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,
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? 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, health pandemics, rising inflation,
bank failures, and environmental weather conditions.
We are also subject to other risks detailed from time to time in our other
filings with the SEC 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, among others, doubtful
accounts receivable, valuation of stock-based services, 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.
(a) Warrants:
There were no warrants outstanding at December 31, 2022 and 2021.
(b) Embedded conversion features of notes payable:
There were no outstanding convertible notes outstanding at December 31, 2022 and
2021:
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(c) Stock options:
The Company accounts for options in accordance with FASB ASC 718-40. Options are
valued upon issuance utilizing the Black-Scholes valuation model. Option expense
is recognized over the requisite service period of the related option award. The
following table illustrates certain key information regarding our options and
option assumptions at December 31, 2022 and 2021:
December 31,
2022 2021
Number of options outstanding 2,300,000 2,100,000
Value at December 31 N/A N/A
Number of options issued during the year 250,000 50,000
Value of options issued during the year $ 2,092 $ 8,616
Number of options recognized during the year 250,000 50,000
Number of options exercised or expired during the year 50,000 200,000
Value of options recognized during the year
$ 8,738 $ 144,274
Revaluation (gain) during the period $ N/A $ N/A
Black-Scholes model variables:
Volatility 24.43 % 71.26 %
Dividends 0 0
Risk-free interest rates 2.63 % 0.23 %
Term (years) 2.00 2.00
Provision for Doubtful Accounts Receivable
The Company maintained an allowance in the amount of $340,225 and $375,931 for
doubtful accounts receivable at December 31, 2022 and 2021, respectively. 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.
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. At
December 31, 2022, the Company has a net operating loss carryforward of
approximately $15,800,000.
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.
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ROU assets represent the right of use to 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.
Background
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado
corporation. From June 1979 through February 2003, we were either inactive or
involved in discontinued business ventures. We changed our name to Fiber
Application Systems Technology, Ltd in February 2003. In January 2004, we
changed our state of incorporation by merging into Innovative Food Holdings,
Inc. ("IVFH"), a Florida corporation formed for that purpose. As a result of the
merger, we changed our name to that of Innovative Food Holdings, Inc. In January
2004, we also acquired Food Innovations, Inc. ("FII" or "Food Innovations"), a
Delaware corporation, for 500,000 shares of our common stock.
Our strategy has been to increase our sales through a combination of
acquisitions and organic growth; through December 31, 2022 we have completed a
total of eight acquisitions.
Transactions With a Major Customer
Transactions with a major customer and related economic dependence information
is set forth (1) following our discussion of Liquidity and Capital Resources,
(2) under the heading Major Customer in Note 18 to the Consolidated Financial
Statements, and (3) in Business - Relationship with U.S. Foods, and (4) as the
second item under Risk Factors.
RESULTS OF OPERATIONS
This discussion may contain forward looking statements that involve risks and
uncertainties. Our future results could differ materially from the forward
looking statements discussed in this report. This discussion should be read in
conjunction with our consolidated financial statements, the notes thereto and
other financial information included elsewhere in the report.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenue
Revenue increased by $17,890,816 or approximately 29% to $80,102,964 for the
year ended December 31, 2022 from $62,212,148 in the prior year. The increase in
revenues is primarily attributable to an increase in specialty foodservice
revenues which was driven by the nationwide opening of restaurants and other
foodservice establishments previously affected by COVID-19 as well as increases
in travel related foodservice, and restaurant dining. The increase in specialty
foodservice revenue was partially offset with decreases in e-commerce revenues.
The decrease in e-commerce revenue during the current period was related to
decreases in COVID-19 driven demand in 2022 compared to 2021 partially driven by
the continued re-opening of bricks and mortar stores, and by decreases in
digital marketing related in part to a more challenging digital marketing
environment as compared to 2021 which has been driven partially by industrywide
marketing challenges related to expanded privacy rules that significantly reduce
data sharing.
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 a strategy which based on our analysis provides the most beneficial
opportunity for growth.
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.
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Currently, a small portion of our revenues comes from imported products or
international sales. Our current sales from such markets may be hampered and
negatively impacted by any economic tariffs that may be imposed in the United
States or in foreign countries.
