Company Quick10K Filing
Quick10K
Innovative Food
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
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 2019-07-24 Officers
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
KS Kapstone Paper & Packaging 3,397
ZYXI Zynex 290
NWGI Newgioco Group 27
TXSO Texas South Energy 20
SENR Strategic Environmental & Energy Resources 13
SFAS Steadfast Apartment REIT III 0
GAHC Global Arena Holding 0
XTRIB Xtribe 0
BHL Brighthouse Life Insurance 0
NIOBF Niocorp Developments 0
IVFH 2019-09-30
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
Part II. Other Information
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-10.2 ex_164754.htm
EX-10.3 ex_164951.htm
EX-10.4 ex_164952.htm
EX-31.1 ex_164604.htm
EX-31.2 ex_164605.htm
EX-32.1 ex_164606.htm
EX-32.2 ex_164607.htm

Innovative Food Earnings 2019-09-30

IVFH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 innovfood20190930_10q.htm FORM 10-Q innovfood20191109_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 September 30, 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)

 

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

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 36,793,671 shares of common stock issued and 34,206,091 shares of common stock outstanding as of November 12, 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’ Equity

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)

26

Item 4.

Controls and Procedures

33

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

35

 

Signatures

37

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Innovative Food Holdings, Inc.

Condensed Consolidated Balance Sheets

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
    (unaudited)          

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 2,825,995     $ 4,759,817  

Accounts receivable, net

    3,179,676       3,039,756  

Inventory

    2,695,489       2,301,377  

Other current assets

    194,372       144,301  

Total current assets

    8,895,532       10,245,251  
                 

Property and equipment, net

    2,208,037       2,456,610  

Investments

    420,225       339,525  

Right to use assets, operating leases, net

    296,579       -  

Right to use assets, finance leases, net

    115,222       -  

Other amortizable intangible assets, net

    1,515,773       2,158,498  

Goodwill and other unamortizable intangible assets

    2,183,065       2,183,065  

Total assets

  $ 15,634,433     $ 17,382,949  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable and accrued liabilities

  $ 2,503,147     $ 3,689,868  

Accrued interest

    18,471       16,402  

Deferred revenue

    197,574       559,315  

Notes payable - current portion

    705,460       928,857  

Lease liability - operating leases, current

    165,369       -  

Lease liability - finance leases, current

    19,279       -  

Contingent liability - current portion

    306,157       472,876  

Total current liabilities

    3,915,457       5,667,318  
                 

Lease liability - operating leases, non-current

    131,210       -  

Lease liability - finance leases, non-current

    92,988       -  

Contingent liability - long-term

    227,600       357,600  

Note payable - long term portion

    436,373       1,196,245  

Total liabilities

    4,803,628       7,221,163  
                 
Commitments and contingencies (see note 16)     -       -  
                 

Stockholders' equity

               

Common stock: $0.0001 par value; 500,000,000 shares authorized; 36,786,528 and 36,296,218 shares issued, and 34,198,948 and 33,708,638 shares outstanding at September 30, 2019 and December 31, 2018, respectively

    3,675       3,627  

Additional paid-in capital

    36,773,186       36,132,065  

Treasury stock: 2,373,171 shares outstanding at September 30, 2019 and December 31, 2018

    (1,016,370

)

    (1,016,370

)

Accumulated deficit

    (24,929,686

)

    (24,957,536

)

Total stockholders' equity

    10,830,805       10,161,786  
                 

Total liabilities and stockholders' equity

  $ 15,634,433     $ 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

   

For the Nine

   

For the Nine

 
   

Months Ended

   

Months Ended

   

Months Ended

   

Months Ended

 
   

September 30,

   

September 30,

   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 
                                 

Revenue

  $ 13,465,764     $ 12,054,490     $ 40,250,430     $ 34,960,037  

Cost of goods sold

    9,864,484       8,523,505       28,608,233       24,370,421  

Gross margin

    3,601,280       3,530,985       11,642,197       10,589,616  
                                 

Selling, general and administrative expenses

    3,754,012       3,354,315       11,560,838       9,429,111  

      Total operating expenses

    3,754,012       3,354,315       11,560,838       9,429,111  
                                 

Operating (loss) income

    (152,732

)

    176,670       81,359       1,160,505  
                                 

Other (income) expense:

                               

Gain on settlement of contingent liability

    -       -       -       (11,000

)

Gain on sale of fixed assets

    (12,495

)

    -       (12,495

)

    -  

Interest expense, net

    17,377       27,969       66,004       89,013  

      Total other expense

    4,882       27,969       53,509       78,013  
                                 

Net (loss) income before taxes

    (157,614

)

    148,701       27,850

 

    1,082,492  
                                 

Income tax expense

    -       -       -       155,000  
                                 

Net (loss) income

  $ (157,614

)

  $ 148,701     $ 27,850

 

  $ 927,492  
                                 

Net (loss) income per share - basic

  $ (0.00

)

  $ 0.00     $ 0.00     $ 0.03  
                                 

Net (loss) income per share - diluted

  $ (0.00

)

  $ 0.00     $ 0.00     $ 0.03  
                                 

Weighted average shares outstanding - basic

    34,060,498       33,989,715       34,021,245       33,974,321  
                                 

Weighted average shares outstanding - diluted

    34,060,498       33,989,715       34,021,245       33,974,321  

 

See notes to these unaudited condensed consolidated financial statements.

