Company Quick10K Filing
Quick10K
Innovative Food
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-01-28 Enter Agreement, Exhibits
8-K 2018-10-31 Shareholder Vote
8-K 2018-01-24 Enter Agreement, M&A, Exhibits
8-K 2018-01-23 Officers, Exhibits
8-K 2018-01-17 Amend Bylaw, Exhibits
WU Western Union 8,270
PRAH PRA Health Sciences 6,010
SJI South Jersey Industries 2,950
CECO Career Education 1,350
FTEO Fronteo 179
INTT inTEST 70
XELB XCel Brands 25
LEAI Legacy Education Alliance 0
MDCL Medicine Man Technologies 0
BPI Bridgepoint Education 0
IVFH 2019-03-31
Part I. Financial Information
Item 1 - Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4 - Controls and Procedures
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_144736.htm
EX-31.2 ex_144737.htm
EX-32.1 ex_144738.htm
EX-32.2 ex_144739.htm

Innovative Food Earnings 2019-03-31

IVFH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 innovfood20190331_10q.htm FORM 10-Q innovfood20190331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549 

 


 

FORM 10-Q

 


 

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

For the quarterly period ended March 31, 2019

 

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

For the transition period from _________ to _________.

 

Commission File Number: 0-9376

 

INNOVATIVE FOOD HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Florida

(State or Other Jurisdiction of Incorporation or Organization)

20-1167761

(IRS Employer I.D. No.)

 

28411 Race Track Rd.

Bonita Springs, Florida 34135

(Address of Principal Executive Offices)

 

(239) 596-0204

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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):

Large Accelerated filer ☐

Accelerated filer                   ☐

Non-accelerated filer    ☐

(Do not check if a smaller reporting company)

Smaller reporting company ☒

Emerging growth company ☐

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 36,427,354 shares of common stock issued and 33,839,774 shares of common stock outstanding as of May 17, 2019.

 

 

 

 

INNOVATIVE FOOD HOLDINGS, INC.

TABLE OF CONTENTS TO FORM 10-Q

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Cash Flows

5

  Condensed Consolidated Statement of Stockholders’ Deficiency 6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (including cautionary statement)

24

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

 

Signatures

33

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Innovative Food Holdings, Inc.

Condensed Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 3,140,799     $ 4,759,817  

Accounts receivable, net

    3,248,519       3,039,756  

Inventory

    2,123,330       2,301,377  

Other current assets

    166,225       144,301  

Total current assets

    8,678,873       10,245,251  
                 

Property and equipment, net

    2,253,224       2,456,610  

Investments

    355,025       339,525  

Right to use assets, operating leases, net

    295,962       -  

Right to use assets, financing leases, net

    130,016       -  
Other amortizable intangible assets, net     1,929,368       2,158,498  

Goodwill and other unamortizable intangible assets

    2,183,065       2,183,065  

Total assets

  $ 15,825,533     $ 17,382,949  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable and accrued liabilities

  $ 2,085,464     $ 3,689,868  

Accrued interest

    18,285       16,402  

Deferred revenue

    277,395       559,315  

Lease liability – operating leases, current

    135,991       -  

Lease liability – financing leases, current

    22,481       -  

Notes payable - current portion

    668,833       928,857  

Contingent liability - current portion

    447,569       472,876  

Total current liabilities

    3,656,018       5,667,318  
                 

Lease liability – operating leases, non-current

    159,971          

Lease liability – financing leases, non-current

    102,828          

Contingent liability - long-term

    357,600       357,600  

Note payable - long term portion

    1,030,160       1,196,245  

Total liabilities

    5,306,577       7,221,163  
                 

Stockholders' equity

               

Common stock: $0.0001 par value; 500,000,000 shares authorized; 36,427,354 and

36,296,218 shares issued; 33,839,774 and 33,708,638 shares outstanding at March 31,

2019 and December 31, 2018, respectively

    3,640       3,627  

Additional paid-in capital

    36,325,862       36,132,065  

Treasury stock: 2,373,171 shares outstanding at

March 31, 2019 and December 31, 2018, respectively

    (1,016,370

)

    (1,016,370

)

Accumulated deficit

    (24,794,176

)

    (24,957,536

)

Total stockholders' equity

    10,518,956       10,161,786  

Total liabilities and stockholders' equity

  $ 15,825,533     $ 17,382,949  

 

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,

 
   

2019

   

2018

 
                 
                 

Revenue

  $ 12,859,215     $ 10,916,544  

Cost of goods sold

    8,881,380       7,437,431  

Gross margin

    3,977,835       3,479,113  
                 

Selling, general and administrative expenses

    3,788,997       3,003,817  

      Total operating expenses

    3,788,997       3,003,817  
                 

Operating income

    188,838       475,296  
                 

Other expense:

               

Interest expense, net

    25,478       26,748  

      Total other expense

    25,478       26,748  
                 

Net income before taxes

    163,360       448,548  
                 

Income tax expense

    -       -  
                 

Net income

  $ 163,360     $ 448,548  
                 

Net income per share - basic

  $ 0.005     $ 0.013  
                 

Net income per share - diluted

  $ 0.005     $ 0.013  
                 

Weighted average shares outstanding - basic

    33,947,817       33,710,609  
                 

Weighted average shares outstanding - diluted

    33,947,817       33,725,720  

 

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,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

   Net income

  $ 163,360     $ 448,548  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

               

     Depreciation and amortization

    305,205       238,413  

     Amortization of right-of-use asset

    42,619       -  

     Stock based compensation

    100,144       8,787  

     Provision for doubtful accounts

    (830

)

    -  
                 

Changes in assets and liabilities:

               

        Accounts receivable

    (223,433

)

    (246,231

)

        Inventory and other current assets

    156,123       (334,920

)

        Accounts payable and accrued liabilities

    (1,508,855

)

    755,799  

        Deferred revenue

    (281,920

)

    -  

        Operating lease liability

    (42,619

)

    -  

        Contingent liabilities

    (25,307

)

    -  

   Net cash (used in) provided by operating activities

    (1,315,513

)

    870,396  
                 

Cash flows from investing activities:

               

   Cash related to the iGourmet asset acquisition

    -       (2,409,437

)

   Acquisition of property and equipment

    (2,705

)

    (69,000

)

   Investment in food related company

    -       (50,000

)

   Net cash used in investing activities

    (2,705

)

    (2,528,437

)

                 

Cash flows from financing activities:

               

    Purchase of stock options from officers, directors, and employees

    -       (167,000

)

    Cash received from the exercise of warrants

    -       35,000  

    Borrowings on term loan

    -       1,500,000  

    Principal payments on debt

    (294,734

)

    (160,186

)

    Principal payments capital leases

    (6,066

)

    (2,394

)

   Net cash (used in) provided by financing activities

    (300,800

)

    1,205,420  
                 

(Decrease) in cash and cash equivalents

    (1,619,018

)

    (452,621 )
                 

Cash and cash equivalents at beginning of period

    4,759,817       5,133,435  
                 

Cash and cash equivalents at end of period

  $ 3,140,799     $ 4,680,814  

 

Supplemental disclosure of cash flow information:

               
                 

Cash paid during the period for:

               

Interest

  $ 27,693     $ 22,834  

Taxes

  $ -     $ -  

Non-cash investing and financing activities:

               
Issuance of 131,136 shares of common stock previously accrued   $ 93,666     $ -  

Right of use asset and liabilities – operating upon adoption of ASU 2016-02

  $ 388,581     $ -  

 

See notes to these unaudited condensed consolidated financial statements.

