1 % (0.5) %

net income (loss) attributable to noncontrolling interests 0.1 % (0.2) %

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

Net revenue for the three months ended June 30, 2024 increased by $10.0 million, or 3.4%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation, volume increases and improved pricing in certain categories, such as chicken and seafood, partially offset by deflation in commodities, such as cooking oils, and the $3.1 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

Gross profit was $52.5 million for three months ended June 30, 2024 compared to $50.7 million in the same period in 2023 , an increase of $1.8 million, or 3.6%.

The increase was primarily attributable to increased net revenue.

Gross profit margin for the three months ended June 30, 2024 increased slightly to 17.4% compared to 17.3% in the same period in 2023 .

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses decreased by $2.4 million, or 4.6%, for the three months ended June 30, 2024 primarily due to a decrease of $5.5 million in professional fees, partially offset by higher payroll and related labor costs.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.5% for the three months ended June 30, 2024 from 17.9% in the same period in 2023, primarily due to increased net revenue and lower professional fees, partially offset by increased headcount.

Interest Expense

Interest expense for the three months ended June 30, 2024 of $3.1 million remained consistent compared to the three months ended June 30, 2023, having increased slightly from $2.8 million.

Average floating interest rates on our floating-rate debt for the three months ended June 30, 2024 increased by approximately 0.4% on our line of credit and 0.3% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $19.2 million, or 51.7%, to $56.4 million for the three months ended June 30, 2024 from $37.2 million for the three months ended June 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.6%, to $104.2 million for the three months ended June 30, 2024 from $109.3 million for the three months ended June 30, 2023.

Income Tax Expense

Income tax expense was $1.6 million for the three months ended June 30, 2024, compared to an income tax expense of $0.2 million for the three months ended June 30, 2023, primarily due to discrete tax items related to the SEC settlement and stock-based compensation shortfalls impacting the tax provision for the current period.

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

Net income attributable to HF Foods Group Inc.

was $0.0 million for the three months ended June 30, 2024 , compared to net loss of $0.9 million for the three months ended June 30, 2023.

The improvement was primarily driven by an increase in our income from operations of $4.2 million, as well as the $5.3 million reversal of our lease guarantee liability, partially offset by our SEC settlement of $3.9 million, the decrease of the gain related to the fair value of interest rate swap contracts of $2.5 million and the increase of income tax expense of $1.4 million.

EBITDA and Adjusted EBITDA

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure:

Three Months Ended June 30,

($ in thousands) 2024 2023 Change

Net income (loss) $ 235 $ (1,560) $ 1,795

Interest expense 3,119 2,847 272

Income tax expense 1,599 209 1,390

Depreciation and amortization 6,590 6,440 150

EBITDA 11,543 7,936 3,607

Lease guarantee income (5,433) (90) (5,343)

Change in fair value of interest rate swap contracts (361) (2,856) 2,495

Stock-based compensation expense 522 752 (230)

SEC settlement 3,900 — 3,900

Asset impairment charges — 1,200 (1,200)

Business transformation costs (1)

Other non-routine expense (2)

260 1,255 (995)

Adjusted EBITDA $ 10,561 $ 8,357 $ 2,204

_________________

(1) Represents non-recurring costs associated with the launch of strategic projects including supply chain management improvements and technology infrastructure initiatives.

(2) Includes contested proxy and related legal and consulting costs and facility closure costs.

Results of Operations

Comparison of Six Months Ended June 30, 2024 to Six Months Ended June 30, 2023

The following table sets forth a summary of our consolidated results of operations for the six months ended June 30, 2024 and 2023 .

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,

($ in thousands) 2024 2023 Change

Net revenue $ 597,996 $ 586,167 $ 11,829

Cost of revenue 495,120 485,329 9,791

Gross profit 102,876 100,838 2,038

Distribution, selling and administrative expenses 100,336 105,172 (4,836)

Income (loss) from operations 2,540 (4,334) 6,874

Interest expense 5,953 5,715 238

Other expense (income), net 3,372 (355) 3,727

Change in fair value of interest rate swap contracts (2,331) (110) (2,221)

Lease guarantee income (5,548) (210) (5,338)

Income (loss) before income taxes 1,094 (9,374) 10,468

Income tax expense (benefit) 1,418 (2,017) 3,435

Net loss and comprehensive loss (324) (7,357) 7,033

net income attributable to noncontrolling interests 135 136 (1)

net income (loss) attributable to noncontrolling interests 353 (574) 927

Net loss and comprehensive loss 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:

Three Months Ended March 31,

Six Months Ended June 30,

Net revenue 100.0 % 100.0 %

2 unchanged sentences

Distribution, selling and administrative expenses 16.8 % 17.9 %

Loss from operations — % (0.9) %

Income (loss) from operations 0.4 % (0.7) %

Interest expense 1.0 % 1.0 %

Other income — % (0.1) %

Other expense (income), net 0.6 % (0.1) %

Change in fair value of interest rate swap contracts (0.4) % — %

Lease guarantee income (0.9) % — %

Loss before income taxes (0.3) % (2.7) %

Income tax benefit (0.1) % (0.8) %

Income (loss) before income taxes 0.1 % (1.6) %

Income tax expense (benefit) 0.2 % (0.3) %

Net loss and comprehensive loss (0.1) % (1.3) %

net income attributable to noncontrolling interests — % 0.1 %

net income (loss) attributable to noncontrolling interests 0.1 % — %

Net loss and comprehensive loss attributable to HF Foods Group Inc.

