HF FOODS GROUP INC. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "possible," "potential," "predict," "project," "will" and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with theSecurities and Exchange Commission ("SEC"). All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph. All forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include without limitation:
•The effects of the COVID-19 pandemic or other pandemics;
•Low margins in the foodservice distribution industry and periods of significant or prolonged inflation;
•Qualified labor shortages;
•Unfavorable macroeconomic conditions in
•Competition in the foodservice distribution industry particularly the entry of new competitors into the Chinese/Asian restaurant supply market niche;
•Increases in fuel costs;
•Disruption of relationships with vendors and increases in product prices;
•Dependency on the timely delivery of products from vendors, particularly the prolonged diminution of global supply chains;
•Our business has been affected and may in the future be affected by the COVID-19 pandemic and the steps taken by the Chinese government to address the pandemic;
•Disruption of relationships with or loss of customers;
•Changes in consumer eating and dining out habits;
•Related party transactions and possible conflicts of interests;
•Related parties and variable interest entities consolidation;
•Failure to protect our intellectual property rights;
•Our ability to renew or replace our current warehouse leases on favorable terms, or terminations prior to expiration of stated terms;
•Failure to retain our senior management and other key personnel, particularly our CEO, COO, CFO and CCO/General Counsel;
•Our ability to attract, train and retain employees;
•Changes in and enforcement of immigration laws;
•Failure to comply with various federal, state and local rules and regulations regarding food safety, sanitation, transportation, minimum wage, overtime and other health and safety laws; •Product recalls, voluntary recalls or withdrawals if any of the products we distribute are alleged to have caused illness, been mislabeled, misbranded or adulterated or to otherwise have violated applicable government regulations;
•Costs to comply with environmental laws and regulations;
•Litigation;
•Increases in commodity prices;
•U.S. government tariffs on products imported into
•Severe weather, natural disasters and adverse climate change;
•Unfavorable geopolitical conditions;
•Any cyber security incident, other technology disruption or delay in implementing our information technology systems;
•Current indebtedness affecting our liquidity and ability of future financing;
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--------------------------------------------------------------------------------•Failure to acquire other distributors or wholesalers and enlarge our customer base could negatively impact our results of operations and financial condition;
•Scarcity of and competition for acquisition opportunities;
•Our ability to obtain acquisition financing;
•The impact of non-cash charges relating to the amortization of intangible assets related to material acquisitions;
•Our ability to identify acquisition candidates;
•Increases in debt in order to successfully implement our acquisition strategy;
•Difficulties in integrating operations, personnel, and assets of acquired businesses that may disrupt our business, dilute stockholder value, and adversely affect our operating results;
•Our ability to regain compliance with Securities Exchange Act of 1934 reporting requirements; and
•The development of an active trading market for our common stock.
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with theSecurities and Exchange Commission (the "SEC") and public communications. We caution you that the important factors referenced above may not contain all of the risks, uncertainties (some of which are beyond our control) or other assumptions that are important to you. Factors that might cause or contribute to such differences include, but are not limited to, those contained in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC . We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.
Company Background and Overview
We market and distribute Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughoutthe United States . HF Group was formed through a merger between two complementary industry participants,HF Foods Group Inc. andB&R Global .
On
Subsequent toMarch 31, 2022 , onApril 29, 2022 , HF Group acquired substantially all of the assets ofSealand Food, Inc. (the "Sealand Acquisition"), one of the largest frozen seafood suppliers servicing the Asian/Chinese restaurant market along the eastern seaboard, fromMassachusetts toFlorida , as well asPennsylvania , WestVirginia, Ohio ,Kentucky , andTennessee .
See Note 7 - Acquisitions for additional information regarding recent acquisitions.
