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IVFH > SEC Filings for IVFH > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for INNOVATIVE FOOD HOLDINGS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for INNOVATIVE FOOD HOLDINGS INC


28-Mar-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.


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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 were valued at issuance utilizing the Black-Scholes valuation method, and were re-valued at each period ending date, also using the Black-Scholes valuation method. Any gain or loss from revaluation was charged to operations during the period.

On December 27, 2012, the Company entered into agreements (the "2012 Notes Payable Extension Agreement") affecting the terms of certain of its convertible notes payable. One of these changes established a minimum conversion price for these notes of $0.05. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for these instruments from derivative accounting to equity accounting. The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. Any gain or loss in value was charged to operations.

(a) Warrants:

The Company valued warrants using the Black-Scholes valuation model. Warrants were valued upon issuance, and re-valued at each financial statement reporting date; they were also valued at December 27, 2012, at which time the Company changed its method of accounting for these instruments from the derivative method to the equity method. The fair value of the Company's outstanding warrants at December 27, 2012 was $2,088,475. This amount was considered a component of the Company's gain on the extinguishment of debt, in the total amount of $3,797,001 during the twelve months ended December 31, 2012.

The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December , 2012 and 2011:

                                                        December 31,
                                                    2012            2011
         Number of warrants outstanding (post
         reverse-split)                            6,964,000       5,464,000
         Value at December 31                            N/A     $   500,825
         Number of warrants issued during the
         period (post reverse-split)               1,500,000               -
         Value of warrants issued during the
         year                                    $   572,765     $         -
         Revaluation (gain) loss during the
         period                                  $   172,785     $  (682,350 )

         Black-Scholes model variables:
                                                   112.43% -        92.52% -
         Volatility                                   214.36 %       114.30%
         Dividends                               $         0     $         0
                                                     0.11% -         0.06% -
         Risk-free interest rates                       1.18 %          0.17 %
                                                      0.01 -
         Term (years)                                   8.00       0.01-5.00

(b) Embedded conversion features of notes payable:


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Through December 27, 2012, the Company accounted 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. The 2012 Notes Payable Extension Agreement resulted in a change in accounting method for these instruments from derivative accounting to equity accounting. The Company revalued these instruments December 27, 2012 using the Black-Scholes valuation method. Any gain or loss in value was charged to operations.

The following table illustrates certain key information regarding our conversion options and valuation assumptions at December 31, 2012 and 2011:

                                                        December 31,
                                                 2012                2011

     Number of conversion options
     outstanding (post-reverse split)           5,368,195              4,437,928
     Value at December 31                    $        N/A      $       1,245,761
     Number of options issued during the
     year (post-reverse split)                  1,200,000                      -
     Value of options issued during the
     year (post-reverse split)               $    263,664      $               -
     Number of options exercised or
     underlying notes paid during the year      3,419,284              2,053,240
     Value of options exercised or
     underlying notes paid during the year   $     81,921      $         623,837
     Revaluation loss (gain) during the
     period                                  $    281,024      $        (595,967 )

     Black-Scholes model variables:
                                               112.43% to
     Volatility                                    214.36 %      92.52% to 114.3 %
     Dividends                                          0                      0
                                                  0.11 to
     Risk-free interest rates                        1.18 %         0.06 to 0.17 %
                                                   1.1 to
     Term (years)                                   10.00                  10.00

(c) Stock options:

The Company accounted for options in accordance FASB ASC 718-40. Options were valued upon issuance, and re-valued at each financial statement reporting date, utilizing the Black-Scholes valuation model; they were also valued at December 27, 2012, at which time the Company changed its method of accounting for these instruments from the derivative method to the equity method. The fair value of the Company's options at December 27, 2012 was $411,792. This amount was reclassified to equity at December 27, 2012.


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The following table illustrates certain key information regarding our options and option assumptions at December 31, 2012 and 2011.

                                                        December 31,
                                                    2012             2011
        Number of options outstanding
        (post-reverse split)                       2,070,000          970,000
        Value at December 31                    $        N/A     $    162,183
        Number of options issued during the
        year (post-reverse split)                  1,100,000                -
        Value of options issued during the
        year (post-reverse split)               $          -                -
        Number of options recognized during
        the year pursuant to SFAS 123(R)           1,100,000                -
        Value of options recognized during
        the year pursuant to SFAS 123(R)        $    186,299     $          -
        Revaluation (gain) during the period    $     63,309     $    174,835

        Black-Scholes model variables:
                                                  112.43% to        92.52% to
        Volatility                                   214.36%           114.3%
        Dividends                                          0                0
                                                     0.11% -          0.06 to
        Risk-free interest rates                        1.18 %           0.17 %
                                                      0.26 -
        Term (years)                                    5.00        0.15-5.00

Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $5,547 for doubtful accounts receivable at December 31, 2012, and $11,044 at December 31, 2011. Actual losses on accounts receivable were $5,687 for 2012 and $13,841 for 2011. 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 2013, the Company removed these liabilities from its balance sheet by reclassifying them as equity; we expect the amount of future gains and losses recognized to be reduced.

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


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In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. ("IVFH"), a Florida 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 nationwide distribution of specialty food , artisanal food, organic foods and health food distribution and sales using third-party shippers and through our own delivery vehicles in the greater Chicago area.

