INNOVATIVE FOOD HOLDINGS INC - Quarter Report: 2018 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549 

 

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FORM 10-Q 

 

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☒  Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the quarterly period ended March 31, 2018

☐  Transition report pursuant to Section 13 or 15(d) of the Exchange Act

For the transition period from _________ to _________.

Commission File Number: 0-9376

(Exact Name of Registrant as Specified in its Charter)

28411 Race Track Rd.

(Address of Principal Executive Offices)

(Registrant’s Telephone Number, Including Area Code)

                                                                                                    

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

(Check One):

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):  YES ☐  NO ☒

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 36,296,218 shares of common stock issued and 33,805,106 shares of common stock outstanding as of May 9, 2018.

INNOVATIVE FOOD HOLDINGS, INC.

TABLE OF CONTENTS TO FORM 10-Q

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Innovative Food Holdings, Inc.

Condensed Consolidated Balance Sheets

 

		March 31,				December 31,
		2018				2017
ASSETS		(unaudited)
Current assets
Cash and cash equivalents		$	4,680,814			$	5,133,435
Accounts receivable, net			2,633,244				2,042,505
Inventory			1,416,984				937,962
Notes receivable			-				325,500
Other current assets			208,046				86,730
Total current assets			8,939,088				8,526,132
Property and equipment, net			1,991,308				1,955,250
Investments			251,525				201,525
Intangible assets, net			4,347,662				1,336,916
Total assets		$	15,529,583			$	12,019,823
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	2,888,669			$	1,836,559
Accrued interest			22,955				15,860
Notes payable - current portion, net of discount			1,395,340				346,855
Contingent liability - current portion			792,900				200,000
Total current liabilities			5,099,864				2,399,274
Contingent liability - long-term			394,900				200,000
Note payable - long term portion, net of discount			1,154,945				866,010
Total liabilities			6,649,709				3,465,284
Stockholders’ equity
Common stock: $0.0001 par value; 500,000,000 shares authorized; 36,296,218 and 36,080,519 shares issued, and 33,805,348 and 33,589,407 shares outstanding at March 31, 2018 and December 31, 2017, respectively			3,627				3,605
Additional paid-in capital			36,073,447				36,196,682
Treasury stock: 2,276,703 shares outstanding at March 31, 2018 and December 31, 2017			(992,313	)			(992,313	)
Accumulated deficit			(26,204,887	)			(26,653,435	)
Total stockholders’ equity			8,879,874				8,554,539
Total liabilities and stockholders’ equity		$	15,529,583			$	12,019,823

 

See notes to these unaudited condensed consolidated financial statements. 

Innovative Food Holdings, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

		For the Three				For the Three
		Months Ended				Months Ended
		March 31,				March 31,
		2018				2017
Revenue		$	10,916,544			$	9,485,164
Cost of goods sold			7,437,431				6,434,232
Gross margin			3,479,113				3,050,932
Selling, general and administrative expenses			3,003,817				2,200,096
Total operating expenses			3,003,817				2,200,096
Operating income			475,296				850,836
Other expense:
Interest expense, net			26,748				116,199
Total other expense			26,748				116,199
Net income before taxes			448,548				734,637
Income tax expense			-				-
Net income		$	448,548			$	734,637
Net income per share  - basic		$	0.013			$	0.029
Net income per share - diluted		$	0.013			$	0.026
Weighted average shares outstanding - basic			33,710,609				25,707,164
Weighted average shares outstanding - diluted			33,725,720				31,854,060

 

See notes to these unaudited condensed consolidated financial statements.

