SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549 

 

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FORM 10-Q 

 

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

For the quarterly period ended September 30, 2017

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

For the transition period from _________ to _________.

Commission File Number: 0-9376

(Exact Name of Registrant as Specified in its Charter)

28411 Race Track Rd.

(Address of Principal Executive Offices)

(Registrant’s Telephone Number, Including Area Code)

                                                                                                    

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

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

 

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

 

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

 

(Check One):

 

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

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 35,086,659 shares of common stock issued and 32,595,547 shares of common stock outstanding as of November 9, 2017.

INNOVATIVE FOOD HOLDINGS, INC.

TABLE OF CONTENTS TO FORM 10-Q

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Innovative Food Holdings, Inc.

Consolidated Balance Sheet

 

 

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,
		2017				2016				2017				2016
Revenue		$	10,495,637			$	9,094,443			$	30,494,462			$	25,413,011
Cost of goods sold			7,052,018				6,404,185				20,585,273				17,979,553
Gross margin			3,443,619				2,690,258				9,909,189				7,433,458
Selling, general and administrative expenses			1,894,588				1,702,425				6,269,386				5,245,178
Total operating expenses			1,894,588				1,702,425				6,269,386				5,245,178
Operating income			1,549,031				987,833				3,639,803				2,188,280
Other (income) expense:
Interest expense, net			16,139				121,226				157,912				365,764
Total other (income) expense			16,139				121,226				157,912				365,764
Net income before taxes			1,532,892				866,607				3,481,891				1,822,516
Income tax expense			-				-				-				-
Net income from continuing operations		$	1,532,892			$	866,607			$	3,481,891			$	1,822,516
Net income from discontinued operations			-				-				-				4,447,279
Consolidated net income		$	1,532,892			$	866,607			$	3,481,891			$	6,269,795
Net income per share from continuing operations - basic		$	0.047			$	0.035			$	0.117			$	0.073
Net income per share from discontinued operations - basic		$	-			$				$	-			$	0.178
Net income per share from continuing operations - diluted		$	0.046			$	0.030			$	0.113			$	0.066
Net income per share from discontinued operations - diluted		$	-			$	-			$	-			$	0.139
Weighted average shares outstanding - basic			32,333,108				25,047,134				29,779,904				24,980,317
Weighted average shares outstanding - diluted			33,476,756				31,619,778				30,842,167				32,044,762

 

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,
		2017				2016
Cash flows from operating activities:
Net income		$	3,481,891			$	6,269,795
Gain on sale of discontinued operations			-				(7,201,196	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			409,283				409,228
Stock based compensation			315,968				673,523
Stock based compensation for TFD employees			-				1,028,908
Amortization of discount on notes payable			185,018				277,529
Allowance for doubtful accounts			-				11,963
Changes in assets and liabilities:
Accounts receivable, net			(878,709	)			(237,265	)
Deferred revenue			-				289,254
Inventory and other current assets, net			(177,674	)			81,012
Accounts payable and accrued expenses - related party			-				(146,018	)
Accounts payable and accrued liabilities			(1,199,680	)			197,603
Accrued liabilities - related party			(65,000	)			-
Due from related party			-				110
Contingent liability			-				(91,000	)
Net cash provided by operating activities			2,071,097				1,563,446
Cash flows from investing activities:
Cash decrease due to sale of discontinued operations			-				(470,482	)
Acquisition of property and equipment			(40,777	)			(10,512	)
Cash paid in the acquisition of Oasis			(300,000	)			-
Net cash (used in) investing activities			(340,777	)			(480,994	)
Cash flows from financing activities:
Common stock sold for exercise of warrants			196,741				-
Payments made on revolving credit facilities			-				(841,831	)
Purchase of stock options from officers, directors, and employees			(163,925	)			-
Cash received from exercise of stock options			70,000				-
Purchase of treasury stock			(505,660	)			(14,850	)
Borrowings on revolving credit facilities			-				805,959
Principal payments on debt			(746,941	)			(1,021,829	)
Principal payments capital leases			(6,926	)			(8,094	)
Net cash (used in)  financing activities			(1,156,711	)			(1,080,645	)
Increase in cash and cash equivalents			573,609				1,807
Cash and cash equivalents at beginning of period			3,764,053				2,137,289
Cash and cash equivalents at end of period		$	4,337,662			$	2,139,096
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	64,198			$	96,318
Taxes		$	-			$	-
Common stock issued for conversion of note payable by related party		$	164,650			$	-
Equipment acquired under capital lease		$	-			$	9,217
Fair value of 25,000 shares of common stock issued to a service provider, previously accrued		$	-			$	34,000

 

See notes to these unaudited condensed consolidated financial statements. 