(0.2) % (1.3) %

Net revenue for the three months ended March 31, 2024 increased by $1.8 million, or 0.6%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation and improved pricing in certain categories, partially offset by the $2.7 million loss in revenue resulting from the exit of our chicken processing businesses.

Gross profit was $50.4 million for three months ended March 31, 2024 compared to $50.2 million in the same period in 2023 , an increase of $0.2 million, or 0.5%.

Gross profit margin for the three months ended March 31, 2024 was flat at 17.1% in the same period in 2023 .

Net revenue for the six months ended June 30, 2024 increased by $11.8 million, or 2.0%, compared to the same period in 2023.

This increase was primarily attributable to product cost inflation and improved pricing in certain categories, partially offset by the $5.8 million loss in revenue resulting from the exit of our chicken processing businesses in 2023.

Gross profit was $102.9 million for the six months ended June 30, 2024 compared to $100.8 million in the same period in 2023 , an increase of $2.1 million, or 2.0% .

The gross profit increase was primarily attributable to increased net revenue.

Gross profit margin for the six months ended June 30, 2024 was flat at 17.2% in the same period in 2023.

Distribution, Selling and Administrative Expenses

Distribution, selling and administrative expenses decreased by $2.4 million, or 4.6%, for the three months ended March 31, 2024 primarily due to a decrease of $2.8 million in professional fees, partially offset by higher payroll and related labor costs.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 17.1% for the three months ended March 31, 2024 from 18.0% in the same period in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased headcount.

Distribution, selling and administrative expenses of $100.3 million for the six months ended June 30, 2024 decreased compared to prior year expenses of $105.2 million primarily due to a decrease of $8.4 million in professional fees, partially offset by higher payroll and related labor costs.

Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16.8% for the six months ended June 30, 2024 from 17.9% in the same period in 2023, primarily due to lower professional fees and increased net revenue, partially offset by increased headcount.

Interest Expense

Interest expense for the three months ended March 31, 2024 of $2.8 million remained consistent compared to the three months ended March 31, 2023, having decreased slightly from $2.9 million.

Average floating interest rates on our floating-rate debt for the three months ended March 31, 2024 increased by approximately 0.8% on our line of credit and 0.8% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $2.0 million, or 4.8%, to $44.7 million for the three months ended March 31, 2024 from $42.6 million for the three months ended March 31, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5 million, or 4.6%, to $105.5 million for the three months ended March 31, 2024 from $110.5 million for the three months ended March 31, 2023.

Income Tax Benefit

Income tax benefit was $181,000 for the three months ended March 31, 2024, compared to an income tax benefit of $2.2 million for the three months ended March 31, 2023, primarily due to a decrease in loss before income taxes, permanent differences and state income taxes during the current period.

Interest expense for the six months ended June 30, 2024 increased by $0.2 million or 4.2% , compared to the six months ended June 30, 2023, primarily due to a slightly higher interest-rate environment.

Average floating interest rates on our floating-rate debt for the six months ended June 30, 2024 increased by approximately 0.6% on the line of credit and 0.6% on the JPMorgan Chase mortgage-secured term loan, compared to the same period in 2023.

Our average daily line of credit balance increased by $10.7 million, or 26.8%, to $50.6 million for the six months ended June 30, 2024 from $39.9 million for the six months ended June 30, 2023, and our average daily JPMorgan Chase mortgage-secured term loan balance decreased by $5.0 million, or 4.5%, to $104.9 million for the six months ended June 30, 2024 from $109.9 million for the six months ended June 30, 2023.

Income Tax Expense (Benefit)

Income tax expense was $1.4 million for the six months ended June 30, 2024, compared to an income tax benefit of $2.0 million for the six months ended June 30, 2023, primarily due to discrete tax expense items impacting the tax provision for the current period compared to losses from operations in the prior period.

Net Loss Attributable to HF Foods Group Inc.

Net loss attributable to HF Foods Group Inc.

was $0.7 million for the three months ended March 31, 2024 , compared to net loss of $5.9 million for the three months ended March 31, 2023.

The improvement of $5.2 million, or 88.3% , is primarily due to the impact from changes in the fair value of interest rate swap and the decreased distribution, selling, and administrative costs.

was $0.7 million for the six months ended June 30, 2024 , compared to net loss of $6.8 million for the six months ended June 30, 2023.