 

 

Innovative Food Holdings, Inc. and subsidiary

Consolidated Statements of Stockholders' Deficiency

 

   

December 31,

                                         
   

Common Stock

           

Treasury stock

   

Accum

         
   

Amount

   

Value

   

APIC

   

Amount

   

Value

   

Deficit

   

Total

 

Balance - December 31, 2017

    36,080,519     $ 3,605     $ 36,196,682       2,276,703     $ (992,313 )   $ (26,653,435 )   $ 8,554,539  
                                                         

Common stock issued for the exercise of options

    100,000       10       34,990       -       -       -       35,000  
                                                         

Purchase of stock options from employees, officers, and directors

    115,699       12       (167,012 )     -       -       -       (167,000 )
                                                         

Fair value of vested stock options issued to management

    -       -       8,787       -       -       -       8,787  
                                                         

Net income for the three months ended March 31, 2018

    -       -       -       -       -       448,548       448,548  
                                                         

Balance - March 31, 2018 (unaudited)

    36,296,218     $ 3,627     $ 36,073,447       2,276,703     $ (992,313 )   $ (26,204,887 )   $ 8,879,874  

 

   

December 31,

                                         
   

Common Stock

           

Treasury stock

   

Accum

         
   

Amount

   

Value

   

APIC

   

Amount

   

Value

   

Deficit

   

Total

 

Balance - December 31, 2018

    36,296,218     $ 3,627     $ 36,132,065       2,373,171     $ (1,016,370

)

  $ (24,957,536

)

  $ 10,161,786  
                                                         

Issuance of shares to employees, previously accrued

    131,136       13       93,653       -       -       -       93,666  
                                                         

Fair value of vested stock and stock options issued to management

    -       -       100,144       -       -       -       100,144  
                                                         

Net income for the three months ended March 31, 2019

    -       -       -       -       -       163,360       163,360  
                                                         

Balance - March 31, 2019 (unaudited)

    36,427,354     $ 3,640     $ 36,325,862       2,373,171     $ (1,016,370

)

  $ (24,794,176

)

  $ 10,518,956  

 

See notes to these unaudited condensed consolidated financial statements.

 

 

INNOVATIVE FOOD HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

 

1. BASIS OF PRESENTATION

 

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 Sales Corp. (“Oasis”),  4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet”); Innovative Gourmet, LLC (“Innovative Gourmet”); Food Funding, LLC (“Food Funding”), M Innovations, LLC (“M Innovations”) 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, 2018.  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, 2019 are not necessarily indicative of the results of operations to be expected for the full year.

 

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

 

Business Activity

 

Our business is currently conducted by our wholly-owned subsidiaries, Artisan, FII, Food New Media Group, Inc. (“FNM”), OFB, Gourmet Foodservice Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc. (“GFW”), Gourmeting Inc. (“Gourmeting”), The Haley Group, Inc. (“Haley”), Oasis, 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet”), Innovative Gourmet (sometimes referred to herein as “Igourmet.com” or “Igourmet”), M Innovations, (sometimes referred to herein as “Mouth” or ” Mouth.com”) and Food Funding (collectively, IVFH and its subsidiaries, the “Company” or “IVFH”).

 

Overall, our business activities are focused around the creation and growth of a platform which provides distribution or the enabling of distribution of high quality, unique specialty food and food related products ranging from specialty foodservice products to Consumer-Packaged Goods (“CPG”) products through a variety of sales channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“D2C”) and direct to business (“B2B”). In our business model, we receive orders from our customers and then work closely with our suppliers and our warehouse facilities to have the orders fulfilled. In order to maintain freshness and quality, we carefully select our suppliers based upon, among other factors, their quality, uniqueness, reliability and access to overnight courier services.

 

FII, though its relationship with the producers, growers, and makers of thousands of unique specialty foodservice products and through its relationship with US Foods, Inc. (“U.S. Foods” or “USF”), has been in the business of providing premium restaurants, within 24 – 72 hours, with the freshest origin-specific perishable, and healthcare products shipped directly from our network of vendors and from our warehouses. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses.

 

Gourmet has been in the business of providing specialty food via e-commerce through its own website at www.forethegourmet.com and through other ecommerce channels, with unique specialty gourmet food products shipped directly from our network of vendors and from our warehouses within 24 – 72 hours. GFG is focused on expanding the Company’s program offerings to additional customers.

 

 

Artisan is a supplier of over 1,500 unique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.

 

Haley is a dedicated foodservice consulting and advisory firm that works closely with companies to access private label and manufacturers’ private label food service opportunities with the intent of helping them launch and commercialize new products in the broadline foodservice industry and assists in the enabling of the distribution of products via national broadline food distributors.

 

OFB and Oasis function as outsourced national sales and brand management teams for emerging organic and specialty food CPG companies of a variety of sizes and business stages, and provides emerging and unique CPG specialty food brands with distribution and shelf placement access in all of the major metro markets in the food retail industry.

 

Igourmet has been in the business of providing DTC specialty food via e-commerce through its own website at www.igourmet.com and through other channels such as www.amazon.com, www.jet.com, and www.walmart.com. In addition, Igourmet.com offers a line of B2B specialty foodservice items. Products are primarily shipped directly from Igourmet.com’s 67,000 square feet warehouse in Pennsylvania via Igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.

 

Mouth.com (www.mouth.com) is an online retailer of specialty foods, monthly subscription boxes and curated gift boxes to thousands of consumers and corporate customers across the United States. Mouth sources high quality specialty foods crafted in the US by independent and small batch makers, and expertly curates them into standout food gifts for both consumers and corporate customers. Mouth also has launched a private label brand, including several award-winning products. 

 

Use of Estimates

 

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. 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, operating right of use assets and 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.

 

Principles of Consolidation

 

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

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At March 31, 2019 and December 31, 2018, trade receivables from the Company’s largest customer amounted to 50% and 48%, respectively, of total trade receivables.

 

Reclassifications

 

Certain reclassifications have been made to conform prior period data to the current presentation.

 

Leases

 

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities.

 

 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.

 

Revenue Recognition

 

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.

 

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 606. A five-step analysis a must be met as outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied..  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Adoption of ASC 606 had no material effect on the Company’s financial statements.

 

Deferred Revenue

 

Certain customer arrangements in the Company's business such as gift cards and “Of the Month Club” purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards are issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards and advance payments for monthly club memberships, as cash is received, and the liability is reduced when the card is redeemed or product delivered.

 

The following table represents the changes in deferred revenue as reported on the Company’s consolidated balance sheets:

 

Balance as of December 31, 2018

  $ 559,315  

Cash payments received

    93,580  

Net sales recognized

    (375,500

)

Balance as of March 31, 2019

  $ 277,395  

 

Disaggregation of Revenue

 

The following table represents a disaggregation of revenue by from sales for the three months ended March 31, 2019 and 2018:

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Specialty food service

  $ 10,205,969     $ 9,311,800  

Ecommerce

    2,187,303       984,421  

National Brand Management

    465,943       620,323  

Total

  $ 12,859,215     $ 10,916,544  

 

Cost of goods sold

 

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 earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings 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.

