UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934For the quarterly period ended September 30, 2017March 31, 2019
☐
Transition report pursuant to Section 13 or 15(d) of the Exchange ActFor the transition period from _________ to _________.
Commission File Number: 0-9376
INNOVATIVE FOOD HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida (State or Other Jurisdiction of Incorporation or Organization) | 20-1167761 (IRS Employer I.D. No.) |
28411 Race Track Rd.
Bonita Springs, Florida 34135
(Address of Principal Executive Offices)
(239) 596-0204
(Registrant’s Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check One):
Large Accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act): YES ☐ NO ☒
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 35,086,65936,427,354 shares of common stock issued and 32,595,54733,839,774 shares of common stock outstanding as of November 9, 2017.
INNOVATIVE FOOD HOLDINGS, INC.
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | 3 | |
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
Item 2. | 24 | |
Item 4. | 30 | |
PART II. | OTHER INFORMATION | |
Item 1. | 31 | |
Item 2. | 31 | |
Item 3. | 31 | |
Item 4. | 31 | |
Item 5. | 31 | |
Item 6. | 32 | |
33 |
PART I. FINANCIAL INFORMATION
Innovative Food Holdings, Inc.
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
ASSETS | (unaudited) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4,337,662 | $ | 3,764,053 | ||||
Accounts receivable, net | 2,417,104 | 1,538,395 | ||||||
Inventory | 983,733 | 815,033 | ||||||
Other current assets | 64,367 | 55,393 | ||||||
Due from related parties | - | - | ||||||
Total current assets | 7,802,866 | 6,172,874 | ||||||
Property and equipment, net | 1,988,055 | 2,068,110 | ||||||
Investment | 201,525 | 208,983 | ||||||
Intangible assets, net | 1,419,233 | 707,684 | ||||||
Total assets | $ | 11,411,679 | $ | 9,157,651 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 2,088,148 | $ | 3,119,533 | ||||
Accrued liabilities - related parties | - | 65,000 | ||||||
Accrued interest | 15,674 | 626,873 | ||||||
Notes payable - related party, current portion | - | 164,650 | ||||||
Notes payable - current portion, net of discount | 547,183 | 1,424,432 | ||||||
Contingent liability - current portion | 200,000 | - | ||||||
Total current liabilities | 2,851,005 | 5,400,488 | ||||||
Contingent liability - long term | 200,000 | - | ||||||
Other long-term liabilities | 200,000 | - | ||||||
Note payable - long term portion, net of discount | 918,646 | 1,137,811 | ||||||
Total liabilities | 4,169,651 | 6,538,299 | ||||||
Stockholders’ equity | ||||||||
Common stock: $0.0001 par value; 500,000,000 shares authorized; 35,086,659 and 25,301,816 shares issued, and 32,595,547 and 24,568,157 shares outstanding at September 30, 2017 and December 31, 2016, respectively | 3,506 | 2,528 | ||||||
Additional paid-in capital | 35,931,641 | 33,974,470 | ||||||
Treasury stock: 2,276,703 and 519,254 shares outstanding at September 30, 2017 and December 31, 2016, respectively | (992,313 | ) | (174,949 | ) | ||||
Accumulated deficit | (27,700,806 | ) | (31,182,697 | ) | ||||
Total stockholders’ equity | 7,242,028 | 2,619,352 | ||||||
Total liabilities and stockholders’ equity | $ | 11,411,679 | $ | 9,157,651 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 3,140,799 | $ | 4,759,817 | ||||
Accounts receivable, net | 3,248,519 | 3,039,756 | ||||||
Inventory | 2,123,330 | 2,301,377 | ||||||
Other current assets | 166,225 | 144,301 | ||||||
Total current assets | 8,678,873 | 10,245,251 | ||||||
Property and equipment, net | 2,253,224 | 2,456,610 | ||||||
Investments | 355,025 | 339,525 | ||||||
Right to use assets, operating leases, net | 295,962 | - | ||||||
Right to use assets, financing leases, net | 130,016 | - | ||||||
Other amortizable intangible assets, net | 1,929,368 | 2,158,498 | ||||||
Goodwill and other unamortizable intangible assets | 2,183,065 | 2,183,065 | ||||||
Total assets | $ | 15,825,533 | $ | 17,382,949 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 2,085,464 | $ | 3,689,868 | ||||
Accrued interest | 18,285 | 16,402 | ||||||
Deferred revenue | 277,395 | 559,315 | ||||||
Lease liability – operating leases, current | 135,991 | - | ||||||
Lease liability – financing leases, current | 22,481 | - | ||||||
Notes payable - current portion | 668,833 | 928,857 | ||||||
Contingent liability - current portion | 447,569 | 472,876 | ||||||
Total current liabilities | 3,656,018 | 5,667,318 | ||||||
Lease liability – operating leases, non-current | 159,971 | |||||||
Lease liability – financing leases, non-current | 102,828 | |||||||
Contingent liability - long-term | 357,600 | 357,600 | ||||||
Note payable - long term portion | 1,030,160 | 1,196,245 | ||||||
Total liabilities | 5,306,577 | 7,221,163 | ||||||
Stockholders' equity | ||||||||
Common stock: $0.0001 par value; 500,000,000 shares authorized; 36,427,354 and 36,296,218 shares issued; 33,839,774 and 33,708,638 shares outstanding at March 31, 2019 and December 31, 2018, respectively | 3,640 | 3,627 | ||||||
Additional paid-in capital | 36,325,862 | 36,132,065 | ||||||
Treasury stock: 2,373,171 shares outstanding at March 31, 2019 and December 31, 2018, respectively | (1,016,370 | ) | (1,016,370 | ) | ||||
Accumulated deficit | (24,794,176 | ) | (24,957,536 | ) | ||||
Total stockholders' equity | 10,518,956 | 10,161,786 | ||||||
Total liabilities and stockholders' equity | $ | 15,825,533 | $ | 17,382,949 |
See notes to these unaudited condensed consolidated financial statements.
Innovative Food Holdings, Inc.
(unaudited)
For the Three | For the Three | For the Nine | For the Nine | |||||||||||||
Months Ended | Months Ended | Months Ended | Months Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 10,495,637 | $ | 9,094,443 | $ | 30,494,462 | $ | 25,413,011 | ||||||||
Cost of goods sold | 7,052,018 | 6,404,185 | 20,585,273 | 17,979,553 | ||||||||||||
Gross margin | 3,443,619 | 2,690,258 | 9,909,189 | 7,433,458 | ||||||||||||
Selling, general and administrative expenses | 1,894,588 | 1,702,425 | 6,269,386 | 5,245,178 | ||||||||||||
Total operating expenses | 1,894,588 | 1,702,425 | 6,269,386 | 5,245,178 | ||||||||||||
Operating income | 1,549,031 | 987,833 | 3,639,803 | 2,188,280 | ||||||||||||
Other (income) expense: | ||||||||||||||||
Interest expense, net | 16,139 | 121,226 | 157,912 | 365,764 | ||||||||||||
Total other (income) expense | 16,139 | 121,226 | 157,912 | 365,764 | ||||||||||||
Net income before taxes | 1,532,892 | 866,607 | 3,481,891 | 1,822,516 | ||||||||||||
Income tax expense | - | - | - | - | ||||||||||||
Net income from continuing operations | $ | 1,532,892 | $ | 866,607 | $ | 3,481,891 | $ | 1,822,516 | ||||||||
Net income from discontinued operations | - | - | - | 4,447,279 | ||||||||||||
Consolidated net income | $ | 1,532,892 | $ | 866,607 | $ | 3,481,891 | $ | 6,269,795 | ||||||||
Net income per share from continuing operations - basic | $ | 0.047 | $ | 0.035 | $ | 0.117 | $ | 0.073 | ||||||||
Net income per share from discontinued operations - basic | $ | - | $ | $ | - | $ | 0.178 | |||||||||
Net income per share from continuing operations - diluted | $ | 0.046 | $ | 0.030 | $ | 0.113 | $ | 0.066 | ||||||||
Net income per share from discontinued operations - diluted | $ | - | $ | - | $ | - | $ | 0.139 | ||||||||
Weighted average shares outstanding - basic | 32,333,108 | 25,047,134 | 29,779,904 | 24,980,317 | ||||||||||||
Weighted average shares outstanding - diluted | 33,476,756 | 31,619,778 | 30,842,167 | 32,044,762 |
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
March 31, | March 31, | |||||||
2019 | 2018 | |||||||
Revenue | $ | 12,859,215 | $ | 10,916,544 | ||||
Cost of goods sold | 8,881,380 | 7,437,431 | ||||||
Gross margin | 3,977,835 | 3,479,113 | ||||||
Selling, general and administrative expenses | 3,788,997 | 3,003,817 | ||||||
Total operating expenses | 3,788,997 | 3,003,817 | ||||||
Operating income | 188,838 | 475,296 | ||||||
Other expense: | ||||||||
Interest expense, net | 25,478 | 26,748 | ||||||
Total other expense | 25,478 | 26,748 | ||||||
Net income before taxes | 163,360 | 448,548 | ||||||
Income tax expense | - | - | ||||||
Net income | $ | 163,360 | $ | 448,548 | ||||
Net income per share - basic | $ | 0.005 | $ | 0.013 | ||||
Net income per share - diluted | $ | 0.005 | $ | 0.013 | ||||
Weighted average shares outstanding - basic | 33,947,817 | 33,710,609 | ||||||
Weighted average shares outstanding - diluted | 33,947,817 | 33,725,720 |
See notes to these unaudited condensed consolidated financial statements.
Innovative Food Holdings, Inc.
