HFFG HF Foods Group Inc

HF Foods Group Inc. (NASDAQ: HFFG), a leading food distributor to Asian restaurants across the United States (“HF Foods”, “HF Group” or the “Company”), reported financial results for the second quarter and six months ended June 30, 2023.

Second Quarter 2023 Financial Results

• Net revenue decreased 2.4% to $292.3 million compared to $299.6 million in the prior year.
• Gross profit decreased 3.6% to $50.7 million, or 17.3% gross profit margin compared to $52.6 million, or 17.5% gross profit margin in the prior year.
• Net (loss) income decreased to a net loss of $1.6 million compared to net income of $4.5 million in the prior year.
• Adjusted EBITDA decreased 50.1% to $6.9 million compared to $13.9 million in the prior year.

Six Months 2023 Financial Results

• Net revenue increased 1.4% to $586.2 million compared to $577.9 million in the prior year.
• Gross profit decreased 2.4% to $100.8 million, or 17.2% gross profit margin compared to $103.3 million, or 17.9% gross profit margin in the prior year.
• Net (loss) income decreased to a net loss of $7.4 million compared to net income of $7.6 million in the prior year.
• Adjusted EBITDA decreased 61.7% to $12.2 million compared to $31.8 million in the prior year.

Management Commentary

“As the only scaled, nationwide operator serving the Asian Foodservice market, we believe we have a strong value proposition for independent restaurant owners. Understanding their language and cultural background is important for creating a partnership with our customers, and we are uniquely differentiated because of the personalized experience we provide and the long-term relationships we develop with our customers,” said Peter Zhang, Chief Executive Officer of HF Foods. “Our team is focusing on reducing our cost structure and transforming our operations, and we believe the sizable legal and compliance fees that we have incurred for the past two years are largely behind us. These measures will have a significant impact as we work to drive profitability and growth as we continue on our mission of helping Asian restaurant owners in the U.S. achieve their business goals by offering the varied assortment of Asian specialty ingredients that our customers need.”

Revenue by Product Category

		Three Months Ended June 30,												Six Months Ended June 30,
($ in thousands)			2023						2022						2023						2022
Seafood		$	91,382		31	%		$	93,397		32	%		$	184,272		32	%		$	168,203		29	%
Asian Specialty			76,337		26	%			75,337		25	%			154,161		26	%			150,013		26	%
Meat and Poultry			56,012		19	%			63,109		21	%			108,061		18	%			124,025		22	%
Fresh Produce			31,636		11	%			31,076		10	%			63,847		11	%			60,955		11	%
Packaging and Other			18,037		6	%			21,296		7	%			37,433		6	%			43,309		7	%
Commodity			18,908		7	%			15,427		5	%			38,393		7	%			31,352		5	%
Total		$	292,312		100	%		$	299,642		100	%		$	586,167		100	%		$	577,857		100	%

Second Quarter 2023 Results

Net revenue was $292.3 million for the second quarter of 2023 compared to $299.6 million in the prior year period, a decrease of $7.3 million, or 2.4%. This decrease was primarily attributable to a $7.0 million decrease in Meat and Poultry revenue compared to the same period in 2022 driven by deflationary pricing in poultry.

Gross profit was $50.7 million for the second quarter of 2023 compared to $52.6 million in the prior year period, a decrease of $1.9 million, or 3.6%. The decrease was primarily attributable to a decrease in Meat and Poultry revenue. Gross profit margin for the second quarter of 2023 decreased to 17.3% from 17.5% in the prior year period. The decrease was primarily attributable to the deflationary pressure in Meat and Poultry partially offset by improved Seafood margins.

Distribution, selling and administrative expenses increased by $6.4 million, or 14.0%, primarily due to an increase of $1.8 million in payroll and related labor costs and higher professional fees, which increased by $1.3 million to $8.1 million in the second quarter of 2023, compared to $6.8 million in the prior year period. In addition, the Company recognized an asset impairment of $1.2 million related to our exit of HF Foods Industrial, LLC (“HFFI”). Distribution, selling and administrative expenses as a percentage of net revenue increased to 17.9% in 2023 from 15.3% in 2022 primarily due to higher professional fees and increased headcount.

Net (loss) income decreased to a net loss of $1.6 million for the second quarter of 2023 compared to net income of $4.5 million for the second quarter of 2022. The decrease was primarily attributable to the increased distribution, selling and administrative costs and lower gross profit, as well as a $1.3 million increase in interest expense, partially offset by the $2.6 million change in the fair value of interest rate swaps.

