We recognized stock-based compensation expense for RSUs in a straight-line manner over the vesting period of the grant. This resulted in stock-based compensation expense (continuing operations) of $190,692 and $753,633$237,667 related to recognition of RSUs during the three months ended September 30, 2016 and 2015, respectively, and $658,709 and $1,551,775 related to recognition of RSUs during the nine months ended September 30, 2016 and 2015, respectively.
In February 2016, the FASB issued ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In March 2016, the FASB issued ASU No. 2016-9, which amends ASC Topic 718, “Compensation – Stock Compensation.” This amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In August 2016, the FASB issued ASU No. 2016-15 which amends ASC Topic 230, “Classification of Certain Cash Receipts and Cash Payments.” The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The update outlines the classification of specific transactions as either cash inflows or outflows from financing activities, operating activities, investing activities or non-cash activities. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
3. ACQUISITION
ASC 360-10-45-9 requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which a set of criteria have been met, including criteria that the sale of the asset (disposal group) is probable and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. This criteria was achieved on February 9, 2016. Additionally, the discontinued operations are comprised of the entirety of The Fresh Diet,FD, excluding corporate services expenses. Lastly, for comparability purposes certain prior period line items relating to the assets held for sale have been reclassified and presented as discontinued operations for all periods presented in the accompanying condensed consolidated statements of operations and the condensed consolidated balance sheets.
The following information presents the major classes of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheet:
| | December 31, | |
| | 2015 | |
Current assets - discontinued operations: | | | |
Cash and cash equivalents | | $ | 491,969 | |
Inventory | | | 173,987 | |
Other current assets | | | 640,137 | |
Due from related parties | | | 461,240 | |
Total current assets - discontinued operations | | $ | 1,767,333 | |
| | | | |
Noncurrent assets - discontinued operations: | | | | |
Property and equipment, net | | $ | 802,843 | |
Intangible assets, net | | | 3,862,711 | |
Total noncurrent assets - discontinued operations | | $ | 4,665,554 | |
| | | | |
Current liabilities - discontinued operations: | | | | |
Accounts payable and accrued liabilities | | $ | 3,022,466 | |
Deferred revenue | | | 5,035,906 | |
Accrued liabilities - related parties | | | 135,935 | |
Accrued interest | | | 58,943 | |
Revolving credit facilities | | | 211,211 | |
Notes payable, current portion | | | 528,594 | |
Deferred tax liability | | | 1,069,200 | |
Contingent liabilities | | | 450,000 | |
Total current liabilities - discontinued operations: | | $ | 10,512,255 | |
| | | | |
Long term liabilities - discontinued operations: | | | | |
Note payable - long term portion | | | 101,181 | |
Notes payable - related parties, long term portion | | | 2,199,970 | |
Total long term liabilities - discontinued operations | | $ | 2,301,151 | |
operations. The following information presents the major classes of line items constituting the after-tax lossincome from discontinued operations in the condensed consolidated statements of operations. The three and nine months ended September 30, 2016 includes the results from discontinued operations from January 2, 2016 through the date of disposal (February 22, 2016):operations:
| | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2016 | | | 2015 | |
Revenue | | | - | | | | 4,103,930 | |
Cost of goods sold | | | - | | | | 3,542,429 | |
Gross margin | | | - | | | | 561,501 | |
| | | | | | | | |
Selling, general and administrative expenses | | | - | | | | 3,446,223 | |
Total operating expenses | | | - | | | | 3,446,223 | |
| | | | | | | | |
Operating loss | | | - | | | | (2,884,722 | ) |
| | | | | | | | |
Other (income) expense: | | | | | | | | |
Gain on sale of discontinued operations | | | - | | | | - | |
Interest expense, net | | | - | | | | 21,556 | |
Total other (income) expense | | | - | | | | 21,556 | |
| | | | | | | | |
Income (loss) from discontinued operations, net of tax | | $ | - | | | $ | (2,906,278 | ) |
| | For the Three Months Ended | |
| | March 31, | |
| | 2016 | |
Revenue | | $ | 2,389,950 | |
Cost of goods sold | | | 1,764,834 | |
Gross margin | | | 625,116 | |
| | | | |
Selling, general and administrative expenses | | | 3,368,213 | |
Total operating expenses | | | 3,368,213 | |
| | | | |
Operating loss | | | (2,743,097 | ) |
| | | | |
Other (income) expense: | | | | |
Gain on sale of discontinued operations | | | (7,201,196 | ) |
Interest expense, net | | | 10,820 | |
Total other (income) expense | | | (7,190,376 | ) |
| | | | |
Income from discontinued operations, net of tax | | $ | 4,447,279 | |
| | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2016 | | | 2015 | |
Revenue | | | 2,389,950 | | | | 13,607,750 | |
Cost of goods sold | | | 1,764,834 | | | | 10,504,109 | |
Gross margin | | | 625,116 | | | | 3,103,641 | |
| | | | | | | | |
Selling, general and administrative expenses | | | 3,368,213 | | | | 9,905,762 | |
Total operating expenses | | | 3,368,213 | | | | 9,905,762 | |
| | | | | | | | |
Operating loss | | | (2,743,097 | ) | | | (6,802,121 | ) |
| | | | | | | | |
Other (income) expense: | | | | | | | | |
Gain on sale is discontinued operations | | | (7,201,196 | ) | | | - | |
Interest expense, net | | | 10,820 | | | | 64,920 | |
Total other (income) expense | | | (7,190,376 | ) | | | 64,920 | |
| | | | | | | | |
Income (loss) from discontinued operations, net of tax | | $ | 4,447,279 | | | $ | (6,867,041 | ) |
The following information presents the major classes of line items constituting significant operating and investing cash flow activities in the unaudited consolidated statements of cash flows relating to discontinued operations:
| | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2016 | | | 2015 | |
Cash Flow: Major line items | | | | | | |
| | | | | | |
Depreciation and Amortization | | | 107,009 | | | | 652,038 | |
Non-cash compensation | | | 1,028,908 | | | | 1,777,944 | |
Purchase of equipment | | | (6,296 | ) | | | (142,162 | ) |
Cash from revolving credit facilities | | | 685,959 | | | | 2,267,700 | |
Payments made on revolving credit facilities | | | (641,831 | ) | | | (2,614,404 | ) |
Principal payments made on notes payable | | | (7,074 | ) | | | (75,756 | ) |
Principal payments made on capital leases | | | (8,094 | ) | | | (157,374 | ) |
| | For the Three Months Ended March 31, | |
| | 2016 | |
Cash Flow: Major line items | | | |
| | | |
Depreciation and Amortization | | | 39,509 | |
Non-cash compensation | | | 1,028,908 | |
Purchase of equipment | | | (6,296 | ) |
Cash from revolving credit facilities | | | 685,959 | |
Payments made on revolving credit facilities | | | (641,831 | ) |
Principal payments made on notes payable | | | (7,074 | ) |
Principal payments made on capital leases | | | (8,094 | ) |
The components of the gain on sale and income from discontinued operations are as follows:
| | February 22, 2016 | | | February 22, 2016 | |
| | | | | | |
Receivable due from buyer, net of reserve of $8,700,000 | | $ | - | | | $ | - | |
Net proceeds from sale of assets and liabilities | | | - | | | | - | |
| | | | | | | | |
Assets sold | | | (6,225,073 | ) | | | (6,225,073 | ) |
Liabilities sold | | | 13,426,269 | | | | 13,426,269 | |
Net liabilities sold | | | 7,201,196 | | | | 7,201,196 | |
| | | | | | | | |
Gain on sale | | | 7,201,196 | | | | 7,201,196 | |
| | | | | | | | |
| | | | | |
Loss from discontinued operations before income tax | | | (2,753,917 | ) | | | (2,753,917 | ) |
Income tax expense | | | - | | | | - | |
| | | | | | | | |
Income from discontinued operations | | $ | 4,447,279 | | | $ | 4,447,279 | |
4.5. ACCOUNTS RECEIVABLE
At September 30, 2016March 31, 2017 and December 31, 2015,2016, accounts receivable consists of:
| | September 30, 2016 | | | December 31, 2015 | | | March 31, 2017 | | | December 31, 2016 | |
Accounts receivable from customers | | $ | 1,932,257 | | | $ | 1,706,948 | | | $ | 1,902,816 | | | $ | 1,546,518 | |
Allowance for doubtful accounts | | | (56,371 | ) | | | (56,364 | ) | | | (8,775 | ) | | | (8,123 | ) |
Accounts receivable, net | | $ | 1,875,886 | | | $ | 1,650,584 | | | $ | 1,894,041 | | | $ | 1,538,395 | |
5.6. INVENTORY
Inventory consists primarily of specialty food products. At September 30, 2016March 31, 2017 and December 31, 2015,2016, inventory consisted of the following:
| | September 30, 2016 | | | December 31, 2015 | |
Finished Goods Inventory | | $ | 925,150 | | | $ | 920,885 | |
| | March 31, 2017 | | | December 31, 2016 | |
Finished Goods Inventory | | $ | 833,796 | | | $ | 815,033 | |
6.7. PROPERTY AND EQUIPMENT
The Company owns a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135 and with respect thereto has entered into each of a Loan Agreement, Mortgage, Security Agreement and Note with Fifth Third Bank, each with an effective date of February 26, 2013.34135. The property consists of approximately 1.1 acres of land and approximately 10,000 square feet of combined office and warehouse space, and was purchased as part of a bank short sale. The Company moved its operations to these premises on July 15, 2013. The purchase price of the property was $792,758 and was financed in part by a five year mortgage in the amount of $546,000 carrying an annual interest rate of 3% above LIBOR Rate, as such term is defined in the Note.$792,758.
