HF Foods Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. HF Foods distributes Asian specialty foods, seafood, produce, and other products primarily to Asian restaurants and foodservice customers in the U.S. It reported one U.S. operating segment and operated 18 distribution centers with a fleet of more than 400 refrigerated vehicles.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $293.9 million | $278.2 million; up 5.6% |
| Gross profit / margin | $50.2 million / 17.1% | $50.7 million / 18.2% |
| Operating income (loss) | $(2.8) million | $10.3 million |
| Net income (loss) attributable to HF Foods | $(5.9) million; $(0.11) per share | $3.1 million; $0.06 per share |
| Adjusted EBITDA | $5.3 million | $17.9 million; down 70.7% |
| Cash from operating activities | $12.6 million | $10.1 million |
| Cash and current assets | $17.5 million cash; $179.4 million current assets | Cash was $24.3 million at December 31, 2022 |
| Debt and revolving credit | $120.1 million carrying value of long-term debt, including current portion; $44.5 million line-of-credit balance | Debt was $121.7 million and line of credit $53.1 million at December 31, 2022 |
Cost of revenue rose 7.1%, faster than revenue. Distribution, selling and administrative expenses increased 31.0% to $52.9 million, or 18.0% of revenue versus 14.5%. The company attributed the increase mainly to $2.8 million more payroll and labor costs, $4.2 million more professional fees—primarily legal and compliance costs—and $0.8 million more sales-related costs. Interest expense rose 124.4% to $2.9 million amid higher rates and a larger average mortgage-term-loan balance. A $2.7 million expense from the change in interest-rate-swap fair value also weighed on results.
Operating cash flow was positive, while investing activities used $0.6 million, primarily for property and equipment. Financing activities used $18.8 million, including net line-of-credit repayments and settlement of checks issued but not yet presented. Cash declined $6.8 million during the quarter. Management reported access to about $55.5 million of additional borrowing under its $100 million line, subject to borrowing-base limits. The current ratio was approximately 1.23 at quarter-end.
Changes, outlook, and notable matters
- Revenue growth reflected higher seafood sales following the 2022 Sealand acquisition and product-cost inflation; lower meat and poultry revenue partly offset growth. Seafood accounted for 32% of Q1 2023 revenue, compared with 27% a year earlier.
- Gross margin contracted by 1.1 percentage points. Management cited product mix, inventory-purchase timing, commodity prices, and an unusually strong prior-year comparison.
- Management stated that operating cash flow should meet normal working-capital needs and that available funds should cover working capital and debt obligations for at least the next 12 months. It cautioned that demand, economic conditions, competition, and continued support from banks and suppliers could affect liquidity. No specific earnings or revenue guidance was provided.
- At March 31, floating-rate debt without hedging was $44.5 million. A new $120 million amortizing swap, effective March 1 and expiring in March 2028, pays a fixed 4.11% rate against floating SOFR payments to partially hedge floating-rate exposure. The filing reported a $2.6 million swap liability at quarter-end. The company was in compliance with its debt covenants.
- The SEC investigation remains ongoing; the company disclosed that potential fines or penalties cannot currently be estimated. Five previously reported material weaknesses in internal controls remained, and management concluded disclosure controls were ineffective as of March 31. Remediation efforts include adding financial personnel and formalizing documentation and transaction controls.
- A derivative action settlement agreed after quarter-end provides for former executives to pay the company $9.25 million and for governance changes. The settlement is subject to Court of Chancery approval. Separately, an April 2023 shareholder rights plan imposes consequences on a person or group acquiring 15% or more of common shares without board approval.
- Other risks highlighted include thin industry margins, inflation and commodity or fuel costs, labor availability, supply-chain and customer disruptions, litigation, related-party conflicts, and the company’s indebtedness. The company reported $2.3 million of related-party sales and $2.3 million of related-party purchases in the quarter.
Investor verification priorities
- Track whether revenue growth translates into recovered gross margin and operating profitability, given the faster increase in costs and sharp decline in adjusted EBITDA.
- Verify liquidity and borrowing-base availability, cash conversion, and debt service needs; assess the effect of interest rates despite the new swap.
- Follow the court approval and accounting treatment of the $9.25 million settlement, and developments in the ongoing SEC investigation and related compliance costs.
- Monitor progress in remediating the five material weaknesses and any subsequent changes in management’s assessment of controls.
- Review related-party transactions and the AnHeart lease guarantee, for which the recorded liability was $5.7 million and estimated minimum payments totaled $7.3 million before imputed interest.
Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results or cash flow.