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 an additional $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 supplier 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) under the heading Transactions with Major Customers in Note 14 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the years ended December 31, 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 consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenue

Revenue increased by $7,057,674 or approximately 61% to $18,610,487 for the year ended December 31, 2012 from $11,552,813 in the prior year. $3,406,391 or 29.5% of the increase was attributable to the acquisition of Artisan. The increase was also attributable to a significant increase in sales of specialty items, and smaller increases in meat and game and cheese products, partially offset by decreases in seafood and 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 year ended December 31, 2012 was $13,793,550, an increase of $4,919,550 or approximately 55% compared to cost of goods sold of $8,874,000 for the year ended December 31, 2011. Cost of goods sold is primarily made up of the following expenses for the year ended December 31, 2012: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $10,013,013; and shipping expenses in the amount of $3,095,046. The cost of goods sold increase is mainly associated with the increase in sales, largely due to the Artisan acquisition. Total gross margin improved to 25.9% of sales in 2012, compared to 23.2% of sales in 2011.


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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 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 will either remain stable or likely improve slightly.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $2,222,860 or approximately 110.7% to $4,230,227 during the year ended December 31, 2012 compared to $2,007,367 for the year ended December 31, 2011. Selling, general and administrative expenses were primarily made up of the following for the year ended December 31, 2012: payroll and related expenses, including employee benefits, in the amount of $2,745,160 (including share based compensation in the amount of $161,821, and value of options in the amount of $249,609); consulting and professional fees in the amount of $397,916; facilities and related expenses in the amount of $203,903; insurance costs in the amount of $163,761; office expense in the amount of $152,141; amortization and depreciation expense in the amount of $126,855; travel and entertainment expenses in the amount of $102,590; computer support expenses in the amount of $95,622; commissions expense in the amount of $68,413; advertising expense in the amount of $52,987; vehicle expense in the amount $45,059; credit card fees in the amount of $35,532; property taxes in the amount of $10,852; and settlement costs of $7,302. The increase in selling, general, and administrative expenses was primarily due to increases in volume, and the acquisition of Artisan Specialty Foods which has higher selling general and administrative expenses than other Innovative Food Holdings historical levels. In addition, expenses associated with the Company's annual meeting and the Artisan acquisition had the effect of increasing selling general and administrative expenses. . We expect our selling, general, and administrative expenses to remain steady or slightly decrease in 2013.

Interest expense, net

Interest expense, net of interest income, increased by $495,336 or approximately 88% to $1,057,308 during the twelve months ended December 31, 2012, compared to $561,972 during the twelve months ended December 31, 2011. The primary reason for the increase was due to the write-off of the discount on notes payable in the amount of $824,286 related to the extinguishment of debt during the year ended December 31, 2012, and to the note payable in the gross amount of $1,200,000 related to the acquisition of Artisan that the Company entered into in May 2012.

Gain on extinguishment of debt

Gain on extinguishment of debt was $3,797,001 during the year ended December 31, 2012, an increase of $3,631,675 or approximately 2,197% compared to gain on extinguishment of debt of $165,326 during the year ended December 31, 2011. The increase is due to gain realized with the restructure of certain of the Company's convertible note agreements in 2012.

Loss on Settlement of Debt

Loss on settlement of debt was $63,000 during the year ended December 31, 2011 compared to $0 during the year ended December 31, 2012. In 2011, the Company entered into an agreement (the "Morren Settlement Agreement") with an investor. Pursuant to the settlement terms of the Morren Settlement Agreement, the Company issued 180,000 shares (post reverse-split) of common stock in full satisfaction of this claim of liability. The fair value of these shares in the amount of $63,000 was recorded as a loss on the settlement of debt during the year ended December 31, 2011.

Cost of Warrant Extension

During the twelve months ended December 31, 2012, the Company extended the term of certain of its warrants outstanding. The Company valued the cost of the extended term using the Black-Scholes valuation model, and charged the fair value of $842,100 to operations during the year ended December 31, 2012. There was no comparable charge during the year ended December 31, 2011.

Gain from change in fair value of warrant liability

At December 31, 2012, the Company had outstanding warrants to purchase an aggregate of 2,070,000 shares (post reverse-split) of the Company's common stock. On December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement, which affected the terms of certain of its convertible notes payable. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for the Company's warrants from derivative accounting to equity accounting. The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $172,595, which the Company included in operations during the year ended December 31, 2012. This was an increase of $855,135 or approximately 125.3% compared to a gain of $682,350 from the revaluation of the warrant liability which the Company recorded during the year ended December 31, 2011.


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(Gain) loss from change in fair value of conversion option liability

At December 31, 2012, the Company had outstanding note payable conversion options to purchase an aggregate of 5,368,195 shares (post reverse-split) of the Company's common stock. On December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement which affected the terms of certain of its convertible notes payable. Under accounting guidance provided by FASB ASC 815-40-05, this resulted in a change in accounting method for the Company's warrants from derivative accounting to equity accounting. The Company revalued these instruments at December 27, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $281,024, which the Company included in operations during the year ended December 31, 2012. This was an increase of $876,991 or approximately 147.2% compared to a gain of $595,967 from the revaluation of the warrant liability which the Company recorded during the year ended December 31, 2011.

Net (loss) Income

For the reasons above, the Company had a net income for the year ended December 31, 2012 of $2,030,494, an increase of $540,377 or approximately 36.3% compared to a net income of $1,490,117 during the twelve months ended December 31, 2011. In 2012 operating income improved due to increases in sales, improved gross margins, and one-time gains associated with the restructuring of the Company's convertible notes.

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