On May 14, 2015, the Company also ownspurchased a building and property located at 2528 S. 27th Avenue, Broadview, Illinois 60155. The property consists of approximately 1.33 acres of land and approximately 28,711 square feet of combined office and warehouse space. The purchase price of $914,350 was initially financed primarily by a draw-down of $900,000 on the Company’s credit facility with Fifth Third Bank. On May 29, 2015, a permanent financing facility was provided by Fifth Third Bank in the form of a loan in the amount of $980,000. $900,000 of this amount was used to pay the balance of the credit facility; the additional $80,000 was used for refrigeration and other up-fit expensesimprovements at the property. The interest on the loan is at the LIBOR rate plus 3.0%. The building is used for office and warehouse space for the Company’s Artisan subsidiary. During the twelve months ended December 31, 2015, the Company paid a total of $474,301 for various building improvements, furniture, fixtures, and equipment related to this property. Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when Artisan occupied the facility in October, 2015.
A summary of property and equipment at September 30, 2016March 31, 2017 and December 31, 2015,2016, was as follows:
| | September 30, 2016 | | | December 31, 2015 | |
Land | | $ | 385,523 | | | $ | 385,523 | |
Building | | | 1,326,165 | | | | 1,326,165 | |
Computer and Office Equipment | | | 466,177 | | | | 466,177 | |
Warehouse Equipment | | | 207,596 | | | | 197,561 | |
Furniture, Fixtures | | | 454,743 | | | | 451,346 | |
Vehicles | | | 40,064 | | | | 40,064 | |
Total before accumulated depreciation | | | 2,880,268 | | | | 2,866,836 | |
Less: accumulated depreciation | | | (793,390 | ) | | | (673,373 | ) |
Total | | $ | 2,086,878 | | | $ | 2,193,463 | |
| | March 31, 2017 | | | December 31, 2016 | |
Land | | $ | 385,523 | | | $ | 385,523 | |
Building | | | 1,326,165 | | | | 1,326,165 | |
Computer and Office Equipment | | | 466,177 | | | | 466,177 | |
Warehouse Equipment | | | 226,953 | | | | 226,953 | |
Furniture, Fixtures | | | 454,743 | | | | 454,743 | |
Vehicles | | | 40,064 | | | | 40,064 | |
Total before accumulated depreciation | | | 2,899,625 | | | | 2,899,625 | |
Less: accumulated depreciation | | | (858,855 | ) | | | (831,515 | ) |
Total | | $ | 2,040,770 | | | $ | 2,068,110 | |
Depreciation and amortization expense for property and equipment amounted to $37,807$27,340 and $106,083$36,359 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Depreciation and amortization expense for property and equipment amounted to $120,017 and $293,348 for the nine months ended September 30, 2016 and 2015, respectively.
7. INVESTMENTS
The Company has made investments in certain early stage food related companies which it expects can benefit from synergies with the Company’s various operating businesses. As of September 30, 2016 and DecemberAt March 31, 2015,2017, the Company had madehas investments in two suchthree food related companies in the aggregate amount of $150,000.$201,525. The Company does not have significant influence over the operations of the companies it invests in.
8.9. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisition of Artisan, Oasis (see note 3), and OFB, and the acquisition of certain assets of The Haley Group, LLC. The following is the net book value of these assets:
| | September 30, 2016 | | | March 31, 2017 | |
| | | | | Accumulated | | | | | | | | | Accumulated | | | | |
| | Gross | | | Amortization | | | Net | | | Gross | | | Amortization | | | Net | |
Trade Name | | $ | 217,000 | | | $ | - | | | $ | 217,000 | | | $ | 217,000 | | | $ | - | | | $ | 217,000 | |
Non-Compete Agreement | | | 244,000 | | | | (244,000 | ) | | | - | | | | 444,000 | | | | (256,500 | ) | | | 187,500 | |
Customer Relationships | | | 1,130,994 | | | | (740,743 | ) | | | 390,251 | | | | 1,930,994 | | | | (881,877 | ) | | | 1,049,117 | |
Goodwill | | | 151,000 | | | | - | | | | 151,000 | | | | 151,000 | | | | - | | | | 151,000 | |
Total | | $ | 1,742,994 | | | $ | (984,743 | ) | | $ | 758,251 | | | $ | 2,742,994 | | | $ | (1,138,377 | ) | | $ | 1,604,617 | |
| | December 31, 2015 | | | December 31, 2016 | |
| | | | | Accumulated | | | | | | | | | Accumulated | | | | |
| | Gross | | | Amortization | | | Net | | | Gross | | | Amortization | | | Net | |
Trade Name | | $ | 217,000 | | | $ | - | | | $ | 217,000 | | | $ | 217,000 | | | $ | - | | | $ | 217,000 | |
Non-Compete Agreement | | | 244,000 | | | | (213,500 | ) | | | 30,500 | | | | 244,000 | | | | (244,000 | ) | | | - | |
Customer Relationships | | | 1,130,994 | | | | (589,042 | ) | | | 541,952 | | | | 1,130,994 | | | | (791,310 | ) | | | 339,684 | |
Goodwill | | | 151,000 | | | | - | | | | 151,000 | | | | 151,000 | | | | - | | | | 151,000 | |
Total | | $ | 1,742,994 | | | $ | (802,542 | ) | | $ | 940,452 | | | $ | 1,742,994 | | | $ | (1,035,310 | ) | | $ | 707,684 | |
AmortizationTotal amortization expense charged to continuing operations for the three months ended September 30,March 31, 2017 and 2016 was $103,067 and 2015 was $50,567 and $210,788,$65,817, respectively. Amortization expense charged to continuing operations for the nine months ended September 30, 2016 and 2015 was $182,201 and $632,364, respectively.
The trade names are not considered finite-lived assets, and are not being amortized. The non-compete agreements are being amortized over a period of 48 months. The customer relationships acquired in the Artisan, Haley, Oasis, and OFB transactions are being amortized over periods of 60, 36, 60, and 60 months, respectively.
As detailed in ASC 350, the Company tests for goodwill impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. As detailed in ASC 350-20-35-3A, in performing its testing for goodwill impairment, management has completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The analysis completed in 20152016 determined that there was no impairment to goodwill assets related to the Artisan and Haley transactions.
9.10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2016March 31, 2017 and December 31, 20152016 are as follows:
| | September 30, 2016 | | | December 31, 2015 | | | March 31, 2017 | | | December 31, 2016 | |
Trade payables | | $ | 1,273,435 | | | $ | 1,623,856 | | | $ | 1,718,681 | | | $ | 1,547,603 | |
Accrued costs of discontinued operations | | | 202,964 | | | | - | | | | 248,390 | | | | 1,478,887 | |
Accrued payroll and commissions | | | 89,803 | | | | 78,670 | | | | 137,343 | | | | 93,043 | |
Total | | $ | 1,566,202 | | | $ | 1,702,526 | | | $ | 2,104,414 | | | $ | 3,119,533 | |
At September 30, 2016March 31, 2017 and December 31, 2015,2016, accrued liabilities to related parties of $65,000 consisted of accrued payroll, accrued bonus, and payroll related benefits.bonus.
10.11. ACCRUED INTEREST
At September 30 2016March 31, 2017, accrued interest was $623,771, which is$629,909, convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share, or a total of 2,495,0842,519,636 shares. During the ninethree months ended September 30, 2016,March 31, 2017, the Company paid cash for interest in the aggregate amount of $92,965. The due date of the accrued interest in the amount is July 1, 2017.$22,029.
At December 31, 2015,2016, accrued interest was $623,695. Of this amount, $614,465 is$626,873, convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share, or a total of 2,457,8602,507,492 shares. During the twelve months ended December 31, 2015,2016, the Company paid cash for interest in the aggregate amount of $68,754. The due date of accrued interest in the amount of $614,465 was extended to July 1, 2017 pursuant to an amendment to the September 2015 Notes Payable Extension Agreement (See Note 12) and is classified as a long-term liability on the Company’s balance sheet at December 31, 2015.$96,318.