Innovative Food Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		For the Three				For the Three
		Months Ended				Months Ended
		March 31,				March 31,
		2018				2017
Cash flows from operating activities:
Net income		$	448,548			$	734,637
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			238,413				130,407
Stock based compensation			8,787				160,896
Amortization of discount on notes payable			-				92,509
Changes in assets and liabilities:
Accounts receivable, net			(246,231	)			(355,646	)
Inventory and other current assets			(334,920	)			(33,403	)
Accounts payable and accrued liabilities			755,799				(1,097,421	)
Net cash provided by (used in) operating activities			870,396				(368,021	)
Cash flows from investing activities:
Cash related to the iGourmet asset acquisition			(2,409,437	)			-
Acquisition of property and equipment			(69,000	)			-
Cash paid in the acquisition of Oasis			-				(300,000	)
Investments in food related companies			(50,000	)			-
Net cash used in investing activities			(2,528,437	)			(300,000	)
Cash flows from financing activities:
Purchase of stock options from officers, directors, and employees			(167,000	)			(34,925	)
Cash received from exercise of warrants			35,000				68,697
Purchase of treasury stock			-				(18,592	)
Borrowings on term loan			1,500,000				-
Principal payments on debt			(160,186	)			(246,008	)
Principal payments capital leases			(2,394	)			(2,281	)
Net cash provided by (used in)  financing activities			1,205,420				(233,109	)
Decrease in cash and cash equivalents			(452,621	)			(901,130	)
Cash and cash equivalents at beginning of period			5,133,435				3,764,053
Cash and cash equivalents at end of period		$	4,680,814			$	2,862,923

 

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	22,834			$	96,318
Taxes		$	-			$	-
Non-cash investing and financing activities:
Common stock issued for conversion of note payable by related party		$	-			$	164,650
Note payable issued for acquisition		$	-			$	100,000

 

See notes to these unaudited condensed consolidated financial statements. 

INNOVATIVE FOOD HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited)

 

1. BASIS OF PRESENTATION

 

 

The accompanying unaudited interim condensed consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, some of which are non-operating, Artisan (“Artisan”), Food Innovations (“FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers (“OFB”), Gourmet Food Service Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc. (“GFW”), Gourmeting, Inc. (“Gourmeting”), The Haley Group, Inc. (“Haley”), Oasis (“Oasis”),  4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet”); Innovative Gourmet, LLC (“Innovative Gourmet”); and Food Funding, LLC (“Food Funding” and collectively with IVFH and its other subsidiaries, the “Company” or “IVFH”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited financial statements and related notes as contained in Form 10-K for the year ended December 31, 2017.  In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations to be expected for the full year.

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

 

 

 

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, and equity based instruments. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

 

 

The accompanying condensed consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, FII, FNM, OFB, GFG,  GFGW, Gourmeting,  Haley,  Oasis, For the Gourmet, Innovative Gourmet, and Food Funding. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

The Company recognizes revenue upon product delivery. All of our products are shipped either same day or overnight or through longer shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.

 

 

We have included in cost of goods sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of food and raw materials, packing and handling, shipping, and delivery costs.

 

Basic and Diluted Earnings Per Share 

Basic net income (loss) per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net income (loss) per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period. 

Dilutive shares at March 31, 2018:

There were no convertible notes or warrants outstanding on March 31, 2018.

 Stock Options

 

The following table summarizes the options outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  

 

Dilutive shares at March 31, 2017:

 

 

 

The following table summarizes the options outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  

 

 

 

During the three months ended March 31, 2017, the Company cancelled all outstanding restricted stock units (“RSUs”) and replaced them with common stock or restricted stock units; see note 16. At March 31, 2017, there are no RSUs outstanding.

During the three months ended March 31,2017, the Company cancelled unvested RSUs representing 1,370,000 shares of common stock and replaced them with restricted stock awards also representing 1,370,000 shares of common stock.  The restricted stock awards will vest over the same vesting period and under the same terms as the RSUs they replaced. During the three months ended March 31, 2017, the Company recognized expense of $120,104 for the vesting of restricted stock awards, the same amount of expense that would have been recognized had the RSUs not been replaced by the restricted stock awards.  

