EDGAR 10-K Filing

Company CIK: 312257
Filing Year: 2021
Filename: 312257_10-K_2021_0001185185-21-000542.json

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ITEM 1. BUSINESS
ITEM 1. Business
Our History
We (or “IVFH”) (or the “Company”) 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 Florida 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 are met over the next one or two years. Those milestones have been met.
On November 2, 2012, the Company entered into an asset purchase agreement (the “Haley Acquisition”) with The Haley Group, LLC whereby we acquired all existing assets of The Haley Group, LLC and its customers. The Haley Acquisition was valued at a total cost of $119,645.
On June 30, 2014, pursuant to a purchase agreement, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”), for $300,000, 100,000 four year options at a price of $1.46 per share, and up to an additional $225,000 in earn-outs if certain milestones are met.
On August 15, 2014, pursuant to a merger agreement, the Company acquired The Fresh Diet, Inc. (“FD”). Effective February 23, 2016, the Company closed a transaction to sell 90% of its ownership in FD for consideration consisting primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations.
Pursuant to an Asset Purchase Agreement dated as of January 1, 2017 the Company’s wholly-owned subsidiary, Oasis Sales Corp. (“Oasis”), purchased substantially all of the assets of Oasis Sales and Marketing, L.L.C. for $300,000 cash; a $200,000 structured equity instrument which can be paid in cash or shares of the Company stock at the Company’s option, anytime under certain conditions, or is automatically payable via the issuance of 200,000 shares if the Company’s shares close above $1.00 for ten consecutive days; a $100,000 note; and up to an additional $400,000 in earn-outs over two years if certain milestones are met. The Agreement also contains claw-back provisions if certain revenue conditions are not met. The milestones have been met.
Effective January 24, 2018, pursuant to an asset acquisition agreement, our wholly-owned subsidiary, Innovative Gourmet LLC (“Innovative Gourmet”), 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 (collectively, “Sellers”) 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 $800,000 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 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 additional purchase price consideration milestone for 2018 and 2019 and 2020 were 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.
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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 acquired certain assets of Mouth 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 the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, 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.
Effective July 23, 2019, P Innovations LLC (“P Innovations”) acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders. The Company is evaluating its preliminary purchase price allocation.
Our Operations
Our business is currently conducted by our wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers, LLC (“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 Food Properties LLC (“IFP”), Innovative Gourmet, LLC (“Innovative Gourmet” or “igourmet”), Food Funding, LLC (“Food Funding”), Logistics Innovations, LLC (“L Innovations”), M Innovations, LLC (“M Innovations” or “Mouth”), P Innovations, LLC “P Innovations”), and collectively with IVFH and its 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.
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-Packaged Goods (“CPG”) products through a variety of sales channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“D2C”) and direct to business (“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, through 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 unique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.
IFP was formed to hold the Company’s real estate holdings including the recently acquired facility in PA.
P Innovations’ focus is to leverage acquired assets to expand the Company’s subscription-based e-commerce business activities.
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L Innovations provides 3rd party warehouse and fulfillment services, out of its first location at the Company’s Mountaintop, Pennsylvania facility.
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 and assists in the enabling of the distribution of products via national broadline food distributors.
OFB and Oasis function 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 provides emerging and unique CPG specialty food brands with distribution and shelf placement access in all of the major metro markets in the food retail industry.
igourmet has been in the business of providing D2C specialty food via e-commerce through its own website at www.igourmet.com and through other channels including www.amazon.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 approximately 100,000 square feet warehouse in Pennsylvania via igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.
Mouth (www.mouth.com) is an online retailer of specialty foods, monthly subscription boxes and curated gift boxes to thousands of consumers and corporate customers nationwide. Mouth sources high quality specialty foods mainly crafted in the US by independent and small batch makers, and expertly curates them into standout food gifts for both consumers and corporate customers. Mouth also has launched a private label brand, including several award-winning products.
Our Products
We distribute over 7,000 perishable and specialty food and food related products, including origin-specific seafood, domestic and imported meats, exotic game and poultry, artisanal cheeses, freshly prepared meals, caviar, wild and cultivated mushrooms, micro-greens, organic farmed and manufactured food products, estate-bottled olive oils and aged vinegars and expertly curated food gift baskets, gift boxes and a full of line of food subscription based offerings. Products are sold under the brand of the respective vendor and are also offered under a variety of Company owned brands. In addition, we offer a line of niche specialty healthcare related products. On a regular basis we add additional products including new products from small batch makers and other unique specialty food products. We offer our nationwide customers access to the best food products available from around the world, quickly, most direct, and cost-effectively.