11.12. REVOLVING CREDIT FACILITIES
| | September 30, 2016 | | | December 31, 2015 | |
| | | | | | |
Line of credit facility with Fifth Third Bank in the original amount of $1,000,000 with an interest rate of LIBOR plus 3.25%. In August 2015, the amount of the credit facility was increased to $1,500,000 and the due date was extended to August 1, 2016. In August 2016, this credit facility was extended to August 1, 2017. During the three and nine months ended September 30, 2016, the Company made net borrowings in the amount of $0 and $120,000 from this facility. During the three months and nine months ended September 30, 2016, the Company made principal payments in the net amount of $0 and $200,000, respectively. During the three months ended September 30,2016, the Company transferred principal in the amount of $1,200,000 from this credit facility to a new term loan established with Fifth Third Bank. During the three and nine months ended September 30, 2016, the Company recorded interest in the amount of $6,151 and $23,203, respectively. | | $ | 100,000 | | | $ | 1,380,000 | |
| | | | | | | | |
Total | | $ | 100,000 | | | $ | 1,380,000 | |
| | March 31, 2017 | | | December 31, 2016 | |
| | | | | | |
Line of credit facility with Fifth Third Bank in the original amount of $1,000,000 with an interest rate of LIBOR plus 3.25%. In August 2015, the amount of the credit facility was increased to $1,500,000 and the due date was extended to August 1, 2016. In August 2016, this credit facility was extended to August 1, 2017. During the twelve months ended December 31, 2016, the Company made net borrowings in the amount of $120,000 from this facility, and transferred principal in the amount of $1,200,000 from this credit facility to a new term loan established with Fifth Third Bank. There was no activity on this credit facility during the three months ended March 31, 2017. | | $ | - | | | $ | - | |
| | | | | | | | |
Total | | $ | - | | | $ | - | |
12.
13. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
| | September 30, 2016 | | | December 31, 2015 | |
| | | | | | |
Term loan dated as of August 5, 2016 in the original amount of $1,200,000 payable to Fifth Third Bank. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of LIBOR plus 4.5%. Principal payments in the amount of $66,667 are due monthly along with accrued interest beginning September 5, 2016. The entire principal balance and all accrued interest is due on the maturity date of February 5, 2018. During the three months ended September 30, 2016, the Company transferred principal in the amount of $1,200,000 from the line of credit facility with Fifth Third Bank into this term loan. During the three months ended September 30, 2016, the Company made principal and interest payments in the amount of $152,634 and $10,039, respectively, on this loan. | | $ | 1,047,366 | | | $ | - | |
| | | | | | | | |
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 February 28, 2018. During the three months ended September 30, 2016, the Company made payments of principal and interest in the amounts of $13,650 and $3,205, respectively. During the nine months ended September 30, 2016, the Company made payments of principal and interest in the amounts of $40,950 and $9,987, respectively. | | | 350,350 | | | | 391,300 | |
| | | | | | | | |
Secured mortgage note payable for the acquisition of land and building in Broadview, Illinois in the amount of $980,000. Payments of $8,167 including principal and interest at the rate of LIBOR plus 2.75% are due monthly through April 2020, the remaining principal balance in the amount of $490,000 will be due May 29, 2020. During the three months ended September 30, 2016, the Company made payments of principal and interest in the amounts of $24,500 and $7,282, respectively. During the nine months ended September 30, 2016, the Company made payments of principal and interest in the amounts of $73,500 and $22,189, respectively. | | | 849,333 | | | | 922,833 | |
| | March 31, 2017 | | | December 31, 2016 | |
| | | | | | |
Term loan dated as of August 5, 2016 in the original amount of $1,200,000 payable to Fifth Third Bank. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of LIBOR plus 4.5%. Principal payments in the amount of $66,667 are due monthly along with accrued interest beginning September 5, 2016. The entire principal balance and all accrued interest is due on the maturity date of February 5, 2018. During the twelve months ended December 31, 2016, the Company transferred principal in the amount of $1,200,000 from the line of credit facility with Fifth Third Bank into this term loan. During the three months ended March 31, 2017, the Company made principal and interest payments on this loan in the amounts of $200,000 and $10,455, respectively. | | $ | 714,033 | | | $ | 914,033 | |
| | | | | | | | |
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 February 28, 2018. During the three months ended March 31, 2017, the Company made payments of principal and interest on this note in the amounts of $13,650 and $3,127, respectively | | | 323,050 | | | | 336,700 | |
| | | | | | | | |
Secured mortgage note payable for the acquisition of land and building in Broadview, Illinois in the amount of $980,000. Payments of $8,167 including principal and interest at the rate of LIBOR plus 2.75% are due monthly through April 2020, the remaining principal balance in the amount of $490,000 will be due May 29, 2020. During the three months ended March 31, 2017, the Company made payments of principal and interest on this note in the amounts of $24,500 and $7,401, respectively. | | | 800,333 | | | | 824,833 | |
| | | | | | | | |
A total of 17 convertible notes payable in the aggregate amount of $647,565 (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; however, the interest may be paid in cash by the Company and certain limited amounts of principle may also be prepaid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015, and 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. In March 2015 the notes were further extended to January 1, 2016. On September 30, 2015, the notes in the amount of $647,565 were further extended to July 1, 2017, and a discount in the amount of $647,565 was recorded to recognize the value of the beneficial conversion featured embedded in the extension of the term of the notes. During the three months ended March 31, 2017, $95,209 of this discount was charged to operations. During the three months ended March 31, 2017, the Company accrued interest in the amount of $3,036 on these notes. | | | 647,565 | | | | 647,565 | |
| | | | | | | | |
Unsecured note to Sam Klepfish for $164,650 which may not be prepaid without Mr. Klepfish’s consent, originally carrying an interest rate of 8% per annum and no due date. As of July 1, 2014, the interest rate was reduced to 1.9% and as of November 17, 2014 the interest rate was further reduced to 0%. During the three months ended December 31, 2015, interest in the amount of $54,150 was capitalized, and the aggregate principal amount of $164,650 was extended to July 1, 2017. This note 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 March 31, 2017, the entire principal balance of this note in the amount of $164,650 was converted into 658,600 shares of the Company’s common stock. | | | - | | | | 164,650 | |
| | September 30, 2016 | | | December 31, 2015 | |
A total of 17 convertible notes payable in the aggregate amount of $647,565 (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; however, the interest may be paid in cash by the Company and certain limited amounts of principle may also be prepaid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015, and 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. In March 2015 the notes were further extended to January 1, 2016. On September 30, 2015, the notes in the amount of $647,565 were further extended to July 1, 2017, and a discount in the amount of $647,565 was recorded to recognize the value of the beneficial conversion featured embedded in the extension of the term of the notes. During the three and nine months ended September 30, 2016, $92,509 and $277,528, respectively, of this discount was charged to operations. During the three and nine months ended September 30, 2016, the Company accrued interest in the amount of $3,102 and $9,306, respectively, on these notes. | | $ | 647,565 | | | $ | 647,565 | |
| | | | | | | | |
An unsecured note to Sam Klepfish for $164,650 which may not be prepaid without Mr. Klepfish’s consent, originally carrying an interest rate of 8% per annum and no due date. As of July 1, 2014, the interest rate was reduced to 1.9% and as of November 17, 2014 the interest rate was further reduced to 0%. During the three months ended December 31, 2015, interest in the amount of $54,150 was capitalized, and the aggregate principal amount of $164,650 was extended to July 1, 2017. This note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share. | | | 164,650 | | | | 164,650 | |
| | | | | | | | |
Promissory note in the amount of $200,000 bearing interest at the rate of 1% per annum issued in connection with the OFB acquisition. Principal in the amount of $100,000 was due June 30, 2015; this payment was made in July 2015 within the 5 day grace period stipulated in the note agreement. During the three and nine months ended September 30, 2016, the Company paid accrued interest in the amount of $2,010 on this note. 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, 2016, the Company accrued interest in the amount of $510 and $1,010, respectively, on this note. In July 2016, the Company made a principal payment in the amount of $100,000 which satisfied this note in full. | | | - | | | | 100,000 | |
| | | | | | | | |
Promissory note payable to Alpha Capital in the amount of $469,010 dated November 6, 2015 bearing interest at the rate of 9.9% per annum. This note is unsecured, and became due December 6, 2015. During the nine months ended September 30, 2016 the Company accrued interest expense in the amount of $9,525, on this note. During the nine months ended September 30, 2016, the Company paid principal and accrued interest in the amounts of $469,010 and $15,798, respectively, which satisfied this note in full. | | | - | | | | 469,010 | |
| | | | | | | | |
Promissory note payable to Alpha Capital in the amount of $176,005 dated November 20, 2015 bearing interest at the rate of 9.9% per annum. This note is unsecured, and became due December 20, 2015. During the nine months ended September 30, 2016, the Company accrued interest expense in the amount of $3,533 on this note. During the nine months ended September 30, 2016, the Company paid principal and accrued interest in the amounts of $176,005 and $5,490, respectively, which satisfied this note in full. | | | - | | | | 176,005 | |
| | | | | | | | |