INNOVATIVE FOOD HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

 

1. BASIS OF PRESENTATION

 

 

The accompanying unaudited interim condensed consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“Food Innovations” or “FII”), Food New Media Group, Inc. (“FNM”), Oasis Sales Corp. (“Oasis”), Organic Food Brokers, Inc. (“OFB”), Gourmet Food Service Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc.,  Gourmeting Inc., The Haley Group, Inc. (“Haley”), 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet” and collectively with IVFH and the 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, 2016.  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, 2017 are not necessarily indicative of the results of operations to be expected for the full year.

On February 23, 2016, the Company consummated the sale of 90% of our ownership in The Fresh Diet (“FD”).   As a result of the sale, the results of operations for all periods have been included in “Net income from discontinued operations” in our condensed consolidated statements of operations for the nine months ended September 30, 2016.

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

 

 

 

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

 

 

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

 

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

 

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  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.

 

 

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

 

Basic and Diluted Earnings Per Share 

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

Dilutive shares at September 30, 2017:

 

At September 30, 2017, the Company had outstanding convertible notes payable in the aggregate principal amount of $20,000 convertible at the rate of $0.25 per share with accrued interest of $15,764.

 

 

At September 30, 2017, the Company had outstanding warrants for holders to purchase the following additional shares: 700,000 shares at a price of $0.01 per share.

 

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

 

 

 

During the nine months ended September 30, 2017, the Company cancelled all outstanding restricted stock units (“RSUs”) and replaced them with common stock or restricted stock awards; see note 16. At September 30, 2017, there are no RSUs outstanding.

We recognized stock-based compensation expense for RSUs in a straight-line manner over the vesting period of the grant. This resulted in stock-based compensation expense of $0 and $658,709 related to recognition of RSUs during the nine months ended September 30, 2017 and 2016, respectively. 

Dilutive shares at September 30, 2016:

 

At September 30, 2016, the Company had outstanding convertible notes payable in the aggregate principal amount of $812,215  with accrued interest of $623,771  convertible at the rate of $0.25 per share into an aggregate of  5,743,994  shares of common stock.

 

At September 30, 2016, the Company had outstanding warrants for holders to purchase the following additional shares: 2,294,491 shares at a price of $0.575 per share; 448,010 shares at a price of $0.55 per share; 94,783 shares at a price of $0.25 per share; and 700,000 shares at a price of $0.01 per share.

 

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, 2016, the Company had issued restricted stock units (“RSUs”) for the potential issuance of shares of the Company’s common stock for the purpose of aligning executives and employees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to members of the board of directors of the Company (“Board RSUs”); certain RSUs were issued to the executive officers of the Company (“Executive RSUs”); certain RSUs were issued to employees of the Company (“Employee RSUs”); and certain RSUs were issued to employees of The Fresh Diet (“FD RSUs”).

In August 2016, 95,000 Board RSUs were exercised.  At September 30, 2016, the following Board RSUs were outstanding: a total of 545,000 RSUs were vested, and 270,000 RSUs will vest on July 1, 2017. 

At September 30, 2016, the following Executive RSUs were outstanding: a total of 1,137,072 RSUs were vested; 600,000 RSUs will vest on December 31, 2016; and 800,000 RSUs will vest on July 1, 2017. An additional 125,000 RSUs 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 RSUs will vest contingent  upon the attainment of a stock price of $3.00  per share for 20 straight trading days. The Company estimated that the stock-price goals of the Company’s stock price closing above $2.00 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value; the Company also estimated that the likelihood of the Company’s stock closing above $3.00 per share for 20 straight days is 70%, and these RSUs were valued at 70% of their face value.

At September 30, 2016, the following FD RSUs were outstanding: A total of 300,000 RSUs were vested; 300,000 RSUs will vest on December 31, 2016; and 400,000 RSUs will vest on July 1, 2017.

 

At September 30, 2016, a total of 251,174 Employee RSUs were outstanding, all of which were vested.

