Accrued interest on the Company’s convertible notes payable is convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share. At JuneSeptember 30, 2014, convertible accrued interest was $659,172$653,019 (including $53,092$53,621 to a related party), which was convertible into 2,636,6882,612,076 shares of common stock; at December 31, 2013, convertible accrued interest was $720,189 (including $48,708 to a related party) which was convertible into 2,880,756 shares of common stock.
| | June 30, 2014 | | | December 31, 2013 | |
Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due March 2018. During the three months ended June 30, 2014, the Company made payments of principal and interest in the amounts of $13,650 and $3,949, respectively; during the six months ended June 30, 2014, the Company made payments of principal and interest in the amounts of $27,300 and $7,922, respectively. | | | | | | | | |
| | | | | | | | |
Term loan from Fifth Third Bank in the original amount of $1,000,000; $660,439 of this amount was used to pay a note payable; $339,561 was used for working capital. This loan is secured by first priority perfected security interest in all personal property of the Company, bears interest at the rate of Libor plus 4.75%, with principal monthly principal payments of $55,556 plus accrued interest. The note is due May 26, 2015. During the three months ended June 30, 2014, the Company made payments of principal and interest in the amounts of $166,667 and $9,228, respectively; During the six months ended June 30, 2014, the Company made payments of principal and interest in the amounts of $333,333 and $20,370, respectively | | | | | | | | |
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A total of 18 convertible notes payable (the “Convertible Notes Payable”). Certain of the Convertible Notes Payable contain cross default provisions, and are secured by subordinated interest in a majority of the Company’s assets. The Convertible Notes Payable bear interest at the rate of 1.9% per annum; principal and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. During the three months ended June 30, 2014, principal in the amount of $77,902 was converted to 311,608 shares of common stock, and accrued interest in the amount of $33,219 was converted to 132,873 shares of common stock. During the six months ended June 30, 2014, principal in the amount of $120,583 was converted to 482,332 shares of common stock, and accrued interest in the amount of $80,627 was converted to 322,503 shares of common stock. Also during the three months ended June 30, 2014, principal in the amount of $5,000 was paid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015. A discount to the notes in the aggregate amount of $732,565 was recorded to recognize the value of the beneficial conversion feature embedded in the extension of the term of the notes. During the three months ended June 30, 2014, $120,965 of this discount was charged to operations; in addition, the amount of $111,776 representing a previous discount to these notes was also charge to operations during the period. | | | | | | | | |
| | | | | | | | |
Secured vehicle lease payable at an effective interest rate of 9.96% for purchase of truck, payable in monthly installments (including principal and interest) of $614 through January 2015. During the three months ended June 30, 2014, the Company made payments in the aggregate amount of $1,842 on this note, consisting of $1,710 of principal and $132 of interest. During the six months ended June 30, 2014, the Company made payments in the aggregate amount of $3,684 on this note, consisting of $3,378 of principal and $306 of interest. | | | | | | | | |
| | September 30, 2014 | | | December 31, 2013 | |
Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due March 2018. During the three months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $13,650 and $3,949, respectively; during the nine months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $40,950 and $7,922, respectively. | | | | | | | | |
| | | | | | | | |
Term loan from Fifth Third Bank in the original amount of $1,000,000; $660,439 of this amount was used to pay a note payable; $339,561 was used for working capital. This loan is secured by first priority perfected security interest in all personal property of the Company, bears interest at the rate of Libor plus 4.75%, with principal monthly principal payments of $55,556 plus accrued interest. The note is due May 26, 2015. During the three months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $166,667 and $9,228, respectively; During the nine months ended September 30, 2014, the Company made payments of principal and interest in the amounts of $500,000 and $20,370, respectively | | | | | | | | |
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Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006, issued pursuant to the Company’s then employment agreement with Mr. Klepfish, which provided that the amount of $4,500 in salary is accrued each month to a note payable. These notes are unsecured. These notes bear interest at the rate of 8% per annum and have no due date. As of July 1, 2014, the notes bear an interest rate of 1.9%. These notes and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. During the six months ended June 30, 2014, Mr. Klepfish gifted three notes to an unrelated third party. | | | | | | | | |
| | | | | | | | |
Secured vehicle lease payable at an effective interest rate of 8.26% for purchase of truck payable in monthly installments (including principal and interest) of $519 through June 2015. During the three months ended June 30, 2014, the Company made payments in the aggregate amount of $1,558 on this note, consisting of $1,415 of principal and $143 of interest. During the six months ended June 30, 2014, the Company made payments in the aggregate amount of $3,116 on this note, consisting of $2,802 of principal and $314 of interest. | | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | September 30, 2014 | | | December 31, 2013 | |
A total of 18 convertible notes payable (the “Convertible Notes Payable”). Certain of the Convertible Notes Payable contain cross default provisions, and are secured by subordinated interest in a majority of the Company’s assets. The Convertible Notes Payable bear interest at the rate of 1.9% per annum; principal and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. During the three months ended September 30, 2014 no principal was converted to shares of common stock, and accrued interest in the amount of $10,357 was converted to 41,428 shares of common stock. During the nine months ended September 30, 2014, principal in the amount of $120,583 was converted to 482,332 shares of common stock, and accrued interest in the amount of $90,984 was converted to 363,936 shares of common stock. Also during the three and nine months ended September 30, 2014, principal payments in the amount of $5,000 and $10,000, respectively, was paid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015. A discount to the notes in the aggregate amount of $732,565 was recorded to recognize the value of the beneficial conversion feature embedded in the extension of the term of the notes. During the three and nine months ended September 30, 2014, $115,765 and $236,730, respectively, of this discount was charged to operations; in addition, the amount of $111,776 representing a previous discount to these notes was also charge to operations during the period. | | | | | | | | |
