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IVFH > SEC Filings for IVFH > Form 10-Q on 21-Nov-2012All Recent SEC Filings

Show all filings for INNOVATIVE FOOD HOLDINGS INC

Form 10-Q for INNOVATIVE FOOD HOLDINGS INC


21-Nov-2012

Quarterly Report


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 behalf of us. 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 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,

? 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 weather conditions.

We are also subject to other risks detailed from time to time in our other Securities and Exchange Commission filings 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.


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Critical Accounting Policy and Estimates

Use of Estimates in the Preparation of Financial Statements

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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.

On August 25, 2005, the Company entered into contracts which obligated the company under certain circumstances to issue shares of common stock in excess of the number of shares of common stock authorized. Under accounting guidance provided by FASB ASC 815-40-05, effective August 25, 2005 the Company began to account for all derivative financial instruments, including warrants, conversion features embedded in notes payable, and stock options, via the liability method of accounting. Accordingly, all these instruments are valued at issuance utilizing the Black-Scholes valuation method, and are re-valued at each period ending date, also using the Black-Scholes valuation method. Any gain or loss from revaluation is charged to operations during the period.

(a) Warrants:

The Company values warrants using the Black-Scholes valuation model. Warrants are valued upon issuance, and re-valued at each financial statement reporting date. Any change in value is charged to income or expense during the period. The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at September 30, 2012 and 2011:

                                                        September 30,
                                                  2012                 2011
    Number of warrants outstanding (post
    reverse-split)                                 6,964,000            5,464,000
    Value at September 30,                  $      1,532,424      $       819,675
    Number of warrants issued during the
    period (post reverse-split)                            -                    -
    Value of warrants issued during the
    period                                  $              -      $             -
    Value of warrants extended during the
    period                                  $        842,100      $             -
    Revaluation (gain) during the period    $       (383,467 )    $      (363,500  )

    Black-Scholes model variables:
    Volatility                                117.77 -214.36 %       92.52-110.66 %
    Dividends                               $              -      $             -
    Risk-free interest rates                       0.41-1.11 %          0.06-0.17 %
    Term (years)                                    2.9-7.63            0.22-2.75

(b) Embedded conversion features of notes payable:

The Company accounts for conversion options embedded in convertible notes in accordance with ASC 815-10-05. ASC 815-10-05 generally requires companies to bifurcate conversion options embedded in convertible notes and preferred shares from their host instruments and to account for them as free standing derivative financial instruments in accordance with ASC 815-40-05.


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The Company values embedded conversion features utilizing the Black-Scholes valuation model. Conversion options are valued upon issuance, and re-valued at each financial statement reporting date. Any change in value is charged to income or expense during the period. The following table illustrates certain key information regarding our Conversion options and conversion option valuation assumptions at September 30, 2012 and 2011:

                                                        September 30,
                                                  2012               2011
       Number of conversion options
       outstanding                               5,539,260           4,917,170
       Value at September 30                   $ 1,284,577      $    1,748,541
       Number of conversion options issued
       during the period                                 -                   -
       Value of conversion options issued
       during the period                       $         -      $            -
       Number of conversion options
       exercised or underlying
         notes paid during the period               34,664           1,574,000
       Value of conversion options exercised
       or underlying
         notes paid during the period          $     7,004      $      452,922
       Revaluation (gain) loss during the
       period                                  $  (197,798 )    $     (264,032 )

       Black-Scholes model variables:
       Volatility                                   214.36 %      92.52-110.66 %
       Dividends                                         -                   -
       Risk-free interest rates                  0.14-0.41 %         0.06-0.19 %
       Term (years)                                     10                  10

(c) Stock options:

The Company accounts for options in accordance FASB ASC 718-40. Options are valued upon issuance, and re-valued at each financial statement reporting date, utilizing the Black-Scholes valuation model. Option expense is recognized over the requisite service period of the related option award. Any change in value is charged to income or expense during the period. The following table illustrates certain key information regarding our options and option assumptions at September 30, 2012 and 2011:

                                                            September 30,
                                                       2012               2011
  Number of vested options outstanding                 1,570,000          1,270,000
  Value at September 30                            $     308,544      $     259,059
  Number of options issued during the period                   -                  -
  Value of options issued during the period        $           -                  -
  Number of options recognized during the period
    pursuant to SFAS 123(R)                                    -                  -
  Value of options recognized during the period
    pursuant to SFAS 123(R)                        $           -      $           -
  Revaluation (gain) during the period             $     (39,938 )    $     (77,660 )

  Black-Scholes model variables:
  Volatility                                              214.36 %     92.52-110.66  %
  Dividends                                        $           -       $          -
  Risk-free interest rates                             0.14-0.41 %        0.06-0.19 %
  Term (years)                                        0.75 -4.59          0.22-4.75

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. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.