 

The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation. 

 

Dilutive shares at March 31, 2019:

 

Convertible notes and interest

 

At March 31, 2019 there were no convertible notes outstanding.

 

Warrants

 

At March 31, 2019 there are no warrants outstanding.

 

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 at March 31, 2019:   

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Exercise

 

 

Number

 

 

Contractual

 

 

Price

 

 

of Options

 

 

Life (years)

 

 

$

0.62

 

 

 

360,000

 

 

 

4.76 

 

 

$

0.75

 

 

 

50,000

 

 

 

2.76

 

 

$

0.85

 

 

 

540,000

 

 

 

4.76 

 

 

$

0.95

 

 

 

50,000

 

 

 

2.76

 

 

$

1.10

 

 

 

75,000

 

 

 

2.12

 

 

$

1.20

 

 

 

900,000

 

 

 

4.76

 

 

$

1.38

 

 

 

100,000

 

 

 

0.67

 

 

$

1.50

 

 

 

125,000

 

 

 

2.76

 

 

$

1.90

 

 

 

100,000

 

 

 

0.42

 

 

$

2.00

 

 

 

125,000

 

 

 

2.76

 

 

$

2.50

 

 

 

125,000

 

 

 

2.76

 

 

$

3.00

 

 

 

125,000

 

 

 

2.76

 

 

 

 

 

 

 

2,675,000

 

 

 

3.92

 

 

Restricted Stock Awards 

 

At March 31, 2019 there are an additional 300,000 unvested restricted stock awards remaining from grants in a prior year. Those 300,000 restricted stock awards will vest as follows: 125,000 restricted stock awards will vest contingent upon the attainment of a stock price of $2.00 per share for 20 straight trading days, and an additional 175,000 restricted stock awards will vest contingent upon the attainment of a stock price of $3.00 per share for 20 straight trading days.

 

Stock-based compensation

 

During the three months ended March 31, 2019, the Company incurred an obligation to issue an aggregate  total of 72,826 shares of common stock to its Chief Executive Officer and to its Director of Strategic Acquisitions based upon their employment agreements

 

 

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:  

 

                 

Weighted

 
                 

Average

 
                 

Remaining

 
 

Exercise

   

Number

   

Contractual

 
 

Price

   

of Options

   

Life (years)

 
  $ 1.04       200,000       2.59  
  $ 1.31       150,000       0.50  
  $ 1.38       100,000       1.67  
  $ 1.42       100,000       0.22  
  $ 1.43       50,000       0.75  
  $ 1.46       100,000       0.25  
  $ 1.70       75,000       0.04  
  $ 1.90       175,000       1.23  
  $ 2.00       50,000       0.04  
  $ 2.40       20,000       0.17  
  $ 2.50       37,500       0.04  
  $ 3.40       30,000       0.17  
  $ 3.50       37,500       0.04  
            1,125,000       0.96  

 

Significant Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and disclosing key information about leasing transactions. Leases are classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provided an optional transition method to apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.

 

We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected certain practical expedients permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the recognition of $338,581 of operating right-of-use assets and $338,581 of operating lease liabilities as of January 1, 2019. The adoption did not have a significant impact on our results of operations or cash flows. See Note 7. "Leases" to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.

 

 

Management does not believe that any other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

3.  ACQUISITIONS

 

Mouth Foods, Inc.

 

Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. (“Mouth”) from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth’s assets in connection with a Delaware assignment proceeding, pursuant to the terms of an Asset Purchase Agreement (“MFI APA”). The MFI APA was accounted for as an acquisition of an ongoing business in accordance with ASC Topic 805 - Business Combinations (“ASC 805”), where the Company was treated as the acquirer and the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, was a privately held New York company operating out of Brooklyn, was an expert curator and online retailer of high quality specialty foods from small-batch makers in the US.

 

The consideration for and in connection with the acquisition consisted of (i) closing related cash payments of $208,355; (ii) additional revenue-based contingent liabilities valued by management at $100,000 related to certain future sales of purchased assets payable under the following terms: payment of 5% of certain revenues, with no payments on the first $500,000 of revenues and no payments on revenues after June 30, 2020; (iii) additional revenue based contingent liabilities of up to $185,000 associated with the purchase of certain debt of the seller; and (iv) additional contingent liability consideration valued by management at approximately $20,000.

 

The acquisition date estimated fair value of the consideration transferred totaled $513,355. During the year ended December 31, 2018, the Company changed the original allocation of the purchase price among the assets acquired. The reallocated purchase price consisted of the following:

 

Cash

  $ 208,355  

Contingent liability – payable to debt holder

    185,000  

Contingent liabilities – payable to sellers

    100,000  

Additional Contingent Liabilities

    20,000  

Total purchase price

  $ 513,355  
         

Tangible assets acquired

  $ 57,000  

Intangible assets acquired

    419,926  

Goodwill acquired

    36,429  

Total purchase price

  $ 513,355  

 

The above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management. 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 a 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. 

 

iGourmet, LLC

 

The iGourmet Asset Purchase Agreement effective January 23, 2018 (the “iGourmet APA”) was accounted for as an acquisition of an ongoing business in accordance with ASC Topic 805 - Business Combinations (“ASC 805”), where the Company was treated as the acquirer and the acquired assets and certain liabilities not purchased or assumed by Innovative Gourmet, which  under certain circumstances, Innovative Gourmet may determine to pay, were recorded by the Company at their preliminary estimated fair values.

 

 

The consideration for and in connection with the iGourmet 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 iGourmet 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 $800,000 thousand 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 additional purchase price consolidation milestone for 2018 was not met. 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. 

 

In connection with the iGourmet 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 iGourmet APA as disclosed in (i) above.

 

The acquisition date estimated fair value of the consideration transferred totaled $4,151,243. During the year ended December 31, 2018, the Company made the following purchase price adjustments: (i) accrued an additional $286,239 for accounts payable prior to acquisition; (ii) decreased contingent liabilities by the amount of $392,900 for earnout payments not made; (iii) decreased accounts receivable in the amount of $108,893 for amounts not collected; and (4) increased deferred revenue in the amount of $231,169 for shipments made. These adjustments increased the value of the acquisition to $4,275,751. At December 31, 2018, the value of the acquisition consisted of the following:

 

Initial purchase price

  $ 1,500,000  

Cash payable in connection with transaction

    1,863,443  

Accounts payable

    286,239  

Deferred revenue

    231,169  

Contingent liabilities

    394,900  

Total purchase price

  $ 4,275,751  
         

Tangible assets acquired

  $ 842,458  

Intangible assets acquired

    2,970,600  

Goodwill acquired

    462,693  

Total purchase price

  $ 4,275,751  

 

The above estimated fair value of the intangible assets is based on a third party valuation expert and also includes additional analysis by management based on a subsequent analysis of the transaction and adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.  Going forward, adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period will be made in our operating results in the period in which the adjustments are determined. 