Six Months 2023 Results

Net revenue was $586.2 million for the first half of 2023 compared to $577.9 million in the prior year period, an increase of $8.3 million, or 1.4%. This increase was attributable to the additional Seafood revenue generated due to the Sealand Food, Inc. acquisition (the “Sealand Acquisition”) and product cost inflation, partially offset by a $16.0 million decrease in Meat and Poultry revenue compared to the same period in 2022 driven by deflationary pricing in poultry.

Gross profit was $100.8 million for the first half of 2023 compared to $103.3 million in the prior year period, a decrease of $2.5 million, or 2.4%. The decrease was primarily attributable to a decrease in Meat and Poultry revenue, partially offset by the additional Seafood revenue generated due to the Sealand Acquisition. Gross profit margin for the first half of 2023 decreased to 17.2% from 17.9% in the prior year period. The decrease was primarily attributable to the shift in product mix to higher Seafood sales and the deflationary pressure in Meat and Poultry.

Distribution, selling and administrative expenses for the first half of 2023 increased by $18.9 million, or 21.9%, primarily due to an increase of $4.6 million in payroll and related labor costs, inclusive of the additional costs due to the Sealand Acquisition. Professional fees increased $5.5 million to $15.2 million for the first half of 2023, from $9.7 million in the prior year period. In addition, the Company recognized asset impairment of $1.2 million related to the exit of HFFI. Distribution, selling and administrative expenses as a percentage of net revenue increased to 17.9% in the first half of 2023 from 14.9% in the prior year period, primarily due to higher professional fees and increased headcount.

Net (loss) income decreased to a net loss of $7.4 million for the first half of 2023 compared to net income of $7.6 million for the first half of 2022. The decrease was primarily attributable to the increased distribution, selling and administrative costs and lower gross profit, as well as a $2.9 million increase in interest expense.

Cash Flow

Cash flow from operating activities decreased to $8.7 million for the first half of 2023, compared to $13.7 million in the prior year period. The decrease in cash flow from operating activities was largely driven by the net loss for the first half of 2023 and the timing of working capital outlays. As of June 30, 2023, the Company had a cash balance of $14.9 million.

About HF Foods Group Inc.

HF Foods Group Inc. 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 United States. HF Foods aims to supply the increasing demand for Asian American restaurant cuisine, leveraging its nationwide network of distribution centers and its strong relations with growers and suppliers of fresh, high-quality specialty restaurant food products and supplies in the US, South America, and China. Headquartered in Las Vegas, Nevada, HF Foods trades on Nasdaq under the symbol “HFFG”. For more information, please visit www.hffoodsgroup.com.

Investor Relations Contact:

HFFG Investor Relations

hffoodsgroup@icrinc.com

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 “believes,” “intends,” 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, 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, 2022 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.

Non-GAAP Financial Measures

Discussion of our results includes certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and non-GAAP net income (loss), that we believe provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial performance with other companies in the same industry, many of which present similar non-GAAP financial measures to investors. The definitions of EBITDA, adjusted EBITDA and non-GAAP net income (loss) may not be the same as similarly titled measures used by other companies in the industry. EBITDA, adjusted EBITDA and non-GAAP net income (loss) are not defined under GAAP and are subject to important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our financial results as reported under GAAP.

We use non-GAAP financial measures to supplement our GAAP financial results. Management uses EBITDA, defined as net income (loss) before interest expense, interest income, income taxes, and depreciation and amortization to measure operating performance. In addition, management uses Adjusted EBITDA, defined as net income (loss) before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, or non-recurring expenses. We believe that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, and other non-cash charges, provides useful information for our investors and is more reflective of other factors that affect our operating performance.

We believe non-GAAP net income (loss) is a useful measure of operating performance because it excludes certain items not reflective of our core operating performance. Non-GAAP net income (loss) is defined as net income (loss) adjusted for amortization of intangibles, change in fair value of interest rate swaps, stock based compensation, transaction related costs, transformational project costs and certain unusual, non-cash, or non-recurring expenses. We believe that non-GAAP net income (loss) facilitates period-over-period comparisons and provides additional clarity for investors to better evaluate our operating results. We present EBITDA, adjusted EBITDA, non-GAAP net income (loss) in order to provide supplemental information that we consider 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. Reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures are included in the schedules attached to this press release.

