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IVFH > SEC Filings for IVFH > Form 10-Q on 10-May-2013All Recent SEC Filings

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

Form 10-Q for INNOVATIVE FOOD HOLDINGS INC


10-May-2013

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 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 following table illustrates certain key information regarding our warrants and warrant valuation assumptions at March 31, 2013, and 2012:

                                                          March 31,
                                                 2013                2012
     Number of warrants outstanding (post
     reverse-split)                             6,964,000              5,464,000
     Value at March 31,                               N/A     $          694,835
     Number of warrants issued during the
     period (post reverse-split)                        -                      -
     Value of warrants issued during the
     period                                             -     $                -

     Revaluation loss during the period               N/A     $          193,821

     Black-Scholes model variables:
     Volatility                                       N/A        112.43 -.118.22 %
     Dividends                                        N/A     $                -
     Risk-free interest rates                         N/A            0.08 - 0.15 %
     Term (years)                                     N/A            0.01 - 3.75

(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 March 31, 2013 and 2012:

                                                         March 31,
                                                 2013               2012
      Number of conversion options
      outstanding (post reverse-split)          5,262,393            4,437,928
      Value at March 31,                              N/A     $      1,604,150
      Number of conversion options issued
      during the period (post
      reverse-split)                                    -                    -
      Value of conversion options issued
      during the period                               N/A     $              -
      Number of conversion options
      exercised or underlying notes paid
      during the period (post
      reverse-split)                                    -               64,000
      Value of conversion options exercised
      or underlying notes paid during the
      period                                            -     $         20,046
      Revaluation loss during the period              N/A     $        378,435

      Black-Scholes model variables:
      Volatility                                      N/A      112.43 to118.22 %
      Dividends                                         -                    -
      Risk-free interest rates                        N/A        0.08 to 0.15. %
      Term (years)                                    N/A                   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 March 31, 2013 and 2012:

                                                         March 31,
                                                2013                 2012
    Number of vested options outstanding
    (post reverse-split)                        1,695,000              1,270,000
    Value at March 31,                      $         N/A      $         216,770
    Number of options issued during the
    period (post reverse-split)                   810,000                      -
    Number of options vested during the
    period (post reverse-split)                    25,000
    Value of options vested 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 )    $          54,587

    Black-Scholes model variables:
    Volatility                                     214.36 %      112.43 - 118.22  %
    Dividends                               $           -      $               -
    Risk-free interest rates                    0.14-0.41 %          0.08 - 0.15 %
    Term (years)                               0.75 -4.59            0.01 - 3.75

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.


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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.

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 by April 30, 2014. 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 contract with USF expired on December 31, 2012. However, the contract provides that it 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. Inasmuch as neither party gave the requisite notice, the agreement was automatically extended through December 31, 2013. 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 months ended March 31, 2013 and 2012, sales to USF accounted for 69.4% and 91.2% of total sales, respectively.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three months ended March 31, 2013 and 2012.

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 March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue

Revenue increased by $2,322,014 or approximately 70.7% to $5,607,321 for the three months ended March 31, 2013 from $3,285,307 in the prior year. $1,404,062 or approximately 42.7% of the increase was attributable to the acquisition of Artisan. The remaining increase is 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.


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Cost of goods sold

Our cost of goods sold for the three months ended March 31, 2013 was $4,034,294, an increase of $1,422,312 or approximately 54.5% compared to cost of goods sold of $2,611,982 for the three months ended March 31, 2012.Cost of goods sold is primarily made up of the following expenses for the three months ended March 31, 2013: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $3,068,012; and shipping expenses in the amount of $834,285. 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 28.1% of sales in 2013, compared to 20.5% of sales in 2012.