 

The consideration for and in connection with the APA consisted of:  (i) $1,500,000, which satisfied or reduced secured, priority and administrative debt of sellers; (ii) in connection with and prior to the acquisition, our wholly-owned subsidiary, Food Funding, funded advances of $325,500 to sellers on a secured basis, pursuant to certain loan documents and as bridge loans, which loans  were reduced by the proceeds of the APA; (iii) the purchase for $200,000 of certain debt owed by sellers, to be paid out of, if  available, Innovative Gourmet’s cash flow; (iv) potential contingent liability allocation for a percentage of sellers’ approximately $2,300,000 of certain debt, not purchased or assumed by Innovative Gourmet, which  under certain circumstances, Innovative Gourmet may determine to pay; and (v) additional purchase price consideration of (a) up to a maximum of $1,500,000, if EBITDA of Innovative Gourmet reaches $3,800,000 million in 2018, (b) up to a maximum of $1,750,000, if EBITDA of Innovative Gourmet in 2019 exceeds its EBITDA in 2018 by at least 20% and if its EBITDA reaches $5,000,000; and (c) up to a maximum of $2,125,000, if EBITDA of Innovative Gourmet in 2020 exceeds its EBITDA in 2019 by at least 20% and if its EBITDA reaches $8,000,000. The EBITDA based earnout shall be paid 37.5% in cash, 25% in Innovative Food Holdings shares valued at the time of the closing of this transaction and 37.5%, at Innovative Gourmet’s option, in Innovative Food Holdings shares valued at the time of the payment of the earnout or in cash.  See note 15.

 

In connection with the APA, our wholly-owned subsidiary, Food Funding, purchased seller’s senior secured note at a price of approximately $1,187,000, pursuant to the terms of a Loan Sale Agreement with UPS Capital Business Credit.  That note was reduced by the proceeds of the APA as disclosed in (i) above.

The above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management and is subject to adjustment as a more detailed analysis by a third party valuation expert is completed.   As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.  After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined. 

 

 

4. ACCOUNTS RECEIVABLE

 

At March 31, 2018 and December 31, 2017, accounts receivable consists of:

 

 

5. INVENTORY

6. PROPERTY AND EQUIPMENT

The Company owns a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135.  The property consists of approximately 1.1 acres of land and approximately 10,000 square feet of combined office and warehouse space, and was purchased as part of a bank short sale.  The Company moved its operations to these premises on July 15, 2013. The purchase price of the property was $792,758.

On May 14, 2015, the Company purchased a building and property located at 2528 S. 27th Avenue, Broadview, Illinois 60155. The property consists of approximately 1.33 acres of land and approximately 28,711 square feet of combined office and warehouse space. The purchase price of $914,350 was initially financed primarily by a draw-down of $900,000 on the Company’s credit facility with Fifth Third Bank. On May 29, 2015, a permanent financing facility was provided by Fifth Third Bank in the form of a loan in the amount of $980,000. $900,000 of this amount was used to pay the balance of the credit facility; the additional $80,000 was used for refrigeration and other improvements at the property. The interest on the loan is at the LIBOR rate plus 3.0%.  The building is used for office and warehouse space for the Company’s Artisan subsidiary.  During the twelve months ended December 31, 2015, the Company paid a total of $474,301 for various building improvements, furniture, fixtures, and equipment related to this property. Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when Artisan occupied the facility in October, 2015.

A summary of property and equipment at March 31, 2018 and December 31, 2017, was as follows:

 

 

Depreciation and amortization expense for property and equipment amounted to $49,267 and $27,340 for the three months ended March 31, 2018 and 2017, respectively.    

 

7. INVESTMENTS

The Company has made investments in certain early stage food related companies which it expects can benefit from synergies with the Company’s various operating businesses.  At March 31, 2018, the Company has investments in three food related companies in the aggregate amount of $251,525.  The Company records these investments under the cost method. The Company does not have significant influence over the operations of the companies it invests in. 