Capital lease obligations under a lease agreement for a forklift payable in thirty-six monthly installments of $274 including interest at the rate of 4.46%. During the three months ended September 30, 2016, the Company made principal and interest payments in the amount of $744 and $78, respectively. During the nine months ended September 30, 2016, the Company made principal and interest payments in the amount of $2,206 and $260, respectively. | | | 6,527 | | | | - | |
| | March 31, 2017 | | | December 31, 2016 | |
| | | | | | |
Unsecured promissory note in the amount of $100,000 dated January 1, 2017 bearing interest at the rate of 2.91% per annum issued in connection with the Oasis acquisition. Payments in the amount of $4,297 consisting of principal and interest are to be made monthly beginning February 15, 2017 for twenty-four months until paid in full. During the three months ended March 31, 2017, the Company made principal and interest payments on this note in the amounts of $7,858 and $736, respectively. | | | 92,142 | | | | - | |
| | | | | | | | |
Capital lease obligations under a lease agreement for a forklift payable in thirty-six monthly installments of $274 including interest at the rate of 4.46%. During the three months ended March 31, 2017, the Company made principal and interest payments on this lease obligation in the amounts of $760 and $62, respectively. | | | 5,018 | | | | 5,778 | |
| | | | | | | | |
Capital lease obligations under a lease agreement for a forklift payable in thirty-six monthly installments of $579 including interest at the rate of 4.83%. During the three months ended March 31, 2017, the Company made principal and interest payments on this lease obligation in the amounts of $1,521 and $216, respectively. | | | 16,833 | | | | 18,534 | |
| | | | | | | | |
Total | | $ | 2,598,974 | | | $ | 2,911,913 | |
| | | | | | | | |
Less: Discount | | | (92,511 | ) | | | (185,020 | ) |
| | | | | | | | |
Net | | $ | 2,506,463 | | | $ | 2,726,893 | |
Current maturities, net of discount | | $ | 1,480,729 | | | $ | 1,589,082 | |
Long-term portion, net of discount | | | 1,025,734 | | | | 1,137,811 | |
Total | | $ | 2,506,463 | | | $ | 2,726,893 | |
| | For the Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
Discount on Notes Payable amortized to interest expense: | | $ | 92,509 | | | $ | 92,509 | |
| | September 30, 2016 | | | December 31, 2015 | |
Total | | $ | 3,065,791 | | | $ | 2,871,363 | |
| | | | | | | | |
Less: Discount | | | (277,529 | ) | | | (555,056 | ) |
| | | | | | | | |
Net | | $ | 2,788,262 | | | $ | 2,316,307 | |
| | | | | | | | |
Current maturities, net of discount | | $ | 1,423,678 | | | $ | 897,615 | |
Long-term portion, net of discount | | | 1,364,584 | | | | 1,418,692 | |
Total | | $ | 2,788,262 | | | $ | 2,316,307 | |
| | For the Three Months Ended September 30, | |
| | 2016 | | | 2015 | |
Discount on Notes Payable amortized to interest expense: | | $ | 92,509 | | | $ | 198,364 | |
| | For the Nine Months Ended September 30, | |
| | 2016 | | | 2015 | |
Discount on Notes Payable amortized to interest expense: | | $ | 277,527 | | | $ | 396,678 | |
At September 30, 2016March 31, 2017 and December 31, 2015,2016, the Company had unamortized discounts to notes payable in the aggregate amount of $277,529$92,511 and $555,056,$185,020, respectively.
Aggregate maturities of long-term notes payable as of March 31, 2017 are as follows:
For the twelve months ended March 31,
2018 | | $ | 1,573,239 | |
2019 | | | 204,128 | |
2020 | | | 156,024 | |
2021 | | | 560,933 | |
2022 | | | 54,600 | |
Thereafter | | | 50,050 | |
Total | | $ | 2,598,974 | |
Beneficial Conversion Features
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 were considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features did not exceed the face value of the notes. These discounts were amortized to interest expense via the effective interest method over the term of the notes.
14. RELATED PARTY TRANSACTIONS
For the ninethree months ended September 30,March 31, 2017:
The Company cancelled RSUs held by its Chief Executive Officer representing 1,382,540 shares of common stock, of which 700,000 were unvested and 682,540 were vested. In place of the 682,540 vested cancelled RSUs, the Company issued a net amount of 586,586 shares of common stock. The remaining 95,954 shares of the 682,540 cancelled vested RSUs were not issued and instead the cash value of those shares was held back by the Company to pay certain taxes related to the issuance. In addition, the 700,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 700,000 RSUs. See note 16.
The Company cancelled RSUs held by its President representing 1,724,532 shares of common stock, of which 490,000 were unvested and 1,234,532 were vested. In place of the 1,234,532 vested cancelled RSUs, the Company issued a net amount of 928,027 shares of common stock. The remaining 306,505 shares of the 1,234,532 cancelled vested RSUs were not issued and instead the cash value of those shares was held back by the Company to pay certain taxes related to the issuance. In addition, the 490,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 490,000 RSUs. See note 16.
The Company cancelled RSUs held by its two of its Directors representing 545,000 shares of common stock, of which 180,000 were unvested and 365,000 were vested. In place of the 365,000 vested cancelled RSUs, the Company issued 365,000 shares of common stock. In addition, the 180,000 unvested RSUs were replaced with restricted stock awards under the same terms and conditions as the 180,000 RSUs. See note 16.
The Company’s Chief Executive Officer converted a note payable in the amount of $164,650 into 658,600 shares of common stock.
The Company acquired options to purchase 100,000 shares of the Company’s common stock from its President for $9,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.
The Company acquired options to purchase 140,000 shares of the Company’s common stock from its President for $13,400 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.
The Company acquired options to purchase 87,500 shares of the Company’s common stock from its Principal Accounting Officer for $8,125 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.
For the three months ended March 31, 2016:
At December 31, 2015, the Company had an accrued liability in the amount of $160,150 representing an aggregate of 210,520 shares of common stock to be issued to officers, directors, and employees for services performed during 2013; during the three months ended March 31, 2016, the Company issued 210,520 RSUs in satisfaction of this liability. Also at December 31, 2015, the Company had an accrued liability in the amount of $157,780 representing 244,620 RSUs to be issued to officers and employees as a bonus for services performed in 2015; during the three months ended March 31, 2016, the Company issued an aggregate of 244,620 RSUs in satisfaction of this liability.
During the three months ended September 30, 2016, the Company issued 95,000 shares of its common stock to an ex-Director of the Company pursuant to the exercise of RSUs.
For the nine months ended September 30, 2015:
During the nine months ended September 30, 2015, the Company extended the expiration date to December 31, 2015 of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees. The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to operations during the period ended June 30, 2015. (See note 15).
At September 30, 2015, the Company’s subsidiary, FD had loans receivable outstanding in the aggregate amount of $426,342 from four individuals who were previously owners of The Fresh Diet. The Company also has a loan receivable in the amount of $34,899 from a previously related entity.
During the three months ended September 30, 2015, the Company issued 25,000 shares of common stock with a value of $42,500 to the President of The Fresh Diet pursuant to his employment agreement.
14.15. COMMITMENTS AND CONTINGENT LIABILITIES
Contingent Liability
Pursuant to the OFBOasis acquisition, the Company wasis contingently liable for certain performance-based payments over the twenty-four months following the acquisition date. The Company believedbelieves it wasis likely that these payments wouldwill be made, and accordingly recorded the entire amount of $225,000$400,000 as a contingent liability on its balance sheet at acquisition with $91,000 outstanding at December 31, 2015. During the three months ended September 30, 2016 and 2015, payments were made in the aggregate amount of $60,000 and $26,250, respectively. During the nine months ended September 30, 2016 and 2015, payments in the aggregate amount of $91,000 and $52,500, respectively, have been made under this contingent liability; at September 30, 2016, the balance of the contingent liability is $0.acquisition.
Litigation
From time to time, the Company may bebecome 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.
15.16. EQUITY
Common Stock
At September 30, 2016March 31, 2017 and December 31, 2015,2016, a total of 733,6621,376,350 and 733,659 shares, respectively, are deemed issued but not outstanding by the Company.
NineThree months ended September 30,March 31, 2017:
The Company issued 274,783 shares of common stock for cash of $68,697 pursuant to the exercise of warrants.
The Company purchased options to purchase a total of 367,500 shares of common stock from two executive officers, and employee, and a board member for an aggregate $34,925 in cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase. The Company charged the amount of $34,925 to additional paid-in capital.
The Company charged the amount of $120,104 to additional paid-in capital representing the vesting of restricted stock awards issued to officers.
The Company issued 658,600 shares of common stock to its Chief Executive Officer for conversion of a note payable in the amount of $164,650.
The Company issued a net amount of 2,410,392 shares of common stock (net of 623,813 shares held back by the Company to pay certain taxes owed related to the issuance) to employees, officers, and directors in satisfaction of the following obligations: vested RSUs representing 2,533,246 shares of common stock, and bonus shares and shares previously accrued representing 500,959 shares of common stock. The Company charged the amount of $33,453 to additional paid-in capital representing the value of these shares that had not been previously charged to operations.
The Company retired to treasury 642,688 shares of common stock pursuant to an agreement signed to acquire those shares. The Company also retired to treasury an aggregate of 37,000 shares of common stock purchased on the open market for cash of $18,592.
Three months ended March 31, 2016:
The Company issued 25,000 shares of common stock with a fair value of $34,000 to a service provider. The value of these shares was accrued during the twelve months ended December 31, 2015.