(unaudited)
For the Nine | For the Nine | |||||||
Months Ended | Months Ended | |||||||
September 30, | September 30, | |||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,481,891 | $ | 6,269,795 | ||||
Gain on sale of discontinued operations | - | (7,201,196 | ) | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 409,283 | 409,228 | ||||||
Stock based compensation | 315,968 | 673,523 | ||||||
Stock based compensation for TFD employees | - | 1,028,908 | ||||||
Amortization of discount on notes payable | 185,018 | 277,529 | ||||||
Allowance for doubtful accounts | - | 11,963 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (878,709 | ) | (237,265 | ) | ||||
Deferred revenue | - | 289,254 | ||||||
Inventory and other current assets, net | (177,674 | ) | 81,012 | |||||
Accounts payable and accrued expenses - related party | - | (146,018 | ) | |||||
Accounts payable and accrued liabilities | (1,199,680 | ) | 197,603 | |||||
Accrued liabilities - related party | (65,000 | ) | - | |||||
Due from related party | - | 110 | ||||||
Contingent liability | - | (91,000 | ) | |||||
Net cash provided by operating activities | 2,071,097 | 1,563,446 | ||||||
Cash flows from investing activities: | ||||||||
Cash decrease due to sale of discontinued operations | - | (470,482 | ) | |||||
Acquisition of property and equipment | (40,777 | ) | (10,512 | ) | ||||
Cash paid in the acquisition of Oasis | (300,000 | ) | - | |||||
Net cash (used in) investing activities | (340,777 | ) | (480,994 | ) | ||||
Cash flows from financing activities: | ||||||||
Common stock sold for exercise of warrants | 196,741 | - | ||||||
Payments made on revolving credit facilities | - | (841,831 | ) | |||||
Purchase of stock options from officers, directors, and employees | (163,925 | ) | - | |||||
Cash received from exercise of stock options | 70,000 | - | ||||||
Purchase of treasury stock | (505,660 | ) | (14,850 | ) | ||||
Borrowings on revolving credit facilities | - | 805,959 | ||||||
Principal payments on debt | (746,941 | ) | (1,021,829 | ) | ||||
Principal payments capital leases | (6,926 | ) | (8,094 | ) | ||||
Net cash (used in) financing activities | (1,156,711 | ) | (1,080,645 | ) | ||||
Increase in cash and cash equivalents | 573,609 | 1,807 | ||||||
Cash and cash equivalents at beginning of period | 3,764,053 | 2,137,289 | ||||||
Cash and cash equivalents at end of period | $ | 4,337,662 | $ | 2,139,096 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 64,198 | $ | 96,318 | ||||
Taxes | $ | - | $ | - | ||||
Common stock issued for conversion of note payable by related party | $ | 164,650 | $ | - | ||||
Equipment acquired under capital lease | $ | - | $ | 9,217 | ||||
Fair value of 25,000 shares of common stock issued to a service provider, previously accrued | $ | - | $ | 34,000 |
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
March 31, | March 31, | |||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 163,360 | $ | 448,548 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | 305,205 | 238,413 | ||||||
Amortization of right-of-use asset | 42,619 | - | ||||||
Stock based compensation | 100,144 | 8,787 | ||||||
Provision for doubtful accounts | (830 | ) | - | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (223,433 | ) | (246,231 | ) | ||||
Inventory and other current assets | 156,123 | (334,920 | ) | |||||
Accounts payable and accrued liabilities | (1,508,855 | ) | 755,799 | |||||
Deferred revenue | (281,920 | ) | - | |||||
Operating lease liability | (42,619 | ) | - | |||||
Contingent liabilities | (25,307 | ) | - | |||||
Net cash (used in) provided by operating activities | (1,315,513 | ) | 870,396 | |||||
Cash flows from investing activities: | ||||||||
Cash related to the iGourmet asset acquisition | - | (2,409,437 | ) | |||||
Acquisition of property and equipment | (2,705 | ) | (69,000 | ) | ||||
Investment in food related company | - | (50,000 | ) | |||||
Net cash used in investing activities | (2,705 | ) | (2,528,437 | ) | ||||
Cash flows from financing activities: | ||||||||
Purchase of stock options from officers, directors, and employees | - | (167,000 | ) | |||||
Cash received from the exercise of warrants | - | 35,000 | ||||||
Borrowings on term loan | - | 1,500,000 | ||||||
Principal payments on debt | (294,734 | ) | (160,186 | ) | ||||
Principal payments capital leases | (6,066 | ) | (2,394 | ) | ||||
Net cash (used in) provided by financing activities | (300,800 | ) | 1,205,420 | |||||
(Decrease) in cash and cash equivalents | (1,619,018 | ) | (452,621 | ) | ||||
Cash and cash equivalents at beginning of period | 4,759,817 | 5,133,435 | ||||||
Cash and cash equivalents at end of period | $ | 3,140,799 | $ | 4,680,814 |
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 27,693 | $ | 22,834 | ||||
Taxes | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Issuance of 131,136 shares of common stock previously accrued | $ | 93,666 | $ | - | ||||
Right of use asset and liabilities – operating upon adoption of ASU 2016-02 | $ | 388,581 | $ | - |
See notes to these unaudited condensed consolidated financial statements.
Innovative Food Holdings, Inc. and subsidiary
Consolidated Statements of Stockholders' Deficiency
December 31, | ||||||||||||||||||||||||||||
Common Stock | Treasury stock | Accum | ||||||||||||||||||||||||||
Amount | Value | APIC | Amount | Value | Deficit | Total | ||||||||||||||||||||||
Balance - December 31, 2017 | 36,080,519 | $ | 3,605 | $ | 36,196,682 | 2,276,703 | $ | (992,313 | ) | $ | (26,653,435 | ) | $ | 8,554,539 | ||||||||||||||
Common stock issued for the exercise of options | 100,000 | 10 | 34,990 | - | - | - | 35,000 | |||||||||||||||||||||
Purchase of stock options from employees, officers, and directors | 115,699 | 12 | (167,012 | ) | - | - | - | (167,000 | ) | |||||||||||||||||||
Fair value of vested stock options issued to management | - | - | 8,787 | - | - | - | 8,787 | |||||||||||||||||||||
Net income for the three months ended March 31, 2018 | - | - | - | - | - | 448,548 | 448,548 | |||||||||||||||||||||
Balance - March 31, 2018 (unaudited) | 36,296,218 | $ | 3,627 | $ | 36,073,447 | 2,276,703 | $ | (992,313 | ) | $ | (26,204,887 | ) | $ | 8,879,874 |
December 31, | ||||||||||||||||||||||||||||
Common Stock | Treasury stock | Accum | ||||||||||||||||||||||||||
Amount | Value | APIC | Amount | Value | Deficit | Total | ||||||||||||||||||||||
Balance - December 31, 2018 | 36,296,218 | $ | 3,627 | $ | 36,132,065 | 2,373,171 | $ | (1,016,370 | ) | $ | (24,957,536 | ) | $ | 10,161,786 | ||||||||||||||
Issuance of shares to employees, previously accrued | 131,136 | 13 | 93,653 | - | - | - | 93,666 | |||||||||||||||||||||
Fair value of vested stock and stock options issued to management | - | - | 100,144 | - | - | - | 100,144 | |||||||||||||||||||||
Net income for the three months ended March 31, 2019 | - | - | - | - | - | 163,360 | 163,360 | |||||||||||||||||||||
Balance - March 31, 2019 (unaudited) | 36,427,354 | $ | 3,640 | $ | 36,325,862 | 2,373,171 | $ | (1,016,370 | ) | $ | (24,794,176 | ) | $ | 10,518,956 |
See notes to these unaudited condensed consolidated financial statements.
March 31, 2019
(Unaudited)
1. BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations Inc. (“Food Innovations” or “FII”FII”), Food New Media Group, Inc. (“FNM”), Oasis Sales Corp. (“Oasis”), Organic Food Brokers Inc. (“OFB”), Gourmet Food Service Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc. (“GFW”), Gourmeting, Inc. (“Gourmeting”), The Haley Group, Inc. (“Haley”), Oasis Sales Corp. (“Oasis”), 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet”); Innovative Gourmet, LLC (“Innovative Gourmet”); Food Funding, LLC (“Food Funding”), M Innovations, LLC (“M Innovations”) and collectively with IVFH and theits other subsidiaries, the “Company” or “IVFH”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All material intercompany transactions have been eliminated upon consolidation of these entities.
The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q. Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited financial statements and related notes as contained in Form 10-K for the year ended December 31, 2016.2018. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results of operations to be expected for the full year.
2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Our business is currently conducted by our wholly-owned subsidiaries, Artisan, FII, Food Innovations, FNM,New Media Group, Inc. (“FNM”), OFB, GFG,Gourmet Foodservice Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc. (“GFW”), Gourmeting Inc. (“Gourmeting”), The Haley Group, Inc. (“Haley”), Oasis, 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet”), Innovative Gourmet (sometimes referred to herein as “Igourmet.com” or “Igourmet”), M Innovations, (sometimes referred to herein as “Mouth” or ” Mouth.com”) and GourmetFood Funding (collectively, with IVFH and its other subsidiaries, the “Company” or “IVFH”).
Overall, our business activities are focused around the creation and growth of a platform which provides distribution or the enabling of distribution of high quality, unique specialty food and food related products ranging from specialty foodservice products to Consumer PackagedConsumer-Packaged Goods (“CPG”) products through a variety of sales channels. Since its incorporation, the Company primarily through FII’s relationship with US Foods, Inc.channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“U.S. Foods” or “USF”D2C”), has been in the and direct to business of providing premium restaurants and other foodservice establishments, within 24 – 72 hours, with the freshest origin-specific perishable, and healthcare products shipped directly from our network of vendors and from our warehouses. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses. Gourmet has been in the business of providing specialty food e-commerce consumers, through its own website at www.forethegourmet.com and through www.amazon.com, with unique specialty gourmet food products shipped directly from our network of vendors and from our warehouses within 24 – 72 hours. GFG is focused on expanding the Company’s program offerings to additional customers.(“B2B”). In our business model, we receive orders from our customers and then work closely with our suppliers and our warehouse facilities to have the orders fulfilled. In order to maintain freshness and quality, we carefully select our suppliers based upon, among other factors, their quality, uniqueness, reliability and access to overnight courier services.
FII, though its relationship with the producers, growers, and makers of thousands of unique specialty foodservice products and through its relationship with US Foods, Inc. (“U.S. Foods” or “USF”), has been in the business of providing premium restaurants, within 24 – 72 hours, with the freshest origin-specific perishable, and healthcare products shipped directly from our network of vendors and from our warehouses. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses.
Gourmet has been in the business of providing specialty food via e-commerce through its own website at www.forethegourmet.com and through other ecommerce channels, with unique specialty gourmet food products shipped directly from our network of vendors and from our warehouses within 24 – 72 hours. GFG is focused on expanding the Company’s program offerings to additional customers.
Artisan is a supplier of over 1,500 niche gourmetunique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area. area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.
Haley is a dedicated foodservice consulting and advisory firm that works closely with companies to access private label and manufacturers’ private label food service opportunities with the intent of helping them launch and commercialize new products in the broadline foodservice industry. industry and assists in the enabling of the distribution of products via national broadline food distributors.
OFB and Oasis arefunction as outsourced national sales and brand management teams for emerging organic and specialty food CPG companies of a variety of sizes and business stages, and provideprovides emerging and unique CPG specialty food brands with distribution and shelf placement access in keyall of the major metro markets in the food retail food industry. FNM provides value-added, synergistic, seed and early stage capital to food related businesses including foodtech, foodservice products, and CPG companies. Through its temperature controlled warehouse, Gourmet Foodservice Warehouse fulfills
Igourmet has been in the business of providing DTC specialty food product ordersvia e-commerce through its own website at www.igourmet.com and through other channels such as www.amazon.com, www.jet.com, and www.walmart.com. In addition, Igourmet.com offers a line of B2B specialty foodservice items. Products are primarily shipped directly from Igourmet.com’s 67,000 square feet warehouse in Pennsylvania via Igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.