Capitalizing on our institutional understanding of the Chinese culture, our over 1,000 employees and subcontractors and our support from two outsourced call centers inChina , we serve over 15,000 Asian restaurants in 46 states with 18 distribution centers strategically located throughout the nation, providing round-the-clock sales and service support to customers who mainly converse in Mandarin or other Chinese dialects. We are dedicated to serving the vast array of Asian and Chinese restaurants in need of high-quality and specialized food ingredients at competitive prices. As a market leader in servicing the Asian/Chinese restaurant sector, we are well-positioned for long-term success. The fragmented nature of the Asian/Chinese foodservice industry and the current environment creates opportunities for a company that has the necessary expertise and a comprehensive cultural understanding of this unique customer base. We believe we are differentiated from our competitors given our extensive footprint, strong vendor and customer relationships, and value-added service offerings, all of which have allowed and will continue to allow us to better serve our customers in these unprecedented conditions. Financial Overview Our net revenue for the three months endedMarch 31, 2022 was$278.2 million , an increase of$118.8 million , or 74.6%, from$159.4 million for the three months endedMarch 31, 2021 . Net income attributable to our shareholders for the three months endedMarch 31, 2022 was$3.1 million , compared to net income attributable to our shareholders of$1.4 million for the three months endedMarch 31, 2021 . Adjusted EBITDA for the three months endedMarch 31, 2022 was$17.9 million , an increase of$11.4 million , or 175.4%, from$6.5 million for the three months endedMarch 31, 2021 .
For additional information on our non-GAAP financial measures, EBITDA and Adjusted EBITDA, see the section entitled "EBITDA and Adjusted EBITDA" below.
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--------------------------------------------------------------------------------COVID-19 Impact
The devastating impact of the COVID-19 pandemic seen in 2020 has generally subsided. Our net revenue for the fiscal year endedDecember 31, 2021 recovered to 96% of pre-COVID-19 pandemic levels. Based on current sales volumes and adjusted cost structures, we continue to generate positive operating cash flows on a weekly basis and do not have immediate liquidity concerns. We remain optimistic with regards to the long-term prospects for our business although the extent to which the COVID-19 pandemic will impact our financial condition or results of operations is uncertain and will depend on future developments including new information that may emerge on the severity or transmissibility of the disease, new variants, government responses, trends in infection rates, development and distribution of effective medical treatments and vaccines, and future consumer spending behavior, among other factors.
How to
In assessing our performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, selling and administrative expenses, as well as certain non-GAAP financial measures, including EBITDA and adjusted EBITDA. The key measures that we use to evaluate the performance of our business are set forth below:
Net Revenue
Net revenue is equal to gross sales minus sales returns, sales incentives that we offer to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net revenue is driven by changes in number of customers and average customer order amount, product inflation that is reflected in the pricing of our products and mix of products sold.
Gross Profit
Gross profit is equal to net revenue minus cost of revenue. Cost of revenue primarily includes inventory costs (net of supplier consideration), inbound freight, customs clearance fees and other miscellaneous expenses. Cost of revenue generally changes as we incur higher or lower costs from suppliers and as the customer and product mix changes.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses consist primarily of salaries, stock-based compensation and benefits for employees and contract laborers, trucking and fuel expenses, utilities, maintenance and repair expenses, insurance expenses, depreciation and amortization expenses, selling and marketing expenses, professional fees and other operating expenses.
EBITDA and Adjusted EBITDA
Discussion of our results includes certain non-GAAP financial measures, including EBITDA and Adjusted EBITDA, 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. We present EBITDA and Adjusted EBITDA in order to provide supplemental information that we consider relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersede GAAP measures. Management uses EBITDA to measure operating performance, defined as net income before interest expense, income taxes, and depreciation and amortization. In addition, management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, or non-recurring expenses. Management believes that Adjusted EBITDA is less susceptible to variances in actual performance resulting from non-recurring expenses, and other non-cash charges and is more reflective of other factors that affect our operating performance. The definition of EBITDA and Adjusted EBITDA may not be the same as similarly titled measures used by other companies in the industry. EBITDA and Adjusted EBITDA 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 HF Group's results as reported under GAAP. For example, Adjusted EBITDA:
•excludes certain tax payments that may represent a reduction in cash available to the Company;
•does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•does not reflect changes in, or cash requirements for, our working capital needs; and
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--------------------------------------------------------------------------------•does not reflect the significant interest expense, or the cash requirements, necessary to service our debt.