 

Innovative Food Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   

For the Nine

   

For the Nine

 
   

Months Ended

   

Months Ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

   Net income

  $ 27,850     $ 927,492  

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

               

     Depreciation and amortization

    921,096       794,285  

     Amortization of right-of-use asset

    140,303       -  

     Stock based compensation

    297,503       47,696  

     Gain on settlement of contingent liability

    -       (11,000

)

     Gain on sale of fixed assets

    (12,495

)

    -  

     Recovery of doubtful accounts

    (1,633

)

    (36,857

)

                 

Changes in assets and liabilities:

               

        Accounts receivable, net

    (183,787

)

    (164,622

)

        Inventory and other current assets, net

    (444,183

)

    (800,119

)

        Accounts payable and accrued liabilities

    (1,090,986

)

    (672,826

)

        Deferred revenue

    (361,741

)

    27,534  

        Operating lease liability

    (140,303

)

    -  

   Net cash (used in) provided by operating activities

    (848,376

)

    111,583  
                 

Cash flows from investing activities:

               

   Cash related to the iGourmet asset acquisition

    -       (2,703,320

)

   Cash received from the sale of fixed assets

    12,495       -  

   Purchase of property and equipment

    (131,095

)

    (382,014

)

   Purchase of intangible assets

    (47,000 )     -  

   Investment in food related companies

    (35,200

)

    (50,000

)

   Net cash used in investing activities

    (200,800

)

    (3,135,334

)

                 

Cash flows from financing activities:

               

    Sales of common stock

    250,000       -  

    Purchase of stock options from officers, directors, and employees

    -       (167,000

)

    Cash received from exercise of stock options

    -       35,000  

    Cash paid in settlement of contingent liabilities in connection with acquisitions

    (296,719 )     (189,000

)

    Borrowings on term loan

    -       1,500,000  

    Purchase of treasury stock

    -       (24,057

)

    Principal payments on debt

    (818,819

)

    (846,556

)

    Principal payments capital leases

    (19,108

)

    (5,900

)

   Net cash (used in) provided by financing activities

    (884,646

)

    302,487  
                 

Decrease in cash and cash equivalents

    (1,933,822

)

    (2,721,264

)

                 

Cash and cash equivalents at beginning of period

    4,759,817       5,133,435  
                 

Cash and cash equivalents at end of period

  $

2,825,995

    $ 2,412,171  
                 

Supplemental disclosure of cash flow information:

               
                 

Cash paid during the period for:

               

Interest

  $ 68,812     $ 94,614  
                 

Taxes

  $ -     $ 155,000  
                 

Non-cash investing and financing activities:

               

Issuance of 131,136 shares of common stock previously accrued

  $ 93,666     $ -  

Right to use assets and liabilities - operating, upon adoption of ASU 2016-02

  $ 338,581     $ -  

Fair value of 9,524 shares of common stock issued for services

  $ 5,143     $ -  

Increase in right of use assets & liabilities

  $ 98,301     $ -  

Investment in food related company

  $ 45,500     $ -  

Return of equipment & reduction in amount due under equipment financing loan

  $ 33,075     $ -  

 

See notes to these unaudited condensed consolidated financial statements.

 

 

Innovative Food Holdings, Inc. and subsidiary

Consolidated Statements of Stockholders' Equity

For the Three and Nine Months Ended September 30, 2019 and 2018

 

   

STOCKHOLDERS' EQUITY - THREE MONTHS ENDED SEPTEMBER 30

 
   

Common Stock

           

Treasury Stock

   

Accum

         
   

Amount

   

Value

   

APIC

   

Amount

   

Value

   

Deficit

   

Total

 

Balance - June 30, 2018 (unaudited)

    36,296,218     $ 3,627     $ 36,088,068       2,306,503     $ (1,016,370

)

  $ (25,874,644

)

  $ 9,200,681  

Fair value of stock vested to management

    -       -       24,288       -       -       -       24,288  

Net income for the three months ended June 30, 2018

    -       -       -       -       -       148,701       148,701  

Balance - September 30, 2018 (unaudited)

    36,296,218     $ 3,627     $ 36,112,356       2,306,503     $ (1,016,370

)

  $ (25,725,943

)

  $ 9,373,670  
                                                         
                                                         

Balance - June 30, 2019 (unaudited)

    36,427,354     $ 3,640     $ 36,421,970       2,373,171     $ (1,016,370

)

  $ (24,772,072

)

  $ 10,637,168  

Common stock issued for services

    9,524       1       5,142       -       -       -       5,143  

Common stock sold for cash

    349,650       34       249,966       -       -       -       250,000  

Fair value of vested stock and stock options issued to management

    -       -       96,108       -       -       -       96,108  

Net loss for the three months ended September 30, 2019

    -       -       -       -       -       (157,614

)

    (157,614

)

Balance - September 30, 2019 (unaudited)

    36,786,528     $ 3,675     $ 36,773,186       2,373,171     $ (1,016,370

)

  $ (24,929,686

)

  $ 10,830,805  

 

   

STOCKHOLDERS' EQUITY - NINE MONTHS ENDED SEPTEMBER 30

 
   

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

)

Purchase of treasury stock from employee

    -       -       -       2,000       (1,940

)

    -       (1,940

)

Fair value of vested stock options issued to management

    -       -       8,787       -       -       -       8,787  

Fair value of stock vested to management

    -       -       38,909       -       -       -       38,909  

Cost of treasury stock acquired during the period

    -       -       -       27,800       (22,117

)

    -       (22,117

)

Net income for the six months ended June 30, 2018

    -       -       -       -       -       927,492       927,492  

Balance - September 30, 2018 (unaudited)

    36,296,218     $ 3,627     $ 36,112,356       2,306,503     $ (1,016,370

)

  $ (25,725,943

)

  $ 9,373,670  
                                                         
                                                         

Balance at December 31, 2018

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

)

  $ (24,957,536

)

  $ 10,161,786  

Common stock issued for services

    9,524       1       5,142       -       -       -       5,143  

Common stock sold for cash

    349,650       34       249,966       -       -       -       250,000  

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

    -       -       292,360       -       -       -       292,360  

Net income for the nine months ended September 30, 2019

    -       -       -       -       -       27,850       27,850  

Balance - September 30, 2019 (unaudited)

    36,786,528     $ 3,675     $ 36,773,186       2,373,171     $ (1,016,370

)

  $ (24,929,686

)

  $ 10,830,805  

 

See notes to these unaudited condensed consolidated financial statements.