| | | | | | | | |
Secured vehicle leases payable at an effective interest rate of 9.96% for purchase of truck, payable in monthly installments (including principal and interest) of $614 through January 2015. During the three months ended September 30, 2014, the Company made payments in the aggregate amount of $1,842 on this lease, consisting of $1,753 of principal and $89 of interest. During the nine months ended September 30, 2014, the Company made payments in the aggregate amount of $5,526 on this lease, consisting of $5,131 of principal and $395 of interest. | | | | | | | | |
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006, issued pursuant to the Company’s then employment agreement with Mr. Klepfish, which provided that the amount of $4,500 in salary is accrued each month to a note payable. These notes are unsecured and may not be prepaid without Mr. Klepfish’s consent. These notes bear interest at the rate of 8% per annum and have no due date. As of July 1, 2014, the notes bear an interest rate of 1.9% and as of November 17, 2014 the interest rate was reduced to 0%. These notes and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. During the nine months ended September 30, 2014, Mr. Klepfish gifted three notes to an unrelated third parties. During the three and nine months ended September 30, 2014, the Company accrued interest in the amount of $529 and $4,913, respectively, on these notes. | | | | | | | | |
| | | | | | | | |
Promissory note in the amount of $200,000 bearing interest at the rate of 1% per annum. Principal in the amount of $100,000 is due June 30, 2015; principal in the amount of $100,000 is due June 30, 2016. The note is convertible into shares of the Company’s common stock at the conversion price of $1.54 per share. During the three and nine months ended September 30, 2014, the Company accrued interest in the amount of $500 on this note. | | | | | | | | |
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Four notes payable to shareholders in the aggregate amount of $1,500,000. These notes are unsecured, bear no interest and mature on August 15, 2017. In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full. | | | | | | | | |
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Two notes payable to shareholders in the aggregate amount of $699,970. These notes are unsecured, and bear interest at the rate of 4% per annum. These notes are due on August 17, 2017. In the event the notes are not paid when due, amounts not paid under the notes shall bear interest at a rate of 21% per annum until paid in full. During the three and nine months ended September 30, 2014, the interest in the amount of $8,720 accrued on these notes. | | | | | | | | |
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Note payable in monthly installments, including interest at the rate of 2% over prime (5.25% as of September 30, 2014), due October 1, 2019, and secured by all assets of The Fresh Diet, the life insurance policies maintained on two of the shareholders of the Company, and personally guaranteed by these shareholders. During the three and nine months ended September 30, 2014, the principal payments in the aggregate amount of $1,802 were made on this note, and interest expense in the amount of $585 was recorded. | | | | | | | | |
| | | | | | | | |
The Company has a $75,000 line of credit which bears monthly interest at the variable interest rate of 2% over prime rate. The line of credit is secured by all corporate assets and by a condominium owned by one of the shareholders. | | | | | | | | |
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Note payable in monthly installments, including interest at the rate of 1.75% over prime adjusted quarterly (5% as of September 30, 2014), due on December 20, 2017, and secured by all assets of The Fresh Diet and personally guaranteed by the spouse of one of its officers. During the three and nine months ended September 30, 2014, principal payments in the aggregate amount of $7,766 were made on this note, and interest expense in the amount of $1,476 was recorded. | | | | | | | | |
| | September 30, 2014 | | | December 31, 2013 | |
Note payable issued for acquisition of Diet at Your Doorstep's customer lists due on May 1, 2015, and with quarterly payments in the form of 10% of revenue attributed to sales to customers who transition to the Fresh Diet's meal plans. Total payments capped at $40,000. During the three and nine months ended September 30, 2014, no payments were made on this loan. | | | | | | | | |
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Unsecured note payable for purchase of website domain bearing 0% interest rate and due on November 20, 2017, with monthly payments of $1,065. During the three and nine months ended September 30, 2014, principal payments in the amount of $1,065 were made on this loan. | | | | | | | | |
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Capital lease obligations under a master lease agreement for vehicles payable in monthly installments, including interest rate ranging from 2.32% to at 7.5%, due on various dates through December 1, 2015, and collateralized by the vehicles. During the three and nine months ended September 30, 2014, principal payments in the aggregate amount of $38,720 were made on these capital leases, and interest expense in the amount of $1,685 was recorded. | | | | | | | | |
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Capital lease obligation for equipment payable in monthly installments, including interest at the rate of 20.35%, due on November 9, 2014, and collateralized by the equipment. During the three and nine months ended September 30, 2014, principal payments in the aggregate amount of $6,036 were made on interest expense in the amount of $817 was recorded. | | | | | | | | |
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Secured vehicle lease payable at an effective interest rate of 8.26% for purchase of truck payable in monthly installments (including principal and interest) of $519 through June 2015. During the three months ended September 30, 2014, the Company made payments in the aggregate amount of $1,558 on this lease, consisting of $1,445 of principal and $113 of interest. During the nine months ended September 30, 2014, the Company made payments in the aggregate amount of $4,674 on this note, consisting of $4,247 of principal and $427 of interest. | | | | | | | | |
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During the three and sixnine months ended JuneSeptember 30, 2014, the Company amortized discounts to notes payable in the amounts of $232,741$115,765 and $492,776,$608,541, respectively. During the three and sixnine months ended JuneSeptember 30, 2013, the Company amortized discounts to notes payable the amounts of $332,617$175,271 and $637,665,$1,337,934, respectively.