 

Pro forma results

 

The following table sets forth the unaudited pro forma results of the Company as if the iGourmet APA was effective on the first day of the March 31, 2018 three month period presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.

 

   

Three months ended

March 31, 2018

 
   

(unaudited)

 

Revenues

  $ 11,293,194  

Net Income

  $ 337,227  

Basic net income per share

  $ 0.010  

Diluted net income per share

  $ 0.010  

Weighted average shares – basic

    33,710,609  

Weighted average shares – diluted

    33,725,720  

 

 

Oasis Sales and Marketing, LLC

 

Pursuant to the Oasis Asset Purchase Agreement, effective 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.  The purchase price consisted of $300,000 cash; a two-year promissory note in the amount of $100,000, and a structured equity instrument (the “SEI”) in the amount of $200,000. In addition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date up to a maximum of $400,000 (“Earnout Payments”). On May 23, 2018, the Company paid the amount of $189,000 related to the Earnout Payment, and recorded a gain in the amount of $11,000. The amount of $200,000 related to the second Earnout Payment is carried as a current liability on the Company’s balance sheet at December 31, 2018. The second Earnout Payment has been earned and is expected to be paid in the second quarter of 2019.

 

The SEI was payable in cash or shares of the Company’s stock at the Company’s option, at any time, or is automatically payable via the issuance of 200,000 shares of the Company’s stock if the Company’s shares close above $1.00 for ten consecutive days. This requirement was met on November 28, 2017, and on that date the $200,000 SEI liability was converted to 200,000 shares of common stock.

 

At the time of acquisition, the Company believed it likely that the Earnout Payments would be made, and accordingly recorded the entire amount of $400,000 as a contingent liability on its balance sheet as of the acquisition date. The amount of $800,000 was allocated to customer lists, an intangible asset with a useful life of 60 months; and the amount of $200,000 was allocated to a non-compete agreement, an intangible asset with a useful life of 48 months.  A total of $52,500 was amortized to operations during each of the three month periods ended March 31, 2019 and 2018.

 

4. ACCOUNTS RECEIVABLE

 

At March 31, 2019 and December 31, 2018, accounts receivable consists of:

 

   

March 31,

2019

   

December 31,

2018

 

Accounts receivable from customers

  $ 3,402,865     $ 3,194,932  

Allowance for doubtful accounts

    (154,346

)

    (155,176

)

Accounts receivable, net

  $ 3,248,519     $ 3,039,756  

 

5. INVENTORY

 

Inventory consists primarily of specialty food products.  At March 31, 2019 and December 31, 2018, inventory consisted of the following:

 

   

March 31,

2019

   

December 31,

2018

 

Finished Goods Inventory

  $ 2,123,330     $ 2,301,377  

 

6. PROPERTY AND EQUIPMENT

 

Acquisition of Building

 

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 primarily for the Company’s Artisan subsidiary. We have also recently completed an additional property improvement and upgrade buildout at the Artisan building which include a fully functional commercial test kitchen and training center and conference room. The test kitchen and training room will be used by Artisan and other subsidiaries of the Company for the purposes of new product testing and development and approval, Quality Assurance and Quality Control as well as sales presentations and customer demonstrations. In addition, we recently added a packaging room to the Artisan building, which is built to FDA, FSMA and SQF food safety standards and purchased new, technologically advanced semi-automated fillers for the packaging room. The packaging room addition will allow for expansion of private label product lines as well as packing of organic, non GMO, diet specific and other specialty foods. The test kitchen, packaging room and additional improvements were financed by a loan from Fifth Third Bank.

   

Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when the Company occupied the facility in October, 2015.

 

A summary of property and equipment at March 31, 2019 and December 31, 2018, was as follows:

 

   

March 31,

2019

   

December 31,

2018

 

Land

  $ 385,523     $ 385,523  

Building

    1,326,165       1,326,165  

Computer and Office Equipment

    523,853       523,853  

Warehouse Equipment

    283,265       302,622  

Furniture, Fixtures

    891,778       889,073  

Vehicles

    92,225       220,812  

Total before accumulated depreciation

    3,502,809       3,648,048  

Less: accumulated depreciation

    (1,249,585

)

    (1,191,438

)

Total

  $ 2,253,224     $ 2,456,610  

 

Depreciation and amortization expense for property and equipment amounted to $76,075 and $49,267 for the three months ended March 31, 2019 and 2018, respectively.

 

7. RIGHT TO USE ASSETS AND LEASE LIABILITY – OPERATING LEASES

 

The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 3 years, some of which include options to extend.

 

The Company’s lease expense for the three months ended March 31, 2019 was entirely comprised of operating leases and amounted to $46,871. The difference between the ROU asset amortization of $42,619 and the associated lease expense of $46,871 consists of interest. 

 

Right to use assets – operating leases are summarized below:

 

   

March 31,

2019

 

Warehouse

  $ 114,543  

Warehouse equipment

    7,298  

Office equipment

    49,907  

Vehicles

    124,214  

Right to use assets, net

  $ 295,962  

 

 

Operating lease liabilities are summarized below:

 

   

March 31,

2019

 

Warehouse

  $ 114,543  

Warehouse equipment

    7,298  

Office equipment

    49,907  

Vehicles

    124,214  

Lease liability

  $ 295,962  

Less: current portion

    (135,991 )

Lease liability, non-current

  $ 159,971  

 

Maturity analysis under these lease agreements are as follows:

 

Nine months ended December 31, 2019

  $ 146,310  

Year ended December 31, 2020

    127,148  

Year ended December 31, 2021

    35,754  

Year ended December 31, 2022

    2,982  

Total

  $ 312,194  

Less: Present value discount

    (16,232

)

Lease liability

  $ 295,962  

  

8. 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, 2019 the Company has investments in five food related companies in the aggregate amount of $355,025.  The Company does not have significant influence over the operations of these companies.

 

9. INTANGIBLE ASSETS

 

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

 

   

March 31, 2019

 
           

Accumulated

         
   

Gross

   

Amortization

   

Net

 

Non-Compete Agreement - amortizable

  $ 505,900     $ (380,570

)

  $ 125,330  

Customer Relationships - amortizable

    3,068,043       (1,955,641

)

    1,112,402  

Trade Name

    1,532,822       -       1,532,822  

Internally Developed Technology

    875,643       (184,007 )     691,636  

Goodwill

    650,243       -       650,243  

Total

  $ 6,632,651     $ (2,520,218

)

  $ 4,112,433  

 

   

December 31, 2018

 
           

Accumulated

         
   

Gross

   

Amortization

   

Net

 

Non-Compete Agreement - amortizable

  $ 505,900     $ (362,913

)

  $ 142,987  

Customer Relationships - amortizable

    3,068,043       (1,783,598

)

    1,284,445  

Trade Name

    1,532,822       -       1,532,822  

Internally Developed Technology

    875,643       (144,577 )     731,066  

Goodwill

    650,243       -       650,243  

Total

  $ 6,632,651     $ (2,291,088

)

  $ 4,341,563  

 

Total amortization expense for the three months ended March 31, 2019 and 2018 was $229,130 and $189,146, respectively.