HF FOODS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)(Unaudited)
	June 30, 2023				December 31, 2022
ASSETS
CURRENT ASSETS:
Cash	$	14,946			$	24,289
Accounts receivable, net		46,193				44,399
Inventories		111,066				120,291
Other current assets		12,482				8,937
TOTAL CURRENT ASSETS		184,687				197,916
Property and equipment, net		136,724				140,330
Operating lease right-of-use assets		12,336				14,164
Long-term investments		2,414				2,679
Customer relationships, net		152,465				157,748
Trademarks and other intangibles, net		33,484				36,343
Goodwill		85,118				85,118
Other long-term assets		4,860				3,231
TOTAL ASSETS	$	612,088			$	637,529
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued not presented for payment	$	20,874			$	21,946
Line of credit		42,173				53,056
Accounts payable		55,718				57,044
Current portion of long-term debt, net		5,936				6,266
Current portion of obligations under finance leases		1,980				2,254
Current portion of obligations under operating leases		3,538				3,676
Accrued expenses and other liabilities		19,763				19,648
TOTAL CURRENT LIABILITIES		149,982				163,890
Long-term debt, net of current portion		112,623				115,443
Obligations under finance leases, non-current		11,375				11,441
Obligations under operating leases, non-current		9,052				10,591
Deferred tax liabilities		33,119				34,443
Other long-term liabilities		5,337				5,472
TOTAL LIABILITIES		321,488				341,280
Commitments and contingencies
SHAREHOLDERS’ EQUITY:
Preferred Stock		—				—
Common Stock		5				5
Additional paid-in capital		600,030				598,322
Accumulated deficit		(313,297	)			(306,514	)
TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO HF FOODS GROUP INC.		286,738				291,813
Noncontrolling interests		3,862				4,436
TOTAL SHAREHOLDERS’ EQUITY		290,600				296,249
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	612,088			$	637,529

HF FOODS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except share and per share data)(Unaudited)
		Three Months Ended June 30,								Six Months Ended June 30,
			2023				2022				2023				2022
Net revenue		$	292,312			$	299,642			$	586,167			$	577,857
Cost of revenue			241,646				247,072				485,329				474,560
Gross profit			50,666				52,570				100,838				103,297
Distribution, selling and administrative expenses			52,243				45,843				105,172				86,251
(Loss) income from operations			(1,577	)			6,727				(4,334	)			17,046
Other (income) expenses:
Interest expense			2,847				1,549				5,715				2,827
Other income			(127	)			(163	)			(355	)			(939	)
Change in fair value of interest rate swap contracts			(2,856	)			(208	)			(110	)			(566	)
Lease guarantee expense			(90	)			(42	)			(210	)			5,889
Total Other expenses, net			(226	)			1,136				5,040				7,211
(Loss) income before income taxes			(1,351	)			5,591				(9,374	)			9,835
Income tax expense (benefit)			209				1,097				(2,017	)			2,201
Net (loss) income			(1,560	)			4,494				(7,357	)			7,634
Less: net loss attributable to noncontrolling interests			(710	)			(70	)			(574	)			(44	)
Net (loss) income attributable to HF Foods Group Inc.		$	(850	)		$	4,564			$	(6,783	)		$	7,678
(Loss) earnings per common share - basic		$	(0.02	)		$	0.08			$	(0.13	)		$	0.14
(Loss) earnings per common share - diluted		$	(0.02	)		$	0.08			$	(0.13	)		$	0.14
Weighted average shares - basic			54,046,328				53,706,392				53,935,178				53,706,392
Weighted average shares - diluted			54,046,328				53,900,883				53,935,178				53,927,957

HF FOODS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands), (Unaudited)
	Six Months Ended June 30,
		2023				2022
Cash flows from operating activities:
Net (loss) income	$	(7,357	)		$	7,634
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense		13,129				11,859
Asset impairment charges		1,200				422
Gain from disposal of property and equipment		—				(1,351	)
Provision for credit losses		56				111
Deferred tax benefit		(1,324	)			(2,674	)
Change in fair value of interest rate swap contracts		(110	)			(565	)
Stock-based compensation		1,848				511
Non-cash lease expense		1,916				1,579
Lease guarantee expense		(210	)			5,889
Other expense (income)		389				(47	)
Changes in operating assets and liabilities (excluding effects of acquisitions):
Accounts receivable		(1,456	)			(6,529	)
Accounts receivable - related parties		(394	)			(629	)
Inventories		9,225				(13,662	)
Prepaid expenses and other current assets		(3,545	)			(4,199	)
Other long-term assets		(1,519	)			(494	)
Accounts payable		(667	)			16,799
Accounts payable - related parties		(659	)			159
Operating lease liabilities		(1,765	)			(1,551	)
Accrued expenses and other liabilities		(25	)			396
Net cash provided by operating activities		8,732				13,658
Cash flows from investing activities:
Purchase of property and equipment		(1,522	)			(4,028	)
Proceeds from sale of property and equipment		—				7,667
Payment made for acquisition of Sealand		—				(34,849	)
Payment made for acquisition of Great Wall Group		—				(17,445	)
Net cash used in investing activities		(1,522	)			(48,655	)
Cash flows from financing activities:
Checks issued not presented for payment		(1,072	)			2,348
Proceeds from line of credit		594,916				625,656
Repayment of line of credit		(605,826	)			(620,783	)
Proceeds from long-term debt		—				45,952
Repayment of long-term debt		(3,172	)			(7,882	)
Payment of debt financing costs		—				(579	)
Repayment of obligations under finance leases		(1,399	)			(1,243	)
Repayment of promissory note payable - related party		—				(4,500	)
Proceeds from noncontrolling interests shareholders		—				240
Cash distribution to shareholders		—				(186	)
Net cash (used in) provided by financing activities		(16,553	)			39,023
Net (decrease) increase in cash		(9,343	)			4,026
Cash at beginning of the period		24,289				14,792
Cash at end of the period	$	14,946			$	18,818