Some of the items we sell include:
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Seafood - Alaskan wild king salmon, Hawaiian sashimi-grade ahi tuna, Gulf of Mexico day-boat snapper, Chesapeake Bay soft shell crabs, New England live lobsters, Japanese Hamachi
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Meat & Game - Prime rib of American kurobuta pork, dry-aged buffalo tenderloin, domestic lamb, Cervena venison, elk tenderloin
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Produce - White asparagus, baby carrot tri-color mix, Oregon wild ramps, heirloom tomatoes
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Poultry - Grade A foie gras, Hudson Valley quail, free range and organic chicken, airline breast of pheasant
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Specialty - Truffle oils, fennel pollen, prosciutto di Parma, wild boar sausage
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Mushrooms - Fresh morels, Trumpet Royale, porcini powder, wild golden chanterelles
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Cheese - Maytag blue, buffalo mozzarella, Spanish manchego, Italian gorgonzola dolce
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Customer Service and Logistics
Our foodservice focused, live chef-driven customer service department is generally available by telephone Monday through Thursday, from 8 a.m. to 6 p.m. and on Friday from 8 a.m. to 5 p.m., Florida time. Our consumer-focused multi-lingual, customer care specialists are available by live chat and telephone Monday through Thursday, from 9 a.m. to 7:00 pm (ET), and on Friday from 9:00 am to 5 pm (ET). Our team is available and can be contacted 7 days a week via email and on social media platforms. The customer service departments are made up of a team of chefs and culinary experts, including a team of culinary trained chefs, who are full-time employees of the Company, and who are experienced in all aspects of perishable and specialty products. By employing chefs and culinary experts to handle customer service, we are able to provide our customers with extensive information about our products, including:
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Flavor profile and eating qualities
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Recipe and usage ideas
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Origin, seasonality, and availability
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Cross utilization ideas and complementary uses of products
Our logistics team manages the shipping and delivery process of every package to ensure timely delivery of products to our customers. We have developed the web-based capability to allow customers to seamlessly receive and send personal orders and gifts according to their desired schedule. The logistics manager receives shipping information on all products ordered, and packages are monitored from origin to delivery. In the event that delivery service is interrupted, our logistics department begins the process of expediting the package to its destination or potentially reshipping the package with a goal of 100% customer satisfaction for our customers. Our logistics manager works directly with our suppliers on an ongoing basis, to ensure that the appropriate packaging and shipping specifications are in place at all times. At the beginning of March 2020, as early signs were beginning to emerge that Covid-19 might potentially be a significant issue in the United states, we initiated additional preventative safety measure in our facilities and we continued adding additional preventative safety measures including protective gear for employees, temperature testing, ongoing onsite team of cleaning and sanitizing specialists, social distancing, special no contact package handling protocols and we continue to assess and add additional measures targeted towards the safety of our employees and the safety of our facilities and our products.
Relationship with U.S. Foods
We have historically sold the majority of our products, $20,748,819 and $33,076,022, respectively, representing 40% and 57% of total sales, respectively, in each of the years ended December 31, 2020 and 2019, through a distributor relationship between FII, one of our wholly-owned subsidiaries, and subsidiaries of U.S. Foods, a leading broadline distributor. On January 26, 2015 we executed a contract directly between FII and U.S. Foods (the “U.S. Foods Agreement”). The term of the U.S. Foods 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 U.S. Foods Agreement was extended through December 31, 2018. Effective January 1, 2018 the U.S. Foods 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.
Growth Strategy
Due to the COVID-19 outbreak in the United States the economic outlook for restaurant-based specialty food remains unclear. According to Technomic, a leading foodservice research provider, despite their expressed excitement and love for restaurants and the experience they provide, consumers report a growing reluctance to quickly return to normal restaurant behaviors. In addition, according to Technomic, food establishment operators are also showing drops in optimism about the pace of reopening. Despite potentially experiencing the bottom of the sales drop, many operators are reporting that they do not expect a quick recovery and expect a prolonged ramp-up period and Technomic is estimating that despite the significant decline in 2020 US restaurant sales, the U.S. restaurant industry sales will grow by 21% in 2021 depending on the length of the shutdown and any subsequent recession.
Credit Suisse Group estimates that 80% of U.S. household food spend now goes towards food-at-home vs. food-away-from-home. This is greater than the food-at-home spending share in 2018 of 47.6% and post-Great Recession peak of 50%, as per the United States Department of Agriculture’s Economic Research Service. In addition, recent commentary from Neilsen indicates that with improvements in technology, infrastructure and experience, coupled with a reduction in barriers to trial, such as delivery length or shipping costs, buyer adoption of online CPG shopping has consistently increased over the last two years. Yet while those changes have increased adoption of online ordering, COVID-19 has caused another step change in the way consumers shop.