The Company calculates the fair value of any beneficial conversion features embedded in its convertible notes via the Black-Scholes valuation method. The Company also calculates the fair value of any detachable warrants offered with its convertible notes via the Black-Scholes valuation method. The instruments are considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features do not exceed the face value of the notes. These discounts are amortized to interest expense over the term of the notes.
Effective August 22, 2013,During the three months ended September 30, 2014, the Company entered into agreements (the “2013 Notes Payable Extension Agreement”) with certain convertibleissued its note payable in the amount of $200,000 pursuant to the acquisition of Organic Food Brokers (see Note 3). Also during the three months ended September 30, 2014, the Company assumed notes holders regarding twenty-five convertible notespayable and capital leases in the aggregate amount of $912,982 in principal and $744,246 in accrued interest. Pursuant$4,306,774, including $2,199,970 due to related parties, pursuant to the 2013 Notes Payable Extension Agreement, the maturity dateacquisition of each note and accrued interest was extended to May 15, 2014; the interest rate was changed to 5%; and the expiration of each warrant associated with each of the notes was extended to February 1, 2016 or February 1, 2017. Pursuant to debt extinguishment accounting, the Company charged to interest expense the unamortized amount of the discount on the related convertible notes at August 22, 2013 in the amount of $491,606. Prior to August 22, 2013, the Company had amortized $637,663 of the discount. At August 22, 2013, the Company recorded a new discount on the convertible notes which was attributable to the conversion feature and related warrants in the aggregate amount of $826,238, which was charged to additional paid-in capital. The discount will be amortized over the term of the related notes.
Effective May 13, 2014, the Company entered into agreements (the “2014 Notes Payable Extension Agreement”) with certain convertible notes holders regarding nineteen convertible notes in the aggregate amount of $732,565 in principal and $684,147 in accrued interest. Pursuant to the 2014 Notes Payable Extension Agreement, the maturity date of each note and accrued interest was extended to December 31, 2015, and the interest rate was reduced to 1.9%Fresh Diet (see Note 3). The prior discount had been fully amortized. At May 13, 2014, the Company recorded a new discount on the convertible notes which was attributable to the conversion in the aggregate amount of $732,467, which was charged to additional paid-in capital. The discount will be amortized over the term of the related notes.
10.13. RELATED PARTY TRANSACTIONS
For the sixnine months ended JuneSeptember 30, 2014:
Pursuant to the terms of the Artisan Acquisition Agreement, the Company made payments in the aggregate amount of $77,581 to David Vohaska. Mr. Vohaska is no longer a related party.
Pursuant to a settlement agreement, the Company purchased 85,950 shares of its common stock from Michael Ferrone, an individual owning greater than 5% of the outstanding shares of the Company. The purchase price was $60,000 or $0.698 per share. These shares were returned to the Company treasury.
For the six months ended June 30, 2013:
Pursuant to the terms of the Artisan Acquisition Agreement, the Company made a milestone earn-out payment in the amount of $37,500 to David Vohaska. Mr. Vohaska is no longer a related party.
11. CONTINGENT LIABILITY
Pursuant to the Artisan acquisition, the Company was obligated to pay up to an additional $300,000, plus interest, in the event certain financial milestones are met by April 30, 2014. This obligation had a fair value of $131,000 at the time of the Artisan acquisition. During the three and six months ended June 30, 2014, the Company made payments in the aggregate amount of $38,536 and $77,581, respectively, against this liability. During the three months ended June 30, 2014, the Company reversed an accrual in the amount of $3,300 related to this liability. At June 30, 2014, there is no further balance due under this obligation.
12. EQUITY
Common Stock
At June 30, 2014 and December 31, 2013, 214,409 shares are deemed issued but not outstanding by the Company.
Six months ended June 30, 2014:
The Company issued 804,83575,000 shares and 100,000 shares of common stock to its Chief Executive Officer and its President, respectively, for the conversion of principal in the amount of $120,583 and accrued interest in the amount of $80,627 for a total conversion value of $201,210.compensation previously owed.
The Company issued 16,203 shares of common stock for the cashless exercise of warrants.
The Company purchased 85,950 shares of the Company’s outstanding common stock. The purchase price was $60,000 and the Company recorded the transaction at cost to Treasury Stock. In addition, the Company has an additional 400,304 shares of common stock which are held in treasury stock at a cost of $100,099.
Six months ended June 30, 2013:
The Company issued 279,310 shares of common stock for settlement of a note. This issuance of shares was accrued in a prior period, and was carried as common stock subscribed in the company’s balance sheet at December 31, 2012.