The improvement of $6.1 million was primarily driven by an increase in our income from operations of $6.9 million, the $5.3 million reversal of our lease guarantee liability and the increase of the gain related to the fair value of interest rate swap contracts of $2.2 million, partially offset by our SEC settlement of $3.9 million and the increase of income tax expense of $3.4 million.

EBITDA and Adjusted EBITDA

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure:

Three Months Ended March 31,

Six Months Ended June 30,

($ in thousands) 2024 2023 Change

1 unchanged sentence

Interest expense 5,953 5,715 238

Income tax benefit (181) (2,226) 2,045

Income tax expense (benefit) 1,418 (2,017) 3,435

Depreciation and amortization 13,266 13,129 137

3 unchanged sentences

Stock-based compensation expense 1,260 1,848 (588)

SEC settlement 3,900 — 3,900

Asset impairment charges — 1,200 (1,200)

Business transformation costs (1)

1,103 204 899

Other non-routine expense (2)

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Liquidity and Capital Resources

As of March 31, 2024, we had cash of approximately $18.2 million, checks issued not presented for payment of $8.7 million and access to approximately $40.9 million in additional funds through our $100.0 million line of credit, subject to a borrowing base calculation.

As of June 30, 2024, we had cash of approximately $14.0 million, checks issued not presented for payment of $6.5 million and access to approximately $29.9 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 bank loans.

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

Management has considered the historical experience, the economy, the trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as of March 31, 2024.

We are party to an amortizing interest rate swap contract with JPMorgan Chase for an initial notional amount of $120.0 million, expiring in March 2028, as a means to partially hedge our existing floating rate loans exposure.

Pursuant to the agreement, we will pay the swap counterparty a fixed rate of 4.11% in exchange for floating payments based on CME Term SOFR.

Our liquidity is also affected by the entry of an administrative civil cease-and-desist order by the SEC, whereby we agreed to payment of a civil monetary penalty of $3.9 million.

We made this payment during the three months ended June 30, 2024.

Management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months.

1 unchanged sentence

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 March 31, 2024, 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, 2024 and 2023:

Three Months Ended March 31,

As of June 30, 2024, 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 June 30, 2024 and 2023:

Six Months Ended June 30,

(In thousands) 2024 2023 Change

Net cash provided by operating activities $ 7,055 $ 12,570 $ (5,515)

Net cash (used in) provided by operating activities $ (17) $ 8,732 $ (8,749)

Net cash used in investing activities (6,331) (1,522) (4,809)

Net cash used in financing activities (1,487) (18,753) 17,266

Net increase (decrease) in cash and cash equivalents $ 2,983 $ (6,812) $ 9,795

Net cash provided by (used in) financing activities 5,084 (16,553) 21,637

Net decrease in cash and cash equivalents $ (1,264) $ (9,343) $ 8,079

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes.

Net cash provided by operating activities decreased by $5.5 million, or 44%, primarily due to the timing of working capital outlays partially offset by improved operating loss.

Net cash (used in) provided by operating activities consists primarily of net income, which includes a $3.9 million civil monetary penalty payment, adjusted for non-cash items, including depreciation and amortization, changes in deferred income taxes and others, and includes the effect of working capital changes.

Net cash (used in) provided by operating activities decreased by $8.7 million primarily due to the timing of working capital outlays and the $3.9 million SEC settlement payment partially offset by improved operating income.

Investing Activities

Net cash used in investing activities increased by $2.0 million, or 311%, primarily due to increased capital project spend in the three months ended March 31, 2024.

Net cash used in investing activities increased by $4.8 million primarily due to increased capital project spend in the six months ended June 30, 2024.

Financing Activities

Net cash used in financing activities decreased by $17.3 million to $1.5 million used in financing activities primarily due to checks issued not presented for payment activity for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, as well as net line of credit activity.

Net cash provided by (used in) financing activities decreased by $21.6 million to $5.1 million provided by financing activities primarily due to net line of credit activity, as well as the checks issued not presented for payment activity for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Critical Accounting Policies and Estimates

3 unchanged sentences

These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 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 three months ended March 31, 2024.

Additionally, see Note 6 - Goodwill and Acquired Intangible Assets of our unaudited condensed consolidated financial statements on this Form 10-Q for disclosure regarding the Company’s at risk single reporting unit.

Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Annual Report on Form 10-K includes a summary of the critical accounting policies and estimates we believe are the most important to aid in understanding our financial results.

There have been no changes to those critical accounting policies and estimates that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the three months ended June 30, 2024.

Additionally, see Note 6 - Goodwill and Acquired Intangible Assets of our condensed consolidated financial statements on this Form 10-Q for disclosure regarding the Company’s single reporting unit.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the

condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

For a discussion of recent accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

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