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IVFH > SEC Filings for IVFH > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for INNOVATIVE FOOD HOLDINGS INC

Form 10-K for INNOVATIVE FOOD HOLDINGS INC


31-Mar-2014

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.


Index

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 environmental weather conditions.

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

Critical Accounting Policy and Estimates

Use of Estimates in the Preparation of Financial Statements

The preparation of these financial statements included in this report 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.


Index

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 December 31, 2013 and 2012:

                                                            December 31,
                                                   2013                 2012
  Number of warrants outstanding                  5,819,129                6,964,000
  Value at December 31                                  N/A     $                  -
  Number of warrants issued during the period             -                1,500,000
  Value of warrants issued during the year              N/A     $            572,765
  Revaluation (gain) loss during the period             N/A     $            172,785

  Black-Scholes model variables:
  Volatility                                            N/A       112.43%  -  214.36 %
  Dividends                                             N/A     $                  0
  Risk-free interest rates                              N/A           0.11%  -  1.18 %
  Term (years)                                          N/A                0.01-8.00

(b) Embedded conversion features of notes payable:

From September 2005 through December 26, 2012, the Company accounted for conversion options embedded in convertible notes in accordance with FASB ASC 815-10-05. ASC 815-10-05 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with ASC 815-40-05.

Effective December 27, 2012, the Company entered into the 2012 Notes Payable Extension Agreement with certain convertible note holders regarding twenty-five convertible notes in the aggregate amount of $2,037,249 in principal and $719,187 in accrued interest. Pursuant to the 2012 Notes Payable Extension Agreement, the maturity date of each note and accrued interest was extended to February 1, 2014 (unless the original maturity date was beyond the extended date, in which case the original maturity date did not change); the expiration date of each warrant associated with each of the notes was extended to August 1, 2015 (unless the original expiration date of each warrant was beyond August 1, 2015, in which case the original expiration date will not change); the minimum conversion price of the note and accrued interest, in the case of any adjustment to such price, was set to be $0.05 per share. The Company also agreed that for as long as the convertible notes are held by the existing note holders, it will not issue any common stock or other securities convertible into or exercisable for shares of common stock at a price of less than $0.05 per share. Accordingly, the conversion option and warrants were reclassified from liability to equity since the conversion and exercise prices were fixed and all other conditions were met to classify the conversion feature and warrants as equity.

The Company revalued its derivative equity instruments at December 27, 2012 using the Black-Scholes valuation method, and recorded losses on revaluation in the amount of $478,822 for the conversion options, $566,063 for the warrants, and $103,248 for stock options. This resulted in liabilities in the amount of $2,088,475 for the value of the warrants, $1,708,528 for the value of the conversion options, and $411,792 for the stock options. The value of the warrants and conversion options (a total of $3,797,001) was eliminated, and recorded as a gain on extinguishment of debt. The value of the stock options of $411,792 was eliminated, and recorded as a charge to additional paid-in capital.


Index

The following table illustrates certain key information regarding our Conversion options and conversion option valuation assumptions at December 31, 2013 and 2012:

                                                     December 31,
                                            2013                  2012

     Number of conversion options
     outstanding                            3,594,592                 5,368,195
     Value at December 31              $          N/A     $                   -
     Number of options issued during
     the year                                       -                 1,200,000
     Value of options issued during
     the year                          $            -     $             263,664
     Number of options exercised or
     underlying notes paid during
     the year                               1,773,603                 3,419,284
     Value of options exercised or
     underlying notes paid during
     the year                                     N/A     $              81,921
     Revaluation loss (gain) during
     the period                                   N/A     $             281,024

     Black-Scholes model variables:               N/A
     Volatility                                   N/A       112.43%  to  214.36 %
     Dividends                                    N/A                         0
     Risk-free interest rates                     N/A            0.11  to  1.18 %
     Term (years)                                 N/A              1.1 to 10.00

(c) Stock options:

The Company accounts for options in accordance with 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 December 31, 2013 and 2012:

                                                     December 31,
                                            2013                     2012
   Number of options outstanding               2,580,000                 2,070,000
   Value at December 31              $                 -     $                   -
   Number of options issued during
   the year                                      910,000                 1,100,000
   Value of options issued during
   the year                          $                 -                         -
   Number of options recognized
   during the year pursuant to
   SFAS 123(R)                                   910,000                 1,100,000
   Value of options recognized
   during the year pursuant to
   SFAS 123(R)                       $           178,183     $             186,299
   Revaluation (gain) during the
   period                                            N/A     $              63,309

   Black-Scholes model variables:
   Volatility                          186.46% to 189.28 %     112.43%  to  214.36 %
   Dividends                                           0                         0
   Risk-free interest rates                 0.04% - 0.37 %         0.11  to   1.18 %
   Term (years)                              0.45 - 4.00                 0.26-5.00

Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $56,740 for doubtful accounts receivable at December 31, 2013, and $5,547 at December 31, 2012. Actual losses on accounts receivable were $6,729 for 2013 and $5,687 for 2012. 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.