The Company issued an aggregate of 600,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued as follows: 300,000 of these shares were issued for the exercise of RSUs held by the employee, and an additional 300,000 shares were charged to discontinued operations at the fair value of $147,000.
The Company issued 133,333 shares of common stock to an employee of The Fresh Diet pursuant to an employee agreement. The fair value of these shares in the amount of $67,987 was charged to discontinued operations during the period.
The Company issued 200,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued via the exercise of RSUs; the par value of $20 was charged to additional paid-in capital during the period.
The Company repurchased 33,000 shares of common stock at a share price of $0.45 per share. The value of these shares in the amount of $14,850 has been recorded in treasury stock.
The Company issued 95,000 shares of common stock pursuant to the exercises of RSUs by an ex-director.
Nine months ended September 30, 2015:
The Company sold 3,178,420 shares of common stock at a price of $0.9646 per share and an additional 943,829 shares at a price of $1.30 per share in a private placement for net cash proceeds of $4,288,596.
The Company paid $3,000,000 cash for the purpose of acquiring, in a block sale, the shares of Monolith Ventures Ltd, a former shareholder of The Fresh Diet, who agreed to sell its position of 3,110,063 shares at a price of $0.9646 per share. The Company cancelled these 3,110,063 shares during the three months ended March 31, 2015.
The Company issued 727,272 shares of common stock pursuant to the exercise of warrants for cash of $400,000.
The Company issued 40,000 shares of common stock pursuant to the exercise of stock options for cash of $15,200.
The Company issued 150,000 shares of common stock Michael Ferrone pursuant to the exercise of 150,000 stock options with a weighted average exercise price of $0.444 per share, for cash proceeds of $66,600.
On September 25, 2015, the Company issued 533,913 shares of common stock pursuant to the exercise of warrants with a purchase price of $0.575 per share, for cash proceeds of $307,000.
On September 30, 2015, the Company recorded the issuance of 25,000 shares of common stock with a fair value of $42,500 to an employee pursuant to an employment agreement.
Warrants
The following table summarizes the significant terms of warrants outstanding at September 30, 2016.March 31, 2017. 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:
Range of exercise Prices | | Number of warrants Outstanding | | Weighted average remaining contractual life (years) | | Weighted average exercise price of outstanding Warrants | | Number of warrants Exercisable | | Weighted average exercise price of exercisable Warrants | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| $ | 0.010 | | | | 700,000 | | | | 3.63 | | | $ | 0.010 | | | | 700,000 | | | $ | 0.010 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 0.250 | | | | 94,783 | | | | 0.75 | | | $ | 0.250 | | | | 94,783 | | | $ | 0.250 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 0.550 | | | | 448,010 | | | | 0.75 | | | $ | 0.550 | | | | 448,011 | | | $ | 0.550 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 0.575 | | | | 2,294,491 | | | | 0.75 | | | $ | 0.575 | | | | 2,294,491 | | | $ | 0.575 | |
| | | | | | 3,537,284 | | | | 1.32 | | | $ | 0.451 | | | | 3,537,284 | | | $ | 0.451 | |
Range of exercise Prices | | | Number of warrants Outstanding | | | Weighted average remaining contractual life (years) | | | Weighted average exercise price of outstanding Warrants | | | Number of warrants Exercisable | | | Weighted average exercise price of exercisable Warrants | |
$ | 0.010 | | | | 700,000 | | | | 3.13 | | | $ | 0.010 | | | | 700,000 | | | $ | 0.010 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.550 | | | | 448,010 | | | | 0.25 | | | $ | 0.550 | | | | 448,010 | | | $ | 0.550 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 0.575 | | | | 2,294,491 | | | | 0.25 | | | $ | 0.575 | | | | 2,294,491 | | | $ | 0.575 | |
| | | | | 3,442,501 | | | | 0.84 | | | $ | 0.457 | | | | 3,442,501 | | | $ | 0.457 | |
Transactions involving warrants are summarized as follows:
| | Number of | | | Weighted Average | | | Number of | | | Weighted Average | |
| | Warrants | | | Exercise Price | | | Warrants | | | Exercise Price | |
Warrants outstanding at December 31, 2015 | | | 3,537,284 | | | $ | 0.451 | | |
Warrants outstanding at December 31, 2016 | | | | 3,537,284 | | | $ | 0.451 | |
| | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | (94,783 | ) | | $ | 0.250 | |
Cancelled / Expired | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Warrants outstanding at September 30, 2016 | | | 3,537,284 | | | $ | 0.451 | | |
Warrants outstanding at March 31, 2017 | | | | 3,442,501 | | | $ | 0.457 | |
Options
The following table summarizes the options outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:
| | | | | | | | | | Weighted | | | | | | Weighted | | | | | | | | | | | Weighted | | | | | | Weighted | |
| | | | | | | Weighted | | | average | | | | | | average | | | | | | | | Weighted | | | average | | | | | | average | |
| | | | | | | average | | | exercise | | | | | | exercise | | | | | | | | average | | | exercise | | | | | | exercise | |
Range of | Range of | | | Number of | | | Remaining | | | price of | | | Number of | | | price of | | Range of | | | Number of | | | Remaining | | | price of | | | Number of | | | price of | |
exercise | exercise | | | options | | | contractual | | | outstanding | | | options | | | exercisable | | exercise | | | options | | | contractual | | | outstanding | | | options | | | exercisable | |
Prices | Prices | | | Outstanding | | | life (years) | | | Options | | | Exercisable | | | Options | | Prices | | | Outstanding | | | life (years) | | | Options | | | Exercisable | | | Options | |
$ | 0.350 | | | | 1,170,000 | | | | 0.91 | | | $ | 0.350 | | | | 1,170,000 | | | $ | 0.350 | | 0.35 | | | | 1,170,000 | | | | 0.41 | | | $ | 0.350 | | | | 1,170,000 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.380 | | | | 92,500 | | | | 0.25 | | | $ | 0.380 | | | | 92,500 | | | $ | 0.380 | | 0.57 | | | | 275,000 | | | | 0.86 | | | $ | 0.570 | | | | 275,000 | | | $ | 0.57 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.400 | | | | 275,000 | | | | 0.25 | | | $ | 0.400 | | | | 275,000 | | | $ | 0.400 | | 1.31 | | | | 150,000 | | | | 1.42 | | | $ | 1.310 | | | | 150,000 | | | $ | 1.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.450 | | | | 92,500 | | | | 0.25 | | | $ | 0.450 | | | | 92,500 | | | $ | 0.450 | | 1.42 | | | | 100,000 | | | | 1.22 | | | $ | 1.420 | | | | 100,000 | | | $ | 1.42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.474 | | | | 92,500 | | | | 0.25 | | | $ | 0.474 | | | | 92,500 | | | $ | 0.474 | | 1.43 | | | | 50,000 | | | | 1.75 | | | $ | 1.750 | | | | 50,000 | | | $ | 1.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.480 | | | | 92,500 | | | | 0.25 | | | $ | 0.480 | | | | 92,500 | | | $ | 0.480 | | 1.46 | | | | 100,000 | | | | 1.25 | | | $ | 1.460 | | | | 100,000 | | | $ | 1.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 0.570 | | | | 225,000 | | | | 1.25 | | | $ | 0.570 | | | | 225,000 | | | $ | 0.570 | | 1.60 | | | | 310,000 | | | | 0.76 | | | $ | 1.600 | | | | 310,000 | | | $ | 1.60 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 1.310 | | | | 75,000 | | | | 1.92 | | | $ | 1.310 | | | | 25,000 | | | $ | 1.310 | | 1.70 | | | | 75,000 | | | | 1.04 | | | $ | 1.700 | | | | 75,000 | | | $ | 1.70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 1.440 | | | | 15,000 | | | | 0.09 | | | $ | 1.440 | | | | 15,000 | | | $ | 1.440 | | 1.90 | | | | 190,000 | | | | 2.10 | | | $ | 1.900 | | | | 15,000 | | | $ | 1.90 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 1.460 | | | | 100,000 | | | | 1.75 | | | $ | 1.460 | | | | 100,000 | | | $ | 1.460 | | 2.00 | | | | 50,000 | | | | 1.04 | | | $ | 2.000 | | | | 50,000 | | | $ | 2.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 1.600 | | | | 310,000 | | | | 1.25 | | | $ | 1.600 | | | | 310,000 | | | $ | 1.600 | | 2.40 | | | | 20,000 | | | | 1.17 | | | $ | 2.400 | | | | 20,000 | | | $ | 2.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 1.900 | | | | 15,000 | | | | 1.09 | | | $ | 1.900 | | | | 15,000 | | | $ | 1.900 | | 2.50 | | | | 37,500 | | | | 1.04 | | | $ | 2.500 | | | | 37,500 | | | $ | 1.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 2.000 | | | | 500,000 | | | | 0.41 | | | $ | 2.000 | | | | 500,000 | | | $ | 2.000 | | 3.40 | | | | 30,000 | | | | 1.17 | | | $ | 3.400 | | | | 30,000 | | | $ | 3.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 2.400 | | | | 20,000 | | | | 1.67 | | | $ | 2.400 | | | | 20,000 | | | $ | 2.400 | | 3.50 | | | | 37,500 | | | | 1.04 | | | $ | 3.500 | | | | 37,500 | | | $ | 3.500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2,595,000 | | | | 0.84 | | | $ | 0.995 | | | | 2,445,000 | | | $ | 0.995 | |
$ | 3.400 | | | | 30,000 | | | | 1.67 | | | $ | 3.400 | | | | 30,000 | | | $ | 3.400 | | |
| | | | | 3,105,000 | | | | 0.81 | | | $ | 0.887 | | | | 3,055,000 | | | $ | 0.880 | | |
Transactions involving stock options are summarized as follows:
| | Number of Shares | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | |
Options outstanding at December 31, 2015 | | | 3,105,000 | | | $ | 0.887 | | |
Options outstanding at December 31, 2016 | | | | 2,445,000 | | | $ | 1.005 | |
| | | | | | | | | | | | | | | | |
Granted | | | - | | | $ | - | | | | 650,000 | | | $ | 1.731 | |
Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
Cancelled / Expired | | | - | | | $ | - | | | | (500,000 | ) | | $ | 2.000 | |
| | | | | | | | | | | | | | | | |
Options outstanding at September 30, 2016 | | | 3,105,000 | | | $ | 0.887 | | |
Options outstanding at March 31, 2017 | | | | 2,595,000 | | | $ | 0.995 | |
Aggregate intrinsic value of options outstanding and exercisable at September 30,March 31, 2017 and 2016 was $583,500 and 2015 was $737,905 and $1,268,030,$313,730, 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 $0.48$0.65 and $1.02$0.55 as of September 30,March 31, 2017 and 2016, and 2015, respectively, and the exercise price multiplied by the number of options outstanding.