 

 

INNOVATIVE FOOD HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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” or “iGourmet”), Food Funding, LLC (“Food Funding”), M Innovations, LLC (“M Innovations”), P Innovations, LLC (“P 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 and nine months ended September 30, 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, FNM, OFB, GFG, GFW, Gourmeting, Haley, Oasis, Gourmet, iGourmet, M Innovations, (sometimes referred to herein as “Mouth” or ” Mouth.com”), Food Funding and P Innovations (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.forthegourmet.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.

 

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.

 

 

GFG is focused on expanding the Company’s program offerings to additional specialty foodservice customers. 

 

P Innovations focus is to leverage acquired assets to expand the Company’s subscription-based e-commerce business activities.

 

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.ebay.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, GFW, Gourmeting, Haley, Oasis, Innovative Gourmet, Food Funding, M Innovations, P 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 September 30, 2019 and December 31, 2018, trade receivables from the Company’s largest customer amounted to 38% and 44%, respectively, of total trade receivables. During the three months ended September 30, 2019 and 2018, sales from the Company’s largest customer amounted to 60% and 63% of total sales, respectively. During the nine months ended September 30, 2019 and 2018, sales from the Company’s largest customer amounted to 60% and 63% of total sales, respectively.

 

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 e-commerce subscription purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards are issued by the Company generally 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  

 

Cash payments received

    225,064  

Net sales recognized

    (221,531

)

Balance as of June 30, 2019

  $ 280,928  

  

Cash payments received

    120,345  

Net sales recognized

    (203,699

)

Balance as of September 30, 2019

  $ 197,574  

 

 

Disaggregation of Revenue

 

The following table represents a disaggregation of revenue by from sales for the three and nine months ended September 30, 2019 and 2018:

 

   

Three Months Ended

 
   

September 30,

 
   

2019

   

2018

 

Specialty food service

  $ 11,574,373     $ 10,481,021  

E-Commerce

    1,572,031       1,181,933  

National Brand Management

    319,360       391,536  

Total

  $ 13,465,764     $ 12,054,490  

 

   

Nine Months Ended

 
   

September 30,

 
   

2019

   

2018

 

Specialty food service

  $ 33,542,367     $ 29,739,129  

E-Commerce

    5,452,024       3,617,039  

National Brand Management

    1,256,039       1,603,869  

Total

  $ 40,250,430     $ 34,960,037  

 

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 September 30, 2019:

 

Convertible notes and interest

 

At September 30, 2019 there were no convertible notes outstanding.

 

Warrants

 

At September 30, 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 September 30, 2019:   

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Exercise

 

 

Number

 

 

Contractual

 

 

Price

 

 

of Options

 

 

Life (years)

 

 

$

0.62

 

 

 

360,000

 

 

 

4.25

 

 

$

0.75

 

 

 

50,000

 

 

 

2.25

 

 

$

0.85

 

 

 

540,000

 

 

 

4.25

 

 

$

0.95

 

 

 

50,000

 

 

 

2.25

 

 

$

1.10

 

 

 

75,000

 

 

 

1.62

 

 

$

1.20

 

 

 

900,000

 

 

 

4.25

 

 

$

1.38

 

 

 

100,000

 

 

 

0.17

 

 

$

1.50

 

 

 

125,000

 

 

 

2.25

 

 

$

2.00

 

 

 

125,000

 

 

 

2.25

 

 

$

2.50

 

 

 

125,000

 

 

 

2.25

 

 

$

3.00

 

 

 

125,000

 

 

 

2.25

 

 

 

 

 

 

 

2,575,000

 

 

 

3.55

 

 

Restricted Stock Awards 

 

At September 30, 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 nine months ended September 30, 2019, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 218,175 shares of common stock to its Chief Executive Officer and to its Director of Strategic Acquisitions; an aggregate total 72,774 shares to board members; and 41,991 shares to an employee.

 

Dilutive shares at September 30, 2018:

 

There were no convertible notes or warrants outstanding on September 30, 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 at September 30, 2018:  

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Exercise

 

 

Number

 

 

Contractual

 

 

Price

 

 

of Options

 

 

Life (years)

 

 

$

1.10

 

 

 

75,000

 

 

 

2.62

 

 

$

1.31

 

 

 

150,000

 

 

 

0.25

 

 

$

1.38

 

 

 

100,000

 

 

 

1.17

 

 

$

1.43

 

 

 

50,000

 

 

 

0.25

 

 

$

1.90

 

 

 

175,000

 

 

 

0.73

 

 

 

 

 

 

 

550,000

 

 

 

0.89

 

 

 

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.

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU relates to the accounting for non-employee share-based payments. The amendment in this update expands the scope of Topic 718 to include all share-based payment transactions in which a grantor acquired goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The ASU excludes share-based payment awards that relate to: (1) financing to the issuer; or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers. The share-based payments are to be measured at grant-date fair value of the equity instruments that the entity is obligated to issue when the goods or service has been delivered or rendered and all other conditions necessary to earn the right to benefit from the equity instruments have been satisfied. This standard will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted the provisions of this ASU on January 1, 2019. The adoption had no impact on our results of operations, cash flows, or financial condition.