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
The following table sets forth a summary of our consolidated results of operations for the three months endedMarch 31, 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 March 31, Change ($ in thousands) 2022 2021 Amount % Net revenue$ 278,215 $ 159,380 $ 118,835 74.6 % Cost of revenue 227,488 129,952 97,536 75.1 % Gross profit 50,727 29,428 21,299 72.4 % Distribution, selling and administrative expenses 40,408 28,089 12,319 43.9 % Income from operations 10,319 1,339 8,980 670.6 % Interest expense 1,278 902 376 41.7 % Other income, net (776) (436) (340) 78.0 % Change in fair value of interest rate swap contracts (358) (1,431) 1,073 (75.0) % Lease guarantee expense 5,931 - 5,931 NM Income before income tax provision 4,244 2,304 1,940 84.2 % Income tax provision 1,104 646 458 70.9 % Net income 3,140 1,658 1,482 89.4 % Less: net income attributable to noncontrolling interests 26 300 (274) (91.3) % Net income attributable to HF Foods Group Inc. $ 3,114$ 1,358 $ 1,756 129.3 % _______________ NM - Not meaningful 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, 2022 2021 Net revenue 100.0 % 100.0 % Cost of revenue 81.8 % 81.5 % Gross profit 18.2 % 18.5 % Distribution, selling and administrative expenses 14.5 % 17.6 % Income from operations 3.7 % 0.9 % Interest expense 0.5 % 0.6 % Other income, net (0.3) % (0.3) % Change in fair value of interest rate swap contracts (0.1) % (0.9) % Lease guarantee expense 2.1 % - % Income before income tax provision 1.5 % 1.5 % Income tax provision 0.4 % 0.4 % Net income 1.1 % 1.1 % Less: net income attributable to noncontrolling interests - % 0.2 % Net income attributable to HF Foods Group Inc. 1.1 % 0.9 % 26 --------------------------------------------------------------------------------
Net Revenue
Net revenue for the three months endedMarch 31, 2022 increased by$118.8 million or 74.6% compared to the same period in 2021. The increase was primarily due to the easing of COVID-19-related restrictions in 2022 that resulted in more dine-in business for our customers and an increase in overall foot traffic to restaurants, as well as the additional revenue generated due to the Great Wall Acquisition and overall product cost inflation. The Great Wall Acquisition, which shifted our product mix to higher Seafood sales compared to the same period in 2021, contributed$47.9 million and organic growth contributed the remaining$70.9 million .
Gross Profit
Gross profit for the three months endedMarch 31, 2022 increased by$21.3 million or 72.4%, compared to the same period in 2021 mainly due to strong revenue growth and the Great Wall Acquisition, which contributed$6.1 million of gross profit for the three months endedMarch 31, 2022 . Overall gross margin decreased from 18.5% in the three months endedMarch 31, 2021 to 18.2% in the three months endedMarch 31, 2022 , primarily due to the expected lower gross margin on our increased Seafood sales, offset by increased gross margin due to organic growth.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses for the three months endedMarch 31, 2022 increased by$12.3 million , or 43.9%, to$40.4 million compared to$28.1 million for the three months endedMarch 31, 2021 . Of the distribution, selling and administrative expenses increase,$9.9 million primarily resulted from payroll and related labor costs, inclusive of the additional costs due to the Great Wall Acquisition, as more workers were, and will continue to be, required to handle the increasing sales demand and$1.1 million was in delivery related cost primarily driven by increasing fuel prices and revenue growth. Distribution, selling and administrative expenses as a percentage of net revenue improved from 17.6% in 2021 to 14.5% in 2022 primarily due to strong revenue growth and fixed cost leverage.