During the six months ended June 30, 2013, the Company issued 341,794 shares of common stock for the conversion of principal of a convertible note in the amount of $50,000 and accrued interest in the amount of $35,448, for a total conversion value of $85,448.
Warrants
The following table summarizes the significant terms of warrants outstanding at June 30, 2014. These warrants may be settled in cash or via cashless conversion into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:
| | | | | | Weighted | | | Weighted | | | | | | Weighted | |
| | | | | | average | | | average | | | | | | average | |
Range of | | | Number of | | | remaining | | | exercise | | | | | | exercise | |
exercise | | | warrants | | | contractual | | | price of | | | Number of | | | price of | |
Prices | | | Outstanding | | | life (years) | | | outstanding Warrants | | | warrants Exercisable | | | exercisable Warrants | |
$ | 0.010 | | | | 700,000 | | | | 5.88 | | | $ | 0.010 | | | | 700,000 | | | $ | 0.010 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.250 | | | | 764,781 | | | | 1.59 | | | $ | 0.250 | | | | 764,781 | | | $ | 0.250 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.550 | | | | 1,507,101 | | | | 2.59 | | | $ | 0.550 | | | | 1,507,101 | | | $ | 0.550 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.575 | | | | 2,828,406 | | | | 2.59 | | | $ | 0.575 | | | | 2,828,406 | | | $ | 0.575 | |
| | | | | 5,800,288 | | | | 2.86 | | | $ | 0.456 | | | | 5,800,288 | | | $ | 0.456 | |
Transactions involving warrants are summarized as follows:
| | Number of | | | Weighted Average | |
| | Warrants | | | Exercise Price | |
Warrants outstanding at December 31, 2013 | | | 5,819,129 | | | $ | 0.457 | |
| | | | | | | | |
Granted | | | - | | | | - | |
Exercised | | | (18,841 | ) | | | 0.250 | |
Cancelled / Expired | | | - | | | | - | |
| | | | | | | | |
Warrants outstanding at June 30, 2014 | | | 5,800,288 | | | $ | 0.456 | |
During the six months ended June 30, 2014, warrants to purchase a total of 18,841 shares of common stock at a price of $0.25 were exercise in cashless conversion transactions; this resulted in the net issuance of 16,203 shares of common stock. There were no warrants issued during the period.
Options
The following table summarizes the changes outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:
| | | | | | | | | Weighted | | | | | | Weighted | |
| | | | | | Weighted | | | average | | | | | | average | |
| | | | | | average | | | exercise | | | | | | exercise | |
Range of | | | Number of | | | Remaining | | | price of | | | Number of | | | price of | |
exercise | | | options | | | contractual | | | outstanding | | | options | | | exercisable | |
Prices | | | Outstanding | | | life (years) | | | Options | | | Exercisable | | | Options | |
$ | 0.350 | | | | 1,240,000 | | | | 3.09 | | | $ | 0.350 | | | | 1,240,000 | | | $ | 0.350 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.380 | | | | 132,500 | | | | 0.75 | | | $ | 0.380 | | | | 132,500 | | | $ | 0.380 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.400 | | | | 275,000 | | | | 2.51 | | | $ | 0.400 | | | | 25,000 | | | $ | 0.400 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.450 | | | | 132,500 | | | | 1.00 | | | $ | 0.450 | | | | 132,500 | | | $ | 0.450 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.474 | | | | 132,500 | | | | 1.25 | | | $ | 0.474 | | | | 132,500 | | | $ | 0.474 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.480 | | | | 132,500 | | | | 1.50 | | | $ | 0.480 | | | | 132,500 | | | $ | 0.480 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.570 | | | | 225,000 | | | | 3.51 | | | $ | 0.570 | | | | - | | | $ | N/A | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 1.310 | | | | 75,000 | | | | 4.18 | | | $ | 1.310 | | | | - | | | $ | N/A | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 1.600 | | | | 310,000 | | | | 3.51 | | | $ | 1.600 | | | | 155,000 | | | $ | 1.600 | |
| | | | | 2,655,000 | | | | 2.75 | | | $ | 0.566 | | | | 1,950,000 | | | $ | 0.476 | |
Transactions involving stock options are summarized as follows:
| | Number of Shares | | | Weighted Average Exercise Price | |
Options outstanding at December 31, 2013 | | | 2,580,000 | | | $ | 0.544 | |
| | | | | | | | |
Granted | | | 75,000 | | | $ | 1.310 | |
Exercised | | | - | | | | - | |
Cancelled / Expired | | | - | | | $ | - | |
| | | | | | | | |
Options outstanding at June 30, 2014 | | | 2,655,000 | | | $ | 0.566 | |
Aggregate intrinsic value of options outstanding and exercisable at June 30, 2014 and 2013 was $1,473,620 and $85,200, respectively. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $1.20 and $0.38 as of June 30, 2014 and 2013, respectively, and the exercise price multiplied by the number of options outstanding.