HF FOODS GROUP INC. AND SUBSIDIARIESRECONCILIATION OF NET (LOSS) INCOME TO EBITDA AND ADJUSTED EBITDA(In thousands)(Unaudited)
		Three Months Ended June 30,								Change
			2023				2022			Amount				%
Net (loss) income		$	(1,560	)		$	4,494			$	(6,054	)		(134.7)%
Interest expense			2,847				1,549				1,298			83.8%
Income tax expense			209				1,097				(888	)		(80.9)%
Depreciation and amortization			6,440				6,080				360			5.9%
EBITDA			7,936				13,220				(5,284	)		(40.0)%
Lease guarantee expense			(90	)			(42	)			(48	)		114.3%
Change in fair value of interest rate swaps			(2,856	)			(208	)			(2,648	)		NM
Stock-based compensation expense			752				221				531			240.3%
Acquisition and integration costs			—				310				(310	)		NM
Asset impairment charges			1,200				422				778			184.4%
Adjusted EBITDA		$	6,942			$	13,923			$	(6,981	)		(50.1)%

	Six Months Ended June 30,								Change
		2023				2022			Amount				%
Net (loss) income	$	(7,357	)		$	7,634			$	(14,991	)		(196.4)%
Interest expense		5,715				2,827				2,888			102.2%
Income tax (benefit) expense		(2,017	)			2,201				(4,218	)		(191.6)%
Depreciation and amortization		13,129				11,859				1,270			10.7%
EBITDA		9,470				24,521				(15,051	)		(61.4)%
Lease guarantee expense		(210	)			5,889				(6,099	)		(103.6)%
Change in fair value of interest rate swaps		(110	)			(566	)			456			NM
Stock-based compensation expense		1,848				511				1,337			261.6%
Acquisition and integration costs		—				1,059				(1,059	)		NM
Asset impairment charges		1,200				422				778			184.4%
Adjusted EBITDA	$	12,198			$	31,836			$	(19,638	)		(61.7)%

____________

NM - Not meaningful

HF FOODS GROUP INC. AND SUBSIDIARIESRECONCILIATION OF NET (LOSS) INCOME ATTRIBUTABLE TO HF FOODS GROUP INC. TO NON-GAAP NET INCOME ATTRIBUTABLE TO HF FOODS GROUP INC. (In thousands)(Unaudited)
		Three Months Ended June 30,								Change
			2023				2022			Amount				%
Net (loss) income attributable to HF Foods Group Inc.		$	(850	)		$	4,564			$	(5,414	)		(118.6)%
Amortization of intangibles			4,071				3,959				112			2.8%
Lease guarantee (income) expense			(90	)			(42	)			(48	)		NM
Change in fair value of interest rate swaps			(2,856	)			(208	)			(2,648	)		NM
Stock-based compensation expense			752				221				531			240.3%
Acquisition and integration costs			—				310				(310	)		NM
Asset impairment charges			1,200				422				778			184.4%
Aggregate adjustment for income taxes			(659	)			(1,044	)			385			(36.9)%
Non-GAAP net income attributable to HF Foods Group Inc.		$	1,568			$	8,182			$	(6,614	)		(80.8)%

		Six Months Ended June 30,								Change
			2023				2022			Amount				%
Net (loss) income attributable to HF Foods Group Inc.		$	(6,783	)		$	7,678			$	(14,461	)		(188.3)%
Amortization of intangibles			8,142				7,601				541			7.1%
Lease guarantee (income) expense			(210	)			5,889				(6,099	)		(103.6)%
Change in fair value of interest rate swaps			(110	)			(566	)			456			NM
Stock-based compensation expense			1,848				511				1,337			261.6%
Acquisition and integration costs			—				1,059				(1,059	)		NM
Asset impairment charges			1,200				422				778			184.4%
Aggregate adjustment for income taxes			(2,834	)			(3,710	)			876			(23.6)%
Non-GAAP net income attributable to HF Foods Group Inc.		$	1,253			$	18,884			$	(17,631	)		(93.4)%

____________

NM - Not meaningful