8. INTANGIBLE ASSETS

The Company acquired certain intangible assets pursuant to the acquisition of Artisan, Oasis (see note 3), Innovative Gourmet (see note 3) and OFB, and the acquisition of certain assets of The Haley Group, LLC. The following is the net book value of these assets:

 

		March 31, 2018
						Accumulated
		Gross				Amortization				Net
Trade Name		$	1,272,400			$	-			$	1,272,400
Non-Compete Agreement			505,900				(320,500	)			185,400
Customer Relationships			2,995,694				(1,248,437	)			1,747,257
Internally Developed Technology			788,600				(26,287	)			762,313
Goodwill			380,292				-				380,292
Total		$	5,942,886			$	(1,595,224	)		$	4,347,662

 

 

Total amortization expense for the three months ended March 31, 2018 and 2017 was $189,146 and $103,067, respectively.  

 

The trade names are not considered finite-lived assets, and are not being amortized.  The non-compete agreements are being amortized over a period of 48 months. The customer relationships acquired in the Artisan, Haley, Oasis, OFB, and Innovative Gourmet transactions are being amortized over periods ranging from 24 to 60 months.

 

As detailed in ASC 350, the Company tests for goodwill impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.  As detailed in ASC 350-20-35-3A, in performing its testing for goodwill impairment, management has completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The analysis completed in 2017 determined that there was no impairment to goodwill assets.

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities at March 31, 2018 and December 31, 2017 are as follows:

 

 

10. ACCRUED INTEREST

At March 31, 2018, accrued interest on notes outstanding was $22,955. During the three months ended March 31, 2018 and 2017, the Company paid cash for interest in the aggregate amount of $22,834 and $22,029, respectively.  

   

11. REVOLVING CREDIT FACILITIES

 

12. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

 

Aggregate maturities of long-term notes payable as of March 31, 2018 are as follows:

For the period ended March 31, 

 

2019		$	1,395,340
2020			489,363
2021			560,933
2022			54,600
2023			50,049
Total		$	2,550,285

 

13. RELATED PARTY TRANSACTIONS

For the three months ended March 31, 2018:

 

For the three months ended March 31, 2017:

 

14. COMMITMENTS AND CONTINGENT LIABILITIES

 

Pursuant to the Oasis acquisition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date. The Company believes it is likely that these payments will be made, and accordingly recorded the entire amount of $400,000 as a contingent liability on its balance sheet at acquisition. This amount is classified as a current liability at March 31, 2018; $200,000 is classified as a current liability and $200,000 is classified as a non-current liability at December 31, 2017.

Pursuant to the iGourmet Asset Purchase Acquisition, The Company has also recorded contingent liabilities in the amount of $787,800.  $392,900 is classified as a current contingent liability and $394,900 is classified as a non-current contingent liability at March 31, 2018.  This amount relates to certain performance based payments over the twenty-four months following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis.

 

15. EQUITY

 

 

At March 31, 2018 and December 31, 2017, a total of 2,491,112 shares are deemed issued but not outstanding by the Company. These include 2,276,703 shares of treasury stock.

Three months ended March 31, 2018:

The Company issued 100,000 shares of common stock for cash of $35,000 pursuant to the exercise of options.

 

Three months ended March 31, 2017:

The Company charged the amount of $120,104 to additional paid-in capital representing the vesting of restricted stock awards issued to officers.

The Company issued 658,600 shares of common stock to its Chief Executive Officer for conversion of a note payable in the amount of $164,650.

 

The Company issued a net amount of 2,410,392 shares of common stock (net of  623,813 shares held back by the Company to pay certain taxes owed related to the issuance) to employees, officers, and directors in satisfaction of the following obligations: vested RSUs representing 2,533,246 shares of common stock, and bonus shares and shares previously accrued representing 500,959 shares of common stock.  The Company charged the amount of $33,453 to additional paid-in capital representing the value of these shares that had not been previously charged to operations.