 

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

 

GBC Sub, Inc. (d/b/a TheGiftBox) 

 

Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30%  of P Innovations subject to dilution for a period  of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings shareholders. The Company is evaluating its preliminary purchase price allocation. As a result, during the preliminary purchase price allocation period, which may be up to one year from the asset purchase date, we may record adjustments to the assets acquired.

 

 

Mouth Foods, Inc.

 

Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth Foods, Inc.’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 Foods, Inc., 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 management’s estimates. 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. 

 

 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 September 30, 2018 nine month period presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.

 

   

Nine months ended

September 30, 2018

 
   

(unaudited)

 

Revenues

  $ 35,337,687  

Net Income

  $ 816,172  

Basic net income per share

  $ 0.024  

Diluted net income per share

  $ 0.024  

Weighted average shares – basic

    33,974,321  

Weighted average shares – diluted

    33,974,321  

 

4. ACCOUNTS RECEIVABLE

 

At September 30, 2019 and December 31, 2018, accounts receivable consists of:

 

   

September 30,

2019

   

December 31,

2018

 

Accounts receivable from customers

  $ 3,332,720     $ 3,194,932  

Allowance for doubtful accounts

    (153,044

)

    (155,176

)

Accounts receivable, net

  $ 3,179,676     $ 3,039,756  

 

 

5. INVENTORY

 

Inventory consists primarily of specialty food products.  At September 30, 2019 and December 31, 2018, inventory consisted of the following:

 

   

September 30,

2019

   

December 31,

2018

 

Finished Goods Inventory

  $ 2,695,489     $ 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, National Association (“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.

 

On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in October 2019 was $6,150,000 “as is” and $8,000,000 with additional scheduled improvements. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the building. The amount of the loan was $5.5 million, the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years and maturity on September 2, 2025 Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase.

 

A summary of property and equipment at September 30, 2019 and December 31, 2018, was as follows:

 

   

September 30,

2019

   

December 31,

2018

 

Land

  $ 385,523     $ 385,523  

Building

    1,356,783       1,326,165  

Computer and Office Equipment

    549,703       523,853  

Warehouse Equipment

    302,046       302,622  

Furniture and Fixtures

    894,628       889,073  

Vehicles

    109,441       220,812  

Total before accumulated depreciation

    3,598,124       3,648,048  

Less: accumulated depreciation

    (1,390,087

)

    (1,191,438

)

Total

  $ 2,208,037     $ 2,456,610  

 

 

Depreciation and amortization expense for property and equipment amounted to $80,402 and $51,384 for the three months ended September 30, 2019 and 2018, respectively. Depreciation and amortization expense for property and equipment amounted to $231,731 and $146,108 for the nine months ended September 30, 2019 and 2018, respectively.

 

7. RIGHT OF USE ASSETS AND LEASE LIABILITIES – 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 and nine months ended September 30, 2019 was entirely comprised of operating leases and amounted to $57,780 and $155,047, respectively. The Company’s ROU asset amortization for the three and nine months ended September 30, 2019 was $53,472 and $140,303, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest. 

 

Right to use assets – operating leases are summarized below:

 

   

September 30,

2019

 

Warehouse

  $ 69,880  

Warehouse equipment

    22,321  

Office equipment

    35,421  

Vehicles

    168,957  

Right to use assets, net

  $ 296,579  

 

Operating lease liabilities are summarized below:

 

   

September 30,

2019

 

Warehouse

  $ 69,880  

Warehouse equipment

    22,321  

Office equipment

    35,421  

Vehicles

    168,957  

Lease liability

  $ 296,579  

Less: current portion

    (165,369

)

Lease liability, non-current

  $ 131,210  

 

Maturity analysis under these lease agreements are as follows:

 

Twelve months ended September 30, 2020

  $ 176,689  

Twelve months ended September 30, 2021

    58,972  

Twelve months ended September 30, 2022

    30,158  

Twelve months ended September 30, 2023

    16,373  

Twelve months ended September 30, 2024

    13,776  

Thereafter

    25,255  

Total

  $ 321,223  

Less: Present value discount

    (24,644

)

Lease liability

  $ 296,579  

  

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 September 30, 2019 the Company has investments in seven food related companies in the aggregate amount of $420,225.  The Company does not have significant influence over the operations of these companies.

 

 

During the three and nine months ended September 30, 2019, the Company invested cash of $10,200 and 35,200, respectively, in food related companies. The Company’s investments may take the form of debt, equity, or equity in the future including convertible notes and other instruments which provide for future equity under various scenarios including subsequent financings or initial public offerings. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments – Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence. 

 

Also during the three and nine months ended September 30, 2019, the Company converted accounts receivable in the amount of $15,000 and $45,500, respectively, into an equity investment in a food related company. 