 

The trade names are not considered finite-lived assets, and are not being amortized.  The non-compete agreement is being amortized over a period of 48 months.  The customer relationships acquired in these transactions are being amortized over periods of 24 to 36 months.  The internally developed technology is being amortized over 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 2018 determined that there was no impairment to goodwill assets.

 

10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities at March 31, 2019 and December 31, 2018 are as follows:

 

   

March 31,

2019

   

December 31,

2018

 

Trade payables

  $ 1,913,895     $ 3,425,178  

Accrued payroll and commissions

    171,569       264,690  

Total

  $ 2,085,464     $ 3,689,868  

 

11. ACCRUED INTEREST

 

At March 31, 2019, accrued interest on notes outstanding was $18,285. During the three months ended March 31, 2019, the Company paid cash for interest in the aggregate amount of $27,693.    

   

At December 31, 2018, accrued interest on a note outstanding was $16,402. During the twelve months ended December 31, 2018, the Company paid cash for interest in the aggregate amount of $122,232.    

 

12. REVOLVING CREDIT FACILITIES

 

   

March 31,

2019

   

December 31,

2018

 
                 

On March 23, 2018, the Company entered into a Master Loan & Security Agreement that provided for the advance of funds in connection with a $500,000 Draw Promissory Note. in order to finance certain equipment acquisitions (“Artisan Equipment Loan”); On December 21, 2018, the Company advanced $391,558 under the $500,000 Draw Promissory Note. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of 5.20%. As of December 31, 2018, there was $108,422 remaining to be drawn on the Artisan Equipment Loan.  On March 27, 2019, an amendment was made to the Draw Promissory Note to extend the draw period to December 31, 2019.   On March 27, 2019, a Promissory Note was made for the amounts advanced in the amount of $391,558 to convert to a Term Loan. (see note 13).

  $ -     $ -  
                 

Line of credit facility with Fifth Third Bank in the original amount of $1,000,000 with an interest rate of LIBOR plus 3.25%. In August 2015, the amount of the credit facility was increased to $1,500,000 and the due date was extended to August 1, 2016. In August 2016, this credit facility was extended to August 1, 2017. On August 1, 2017 this credit facility was increased to $2,000,000 and the due date was extended to August 1, 2018. In August 2018, this credit facility was extended to August 1, 2019. 

  $ -     $ -  
                 

Total 

  $ -     $ -  

 

 

13. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

 

   

March 31,

2019

   

December 31,

2018

 
                 

Term loan dated as of August 5, 2016 in the original amount of $1,200,000 payable to Fifth Third Bank. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of LIBOR plus 4.5%. Principal payments in the amount of $66,667 are due monthly along with accrued interest beginning September 5, 2016. The entire principal balance and all accrued interest was due and was paid on the maturity date of February 5, 2018. See note 20. During the twelve months ended December 31, 2016, the Company transferred principal in the amount of $1,200,000 from the line of credit facility with Fifth Third Bank into this term loan. During the twelve months ended December 31, 2018, the Company made principal and interest payments on this loan in the amounts of $114,033 and $829, respectively.

  $ -     $ -  
                 

Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 plus interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount was originally due February 28, 2018. On March 23, 2018 and effective February 26, 2018, this note was amended and renewed in the amount of $273,000, with monthly payments of principal and interest of $4,550 payable through the maturity date of February 28, 2023. During the three months ended March 31, 2019, the Company made payments of principal and interest on this note in the amounts of $13,650 and $3,130, respectively.

    218,400       232,050  
                 

Secured mortgage note payable for the acquisition of land and building in Broadview, Illinois in the amount of $980,000. Principal payments of $8,167 plus interest at the rate of LIBOR plus 2.75% are due monthly through April 2020, the remaining principal balance in the amount of $490,000 will be due May 29, 2020. During the three months ended March 31, 2019, the Company made payments of principal and interest on this note in the amounts of $24,500 and $8,215, respectively.

    604,333       628,833  
                 

Term loan dated March 28, 2018 in the original amount of $1,500,000 payable to Fifth Third Bank. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of LIBOR plus 4.25%.  Principal payments in the amount of $83,333 are due monthly along with accrued interest beginning March 28, 2018. The entire principal balance and all accrued interest is due on the maturity date of August 28, 2019. During the three months ended March 31, 2019, the Company made payments of principal and interest on this note in the amounts of $249,999 and $9,975, respectively.

    416,667       666,670  
                 
Promissory note dated March 22, 2019 in the original amount of $391,558 (the “Artisan Equipment Loan”) payable to Fifth Third Bank. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of 5.20%.  The entire principal balance and all accrued interest is due on the maturity date of March 21, 2024.  (see note 11). Monthly payments in the amount of $7,425 including principal and interest will commence in April, 2019.     391,558       391,558  
                 

A note payable in the amount of $20,000.  The Note was due in January 2006 and the Company is currently accruing interest on this note at 1.9%. During the three months ended March 31, 2019, the Company accrued interest in the amount of $93 on this note.

    20,000       20,000  

 

 

 

   

March 31,

2019

   

December 31,

2018

 
                 

Unsecured promissory note in the amount of $100,000 dated January 1, 2017 bearing interest at the rate of 2.91% per annum issued in connection with the Oasis acquisition. Payments in the amount of $4,297 consisting of principal and interest are to be made monthly beginning February 15, 2017 for twenty-four months until paid in full. During the three months ended March 31, 2019, the Company made principal and interest payments on this note in the amount of $4,291 and $2, respectively.

    -       4,291  
                 

This obligation was reclassified as a Lease Liability - Financing Lease in connection with the Company’s adoption of ASU 2016-02 on January 1, 2019; see note 14. 

            5,661  
                 

Vehicle acquisition loan dated December 6, 2018 in the original amount of $51,088, payable in sixty monthly installments of $955 including interest at the rate of 4.61%. During the three months ended March 31, 2019, the Company made principal and interest payments in the amount of $2,295 and $571, respectively, on this loan.

    48,035       50,328  
                 

This obligation was reclassified as a Lease Liability - Financing Lease in connection with the Company’s adoption of ASU 2016-02 on January 1, 2019; see note 14.

    -       125,711  
                 

Total

  $ 1,698,993     $ 2,125,102  
                 

Current portion

  $ 668,833     $ 928,857  

Long-term maturities

    1,030,160       1,196,245  

Total

  $ 1,698,993     $ 2,125,102  

 

Aggregate maturities of long-term notes payable as of March 31, 2019 are as follows:

 

For the period ended March 31, 

 

2020

  $ 650,895  

2021

    643,779  

2022

    141,852  

2023

    146,467  

2024

    116,000  

Thereafter

    -  

Total

  $ 1,698,993  

 

 

 

14. LEASE LIABILITIES - FINANCING LEASES

 

Financing lease obligation under a lease agreement for a forklift payable in thirty-six monthly installments of $579 including interest at the rate of 4.83%. During the three months ended March 31, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $1,675 and $62, respectively. 

    3,986       -  
                 

Financing lease obligations under a lease agreement for a truck in the original amount of $128,587 payable in seventy monthly installments of $2,326 including interest at the rate of 8.33%. During the three months ended March 31, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $4,388 and $2,588, respectively. 