Mouth.com (www.mouth.com) is an online retailer of specialty foods, monthly subscription boxes and curated gift boxes to thousands of consumers and corporate customers across the United States. Mouth sources high quality specialty foods crafted in the US by independent and small batch makers, and expertly curates them into standout food gifts for the Company’s wholesaleboth consumers and direct to consumercorporate customers.
Use of Estimates
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, operating right of use assets and liabilities, and equity based instruments. 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.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, Food Innovations,FII, FNM, OFB, Oasis, GFG, Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc., Haley, Oasis, Innovative Gourmet, Food Funding, M Innovations and Gourmet. All accounts of FD have been included under discontinued operations. All material intercompany transactions have been eliminated upon consolidation of these entities.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At September 30, 2017March 31, 2019 and December 31, 2016,2018, trade receivables from the Company’s largest customer amounted to 49%50% and 44%48%, respectively, of total trade receivables.
Reclassifications
Certain reclassifications have been made to conform prior period data to the current presentation.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.
Revenue Recognition
The Company recognizes revenue upon product delivery. All of our products are shipped either same day or overnight or through longer shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria606. A five-step analysis a must be met beforeas outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4)when (or as) performance obligations are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.satisfied.. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Deferred Revenue
Certain customer arrangements in the Company's business such as gift cards and “Of the Month Club” purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards are issued by the Company do not have expiration dates. The Company records a liability for unredeemed gift cards and advance payments for monthly club memberships, as cash is received, and the liability is reduced when the card is redeemed or product delivered.
The following table represents the changes in deferred revenue as reported on the Company’s consolidated balance sheets:
Balance as of December 31, 2018 | $ | 559,315 | ||
Cash payments received | 93,580 | |||
Net sales recognized | (375,500 | ) | ||
Balance as of March 31, 2019 | $ | 277,395 |
Disaggregation of Revenue
The following table represents a disaggregation of revenue by from sales for the three months ended March 31, 2019 and 2018:
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Specialty food service | $ | 10,205,969 | $ | 9,311,800 | ||||
Ecommerce | 2,187,303 | 984,421 | ||||||
National Brand Management | 465,943 | 620,323 | ||||||
Total | $ | 12,859,215 | $ | 10,916,544 |
Cost of goods sold
We have included in cost of goods sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of food and raw materials, packing and handling, shipping, and delivery costs.
Basic net income (loss)earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net income (loss)earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
Dilutive shares at September 30, 2017:
Convertible notes and interest
At September 30, 2017, the Company had outstandingMarch 31, 2019 there were no convertible notes payable in the aggregate principal amount of $20,000 convertible at the rate of $0.25 per share with accrued interest of $15,764.
Warrants
At September 30, 2017, the Company had outstandingMarch 31, 2019 there are no warrants for holders to purchase the following additional shares: 700,000 shares at a price of $0.01 per share.
Stock 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 | ||||||||||
Average | ||||||||||
Remaining | ||||||||||
Exercise | Number | Contractual | ||||||||
Price | of Options | Life (years) | ||||||||
$ | 0.35 | 470,000 | 0.31 | |||||||
$ | 0.57 | 225,000 | 0.25 | |||||||
$ | 1.31 | 200,000 | 0.69 | |||||||
$ | 1.42 | 100,000 | 0.72 | |||||||
$ | 1.43 | 50,000 | 1.25 | |||||||
$ | 1.46 | 100,000 | 0.75 | |||||||
$ | 1.60 | 310,000 | 0.25 | |||||||
$ | 1.70 | 75,000 | 0.54 | |||||||
$ | 1.90 | 190,000 | 1.60 | |||||||
$ | 2.00 | 50,000 | 0.54 | |||||||
$ | 2.40 | 20,000 | 0.67 | |||||||
$ | 2.50 | 37,500 | 0.54 | |||||||
$ | 3.40 | 30,000 | 0.67 | |||||||
$ | 3.50 | 37,500 | 0.54 | |||||||
1,895,000 | 0.57 |
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| Weighted |
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| Average |
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| Remaining |
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| Exercise |
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| Number |
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| Contractual |
| |||
| Price |
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| of Options |
|
| Life (years) |
| |||
| $ | 0.62 |
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| 360,000 |
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| 4.76 |
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| $ | 0.75 |
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| 50,000 |
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| 2.76 |
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| $ | 0.85 |
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| 540,000 |
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| 4.76 |
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| $ | 0.95 |
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| 50,000 |
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| 2.76 |
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| $ | 1.10 |
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| 75,000 |
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| 2.12 |
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| $ | 1.20 |
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| 900,000 |
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|
| 4.76 |
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| $ | 1.38 |
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| 100,000 |
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|
| 0.67 |
|
| $ | 1.50 |
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| 125,000 |
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| 2.76 |
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| $ | 1.90 |
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| 100,000 |
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|
| 0.42 |
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| $ | 2.00 |
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| 125,000 |
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| 2.76 |
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| $ | 2.50 |
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| 125,000 |
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| 2.76 |
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| $ | 3.00 |
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| 125,000 |
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| 2.76 |
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| 2,675,000 |
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| 3.92 |
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Restricted Stock Awards
At March 31, 2019 there are a total ofan additional 300,000 unvested restricted stock awards remaining.remaining from grants in a prior year. Those 300,000 restricted stock awards will vest as follows: 125,000 restricted stock awards 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 restricted stock awards will vest contingent upon the attainment of a stock price of $3.00 per share for 20 straight trading days.
Stock-based compensation
During the ninethree months ended September 30, 2017,March 31, 2019, the Company recognized expenseincurred an obligation to issue an aggregate total of $240,208 for the vesting72,826 shares of restrictedcommon stock awards, the same amountto its Chief Executive Officer and to its Director of expense that would have been recognized had the RSUs not been replaced by the restricted stock awards. As the restricted stock awards were not in place during the nine months ended September 30, 2016, there was no such cost during that period.
Dilutive shares at September 30, 2016:
There were no convertible notes payable in the aggregate principal amount of $812,215 with accrued interest of $623,771 convertible at the rate of $0.25 per share into an aggregate of 5,743,994 shares of common stock.
Stock optionsOptions
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 | ||||||||||
Average | ||||||||||
Remaining | ||||||||||
Exercise | Number of | Contractual | ||||||||
Prices | Options | Life (years) | ||||||||
$ | 0.350 | 1,170,000 | 1.17 | |||||||
$ | 0.380 | 92,500 | 0.50 | |||||||
$ | 0.400 | 275,000 | 0.51 | |||||||
$ | 0.450 | 92,500 | 0.50 | |||||||
$ | 0.474 | 92,500 | 0.50 | |||||||
$ | 0.480 | 92,500 | 0.50 | |||||||
$ | 0.570 | 225,000 | 1.51 | |||||||
$ | 1.310 | 75,000 | 2.17 | |||||||
$ | 1.440 | 15,000 | 0.34 | |||||||
$ | 1.460 | 100,000 | 2.00 | |||||||
$ | 1.600 | 310,000 | 1.51 | |||||||
$ | 1.900 | 15,000 | 1.34 | |||||||
$ | 2.000 | 500,000 | 0.67 | |||||||
$ | 2.400 | 20,000 | 1.92 | |||||||
$ | 3.400 | 30,000 | 1.92 | |||||||
3,105,000 | 1.07 |
Weighted | |||||||||||
Average | |||||||||||
Remaining | |||||||||||
Exercise | Number | Contractual | |||||||||
Price | of Options | Life (years) | |||||||||
$ | 1.04 | 200,000 | 2.59 | ||||||||
$ | 1.31 | 150,000 | 0.50 | ||||||||
$ | 1.38 | 100,000 | 1.67 | ||||||||
$ | 1.42 | 100,000 | 0.22 | ||||||||
$ | 1.43 | 50,000 | 0.75 | ||||||||
$ | 1.46 | 100,000 | 0.25 | ||||||||
$ | 1.70 | 75,000 | 0.04 | ||||||||
$ | 1.90 | 175,000 | 1.23 | ||||||||
$ | 2.00 | 50,000 | 0.04 | ||||||||
$ | 2.40 | 20,000 | 0.17 | ||||||||
$ | 2.50 | 37,500 | 0.04 | ||||||||
$ | 3.40 | 30,000 | 0.17 | ||||||||
$ | 3.50 | 37,500 | 0.04 | ||||||||
1,125,000 | 0.96 |
Significant Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
In May 2014,February 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606)842) , to clarifyincrease transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the principlesbalance sheet for all leases with terms longer than 12 months and disclosing key information about leasing transactions. Leases are classified as either operating or financing, with such classification affecting the pattern of recognizing revenueexpense recognition in the income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provided an optional transition method to apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.
We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and create common revenueelected certain practical expedients permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the recognition guidance between U.S. GAAPof $338,581 of operating right-of-use assets and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when$338,581 of operating lease liabilities as of January 1, 2019. The adoption did not have a customer obtains controlsignificant impact on our results of promised goodsoperations or services and is recognized at an amount that reflects the consideration expectedcash flows. See Note 7. "Leases" to be received in exchangeour condensed consolidated financial statements for such goods or services. In addition, ASU 2014-09 requires disclosurefurther discussion of the nature, amount, timing, and uncertaintyeffects of revenue and cash flows arising from contracts with customers. Thethe adoption of ASU is effective for fiscal years beginning after December 15, 2017. The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies2016-02 and the accounting profession work to implement this new standard. The Company is still in the processassociated disclosures.
Management does not believe that any other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying condensed consolidated financial statements.
3. ACQUISITIONS
Mouth Foods, Inc.
Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. (“Mouth”) from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth’s assets in connection with a Delaware assignment proceeding, pursuant to the terms of an Asset Purchase Agreement (“MFI APA”). The MFI APA was accounted for as an acquisition of an ongoing business in accordance with ASC Topic 805 - Business Combinations (“ASC 805”), where the Company was treated as the acquirer and the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, was a privately held New York company operating out of Brooklyn, was an expert curator and online retailer of high quality specialty foods from small-batch makers in the US.
The consideration for and in connection with the acquisition consisted of (i) closing related cash payments of $208,355; (ii) additional revenue-based contingent liabilities valued by management at $100,000 related to certain future sales of purchased assets payable under the following terms: payment of 5% of certain revenues, with no payments on the first $500,000 of revenues and no payments on revenues after June 30, 2020; (iii) additional revenue based contingent liabilities of up to $185,000 associated with the purchase of certain debt of the seller; and (iv) additional contingent liability consideration valued by management at approximately $20,000.