We recognized stock-based compensation expense for RSUs in a straight-line manner over the vesting period of the grant. This resulted in stock-based compensation expense (continuing operations) of $190,692 related to recognition of RSUs during the three months ended September 30, 2016 and $658,709 related to recognition of RSUs during the nine months ended September 30, 2016.

 

Pursuant to the Oasis Asset Purchase Agreement, effective January 1, 2017, the Company, through its wholly-owned subsidiary Oasis Sales Corp., purchased certain assets of Oasis Sales and Marketing, L.L.C., a California limited liability company.  The purchase price consisted of $300,000 cash; a two-year promissory note in the amount of $100,000, and a structured equity instrument (the “SEI”) in the amount of $200,000. In addition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date up to a maximum of $400,000 (“Earnout Payments”). The SEI is recorded as Other Long Term Liabilities on the Company’s balance sheet at September 30, 2017. The SEI can be paid in cash or shares of the Company’s stock at the Company’s option, at any time, or is automatically payable via the issuance of 200,000 shares of the Company’s stock if the Company’s shares close above $1.00 for ten consecutive days. The Company believes it is likely that the Earnout Payments will be made, and accordingly has recorded the entire amount of $400,000 as a contingent liability on its balance sheet at September 30, 2017.   The amount of $800,000 was allocated to customer lists, an intangible asset with a useful life of 60 months; and the amount of $200,000 was allocated to a non-compete agreement, an intangible asset with a useful life of 48 months.  A total of $52,500 and $157,500 was amortized to operations during the three and nine months ended September 30, 2017, respectively.  The Company has presented preliminary estimates of the fair value of the intangible assets acquired.  The Company is in the process of finalizing its review and evaluation of the related valuation assumptions supporting its fair value estimates of acquired intangible assets; therefore, the estimates used herein are subject to change.  This may result in adjustments to the values presented.

The following information presents the major classes of line items constituting significant operating and investing cash flow activities in the consolidated statements of cash flows relating to discontinued operations:

 

The components of the gain on sale and income from discontinued operations are as follows:

5. ACCOUNTS RECEIVABLE

 

At September 30, 2017 and December 31, 2016, accounts receivable consists of:

 

 

6. INVENTORY

   

7. PROPERTY AND EQUIPMENT

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

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

A summary of property and equipment at September 30, 2017 and December 31, 2016, was as follows:

 

		September 30, 2017				December 31, 2016
Land		$	385,523			$	385,523
Building			1,326,165				1,326,165
Computer and Office Equipment			497,191				466,177
Warehouse Equipment			226,953				226,953
Furniture, Fixtures			464,502				454,743
Vehicles			40,064				40,064
Total before accumulated depreciation			2,940,398				2,899,625
Less: accumulated depreciation			(952,343	)			(831,515	)
Total		$	1,988,055			$	2,068,110

 

Depreciation and amortization expense for property and equipment amounted to $41,700 and $37,807 for the three months ended September 30, 2017 and 2016, respectively.  Depreciation and amortization expense for property and equipment amounted to $120,832 and $120,017 for the nine months ended September 30, 2017 and 2016, respectively.  

 

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, 2017, the Company has investments in three food related companies in the aggregate amount of $201,525.  The Company does not have significant influence over the operations of the companies it invests in. 

9. INTANGIBLE ASSETS

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

 

 

 

Total amortization expense charged to continuing operations for the three months ended September 30, 2017 and 2016 was $82,317 and $50,567, respectively.  Total amortization expense charged to continuing operations for the nine months ended September 30, 2017 and 2016 was $288,451 and $182,201, respectively.  

The trade names are not considered finite-lived assets, and are not being amortized.  The non-compete agreements are being amortized over a period of 48 months. The customer relationships acquired in the Artisan, Haley, Oasis, and OFB transactions are being amortized over periods of 60, 36, 60, and 60 months, respectively.

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 2016 determined that there was no impairment to goodwill assets.

10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities at September 30, 2017 and December 31, 2016 are as follows:

 

 

 

At September 30, 2017 and December 31, 2016, accrued liabilities to related parties of $0 and $65,000, respectively, consisted of accrued bonus. 

11. ACCRUED INTEREST

At September 30, 2017, accrued interest on a note outstanding was $15,674. During the three and nine months ended September 30, 2017, the Company paid cash for interest in the aggregate amount of $17,480 and $59,432, respectively.  