During the six months ended June 30, 2014, the Company issued options to purchase 75,000 shares of common stock at a price of $1.31 per share with the following terms: four-year options to purchase 12,500 shares vest on December 31, 2014; four-year options to purchase 12,500 shares vest on December 31, 2015; and five-year options to purchase 50,000 shares vest on December 31, 2016. During the three and six months ended June 30, 2014, the Company charged a total of $39,245 and $47,958, respectively, to operations related to recognized stock-based compensation expense for employee stock options; during the three and six months ended June 30, 2013, the Company charged a total of $0 and $35,662, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
Accounting for warrants and stock options
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
| | June 30, | | | June 30, | |
| | 2014 | | | 2013 | |
Volatility | | | | % | | | 189.28 | % |
Dividends | | $ | - | | | $ | - | |
Risk-free interest rates | | | 0.37 | % | | | 0.37 | % |
Term (years) | | | 4.00 | | | | 4.00 | |
13. SUBSEQUENT EVENTS
Effective August 13, 2014, the Company amended the terms of the employment agreements of its CEO and President to, among other things, extend the agreements for one year through 2016, provide for salary increases of 10%, removal of rights to certain bonuses as currently provided for 2014 and 2015 and added a simplified EBITDA driven performance based bonus structure for 2014. The amended terms also provide that the executives may elect to take any part of the cash portion of salary or bonus in cash or stock, but the stock portion may only be taken in stock. A summary
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On June 1, 2012, nine persons, on behalf of themselves and others similarly situated, filed a Collective and Collective and Class Action Complaint against The Fresh Diet Inc. and certain individuals and on or about October 26, 2012, Plaintiffs filed an Amended Complaint adding additional defendants seeking to recover unpaid wages on behalf of drivers for The Fresh Diet and/or Late Night Express who delivered meals in New York Tristate area. In an Opinion dated September 29, 2014 the Plaintiff's motion for summary Judgment was denied as was our cross motion for Summary Judgment; the Plaintiff's motion to certify a class of 109 drivers as an increase from the 29 in the case was denied; and our motion to decertify the case from 29 down to the 8 named defendants was granted. The Company has recorded a contingent liability of $250,000 representing the estimated potential amounts payable pursuant to this litigation, but believes the actual amount may be much less.
On September 3, 2014 the registrant’s subsidiary was served a complaint by Monolith Ventures, Ltd., in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida (the “Complaint”). The plaintiff listed in the Complaint, which was brought by a shareholder of less than 24% of the outstanding shares of The Fresh Diet, Inc., seeks to attack the registrant’s recently concluded acquisition of The Fresh Diet, Inc., which was approved by a majority of the Fresh Diet shareholders. In the Complaint, the plaintiff asks the court to set aside the transaction. The registrant believes the Complaint is without merit, contains numerous factual errors, and the registrant is confident that it will prevail.
15. EQUITY
Common Stock
At September 30, 2014 and December 31, 2013, 214,409 shares are deemed issued but not outstanding by the Company.
Nine months ended September 30, 2014:
The Company completed an equity financing whereby 1,585,000 shares of common stock were sold at a price of $1.00 per share for a total of $1,585,000. The financing was an exempt private placement under Regulation D with offers and sales made only to “accredited investors” without the use of public advertising. At September 30, 2014, 1,235,000 of these shares have been issued, and an additional 250,000 have been subscribed for $250,000 cash, which is carried on the Company’s balance sheet as Common Stock Subscribed. An additional 100,000 shares were sold for $100,000 cash subsequent to September 30, 2014.
The Company issued 16,202 shares of common stock for the cashless exercise of warrants.
The Company issued 17,248 shares of common stock with a fair value of $17,593 to a service provider.
The Company issued 1,001,819 shares of common stock for the exercise of warrants for an aggregate exercise price of $350,000.
The Company issued 846,266 shares of common stock upon conversion of $120,583 of principal and $90,984 of accrued interest on notes payable.
The Company issued 175,000 shares of common stock to officers for shares owed and previously accrued at $65,835
Pursuant to the acquisition of The Fresh Diet, the Company issued 6,889,937 shares of common stock with a fair value of $1.40 for a total cost of $9,645,912. The Company also recorded the issuance of an additional 3,110,063 shares of common stock with a fair value of $1.40 per share to shareholders of The Fresh Diet who have not yet submitted their shares of The Fresh Diet to the Company (see Note 3).
The Company purchased 85,950 shares of the Company’s outstanding common stock. The purchase price was $60,000 and the Company recorded the transaction at cost to Treasury Stock. In addition, the Company has an additional 400,304 shares of common stock which are held in treasury stock at a cost of $100,099.
Warrants
The following table summarizes the significant terms of warrants outstanding at September 30, 2014. These warrants may be settled in cash and, unless the underlying shares are registered, via cashless conversion, into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:
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Range of | | | Number of | | | remaining | | | exercise | | | | | | exercise | |
exercise | | | warrants | | | contractual | | | price of | | | Number of | | | price of | |
Prices | | | Outstanding | | | life (years) | | | outstanding Warrants | | | warrants Exercisable | | | exercisable Warrants | |
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Transactions involving warrants are summarized as follows:
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Warrants outstanding at December 31, 2013 | | | | | | | | |
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Warrants outstanding at September 30, 2014 | | | | | | | | |
During the three months ended September 30, 2014, warrants to purchase a total of 18,841 shares of common stock at a price of $0.25 were exercised in cashless conversion transactions; this resulted in the net issuance of 16,602 shares of common stock. During the nine months ended September 30, 2014, warrants to purchase 670,000 shares of common stock were exercised at price of $0.25 per share for a total of $167,500, and warrants to purchase 331,819 shares of common stock were exercised at a price of $0.55 per share for a total of $182,500. There were no warrants issued during the period.