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Prior to the onset of the COVID-19 outbreak, industry trends were very favorable towards market acceptance and continued growth of specialty food brands, which was a trend that boded well for us and our products.
To drive growth within the specialty food space, we intend to focus our efforts in demand driven active sales channels and leverage our ability to offer our products across multiple selling channels including to professional chefs within the restaurant channel as well as directly to consumer at home via ecommerce. We expect to continue offering unique and premium quality products as well as new product introduction and innovation to our customers and potential customers. In addition, we plan on continuing to value and strive for a high level of personalized customer service.
We anticipate attempting to grow our business through:
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Increased ecommerce conversion rates by improving the shopping experience on our website.
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Growth in the number of unique visitors to our various ecommerce sites.
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Maximize sales of current product catalog to our existing customers and potential new customers.
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Introduction of new products to customers.
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Expansion of availability of branded products and new brands which are consistent with the changing demands of customers in the U.S.
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Leveraging igourmet.com and mouth.com toward further expansion of our sales and distribution channels either organically or through acquisition.
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Leveraging our platform to partner with both foodservice and other consumer oriented entities such as stores and celebrity brands, to offer unique product offerings related to specialty food and specialty food gifting.
In addition to attempting to grow our current business, we believe that there are lateral opportunities in the food industry. We may consider the possibility of acquiring specialty food manufacturers, specialty food distributors, small specialty food brands, or specialty food e-commerce businesses. We anticipate that, given our current cash flow levels, any acquisition could potentially involve the issuance of additional shares of our common stock or third party financing, which may not be available on acceptable terms. No acquisition will be consummated without thorough due diligence. No assurance can be given that we will be able to identify and successfully conclude negotiations with any potential target.
Competition
While we face intense competition in the marketing of our products and services, it is our belief that there are few companies offering such a broad range of customer service oriented, quality, chef driven products and specialty gourmet products, for delivery from same day to 72 hours. Our primary competition is from local purveyors that supply a limited local market and have a limited range of products and from the other specialty gourmet distributors and specialty food retail stores or ecommerce stores, and from the national, regional or local expansion of specialty and non-specialty food distributers and food stores and food focused ecommerce sites. In addition, many purveyors are well established, have reputations for success in the development and marketing of these types of products and services and have significantly greater financial, marketing, distribution, personnel and other resources. These financial and other capabilities permit such companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors such as us, to enter into new markets and introduce new products and services.
Insurance
We maintain a Business Owners Policy with a general liability per occurrence limit of $1,000,000 and aggregate policy covering $2,000,000 of liability for all entities. The Company carries an Auto Policy with non-owned automobile bodily injury and property damage coverage with a limit of $1,000,000 for all entities. The Company also carries an Umbrella policy of up to $14,000,000 which covers all entities, along with two excess umbrella policies that sit over the BOP and Umbrella policies. The excess umbrella policies have limits of $5,000,000 and $6,000,000. The Company carries a Cyber policy of up to $2,000,000 which insures the Company and its subsidiaries. The Company carries two Commercial Property Policies, for its buildings in PA and FL, with a limit of up to $12,490,000 for PA and a limit of up to $1,595,000 for FL . Such insurance may not be sufficient to cover all potential claims against us and additional insurance may not be available in the future at a reasonable price.
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Government Regulation
Various federal and state laws currently exist, and more are sure to be adopted, regulating the delivery of fresh food products. We require specialty foodservice third-party vendors to certify that they maintain at least $3,000,000 liability insurance coverage and compliance with Hazard Analysis and Critical Control Point (HACCP), an FDA- and USDA-mandated food safety program, or a similar standard. Any changes in the government regulation of delivering of fresh food products that hinders our current ability and/or cost to deliver fresh products, could adversely impact our net revenues and gross margins and, therefore, our profitability and cash flows could also be adversely affected.
Employees
We currently employ 129 full-time employees, including 8 chefs and 2 executive officers. We believe that our relations with our employees are satisfactory. None of our employees are represented by a union.
Transactions with Major Customers
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 19 to the Consolidated Financial Statements, (3) in Business - Relationship with U.S. Foods, (4) as the third item under Risk Factors.
How to Contact Us
Our executive offices are located at 28411 Race Track Rd., Bonita Springs, Florida 34135; our Internet address is www.ivfh.com; and our telephone number is (239) 596-0204. The contents of our website are not incorporated in or deemed to be a part of this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our sales and supply chain and impact our operating results.
Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of novel coronavirus (COVID-19) causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China. The coronavirus was declared a global pandemic by the World Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people. Included in these emergency measures is the mandated full or partial closure of restaurants and other foodservice establishments across the United States. These foodservice establishments represent a significant portion of our revenues and their continued closure and/or operation with capacity limits would likely continue to have a detrimental effect on our business.
In addition, in the relatively short period with which the world has been dealing with this pandemic, significant economic turmoil has already impacted world markets. Numerous nationally recognized economists are predicting that the disease will lead to a worldwide recession. Should that occur, we can expect that our sales, net income and cash flows will be negatively impacted. While the governmental organizations of the United States, as well as governments across the world, are implementing emergency economic measures and announcing the consideration of additional emergency economic assistance packages, it is unclear what impact they are having, and will have, on the economy in the United States and worldwide. Great uncertainty surrounds the length of time this disease will continue to spread, the potential effect the disease, or the fear of the disease, could have on any area of our business operations, the number of people it will impact, directly and indirectly, and the extent governments will continue to impose, or add additional, quarantines, curfews, travel restrictions and closures of restaurants and other foodservice establishments. In addition, even following control of the disease and the end of the pandemic, the economic dislocation caused by the disease to so many people may linger and be so significant that consumers’ focus could be directed away from spending for products such as ours for an extended period of time. In addition, if the economy does not begin recovering and foodservice revenues do not increase, there could be financial stress on the Company which may require the Company to take additional measures appropriate under those circumstances. For all of these reasons, the impact on sales, net income and cash flows can be significant depending on the items mentioned above but at this time we cannot quantify the specific extent of the impact this disease will have on our sales, net income and cash flows.
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We Have a History of Losses Requiring Us to Seek Additional Sources of Capital.
As of December 31, 2020, we had an accumulated deficit of $32,399,793. We cannot assure you that we can achieve profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, or other extraordinary events occur, we will incur losses. Our possible success is dependent upon the successful development and marketing of our services and products, as well as continued expansion of our products and customers, as to which we can give no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel, marketing and promotions, reduced margins caused by competitive pressures and other economic and non-economic factors. These conditions may have a materially adverse effect upon us or may force us to curtail operations. In addition, we could require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges. We can give no assurance that financing will be available in amounts or on terms acceptable to us, if at all. Our inability in such instance to obtain sufficient funds from our operations or external sources could require us to curtail operations.
We Have Historically Derived Substantially Most of Our Revenue From One Client and if We Were to Lose Such Client and Be Unable to Generate New Sales to Offset Such Loss, We May Be Forced to Cease or Curtail Our Operations.
In 2003, Next Day Gourmet initially contracted with our subsidiary, Food Innovations, to handle the distribution of over 3,000 perishable and specialty food products to customers of USF. Effective January 1, 2018, we executed a contract amendment between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods which provides for no limit on automatic annual renewals thereafter if no party gives the other 30 days’ notice of its intent not to renew. Our sales through USF’s sales force generated gross revenues for us of $20,748,819 in the year ended December 31, 2020, and $33,076,220 in the year ended December 31, 2019. Those amounts contributed 40% and 57% of our total sales for each of 2020 and 2019, respectively. Our sales efforts within specialty foodservice are for the most part substantially dependent upon the efforts of the USF sales force. Although we have generated revenues from additional customers other than USF, if our relationship with USF were to be materially changed and we are unable to generate substantial new sales to offset such loss, we may be forced to significantly curtail our operations.
A Variety of Factors, Including Seasonality and the Economic Environment, May Cause Our Quarterly Operating Results to Fluctuate, Leading to Volatility in Our Stock Price.
Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including changes in economic conditions, including both COVID-19 related and non-related conditions, and shifts in the timing of holiday related purchases. While our annual sales have always had a significant seasonal aspect, this has increased with our acquisition of substantially all of the assets of igourmet LLC and Mouth Foods, Inc, as further described below. As a result of the seasonal nature of our business, we would be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events such as a terrorist attack or economic shock (including shock caused by world-wide pandemic or otherwise) that harm the retail environment or consumer buying patterns during our key selling season, or by events such as pandemic, strikes or weather related delays that interfere with the shipment of goods, during the critical period of the holiday season.
The Loss of Availability of our Bank Loans Could Adversely Impact our Business and Financial Condition.