In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. ("IVFH"), a Florida shell corporation. As a result of the merger we changed our name to that of Innovative Food Holdings, Inc. In February 2004 we also acquired Food Innovations, Inc. ("FII") a Delaware corporation incorporated on January 9, 2002 and through FII and our other subsidiaries we are in the business of national food distribution and sales using third-party shippers.


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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 are met over the next one or two years. The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000. Prior to the acquisition, Artisan was a vendor and had sold products to the Company.

Transactions With a Major Customer

Transactions with a major customer and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources,
(2) Concentrations of Credit Risk in Note 2 to the Condensed Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.

Relationship with U.S. Foods

In February 2010, one of our subsidiaries, Food Innovations, signed a new contract with U.S. Foods ("USF"). This current contract with USF expires on December 31, 2012. The contract automatically renews for an additional 12-month term unless either party notifies the other in writing 30 days prior to the end date of its intent not to renew. We believe that although a significant portion of our sales occurs through the USF sales force, the success of the program is less contingent on a contract then on the actual performance and quality of our products. Other than our business arrangements with USF, we are not affiliated with either USF or its subsidiary, Next Day Gourmet, L.P. ("Next Day Gourmet"). During the three and nine months ended September 30, 2012, sales to USF accounted for 65.4% and 76.4% of total sales, respectively; during three and nine months ended September 30, 2011, sales to USF accounted for 94.0% and 93.5% of total sales, respectively.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011.

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 unaudited condensed consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenue

Revenue increased by $2,238,214 or approximately 77% to $5,130,418 for the three months ended September 30, 2012 from $2,892,204 in the prior three months ended September 30, 2011. The increase was attributable both to the acquisition of Artisan $1,497,286, as well as to increases in sales in existing parts of our business $740,928. The areas of increased sales included specialty items, produce, meat and game, cheese and seafood, and with a smaller increase in poultry products. We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities and will implement that strategy if, based on our analysis, we deem it beneficial to us.

Any changes in the food distribution 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.

Cost of goods sold

Our cost of goods sold for the three months ended September 30, 2012 was $3,872,444, an increase of $1,467,556 or approximately 61% compared to cost of goods sold of $2,404,888 for the three month ended September 30, 2011. The increase was due primarily to a corresponding growth in sales. Cost of goods sold is primarily made up of the following expenses for the three months ended September 30, 2012: cost of good of specialty, meat, game, cheese poultry and other sales categories in the amount of $3,063,734; and shipping expenses in the amount of $817,479. The cost of goods sold increase is mainly associated with an increase in sales.


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In 2012, we continued to aggressively price our products in order to gain market share and increase the number of our end users. We were successful in doing so and increased the number of our end users for the quarter by approximately 25% to more than 12,000 end users for the third quarter compared to the third quarter of 2011. We currently expect, if market conditions remain constant, that our cost of goods sold will stabilize and likely improve compared to the first 9 months of 2012.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $334,437 or approximately 58%, to $908,235 during the three months ended September 30, 2012 compared to $573,798 for the three months ended September 30, 2011. The increase was due primarily to the costs associated with the acquisition of Artisan and additional operational, selling, general, and administrative expenses related to the operations of Artisan. Selling, general and administrative expenses were primarily made up of the following for the three months ended September 30, 2012: payroll and related expenses, including employee benefits, in the amount of $590,319; consulting and professional fees in the amount of $73,350; insurance costs in the amount of $67,112; facilities and related expenses in the amount of $61,632; office expense in the amount of $43,828; travel and entertainment expenses in the amount of $30,410; computer support expenses in the amount of $27,046; vehicle expense of $19,804; amortization and depreciation expense of $54,728; commissions expense in the amount of $15,931; advertising expenses in the amount of $4,028; credit card expense of $3,064; and credit of options, including the fair value of options issued and the change in fair value of the option liability in the amount of $111,288. We expect our legal fees to slightly increase in 2012 and our accounting fees in 2012 to remain constant. We do however expect to increase our spending on advertising and marketing and web development fees in 2012.

Interest expense

Interest expense decreased by $50,145, or approximately 43%, from $117,427 during the three months ended September 30, 2011 to $67,282 for the three months ended September 30, 2012. Interest expense decreased during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 as the result of the settlement of notes payable that occurred in the year ended December 31, 2011. Interest expense is expected to increase due to an increase in notes payable, and the amortization of the discount on notes payable.

Loss from change in fair value of warrant liability

At September 30, 2012, the Company had outstanding warrants to purchase an aggregate of 6,964,000 shares of the Company's common stock. The Company revalued this warrant liability at September 30, 2012 at $1,532,424. This revaluation resulted in a gain of $652,644 which the Company credited to operations during the three months ended September 30, 2012. This is an increase of $588,612 or approximately 919% compared to a gain of $64,032 from the revaluation of the warrant liability which the Company recorded during the three months ended September 30, 2011.