Options
The following table summarizes the changes outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:
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Range of | | | Number of | | | Remaining | | | price of | | | Number of | | | price of | |
exercise | | | options | | | contractual | | | outstanding | | | options | | | exercisable | |
Prices | | | Outstanding | | | life (years) | | | Options | | | Exercisable | | | Options | |
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Transactions involving stock options are summarized as follows:
| | Number of Shares | | | Weighted Average Exercise Price | |
Options outstanding at December 31, 2013 | | | | | | | | |
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Options outstanding at September 30, 2014 | | | | | | | | |
Aggregate intrinsic value of options outstanding and exercisable at September 30, 2014 and 2013 was $2,124,120 and $1,247,370, respectively. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $1.42 and $1.05 as of September 30, 2014 and 2013, respectively, and the exercise price multiplied by the number of options outstanding.
During the nine months ended September 30, 2014, the Company issued options to purchase 75,000 shares of common stock at a price of $1.31 per share with the following terms: four-year options to purchase 12,500 shares vest on December 31, 2014; four-year options to purchase 12,500 shares vest on December 31, 2015; and five-year options to purchase 50,000 shares vest on December 31, 2016. The Company also issued 100,000 stock options at a price of $1.46 per share valued at $71,349 in connection with the acquisition, 15,000 stock options at a price of $1.44 per share, and 15,000 stock options at a price of $1.90 per share, all of which vested up issuance.
During the three and nine months ended September 30, 2014, the Company charged a total of $95,304 and $143,262, respectively, to operations related to recognized stock-based compensation expense for employee stock options; during the three and nine months ended September 30, 2013, the Company charged a total of $0 and $35,662, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
Accounting for warrants and stock options
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
| | September 30, | | | September 30, | |
| | 2014 | | | 2013 | |
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16. NONCONTROLLING INTEREST
The carrying value and ending balance of the noncontrolling interest at September 30, 2014 was calculated as follows:
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Carrying value of noncontrolling interest acquired with the Fresh Diet Merger | | $ | 674 | |
Loss attributable to noncontrolling interest | | | 39,563 | |
Ending balance of noncontrolling interest at September 30, 2014 | | $ | 40,237 | |
17. SUBSEQUENT EVENTS
The employment agreements for each of Sam Klepfish and Justin Wiernasz, the Corporation’s CEO and President, respectively, were amended effective November 17, 2014 to provide upon a change of control for acceleration of equity awards and removal of restrictions thereon and a payment in the event of a termination without Cause. Messrs. Klepfish and Wiernasz were also each awarded, to further retention of qualified management, to further incentivize management, and to further align management with the new capital structure post the acquisition of The Fresh Diet, Restricted Stock Units ( RSU) effective November 17, 2014, in the following amounts: 300,000 restricted stock units (“RSU”) which vest between July 31, 2015 and December 31, 2015, 300,000 RSUs which vest December 31, 2016 and 400,000 RSUs which vest July 1, 2017, subject to performance and customary vesting conditions.
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, |
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● | 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,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. successful, |
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● | 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.
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 sixnine months ended JuneSeptember 30, 2014 and 2013:
| | June 30, | |
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Number of vested options outstanding | | | 1,950,000 | | | | 1,695,000 | |
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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) | | $ | | | | $ | - | |
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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 | |
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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. Pursuant to a purchase agreement, effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).
On August 15, 2014, pursuant to a merger agreement (the “Fresh Diet Merger Agreement”), the Company acquired The Fresh Diet, Inc. (“FD”) through a reverse triangular merger as the registrant created a subsidiary corporation (FD Acquisition Corp) that merged with and into FD with FD being the surviving corporation and becoming a wholly-owned subsidiary of the registrant. FD is the nationwide leader in freshly prepared gourmet specialty meals, using the finest specialty, artisanal, direct from source ingredients, delivered daily, directly to consumers using The Fresh Diet® platform. The Fresh Diet’s platform includes a company managed and owned preparation and logistics infrastructure, including a comprehensive company owned network of same day and next day last mile food delivery capabilities. The purchase price consisted of 10,000,000 shares of the registrant’s common stock valued at $14,000,000. The majority of FD’s current liabilities consist of approximately $3.8 million of deferred revenues and approximately $2.1 million in short term commercial loans and there are additional ordinary course of business expenses such as trade payables, payroll and sales taxes which varies from month to month. In addition, it has some long term obligations the bulk of which consist of interest free loans from FD’s shareholders in the amount of approximately $2.2 million which are not due for three years. Prior to the merger FD had purchased an immaterial amount of product from the registrant. It is anticipated that FD will operate as an independent subsidiary subject to oversight of its board of directors and the registrant’s President and CEO and that two of FD’s executive officers will be appointed to the registrant’s board of directors.
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.