    121,323       -  
                 

Total

  $ 125,309     $ -  
                 

Current portion

  $ 22,481     $ -  

Long-term maturities

    102,828       -  

Total

  $ 125,309     $ -  

 

Aggregate maturities of lease liabilities – financing leases as of March 31, 2019 are as follows:

 

For the period ended March 31, 

 

2020

  $ 22,481  

2021

    20,096  

2022

    21,836  

2023

    23,726  

2024

    25,780  

Thereafter

    11,390  

Total

  $ 125,309  

 

15. RELATED PARTY TRANSACTIONS

 

For the three months ended March 31, 2019:

 

During the three months ended March 31, 2019 in connection with stock based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members,  the Company charged to operations the aggregate total amount of $54,036 for the vesting of a total of 97,084 shares of common stock issuable to its Chief Executive Officer ,its Director of Strategic Acquisitions and to its two independent board members.

 

In January 2019, the Company awarded the following to each of its two independent directors: (i) a cash retainer in the amount of $45,000, which was paid in January 2019; and (ii) cash retainers in the amount of $30,000 per year, to be paid quarterly.

 

In January 2019, the Company awarded the following stock options to each of its four directors:

 

-

(i) five-year options to purchase 90,000 shares of common stock at a price of $0.62 per share, vesting quarterly over a three year period;

 

-

(ii) five-year options to purchase 135,000 shares of common stock at a price of $0.85 per share, vesting quarterly over a three year period;

 

-

(iii) five-year options to purchase 225,000 shares of common stock at a price of $1.20 per share, vesting quarterly over a three year period

 

The Company recognized non-cash compensation in the amount of $38,550 during the three months ended March 31, 2019 in connection with these options.

 

 

For the three months ended March 31, 2018:

 

In December 2017, the Company’s Chief Executive Officer exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share.  The date for payment of the exercise price of these options was extended to April 26, 2018. 55,192 shares of common stock were deemed issued on March 5, 2018, which number of shares represents a net amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase, and taxes.

 

In December 2017, the Company’s President exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share.  The date for payment of the exercise price of these options was extended to April 26, 2018. 60,749 shares of common stock were deemed issued on March 5, 2018, which number of shares represents a net amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase, and taxes.

 

In December 2017, a Board Member exercised 100,000 options at a price of $0.35 per share.  The date for payment of the exercise price of these options was extended to April 26, 2018. In March 2018 the Company made a payment of $77,000 which is the difference between the exercise price of the options and the market price of the stock on the date of purchase.

 

16. COMMITMENTS AND CONTINGENT LIABILITIES

 

Contingent Liability

 

Pursuant to the iGourmet Asset Purchase Acquisition, the Company recorded contingent liabilities in the original amount of $787,800. 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. During the year ended December 31, 2018, the Company reduced this amount by $392,900 as the performance goals for the first year were not met. At March 31, 2019, the amount of $132,300 remains on the Company’s balance sheet as a current contingent liability, and $257,600 as a long term contingent liability.

 

Pursuant to the Oasis acquisition, the Company had a contingent liability in the amount of $400,000 on connection with performance-based bonus obligations. During the year ended December 31, 2018, the company paid the amount of $189,000 related to these obligations, and recorded a gain in the amount of $11,000. At March 31, 2019, the Company has the amount of $200,000 on its balance sheet as a current contingent liability in connection with the second year performance based bonus payment.

 

Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of $240,576.  $115,269 is classified as a current contingent liability and $100,000 is classified as a non-current contingent liability at March 31, 2019.  These amounts relate to the estimate of certain performance based payments following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis.

 

Litigation

 

From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of business, or as the result of current or previous investments, or current or previous subsidiaries, or current or previous employees, or current or previous directors, or as a result of acquisitions and dispositions or other corporate activities.  The Company intends to vigorously defend its positions. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our financial position or our business and the outcome of these matters cannot be ultimately predicted.

 

 

17. EQUITY

 

Common Stock

 

At March 31, 2019 and December 31, 2018, a total of 2,520,912 shares are deemed issued but not outstanding by the Company. These include 2,306,503 shares of treasury stock.

 

Three months ended March 31, 2019:

 

The Company issued a total of 131,136 shares of common stock to seven employees for previously accrued bonuses in the amount of $93,666.

 

The Company accrued the amount of $61,594 in connection with the vesting of 110,980 shares of common stock issuable to board members and employees in connection with their employment agreements.

 

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.

 

In December 2017, the Company’s Chief Executive Officer exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share.  The date for payment of the exercise price of these options was extended to April 26, 2018. 55,192 shares of common stock were deemed issued on March 5, 2018, which number of shares represents a net amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase, and taxes.

 

In December 2017, the Company’s President exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share.  The date for payment of the exercise price of these options was extended to April 26, 2018. 60,749 shares of common stock were deemed issued on March 5, 2018, which number of shares represents a net amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase, and taxes.

 

The Company recognized the fair value of stock options vested to management in the amount of $8,787 during the three month ended March 31, 2018.

 

Warrants 

 

There were no warrants outstanding at March 31, 2019 or December 31, 2018.  

 

 

Options

 

The following table summarizes the options outstanding at March 31, 2019 and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  

 

                       

Weighted

           

Weighted

 
               

Weighted

   

average

           

average

 
               

average

   

exercise

           

exercise

 

Range of

   

Number of

   

Remaining

   

price of

   

Number of

   

price of

 

exercise

   

options

   

contractual

   

outstanding

   

options

   

exercisable

 

Prices

   

Outstanding

   

life (years)

   

Options

   

Exercisable

   

Options

 
$ 0.62       360,000       4.76     $ 0.62       30,000     $ 0.62  
$ 0.75       50,000       2.76     $ 0.75       -     $ 0.75  
$ 0.85       540,000       4.76     $ 0.85       45,000     $ 0.85  
$ 0.95       50,000       2.76     $ 0.95       -     $ 0.95  
$ 1.10       75,000       2.12     $ 1.10       75,000     $ 1.10  
$ 1.20       900,000       4.76     $ 1.20       75,000     $ 1.20  
$ 1.38       100,000       0.67     $ 1.38       100,000     $ 1.38  
$ 1.50       125,000       2.76     $ 1.50       -     $ 1.50  
$ 1.90       100,000       0.42     $ 1.90       100,000     $ 1.90  
$ 2.00       125,000       2.76     $ 2.00       -     $ 2.00  
$ 2.50       125,000       2.76     $ 2.50       -     $ 2.50  
$ 3.00       125,000       2.76     $ 3.00       -     $ 3.00  
          2,675,000       3.92     $ 1.26       425,000     $ 1.31  

 

Transactions involving stock options are summarized as follows:

 

   

Number of Shares

   

Weighted Average

Exercise Price

 

Options outstanding at December 31, 2018

    1,050,000     $ 1.80  
                 

Granted

    1,800,000     $ 0.98  

Exercised

    -     $ -  

Cancelled / Expired

    (175,000

)

  $ 1.53  
                 

Options outstanding at March 31, 2019

    2,675,000     $ 1.26  

 

Aggregate intrinsic value of options outstanding and exercisable at March 31, 2019 and 2018 was $0 and $12,250, 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 $0.45 and $1.06 as of March 31, 2019 and 2018, respectively, and the exercise price multiplied by the number of options outstanding.