Index

Fair Value of Financial Instruments

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

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 and through FII and our other subsidiaries we are in the business of national food distribution and sales primarily 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) under the heading Transactions with Major Customers in Note 14 to the Consolidated Financial Statements, and (3) in Business - Relationship with U.S. Foods, and (4) as the second 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, 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 consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenue

Revenue increased by $4,892,253 or approximately 26.3% to $23,502,740 for the year ended December 31, 2013 from $18,610,487 in the prior year. The increase was primarily attributable to year-over-year organic sales growth, but included a full 12 months of Artisan's revenues in 2013 compared to only 7 months in 2012.

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.


Index

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 twelve months ended December 31, 2013 was $16,853,557, an increase of $3,060,007 or approximately 22.2% compared to cost of goods sold of $13,793,550 for the twelve months ended December 31, 2012. Cost of goods sold is primarily made up of the following expenses for the twelve months ended December 31, 2013: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $12,783,591; and shipping, handling, and purchase allowance expenses in the amount of $4,069,966. 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 possibly improve slightly.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $1,453,137 or approximately 34.4% to $5,683,364 during the twelve months ended December 31, 2013 compared to $4,230,227 for the twelve months ended December 31, 2012. Selling, general and administrative expenses were primarily made up of the following for the twelve months ended December 31, 2013: payroll and related expenses, including employee benefits, in the amount of $3,384,062 , including non-cash compensation of $221,120 and commissions of $111,349; facilities and vehicles expense in the amount of $574,914; insurance expense in the amount of $271,129; amortization and depreciation in the amount of $262,881; computer support expenses in the amount of $126,038; consulting and professional fees in the amount of $253,006; banking and credit card fees expenses in the amount of $150,096; travel and entertainment expenses in the amount of $110,148; bad debt expense in the amount of $56,740; taxes of $53,765; and advertising and marketing expense in the amount of $25,742. 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, the bank loan, restructuring of the Company's notes, and additional expenses associated with the Artisan acquisition 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 2014.

Interest expense, net

Interest expense, net of interest income, increased by $1,394,768 or approximately 131.9% to $2,452,076 during the twelve months ended December 31, 2013, compared to $1,057,308 during the twelve months ended December 31, 2012. Approximately 5.3% or $130,064 of the interest expense was accrued or paid interest on the company's notes payable; approximately 94.7% or $2,322,909 of the interest was associated with the amortization of the discounts on the Company's notes payable.

Gain on extinguishment of debt

Gain on extinguishment of debt was $3,797,001 during the year ended December 31, 2012 which was related to the restructure of certain of the Company's convertible note agreements in 2012. There was no such gain during the year ended December 31, 2013.

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, 2013.


Index

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 December 31, 2013. The Company revalued these instruments during the year ended December 31, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $172,785 which the Company included in operations during the year ended December 31, 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 December 31, 2013. The Company revalued these instruments during the year ended December 31, 2012 using the Black-Scholes valuation method. This revaluation resulted in a loss of $281,024, which the Company included in operations during the twelve months ended December 31, 2012. There was no such comparable gain or loss during the current period.

Net (loss) Income

For the reasons above, the Company had a net loss for the year ended December 31, 2013 of $1,486,257, a decrease of $3,516,751 or approximately 173.2% compared to a net income of $2,030,494 during the twelve months ended December 31, 2012. For the twelve months ended December 31, 2013, approximately 165% or $2,452,076 of the loss was related to non-operational expenses as described above.

Liquidity and Capital Resources at December 31, 2013

As of December 31, 2013, the Company had current assets of $3,696,105 consisting of cash and cash equivalents of $2,073,605, trade accounts receivable of $771,205, inventory of $839,979, and other current assets of $11,316. Also at December 31, 2013, the Company had current liabilities of $3,870,082, consisting of accounts payable and accrued liabilities of $1,808,259 (of which $523,110 was payable to related parties); accrued interest of $720,189 (of which $48,708 was payable to related parties); current portion of notes payable, net of discounts, of $1,150,523; current portion of notes payable - related parties of $110,500; and contingent purchase price liability of $80,881.

During the twelve months ended December 31, 2013, the Company generated cash from operating activities in the amount of $1,354,881. This consisted of the Company's net loss of $(1,486,257), offset by non-cash charges for the amortization of discount on notes payable of $2,322,909; depreciation and amortization of $262,882; increase in allowance for bad debt of $38,264; and non-cash compensation in the amount of $309,013. The Company's cash position was also reduced by $91,930 as a result of changes 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 December 31, 2013: cash of $227,071; accounts receivable of $276,738; inventory of $750,094; other current assets of $8,333; accounts payable and accrued liabilities of $320,751; and current portion of lease payable of $12,649.

The Company had cash used by investing activities of $441,438 for the twelve months ended December 31, 2013, which consisted of $100,000 for the purchase of treasury stock, and $341,438 for the acquisition of land, building, and related furniture and fixtures. The Company had cash used by financing activities of $186,867 for the twelve months ended December 31, 2013, which consisted of principal payments on notes payable of $511,543 partially offset by proceeds from a bank loan of $32,676. The Company also paid a note in the principal amount of $675,324 with funds obtained from a bank term loan.

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