The acquisition date estimated fair value of the consideration transferred totaled $513,355. During the year ended December 31, 2018, the Company changed the original allocation of the purchase price among the assets acquired. The reallocated purchase price consisted of the following:
Cash | $ | 208,355 | ||
Contingent liability – payable to debt holder | 185,000 | |||
Contingent liabilities – payable to sellers | 100,000 | |||
Additional Contingent Liabilities | 20,000 | |||
Total purchase price | $ | 513,355 | ||
Tangible assets acquired | $ | 57,000 | ||
Intangible assets acquired | 419,926 | |||
Goodwill acquired | 36,429 | |||
Total purchase price | $ | 513,355 |
The above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.
iGourmet, LLC
The iGourmet Asset Purchase Agreement effective January 23, 2018 (the “iGourmet APA”) was accounted for as an acquisition of an ongoing business in accordance with ASC Topic 805 - Business Combinations (“ASC 805”), where the Company was treated as the acquirer and the acquired assets and certain liabilities not purchased or assumed by Innovative Gourmet, which under certain circumstances, Innovative Gourmet may determine to pay, were recorded by the Company at their preliminary estimated fair values.
The consideration for and in connection with the iGourmet APA consisted of: (i) $1,500,000, which satisfied or reduced secured, priority and administrative debt of sellers; (ii) in connection with and prior to the acquisition, our wholly-owned subsidiary, Food Funding, funded advances of $325,500 to sellers on a secured basis, pursuant to certain loan documents and as bridge loans, which loans were reduced by the proceeds of the iGourmet APA; (iii) the purchase for $200,000 of certain debt owed by sellers, to be paid out of, if available, Innovative Gourmet’s cash flow; (iv) potential contingent liability allocation for a percentage of sellers’ approximately $2,300,000 of certain debt, not purchased or assumed by Innovative Gourmet, which under certain circumstances, Innovative Gourmet may determine to pay; and (v) additional purchase price consideration of (a) up to a maximum of $1,500,000, if EBITDA of Innovative Gourmet reaches $800,000 thousand in 2018, (b) up to a maximum of $1,750,000, if EBITDA of Innovative Gourmet in 2019 exceeds its EBITDA in 2018 by at least 20% and if its EBITDA reaches $5,000,000; and (c) up to a maximum of $2,125,000, if EBITDA of Innovative Gourmet in 2020 exceeds its EBITDA in 2019 by at least 20% and if its EBITDA reaches $8,000,000. The additional purchase price consolidation milestone for 2018 was not met. The EBITDA based earnout shall be paid 37.5% in cash, 25% in Innovative Food Holdings shares valued at the time of the closing of this transaction and 37.5%, at Innovative Gourmet’s option, in Innovative Food Holdings shares valued at the time of the payment of the earnout or in cash.
In connection with the iGourmet APA, our wholly-owned subsidiary, Food Funding, purchased seller’s senior secured note at a price of approximately $1,187,000, pursuant to the terms of a Loan Sale Agreement with UPS Capital Business Credit. That note was reduced by the proceeds of the iGourmet APA as disclosed in (i) above.
The acquisition date estimated fair value of the consideration transferred totaled $4,151,243. During the year ended December 31, 2018, the Company made the following purchase price adjustments: (i) accrued an additional $286,239 for accounts payable prior to acquisition; (ii) decreased contingent liabilities by the amount of $392,900 for earnout payments not made; (iii) decreased accounts receivable in the amount of $108,893 for amounts not collected; and (4) increased deferred revenue in the amount of $231,169 for shipments made. These adjustments increased the value of the acquisition to $4,275,751. At December 31, 2018, the value of the acquisition consisted of the following:
Initial purchase price | $ | 1,500,000 | ||
Cash payable in connection with transaction | 1,863,443 | |||
Accounts payable | 286,239 | |||
Deferred revenue | 231,169 | |||
Contingent liabilities | 394,900 | |||
Total purchase price | $ | 4,275,751 | ||
Tangible assets acquired | $ | 842,458 | ||
Intangible assets acquired | 2,970,600 | |||
Goodwill acquired | 462,693 | |||
Total purchase price | $ | 4,275,751 |
The above estimated fair value of the intangible assets is based on a third party valuation expert and also includes additional analysis by management based on a subsequent analysis of the transaction and adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Going forward, adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period will be made in our operating results in the period in which the adjustments are determined.
Pro forma results
The following table sets forth the unaudited pro forma results of the Company as if the iGourmet APA was effective on the first day of the March 31, 2018 three month period presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
Three months ended March 31, 2018 | ||||
(unaudited) | ||||
Revenues | $ | 11,293,194 | ||
Net Income | $ | 337,227 | ||
Basic net income per share | $ | 0.010 | ||
Diluted net income per share | $ | 0.010 | ||
Weighted average shares – basic | 33,710,609 | |||
Weighted average shares – diluted | 33,725,720 |
Oasis Sales and Marketing, LLC
Pursuant to the Oasis Asset Purchase Agreement, effective January 1, 2017, the Company, through its wholly-owned subsidiary, Oasis Sales Corp., purchased certain assets of Oasis Sales and Marketing, L.L.C., a California limited liability company. The purchase price consisted of $300,000 cash; a two-year promissory note in the amount of $100,000, and a structured equity instrument (the “SEI”) in the amount of $200,000. In addition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date up to a maximum of $400,000 (“Earnout Payments”). On May 23, 2018, the Company paid the amount of $189,000 related to the Earnout Payment, and recorded a gain in the amount of $11,000. The SEIamount of $200,000 related to the second Earnout Payment is recordedcarried as Other Long Term Liabilitiesa current liability on the Company’s balance sheet at September 30, 2017. December 31, 2018. The second Earnout Payment has been earned and is expected to be paid in the second quarter of 2019.
The SEI can be paidwas payable in cash or shares of the Company’s stock at the Company’s option, at any time, or is automatically payable via the issuance of 200,000 shares of the Company’s stock if the Company’s shares close above $1.00 for ten consecutive days. TheThis requirement was met on November 28, 2017, and on that date the $200,000 SEI liability was converted to 200,000 shares of common stock.
At the time of acquisition, the Company believesbelieved it is likely that the Earnout Payments willwould be made, and accordingly has recorded the entire amount of $400,000 as a contingent liability on its balance sheet at September 30, 2017.as of the acquisition date. The amount of $800,000 was allocated to customer lists, an intangible asset with a useful life of 60 months; and the amount of $200,000 was allocated to a non-compete agreement, an intangible asset with a useful life of 48 months. A total of $52,500 and $157,500 was amortized to operations during each of the three month periods ended March 31, 2019 and nine months ended September 30, 2017, respectively. The Company has presented preliminary estimates of the fair value of the intangible assets acquired. The Company is in the process of finalizing its review and evaluation of the related valuation assumptions supporting its fair value estimates of acquired intangible assets; therefore, the estimates used herein are subject to change. This may result in adjustments to the values presented.
4. DISCONTINUED OPERATIONS
For the Nine Months Ended | ||||
September 30, | ||||
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 |
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 | ) | ||
Liabilities sold | 13,426,269 | |||
Net liabilities sold | 7,201,196 | |||
Gain on sale | 7,201,196 | |||
Loss from discontinued operations before income tax | (2,753,917 | ) | ||
Income tax expense | - | |||
Income from discontinued operations | $ | 4,447,279 |
At September 30, 2017March 31, 2019 and December 31, 2016,2018, accounts receivable consists of:
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable from customers | $ | 2,422,540 | $ | 1,546,518 | ||||
Allowance for doubtful accounts | (5,436 | ) | (8,123 | ) | ||||
Accounts receivable, net | $ | 2,417,104 | $ | 1,538,395 |
March 31, 2019 | December 31, 2018 | |||||||
Accounts receivable from customers | $ | 3,402,865 | $ | 3,194,932 | ||||
Allowance for doubtful accounts | (154,346 | ) | (155,176 | ) | ||||
Accounts receivable, net | $ | 3,248,519 | $ | 3,039,756 |
5. INVENTORY
Inventory consists primarily of specialty food products. At September 30, 2017March 31, 2019 and December 31, 2016,2018, inventory consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Finished Goods Inventory | $ | 983,733 | $ | 815,033 |
March 31, 2019 | December 31, 2018 | |||||||
Finished Goods Inventory | $ | 2,123,330 | $ | 2,301,377 |
6. PROPERTY AND EQUIPMENT
Acquisition of Building
The Company owns a building and property located at 28411 Race Track Road, Bonita Springs, Florida 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.
On May 14, 2015, the Company purchased 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 improvements 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 primarily for the Company’s Artisan subsidiary. DuringWe have also recently completed an additional property improvement and upgrade buildout at the twelve months ended December 31, 2015,Artisan building which include a fully functional commercial test kitchen and training center and conference room. The test kitchen and training room will be used by Artisan and other subsidiaries of the Company paidfor the purposes of new product testing and development and approval, Quality Assurance and Quality Control as well as sales presentations and customer demonstrations. In addition, we recently added a totalpackaging room to the Artisan building, which is built to FDA, FSMA and SQF food safety standards and purchased new, technologically advanced semi-automated fillers for the packaging room. The packaging room addition will allow for expansion of $474,301 for various buildingprivate label product lines as well as packing of organic, non GMO, diet specific and other specialty foods. The test kitchen, packaging room and additional improvements furniture, fixtures, and equipment related to this property. were financed by a loan from Fifth Third Bank.
Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when Artisanthe Company occupied the facility in October, 2015.
A summary of property and equipment at September 30, 2017March 31, 2019 and December 31, 2016,2018, was as follows:
September 30, 2017 | December 31, 2016 | |||||||
Land | $ | 385,523 | $ | 385,523 | ||||
Building | 1,326,165 | 1,326,165 | ||||||
Computer and Office Equipment | 497,191 | 466,177 | ||||||
Warehouse Equipment | 226,953 | 226,953 | ||||||
Furniture, Fixtures | 464,502 | 454,743 | ||||||
Vehicles | 40,064 | 40,064 | ||||||
Total before accumulated depreciation | 2,940,398 | 2,899,625 | ||||||
Less: accumulated depreciation | (952,343 | ) | (831,515 | ) | ||||
Total | $ | 1,988,055 | $ | 2,068,110 |
March 31, 2019 | December 31, 2018 | |||||||
Land | $ | 385,523 | $ | 385,523 | ||||
Building | 1,326,165 | 1,326,165 | ||||||
Computer and Office Equipment | 523,853 | 523,853 | ||||||
Warehouse Equipment | 283,265 | 302,622 | ||||||
Furniture, Fixtures | 891,778 | 889,073 | ||||||
Vehicles | 92,225 | 220,812 | ||||||
Total before accumulated depreciation | 3,502,809 | 3,648,048 | ||||||
Less: accumulated depreciation | (1,249,585 | ) | (1,191,438 | ) | ||||
Total | $ | 2,253,224 | $ | 2,456,610 |
Depreciation and amortization expense for property and equipment amounted to $41,700$76,075 and $37,807$49,267 for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. Depreciation
7. RIGHT TO USE ASSETS AND LEASE LIABILITY – OPERATING LEASES
The Company has operating leases for offices, warehouses, vehicles, and amortizationoffice equipment. The Company’s leases have remaining lease terms of 1 year to 3 years, some of which include options to extend.