In 2013, 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 will either remain stable or likely improve slightly.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $540,977 or approximately 82.0% to $1,200,614 during the three months ended March 31, 2013 compared to $659,637 for the three months ended March 31, 2012. Selling, general and administrative expenses were primarily made up of the following for the three months ended March 31, 2013: payroll and related expenses, including employee benefits, in the amount of $745,475 (including the value of options issued in the amount of $7,725); facilities expense in the amount of $63,351; bad debt expense in the amount of $60,812; insurance expense in the amount of $59,068; office expense in the amount of $45,389; computer support expenses in the amount of $32,514; amortization and depreciation in the amount of $27,988; consulting and professional fees in the amount of $24,422; travel and entertainment expenses in the amount of $18,693; share based compensation in the amount of $35,662; credit card expenses in the amount of $23,616; vehicle expenses in the amount of $10,394; commissions expense in the amount of $8,999; and advertising expense in the amount of $4,865. 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. We expect our selling, general, and administrative expenses to remain steady or slightly decrease in 2013.

Interest expense

Interest expense, net of interest income, increased by $296,496 or approximately 643.6% to $342,565 during the three months ended March 31, 2013, compared to $46,069 during the three months ended March 31, 2012. The primary reason for the increase was due to the amortization of the discount on the note payable related to the financing of the Artisan acquisition.

Loss from change in fair value of warrant liability

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. Accordingly, the Company did not revalue these instruments at March 31, 2013. The Company revalued these instruments at March
31 ,2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $193,821 which the Company included in operations during the three months ended March 31, 2012. There was no such comparable gain or loss during the current period.

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

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 conversion options from derivative accounting to equity accounting. Accordingly, the Company did not revalue these instruments at March 31, 2013. The Company revalued these instruments at March 31, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $378,435, which the Company included in operations during the year three months ended March 31, 2012. There was no such comparable gain or loss during the current period.

Net Income (loss)

For the reasons above, the Company had a net income for the three months ended March 31, 2013 of $29,848, an increase of $634,485 compared to a net loss of $604,637 during the three months ended March 31, 2012.


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Liquidity and Capital Resources

As of March 31, 2013, the Company had current assets of $2,515,749 consisting of cash of $901,637, trade accounts receivable of $1,052,407, inventory of $546,612, and other current assets of $14,583. Also at March 31, 2013, the Company had current liabilities of $2,262,245, consisting of accounts payable and accrued liabilities of $1,346,372 (of which $75,280 is payable to related parties); accrued interest of $782,992 (of which $42,046 is payable to related parties: current portion of notes payable, net of discounts, of $11,811; current portion of notes payable - related parties, net of discounts of $110,500; and a contingent purchase price liability of $10,570.

During the three months ended March 31, 2013, the Company used cash in operating activities in the amount of $74,708. This consisted of the Company's net income of $29,848, increased by non-cash charges for the amortization of discount on notes payable of $305,048; depreciation and amortization of $63,998; and non-cash compensation in the amount of $35,662 . The Company's cash position was also reduced by $509,254 as a result of a change in the components of current assets and current liabilities as well as a result of the payment of bonuses owed for 2012. The acquisition of Artisan had an effect on the components of the Company's working capital. The following amounts were associated with Artisan at March 31, 2013: cash of $161,865; accounts receivable of $379,827; inventory of $477,053; other current assets of $8,333; accounts payable and accrued liabilities of $373,872; and current portion of lease payable of $11,811.

The Company had cash used by investing activities of $803,544 for the three months ended March 31, 2013, which consisted of a cash paid for the acquisition of land, building, and related furniture and fixtures. Company had cash provided by financing activities of $432,860 for the three months ended March 31, 2013, which consisted of net proceeds from the issuance of notes payable in the amount of $546,000, offset by principal payments on notes payable of $110,352 and principal payments on notes payable to a related party of $2,788.

The Company had net working capital of $252,994 as of March 31, 2013. We have generated positive cash flow from operations during the years ended December 31, 2012 and 2011. In addition, the Company's auditors removed the going concern qualification to the audit opinion on the Company's financial statements for the year ended December 31, 2012. 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 10 to the financial statements included in this report. As we seek to increase our sales of perishables, as well as identify new and other consumer and food service oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.

If the Company's cash flow from operations is insufficient, the Company may require additional financing in order to execute its operating plan and continue as a going concern. 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. The Company expects that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders.

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.

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, 2012 which is available at no cost at www.sec.gov.


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