We currently have multiple loans with Fifth Third Bank. All of these contain cross-default provisions which means that all outstanding borrowings can be accelerated and can become immediately due and payable in the event of a default in any of such loans, which includes, among other things, failure to comply with certain financial covenants, one of which was not met at year end, or breach of representations contained in the loan documents, defaults under other loans or obligations or involvement in bankruptcy proceedings (as such terms are defined in the loan documents). We are also subject to negative covenants which, during the life of the loans, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. Any material change to the business and economic landscape negatively impacting our business, including among other things, an outbreak of infectious disease, a pandemic or a similar public health threat, such as the COVID-19 outbreak, could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the loan documents could cause a default and we may then be required to repay all of such borrowings with capital from other sources. Under these circumstances, other sources of capital may not be available or may be available only on unfavorable terms. In the event of a default, it is possible that our assets and certain of our subsidiaries’ assets may be attached or seized by the lenders. Any (i) failure by us to comply with the covenants or other provisions of the loan documents, (ii) difficulty in securing any required future financing, or (iii) any such seizure or attachment of assets could have a material adverse effect on our business and financial condition.
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The Recent Acquisition of Substantially All of the Assets of igourmet LLC and Mouth Foods, Inc. Could Create Additional Risks to Our Business.
On January 23, 2018, our subsidiary, Innovative Gourmet LLC, acquired substantially all of the assets of igourmet, LLC. On July 6, 2018, our subsidiary, M Innovations LLC, acquired substantially all of assets of Mouth Foods, Inc. These businesses are very seasonal in nature, which generates certain operational considerations and could exacerbate the seasonality of our business. To wit, if Innovative Gourmet or Mouth does not have a strong holiday season, it likely will not be successful. In addition, while our subsidiary acquired only certain discrete liabilities of igourmet LLC, creditors of igourmet or Mouth may seek to impose liability on us or our subsidiaries, the payment of which, if required, could impair our cash flow and even if there may be no actual liability or responsibility to pay such claims, our challenge to such claims could involve significant legal fees and be a distraction to our management. The business model of the assets acquired from igourmet LLC and Mouth differ from our current businesses and operations, and therefore the success of its operations and its business model may create unforeseen complications requiring the use of our limited resources to resolve.
Computer System Disruption and Cyber Security Attacks or a Data Breach Could Damage Our Relationships With Our Customers, Harm Our Reputation, Expose Us To Litigation And Adversely Affect Our Business.
Our systems are subject to damage or interruption from computer viruses, malicious attacks and other security breaches. The possibility of a cyberattack on any one or all of these systems is a serious threat.
As part of our business model, we collect, retain, and transmit confidential information over public networks. In addition to our own databases, we use third party service providers to store, process and transmit this information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future either at their location or within their systems. We have confidential security measures in place to protect both our physical facilities and digital systems from attacks. Despite these efforts, we may be vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
Given the growing nature of our e-commerce presence and digital strategy, it is imperative that we and our partners maintain uninterrupted and secure operation of our: (i) computer hardware, (ii) software systems, (iii) customer marketing databases and other customer information, and (iv) ability to email our current and potential customers.
If our systems are damaged or fail to function properly or reliably, we may incur substantial repair or replacement costs, experience data loss or theft and impediments to our ability to conduct our operations. Any material disruptions in our e-commerce presence or information technology systems could have a material adverse effect on our business, financial condition and results of operations.
A Failure to Establish and Maintain Strategic Online and Social Media Relationships, and Other Relationships Targeted Towards Driving Web Traffic to our Websites, that Generate a Significant Amount of Traffic Could Limit the Growth of the Assets Acquired from igourmet LLC and Mouth Foods Inc.
We rely on third party websites, search engines and affiliates with which we have strategic relationships for traffic. If these third-parties do not attract a significant number of visitors, we may not receive a significant number of online customers from these relationships and our revenues from these relationships may remain flat or decrease. There continues to be strong competition to establish or maintain relationships with leading Internet companies, and we may not successfully enter into additional relationships, or renew existing ones beyond their current terms. We may also be required to pay significant fees to maintain and expand existing relationships or possibly not achieve the desired results with existing relationships. Our online revenues may suffer if we do not enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs.
If a Significant Number of Customers are not Satisfied with their Purchase, We will be Required to Incur Substantial Costs to Issue Refunds, Credits or Replacement Products.
If customers are not satisfied with the products they receive, we may either replace the product for the customer or issue the customer a refund or credit. Ours net income would decrease if a significant number of customers request replacement products, refunds or credits and we are unable to pass such costs onto the supplier.
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If We Fail to Continuously Improve Our Website, it May Not Attract or Retain Customers.
If potential or existing customers do not find our websites including www.igourmet.com, www.mouth.com or any of the company’s other websites, a convenient place to shop, we may not attract or retain customers and our sales may suffer. To encourage the use of our website, we must continuously improve its accessibility, mobile capabilities, content and ease of use. In addition, customer traffic and our business would be adversely affected if competitors’ websites are perceived as easier to use or better able to satisfy customer needs. Furthermore, e-commerce conversion rates could be adversely affected by a variety of website related factors.
