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IVFH > SEC Filings for IVFH > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for INNOVATIVE FOOD HOLDINGS INC

Form 10-Q for INNOVATIVE FOOD HOLDINGS INC


14-Nov-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 our behalf. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "explore", "consider", "anticipate", "intend", "could", "estimate", "plan", "propose" or "continue" or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:

? Our ability to raise capital necessary to sustain our anticipated operations and implement our business plan,

? Our ability to implement our business plan,

? Our ability to generate sufficient cash to pay our lenders and other creditors,

? Our dependence on one major customer,

? Our ability to employ and retain qualified management and employees,

? Our dependence on the efforts and abilities of our current employees and executive officers,

? Changes in government regulations that are applicable to our current or anticipated business,

? Changes in the demand for our services,

? 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 September 30, 2013, and 2012:

                                                           September 30,
                                                    2013                 2012
 Number of warrants outstanding                     6,944,000              6,964,000
 Value at September 30,                                   N/A     $        1,532,424
 Number of warrants issued during the period                -                      -
 Value of warrants issued during the period                 -     $                -
 Value of warrants extended during the period               -     $          842,100
 Revaluation loss during the period                       N/A     $         (383,467 )

 Black-Scholes model variables:
 Volatility                                            186.46 %      117.77 - 214.36 %
 Dividends                                                  -     $                -
 Risk-free interest rates                         0.03 - 0.82 %          0.41 - 1.11 %
 Term (years)                                     0.04 - 6.74                   7.63

(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, 2013 and 2012:

                                                       September 30,
                                                 2013                2012
     Number of conversion options
     outstanding                                 4,847,192            5,539,260
     Value at September 30,                            N/A      $     1,284,577
     Number of conversion options issued
     during the period                                   -                    -
     Value of conversion options issued
     during the period                                 N/A      $             -
     Number of conversion options
     exercised or underlying notes paid
     during the period                                   -               34,664
     Value of conversion options exercised
     or underlying notes paid during the
     period                                              -      $         7,004
     Revaluation loss during the period                N/A      $      (197,798 )

     Black-Scholes model variables:
     Volatility                                     186.46 %             214.36 %
     Dividends                                           -                    -
     Risk-free interest rates                  0.03 - 0.82 %      0.14 to 0.41. %
     Term (years)                              0.45 - 6.74                   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, 2013 and 2012:

                                                        September 30,
                                                   2013               2012
      Number of vested options outstanding         2,480,000          1,570,000
      Value at September 30,                  $          N/A      $     308,544
      Number of options issued during the
      period                                               -                  -
      Number of options vested during the
      period                                               -                  -
      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 )

      Black-Scholes model variables:
      Volatility                                      186.46 %           214.36  %
      Dividends                               $            -      $           -
      Risk-free interest rates                   0.42 - 0.82 %      0.14 - 0.41 %
      Term (years)                                 0.04-6.74        0.75 - 4.59

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. During the three months ended September 30, 2013 and 2012, sales to USF accounted for 71.5% and 65.4% of total sales, respectively. During the nine months ended September 30, 2013 and 2012, sales to USF accounted for 70.8% and 76.4% 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, 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 September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenue

Revenue increased by $874,673, or approximately 17%, to $6,005,091 for the three months ended September 30, 2013 from $5,130,418 in the prior year. The increase was attributable to year-over-year organic sales growth.

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 September 30, 2013 was $4,326,573, an increase of $454,129 or approximately 12% compared to cost of goods sold of $3,872,444 for the three months ended September 30, 2012. Cost of goods sold is primarily made up of the following expenses for the three months ended September 30, 2013: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $3,400,858; and shipping expenses in the amount of $769,037. The cost of goods sold increase is mainly associated with the increase in sales. Total gross margin was approximately 28% of sales in 2013, compared to approximately 25% 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 $374,487 or approximately 29% to $1,282,722 during the three months ended September 30, 2013 compared to $908,235 for the three months ended September 30, 2012. Selling, general and administrative expenses were primarily made up of the following for the three months ended September 30, 2013: payroll and related expenses, including employee benefits, in the amount of $697,021; facilities expense in the amount of $140,890; insurance expense in the amount of $79,938; amortization and depreciation in the amount of $68,372; computer support expenses in the amount of $41,783; consulting and professional fees in the amount of $34,894; banking and credit card fees expenses in the amount of $33,299; travel and entertainment expenses in the amount of $32,371; bad debt expense in the amount of $12,793 and advertising expense in the amount of $6,618. The increase in selling, general, and administrative expenses was primarily due to; costs associated with the Company's move into its new facility and improvements in the Company's Florida warehouse, and higher selling expenses and expansion expenses associated with Artisan and The Haley Group and Gourmet Foodservice group. We expect our selling, general, and administrative expenses to remain steady for the remainder of 2013.