 

During the three months ended March 31, 2019 and 2018, the Company charged $38,550 and $8,787, respectively, to operations to recognized stock-based compensation expense for employee stock options.

 

Accounting for warrants and stock options

 

The Company valued warrants and stock options during the three months ended March 31, 2019 using the Black-Scholes valuation model utilizing the following variables: 

 

   

March 31,

 
   

2019

 

Volatility

    59.4

%

Dividends

  $ -  

Risk-free interest rates

    2.49

%

Term (years)

    5.00  

 

 

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:

 

 Our ability to raise capital necessary to sustain our anticipated operations and implement our business plan,

 

 

 Our ability to implement our business plan,

 

 Our ability to generate sufficient cash to pay our lenders and other creditors,

 

 Our dependence on one major customer,

 

 

 Our ability to employ and retain qualified management and employees,

 

 Our dependence on the efforts and abilities of our current employees and executive officers,

 

 Changes in government regulations that are applicable to our current  or anticipated business,

 

 Changes in the demand for our services and different food trends,

 

 The degree and nature of our competition,

 

 The lack of diversification of our business plan,

 

 The general volatility of the capital markets and the establishment of a market for our shares, and

 

 Disruption in the economic and financial conditions primarily from the impact of past terrorist attacks in the United States, threats of future attacks, police and military activities overseas and other disruptive worldwide political and economic events and environmental weather conditions.

 

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, operating right of use assets and liabilities, 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 $154,346 for doubtful accounts receivable at March 31, 2019, and $155,176 at December 31, 2018. 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 uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.

 

Leases

 

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities.

 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.

 

 

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 Florida corporation, for 500,000 shares of our common stock.

 

On November 2, 2012, the Company entered into an asset purchase agreement (the “Haley Acquisition”) with The Haley Group, LLC whereby we acquired all existing assets of The Haley Group, LLC and its customers. The Haley Acquisition was valued at a total cost of $119,645.  On June 30, 2014, pursuant to a purchase agreement, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”), for $300,000, 100,000 four year options at a price of $1.46 per share, and up to an additional $225,000 in earn-outs if certain milestones are met. Pursuant to an Asset Purchase Agreement dated as of January 1, 2017 the Company’s wholly-owned subsidiary, Oasis Sales Corp. (“Oasis”), purchased substantially all of the assets of Oasis Sales and Marketing, L.L.C. for $300,000 cash;  a $200,000 structured equity instrument which can be paid in cash or shares of the Company stock at the Company’s option, anytime under certain conditions, or is automatically payable via the issuance of 200,000 shares if the Company’s shares close above $1.00 for ten consecutive days; a $100,000 note;  and up to an additional $400,000 in earn-outs over two years if certain milestones are met.  The Agreement also contains claw-back provisions if certain revenue conditions are not met.

 

On August 15, 2014, pursuant to a merger agreement, the Company acquired The Fresh Diet, Inc. (“FD”).  Effective February 23, 2016, the Company closed a transaction to sell 90% of our ownership in FD for consideration consisting primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations. 

 

Effective January 24, 2018, pursuant to an asset acquisition agreement (the “iGourmet Asset Acquisition Agreement”), our wholly-owned subsidiary, Innovative Gourmet, LLC acquired substantially all of the assets and certain liabilities of iGourmet LLC and iGourmet NY LLC, privately-held New York limited liability companies located in West Pittston, Pennsylvania  and engaged in the sale, marketing, and distribution of specialty food and specialty food items through www.igourmet.com, online marketplaces, additional  direct-to-consumer platforms, distribution to foodservice, retail stores and other wholesale accounts, pursuant to the terms of an Asset Purchase Agreement. The consideration for and in connection with the acquisition 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, LLC (“Food Funding”), funded advances of $325,000 to Sellers on a secured basis, pursuant to certain loan documents and as bridge loans, which loans  were reduced by the proceeds of the Asset Purchase Agreement; (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 $800,00 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 IVFH shares valued at the time of the closing of this transaction and 37.5%, at Innovative Gourmet’s  option, in IVFH shares valued  at the time of the payment of the earnout or in cash. The 2018 earnout milestone was not met. In connection with the acquisition, 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 Asset Purchase Agreement.  See Item (i) above.

 

Effective July 6, 2018, pursuant to an asset purchase agreement between Mouth Foods, Inc. (“Mouth”) and our wholly-owned subsidiary M Innovations LLC (“M Innovations”)(the “MFI APA”), the Company acquired certain assets of Mouth from MFI (assignment for the benefit of creditors), LLC, in connection with a Delaware assignment proceeding. The MFI APA was accounted for as an acquisition of an ongoing business where the Company was treated as the acquirer and the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, a privately held New York company operating out of Brooklyn, was an expert curator and online retailer of high quality specialty foods from small-batch makers in the US.

 

 

The consideration for and in connection with the acquisition consisted of (i) closing related cash payments of $208,355; (ii) additional revenue-based contingent liabilities valued by management at $100,000 related to certain future sales of purchased assets payable under the following terms: payment of 5% of certain revenues, with no payments on the first $500,000 of revenues and no payments on revenues after June 30, 2020;  (iii) additional revenue based contingent liabilities of up to $185,000 associated with the purchase of certain debt of the seller; and (iv) additional contingent liability consideration valued by management at approximately $20,000.

 

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, 2018 (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 $7,541,296 (59% of total sales) and $7,083,672 (65% of total sales) for the three months ended March 31, 2019 and 2018 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, 2019 Compared to Three Months Ended March 31, 2018

 

Revenue

 

Revenue increased by $1,942,671 or approximately 17.8% to $12,859,215 for the three months ended March 31, 2019 from $10,916,544 in the prior year. The increase in revenues was attributable to an increase in revenues associated with foodservice and ecommerce offset partially by a decrease in revenues associated with national brand management.

 

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 a strategy which based on our analysis provides the most beneficial opportunity for growth.

 

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 markets 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.

 

 

Cost of goods sold

 

Our cost of goods sold for the three months ended March 31, 2019 was $8,881,380, an increase of $1,443,949 or approximately 19.4% compared to cost of goods sold of $7,437,431 for the three months ended March 31, 2018. Cost of goods sold is made up of the following expenses for the three months ended March 31, 2019: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $6,248,748; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2,632,632. Total gross margin was approximately 30.9% of sales in 2019 compared to approximately 31.9% of sales in 2018.  The increase in cost of goods sold is primary attributable to an increase in sales.  The decrease in gross margins from 2018 are primarily attributable to variation in product and revenue mix across our various selling channels including a decrease in higher gross margin revenues associated with National Brand Management.

     

In 2019, we continued to price our products in order to increase sales, gain market share and increase the number of our end users and ecommerce customers. We were successful in both increasing sales and increasing market share and increasing the number of our ecommerce customers.  We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold may increase. 