The Company’s lease expense for propertythe three months ended March 31, 2019 was entirely comprised of operating leases and equipment amounted to $120,832$46,871. The difference between the ROU asset amortization of $42,619 and $120,017 for the nine months ended September 30, 2017 and 2016, respectively. associated lease expense of $46,871 consists of interest.
Right to use assets – operating leases are summarized below:
March 31, 2019 | ||||
Warehouse | $ | 114,543 | ||
Warehouse equipment | 7,298 | |||
Office equipment | 49,907 | |||
Vehicles | 124,214 | |||
Right to use assets, net | $ | 295,962 |
Operating lease liabilities are summarized below:
March 31, 2019 | ||||
Warehouse | $ | 114,543 | ||
Warehouse equipment | 7,298 | |||
Office equipment | 49,907 | |||
Vehicles | 124,214 | |||
Lease liability | $ | 295,962 | ||
Less: current portion | (135,991 | ) | ||
Lease liability, non-current | $ | 159,971 |
Maturity analysis under these lease agreements are as follows:
Nine months ended December 31, 2019 | $ | 146,310 | ||
Year ended December 31, 2020 | 127,148 | |||
Year ended December 31, 2021 | 35,754 | |||
Year ended December 31, 2022 | 2,982 | |||
Total | $ | 312,194 | ||
Less: Present value discount | (16,232 | ) | ||
Lease liability | $ | 295,962 |
8. 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. At September 30, 2017,March 31, 2019 the Company has investments in threefive food related companies in the aggregate amount of $201,525.$355,025. The Company does not have significant influence over the operations of the companies it invests in.
9. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisition ofacquisitions through Artisan, Oasis (see note 3), Innovative Gourmet (see note 3), OFB, Haley, and OFB, and the acquisition of certain assets of The Haley Group, LLC.M Innovations. The following is the net book value of these assets:
September 30, 2017 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Trade Name | $ | 217,000 | $ | - | $ | 217,000 | ||||||
Non-Compete Agreement | 444,000 | (281,500 | ) | 162,500 | ||||||||
Customer Relationships | 1,930,994 | (1,042,261 | ) | 888,733 | ||||||||
Goodwill | 151,000 | - | 151,000 | |||||||||
Total | $ | 2,742,994 | $ | (1,323,761 | ) | $ | 1,419,233 |
December 31, 2016 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Trade Name | $ | 217,000 | $ | - | $ | 217,000 | ||||||
Non-Compete Agreement | 244,000 | (244,000 | ) | - | ||||||||
Customer Relationships | 1,130,994 | (791,310 | ) | 339,684 | ||||||||
Goodwill | 151,000 | - | 151,000 | |||||||||
Total | $ | 1,742,994 | $ | (1,035,310 | ) | $ | 707,684 |
March 31, 2019 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Non-Compete Agreement - amortizable | $ | 505,900 | $ | (380,570 | ) | $ | 125,330 | |||||
Customer Relationships - amortizable | 3,068,043 | (1,955,641 | ) | 1,112,402 | ||||||||
Trade Name | 1,532,822 | - | 1,532,822 | |||||||||
Internally Developed Technology | 875,643 | (184,007 | ) | 691,636 | ||||||||
Goodwill | 650,243 | - | 650,243 | |||||||||
Total | $ | 6,632,651 | $ | (2,520,218 | ) | $ | 4,112,433 |
December 31, 2018 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Non-Compete Agreement - amortizable | $ | 505,900 | $ | (362,913 | ) | $ | 142,987 | |||||
Customer Relationships - amortizable | 3,068,043 | (1,783,598 | ) | 1,284,445 | ||||||||
Trade Name | 1,532,822 | - | 1,532,822 | |||||||||
Internally Developed Technology | 875,643 | (144,577 | ) | 731,066 | ||||||||
Goodwill | 650,243 | - | 650,243 | |||||||||
Total | $ | 6,632,651 | $ | (2,291,088 | ) | $ | 4,341,563 |
Total amortization expense charged to continuing operations for the three months ended September 30, 2017March 31, 2019 and 20162018 was $82,317$229,130 and $50,567,$189,146, respectively. Total amortization expense charged to continuing operations for the nine months ended September 30, 2017 and 2016 was $288,451 and $182,201, respectively.
The trade names are not considered finite-lived assets, and are not being amortized. The non-compete agreements areagreement is being amortized over a period of 48 months. The customer relationships acquired in the Artisan, Haley, Oasis, and OFBthese transactions are being amortized over periods of 24 to 36 months. The internally developed technology is being amortized over 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 20162018 determined that there was no impairment to goodwill assets.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2017March 31, 2019 and December 31, 20162018 are as follows:
September 30, 2017 | December 31, 2016 | |||||||
Trade payables | $ | 1,921,920 | $ | 1,547,603 | ||||
Accrued costs of discontinued operations | 18,765 | 1,478,887 | ||||||
Accrued payroll and commissions | 147,463 | 93,043 | ||||||
Total | $ | 2,088,148 | $ | 3,119,533 |
March 31, 2019 | December 31, 2018 | |||||||
Trade payables | $ | 1,913,895 | $ | 3,425,178 | ||||
Accrued payroll and commissions | 171,569 | 264,690 | ||||||
Total | $ | 2,085,464 | $ | 3,689,868 |
11. ACCRUED INTEREST
At September 30, 2017,March 31, 2019, accrued interest on a notenotes outstanding was $15,674.$18,285. During the three and nine months ended September 30, 2017,March 31, 2019, the Company paid cash for interest in the aggregate amount of $17,480 and $59,432, respectively.
At December 31, 2016,2018, accrued interest on a note outstanding was $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 2,507,492 shares.$16,402. During the twelve months ended December 31, 2016,2018, the Company paid cash for interest in the aggregate amount of $96,318.
12. REVOLVING CREDIT FACILITIES
March 31, 2019 | December 31, 2018 | |||||||
On March 23, 2018, the Company entered into a Master Loan & Security Agreement that provided for the advance of funds in connection with a $500,000 Draw Promissory Note. in order to finance certain equipment acquisitions (“Artisan Equipment Loan”); On December 21, 2018, the Company advanced $391,558 under the $500,000 Draw Promissory Note. This loan is secured by the Company’s tangible and intangible personal property and bears interest at the rate of 5.20%. As of December 31, 2018, there was $108,422 remaining to be drawn on the Artisan Equipment Loan. On March 27, 2019, an amendment was made to the Draw Promissory Note to extend the draw period to December 31, 2019. On March 27, 2019, a Promissory Note was made for the amounts advanced in the amount of $391,558 to convert to a Term Loan. (see note 13). | $ | - | $ | - | ||||
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. On August 1, 2017 this credit facility was increased to $2,000,000 and the due date was extended to August 1, 2018. | $ | - | $ | - | ||||
Total | $ | - | $ | - |
13. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
September 30, 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 September 30, 2017, the Company made principal and interest payments on this loan in the amounts of $200,000 and $5,594, respectively. During the nine months ended September 30, 2017, the Company made principal and interest payments on this loan in the amounts of $600,000 and $24,187, respectively. | $ | 314,033 | $ | 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 September 30, 2017, the Company made payments of principal and interest on this note in the amounts of $13,650 and $3,288, respectively. During the nine months ended September 30, 2017, the Company made payments of principal and interest on this note in the amounts of $40,950 and $9,663, respectively. | 295,750 | 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 September 30, 2017, the Company made payments of principal and interest on this note in the amounts of $24,500 and $7,845, respectively. During the nine months ended September 30, 2017, the Company made payments of principal and interest on this note in the amounts of $73,500 and $22,919, respectively. | 751,333 | 824,833 | ||||||
A total of 16 convertible notes payable in the aggregate amount of $627,565 (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 $712,565 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 $627,565 were further extended to July 1, 2017, and a discount in the amount of $627,565 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, 2017, $0 and $185,018, respectively, of this discount was charged to operations. During the three and nine months ended September 30, 2017, the Company accrued interest in the amount of $0 and $179,304, respectively, on these notes. During the three months ended June 30, 2017, holders of the Convertible Notes Payable converted principal in the amount of $627,565 and accrued interest in the amount of $528,242 into an aggregate of 1,155,807 shares of common stock, and accrued interest in the amount of $86,089 was forgiven. The amount of $86,809 is recorded as a decrease in interest expense during the three and six months ended June 30, 2017. | - | 627,565 | ||||||
A convertible note payable in the amount of $20,000 The Note was due in January 2006 and the Company is currently accruing interest on this note at 1.9%. The principal is convertible into common stock of the Company at a conversion price of $0.25 per share. During the three and nine months ended September 30, 2017, the Company accrued interest in the amount of $93 and $279, respectively, on this note. | 20,000 | 20,000 |
March 31, 2019 | December 31, 2018 | |||||||
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 was due and was paid on the maturity date of February 5, 2018. See note 20. 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 twelve months ended December 31, 2018, the Company made principal and interest payments on this loan in the amounts of $114,033 and $829, respectively. | $ | - | $ | - | ||||
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 plus interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount was originally due February 28, 2018. On March 23, 2018 and effective February 26, 2018, this note was amended and renewed in the amount of $273,000, with monthly payments of principal and interest of $4,550 payable through the maturity date of February 28, 2023. During the three months ended March 31, 2019, the Company made payments of principal and interest on this note in the amounts of $13,650 and $3,130, respectively. | 218,400 | 232,050 | ||||||
Secured mortgage note payable for the acquisition of land and building in Broadview, Illinois in the amount of $980,000. Principal payments of $8,167 plus 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, 2019, the Company made payments of principal and interest on this note in the amounts of $24,500 and $8,215, respectively. | 604,333 | 628,833 | ||||||
Term loan dated March 28, 2018 in the original amount of $1,500,000 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 4.25%. Principal payments in the amount of $83,333 are due monthly along with accrued interest beginning March 28, 2018. The entire principal balance and all accrued interest is due on the maturity date of August 28, 2019. During the three months ended March 31, 2019, the Company made payments of principal and interest on this note in the amounts of $249,999 and $9,975, respectively. | 416,667 | 666,670 | ||||||
Promissory note dated March 22, 2019 in the original amount of $391,558 (the “Artisan Equipment Loan”) 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 5.20%. The entire principal balance and all accrued interest is due on the maturity date of March 21, 2024. (see note 11). Monthly payments in the amount of $7,425 including principal and interest will commence in April, 2019. | 391,558 | 391,558 | ||||||
A note payable in the amount of $20,000. The Note was due in January 2006 and the Company is currently accruing interest on this note at 1.9%. During the three months ended March 31, 2019, the Company accrued interest in the amount of $93 on this note. | 20,000 | 20,000 |
September 30, 2017 | December 31, 2016 | |||||||