 

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:

 

   

September 30, 2019

 
           

Accumulated

         
   

Gross

   

Amortization

   

Net

 

Non-Compete Agreement - amortizable

  $ 505,900     $ (415,887

)

  $ 90,013  

Customer Relationships - amortizable

    3,068,043       (2,279,241

)

    788,802  

Trade Name

    1,532,822       -       1,532,822  

Internally Developed Technology - amortizable

    875,643       (285,685

)

    589,958  

Goodwill

    650,243       -       650,243  

Website - amortizable

    47,000       -       47,000  

Total

  $ 6,679,651     $ (2,980,813

)

  $ 3,698,838  

 

   

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 - amortizable

    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 September 30, 2019 and 2018 was $210,028 and $242,874, respectively; total amortization expense for the nine months ended September 30, 2019 and 2018 was $689,725 and $648,177, 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 September 30, 2019 and December 31, 2018 are as follows:

 

   

September 30,

2019

   

December 31,

2018

 

Trade payables and accrued liabilities

  $ 2,286,085     $ 3,425,178  

Accrued payroll and commissions

    217,062       264,690  

Total

  $ 2,503,147     $ 3,689,868  

 

11. ACCRUED INTEREST

 

At September 30, 2019, accrued interest on notes outstanding was $18,471. During the nine months ended September 30, 2019, the Company paid cash for interest in the aggregate amount of $68,812.

   

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 $190,781.   

 

12. REVOLVING CREDIT FACILITIES

 

   

September 30,

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.  Effective August 1, 2019, this credit facility was extended to August 1, 2021.

  $ -     $ -  
                 

Total 

  $ -     $ -  

 

 

13. NOTES PAYABLE

 

   

September 30,

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. 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 September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $13,650 and $2,695, respectively. During the nine months ended September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $40,950 and $8,817, respectively.

    191,100       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 September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $24,500 and $7,364, respectively. During the nine months ended September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $73,500 and $23,577, respectively.

    555,333       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 September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $166,668 and $1,390, respectively. During the nine months ended September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $666,670 and $17,157, respectively.

    -       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.  Monthly payments in the amount of $7,425 including principal and interest commenced in April, 2019. During the three and nine months ended September 30, 2019, equipment financed under the Artisan Equipment Loan in the amount of $33,075 was returned for credit. Also during the three and nine months ended September 30, 2019, the Company made payments of principal and interest on this note in the amounts of $16,001 and $4,455, respectively.

    332,032       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 and nine months ended September 30, 2019, the Company accrued interest in the amount of $93 and $279, respectively, on this note.

    20,000       20,000  

 

 

 

 

September 30,

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 September 30, 2019, the Company made principal and interest payments on this note in the amount of $0 and $0, respectively. During the nine months ended September 30, 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 September 30, 2019, the Company made principal and interest payments in the amount of $3,123 and $697, respectively, on this loan. During the nine months ended September 30, 2019, the Company made principal and interest payments in the amount of $6,961 and $1,634, respectively, on this loan.

 

 

43,368

 

 

 

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

 

$

1,141,833

 

 

$

2,125,102

 

 

 

 

 

 

 

 

 

 

Current portion

 

$

705,460

 

 

$

928,857

 

Long-term maturities

 

 

436,373

 

 

 

1,196,245

 

Total

 

$

1,141,833

 

 

$

2,125,102

 

 

Aggregate maturities of long-term notes payable as of September 30, 2019 are as follows:

 

For the period ended September 30, 

 

2020

  $ 705,197  

2021

    133,907  

2022

    138,121  

2023

    115,259  

2024

    49,349  

Thereafter

    -  

Total

  $ 1,141,833  

 

 

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 September 30, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $1,722 and $14, respectively. During the nine months ended September 30, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $5,661 and $103, respectively. 

    --       -  
                 

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 September 30, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $4,5751 and $2,402, respectively. During the nine months ended September 30, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $13,444 and $7,487 respectively. 

    112,267       -  
                 

Total

  $ 112,267     $ -  
                 

Current portion

  $ 19,279     $ -  

Long-term maturities

    92,988       -  

Total

  $ 112,267     $ -  

 

Aggregate maturities of lease liabilities – financing leases as of September 30, 2019 are as follows:

 

For the period ended September 30, 

 

2020

 

$

19,279

 

2021

 

 

20,952

 

2022

 

 

22,766

 

2023

 

 

24,737

 

2024

 

 

24,533

 

Thereafter

 

 

-

 

Total

 

$

112,267

 

 

15. RELATED PARTY TRANSACTIONS

 

For the nine months ended September 30, 2019:

 

GBC Sub, Inc. (d/b/a TheGiftBox) 

 

Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30%  of P Innovations subject to dilution for a period  of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings shareholders. The Company is evaluating its preliminary purchase price allocation. As a result, during the preliminary purchase price allocation period, which may be up to one year from the asset purchase date, we may record adjustments to the assets acquired.

 

Sale of common stock to related party

 

On July 23, 2019, the Company entered into a subscription agreement to sell 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000. See note 17.

 

Vesting of shares to officers

 

During the nine months ended September 30, 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 $154,036 for the vesting of a total of 290,949 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 $34,120 and $102,360 during the three and nine months ended September 30, 2019 in connection with these options.

 

For the nine months ended September 30, 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 former 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.

 

In May 2018, as part of a realignment towards focusing on certain specific growth initiatives and growth opportunities the Company amended the employment agreement with its President, and the President of the Company was named as the Director of Strategic Acquisitions, whose responsibilities include: (i) identifying and assisting in the acquisition and integration of strategic assets; (ii) identifying and executing on new growth opportunities; and (iii) identifying and executing growth initiatives for the Company.  In order to allow for the Executive to devote his full time to his new responsibilities, the President of the Company resigned from his role as President of the Company and its subsidiaries. Pursuant to this agreement, the Executive’s salary was reduced by $15,000 per year, and an equity bonus of 46,000 shares of the Company’s common stock will be issued to the Executive. These shares will vest at a rate of one-sixth per month over a period of six months.