Interest Expense
Interest expense for the three months endedMarch 31, 2022 increased by$0.4 million , or 41.7%, compared to the same period in 2021 mainly due to higher utilization of the line of credit. Our average daily line of credit balance increased by$48.2 million , or 300.0%, to$64.3 million for the three months endedMarch 31, 2022 from$16.1 million for three months endedMarch 31, 2021 .
Income Tax Provision
Our provision for income taxes increased by$0.5 million , or 70.9%, from$0.6 million for the three months endedMarch 31, 2021 to$1.1 million for the three months endedMarch 31, 2022 mainly due to increasing income before tax, resulting from business expansion and our improved profitability.
Net Income Attributable to
Net income attributable toHF Foods Group Inc. was$3.1 million for the three months endedMarch 31, 2022 , compared to$1.4 million for the three months endedMarch 31, 2021 . The year over year change in net income attributable toHF Foods Group Inc. increased$1.8 million , or approximately 129.3% compared to the three months endedMarch 31, 2021 . The strong upward-trend is attributable to increased consumer demand for dine-in/take-out meals as COVID-19 restrictions eased in 2022, thereby prompting restaurants to replenish products more frequently, partially offset by a one-time lease guarantee expense of$5.9 million (see Note 15 - Commitments and Contingencies for additional information). 27 --------------------------------------------------------------------------------
EBITDA and Adjusted EBITDA
The following table sets forth the calculation of EBITDA and Adjusted EBITDA, and reconciliation to net income, the closest GAAP measure:
Three Months Ended March 31, Change
($ in thousands) 2022 2021 Amount %
Net income $ 3,140 $ 1,658 $ 1,482 89.4 %
Interest expense 1,278 902 376 41.7 %
Income tax provision 1,104 646 458 70.9 %
Depreciation and amortization 5,779 4,730 1,049 22.2 %
EBITDA 11,301 7,936 3,365 42.4 %
Lease guarantee expense 5,931 - 5,931 NM
Change in fair value of interest rate
swap contracts (358) (1,431) 1,073 (75.0) %
Stock-based compensation expense 290 - 290 NM
Acquisition and integration costs 749 - 749 NM
Adjusted EBITDA $ 17,913 $ 6,505 $ 11,408 175.4 %
Adjusted EBITDA margin 6.4 % 4.1 %
____________________
NM - Not meaningful
Adjusted EBITDA was $17.9 million for the three months ended March 31, 2022 , an
increase of $11.4 million , or 175.4%, compared to $6.5 million for the three
months ended March 31, 2021 . The $11.4 million increase in Adjusted EBITDA was
primarily attributable to our strong business recovery to pre-COVID-19 pandemic
levels and an improvement of distribution, selling and administrative expenses
from 17.6% of net revenue in 2021 to 14.5% in 2022.