During the nine months ended September 30, 2015, the Company extended the expiration date of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees. The expiration dates of options to purchase 92,500 shares of common stock at a price of $0.38 per share were extended from March 31, 2015 to December 31, 2015; the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.45 per share were extended from June 30, 2015 to December 31, 2015; and the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.474 per share were extended from September 30, 2015 to December 31, 2015. The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to operations during the period ended March 31, 2015.
During the three months ended September 30,March 31, 2017, and 2016 and 2015 the Company charged a total of $4,983$7,339 and $9,959, respectively, to operations related to recognized stock-based compensation expense for employee stock options. During the nine months ended September 30, 2016, and 2015 the Company charged a total of $14,814 and $95,873,$4,938, 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,March 31, | |
| | 20152017 | |
Volatility | | | 47.3556.9 | % |
Dividends | | $ | - | |
Risk-free interest rates | | | 0.990.87 | % |
Term (years) | | | 3.000.78-2.44 | |
Restricted Stock Units (“RSUs”)
At September 30, 2016,During the three months ended March 31, 2017, the Company hascancelled all of its outstanding RSUs and issued restricted stock units (“RSUs”) for the potential issuance offollowing: For vested RSUs representing 3,104,205 shares of the Company’s common stock, for the purpose of aligning executives and employees of the Company and forissued a net amount of 2,410,392 shares of restricted common stock (net of 623,813 shares held back by the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certaintaxes owed related to the issuance); for unvested RSUs representing 1,370,000 shares of common stock, the Company issued 1,370,000 shares of restricted common stock under the same terms as the cancelled RSUs. 1,070,000 of the restricted stock awards will vest on June 30, 2017, the same date at which the RSUs were issuedwhich they replaced would have vested. The remaining 300,000 restricted stock awards vesting is contingent upon meeting certain price and volume conditions related to membersthe Company’s stock; these conditions are the same conditions required for vesting of the boardcancelled RSUs. The Company charged the amount of directors$120,104 to operations during the three months ended March 31, 2017 representing the amortization of the Company (“Board RSUs”); certain RSUs were issuedcost of these restricted stock awards. The $120,104 charged to operations is the executive officers ofsame amount that the Company (“Executive RSUs”); certainwould have charged for the RSUs that were issuedcancelled had they not been cancelled.
RSUs expense during the three months ended March 31, 2017 and 2016 are summarized in the table below:
| | March 31, | |
| | 2017 | | | 2016 | |
| | | | |
RSUs expense – Continuing operations | | $ | - | | | $ | 237,667 | |
RSUs expense – Discontinued operations | | | - | | | | 813,908 | |
Total | | $ | - | | | $ | 1,051,575 | |
17. SUBSEQUENT EVENTS
In April 2017, a former board member exercised options to employeespurchase 100,000 shares of common stock at a price of $0.35 per share. The Company expects to issue these shares in May 2017.
In April 2017, the Company (“Employee RSUs”); and certain RSUs were issued 70,000 shares of common stock with a fair value of $33,600 to employees of The Fresh Diet (“FD RSUs”).an employee as a bonus.
In August 2016, 95,000 Board RSUs were exercised. At September 30, 2016,April and May 2017, the following Board RSUs were outstanding:Company issued 2,685,467 shares of common stock to investors for the conversion of principal and accrued interest on notes payable in the amounts of $146,377 and $524,990, respectively.
In May 2017, the Company purchased options to purchase a total of 545,000 RSUs were vested,400,000 shares of common stock from four board members (100,000 from each board member) for an aggregate of $96,000 in cash, which was the difference between the exercise price of the options and 270,000 RSUs will vestthe market price of the stock on July 1, 2017.the date of purchase.
At September 30, 2016, the following Executive RSUs were outstanding: a total of 1,137,072 RSUs were vested; 600,000 RSUs will vest on December 31, 2016; and 800,000 RSUs will vest on July 1, 2017. An additional 125,000 RSUs will vest contingent upon the attainment of a stock price of $2.00 per share for 20 straight trading days, and an additional 175,000 RSUs will vest contingent upon the attainment of a stock price of $3.00 per share for 20 straight trading days. The Company estimated that the stock-price goals of the Company’s stock price closing above $2.00 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value;In May 2017, the Company also estimated that the likelihoodextended term of the Company’soptions held by a former board member to purchase 100,000 shares of comment stock closing above $3.00 per share for 20 straight days is 70%, and these RSUs were valued at 70%a period of their face value46 days.
At September 30, 2016, the following FD RSUs were outstanding: A total of 300,000 RSUs were vested; 300,000 RSUs will vest on December 31, 2016; and 400,000 RSUs will vest on July 1, 2017.
At September 30, 2016, a total of 251,174 Employee RSUs were outstanding, all of which were vested
RSUs expense during the three and nine months ended September 30, 2016 and 2015 are summarized in the table below:
| | Three Months Ended September 30, | |
| | 2016 | | | 2015 | |
| | | | |
RSUs expense – Continuing operations | | $ | 190,692 | | | $ | 753,633 | |
RSUs expense – Discontinued operations | | | - | | | | 374,536 | |
Total | | $ | 190,692 | | | $ | 1,128,169 | |
| | Nine Months Ended September 30, | |
| | 2016 | | | 2015 | |
| | | | |
RSUs expense – Continuing operations | | $ | 658,709 | | | $ | 1,551,775 | |
RSUs expense – Discontinued operations | | | 813,908 | | | | 1,735,444 | |
Total | | $ | 1,472,617 | | | $ | 3,287,219 | |
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and operational references, appearing elsewhere in this document.
Certain information contained in this discussion and elsewhere in this report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. The safe harbor created by the Private Securities Litigation Reform Act will not apply to certain “forward looking statements” because we issued “penny stock” (as defined in Section 3(a)(51) of the Securities Exchange Act of 1934 and Rule 3(a)(51-1) under the Exchange Act) during the three year period preceding the date(s) on which those forward looking statements were first made, except to the extent otherwise specifically provided by rule, regulation or order of the Securities and Exchange Commission. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on our behalf. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “explore”, “consider”, “anticipate”, “intend”, “could”, “estimate”, “plan”, “propose” or “continue” or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:
● | Our ability to raise capital necessary to sustain our anticipated operations and implement our business plan, |
| |
● | Our ability to implement our business plan, |
● | Our ability to generate sufficient cash to pay our lenders and other creditors, |
● | Our dependence on one major customer, |
| |
● | Our ability to employ and retain qualified management and employees, |
● | Our dependence on the efforts and abilities of our current employees and executive officers, |
● | Changes in government regulations that are applicable to our current or anticipated business, |
● | Changes in the demand for our services, |
● | The costs and potential liabilities arising from lawsuits which may be brought against us with respect to our current and past business activities, |
● | The degree and nature of our competition, |
● | The lack of diversification of our business plan, |
● | The general volatility of the capital markets and the establishment of a market for our shares, and |
● | Disruption in the economic and financial conditions primarily from the impact of past terrorist attacks in the United States, threats of future attacks, police and military activities overseas and other disruptive worldwide political and economic events and environmental weather conditions. |
We are also subject to other risks detailed from time to time in our other filings with Securities and Exchange Commission and elsewhere in this report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
Critical Accounting Policy and Estimates
Use of Estimates in the Preparation of Financial Statements
The preparation of these financial statements included in this report requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.