 

16. COMMITMENTS AND CONTINGENT LIABILITIES

 

Contingent Liability

 

Pursuant to the iGourmet Asset Purchase Agreement, 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. During the three months ended September 30, 2019, the Company paid the amount of $30,000 in connection with the additional liabilities; at September 30, 2019, the amount of $132,300 remains on the Company’s balance sheet as a current contingent liability, and $227,600 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. During the three months ended September 30, 2019, the Company paid the amount of $200,000 in connection with these obligations; at September 30, 2019, there is no further liability related to these obligations on the Company’s balance sheet.

 

 

Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of $240,576.   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. During the three and nine months ended September 30, 2019, the Company paid the amount of $12,951 and $66,719 in connection with these liabilities. At September 30, 2019, $53,857 is classified as a current contingent liability.

 

License Agreements

 

In May 2019, the Company entered into a royalty-based license agreement, through December 31, 2022 with a lifestyle brand, which provides the exclusive right, with certain carve-outs and limitations,  to sell and promote  branded gift baskets for certain channels including: retail, warehouse club stores, certain of the Company’s current e-commerce channels, and other e-commerce channels such as amazon.com (the “May 2019 License Agreement”). Pursuant to the May 2019 License Agreement, the Company paid an initial royalty deposit in the amount of $50,000 towards the minimum royalty, which is classified as other current assets on the Company’s balance sheet at September 30, 2019.  Future royalty amounts owed for minimum payments in connection with the May 2019 License Agreement will be deducted from this deposit. The royalty rate is 5% of net sales, and the Company is required, with certain exceptions and exclusions, to make minimum royalty payments of $100,000 through the end of 2020, $110,000 in 2021, and $125,000 in 2022, respectively.

 

Litigation

 

On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and demands minimum aggregate damages of $1.25 million, although we expect Plaintiffs’ actual claims for damages to be substantially higher. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy, we intend to further aggressively pursue the Company and its subsidiaries’ insurance coverage under their umbrella and other available policies. In addition, the Company intends to defend this action and believes that the likely outcome would result in any liabilities being covered in full by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations.

 

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 September 30, 2019 and December 31, 2018, a total of 2,587,580 shares are deemed issued but not outstanding by the Company. These include 2,373,171 shares of treasury stock.

 

Nine months ended September 30, 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 charged the amount of $176,709 in connection with the vesting of 332,940 shares of common stock issuable to board members and employees in connection with their employment agreements.

 

The Company sold 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000.

 

The Company issued 9,524 shares of common stock with a fair value of $0.54 to a service provider; the fair value of $5,143 was charged to operations during the three months ended September 30, 2019.

 

 

Nine months ended September 30, 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 and employees in the amount of $9,462. The Company also recognized the fair value of stock grants to management and employees in the amount of $13,946.

 

The Company purchased 2,000 shares of common stock from an employee at a cost of $0.97 per share for a total of $1,940 and retired these shares to treasury.

 

The Company made open market purchases of 27,800 shares of its common stock at an average cost of $0.79 per share for a total of $22,117 and retired these shares to treasury.

 

Warrants 

 

There were no warrants outstanding at September 30, 2019 or December 31, 2018.  

 

Options

 

The following table summarizes the options outstanding at September 30, 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

 

 

 

4.25

 

 

$

0.62

 

 

 

90,000

 

 

$

0.62

 

$

0.75

 

 

 

50,000

 

 

 

2.25

 

 

$

0.75

 

 

 

-

 

 

$

-

 

$

0.85

 

 

 

540,000

 

 

 

4.25

 

 

$

0.85

 

 

 

135,000

 

 

$

0.85

 

$

0.95

 

 

 

50,000

 

 

 

2.25

 

 

$

0.95

 

 

 

-

 

 

$

-

 

$

1.10

 

 

 

75,000

 

 

 

1.62

 

 

$

1.10

 

 

 

75,000

 

 

$

1.10

 

$

1.20

 

 

 

900,000

 

 

 

4.25

 

 

$

1.20

 

 

 

225,000

 

 

$

1.20

 

$

1.38

 

 

 

100,000

 

 

 

0.17

 

 

$

1.38

 

 

 

100,000

 

 

$

1.38

 

$

1.50

 

 

 

125,000

 

 

 

2.25

 

 

$

1.50

 

 

 

-

 

 

$

-

 

$

2.00

 

 

 

125,000

 

 

 

2.25

 

 

$

2.00

 

 

 

-

 

 

$

-

 

$

2.50

 

 

 

125,000

 

 

 

2.25

 

 

$

2.50

 

 

 

-

 

 

$

-

 

$

3.00

 

 

 

125,000

 

 

 

2.25

 

 

$

3.00

 

 

 

-

 

 

$

-

 

 

 

 

 

 

2,575,000

 

 

 

3.55

 

 

$

1.24

 

 

 

625,000

 

 

$

1.06

 

 

 

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

    (275,000

)

  $ 1.51  
                 

Options outstanding at September 30, 2019

    2,575,000     $ 1.24  

Options exercisable at September 30, 2019

    625,000     $ 1.06  

 

Aggregate intrinsic value of options outstanding and exercisable at September 30, 2019 and 2018 was $0 and $0, 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 $0.58 and $0.68 as of September 30, 2019 and 2018, respectively, and the exercise price multiplied by the number of options outstanding.

 

During the three months ended September 30, 2019 and 2018, the Company charged $38,550 and $24,285, respectively, to operations to recognized stock-based compensation expense for employee stock options. During the nine months ended September 30, 2019 and 2018, the Company charged $115,651 and $47,693, respectively, to operations related 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 and nine months ended September 30, 2019 using the Black-Scholes valuation model utilizing the following variables: 

 

   

September 30,

 
   

2019

 

Volatility

    59.4

%

Dividends

  $ -  

Risk-free interest rates

    2.49

%

Term (years)

    5.00  

 

18. SUBSEQUENT EVENTS

 

In October and November 2019, the Company issued 4,762 and 2,381 shares of common stock to a service provider.  