Gain and loss from change in fair value of conversion option liability

At September 30, 2012, the Company had outstanding a liability to issue an aggregate of 5,539,260 shares of the Company's common stock pursuant to convertible notes payable. The Company revalued this liability at September 30, 2012 at $1,284,577. This revaluation resulted in a gain of $665,802, which the Company included in operations for the three months ended September 30, 2012. This is an increase of $667,571 or approximately 37,737% compared to a loss of $1,769 from the revaluation of the conversion option liability which the Company recorded during the three months ended September 30, 2011.

Net Income (loss)

For the reasons above, the Company had a net income for the three months ended September 30, 2012 of $1,600,903, an increase of $1,742,549 compared to a net loss of $141,646 during the three months ended September 30, 2011.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenue

Revenue increased by $4,628,586 or approximately 57% to $12,768,596 for the nine months ended September 30, 2012 from $8,140,010 in the prior nine months ended September 30, 2011. The increase was due both to the acquisition of Artisan and to increases in sales from our existing parts of our business. There were significant increase in sales of specialty items, produce, meat and game, cheese and seafood, and with a smaller increase in poultry products. We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities and will implement that strategy if, based on our analysis, we deem it beneficial to us.


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Any changes in the food distribution 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.

Cost of goods sold

Our cost of goods sold for the nine months ended September 30, 2012 was $9,645,040, an increase of $3,309,302 or approximately 52% compared to cost of goods sold of $6,335,738 for the nine month ended September 30, 2011. The increase was due primarily to a corresponding growth in sales and to a focus on gaining market share in certain of our product lines. Cost of goods sold is primarily made up of the following expenses for the nine months ended September 30, 2012: cost of good of specialty, meat, game, cheese poultry and other sales categories in the amount of $6,959,983; and shipping expenses in the amount of $2,186,124. The gross margin increased in 2012 as compared to 2011 due to the acquisition of Artisan Specialty Foods partially offset by the company's strategy of pursuing market share in certain product lines.

In 2012, we continued to aggressively price our products in order to gain market share and increase the number of our end users. We were successful in doing so and increased the number of our end users for the nine months ending September 30, 2012 by approximately 6% to more than 22,000 versus the nine months ending September 30, 2011. We currently expect if market conditions remain constant that our cost of goods sold will stabilize and likely improve compared to the first half of 2012.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $1,187,527 or approximately 79%, to $2,690,044 during the nine months ended September 30, 2012 compared to $1,502,517 for the nine months ended September 30, 2011. The increase was due primarily to the costs associated with the acquisition of Artisan and additional operational selling, general, and administrative expenses related to the operations of Artisan Selling, general and administrative expenses were primarily made up of the following for the nine months ended September 30, 2012: payroll and related expenses, including employee benefits, in the amount of $1,395,740; consulting and professional fees in the amount of $343,374; options expense, including the fair value of options issued and the change in fair value of the option liability in the amount of $146,361; insurance costs in the amount of $135,458; facilities and related expenses in the amount of $135,458; office expense in the amount of $84,168; computer support expenses in the amount of $83,421; travel and entertainment expenses in the amount of $77,231; commissions expense in the amount of $56,349; vehicle expense of $27,947; amortization and depreciation expense of $69,313; credit card expense of $17,739; settlement expense of $7,302; and advertising expenses in the amount of $42,072. We expect our legal fees to slightly increase in 2012 and our accounting fees in 2012 to remain constant. We do however expect to increase our spending on advertising and marketing and web development fees in 2012.

Interest expense

Interest expense decreased by $337,493, or approximately 67%, from $503,526 during the nine months ended September 30, 2011 to $166,033 for the nine months ended September 30, 2012. Interest expense decreased during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 as the result of the settlement of notes payable that occurred in the year ended December 31, 2011. Interest expense is expected to increase due to an increase in notes payable, and the amortization of the discount on notes payable.

Loss from change in fair value of warrant liability

At September 30, 2012, the Company had outstanding warrants to purchase an aggregate of 6,964,000 shares of the Company's common stock. The Company revalued this warrant liability at September 30, 2012 at $1,532,424. This revaluation resulted in a gain of $383,467 which the Company credited to operations during the nine months ended September 30, 2012. This is an increase of $19,967 or approximately 6% compared to a gain of $363,500 from the revaluation of the warrant liability which the Company recorded during the nine months ended September 30, 2011.


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Gain and loss from change in fair value of conversion option liability

At September 30, 2012 the Company had outstanding a liability to issue an aggregate of 5,539,260 shares of the Company's common stock pursuant to convertible notes payable. The Company revalued this liability at September 30, 2012 at $1,284,577. This revaluation resulted in a gain of $197,798, which the . . .

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