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IVFH > SEC Filings for IVFH > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for INNOVATIVE FOOD HOLDINGS INC

Form 10-Q for INNOVATIVE FOOD HOLDINGS INC


14-Aug-2014

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 3a51-1 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 contract with whom ends in December 2014, and while we are negotiating a multi-year extension, no assurance can be given that the negotiations will be successful.

? 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,

? Our ability to integrate new acquisitions into our existing operations,

? 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 the 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.

Stock options:

The Company accounts for options in accordance FASB ASC 718-40. Options are valued upon issuance utilizing the Black-Scholes valuation model. Option expense is recognized over the requisite service period of the related option award. The following table illustrates certain key information regarding our options and option assumptions during the six months ended June 30, 2014 and 2013:

                                                          June 30,
                                                   2014              2013
       Number of vested options outstanding       1,950,000          1,695,000

       Number of options issued during the
       period                                        75,000            810,000
       Number of options vested during the
       period                                        30,000             25,000
       Value of options vested during the
       period                                  $      8,713                  -
       Number of options recognized during
       the period pursuant to SFAS 123(R)            30,000                  -
       Value of options recognized during
       the period pursuant to SFAS 123(R)      $     47,958      $           -


       Black-Scholes model variables:
       Volatility                                    187.68 %           214.36  %
       Dividends                               $          -      $           -
       Risk-free interest rates                        0.37 %      0.14 - 0.41 %
       Term (years)                                    4.00        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.

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") 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 immediately below and above in Note 2 to the Condensed Consolidated Financial Statements and also in our Annual Report on Form 10-K for the year ended December 31, 2013 (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.


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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 and again through December 31, 2014. Discussions are currently ongoing with respect to entering into a new multi-year agreement. 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 June 30, 2014 and 2013, sales to USF accounted for 72% and 72% of total sales, respectively. During the six months ended June 30, 2014 and 2013, sales to USF accounted for 74% and 70% of total sales, respectively.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three and six months ended June 30, 2014 and 2013.

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 June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue

Revenue increased by $1,130,726, or approximately 21.3%, to $6,449,027 for the three months ended June 30, 2014 from $5,318,301 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 June 30, 2014 was $4,464,276, an increase of $633,828 or approximately 16.5% compared to cost of goods sold of $3,830,448 for the three months ended June 30, 2013. Cost of goods sold is primarily made up of the following expenses for the three months ended June 30, 2014: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $3,463,498; and shipping and packaging expenses in the amount of $1,000,778. While the cost of goods sold increased during the quarter as compared to last year, the increase was less than the increase in revenue for the quarter, reflecting the implementation of improved inventory and cost controls as well as a contribution of higher margin revenues related to the Haley Group. Total gross margin was approximately 30.8% of sales in the second quarter of 2014, compared to approximately 28.0% of sales in the second quarter of 2013.

In 2014, 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 likely remain stable.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $94,763 or approximately 7.8% to $1,303,106 during the three months ended June 30, 2014 compared to $1,208,343 for the three months ended June 30, 2013. Selling, general and administrative expenses were primarily made up of the following for the three months ended June 30, 2014: payroll and related expenses, including employee benefits, in the amount of $897,629; facilities and office expense in the amount of $106,978; consulting and professional fees in the amount of $90,975; amortization and depreciation in the amount of $65,727; commissions in the amount of travel and entertainment expenses in the amount of $37,970; insurance expense in the amount of $32,796; computer support expenses in the amount of $26,140; banking and credit card fees expenses in the amount of $26,077; vehicle expense in the amount of $15,921; food show expense in the amount of $11,679; advertising in the amount of $3,237; and bad debt expense in the amount of ($15,414). The increase in selling, general, and administrative expenses was primarily due to additional personnel expenses and higher professional expenses and other expenses associated with the expansion of certain areas of the Company's businesses and business lines. We expect our selling, general, and administrative expenses to remain steady for the remainder of 2014.

Interest expense

Interest expense, net of interest income, decreased by $117,488 or approximately 31.6% to $254,504 during the three months ended June 30, 2014, compared to $371,992 during the three months ended June 30, 2013. Approximately 8.6% or $21,763 of the interest expense was accrued or paid interest on the company's notes payable; approximately 91.4% or $232,741 of the interest expense was non-cash interest expense associated with the amortization of the discounts on the Company's notes payable.