 

On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Wright, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in October 2019 was $6,150,000 “as is” and $8,000,000 with additional improvements. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the building. The amount of the loan was $5.5 million, the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years and maturity on September 2, 2025 Related to the Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase.

 

 

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 $153,044 for doubtful accounts receivable at September 30, 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.

 

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, 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 purchase agreement (the “iGourmet Asset Purchase Agreement”), our wholly-owned subsidiary, Innovative Gourmet, 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, 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 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. and our wholly-owned subsidiary M Innovations (the “MFI APA”), the Company acquired certain assets of Mouth Foods, Inc. 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 Foods, Inc., 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 $8,037,169 (60% of total sales) and $7,559,430 (63% of total sales) for the three months ended September 30, 2019 and 2018 respectively; and $24,247,665 (60% of total sales) and $22,151,487 (63% of total sales) for the nine months ended September 30, 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 September 30, 2019 Compared to Three Months Ended September 30, 2018

 

Revenue

 

Revenue increased by $1,411,274 or approximately 12% to $13,465,764 for the three months ended September 30, 2019 from $12,054,490 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 September 30, 2019 was $9,864,484, an increase of $1,340,979 or approximately 15.7% compared to cost of goods sold of $8,523,505 for the three months ended September 30, 2019. Cost of goods sold is made up of the following expenses for the three months ended September 30, 2019: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $6,544,503; and shipping, delivery, handling, and purchase allowance expenses in the amount of $3,319,981. Total gross margin was approximately 26.7% of sales in 2019 compared to approximately 29.3% 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 and variations in both revenue mix and gross margins associated with foodservice revenues.

 

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 $399,697 or approximately 11.9% to $3,754,012 during the three months ended September 30, 2019 compared to $3,354,315 for the three months ended September 30, 2018. The increase in selling, general, and administrative expenses was primarily due to an increase in office, facility, and vehicle costs of $259,445; payroll and related costs of approximately $230,323 (including an increase in non-cash compensation in the amount of $76,963), and an increase in insurance costs of $66,667. These increases were partially offset by decreases in professional fees in the amount of $43,349 and banking cost and processing fees in the amount of $21,227. The increases were driven mainly by increases associated with Mouth which was added in 2019, and increases in Company payroll associated mainly with additional personnel added to the Company to support sales growth. 

 

Gain on sale of fixed assets

 

During the three months ended September 30, 2019, the Company recorded a gain on the sale of warehouse equipment in the amount of $12,495; there was no comparable transaction in the prior period.

 

Interest expense, net

 

Interest expense, net of interest income, decreased by $10,592 or approximately 37.9% to $17,377 during the three months ended September 30, 2019, compared to $27,969 during the three months ended September 30, 2018.  Interest accrued or paid on the Company’s commercial loans and notes payable decreased by $10,233 to $19,094 during the current period, compared to $29,327 during the prior year; interest income increased by $359 to $1,717 during the current period compared to $1,358 during the prior period.

 

Net loss

 

For the reasons above, the Company had a net loss for the three months ended September 30, 2019 of $157,614 which is a decrease of approximately $306,315 or 206.0% compared to a net income of $148,701 during the three months ended September 30, 2018. The loss for the three months ended September 30, 2019 includes a total of $391,262 in non-cash charges, including amortization of intangible assets in the amount of $210,029, depreciation expense of $79,982, and charges for non-cash compensation in the amount of $101,251. The income for the three months ended September 30, 2018 includes a total of $318,546 in non-cash charges, including amortization of intangible assets in the amount of $242,874, depreciation expense of $51,384, and non-cash compensation of $24,288.

 

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

Revenue

 

Revenue increased by $5,290,393 or approximately 15.1% to $40,250,430 for the nine months ended September 30, 2019 from $34,960,037 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 nine months ended September 30, 2019 was $28,608,233, an increase of $4,237,812 or approximately 17.4% compared to cost of goods sold of $24,370,421 for the nine months ended September 30, 2018. Cost of goods sold is made up of the following expenses for the nine months ended September 30, 2019: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $19,712,472; and shipping, delivery, handling, and purchase allowance expenses in the amount of $8,895,761. Total gross margin was approximately 28.9% of sales in 2019 compared to approximately 30.3% 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 and variations in both revenue mix and gross margins associated with foodservice revenues.

 

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 $2,131,727 or approximately 22.6% to $11,560,838 during the nine months ended September 30, 2019 compared to $9,429,111 for the nine months ended September 30, 2018. The increase in selling, general, and administrative expenses was primarily due to an increase in payroll and related costs of approximately $1,505,079 (including an increase in non-cash compensation in the amount of $249,807), an increase in office, facility, and vehicle costs of $476,774, an increase in depreciation and amortization of $129,812, an increase in advertising and marketing of $88,056, an increase in travel and entertainment of $86,789, an increase in computer and IT costs in the amount of $66,394, and an increase in insurance costs of $63,185. Professional fees decreased by $179,047 during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to a decrease in acquisition activity in the current period compared to the nine months ended September 30, 2018. The increase in payroll and related costs were driven mainly by increases associated with Mouth which was added in 2019, and increases in Company payroll associated mainly with additional personnel added to the Company to support sales growth. 

 

Gain on sale of fixed assets

 

During the nine months ended September 30, 2019, the Company recorded a gain on the sale of warehouse equipment in the amount of $12,495; there was no comparable transaction in the prior period.