The Company retired to treasury 642,688 shares of common stock pursuant to an agreement signed to acquire those shares.  The Company also retired to treasury an aggregate of 37,000 shares of common stock purchased on the open market for cash of $18,592.

Warrants 

There were no warrants outstanding at March 31, 2018 or December 31, 2017.   

The following table summarizes the options outstanding at March 31, 2018 and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  

 

Transactions involving stock options are summarized as follows:

 

 

Aggregate intrinsic value of options outstanding and exercisable at March 31, 2018 and 2017 was $12,250 and $583,500, respectively.  Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $1.06 and $0.65 as of March 31, 2018 and 2017, respectively, and the exercise price multiplied by the number of options outstanding.

During the three months ended March 31, 2018 and 2017, the Company charged $8,787 and $7,339, respectively, to operations related to recognized stock-based compensation expense for employee stock options.

The Company did not value warrants and options using during the three months ended March 31, 2018.  The Company valued warrants and stock options during the three months ended March 31, 2017 using the Balck-Scholes valuation model utilizing the following variables: 

 

 

The Company had no RSUs outstanding during the three months ended March 31, 2018.

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and operational references, appearing elsewhere in this document. 

 

Certain information contained in this discussion and elsewhere in this report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. The safe harbor created by the Private Securities Litigation Reform Act will not apply to certain “forward looking statements” because we issued “penny stock” (as defined in Section 3(a)(51) of the Securities Exchange Act of 1934 and Rule 3(a)(51-1) under the Exchange Act) during the three year period preceding the date(s) on which those forward looking statements were first made, except to the extent otherwise specifically provided by rule, regulation or order of the Securities and Exchange Commission. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on our behalf.  For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “explore”, “consider”, “anticipate”, “intend”, “could”, “estimate”, “plan”, “propose” or “continue” or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:

 

 

 

 

 

 

 

 

 

 

 

We are also subject to other risks detailed from time to time in our other filings with Securities and Exchange Commission and elsewhere in this report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Critical Accounting Policy and Estimates

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, and equity based instruments. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

Doubtful Accounts Receivable

 

The Company maintained an allowance in the amount of $44,867 for doubtful accounts receivable at March 31, 2018, and $8,775 at March 31, 2017. The Company has an operational relationship of several years with our major customers, and we believe this experience provides us with a solid foundation from which to estimate our expected losses on accounts receivable. Should our sales mix change or if we develop new lines of business or new customers, these estimates and our estimation process will change accordingly. These estimates have been accurate in the past.

 

Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair values approximate their carrying value because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates. These fair values have historically varied due to the market price of the Company’s stock at the date of valuation. Generally, these liabilities increased as the price of the Company’s stock increased (with resultant gain), and decreased as the Company’s stock decreased (yielding a loss). In December 2012, the Company removed these liabilities from its balance sheet by reclassifying them as equity.

 

Income Taxes

 

The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past.

 

Background

 

We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger, we changed our name to that of Innovative Food Holdings, Inc. In January 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”), a Delaware corporation, for 500,000 shares of our common stock.

 

On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska.  The purchase price was $1.2 million, with up to another $300,000 (with a fair value of $131,000) payable in the event certain financial milestones were met over the next one or two years.  Those milestones have been met. The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000. The loan was repaid in November 2013 via the issuance of a loan from Fifth Third Bank which has been paid in full.  Prior to the acquisition, Artisan was a supplier and had sold products to the Company.

Pursuant to an asset purchase agreement, effective November 2, 2012, the Company purchased the outstanding assets of The Haley Group, LLC (“Haley”). Pursuant to a purchase agreement, effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).