   

At December 31, 2016, accrued interest was $626,873, convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share, or a total of 2,507,492 shares. During the twelve months ended December 31, 2016, the Company paid cash for interest in the aggregate amount of $96,318.    

 

12. REVOLVING CREDIT FACILITIES

 

13. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

 

At September 30, 2017 and December 31, 2016, the Company had unamortized discounts to notes payable in the aggregate amount of $0 and $185,020, respectively.

Aggregate maturities of long-term notes payable as of September 30, 2017 are as follows:

 

The Company calculates the fair value of any beneficial conversion features embedded in its convertible notes via the Black-Scholes valuation method. The Company also calculates the fair value of any detachable warrants offered with its convertible notes via the Black-Scholes valuation method.  The instruments were considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features did not exceed the face value of the notes. These discounts were amortized to interest expense via the effective interest method over the term of the notes.  

14. RELATED PARTY TRANSACTIONS

For the nine months ended September 30, 2017:

The Company cancelled RSUs held by its Chief Executive Officer representing 1,382,540 shares of common stock, of which 700,000 were unvested and 682,540 were vested. In place of the 682,540 vested cancelled RSUs, the Company issued a net amount of 586,586 shares of common stock.  The remaining 95,954 shares of the 682,540 cancelled vested RSUs were not issued and instead the cash value of those shares was held back by the Company to pay certain taxes related to the issuance.  In addition, the 700,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 700,000 RSUs.  See note 16.

The Company cancelled RSUs held by its President representing 1,724,532 shares of common stock, of which 490,000 were unvested and 1,234,532 were vested. In place of the 1,234,532 vested cancelled RSUs, the Company issued a net amount of 928,027 shares of common stock.  The remaining 306,505 shares of the 1,234,532 cancelled vested RSUs were not issued and instead the cash value of those shares was held back by the Company to pay certain taxes related to the issuance.  In addition, the 490,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 490,000 RSUs.  See note 16.

The Company cancelled RSUs held by its two of its Directors representing 545,000 shares of common stock, of which 180,000 were unvested and 365,000 were vested. In place of the 365,000 vested cancelled RSUs, the Company issued 365,000 shares of common stock.  In addition, the 180,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 180,000 RSUs. See note 16.

 

The Company’s Chief Executive Officer converted a note payable in the amount of $164,650 into 658,600 shares of common stock.

 

The Company acquired options to purchase 100,000 shares of the Company’s common stock from its President for $9,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 140,000 shares of the Company’s common stock from its President for $13,400 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 87,500 shares of the Company’s common stock from its Principal Accounting Officer for $8,125 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 100,000 shares of the Company’s common stock from its Chief Executive Officer for $24,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 100,000 shares of the Company’s common stock from its President for $24,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 200,000 shares of the Company’s common stock from two of its directors (100,000 from each director) for $48,000 ($24,000 to each director), which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company acquired options to purchase 100,000 shares of the Company’s common stock from a director for $33,000, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

For the nine months ended September 30, 2016:

At December 31, 2015, the Company had an accrued liability in the amount of $160,150 representing an aggregate of 210,520 shares of common stock to be issued to officers, directors, and employees for services performed during 2013; during the three months ended March 31, 2016, the Company issued 210,520 RSUs in satisfaction of this liability.  Also at December 31, 2015, the Company had an accrued liability in the amount of $157,780 representing 244,620 RSUs to be issued to officers and employees as a bonus for services performed in 2015;  during the three months ended March 31, 2016, the Company issued an aggregate of 244,620  RSUs  in satisfaction of this liability.

During the three months ended September 30, 2016, the Company issued 95,000 shares of its common stock to an ex-Director of the Company pursuant to the exercise of RSUs.

15. COMMITMENTS AND CONTINGENT LIABILITIES

 

Pursuant to the Oasis acquisition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date. The Company believes it is likely that these payments will be made, and accordingly recorded the entire amount of $400,000 as a contingent liability on its balance sheet at acquisition. $200,000 of this amount is classified as a current liability and $200,000 is classified as a long term liability at September 30, 2017.

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. 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 business.

 

 

 

At September 30, 2017 and December 31, 2016, a total of 2,491,112 and 733,659 shares, respectively, are deemed issued but not outstanding by the Company. These include 2,276,703 shares of treasury stock as of September 30, 2017 and 519,254 shares of treasury stock as of December 31, 2016.