Our Marketing Efforts to Help Grow Our Business May Not be Effective.
Maintaining and promoting awareness of our websites, including www.igourmet.com is important to our ability to attract and retain visitors. Generating a meaningful return on our investments in marketing initiatives may be difficult. The marketing efforts we implement may not succeed for a variety of reasons, including our inability to execute and implement our plans. External factors beyond our control may also impact the success of our marketing initiatives. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, which can negatively affect the placement of links to our websites and, therefore, reduce the number of visits to our websites.
The growing use of online ad-blocking software, including on mobile devices, may also impact the success of our marketing efforts because we may reach a smaller audience and fail to bring more visitors to our websites. In addition, ongoing privacy regulatory changes may impact the scope and effectiveness of marketing and advertising services generally, including those used related to our websites. We also seek to obtain website visitors through email. If we are unable to successfully deliver emails to potential customers or customers do not open our emails, whether by choice or because those emails are marked as low priority or spam, or for other reasons, our business could be adversely affected. Social networking websites, such as Facebook and others are another source of visits to our websites. As ecommerce and social networking evolve, we must continue to evolve our marketing tactics accordingly and, if we are unable to do so, our business could be adversely affected.
If We Do Not Accurately Predict Customer Demand for Our Products, We May Lose Customers or Experience Increased Costs.
As we expand the volume of products offered to our customers, we may be required or may elect for business purposes, to increase inventory levels and the number of products maintained in our warehouses. If we overestimate customer demand for our products, excess inventory and outdated merchandise could accumulate, tying up working capital and potentially resulting in reduced warehouse capacity and inventory losses due to damage, theft and obsolescence. If we underestimate customer demand, it may disappoint customers who may turn to our competitors.
The Laws with Respect to Taxes Have Changed and May Change Again Which Could Impact Our Operating Results.
The U.S. Congress has enacted legislation that significantly reforms the Internal Revenue Code of 1986, as amended. The new legislation, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating losses, and allows for the expensing of certain capital expenditures. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. We have adjusted our deferred tax assets and liabilities at December 31, 2018, using the new corporate rate of 21 percent; however, we base our estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. it is possible that the application of these new rules may have a material and adverse impact on our operating results, cash flows and financial condition. Furthermore, the recent Supreme Court Ruling in South Dakota V. Wayfair, Inc, in which the Court upheld South Dakota’s economic nexus law, which requires companies to collect sales tax when their sales or the number of transactions with the state exceed certain thresholds. could have an adverse on our business. In addition, any other changes to applicable tax laws, whether on a federal or state level, could also decrease our ability to compete with traditional retailers, and otherwise harm our business.
If We Fail to Attract and Retain Key Personnel, Our Business and Operating Results May be Harmed.
Our future success depends to a significant degree on the skills, experience and efforts of key personnel in our senior management, whose vision for our company, knowledge of our business and expertise would be difficult to replace. If any one of our key employees leaves, is unable to work, or fails to perform and we are unable to find a qualified replacement, we may be unable to execute our business strategy.
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We May Be Unable to Manage Our Growth Which Could Result in Our Being Unable to Maintain Our Operations.
Our strategy for growth is focused on continued enhancements and expansion to our existing business model, offering a broader range of services and products, affiliating with additional vendors and through possible joint ventures. Pursuing this strategy presents a variety of challenges. We may not experience an increase in our services to our existing customers, and we may not be able to achieve the economies of scale, or provide the business, administrative and financial services, required to sustain profitability from servicing our existing and future customer base. Should we be successful in our expansion efforts, the expansion of our business would place further demands on our management, operational capacity and financial resources. To a significant extent, our future success will be dependent upon our ability to maintain adequate financial controls and reporting systems to manage a larger operation and to obtain additional capital upon favorable terms. We can give no assurance that we will be able to successfully implement our planned expansion (whether due to the impact of COVID-19 or other unrelated reasons), finance its growth, or manage the resulting larger operations, if any. In addition, we can give no assurance that our current systems, procedures or controls will be adequate to support any expansion of our operations. Our failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
The Specialty Food and Foodservice Industry is Very Competitive, Which May Result in Decreased Revenue for Us as Well as Increased Expenses Associated with Marketing Our Services and Products.
The specialty food and foodservice businesses are highly competitive. We compete against other providers of quality foods, some of which sell their services globally, and some of these providers have considerably greater resources than we have. These competitors may have greater marketing and sales capacity, established distribution networks, significant goodwill and global name recognition. Our e-commerce and product catalog websites and paper mailings compete with other e-commerce websites and other catalogs, and other specialty foodservice providers that market lines of products similar to ours. We compete with national, regional and local businesses utilizing a similar strategy, as well as traditional specialty food and foodservice distributors. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors, new business models, and an increase in competition from established companies. Furthermore, it may become necessary for us to reduce our prices in response to competition. This could negatively impact our ability to be profitable.