On August 15, 2014, pursuant to a merger agreement (the “Fresh Diet Merger Agreement”), the Company acquired The Fresh Diet, Inc. (“The Fresh Diet” or “FD”) through a reverse triangular merger as the registrant created a subsidiary corporation (FD Acquisition Corp) that merged with and into FD with FD being the surviving corporation and becoming a wholly-owned subsidiary of the Company. The purchase price consisted of 10,000,000 shares of the Company’s common stock valued at $14,000,000. The majority of FD’s current liabilities consisted of approximately $3.8 million of deferred revenues and approximately $2.1 million in short term commercial loans and there were additional ordinary course of business expenses such as trade payables, payroll and sales taxes which varied from month to month. In addition, it had some long term obligations the bulk of which consisted of interest free loans from FD’s former shareholders in the amount of approximately $2.2 million which were not due for three years.  Prior to the merger FD had purchased an immaterial amount of product from the Company.  FD operated as an independent subsidiary subject to oversight of its board of directors and the Company’s President and CEO.  Effective February 23, 2016, the Company closed a transaction to sell 90% of our ownership in FD to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD who was appointed Interim CEO of FD on February 9, 2016.  The consideration to Innovative Food Holdings consisted primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. Aside from payments related to previously accrued liabilities there were no cash inflows or outflows from or to the discontinued operations.

 

On January 1, 2017, the Company, through its wholly-owned subsidiary Oasis Sales Corp., purchased certain assets of Oasis Sales and Marketing, L.L.C., a California limited liability company.

 

Transactions With a Major Customer

 

Transactions with a major customer and related economic dependence information is set forth immediately below and above in Note 2 to the Condensed Consolidated Financial Statements and also in our Annual Report on Form 10-K for the year ended December 31, 2017 (1) following our discussion of Liquidity and Capital Resources, (2) Concentrations of Credit Risk in Note 17 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.

Relationship with U.S. Foods

 

We have historically sold the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods, a leading broadline distributor. These sales amounted to $7,083,672 (65% of total sales) and $6,885,179 (73% of total sales) for the three months ended March 31, 2018 and 2017 respectively. On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods, Inc.  The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for a limited number of automatic annual renewals thereafter if no party gives the other 30 days’ notice of its intent not to renew.  Based on the terms, the Agreement was extended through 2018. Effective January 1, 2018 the Agreement was further amended to remove the cap on renewals, and provide for an unlimited number of additional 12-month terms unless either party notifies the other in writing, 30 days prior to the end date, of its intent not to renew. 

RESULTS OF OPERATIONS

This discussion may contain forward looking-statements that involve risks and uncertainties. Our future results could differ materially from the forward looking-statements discussed in this report. This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Revenue increased by $1,431,380 or approximately 15% to $10,916,544 for the three months ended March 31, 2018 from $9,485,164 in the prior year. The increases in revenues were driven by revenues associated with the Company’s wholly owned subsidiary, Innovative Gourmet and by an overall increase in revenue associated with the Company’s other wholly owned operating subsidiaries.

We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products, private label products and additional sales channel opportunities in both the foodservice and consumer space and will implement that strategy if, based on our analysis, we deem it beneficial to us.

Any changes in the food distribution and specialty foods operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.

Currently, a small portion of our revenues comes from imported products or international sales. Our current sales from such segments may be hampered and negatively impacted by any economic tariffs that may be imposed in the United States or in foreign countries.

See “Transactions with Major Customers” and the Securities and Exchange Commission’s (“SEC”) mandated FR-60 disclosures following the “Liquidity and Capital Resources” section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future results.

Our cost of goods sold for the three months ended March 31, 2018 was $7,437,431, an increase of $1,003,199 or approximately 16% compared to cost of goods sold of $6,434,232 for the three months ended March 31, 2017. Cost of goods sold is made up of the following expenses for the three months ended March 31, 2018: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $5,236,236; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2,201,195.  Total gross margin was approximately 31.9% of sales in 2018 compared to approximately 32.2% of sales in 2017.  The increase in cost of goods sold is primary attributable to an increase in sales.  The decrease  in gross margins from 2017 is primarily attributable to variation in product and revenue mix as well as variations in cost of goods sold as a percentage of total expenses, across our various selling channels.