Net Income

For the reasons above, the Company had a net income for the three months ended June 30, 2014 of $427,141, which is an increase of $519,623, compared to a net loss of $92,482 during the three months ended June 30, 2013.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue

Revenue increased by $1,442,518, or approximately 13.7%, to $12,002,493 for the six months ended June 30, 2014 from $10,559,975 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 six months ended June 30, 2014 was $8,194,131, an increase of $695,036 or approximately 9.3% compared to cost of goods sold of $7,499,095 for the six months ended June 30, 2013. Cost of goods sold is primarily made up of the following expenses for the six months ended June 30, 2014: cost of goods of specialty, meat, game, cheese poultry and other sales categories in the amount of $6,257,094; and shipping and packaging expenses in the amount of $1,937,037. While the cost of goods sold increased during the quarter as compared to last year, the increase was less than the increase in revenue for the quarter, reflecting the implementation of improved inventory and cost controls as well as a contribution of higher margin revenues related to the Haley Group. Total gross margin was approximately 31.7% of sales in 2014, compared to approximately 29.0% of sales in 2013.

In 2014, 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 likely remain stable.

Selling, general and administrative expenses

Selling, general, and administrative expenses increased by $262,260 or approximately 10.9% to $2,671,217 during the six months ended June 30, 2014 compared to $2,408,957 for the six months ended June 30, 2013. Selling, general and administrative expenses were primarily made up of the following for the six months ended June 30, 2014: payroll and related expenses, including employee benefits, in the amount of $1,804,729; facilities and office expense in the amount of $215,808; consulting and professional fees in the amount of $195,675; amortization and depreciation in the amount of $133,303; computer support expenses in the amount of $77,956; travel and entertainment expenses in the amount of $77,573; insurance expense in the amount of $69,186; banking and credit card fees expenses in the amount of $45,194; vehicle expense in the amount of $26,486; advertising expense of $15,051; food show expenses of $12,560; and bad debt expense in the amount of ($5,725). The increase in selling, general, and administrative expenses was primarily due to additional personnel expenses and higher professional expenses and other expenses associated with the expansion of certain areas of the Company's businesses and business lines. We expect our selling, general, and administrative expenses to remain steady for the remainder of 2014.

Other Income

Other income increased by $20,000 to $20,000 during the six months ended June 30, 2014 compared to $0 for the six months ended June 30, 2013. The increase in other income was due to the adjustment of the contingent liability due to The Haley Group, LLC pursuant to the terms of the Haley acquisition. There were no comparable transactions during the six months ended June 30, 2013.

Interest expense

Interest expense, net of interest income, decreased by $173,259 or approximately 24.2% to $541,298 during the six months ended June 30, 2014, compared to $714,557 during the six months ended June 30, 2013. Approximately 9.0% or $48,522 of the interest expense was accrued or paid interest on the company's notes payable; approximately 91.0% or $492,776 of the interest expense was non-cash interest expense associated with the amortization of the discounts on the Company's notes payable.

Net Income

For the reasons above, the Company had a net income for the six months ended June 30, 2014 of $615,847, an increase of $678,481 compared to net loss of $62,634 during the six months ended June 30, 2013.

Liquidity and Capital Resources

As of June 30, 2014, the Company had current assets of $4,311,096 consisting of cash and cash equivalents of $2,266,135, trade accounts receivable of $1,148,316, inventory of $885,329, and other current assets of $11,316. Also at June 30, 2014, the Company had current liabilities of $2,721,923, consisting of accounts payable and accrued liabilities of $1,684,119 (of which $248,985 is payable to related parties); accrued interest of $659,172 (of which $53,092 is payable to related parties); current portion of notes payable, net of discounts, of $268,132; and current portion of notes payable - related parties, of $110,500.

During the six months ended June 30, 2014, the Company generated cash from operating activities in the amount of $681,861. This consisted of the Company's net income of $615,847, offset by non-cash charges for the amortization of discount on notes payable of $492,776; depreciation and amortization of $133,303; and non-cash compensation in the amount of $72,833.

The Company had cash used by investing activities of $57,519 for the six months ended June 30, 2014, which consisted primarily of $54,000 for the purchase of an investment and $3,519 for the acquisition of equipment. The Company had cash used by financing activities of $431,812 for the six months ended June 30, 2014, which consisted of $371,812 principal payments on notes payable; and $60,000 for the purchase of treasury stock.


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The Company had net working capital of $1,589,173 as of June 30, 2014. We have generated positive cash flow from operations during the years ended December 31, 2013 and 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 9 to the financial statements included in this report. As we seek to increase our sales of new items and enter new markets, acquire new businesses 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, 2013 which is available at no cost at www.sec.gov.

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