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 | ||||||
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 and nine months ended September 30, 2017, the Company made principal payments on this note in the amount of $12,361 and $530, respectively; during the three and nine months ended September 30, 2017, the Company made interest payments on this note in the amount of rest payments on this note in the amounts of $32,496, and $1,880, respectively. | 67,504 | - | ||||||
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 and nine months ended September 30, 2017, the Company made principal payments in the amount of $778 and $2,307, respectively. During the three and nine months ended September 30, 2017, the Company made interest payments on this lease obligation in the amounts of $45 and $159, respectively. | 3,471 | 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 and nine months ended September 30, 2017, the Company made principal payments in the amounts of $1,558 and $4,617, respectively. During the three and nine months end September 30, 2017, the Company made interest payments on this lease obligation in the amounts of $178 and $591, respectively. | 13,738 | 18,354 | ||||||
Total | $ | 1,465,829 | $ | 2,911,913 | ||||
Less: Discount | - | (185,020 | ) | |||||
Net | $ | 1,465,829 | $ | 2,726,893 | ||||
Current maturities, net of discount | $ | 547,183 | $ | 1,589,082 | ||||
Long-term portion, net of discount | 918,646 | 1,137,811 | ||||||
Total | $ | 1,465,829 | $ | 2,726,893 |
For the Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Discount on Notes Payable amortized to interest expense: | $ | - | $ | 92,509 |
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Discount on Notes Payable amortized to interest expense: | $ | 185,018 | $ | 277,527 |
March 31, 2019 | December 31, 2018 | |||||||
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, 2019, the Company made principal and interest payments on this note in the amount of $4,291 and $2, respectively. | - | 4,291 | ||||||
This obligation was reclassified as a Lease Liability - Financing Lease in connection with the Company’s adoption of ASU 2016-02 on January 1, 2019; see note 14. | 5,661 | |||||||
Vehicle acquisition loan dated December 6, 2018 in the original amount of $51,088, payable in sixty monthly installments of $955 including interest at the rate of 4.61%. During the three months ended March 31, 2019, the Company made principal and interest payments in the amount of $2,295 and $571, respectively, on this loan. | 48,035 | 50,328 | ||||||
This obligation was reclassified as a Lease Liability - Financing Lease in connection with the Company’s adoption of ASU 2016-02 on January 1, 2019; see note 14. | - | 125,711 | ||||||
Total | $ | 1,698,993 | $ | 2,125,102 | ||||
Current portion | $ | 668,833 | $ | 928,857 | ||||
Long-term maturities | 1,030,160 | 1,196,245 | ||||||
Total | $ | 1,698,993 | $ | 2,125,102 |
Aggregate maturities of long-term notes payable as of September 30, 2017March 31, 2019 are as follows:
For the period ended March 31,
2020 | $ | 650,895 | ||
2021 | 643,779 | |||
2022 | 141,852 | |||
2023 | 146,467 | |||
2024 | 116,000 | |||
Thereafter | - | |||
Total | $ | 1,698,993 |
14. LEASE LIABILITIES - FINANCING LEASES
Financing lease obligation 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, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $1,675 and $62, respectively. | 3,986 | - | ||||||
Financing lease obligations under a lease agreement for a truck in the original amount of $128,587 payable in seventy monthly installments of $2,326 including interest at the rate of 8.33%. During the three months ended March 31, 2019, the Company made principal and interest payments on this lease obligation in the amounts of $4,388 and $2,588, respectively. | 121,323 | - | ||||||
Total | $ | 125,309 | $ | - | ||||
Current portion | $ | 22,481 | $ | - | ||||
Long-term maturities | 102,828 | - | ||||||
Total | $ | 125,309 | $ | - |
Aggregate maturities of lease liabilities – financing leases as of March 31, 2019 are as follows:
For the period ended September 30,
2018 | $ | 547,183 | ||
2019 | 177,038 | |||
2020 | 609,933 | |||
2021 | 54,600 | |||
2022 | 54,600 | |||
Thereafter | 22,475 | |||
Total | $ | 1,465,829 |
2020 | $ | 22,481 | ||
2021 | 20,096 | |||
2022 | 21,836 | |||
2023 | 23,726 | |||
2024 | 25,780 | |||
Thereafter | 11,390 | |||
Total | $ | 125,309 |
15. RELATED PARTY TRANSACTIONS
For the fair valuethree months ended March 31, 2019:
During the three months ended March 31, 2019 in connection with stock based compensation based upon the terms 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 offeredemployment agreements with its convertible notes viaemployees and compensation agreements with the Black-Scholes valuation method. The instruments were considered discountsCompany’s independent board members, the Company charged to the notes, to the extentoperations the aggregate valuetotal amount of $54,036 for the warrants and conversion features did not exceed the face valuevesting of the notes. These discounts were amortizeda total of 97,084 shares of common stock issuable to interest expense via the effective interest method over the term of the notes.
In January 2019, the Company awarded the following to each of its two independent directors: (i) a cash retainer in the amount of $45,000, which was paid in January 2019; and (ii) cash retainers in the amount of $30,000 per year, to be paid quarterly.
In January 2019, the Company awarded the following stock options to each of its four directors:
- | (i) five-year options to purchase 90,000 shares of common stock at a price of $0.62 per share, vesting quarterly over a three year period; |
- | (ii) five-year options to purchase 135,000 shares of common stock at a price of $0.85 per share, vesting quarterly over a three year period; |
- | (iii) five-year options to purchase 225,000 shares of common stock at a price of $1.20 per share, vesting quarterly over a three year period |
The Company recognized non-cash compensation in the amount of $38,550 during the three months ended March 31, 2019 in connection with these options.
For the three months ended March 31, 2018:
In December 2017, the Company’s Chief Executive Officer exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share. The date for payment of the exercise price of these options was extended to April 26, 2018. 55,192 shares of common stock were deemed issued on March 5, 2018, which number of which 700,000 were unvested and 682,540 were vested. In place of the 682,540 vested cancelled RSUs, the Company issuedshares represents a net amount after a cash payment 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.
In December 2017, the Company’s President exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share. The Company acquireddate for payment of the exercise price of these options was extended to purchase 140,000April 26, 2018. 60,749 shares of the Company’s common stock from its President for $13,400were deemed issued on March 5, 2018, which number of shares represents a net amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase.
In December 2017, a Board Member exercised 100,000 options at a price of $0.35 per share. The Company acquired options to purchase 87,500 sharesdate for payment of the Company’s common stock from its Principal Accounting Officer for $8,125 cash,exercise price of these options was extended to April 26, 2018. In March 2018 the Company made a payment of $77,000 which wasis the difference between the exercise price of the options and the market price of the stock on the date of purchase.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Contingent Liability
Pursuant to the Oasis acquisition,iGourmet Asset Purchase Acquisition, the Company is contingently liable forrecorded contingent liabilities in the original amount of $787,800. This amount relates to certain performance-basedperformance based payments over the twenty-four months following the acquisition date. Thedate as well as to certain additional liabilities that the Company believes it is likely that these payments will be made,has evaluated and accordinglyhas recorded on a contingent basis. During the entireyear ended December 31, 2018, the Company reduced this amount by $392,900 as the performance goals for the first year were not met. At March 31, 2019, the amount of $132,300 remains on the Company’s balance sheet as a current contingent liability, and $257,600 as a long term contingent liability.
Pursuant to the Oasis acquisition, the Company had a contingent liability in the amount of $400,000 ason connection with performance-based bonus obligations. During the year ended December 31, 2018, the company paid the amount of $189,000 related to these obligations, and recorded a contingent liabilitygain in the amount of $11,000. At March 31, 2019, the Company has the amount of $200,000 on its balance sheet at acquisition. $200,000as a current contingent liability in connection with the second year performance based bonus payment.
Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of this amount$240,576. $115,269 is classified as a current contingent liability and $200,000$100,000 is classified as a long termnon-current contingent liability at September 30, 2017.
Litigation
From time to time, the Company has become and may become involved in variouscertain lawsuits and legal proceedings which arise in the ordinary course of business.business, or as the result of current or previous investments, or current or previous subsidiaries, or current or previous employees, or current or previous directors, or as a result of acquisitions and dispositions or other corporate activities. The Company intends to vigorously defend its positions. 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.
17. EQUITY
Common Stock
At September 30, 2017March 31, 2019 and December 31, 2016,2018, a total of 2,491,112 and 733,6592,520,912 shares respectively, are deemed issued but not outstanding by the Company. These include 2,276,7032,306,503 shares of treasury stock as of September 30, 2017 and 519,254 shares of treasury stock as of December 31, 2016.
Three months ended September 30, 2017:
The Company issued 274,783a total of 131,136 shares of common stock to seven employees for previously accrued bonuses in the amount of $93,666.
The Company accrued the amount of $61,594 in connection with the vesting of 110,980 shares of common stock issuable to board members and employees in connection with their employment agreements.
Three months ended March 31, 2018:
The Company issued 100,000 shares of common stock for cash of $68,697$35,000 pursuant to the exercise of warrants.
In December 2017, the Company’s Chief Executive Officer exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share. The Company purchaseddate for payment of the exercise price of these options was extended to purchase a total of 367,500April 26, 2018. 55,192 shares of common stock from two executive officers, and employee, andwere deemed issued on March 5, 2018, which number of shares represents a board member for an aggregate $34,925 innet amount after a cash payment of $45,000 which was a portion of the difference between the exercise price of the options and the market price of the stock on the date of purchase.purchase, and taxes.
In December 2017, the Company’s President exercised 100,000 options at a price of $0.35 per share and an additional 100,000 options at a price of $0.57 per share. The Company chargeddate for payment of the amountexercise price of $34,925these options was extended to additional paid-in capital.
The Company acquired options to purchase 100,000 shares ofrecognized the Company’s common stock from its President for $24,000 cash, which was the difference between the exercise price of the options and the market price of the stock on the date of purchase.
Warrants
There were no warrants outstanding at March 31, 2019 or December 31, 2015.