Doubtful Accounts Receivable
The Company maintained an allowance in the amount of $56,371$8,775 for doubtful accounts receivable at September 30, 2016,March 31, 2017, and $29,429$47,368 at September 30, 2015.March 31, 2016. The Company has an operational relationship of several years with our major customers, and we believe this experience provides us with a solid foundation from which to estimate our expected losses on accounts receivable. Should our sales mix change or if we develop new lines of business or new customers, these estimates and our estimation process will change accordingly. These estimates have been accurate in the past.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair values approximate their carrying value because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates. These fair values have historically varied due to the market price of the Company’s stock at the date of valuation. Generally, these liabilities increased as the price of the Company’s stock increased (with resultant gain), and decreased as the Company’s stock decreased (yielding a loss). In December 2012, the Company removed these liabilities from its balance sheet by reclassifying them as equity.
Income Taxes
The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past.
Background
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger, we changed our name to that of Innovative Food Holdings, Inc. In January 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”), a Delaware corporation, for 500,000 shares of our common stock.
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 were met over the next one or two years. Those milestones have been met. The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000. The loan was repaid in November 2013 via the issuance of a loan from Fifth Third Bank which has been paid in full. Prior to the acquisition, Artisan was a supplier and had sold products to the Company.
Pursuant to an asset purchase agreement, effective November 2, 2012, the Company purchased the outstanding assets of The Haley Group, LLC (“Haley”). 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. (“The Fresh Diet” or “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 Company. The purchase price consisted of 10,000,000 shares of the Company’s common stock valued at $14,000,000. The majority of FD’s current liabilities consisted of approximately $3.8 million of deferred revenues and approximately $2.1 million in short term commercial loans and there were additional ordinary course of business expenses such as trade payables, payroll and sales taxes which varied from month to month. In addition, it had some long term obligations the bulk of which consisted of interest free loans from FD’s former shareholders in the amount of approximately $2.2 million which were not due for three years. Prior to the merger FD had purchased an immaterial amount of product from the Company. FD operated as an independent subsidiary subject to oversight of its board of directors and the Company’s President and CEO. Effective February 23, 2016, the Company closed a transaction to sell 90% of our ownership in FD to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD who was appointed Interim CEO of FD on February 9, 2016. The consideration to Innovative Food Holdings consisted primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. The Company considers the ultimate collection of these notesAside from payments related to be doubtful, and they have been fully reserved on the Company’s balance sheet at September 30, 2016. There ispreviously accrued liabilities there were no continuing cash inflows or outflows from or to the discontinued operations.
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, 20152016 (1) following our discussion of Liquidity and Capital Resources, (2) Concentrations of Credit Risk in Note 17 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.
Relationship with U.S. Foods
We have historically sold the majority of our products, $6,885,179 and $5,863,243 for the three months ended March 31, 2017 and 2016, respectively (73% and 73% of total sales in three months ended March 31, 2017 and 2016, respectively) through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods, a leading broadline distributor. These sales amounted to $6,546,697 (72% of total sales) and $5,761,640 (72% of total sales) for the three months ended September 30, 2016 and 2015, respectively; and $18,352,407 (72% of total sales) and $15,927,510 (72% of total sales) for the nine months ended September 30, 2016 and 2015, respectively. On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods. The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for up to three (3) automatic annual renewals thereafter if no party gives the other 30 days’ notice of its intent not to renew. Based on the terms, the Agreement was extended through 2017.
RESULTS OF OPERATIONS
Prior year balances have been recast to reflect the sale of 90% of our interest in The Fresh Diet, Inc. in February 2016. Results of discontinued operations are excluded from the accompanying results of operations for all periods presented, unless otherwise noted. See Note 34 – discontinued operations in the accompanying notes to consolidated financial statements.
This discussion may contain forward looking-statements that involve risks and uncertainties. Our future results could differ materially from the forward looking-statements discussed in this report. This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.
Three Months Ended September 30, 2016March 31, 2017 Compared to Three Months Ended September 30, 2015March 31, 2016
Revenue
Revenue increased by $1,068,671$1,469,823 or approximately 13%18.3% to $9,094,443$9,485,164 for the three months ended September 30, 2016March 31, 2017 from $8,025,772$8,015,341 in the prior year.
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products, private label products and additional sales channel opportunities in both the foodservice and consumer space and will implement that strategy if, based on our analysis, we deem it beneficial to us.
Any changes in the food distribution and specialty foods 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, 2016 was $6,404,185, an increase of $732,471 or approximately 13% compared to cost of goods sold of $5,671,714 for the three months ended September 30, 2015. The increase was due primarily to an increase in sales during the period. Cost of goods sold is made up of the following expenses for the three months ended September 30, 2016: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $4,648,891; and shipping, delivery, handling, and purchase allowance expenses in the amount of $1,755,294. Total gross margin was approximately 29.6% of sales in 2016, compared to approximately 29.3% of sales in 2015. The increase in gross margins from 2015 are primarily attributable to variation in product and revenue mix across our various selling channels.
In 2016, we continued to price our products in order to gain market share, optimize gross profit dollars and increase the number of our end users. We were successful in both increasing sales and increasing market share. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold will either remain stable or possibly improve slightly.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased by $697,876 or approximately 29% to $1,702,425 during the three months ended September 30, 2016 compared to $2,400,301 for the three months ended September 30, 2015. During the three months ended September 30, 2016 the decrease in selling, general, and administrative expenses was mainly associated with a decrease in share based compensation of $567,962.
Interest expense, net
Interest expense, net of interest income, decreased by $102,030 or approximately 46% to $121,226 during the three months ended September 30, 2016, compared to $223,256 during the three months ended September 30, 2015. The decrease was due to a decrease of $105,855 in amortization of the discount on notes payable during the period. Approximately 25% or $30,367 of the interest expense was accrued or paid interest on the company’s notes payable; approximately 75% or $92,509 of the interest was a non-cash GAAP accounting charge associated with the amortization of the discounts on the Company’s notes payable. The Company also had $1,650 of interest income during the period.
Net income from continuing operations
For the reasons above, the Company had net income from continuing operations for the three months ended September 30, 2016 of $866,607, which is an increase of $1,130,706 compared to a net loss of ($264,099) during the three months ended September 30, 2015. The income for the three months ended September 30, 2016 includes a total of $375,513 in non-cash charges, including amortization of intangible assets in the amount of $50,567, depreciation expense of $37,807, charges for non-cash compensation in the amount of $195,630, and amortization of the discount on notes payable in the amount of $92,509. The income for the three months ended September 30, 2015 included a total of $1,055,483 in non-cash charges, including amortization of intangible assets in the amount of $75,788, depreciation expense of $17,739, charges for non-cash compensation in the amount of $763,592, and amortization of the discount on notes payable in the amount of $198,364.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Revenue
Revenue increased by $3,176,741 or approximately 14% to $25,413,011 for the nine months ended September 30, 2016 from $22,236,270 in the prior year.
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities in both the foodservice and consumer space and will implement that strategy if, based on our analysis, we deem it beneficial to us.
Any changes in the food distribution and specialty foods 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 ninethree months ended September 30, 2016March 31, 2017 was $17,979,553,$6,434,232, an increase of $2,313,412$763,494 or approximately 15%13.5% compared to cost of goods sold of $15,666,141$5,670,738 for the ninethree months ended September 30, 2015.March 31, 2016. Cost of goods sold is made up of the following expenses for the ninethree months ended September 30 2016:March 31, 2017: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $12,866,371;$4,594,898; and shipping, delivery, handling, and purchase allowance expenses in the amount of $5,113,182.$1,839,334. Total gross margin was approximately 32.2% of sales in 2017 compared to approximately 29.3% of sales in 2016, compared2016. The increase in cost of goods sold is primary attributable to approximately 29.5% of salesan increase in 2015.sales. The slight decreaseincrease in gross margins from 20152016 are primarily attributable to variation in product and revenue mix across our various selling channels.
In 2016,2017, we continued to price our products in order to gain market share optimize gross profit dollars and increase the number of our end users. We were successful in both increasing sales and increasing market share. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold will either remain stable or possibly improve slightly.may increase.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreasedincreased by $1,157,870$367,788 or approximately 18%20.1% to $5,245,178$2,200,096 during the ninethree months ended September 30, 2016March 31, 2017 compared to $6,403,048$1,832,308 for the ninethree months ended September 30, 2015. During the nine months ended September 30, 2016, the decreaseMarch 31, 2016. The increase in selling, general, and administrative expenses was mainlyprimarily due to an increase in SGA expenses associated with a decreaseOasis, and to an increase in share based compensation of $967,377. professional fees. Increases in payroll taxes and employee benefit costs also contributed to the increase.