  

Nine months ended September 30, 2017:

The Company issued 274,783 shares of common stock for cash of $68,697 pursuant to the exercise of warrants.

The Company purchased options to purchase a total of 367,500 shares of common stock from two executive officers, and employee, and a board member for an aggregate $34,925 in cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.  The Company charged the amount of $34,925 to additional paid-in capital.

 

The Company charged the amount of $240,208 to additional paid-in capital representing the vesting of restricted stock awards issued to officers.

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

 

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

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

The Company issued 4,626,427 shares of common stock for the conversion of notes payable and accrued interest in the aggregate amount of $1,155,807.

 

The Company issued 70,000 shares of common stock with a fair value of $33,600 to an employee as a bonus.

 

The Company acquired options to purchase 100,000 shares of the Company’s common stock from its Chief Executive Officer for $24,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

 

The Company acquired options to purchase 100,000 shares of the Company’s common stock from its President for $24,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

 

The Company acquired options to purchase 200,000 shares of the Company’s common stock from two of its directors (100,000 from each director) for $48,000 ($24,000 to each director), which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.

The Company issued 200,000 shares of common stock for cash of $70,000 pursuant to the exercise of stock options.

 

The Company issued 224,638 shares of common stock for subscriptions receivable in the amount of $128,022 in connection with the exercise of warrants.

The Company issued a total of 1,070,000 shares of common stock to officers and directors pursuant to the vesting of restricted stock awards:  400,000 shares to its Chief Executive Officer; 400,000 shares to its President; and 90,000 shares to each of three directors.

Nine months ended September 30, 2016:

The Company issued 25,000 shares of common stock with a fair value of $34,000 to a service provider.  The value of these shares was accrued during the twelve months ended December 31, 2015.

The Company issued an aggregate of 600,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued as follows: 300,000 of these shares were issued for the exercise of RSUs held by the employee, and an additional 300,000 shares were charged to discontinued operations at the fair value of $147,000.

The Company issued 133,333 shares of common stock to an employee of The Fresh Diet pursuant to an employee agreement.  The fair value of these shares in the amount of $67,987 was charged to discontinued operations during the period.

The Company issued 200,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement.   These shares were issued via the exercise of RSUs; the par value of $20 was charged to additional paid-in capital during the period.

The Company repurchased 33,000 shares of common stock at a share price of $0.45 per share.  The value of these shares in the amount of $14,850 has been recorded in treasury stock.

The Company issued 95,000 shares of common stock pursuant to the exercises of RSUs by an ex-director.

 

The following table summarizes the significant terms of warrants outstanding at September 30, 2017. These warrants may be settled in cash and, unless the underlying shares are registered, via cashless exercise, into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted in 2012 as part of a financing and loan agreement related to the acquisition of Artisan Specialty Foods in 2012:

 

 

Transactions involving warrants are summarized as follows:

 

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:  

 

 

Transactions involving stock options are summarized as follows:

 

		Number of Shares				Weighted Average Exercise Price
Options outstanding at December 31, 2016			2,445,000			$	1.01
Granted			650,000			$	1.73
Exercised			(200,000	)		$	0.35
Cancelled / Expired			(1,000,000	)		$	1.18
Options outstanding at September 30, 2017			1,895,000			$	1.25

 

Aggregate intrinsic value of options outstanding and exercisable at September 30, 2017 and 2016 was $339,700 and $737,905, 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 $0.91 and $0.48 as of September 30, 2017 and 2016, respectively, and the exercise price multiplied by the number of options outstanding.

During the three months ended September 30, 2017 and 2016, the Company charged a total of $0 and $4,983, respectively, to operations related to recognized stock-based compensation expense for employee stock options. During the nine months ended September 30, 2017 and 2017, the Company charged a total of $8,707 and $14,814, respectively, to operations related to recognized stock-based compensation expense for employee stock options.