See "Transactions with Major Customers" and the Securities and Exchange
Commission's ("SEC") mandated FR-60 disclosures following the "Liquidity and
Capital Resources" section for a further discussion of the significant customer
concentrations, loss of significant customer, critical accounting policies and
estimates, and other factors that could affect future results.
Cost of goods sold
Our cost of goods sold for the year ended December 31, 2022 was $61,414,765, an
increase of $16,153,364 or approximately 36% compared to cost of goods sold of
$45,261,401 for the year ended December 31, 2021. Cost of goods sold was made up
of the following expenses for the year ended December 31, 2022: cost of goods of
specialty, meat, game, cheese, seafood, poultry and other sales categories in
the amount of $41,897,142; shipping, delivery, handling, and purchase allowance
expenses in the amount of $18,989,389; and cost of goods associated with
logistics of $528,233. Gross margins as a percentage of sales declined during
the current period to 23.3% compared to 27.2% during the comparable period,
primarily due to variation in product and revenue mix across our various selling
channels, increases in fuel costs and fuel surcharges associated with the higher
cost of fuel in the United States and higher shipping costs contributed to the
decline in gross margins as a percentage of sales.
In 2022, we continued to price our products in order to increase sales, gain
market share and increase the number of our end users and customers. We
currently expect, if market conditions, overall economic conditions, and our
product revenue mix remain constant, that our cost of goods sold may increase
and may result in a decrease in profit margin.
Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased by $814,636 or
approximately 4% to $19,725,593 during the year ended December 31, 2022 compared
to $20,540,229 for the year ended December 31, 2021. The decrease in selling,
general, and administrative expenses was primarily due to a decrease in
advertising and digital marketing costs in the amount of $499,610, a decrease in
payroll and related costs in the amount of $424,308, including a decrease of
$91,287 in non-cash compensation; and a decrease in banking and credit card fees
of $187,156. Other components of the decrease in selling, general, and
administrative expenses include a decrease in bad debt expense in the amount of
$33,671 and taxes in the amount of $7,589. These decreases were partially offset
by an increase in travel and entertainment costs of $105,297, an increase in
office & facilities costs of $73,457, an increase in computer and IT expense of
$52,115, an increase in professional fees of $47,371, an increase in
amortization and depreciation of $36,344, and an increase in insurance costs of
$23,263. The decrease in sales, general, and administrative expenses represent
the results of our overall cost-cutting efforts as well as the restructuring of
our marketing and advertising programs.
Impairment of Investment
During the year ended December 31, 2022, we made the determination that our
investments in seven food-related companies were unlikely to be recovered, and
we recorded an impairment on these investments in the aggregate amount of
$286,725.
During the year ended December 31, 2021, the founder of one of the food related
companies passed away in an untimely tragic accident, and as a result the food
related company ceased operations and the Company recognized an impairment in
the amount of $209,850 in connection with that investment. There was no such
comparable transaction in the current period.
Other Income
During the year ended December 31, 2022, the Company recognized other income in
the amount of $294,000 in connection with the termination of the interest rate
swap. There was no comparable transaction in the prior period.
Gain on forgiveness of debt
During the year ended December 31, 2021, the Company recorded a gain on
forgiveness of debt in connection with the IVFH PPP Loans in the amount of
$3,425,015, consisting of $3,398,635 of principal and $26,380 of accrued
interest. There was no comparable transaction in the current period.
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Gain on contingent liabilities
During the year ended December 31, 2022, the Company recorded a total of
$295,600 in gains on contingent liabilities. This was composed of two contingent
liabilities recorded in connection with the igourmet acquisition on January 24,
2018, with a total remaining balance in the amount of $175,600; and two
contingent liabilities recorded in connection with the Mouth acquisition on July
6, 2018, with a total remaining balance in the amount of $120,000. In each
instance, the contingent event was not met and the payment period has passed;
accordingly, the Company has reversed these liabilities.
Loss on extinguishment of debt
During the year ended December 31, 2022, we entered into a revolving line of
credit agreement and two term loan agreements with MapleMark Bank, replacing our
revolving line of credit and term loans with Fifth Third Bank. We wrote off the
existing discounts to the Fifth Third Bank loans in the amount of $40,556
resulting in a loss on extinguishment of debt. There was no comparable
transaction during the year ended December 31, 2021.