Interest expense, net
Interest expense, net of interest income, decreased by $78,060$15,450 or approximately 18%10.7% to $365,764$116,199 during the ninethree months ended September 30, 2016,March 31, 2017, compared to $443,824$131,649 during the ninethree months ended September 30, 2015. The decrease was due primarily to a decrease of $119,151 in the amortization of the discount on notes payable during the period.March 31, 2016. Approximately 25%21.3% or $93,041$25,032 of the interest expense was accrued or paid interest on the company’s commercial loans and notes payable; approximately 75%78.7% or $277,527$92,509 of the interest was a non-cash GAAP accounting charge associated with the amortization of the discounts on the Company’s notes payable. The Company also had $4,804$1,342 of interest income during the period.three months ended March 31, 2017.
Net income from continuing operations
For the reasons above, the Company had net income from continuing operations for the ninethree months ended September 30, 2016March 31, 2017 of $1,822,516,$734,637 which is an increase of $2,093,859approximately 93.0% compared to a net lossincome of ($271,343)$380,646 during the ninethree months ended September 30, 2015.March 31, 2016. The income for the ninethree months ended September 30, 2016March 31, 2017 includes a total of $1,253,239$350,359 in non-cash charges, including amortization of intangible assets in the amount of $182,201,$103,067, depreciation expense of $120,018,$27,340, charges for non-cash compensation in the amount of $673,523,$160,896, and amortization of the discount on notes payable in the amount of $277,527.$92,509. The lossincome for the ninethree months ended September 30, 2015 includedMarch 31, 2016 includes a total of $2,357,146$437,290 in non-cash charges, including amortization of intangible assets in the amount of $227,364,$65,817, depreciation expense of $46,310,$36,359, charges for non-cash compensation in the amount of $1,686,794,$242,605, and amortization of the discount on notes payable in the amount of $396,678.$92,509.
Liquidity and Capital Resources at September 30, 2016March 31, 2017
As of September 30, 2016,March 31, 2017, the Company had current assets of $5,008,918,$5,660,793, consisting of cash and cash equivalents of $2,139,096;$2,862,923; trade accounts receivable, net of $1,875,886;$1,894,041; inventory of $925,150;$833,796; and other current assets of $68,786.$70,033. Also at September 30, 2016,March 31, 2017, the Company had current liabilities of $3,713,651,$4,280,052, consisting of accounts payabletrade payables of $1,718,681; accrued costs of discontinued operations of $248,390; accrued payroll and accrued liabilitiescommissions of $1,566,202 (of which $0 was payable$137,343; $65,000 to related parties);parties for accrued bonus; accrued interest of $623,771;$629,909; and current portion of notes payable of $1,259,028; note payable to a related party$1,480,729, net of $164,650; and amount due under revolving credit facilitiesdiscount of $100,000. $92,511.
During the ninethree months ended September 30, 2016,March 31, 2017, the Company had cash providedused by operating activities of $1,563,446. This$368,021. Cash flow from operations consisted ofof: the Company’s consolidated net income of $6,269,795, reduced by gain on sale of discontinued operations of $7,201,196, and increased by stock based$734,637 plus non-cash compensation in the amount of $1,702,431 (including $1,028,908 charged to discontinued operations);$160,896; non-cash amortization of discount on notes payable of $277,527;$92,509, and depreciation and amortization of $409,228; and increase in allowance for bad debt of $11,963.$130,407. The Company’s cash position also increaseddecreased by $93,698$1,486,470 as a result of changes in the components of current assets and current liabilities. liabilities, primarily a reduction in accrued liabilities related to related to discontinued operations in the amount of $1,230,497.
The Company had cash used in investing activities of $480,994$300,000 for the ninethree months ended September 30, 2016,March 31, 2017, which consisted of $470,482 cash disposedpaid in the sale of discontinued operations, and $10,512 for the acquisition of property and equipment.Oasis. The Company had cash used in financing activities of $1,080,645$233,109 for the ninethree months ended September 30, 2016, consistingMarch 31, 2017, which consisted of borrowings on revolving credit facilities of $805,959, offset byprincipal payments made on revolving credit facilities of $841,831; principal payments on notes payable of $1,021,829,$246,008; principal payments on capital leases of $8,094,$2,281, payments made for the purchase of treasury stock of $18,592; and payments made for the repurchasepurchase of options from employees of $34,925. The Company also received cash of $68,697 from the exercise of warrants for common stockstock.
The Company had net working capital of $1,380,741 as of March 31, 2017. The Company had used cash in operations during the three months ended March 31, 2017 in the amount of $14,850.
The Company had$368,021 including certain payments in the amount of $1,230,497 related to discontinued operations which relate mainly to a net working capitaltransaction to purchase the rights to 1,450,000 RSUs and 642,688 shares of $1,295,267 as of September 30, 2016. Wethe Company’s common stock from a former FD employee which resulted in $850,000 in non-recurring cash payments compared to cash generated positive cash flow from operating activities of $1,563,446$442,300 during the three months ended March 31, 2016. Without the cash flow items associated with discontinued operations, cash operating cash flow would have been $868,845 for the ninethree months ended September 30, 2016. We generated negative cash flow from operations during the year ended DecemberMarch 31, 2015, which includes the results of The Fresh Diet.2017. 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 1211 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.
In February 2016, we completed the sale of The Fresh DietFD to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD. See Note 3.
In August 2016, we entered into a term loan agreement with Fifth Third Bank, and transferred the amount of $1,200,000 from our line of credit with Fifth Third Bank into this Term Loan Agreement. The line of credit with Fifth Third Bank was then renewed for an additional year. See Note 12.2.
If the Company’s cash flow from operations is insufficient to fully implement its business plan, the Company may require additional financing in order to execute its operating plan and continue as a going concern.plan. 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.
2016 2017 Plans
During 2016,2017, in addition to our efforts to increase sales in our existing foodservice operations we plan to attempt to expand our business by expanding our focus to additional specialty foods markets in both the consumer and foodservice sector, exploreexploring potential acquisition and partnership opportunities and continuecontinuing to extend our focus in the specialty food market through the growth of the Company’s existing sales channels and through a variety of additional sales channel relationships which are currently being explored. In addition, we are currently exploring the introduction of a variety of new product categories and new product lines, including private label products and proprietary branded products to leverage our existing foodservice and consumer customer base.
No assurances can be given that any of these plans will come to fruition or that if implemented that they will necessarily yield positive results.
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, 20152016 which is available at no cost at www.sec.gov.
ITEM 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
Item 1. Legal Proceedings
From time to time, the Company may bebecome 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued 95,000the following shares of common stock during the three months ended March 31, 2017:
The Company issued 274,783 shares of common stock for cash of $68,697 representing the exercise of warrants at a price of $0.25 per shares.
The Company issued 2,410,392 shares of common stock (net of 623,813 shares held back for withholding taxes) to employees, officers, and directors in satisfaction of the following obligations: vested RSUs representing 2,533,246 shares of common stock, and bonus shares and shares previously accrued representing 500,959 shares of common stock. The Company charged the amount of $59,584 to additional paid-in capital representing the value of these shares that had not been previously charged to operations.
The Company issued 658,600 shares of common stock to an ex-directorits Chief Executive Officer for the conversion of a note payable at $0.25 per share.
The Company issued the following shares of common stock subsequent to March 31, 2017:
In April and May 2017, the Company pursuantissued 2,685,467 shares of common stock to investors for the exerciseconversion of RSUs.principal and accrued interest on notes payable in the amounts of $146,377 and $524,990, respectively.
The Company made the following purchases of its common stock during the three months ended March 31, 2017:
| | (a) Total number of shares purchased | | | (b) Average price paid per share | | | (c) Total number of shares purchased as part of publicly announced plans or programs | | | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | |
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Period | | | | | | | | |
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January 2017 | | | 37,000 | | | $ | 0.502 | | | | N/A | | | | N/A | |
February 2017 | | | 642,688 | | | $ | 0.485 | | | | N/A | | | | N/A | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety
Disclosures.Disclosures
Not applicable.applicable
Item 5. Other Information
None.
3.1 | Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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3.2 | Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011). |
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4.1 | Form of Convertible Note (incorporated by reference to exhibit 4.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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4.2 | Form of Convertible Note (incorporated by reference to exhibit 4.2 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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4.3 | Form of Warrant - Class A (incorporated by reference to exhibit 4.3 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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4.4 | Form of Warrant - Class B (incorporated by reference to exhibit 4.4 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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4.5 | Form of Warrant - Class C (incorporated by reference to exhibit 4.5 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005). |
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4.6 | Secured Convertible Promissory Note dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009). |
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4.7 | Class B Common Stock Purchase Warrant dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009). |
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4.8 | Subscription Agreement between the Registrant and Alpha Capital Anstalt dated December 31, 2008 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009). |
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4.9 | Amendment, Waiver, and Consent Agreement effective January 1, 2009 between the Registrant and Alpha Capital Anstalt (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009). |
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31.1 | |
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31.2 | |
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32.1 | |
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32.2 | |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | XBRL Taxonomy Extension Label Linkbase |
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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 |
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/s/ Sam Klepfish | | Chief Executive Officer | | November 14, 2016May 15, 2017 |
Sam Klepfish | | | | |
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/s/ John McDonald | | Principal Financial Officer | | November 14, 2016May 15, 2017 |
John McDonald | | | | |
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