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 JuneSeptember 30, 2014 and 2013, sales to USF accounted for 72%57% and 72% of total sales, respectively. During the sixnine months ended JuneSeptember 30, 2014 and 2013, sales to USF accounted for 74%68% 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 sixnine months ended JuneSeptember 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 JuneSeptember 30, 2014 Compared to Three Months Ended JuneSeptember 30, 2013
Revenue
Revenue increased by $1,130,726,$2,917,651, or approximately 21.3%50.0%, to $6,449,027$8,757,934 for the three months ended JuneSeptember 30, 2014 from $5,318,301$5,840,283 in the prior year. The$2,182,219, or 74.8% of the increase was attributable to acquisitions the Company made during the period. The balance of the increase, or $735,432, was due 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.
Cost of goods sold
Our cost of goods sold for the three months ended September 30, 2014 was $6,577,167, an increase of $2,415,402 or approximately 58.0% compared to cost of goods sold of $4,161,765 for the three months ended September 30, 2014. $1,769,379 or 73.2% of the increase was attributable to acquisitions the Company made during the period. Cost of goods sold is primarily made up of the following expenses for the three months ended September 30, 2014: cost of goods of specialty, meat, game, cheese poultry, prepared meals and other sales categories in the amount of $3,551,746; and shipping, packaging, and delivery expenses in the amount of $3,025,421. Total gross margin was approximately 24.9% of sales in the third quarter of 2014, compared to approximately 28.7% of sales in the third 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 $1,391,114 or approximately 108.5% to $2,673,836 during the three months ended September 30, 2014 compared to $1,282,722 for the three months ended September 30, 2013. $1,061,524 or 76.3% of the increase was attributable to acquisitions the Company made during the period. Selling, general and administrative expenses were primarily made up of the following for the three months ended September 30, 2014: payroll and related expenses, including employee benefits, in the amount of $1,390,827; facilities and office expense in the amount of $152,986; consulting and professional fees in the amount of $271,378; amortization and depreciation in the amount of $338,712; travel and entertainment expenses in the amount of $49,344; insurance expense in the amount of $92,271; computer support expenses in the amount of $48,055; banking and credit card fees expenses in the amount of $92,146; taxes in the amount of $81,346; vehicle expense in the amount of $21,016; marketing costs in the amount of $18,365; advertising in the amount of $67,660; and bad debt expense in the amount of $31,041.
Other Income
Other income increased by $25,495 to $25,495 during the three months ended September 30, 2014 compared to $0 for the three months ended September 30, 2013. The increase in other income was due to gains on the sale of property and equipment in the amount of $24,495. There were no comparable transactions during the three months ended September 30, 2013.
Interest expense
Interest expense, net of interest income, decreased by $587,067 or approximately 80.0% to $146,487 during the three months ended September 30, 2014, compared to $733,554 during the three months ended September 30, 2013. Approximately 21.0% or $30,722 of the interest expense was accrued or paid interest on the company’s notes payable; approximately 79.0% or $115,765 of the interest expense was non-cash interest expense associated with the amortization of the discounts on the Company’s notes payable.
Net income attributable to variable interest entities
During the three months ended September 30, 2014, the Company recognized income of $39,563 from a variable interest entity acquired as part of the acquisition of The Fresh Diet during the current period. There was no such income or loss in the comparable period of the prior year.
Net Income attributable to Innovative Food Holdings, Inc.
For the reasons above, the Company had a net loss for the three months ended September 30, 2014 of $653,624, which is an increase of $315,866 or approximately 93.5% compared to a net loss of $337,758 during the three months ended September 30, 2013.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Revenue
Revenue increased by $4,360,169 or approximately 26.6% to $20,760,427 for the nine months ended September 30, 2014 from $16,400,258 in the prior year. $2,182,219 or 50.5% of the increase was attributable to acquisitions the Company made during the period. The balance of the increase, or $2,177,950, was due to year-over-year organic sales growth.
We continue to assess the potential of new revenue sources from the production and sale of proprietary food products, additional product lines, additional direct to consumer markets 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 and food production 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 threenine months ended JuneSeptember 30, 2014 was $4,464,276,$14,771,298, an increase of $633,828$3,110,438 or approximately 16.5%26.7% compared to cost of goods sold of $3,830,448$11,660,860 for the threenine months ended JuneSeptember 30, 2013.2014. $1,769,379 or 56.9% of the increase was attributable to acquisitions the Company made during the period. Cost of goods sold is primarily made up of the following expenses for the threenine months ended JuneSeptember 30, 2014: cost of goods of specialty, meat, game, cheese poultry, prepared meals and other sales categories in the amount of $3,463,498;$9,574,719; and shipping, packaging, and packagingdelivery 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.$5,196,579. Total gross margin was approximately 30.8%28.8% of sales in the second quarterfirst three quarters of 2014, compared to approximately 28.0%28.9% of sales in the second quarterfirst three quarters 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.