The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables: 

 

 

During the nine months ended September 30, 2017, the Company cancelled all of its outstanding RSUs and issued the following:  For vested RSUs representing 3,104,205 shares of common stock, the Company issued a net amount of 2,480,392 shares of restricted common stock (net of 623,813 shares held back by the Company to pay certain taxes owed related to the issuance); for unvested RSUs representing 1,370,000 shares of common stock, the Company issued 1,370,000 shares of restricted common stock under the same terms as the cancelled RSUs.  1,070,000 of the restricted stock awards vested on July 1, 2017, the same date at which the RSUs which they replaced would have vested.  These 1,070,000 shares were issued during the three months ended September 30, 2017. The vesting for the remaining 300,000 restricted stock awards is contingent upon meeting certain price and volume conditions related to the Company’s stock; these conditions are the same conditions required for vesting of the cancelled RSUs.  The Company charged the amount of $0 and $240,208, respectively, to operations during the three and nine months ended September 30, 2017 representing the amortization of the cost of these restricted stock awards.  The amounts charged to operations is the same amount that the Company would have charged for the RSUs that were cancelled had they not been cancelled.

 

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

 

FORWARD LOOKING STATEMENTS

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

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

Critical Accounting Policy and Estimates

 

Use of Estimates in the Preparation of Financial Statements

 

Doubtful Accounts Receivable

 

The Company maintained an allowance in the amount of $5,436 for doubtful accounts receivable at September 30, 2017, and $56,371 at September 30, 2016. The Company has an operational relationship of several years with our major customers, and we believe this experience provides us with a solid foundation from which to estimate our expected losses on accounts receivable. Should our sales mix change or if we develop new lines of business or new customers, these estimates and our estimation process will change accordingly. These estimates have been accurate in the past.

 

Fair Value of Financial Instruments

 

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

 

Income Taxes

 

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

 

Background

 

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

 

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

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

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

 

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

 

 

Transactions with a major customer 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, 2016 (1) following our discussion of Liquidity and Capital Resources, (2) Concentrations of Credit Risk in Note 17 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.

Relationship with U.S. Foods

 

We have historically sold the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods, a leading broadline distributor. These sales amounted to $7,604,308 (72% of total sales) and $6,546,697 (72% of total sales) for the three months ended September 30, 2017 and 2016, respectively; and $22,004,270 (72% of total sales) and $18,352,407 (72% of total sales) for the nine months ended September 30, 2017 and 2016, respectively. On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods.  The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for up to three (3) 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 2017.

 

RESULTS OF OPERATIONS

Prior year balances have been recast to reflect the sale of 90% of our interest in The Fresh Diet, Inc. in February 2016.  Results of discontinued operations are excluded from the accompanying results of operations for all periods presented, unless otherwise noted.  See Note 4 – discontinued operations in the accompanying notes to consolidated financial statements.

 

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, 2017 Compared to Three Months Ended September 30, 2016

Revenue increased by $1,401,194 or approximately 15% to $10,495,637 for the three months ended September 30, 2017 from $9,094,443 in the prior year. 

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

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

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

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

Our cost of goods sold for the three months ended September 30, 2017 was $7,052,018, an increase of $647,833 or approximately 10% compared to cost of goods sold of $6,404,185 for the three months ended September 30, 2016. Cost of goods sold is made up of the following expenses for the three months September 30, 2017: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $4,982,334; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2,069,684.  Total gross margin was approximately 32.8% of sales in 2017 compared to approximately 29.6% of sales in 2016.  The increase in cost of goods sold is primary attributable to an increase in sales.  The increase in gross margins from 2016 is primarily attributable to variation in product and revenue mix as well as variations in cost of goods sold as a percentage of total expenses, across our various selling channels.

 

In 2017, we continued to price our products in order to gain market share and increase the number of our end users. We were successful in both increasing sales and increasing market share.  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 increased by $192,163 or approximately 11% to $1,894,588 during the three months ended September 30, 2017 compared to $1,702,425 for the three months ended September 30, 2016. The increase in selling, general, and administrative expenses was primarily due to an increase in SGA expenses associated with Oasis, and to an increase in office, facilities, and vehicles costs. Increases in payroll taxes and employee benefit costs also contributed to the increase.

 

Interest expense, net of interest income, decreased by $105,087 or approximately 87% to $16,139 during the three months ended September 30, 2017, compared to $121,226 during the three months ended September 30, 2016.  The decrease was due primarily to a reduction of the amortization of discounts on the Company’s notes payable.  These discounts are fully amortized, and there was $0 interest expense associated with this amortization during the three months ended September 30, 2017, compared to $92,509 during the three months ended September 30, 2016. There was a decrease of  approximately $17,481 or 100% of the gross interest expense of $17,481 was accrued or paid interest on the company’s commercial loans and notes payable. The Company also had $1,342 of interest income during the three months ended September 30, 2017.