  

Interest expense, net

 

Interest expense, net of interest income, decreased by $23,009 or approximately 25.8% to $66,004 during the nine months ended September 30, 2019, compared to $89,013 during the nine months ended September 30, 2018.  Interest accrued or paid on the Company’s commercial loans and notes payable decreased by $24,000 to $70,882 during the current period, compared to $94,882 during the prior year; interest income decreased by $991 to $4,878 during the current period compared to $5,869 during the prior period.

 

 

Net income

 

For the reasons above, the Company had net income for the nine months ended September 30, 2019 of $27,850 which is a decrease of approximately $899,642 or 97.0% compared to a net income of $927,492 during the nine months ended September 30, 2018. The income for the nine months ended September 30, 2019 includes a total of $1,218,600 in non-cash charges, including amortization of intangible assets in the amount of $689,726, depreciation expense of $231,371, and charges for non-cash compensation in the amount of $297,503. The income for the nine months ended September 30, 2018 includes a total of $841,981 in non-cash charges, including amortization of intangible assets in the amount of $648,177, depreciation expense of $146,108 and charges for non-cash compensation in the amount of $47,696.

 

Liquidity and Capital Resources at September 30, 2019

 

As of September 30, 2019, the Company had current assets of $8,895,532, consisting of cash and cash equivalents of $2,825,995; trade accounts receivable of $3,179,676; inventory of $2,695,489; and other current assets of $194,392.  Also at September 30, 2019, the Company had current liabilities of $3,915,457, consisting of trade payables and accrued liabilities of $2,503,147; accrued interest of $18,471; deferred revenue of $197,574; lease liabilities – operating leases, current portion of $165,369; lease liabilities – financing leases, current portion of $19,279; current portion of notes payable of $705,460; and current portion of contingent liabilities of $306,157.

 

During the nine months ended September 30, 2019, the Company had cash used in operating activities of $848,376.  Cash used in operations consisted of the Company’s consolidated net income of $27,850 plus non-cash compensation in the amount of $297,503; depreciation and amortization of $921,096; and amortization of right-of-use asset of $140,304. These amounts were partially offset by a gain on the sale of fixed assets in the amount of $12,495, a decrease in provision for doubtful accounts of $1,633 and by a change in the components of current assets and liabilities in the amount of $2,221,001.   

 

The Company had cash used in investing activities of $200,800 for the nine months ended September 30, 2019, which consisted of cash paid for the acquisition of property and equipment of $131,095, cash paid for the acquisition of intangible assets of $47,000, and cash paid in connection with an investment in food-related companies of $47,000. The Company also received $12,495 from the sale of fixed assets.

 

The Company had cash used in financing activities of $884,646 for the nine months ended September 30, 2019, which consisted of principal payments made on notes payable of $818,819, cash payments on contingent liabilities in connection with acquisitions of $296,719, and principal payments on financing leases of $19,108, partially offset by the sale of common stock for cash in the amount of $250,000.

 

The Company had net working capital of $4,980,075 as of September 30, 2019. The Company had cash used by operations during the nine months ended September 30, 2019 in the amount of $848,376. This compares to cash generated from operating activities of $111,583 during the nine months ended September 30, 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.  As of September 30, 2019,  we do not have any material long-term obligations other than those described in Notes 12, 13, and 14 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 September 30, 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 

 

On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and demands minimum aggregate damages of $1.25 million, although we expect Plaintiffs’ actual claims for damages to be substantially higher. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy, we intend to further aggressively pursue the Company and its subsidiaries’ insurance coverage under their umbrella and other available policies. In addition, the Company intends to defend this action and believes that the likely outcome would result in any liabilities being covered in full by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations.

 

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 

 

On July 23, 2019, the Company entered into a subscription agreement to sell 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000. The sale was made directly between the Company and Mr. Polinsky without any brokers or public advertising and was exempt as a private placement pursuant to Section 4(1).

 

On July 31, 2019, the Company issued 9,524 shares of common stock with a fair value of $0.54 to a service provider; the fair value of $5,143 was charged to operations during the three months ended September 30, 2019.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, Innovative Food Properties, LLC, a Delaware limited liability company (“Purchaser”), purchased a logistics and warehouse facility (the “Facility”) for $4.5 million from East Coast Logistics & Distribution, Inc., a Pennsylvania corporation.  The Facility is approximately 200,000 square feet and is situated on approximately 1.5 acres in Mountain Top, Pennsylvania.  The purchase price was financed by a loan from Fifth Third Bank, National Association (“Fifth Third Bank”) secured by a mortgage on the property and other Company and Purchaser assets, as further described below.  Related to the Facility purchase, the Purchaser also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase.

 

As part of the financing for the acquisition of the Facility described above, on November 8, 2019 the Company and Purchaser entered into various agreements with Fifth Third Bank including, Eighth Amendment to Restated Loan Agreement dated November 26, 2013, as modified and amended to date, which primarily served to add a new credit facility in the amount of $5.5 million; a Promissory Note of Purchaser evidencing such new loan which is due September 2, 2025 and carries interest at LIBOR plus 2.75%; and a Mortgage, Assignment of Leases, Fixture Filing and Security Agreement whereby the Purchaser granted Fifth Third Bank security for the new loan.

 

The foregoing description of the Eighth Amendment to Restated Loan Agreement; Promissory Note; and Mortgage, Assignment of Leases, Fixture Filing and Security Agreement and are qualified in their entirety by reference to the agreements, copies of which are filed as exhibits to this Report and are incorporated by reference in this Part II, Item 5.

 

 

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).