We currently expect, if market conditions remain constant and revenues increase, that our cost of goods sold as a percentage of revenues will improve
Selling, general and administrative expenses
Selling, general, and administrative expenses increased by $94,763$1,653,374 or approximately 7.8%44.8% to $1,303,106$5,345,053 during the threenine months ended JuneSeptember 30, 2014 compared to $1,208,343$3,691,679 for the threenine months ended JuneSeptember 30, 2013. $1,061,524 or 64.2% % of the increase was attributable to acquisitions the Company made during the period. Selling, general and administrative expenses were primarily made up of the following for the threenine months ended JuneSeptember 30, 2014: payroll and related expenses, including employee benefits, in the amount of $897,629;$3,195,556; facilities and office expense in the amount of $106,978;$364,137; consulting and professional fees in the amount of $90,975;$467,053; amortization and depreciation in the amount of $65,727; commissions in the amount of$472,015; travel and entertainment expenses in the amount of $37,970;$126,917; insurance expense in the amount of $32,796;$161,457; computer support expenses in the amount of $26,140;$126,011; banking and credit card fees expenses in the amount of $26,077;$137,340; taxes in the amount of $81,821; vehicle expense in the amount of $15,921; food show expense$47,502; marketing costs in the amount of $11,679;$37,795; advertising in the amount of $3,237;$82,711; 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.$25,316. We expect our selling, general, and administrative expenses to remain steadyincrease 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 ofprior year due to 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,acquisitions 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.
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.has completed.
Other Income
Other income increased by $20,000$45,495 to $20,000$45,495 during the sixnine months ended JuneSeptember 30, 2014 compared to $0 for the sixnine months ended JuneSeptember 30, 2013. The increase in other income was due to gains on the sale of property and equipment in the amount of $24,495, and 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 sixnine months ended JuneSeptember 30, 2013.
Interest expense
Interest expense, net of interest income, decreased by $173,259$760,326 or approximately 24.2%52.5% to $541,298$687,785 during the sixnine months ended JuneSeptember 30, 2014, compared to $714,557$1,448,111 during the sixnine months ended JuneSeptember 30, 2013. Approximately 9.0%11.5% or $48,522$79,244 of the interest expense was accrued or paid interest on the company’s notes payable; approximately 91.0%88.5% or $492,776$608,541 of the interest expense was non-cash interest expense associated with the amortization of the discounts on the Company’s notes payable.
Net income attributable to variable interest entities
During the three months ended September 30, 2014, the Company recognized income of $39,653 from a variable interest entity acquired in the acquisition of The Fresh Diet during the current period. There was no such income or loss in the comparable period of the prior year.
Net Income attributable to Innovative Food Holdings, Inc.
For the reasons above, the Company had a net income for the sixnine months ended JuneSeptember 30, 2014 of $615,847,$1,786, which is an increase of $678,481$402,178 compared to a net loss of $62,634$400,392 during the sixnine months ended JuneSeptember 30, 2013.
Liquidity and Capital Resources
As of JuneSeptember 30, 2014, the Company had current assets of $4,311,096$7,289,572 consisting of cash and cash equivalents of $2,266,135, trade$4,079,213, accounts receivable of $1,148,316,$1,165,410, inventory of $885,329, and$1,231,299, other current assets of $11,316.$351,024, and amounts due from related parties of $462,626. Also at JuneSeptember 30, 2014, the Company had current liabilities of $2,721,923,$10,972,978, consisting of accounts payable andof $2,845,962; accrued liabilities of $1,684,119$1,650,762 (of which $248,985$178,150 is payable to related parties); deferred revenue of $3,961,634, revolving credit facilities of $897,222; accrued interest of $659,172$670,659 (of which $53,092$53,621 is payable to related parties); current portion of notes payable, net of discounts, of $268,132;$209,339, contingent liabilities of $448,750; and current portion of notes payable –to related parties, of $110,500.
During the sixnine months ended JuneSeptember 30, 2014, the Company generated cash from operating activities in the amount of $681,861.$1,058,202. This consisted of the Company’s net income of $615,847,$1,786, offset by non-cash charges for the amortization of discount on notes payable of $492,776;$608,541; depreciation and amortization of $133,303; and$503,650; non-cash compensation in the amount of $72,833.$160,855; and increase in allowance for doubtful accounts of $25,316.
The Company had cash usedgenerated by investing activities of $57,519$122,299 for the sixnine months ended JuneSeptember 30, 2014, which consisted primarily of $54,000$277,885 cash received in the acquisition of The Fresh Diet and $51,933 cash from the sale of property and equipment, offset by $104,000 for the purchase of an investmentinvestments, $100,000 for the acquisition of Organic Food Brokers, and $3,519 for the acquisition of equipment.
The Company had cash usedgenerated by financing activities of $431,812$825,107 for the sixnine months ended JuneSeptember 30, 2014, which consisted of $371,812$1,835,000 in cash received from the sale of common stock, offset by $949,893 principal payments on notes payable;payable and capital leases and $60,000 for the purchase of treasury stock.
The Company had net working capital of $1,589,173($3,683,406) as of JuneSeptember 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 912 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.its growth. 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.
IITETEM M 4 - CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
(a) Evaluation of disclosure controls and procedures
Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The conclusions notwithstanding, you are advised that no system is foolproof.
(b) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
None.
ItemItem 2 2.. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. 3. Defaults Upon Senior Securities
None.
Item 44.. Mine Safety Disclosures.
Not applicable.
None.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE | | TITLE | | DATE |
| | | | |
/s/Sam Klepfish | | Chief Executive Officer | | August 14,November 18, 2014 |
Sam Klepfish | | | | |
| | | | |
/s/ John McDonald | | Principal Financial Officer | | August 14,November 18, 2014 |
John McDonald | | | | |