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 | 2.63 | $ | 0.01 | 700,000 | $ | 0.01 | ||||||||||||||
700,000 | 2.63 | $ | 0.01 | 700,000 | $ | 0.01 |
Number of | Weighted Average | |||||||
Warrants | Exercise Price | |||||||
Warrants outstanding at December 31, 2016 | 3,537,284 | $ | 0.45 | |||||
Granted | - | - | ||||||
Exercised | (2,837,284 | ) | $ | 0.56 | ||||
Cancelled / Expired | - | - | ||||||
Warrants outstanding at September 30, 2017 | 700,000 | $ | 0.01 |
Options
The following table summarizes the options outstanding at March 31, 2019 and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:
Weighted | Weighted | |||||||||||||||||||||
Weighted | average | average | ||||||||||||||||||||
average | exercise | exercise | ||||||||||||||||||||
Range of | Number of | Remaining | price of | Number of | price of | |||||||||||||||||
exercise | options | contractual | outstanding | options | exercisable | |||||||||||||||||
Prices | Outstanding | life (years) | Options | Exercisable | Options | |||||||||||||||||
$ | 0.35 | 470,000 | 0.31 | $ | 0.35 | 470,000 | $ | 0.35 | ||||||||||||||
$ | 0.57 | 225,000 | 0.25 | $ | 0.57 | 225,000 | $ | 0.57 | ||||||||||||||
$ | 1.31 | 200,000 | 0.69 | $ | 1.31 | 200,000 | $ | 1.31 | ||||||||||||||
$ | 1.42 | 100,000 | 0.72 | $ | 1.42 | 100,000 | $ | 1.42 | ||||||||||||||
$ | 1.43 | 50,000 | 1.25 | $ | 1.43 | 50,000 | $ | 1.50 | ||||||||||||||
$ | 1.46 | 100,000 | 0.75 | $ | 1.46 | 100,000 | $ | 1.46 | ||||||||||||||
$ | 1.60 | 310,000 | 0.25 | $ | 1.60 | 310,000 | $ | 1.60 | ||||||||||||||
$ | 1.70 | 75,000 | 0.54 | $ | 1.70 | 75,000 | $ | 1.70 | ||||||||||||||
$ | 1.90 | 190,000 | 1.60 | $ | 1.90 | 190,000 | $ | 1.90 | ||||||||||||||
$ | 2.00 | 50,000 | 0.54 | $ | 2.00 | 50,000 | $ | 2.00 | ||||||||||||||
$ | 2.40 | 20,000 | 0.67 | $ | 2.40 | 20,000 | $ | 2.40 | ||||||||||||||
$ | 2.50 | 37,500 | 0.54 | $ | 2.50 | 37,500 | $ | 0.79 | ||||||||||||||
$ | 3.40 | 30,000 | 0.67 | $ | 3.40 | 30,000 | $ | 3.40 | ||||||||||||||
$ | 3.50 | 37,500 | 0.54 | $ | 3.50 | 37,500 | $ | 3.50 | ||||||||||||||
1,895,000 | 0.57 | $ | 1.25 | 1,895,000 | $ | 1.25 |
Weighted | Weighted | |||||||||||||||||||||
Weighted | average | average | ||||||||||||||||||||
average | exercise | exercise | ||||||||||||||||||||
Range of | Number of | Remaining | price of | Number of | price of | |||||||||||||||||
exercise | options | contractual | outstanding | options | exercisable | |||||||||||||||||
Prices | Outstanding | life (years) | Options | Exercisable | Options | |||||||||||||||||
$ | 0.62 | 360,000 | 4.76 | $ | 0.62 | 30,000 | $ | 0.62 | ||||||||||||||
$ | 0.75 | 50,000 | 2.76 | $ | 0.75 | - | $ | 0.75 | ||||||||||||||
$ | 0.85 | 540,000 | 4.76 | $ | 0.85 | 45,000 | $ | 0.85 | ||||||||||||||
$ | 0.95 | 50,000 | 2.76 | $ | 0.95 | - | $ | 0.95 | ||||||||||||||
$ | 1.10 | 75,000 | 2.12 | $ | 1.10 | 75,000 | $ | 1.10 | ||||||||||||||
$ | 1.20 | 900,000 | 4.76 | $ | 1.20 | 75,000 | $ | 1.20 | ||||||||||||||
$ | 1.38 | 100,000 | 0.67 | $ | 1.38 | 100,000 | $ | 1.38 | ||||||||||||||
$ | 1.50 | 125,000 | 2.76 | $ | 1.50 | - | $ | 1.50 | ||||||||||||||
$ | 1.90 | 100,000 | 0.42 | $ | 1.90 | 100,000 | $ | 1.90 | ||||||||||||||
$ | 2.00 | 125,000 | 2.76 | $ | 2.00 | - | $ | 2.00 | ||||||||||||||
$ | 2.50 | 125,000 | 2.76 | $ | 2.50 | - | $ | 2.50 | ||||||||||||||
$ | 3.00 | 125,000 | 2.76 | $ | 3.00 | - | $ | 3.00 | ||||||||||||||
2,675,000 | 3.92 | $ | 1.26 | 425,000 | $ | 1.31 |
Transactions involving stock options are summarized as follows:
Number of Shares | Weighted Average Exercise Price | |||||||
Options outstanding at December 31, 2016 | 2,445,000 | $ | 1.01 | |||||
Granted | 650,000 | $ | 1.73 | |||||
Exercised | (200,000 | ) | $ | 0.35 | ||||
Cancelled / Expired | (1,000,000 | ) | $ | 1.18 | ||||
Options outstanding at September 30, 2017 | 1,895,000 | $ | 1.25 |
Number of Shares | Weighted Average Exercise Price | |||||||
Options outstanding at December 31, 2018 | 1,050,000 | $ | 1.80 | |||||
Granted | 1,800,000 | $ | 0.98 | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | (175,000 | ) | $ | 1.53 | ||||
Options outstanding at March 31, 2019 | 2,675,000 | $ | 1.26 |
Aggregate intrinsic value of options outstanding and exercisable at September 30, 2017March 31, 2019 and 20162018 was $339,700$0 and $737,905,$12,250, 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 $0.91$0.45 and $0.48$1.06 as of September 30, 2017March 31, 2019 and 2016,2018, respectively, and the exercise price multiplied by the number of options outstanding.
During the three months ended September 30, 2017March 31, 2019 and 2016,2018, the Company charged a total of $0$38,550 and $4,983,$8,787, respectively, to operations related to recognized stock-based compensation expense for employee stock options. During the nine months ended September 30, 2017 and 2017, the Company charged a total of $8,707 and $14,814, 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 stock options during the three months ended March 31, 2019 using the Black-Scholes valuation model utilizing the following variables:
March 31, | ||||
2019 | ||||
Volatility | % | |||
Dividends | $ | - | ||
Risk-free interest rates | % | |||
Term (years) |
September 30, | ||||||||
2017 | 2016 | |||||||
RSUs expense – Continuing operations | $ | - | $ | 190,692 | ||||
RSUs expense – Discontinued operations | - | - | ||||||
Total | $ | - | $ | 190,692 |
September 30, | ||||||||
2017 | 2016 | |||||||
RSUs expense – Continuing operations | $ | - | $ | 658,709 | ||||
RSUs expense – Discontinued operations | - | 813,908 | ||||||
Total | $ | - | $ | 1,472,617 |
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 and different food trends, |
● | 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 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, operating right of use assets and liabilities, 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. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, and equity based instruments. 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 $5,436$154,346 for doubtful accounts receivable at September 30, 2017,March 31, 2019, and $56,371$155,176 at September 30, 2016.December 31, 2018. 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 uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within accrued liabilities.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a history of losses, and as such has recorded no liability for income taxes. Until such time assingle lease component. For lease agreements with terms less than 12 months, the Company begins to provide evidence thathas elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a continued profit is a reasonable expectation, management will not determine that there is astraight-line basis for accruing an income tax liability. These estimates have been accurate inover the past.lease term.
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 DelawareFlorida 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.
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”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. Thefor consideration to Innovative Food Holdings consistedconsisting primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. Aside from payments related to previously accrued liabilities there wereThere is no continuing cash inflows or outflows from or to the discontinued operations.
Effective January 1, 2017,24, 2018, pursuant to an asset acquisition agreement (the “iGourmet Asset Acquisition Agreement”), our wholly-owned subsidiary, Innovative Gourmet, LLC acquired substantially all of the assets and certain liabilities of iGourmet LLC and iGourmet NY LLC, privately-held New York limited liability companies located in West Pittston, Pennsylvania and engaged in the sale, marketing, and distribution of specialty food and specialty food items through www.igourmet.com, online marketplaces, additional direct-to-consumer platforms, distribution to foodservice, retail stores and other wholesale accounts, pursuant to the terms of an Asset Purchase Agreement. The consideration for and in connection with the acquisition consisted of: (i) $1,500,000, which satisfied or reduced secured, priority and administrative debt of Sellers; (ii) in connection with and prior to the acquisition, our wholly-owned subsidiary, Food Funding, LLC (“Food Funding”), funded advances of $325,000 to Sellers on a secured basis, pursuant to certain loan documents and as bridge loans, which loans were reduced by the proceeds of the Asset Purchase Agreement; (iii) the purchase for $200,000 of certain debt owed by Sellers, to be paid out of, if available, Innovative Gourmet’s cash flow; (iv) potential contingent liability allocation for a percentage of Sellers’ approximately $2,300,000 of certain debt, not purchased or assumed by Innovative Gourmet, which under certain circumstances, Innovative Gourmet may determine to pay; and (v) additional purchase price consideration of (a) up to a maximum of $1,500,000, if EBITDA of Innovative Gourmet reaches $800,00 in 2018, (b) up to a maximum of $1,750,000, if EBITDA of Innovative Gourmet in 2019 exceeds its EBITDA in 2018 by at least 20% and if its EBITDA reaches $5,000,000; and (c) up to a maximum of $2,125,000, if EBITDA of Innovative Gourmet in 2020 exceeds its EBITDA in 2019 by at least 20% and if its EBITDA reaches $8,000,000. The EBITDA based earnout shall be paid 37.5% in cash, 25% in IVFH shares valued at the time of the closing of this transaction and 37.5%, at Innovative Gourmet’s option, in IVFH shares valued at the time of the payment of the earnout or in cash. The 2018 earnout milestone was not met. In connection with the acquisition, our wholly-owned subsidiary, Food Funding, purchased Seller’s senior secured note at a price of approximately $1,187,000, pursuant to the terms of a Loan Sale Agreement with UPS Capital Business Credit. That note was reduced by the proceeds of the Asset Purchase Agreement. See Item (i) above.
Effective July 6, 2018, pursuant to an asset purchase agreement between Mouth Foods, Inc. (“Mouth”) and our wholly-owned subsidiary M Innovations LLC (“M Innovations”)(the “MFI APA”), the Company through its wholly-owned subsidiary Oasis Sales Corp., purchasedacquired certain assets of Oasis SalesMouth from MFI (assignment for the benefit of creditors), LLC, in connection with a Delaware assignment proceeding. The MFI APA was accounted for as an acquisition of an ongoing business where the Company was treated as the acquirer and Marketing, L.L.C.,the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, a California limitedprivately held New York company operating out of Brooklyn, was an expert curator and online retailer of high quality specialty foods from small-batch makers in the US.