We Rely Upon Outside Vendors and Shippers for Our Specialty Food Products and Interruption in the Supply of Our Products or their Failure to Adhere to Our Quality Standards May Negatively Impact Our Revenues.
Shortages in supplies of the food products we sell may impair our ability to provide our services. Our vendors are independent and we cannot guarantee their future ability to source the products that we sell. Many of our products are wild-caught, and we cannot guarantee their availability in the future. Unforeseen strikes and labor disputes as well as adverse weather conditions may result in our inability to deliver our products in a timely manner. Also, if our suppliers fail to supply quality product in a timely and effective manner it could lead to an increase in recalls and customer litigation against us which could harm our brands’ images and negatively affect our business and operating results. The success of our business depends, in part, on our ability to timely and effectively deliver merchandise (e.g. fresh products) to our customers. We cannot control all of the various factors that might affect our fulfillment rates in direct-to-customer sales. We are heavily dependent upon one national carrier for the delivery of our fresh products to our customers. Accordingly, we are subject to risks, including labor disputes, union organizing activity, inclement weather, technology breakdowns, natural disasters, the closure of their offices or a reduction in operational hours due to an economic slowdown or health related crisis, possible acts of terrorism, their ability to provide delivery services to meet our shipping needs, disruptions or increased fuel costs, and costs associated with any regulations to address climate change. Since our customers rely on us to deliver their orders daily or within 24-72 hours, delivery delays could significantly harm our business.
In Order to be Successful, We Must be able to Enhance Our Existing Products and Develop and Introduce New Products and Services to Respond to Changing Market Demand.
The markets in which we operate are characterized by frequently changing customer demand and the introduction of new “flavors of the month” as certain foods become more and less popular. Changes in customer preferences and buying trends may also affect our products differently. We must be able to stay current with preferences and trends in specialty food and address the customer tastes for each of our target customer demographics. We must also be able to identify and adjust products to cater to customer demands and dietary needs. For example, a change in customer preferences for gluten free items may not correlate to a similar change in buying trends for other specialty food. In order to be successful, we must be able to enhance our existing products and anticipate and develop and introduce new products and services to respond to changing market demand for new tastes. The development and enhancement of services and products entails significant risks, including:
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o the inability to effectively adapt new food types to our business;
o the failure to conform our services and products to evolving industry standards;
o the inability to develop, introduce and market enhancements to our existing services and products or new services and products on a timely basis; and
o the non-acceptance by the market of such new service and products.
If we misjudge either the market for our products or our customers’ purchasing habits, our sales may decline significantly which would negatively impact our business and operating results.
Any Acquisitions We Make or Have Made Could Result in Difficulties in Successfully Managing Our Business and Consequently Harm Our Financial Condition.
We seek to expand by acquiring complementary businesses or assets in our current or ancillary markets. We cannot accurately predict the timing, size and success of our acquisition efforts and the associated capital commitments that might be required. We expect to face competition for acquisition candidates, which may limit the number of acquisition opportunities available to us and may lead to higher acquisition prices. There can be no assurance that we will be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, without substantial costs, delays or other operational or financial difficulties. In addition, acquisitions involve a number of other risks, including:
●
failure of the acquired businesses or assets acquired to achieve expected results;
●
failure to integrate acquired business or assets into current operations
●
diversion of management’s attention and resources to acquisitions;
●
failure to retain key customers or personnel of the acquired businesses or assets;
●
disappointing quality or functionality of acquired equipment and people; and
●
risks associated with unanticipated events, liabilities or contingencies.
Client dissatisfaction or performance problems at a single acquired business could negatively affect our reputation. The inability to acquire businesses on reasonable terms or successfully integrate and manage acquired companies, or the occurrence of performance problems at acquired companies, both prior and after acquisition, could result, or has resulted, in dilution, potential violations of bank covenants, unfavorable accounting treatment or one-time charges, and difficulties in successfully managing our business, requiring us to expend additional effort and expense in obtaining waivers, settling matters and otherwise addressing any such issues.
Our Future Results Depend on Continued Evolution of the Internet and its Use by Consumers and Businesses for Buying Our Products.
Our future results can depend on the use of the Internet for information, publication, distribution and commerce. Our growth may also be dependent on increasing availability to business consumers of broadband Internet access which will allow such persons to access higher-capacity content through the Internet. Our business could suffer if Internet usage and broadband availability does not continue to grow and evolve. In addition, the concept of ordering food, including ingredients, while it has recently grown, is a relatively new concept and represents a change from the way it had been previously done.