Interest expense

Interest expense, net of interest income, increased by $666,272 or approximately 990% to $733,554 during the three months ended September 30, 2013, compared to $67,282 during the three months ended September 30, 2012. Approximately 5% or $33,283 of the interest expense was accrued or paid interest on the company's notes payable; approximately 95% or $700,271 of the interest was associated with the amortization of the discounts on the Company's notes payable.

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 September 30, 2013. The Company revalued these instruments at September 30, 2012 using the Black-Scholes valuation method. This revaluation resulted in a gain of $652,644 which the Company included in operations during the three months ended September 30, 2012. There was no such comparable gain or loss during the current period.

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 September 30, 2013. The Company revalued these instruments at September 30, 2012 using the Black-Scholes valuation method. This revaluation resulted in a gain of $665,802, which the Company included in operations during the three months ended September 30, 2012. There was no such comparable gain or loss during the current period.

Net Loss

For the reasons above, the Company had a net loss for the three months ended September 30, 2013 of $337,758, an increased loss of $1,938,661 compared to net income of $1,600,903 during the three months ended September 30, 2012.


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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenue

Revenue increased by $4,362,765, or approximately 34%, to $17,131,361 for the nine months ended September 30, 2013 from $12,768,596 in the prior year. $1,848,436, or approximately 42%, of the increase was attributable to the acquisition of Artisan, while $2,514,329, or approximately 58%, of the increase was attributable to year-over-year organic growth.

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 nine months ended September 30, 2013 was $12,391,963, an increase of $2,746,923, or approximately 28%, compared to cost of goods sold of $9,645,040 for the nine months ended September 30, 2012. Cost of goods sold is primarily made up of the following expenses for the nine months ended September 30, 2013: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $9,511,193; and shipping expenses in the amount of $2,747,154. The cost of goods sold increase is mainly associated with the increase in sales. Total gross margin improved to approximately 28% of sales in 2013, compared to approximately 25% 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 $1,001,635 or approximately 37% to $3,691,679 during the nine months ended September 30, 2013 compared to $2,690,044 for the nine months ended September 30, 2012. Selling, general and administrative expenses were primarily made up of the following for the nine months ended September 30, 2013: payroll and related expenses, including employee benefits, in the amount of $2,216,726; facilities expense in the amount of $376,414; amortization and depreciation in the amount of $196,057; insurance expense in the amount of $197,901; consulting and professional fees in the amount of $137,606; bad debt expense in the amount of $100,709; computer support expenses in the amount of $93,912; banking and credit card fees in the amount of $78,880; travel and entertainment expenses in the amount of $75,005; share based compensation in the amount of $35,662; and advertising expense in the amount of $15,356. The increase in selling, general, and administrative expenses was primarily due to the acquisition of Artisan which has higher selling general and administrative expenses than Innovative Food Holdings' historical levels, costs associated with the Company's move into its new facility and improvements in the Company's Florida warehouse, and higher selling expenses and expansion expenses associated with Artisan and The Haley Group and Gourmet Foodservice Group. We expect our selling, general, and administrative expenses to remain steady for the remainder of 2013.

Interest expense

Interest expense, net of interest income, increased by $1,282,078 or approximately 772% to $1,448,111 during the nine months ended September 30, 2013, compared to $166,033 during the nine months ended September 30, 2012. Approximately 8% or $110,177 of the interest expense was accrued or paid interest on the company's notes payable; approximately 92% or $1,337,934 of the interest was associated with the amortization of the discounts on the Company's notes payable.


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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 September 30, 2013. The Company revalued these instruments at September 30, 2012 using the Black-Scholes valuation method. This revaluation resulted in a gain of $383,467 which the Company included in operations during the nine months ended September 30, 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 . . .

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