 

 

For the reasons above, the Company had net income from continuing operations for the three months ended September 30, 2017 of $1,532,892 which is an increase of approximately 77% compared to a net income of $866,607 during the three months ended September 30, 2016. The income for the three months ended September 30, 2017 includes a total of $124,013 in non-cash charges, including amortization of intangible assets in the amount of $82,317 and depreciation expense of $41,696. The income for the three months ended September 30, 2016 includes a total of $376,513 in non-cash charges, including amortization of intangible assets in the amount of $50,567, depreciation expense of $37,807, charges for non-cash compensation in the amount of $195,630, and amortization of the discount on notes payable in the amount of $92,509.

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Revenue increased by $5,081,451 or approximately 20% to $30,494,462 for the nine months ended September 30, 2017 from $25,413,011 in the prior year. 

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

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

 

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

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

Our cost of goods sold for the nine months ended September 30, 2017 was $20,585,273, an increase of $2,605,720 or approximately 15% compared to cost of goods sold of $17,979,553 for the nine months ended September 30, 2016. Cost of goods sold is made up of the following expenses for the nine months September 30, 2017: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $14,614,941; and shipping, delivery, handling, and purchase allowance expenses in the amount of $5,970,332.  Total gross margin was approximately 32.5% of sales in 2017 compared to approximately 29.3% of sales in 2016.  The increase in cost of goods sold is primary attributable to an increase in sales.  The increase in gross margins from 2016 is primarily attributable to variation in product and revenue mix as well as variations in cost of goods sold as a percentage of total expenses, across our various selling channels.

 

In 2017, we continued to price our products in order to gain market share and increase the number of our end users. We were successful in both increasing sales and increasing market share.  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 increased by $1,024,208 or approximately 20% to $6,269,386 during the nine months ended September 30, 2017 compared to $5,245,178 for the nine months ended September 30, 2016. The increase in selling, general, and administrative expenses was primarily due to an increase in SGA expenses associated with Oasis, and to an increase in office, facilities, and vehicles costs. Increases in payroll taxes and employee benefit costs also contributed to the increase.

 

Interest expense, net of interest income, decreased by $207,852 or approximately 57% to $157,912 during the nine months ended September 30, 2017, compared to $365,764 during the nine months ended September 30, 2016.  The decrease was due primarily to a reduction of interest as a result of negotiations with certain noteholders which resulted in a reduction of accrued interest in the amount of $86,089.  Without this adjustment, and adding back interest income of $4,026, gross interest expense would have been $248,027 for the period.  Approximately $63,009 or 25.4% of the gross interest expense was accrued or paid interest on the company’s commercial loans and notes payable; approximately $185,018 or 74.6% of the gross interest expense was a non-cash GAAP accounting charge associated with the amortization of the discounts on the Company’s notes payable.  

 

 

For the reasons above, the Company had net income from continuing operations for the nine months ended September 30, 2017 of $3,481,891 which is an increase of approximately 91% compared to a net income of $1,822,516 during the nine months ended September 30, 2016. The income for the nine months ended September 30, 2017 includes a total of $910,269 in non-cash charges, including amortization of intangible assets in the amount of $288,451, depreciation expense of $120,832, charges for non-cash compensation in the amount of $315,968, and amortization of the discount on notes payable in the amount of $185,018. The income for the nine months ended September 30, 2016 includes a total of $1,253,239 in non-cash charges, including amortization of intangible assets in the amount of $182,201, depreciation expense of $120,018, charges for non-cash compensation in the amount of $673,523, and amortization of the discount on notes payable in the amount of $277,527.

Liquidity and Capital Resources at September 30, 2017

As of September 30, 2017, the Company had current assets of $7,802,866, consisting of cash and cash equivalents of $4,337,662; trade accounts receivable, net of $2,417,104; inventory of $983,733; and other current assets of $64,367.  Also at September 30, 2017, the Company had current liabilities of $2,851,005, consisting of trade payables and accrued liabilities of $2,088,148; accrued interest of $15,674; current portion of notes payable and capital leases of $547,183; and current portion of contingent liability of $200,000.