 

 

Selling, general, and administrative expenses increased by $803,721 or approximately 36% to $3,003,817 during the three months ended March 31, 2018 compared to $2,200,096 for the three months ended March 31, 2017. The increase in selling, general, and administrative expenses was primarily due to an increase in SGA expenses associated with Innovative Gourmet, increased  professional and legal costs, and other costs associated with the acquisition of Innovative Gourmet.  Increases in payroll taxes and employee benefit costs also contributed to the increase.

 

Interest expense, net of interest income, decreased by $89,451 or approximately 77% to $26,748 during the three months ended March 31, 2018, compared to $116,199 during the three months ended March 31, 2017.  The decrease was due primarily to a reduction of the amortization of discounts on the Company’s notes payable.  These discounts are fully amortized, and there was $0 interest expense associated with this amortization during the three months ended March 31, 2018, compared to $92,509 during the three months ended March 31, 2017. The Company also incurred $29,932 of interest expense on the Company’s commercial loans and notes payable during the three months ended March 31, 2018, which was a decrease of $4,900 compared to $25,032 in the prior period.. The Company also had $3,184 of interest income during the three months ended March 31, 2018, an increase of $1,842 compared to interest income of $1,342 in the prior period.

 

 

For the reasons above, the Company had net income for the three months ended March 31, 2018 of $448,548 which is a a decrease of approximately 44% compared to a net income of $734,637 during the three months ended March 31,  2017. The income for the three months ended March 31, 2018 includes a total of $247,200 in non-cash charges, including amortization of intangible assets in the amount of $189,146 and depreciation expense of $49,267. The income for the three months ended March 31, 2017 includes a total of $376,513 in non-cash charges, including amortization of intangible assets in the amount of $50,567, depreciation expense of $37,807, charges for non-cash compensation in the amount of $195,630, and amortization of the discount on notes payable in the amount of $92,509.

 

Liquidity and Capital Resources at March 31, 2018

As of March 31, 2018, the Company had current assets of $8,939,088, consisting of cash and cash equivalents of $4,680,814; trade accounts receivable, net of $2,633,244; inventory of $1,416,984; and other current assets of $208,046.  Also at March 31, 2018, the Company had current liabilities of $5,099,864, consisting of trade payables and accrued liabilities of $2,888,669; accrued interest of $22,955; current portion of notes payable and capital leases of $1,395,340; and current portion of contingent liability of $792,900.

If the Company’s cash flow from operations is insufficient to fully implement its business plan, the Company may require additional financing in order to execute its operating plan.  The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. 

In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The Company has not made any adjustments to the financial statements which would be necessary should the Company not be able to continue as a going concern. 

2018 Plans

During 2018, in addition to our efforts to increase both sales, and market share, and visibility in our existing foodservice operations we plan to attempt to expand our business by expanding our e-commerce activities and other digitally focused activities and through expanding our product lines in both the consumer and foodservice sector exploring the introduction of a variety of new product categories and new product lines, including private label products and proprietary branded products to leverage our existing foodservice and consumer customer base.

No assurances can be given that any of these plans will come to fruition or that if implemented that they will necessarily yield positive results.

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Inflation

 

In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.

 

RISK FACTORS

The Company’s business and success is subject to numerous risk factors as detailed in its Annual Report on Form 10-K for the year ended December 31, 2017 which is available at no cost at www.sec.gov.

ITEM 4 - CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

 

(a) Evaluation of disclosure controls and procedures

 

Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The conclusions notwithstanding, you are advised that no system is foolproof.

 

(b) Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

 

PART II.  OTHER INFORMATION 

Item 1. Legal Proceedings 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

The Company issued the following shares of common stock during the three months ended March 31, 2018:

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

 

 

Item 6. Exhibits

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.