Liquidity and Capital Resources
As ofMarch 31, 2022 , we had cash of approximately$16.4 million , checks issued not presented for payment of$18.5 million and access to approximately$31.6 million in additional funds through our$100.0 million line of credit, subject to a borrowing base calculation. We have funded working capital and other capital requirements primarily by cash flow from operations and our line of credit. Cash is required to pay purchase costs for inventory, salaries, fuel and trucking expenses, selling expenses, rental expenses, income taxes, other operating expenses and to service debts. Based on current sales volume, which has been increasing steadily quarter-on-quarter since the outbreak of COVID-19 in the first half of 2020, we believe that our cash flow generated from operations is sufficient to meet our normal working capital needs and debt obligations for at least the next twelve months. However, our ability to repay our current obligations will depend on the future realization of our current assets. Management has taken into consideration historical experience, general economic trends inthe United States , and trends in the foodservice distribution industry to determine the expected collectability of accounts receivable and the realization of inventories as ofMarch 31, 2022 . OnMarch 31, 2022 , we amended the Credit Agreement with J.P. Morgan extending our line of credit for 5 years. The amendment provides for a$100.0 million asset-secured revolving credit facility with a 1-month SOFR plus a credit adjustment of 0.1% plus 1.375% per annum. In April of 2022, the$46.0 million increase to the mortgage-secured term loan was used to pay down our$100.0 million line of credit. We also received a waiver throughJanuary 31, 2023 related to the timing of our filing of our 2021 audited financial statements. OnApril 29, 2022 , we completed the Sealand Acquisition for cash consideration of$20.0 million plus approximately$14.4 million of inventory. We financed the Sealand Acquisition through our$100.0 million line of credit. During the three months endedJune 30, 2022 , we sold a warehouse to a related party for approximately$7.2 million and used a portion of the proceeds to pay the outstanding balance of our$4.5 million loan withFirst Horizon Bank . We also paid the remaining$4.5 million of our related party promissory note payable. 28 -------------------------------------------------------------------------------- Based on the above considerations, management believes we have sufficient funds to meet our working capital requirements and debt obligations in the next twelve months. However, there are a number of factors that could potentially arise which might result in shortfalls in anticipated cash flow, such as the demand for our products, economic conditions, government intervention in response to a potential resurgence of COVID-19, competitive pricing in the foodservice distribution industry, and our bank and suppliers being able to provide continued support. If the future cash flow from operations and other capital resources is insufficient to fund our liquidity needs, we may have to resort to reducing or delaying our expected acquisition plans, liquidating assets, obtaining additional debt or equity capital, or refinancing all or a portion of our debt.
As of
The following table summarizes cash flow data for the three months ended
Three Months Ended March 31, Change
($ in thousands) 2022 2021 Amount %
Net cash provided by operating activities
(8.1)%
Net cash used in investing activities (19,932) (440) (19,492) NM
Net cash provided by (used in) financing
activities 11,453 (8,889) 20,342 NM
Net increase in cash and cash equivalents $ 1,634 $ 1,674 $ (40) (2.4)%
____________________
NM - Not meaningful
Operating Activities
Net cash provided by operating activities was $10.1 million for the three months
ended March 31, 2022 , compared to $11.0 million for the three months ended
March 31, 2021 , a decrease of $0.9 million , as a result of changes in working
capital items primarily due to two factors: (a) Our accounts receivable balance
as of March 31, 2022 was significantly higher as a result of both the increased
sales generated related to the Great Wall Acquisition as well as increasing
sales volume, and (b) compared to March 31, 2021 , our inventory level as of
March 31, 2022 increased sharply as a direct result of increasing sales volume
and the need for normal inventory level build up during the period, partially
offset by an increase in net income of $1.5 million .
Investing Activities
Net cash used in investing activities increased by$19.5 million primarily due to the$17.4 million paid for the inventory acquired related to the Great Wall Acquisition and, to a lesser extent, the purchase of property and equipment for our expanding business. Financing Activities Net cash provided by financing activities was$11.5 million for the three months endedMarch 31, 2022 , compared to net cash used in financing activities of$8.9 million for the three months endedMarch 31, 2021 , an increase of$20.3 million , primarily due to the net impact of$15.2 million on our line of credit from an increase in net repayments of$1.9 million in 2021 to net proceeds of$13.3 million in 2022 as well as the net impact of$5.1 million on our checks issued not presented for payment from net repayments of$4.4 million in 2021 to net proceeds of$0.7 million in 2022.
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in
accordance with GAAP. Preparing our consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during these reporting periods. We base our estimates and judgments on
historical experience and other factors we believe are reasonable under the
circumstances. 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 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
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no changes to those critical accounting policies that have had a material impact
on our reported amounts of assets, liabilities, revenue, or expenses during the
three months ended March 31, 2022 .
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Recent Accounting Pronouncements in Note 2 - Summary of Significant Accounting Policies, in our unaudited condensed consolidated financial statements.
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