HF Foods Reports Second Quarter 2023 Financial Results


First Half Record Net Revenue

Focus is to Reduce Cost Structure and Transform Operations

LAS VEGAS, Aug. 09, 2023 (GLOBE NEWSWIRE) -- 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 SUBSIDIARIES
CONDENSED 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 SUBSIDIARIES
CONDENSED 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 SUBSIDIARIES
CONDENSED 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 SUBSIDIARIES
RECONCILIATION 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)%

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HF FOODS GROUP INC. AND SUBSIDIARIES
RECONCILIATION 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)%

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NM - Not meaningful