Other leasing income
During the year ended December 31, 2022, the Company recognized income in the
amount of $11,226 in connection with the lease of space in our Mountaintop
warehouse facility, an increase of $386 or approximately 4% compared to $10,840
during the year ended December 31, 2021.
Interest expense, net
Interest expense, net of interest income, increased by $233,299 or approximately
66% to $586,153 during the year ended December 31, 2022, compared to $352,854
during the year ended December 31, 2021. The increase was due primarily to an
increase in interest accrued or paid on the Company's commercial loans and notes
payable in the amount of $165,703 due to higher interest rates and an increase
in loan fees in the amount of $103,235 due to loan fees incurred in connection
with the MapleMark and Fifth Third loans. These increases were partially offset
by a decrease in the amount of $20,639 in connection with the interest rate
swap, and a decrease in $14,852 related to the PPP loans.
Net loss
For the reasons above, the Company had a net loss for the year ended December
31, 2022 of $1,350,002 compared to a net loss of $716,331 during the year ended
December 31, 2021. The loss for the year ended December 31, 2022 includes a net
total of $1,580,162 in non-cash charges, including charges for non-cash
compensation in the amount of $576,964; depreciation expense of $520,848;
impairment of investments of $286,725; amortization of prepaid loan fees of
$115,760; amortization of intangible assets in the amount of $41,224; and loss
on extinguishment of debt of $40,556. These charges were partially offset by a
gain on contingent liabilities in the amount of $295,600 and provision for
doubtful accounts of $1,915. The loss for the year ended December 31, 2021
includes a total of $1,551,951 in non-cash charges, including charges for
non-cash compensation in the amount of $668,251; depreciation expense of
$517,942; impairment of investment of $209,850; provision for doubtful accounts
of $31,756; amortization of prepaid loan fees of $12,525; and amortization of
intangible assets in the amount of $8,912. These non-cash losses were offset by
a gain on forgiveness of debt in the amount of $3,425,015.
Liquidity and Capital Resources at December 31, 2022
As of December 31, 2022, the Company had current assets of $13,212,077,
consisting of cash and cash equivalents of $4,899,398; trade accounts, net
receivable of $4,969,395; inventory of $3,053,852; and other current assets of
$289,432. Also at December 31, 2022, the Company had current liabilities of
$16,412,609, consisting of trade payables and accrued liabilities of $6,853,253,
accrued interest of $18,104, deferred revenue of $1,558,155, line of credit of
$2,014,333, current portion of notes payable of $5,711,800, current portion of
operating lease liability of $64,987, and current portion of financing lease
liability of $191,977.
During the year ended December 31, 2022, the Company had cash used in operating
activities of $599,086. Cash flow used in operations consisted of the Company's
consolidated net loss of $1,350,002 less depreciation and amortization of
$562,072, stock-based compensation in the amount of $576,964, impairment of
investment of $286,725, amortization of right-of-use assets of $66,740, and
amortization of prepaid loan fees in the amount of $115,760, and loss on
extinguishment of debt of $40,556. These amounts were partially offset by a gain
on contingent liabilities in the amount of $295,600 and recoveries of doubtful
accounts of $1,915. The Company's cash position decreased by $600,386 as a
result of changes in the components of current assets and current liabilities.
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The Company had cash used in investing activities of $114,966 for the year ended
December 31, 2022, which consisted of cash paid for the acquisition of property
and equipment.
The Company had cash used in financing activities of $509,221 for the year ended
December 31, 2022, which consisted of principal payments on loans and notes
payable in the amount of $172,422; principal payments on financing leases in the
amount of $176,494; cost of debt financing of $110,305; and payment of offering
costs for stock previously accrued of $50,000.
The Company had a net working capital deficit of $3,200,532 as of December 31,
2022. The Company had cash used in operating activities during the year ended
December 31, 2022 in the amount of $599,086, compared to $3,661,569 during the
year ended December 31, 2021. 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 and improving
operating efficiencies. Currently, we do not have any material long-term
obligations other than those described in Notes 11, 12 and 13 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 food
oriented products and services, we may use existing cash reserves, long-term
financing, or other means to finance such diversification, although no assurance
can be given that such growth will occur.
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. 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.
