HF Foods Group Inc

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.

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

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 forthree 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 thethree 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 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.

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

(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.

The following table sets forth the components of our consolidated results of operations expressed as a percentage of net revenue for the periods indicated:

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 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 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 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.

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

(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.

Liquidity and Capital Resources

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. 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.

We believe that our cash flow generated from operations is sufficient to meet our normal working capital needs 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 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 June 30, 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. 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, 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 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:

Operating Activities

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 $4.8 million primarily due to increased capital project spend in the six months ended June 30, 2024.

Financing Activities

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

We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing our condensed 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 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.