The consideration for and in connection with the acquisition consisted of (i) closing related cash payments of $208,355; (ii) additional revenue-based contingent liabilities valued by management at $100,000 related to certain future sales of purchased assets payable under the following terms: payment of 5% of certain revenues, with no payments on the first $500,000 of revenues and no payments on revenues after June 30, 2020; (iii) additional revenue based contingent liabilities of up to $185,000 associated with the purchase of certain debt of the seller; and (iv) additional contingent liability company.
Transactions With a Major Customer
Transactions with a major customer and related economic dependence information is set forth immediately below and above in Note 2 to the Condensed Consolidated Financial Statements and also in our Annual Report on Form 10-K for the year ended December 31, 20162018 (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 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 $7,604,308 (72%$7,541,296 (59% of total sales) and $6,546,697 (72%$7,083,672 (65% of total sales) for the three months ended September 30, 2017March 31, 2019 and 2016, respectively; and $22,004,270 (72% of total sales) and $18,352,407 (72% of total sales) for the nine months ended September 30, 2017 and 2016,2018 respectively. On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods.Foods, Inc. The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for up to three (3)a limited number of 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
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, 2017March 31, 2019 Compared to Three Months Ended September 30, 2016
Revenue
Revenue increased by $1,401,194$1,942,671 or approximately 15%17.8% to $10,495,637$12,859,215 for the three months ended September 30, 2017March 31, 2019 from $9,094,443$10,916,544 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 thata strategy if,which based on our analysis we deem itprovides the most 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 segmentsmarkets 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.
Our cost of goods sold for the three months ended September 30, 2017March 31, 2019 was $7,052,018,$8,881,380, an increase of $647,833$1,443,949 or approximately 10%19.4% compared to cost of goods sold of $6,404,185$7,437,431 for the three months ended September 30, 2016.March 31, 2018. Cost of goods sold is made up of the following expenses for the three months September 30, 2017:ended March 31, 2019: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $4,982,334;$6,248,748; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2,069,684.$2,632,632. Total gross margin was approximately 32.8%30.9% of sales in 20172019 compared to approximately 29.6%31.9% of sales in 2016.2018. The increase in cost of goods sold is primary attributable to an increase in sales. The increasedecrease in gross margins from 2016 is2018 are primarily attributable to variation in product and revenue mix as well as variations in cost of goods sold as a percentage of total expenses, across our various selling channels.
In 2017,2019, we continued to price our products in order to increase sales, gain market share and increase the number of our end users.users and ecommerce customers. We were successful in both increasing sales and increasing market share.share and increasing the number of our ecommerce customers. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold may increase.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased by $192,163$785,180 or approximately 11%26.1% to $1,894,588$3,788,997 during the three months ended September 30, 2017March 31, 2019 compared to $1,702,425$3,003,817 for the three months ended September 30, 2016.March 31, 2018. The increase in selling, general, and administrative expenses was primarily due to an increase in SGA expenses associated with Oasis,payroll and torelated costs of approximately $634,125 (including an increase in office, facilities,non-cash compensation in the amount of $91,357), an increase in depreciation and vehicles costs. Increasesamortization of $66,792, an increase in advertising and marketing of $66,060, an increase in travel and entertainment of $65,522, and an increase in computer and IT costs in the amount of $37,024. Professional fees decreased by $172,532 during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decrease in acquisition activity in the current period compared to the three months ended March 31, 2018. The increase in payroll taxes and employee benefitrelated costs also contributedwere driven mainly by increases associated with Mouth, which was acquired in 2019 and increases in payroll at Innovative Gourmet The increases in payroll expenses at Innovative Gourmet were driven mainly by an increase in the time periods incorporating payroll expenses compared to the increase.
Interest expense, net
Interest expense, net of interest income, decreased by $105,087$1,270 or approximately 87%4.7% to $16,139$25,478 during the three months ended September 30, 2017,March 31, 2019, compared to $121,226$26,748 during the three months ended September 30, 2016. The decrease was due primarily to a reduction of the amortization of discountsMarch 31, 2018. Interest accrued or paid on the Company’s notes payable. These discounts are fully amortized, and there was $0 interest expense associated with this amortization during the three months ended September 30, 2017, compared to $92,509 during the three months ended September 30, 2016. There was a decrease of approximately $17,481 or 100% of the gross interest expense of $17,481 was accrued or paid interest on the company’s commercial loans and notes payable. The Company also had $1,342 ofpayable decreased by $2,936 to $26,996 during the current period, compared to $29,932 during the prior year; interest income decreased by $1,666 to $1,518 during the three months ended September 30, 2017.
Net income from continuing operations
For the reasons above, the Company had net income from continuing operations for the three months ended September 30, 2017March 31, 2019 of $1,532,892$163,360 which is an increasea decrease of approximately 77%$285,188 or 63.6% compared to a net income of $866,607$448,548 during the three months ended September 30, 2016.March 31, 2018. The income for the three months ended September 30, 2017March 31, 2019 includes a total of $124,013$405,349 in non-cash charges, including amortization of intangible assets in the amount of $82,317 and$229,130, depreciation expense of $41,696.$76,075, and charges for non-cash compensation in the amount of $100,144. The income for the three months ended September 30, 2016March 31, 2018 includes a total of $376,513$247,200 in non-cash charges, including amortization of intangible assets in the amount of $50,567,$189,146, depreciation expense of $37,807,$49,267, 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.
Liquidity and Capital Resources at September 30, 2017
As of September 30, 2017,March 31, 2019, the Company had current assets of $7,802,866,$8,678,873, consisting of cash and cash equivalents of $4,337,662;$3,140,799; trade accounts receivable net of $2,417,104;$3,248,519; inventory of $983,733;$2,123,330; and other current assets of $64,367.$166,225. Also at September 30, 2017,March 31, 2019, the Company had current liabilities of $2,851,005,$3,644,024, consisting of trade payables and accrued liabilities of $2,088,148;$2,098,702; accrued interest of $15,674;$18,285; deferred revenue of $264,157; lease liabilities – operating leases, current portion of $135,991; lease liabilities – financing leases, current portion of $22,481; current portion of notes payable and capital leases of $547,183;$668,833; and current portion of contingent liability of $200,000.
During the ninethree months ended September 30, 2017,March 31, 2019, the Company had cash provided byused in operating activities of $2,071,097.$1,315,513. Cash flow fromused in operations consisted of:of the Company’s consolidated net income of $3,481,891$163,360 plus non-cash compensation in the amount of $315,968; non-cash amortization of discount on notes payable of $185,018,$100,144; and depreciation and amortization of $409,283. The Company’s cash position decreased$305,205. These amounts were partially offset by $2,321,063 as a resultdecrease in provision for doubtful accounts of changes$830 and by a change in the components of current assets and current liabilities primarily a reduction in accrued liabilities related to related to discontinued operations in the amount of $1,460,122.
The Company had cash used in investing activities of $340,777$2,705 for the ninethree months ended September 30, 2017,March 31, 2019, which consisted of cash paid in the acquisition of Oasis in the amount of $300,000, and cash paid for the acquisition of property and equipment in the amount of $40,777. equipment.
The Company had cash used in financing activities of $1,156,711$300,800 for the ninethree months ended September 30, 2017,March 31, 2019, which consisted of principal payments made on notes payable of $746,941;$294,734 and principal payments on capitalfinancing leases of $6,926, payments made for the purchase of treasury stock of $505,660; and payments made for the purchase of options from officers, directors, and employees of $163,925. The Company also received cash of $196,741 from the exercise of warrants for common stock, and $70,000 for the exercise of common stock options.
The Company had net working capital of $4,951,861$5,034,849 as of September 30, 2017.March 31, 2019. The Company had cash providedused by operations during the ninethree months ended September 30, 2017March 31, 2019 in the amount of $2,071,097; this amount is net of certain payments in the amount of $1,460,122 related to discontinued operations which relate mainly to a transaction to purchase the rights to 1,450,000 RSUs and 642,688 shares of the Company’s common stock from a former FD employee which resulted in $850,000 in non-recurring cash payments compared$1,315,513. This compares to cash generated from operating activities of $1,563,446$870,396 during the ninethree months ended September 30, 2016. Without the cash flow items associated with discontinued operations, cash operating cash flow would have been $3,531,219 for the nine months ended September 30, 2017.March 31, 2018. 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 1312 to the financial statements included in this report. As we seek to increase our sales of new items and enter new markets, acquire new businesses as well as identify new and other consumer and food service oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.
If the Company’s cash flow from operations is insufficient to fully implement its business plan, the Company may require additional financing in order to execute its operating 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.
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.
2019 Plans
During 2017,2019, 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, exploring potential acquisition and partnership opportunities and continuing 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.
Furthermore, the Company intends to expand its activities in the direct to consumer space and the overall consumer packaged goods (CPG) space through leveraging the assets acquired from iGourmet LLC and Mouth Foods, Inc. and through leveraging its overall capabilities in the consumer space.
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, 20162018 which is available at no cost at www.sec.gov.
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 as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act Rules 13a-15(e) and 15d-15(e)Act.) as of the end of the period covered by this Quarterly Report, have identified a control deficiency regarding the integration of two acquisitions in 2018 and as a result management has concluded our internal control over financial reporting was ineffective at March 31, 2019 at the reasonable assurance level. Management of the Company believes that asthis deficiency is primarily due to the smaller size of that date,the company’s accounting staff in relation to certain continued system integrations related to the 2018 acquisitions of certain assets of iGourmet LLC and Mouth Foods, Inc. To address this matter, we have expanded our disclosure controlsaccounting staff and procedures were adequate and effectivewe expect to ensure that information requiredretain additional qualified personnel to be disclosed by uscontinue to remediate this control deficiency in the reports we file or submit withfuture.. In making this assessment, our management used the Securities and Exchangecriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission is recorded, processed, summarized and reported within the time periods specified(“COSO”) 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
From time to time, the Company has become and may become involved in variouscertain lawsuits and legal proceedings which arise in the ordinary course of business.business, or as the result of current or previous investments, or current or previous subsidiaries, or current or previous employees, or current or previous directors, or as a result of acquisitions and dispositions or other corporate activities. The Company intends to vigorously defend its positions. 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.
The Company issued the following shares of common stock during the ninethree months ended September 30, 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.
Period | (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 | ||||||||||||
January 2017 | 37,000 | $ | 0.502 | N/A | N/A | |||||||||||
February 2017 | 642,688 | $ | 0.485 | N/A | N/A | |||||||||||
May 2017 | 639,383 | $ | 0.368 | N/A | N/A | |||||||||||
June 2017 | 438,379 | $ | 0.575 | N/A | N/A |
None.
Not applicable
None.
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10.1 | Employment Agreement with Justin Wiernasz dated as of January 28, 2019 (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 February 1, 2019). |
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101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE | TITLE | DATE | ||
/s/ Sam Klepfish | Chief Executive Officer | May 20, 2019 | ||
Sam Klepfish | ||||
/s/ John McDonald | Principal | May 20, 2019 | ||
John McDonald |