During the nine months ended September 30, 2017, the Company had cash provided by operating activities of $2,071,097.  Cash flow from operations consisted of: the Company’s consolidated net income of $3,481,891 plus non-cash compensation in the amount of $315,968; non-cash amortization of discount on notes payable of $185,018, and depreciation and amortization of $409,283. The Company’s cash position decreased by $2,321,063 as a result of changes in the components of current assets and current liabilities, primarily a reduction in accrued liabilities related to related to discontinued operations in the amount of $1,460,122.

The Company had cash used in investing activities of $340,777 for the nine months ended September 30, 2017, which consisted of cash paid in the acquisition of Oasis in the amount of $300,000, and cash paid for the acquisition of property and equipment in the amount of $40,777.  The Company had cash used in financing activities of $1,156,711 for the nine months ended September 30, 2017, which consisted of principal payments made on notes payable of $746,941; principal payments on capital leases of $6,926, payments made for the purchase of treasury stock of $505,660; and payments made for the purchase of options from officers, directors, and employees of $163,925.  The Company also received cash of $196,741 from the exercise of warrants for common stock, and $70,000 for the exercise of common stock options.

The Company had net working capital of $4,951,861 as of September 30, 2017.  The Company had cash provided by operations during the nine months ended September 30, 2017 in the amount of $2,071,097; this amount is net of certain payments in the amount of $1,460,122 related to discontinued operations which relate mainly to a transaction to purchase the rights to 1,450,000 RSUs and 642,688 shares of the Company’s common stock from a former FD employee which resulted in $850,000 in non-recurring cash payments compared to cash generated from operating activities of $1,563,446 during the nine months ended September 30, 2016.  Without the cash flow items associated with discontinued operations, cash operating cash flow would have been $3,531,219 for the nine months ended September 30, 2017.  The Company intends to continue to focus on increasing market share and cash flow from operations by focusing its sales activities on specific market segments and new product lines.  Currently, we do not have any material long-term obligations other than those described in Note 13 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. 

 

In February 2016, we completed the sale of FD to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD.  See Note 4 to the accompanying financial statements.

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

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

 2017 Plans

During 2017, 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.

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, 2016 which is available at no cost at www.sec.gov.

ITEM 4 - CONTROLS AND PROCEDURES

 

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

 

(a) Evaluation of disclosure controls and procedures

 

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

 

(b) Changes in internal control over financial reporting

 

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

 

PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. 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 business.

 

On July 7, 2017, Scher Zalman Duchman and Deborah L. Duchman (collectively, “Duchmans”) filed an amended complaint in the United States District Court for the Southern District of Florida seeking approximately $1 million in damages against Innovative Food Holdings, Inc., FD Acquisition Corp., and Sam Klepfish, IVFH’s CEO.  The Duchmans, amongst other things, allege that defendants owed a fiduciary duty to the Duchmans to minimize the Duchmans’ own personal guarantees and personal obligations related to loans and other obligations incurred by a former subsidiary of the Company and that the Defendants did not fulfill that alleged fiduciary obligation.  In response to the lawsuit, IVFH has filed a motion, which is currently being considered by the court, seeking dismissal of all claims on a number of basis including providing the court with a copy of a release and covenant not to sue executed by the Duchmans in April of 2017 in favor of IVFH and its officers which encompasses the claims the Duchmans have asserted.  IVFH believes that this lawsuit is without merit and is an attempt by the Duchmans to drag IVFH into the Duchmans’ personal financial matters which are unrelated to IVFH. While IVFH intends to vigorously defend against this lawsuit, the outcome of this lawsuit cannot ultimately be predicted.

 

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

 

The Company issued 4,626,427 shares of common stock to investors for the conversion of principal and accrued interest on notes payable in the amounts of $627,565 and $528,242, respectively.

The Company issued 70,000 shares of common stock with a fair value of $33,600 to an employee as a bonus.

The Company issued 200,000 shares of common stock for the exercise of stock options for cash of $70,000.

The Company issued 224,638 shares of common stock for a subscription receivable in the amount of $128,044.

The Company issued 250,000 shares of common stock in exchange for the cashless conversion of warrants.

The Company issued a total of 1,070,000 shares of common stock to officers and directors pursuant to the vesting of restricted stock awards:  400,000 shares to its Chief Executive Officer; 400,000 shares to its President; and 90,000 shares to each of three directors.

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

 

SIGNATURES

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