 

Selling, general, and administrative expenses

 

Selling, general, and administrative expenses increased by $785,180 or approximately 26.1% to $3,788,997 during the three months ended March 31, 2019 compared to $3,003,817 for the three months ended March 31, 2018. The increase in selling, general, and administrative expenses was primarily due to an increase in payroll and related costs of approximately $634,125 (including an increase in non-cash compensation in the amount of $91,357), an increase in depreciation and amortization of $66,792, an increase in advertising and marketing of $66,060, an increase in travel and entertainment of $65,522, and an increase in computer and IT costs in the amount of $37,024. Professional fees decreased by $172,532 during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decrease in acquisition activity in the current period compared to the three months ended March 31, 2018. The increase in payroll and related costs were driven mainly by increases associated with Mouth, which was acquired in 2019 and increases in payroll at Innovative Gourmet The increases in payroll expenses at Innovative Gourmet were driven mainly by an increase in the time periods incorporating payroll expenses compared to the prior year as well as additional personnel added to support Innovative Gourmet sales growth. 

 

Interest expense, net

 

Interest expense, net of interest income, decreased by $1,270 or approximately 4.7% to $25,478 during the three months ended March 31, 2019, compared to $26,748 during the three months ended March 31, 2018.  Interest accrued or paid on the Company’s commercial loans and notes payable decreased by $2,936 to $26,996 during the current period, compared to $29,932 during the prior year; interest income decreased by $1,666 to $1,518 during the current period compared to $3,184 during the prior period.

 

Net income

 

For the reasons above, the Company had net income for the three months ended March 31, 2019 of $163,360 which is a decrease of approximately $285,188 or 63.6% compared to a net income of $448,548 during the three months ended March 31, 2018. The income for the three months ended March 31, 2019 includes a total of $405,349 in non-cash charges, including amortization of intangible assets in the amount of $229,130, depreciation expense of $76,075, and charges for non-cash compensation in the amount of $100,144. 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, depreciation expense of $49,267, charges for non-cash compensation in the amount of $8,787.

 

Liquidity and Capital Resources at March 31, 2019

 

As of March 31, 2019, the Company had current assets of $8,678,873, consisting of cash and cash equivalents of $3,140,799; trade accounts receivable of $3,248,519; inventory of $2,123,330; and other current assets of $166,225.  Also at March 31, 2019, the Company had current liabilities of $3,644,024, consisting of trade payables and accrued liabilities of $2,098,702; accrued interest of $18,285; deferred revenue of $264,157; lease liabilities – operating leases, current portion of $135,991; lease liabilities – financing leases, current portion of $22,481; current portion of notes payable of $668,833; and current portion of contingent liability of $447,569.

 

 

During the three months ended March 31, 2019, the Company had cash used in operating activities of $1,315,513.  Cash used in operations consisted of the Company’s consolidated net income of $163,360 plus non-cash compensation in the amount of $100,144; and depreciation and amortization of $305,205. These amounts were partially offset by a decrease in provision for doubtful accounts of $830 and by a change in the components of current assets and liabilities in the amount of $1,922,145.   

 

The Company had cash used in investing activities of $2,705 for the three months ended March 31, 2019, which consisted of cash paid in the for the acquisition of property and equipment.

 

The Company had cash used in financing activities of $300,800 for the three months ended March 31, 2019, which consisted of principal payments made on notes payable of $294,734 and principal payments on financing leases of $6,066.

 

The Company had net working capital of $5,034,849 as of March 31, 2019. The Company had cash used by operations during the three months ended March 31, 2019 in the amount of $1,315,513. This compares to cash generated from operating activities of $870,396 during the three months ended March 31, 2018.  The Company intends to continue to focus on increasing market share and cash flow from operations by focusing its sales activities on specific market segments and new product lines.  Currently, we do not have any material long-term obligations other than those described in Note 12 to the financial statements included in this report. As we seek to increase our sales of new items and enter new markets, acquire new businesses as well as identify new and other consumer and food service oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification. 

 

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.

 

2019 Plans

 

During 2019, in addition to our efforts to increase sales in our existing foodservice operations we plan to attempt to expand our business by expanding our focus to additional specialty foods markets in both the consumer and foodservice sector, exploring potential acquisition and partnership opportunities and continuing to extend our focus in the specialty food market through the growth of the Company’s existing sales channels and through a variety of additional sales channel relationships which are currently being explored. In addition, we are currently 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.

 

Furthermore, the Company intends to expand its activities in the direct to consumer space and the overall consumer packaged goods (CPG) space through leveraging the assets acquired from iGourmet LLC and Mouth Foods, Inc. and through leveraging its overall capabilities in the consumer space.

 

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, 2018 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 as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act.) as of the end of the period covered by this Quarterly Report, have identified a control deficiency regarding the integration of two acquisitions in 2018 and as a result management has concluded our internal control over financial reporting was ineffective at March 31, 2019 at the reasonable assurance level. Management of the Company believes that this deficiency is primarily due to the smaller size of the company’s accounting staff in relation to certain continued system integrations related to the 2018 acquisitions of certain assets of iGourmet LLC and Mouth Foods, Inc. To address this matter, we have expanded our accounting staff and we expect to retain additional qualified personnel to continue to remediate this control deficiency in the future.. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).

 

(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 

 

From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of business, or as the result of current or previous investments, or current or previous subsidiaries, or current or previous employees, or current or previous directors, or as a result of acquisitions and dispositions or other corporate activities.  The Company intends to vigorously defend its positions. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our financial position or our business and the outcome of these matters cannot be ultimately predicted.

 

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, 2019:

 

The Company issued 131,136 shares of common stock to employees for bonuses previously accrued in the amount of $93,666.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

3.1

Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

3.2

Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011).

 

 

4.1

Form of Convertible Note (incorporated by reference to exhibit 4.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

4.2

Form of Convertible Note (incorporated by reference to exhibit 4.2 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

4.3

Form of Warrant - Class A (incorporated by reference to exhibit 4.3 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

4.4

Form of Warrant - Class B (incorporated by reference to exhibit 4.4 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

4.5

Form of Warrant - Class C (incorporated by reference to exhibit 4.5 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).

 

 

4.6

Secured Convertible Promissory Note dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).

 

 

4.7

Class B Common Stock Purchase Warrant dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).

 

 

4.8

Subscription Agreement between the Registrant and Alpha Capital Anstalt dated December 31, 2008 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).

 

 

4.9

Amendment, Waiver, and Consent Agreement effective January 1, 2009 between the Registrant and Alpha Capital Anstalt (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).

 

 

10.1 Employment Agreement with Justin Wiernasz dated as of January 28, 2019 (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2019).
   
10.2 Employment Agreement with Sam Klepfish dated as of January 28, 2019 (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2019).
   
10.3 Form of Director Agreement (incorporated by reference to exhibit 10.3 of the Company’s (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2019).
   

31.1

Section 302 Certification

 

 

31.2

Section 302 Certification

 

 

32.1

Section 906 Certification

 

 

32.2

Section 906 Certification

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

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.

 

SIGNATURE

 

TITLE

 

DATE

 

 

 

 

 

/s/ Sam Klepfish                                   

 

Chief Executive Officer

 

May 20, 2019

Sam Klepfish

 

 

 

 

 

 

 

 

 

/s/ John McDonald                                

 

Principal Accounting Officer

 

May 20, 2019

John McDonald

 

 

 

 

  

 

 

 

 

 

 

33