2023 Plans
The world has been in the grip of a pandemic since March 2020 which has wreaked
havoc on economies world-wide, including in the U.S., which is our primary
market. As a result of the pandemic, restaurants, hotels, country clubs,
casinos, catering houses and other segments of our primary customer base were
either closed completely or have only opened with significantly reduced
operations. Accordingly, foodservice revenues, which historically have been a
significant portion of our overall revenues had been significantly reduced as
most foodservice establishments cross the United States closed or had limited
operations. As a result, foodservice revenue commencing in the second half of
March 2020 and through the end of 2021 experienced unprecedented declines. In
2022, as the pandemic began to recede and foodservice establishments reopened
and travel resumed, we have experienced strong foodservice revenue growth.
Concurrently, while ecommerce revenues remained above pre-pandemic historical
levels, lower deferred revenues recognized in the twelve months of 2022 and
decreases in COVID-19 driven demand in 2022 compared to 2021 (partially driven
by the continued re-opening of bricks and mortar stores), and an increasingly
challenging digital marketing environment fueled by industry-wide marketing
challenges, including expanded privacy rules that significantly reduce data
sharing.
During 2023, as Mr. Bennett has now recently taken the role of CEO, we will be
doing a holistic review of the Company's portfolio of businesses and go to
market strategies. In the meantime, we plan to continue to expand our business
by expanding our focus on additional specialty foods markets and by leveraging
our e-commerce platform to launch and grow new D2C brands and e-commerce sites
within targeted consumer areas either organically and/or through acquisition of
new D2C brands and e-commerce sites within targeted consumer areas. In addition,
we will continue exploring potential acquisition and partnership opportunities
with influencers and other celebrities to continue 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 potential sales channel
relationships. Additionally, to further optimize the Company's return on
marketing spend, the company has meaningfully reduced its digital marketing
spend in traditional digital marketing channels and has shifted focus to
increasing our strategic loyalty and retention focused customer experience
improvements across our branded online retailers. Additional focus includes
further improving the customer experience on our existing food subscription
offerings, expanding our traditional monthly subscription offerings and
launching a "subscribe and save" subscription offering.
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In addition, we are currently exploring the introduction of, or have introduced
into the market, 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 continue to expand its activities in the
direct-to-consumer space and the overall consumer packaged goods (CPG) space by
leveraging its overall capabilities in the consumer space, including leveraging
its direct to consumer e-commerce platform to reach both additional customers in
multiple channels, and to expand availability of its e-commerce capabilities to
additional products and markets.
The Company also plans on expanding its B2B offerings, including of its managed
services which provide a complete customer backend experience solution for small
to large brands by leveraging the platform's procurement, logistics and
fulfillment capabilities. The Company also manages monthly subscription
offerings on behalf of third party B2B clients and the Company plans on
expanding this offering in 2023. In addition, the Company is focused on formally
launching its B2B managed marketplace offerings, currently in beta testing, in
which the Company offers its B2B customers a complete managed solution including
warehousing fulfillment and listing management, for third party marketplace for
marketplaces such as Amazon, Walmart and other third party marketplaces.
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 had a material effect on the
Company's financial condition and results of its operations. The Company has
seen inflation across its costs for fuel, shipping, cost of goods, and
marketing. Balancing the management of these increases with the willingness of
our customers to pay higher prices will be a key focus for the Company this
year. However, no assurance can be given that we will be successful and
inflationary pressure on our profits will likely continue into 2023.
Transactions with Major Customers
The Company's largest customer, U.S. Foods, Inc. and its affiliates, accounted
for approximately 49% and 46% of total sales in the years ended December 31,
2022 and 2021, respectively; and approximately 46% of total sales in the fourth
quarter of 2022 compared to 40% of total sales in the fourth quarter of 2021. A
contract between our subsidiary, Food Innovations, and USF entered an optional
renewal period in December 2012 but was automatically extended for an additional
12 months in each of January 1, 2013 and 2014. On January 26, 2015 we executed a
contract directly between Food Innovations, Inc., our wholly-owned subsidiary,
and U.S. Foods, Inc. The term of the Agreement was from January 1, 2015 through
December 31, 2016 and provided for 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 2018. Effective
January 1, 2018 the Agreement was further amended to remove the cap on renewals,
and provide for an unlimited number of additional 12-month terms unless either
party notifies the other in writing, 30 days prior to the end date, of its
intent not to renew.
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INNOVATIVE FOOD HOLDINGS, INC. 