If We are Unable to Effectively Manage Our IT Dependent Business Our Reputation and Operating Results May be Harmed.
The success of our business depends, in part, on third parties and factors over which we have limited control. We are also vulnerable to certain additional risks and uncertainties associated with our e-commerce and product catalog websites, our internal IT systems and IT integration with our partners, including: changes in required technology interfaces; system issues and limitations, website downtime and other technical failures; internet connectivity issues; costs and technical issues as we upgrade our website software; computer viruses; changes in applicable federal and state regulations; security breaches; and consumer privacy concerns. In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not succeed in increasing sales or attracting customers. Our failure to successfully respond to these risks and uncertainties might adversely affect our sales, as well as damage our reputation and brands.
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We May be Exposed to Risks and Costs Associated with Credit Card Fraud and Identity Theft that could Cause Us to Incur Unexpected Expenses and Loss of Revenue.
An increasing portion of our customer orders are placed through our e-commerce websites and a significant portion of our orders are submitted via networked applications. In addition, a significant portion of sales made through our retail channel require the collection of certain customer data, such as credit card information. In order for our sales channels to function and develop successfully, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. Third parties may have the technology or knowledge to breach the security of customer transaction data. Although we take the security of our systems and the privacy of our customers’ confidential information extremely seriously, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our websites and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation, any of which could harm our business.
In addition, states and the federal government are increasingly enacting laws and regulations to protect consumers against identity theft. Compliance with these laws will likely increase the costs of doing business and, if we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these new laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
Earthquakes, Inclement Weather or Other Events Out of Our Control May Damage or Limit Production from Our Facilities and Our Ability to Timely Deliver Products Thereby Adversely Affecting Our Results of Operations.
We have significant operations in Florida, Illinois, and in other areas where weather or other events such as an earthquake, tsunami, hurricane, flood, fire, high winds, extreme heat or cold, or other natural or manmade events, could disrupt our operations and impair production or distribution of our products, damage inventory, interrupt critical functions, or otherwise affect our business negatively, adversely affecting our results of operations.
Declines in General Economic Conditions and the Resulting Impact on Consumer Confidence and Consumer Spending Could Adversely Impact Our Results of Operations.
Our financial performance is subject to declines in general economic conditions and the impact of such economic conditions on levels of consumer confidence and consumer spending. Consumer confidence and consumer spending may deteriorate significantly, and could remain depressed for an extended period of time, whether due to COVID-19 or other unrelated reasons. Consumer purchases of discretionary items, including specifically our merchandise, generally decline during periods when disposable income is limited, unemployment rates increase, and consumer perceptions of personal well-being and security declines or there is economic uncertainty. An uncertain economic environment, could adversely impact our business and operating results.
We Are and May Be Subject to Regulatory Compliance and Legal Uncertainties.
Changes in government regulation and supervision or proposed Department of Agriculture or other regulatory agency reforms or rule changes could impair our sources of revenue and limit our ability to expand our business. In the event any future laws or regulations are enacted which apply to us, we may have to expend funds and/or alter our operations to insure compliance. New legislation or regulation, or the application of existing laws and regulations to the areas related to our business could add additional costs and risks to doing business. In addition, we are subject to regulations applicable to businesses generally and laws and regulations directly applicable to communications over the Internet and access to e-commerce. In addition, it is possible that a number of laws and regulations may be adopted with respect to the Internet and other areas of our business, covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust, taxation and characteristics and quality of products and services.
Since we do Not Intend to Pay Any Cash Dividends on Our Shares of Common Stock, Our Stockholders Will Not be Able to Receive a Return on Their Shares Unless They Sell Them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them at a price higher than that which they initially paid for such shares.
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We may be Subject to Legal Proceedings that Could be Time Consuming, Result in Costly Litigation, Require Significant Amounts of Management Time and Result in the Diversion of Significant Operational Resources.
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly arbitration or litigation, require significant amounts of management time and result in the diversion of significant operational resources. Even if we believe that we have meritorious defenses against these actions, and we resolve to vigorously defend against them, the cost of defending against all these types of claims against us or the ultimate resolution of such claims, whether by settlement or adverse court decision, may harm our business and operating results and may be in excess of any amounts previously reserved for legal expenses. In addition, the increasingly regulated business environment and the nature of our products may result in a greater number of enforcement actions and private litigation. This could subject us to increased exposure to stockholder lawsuits. Also, we (and our affiliates) may be subject to attempts to bring legal claims by creditors and other third parties related to the liabilities or potential liabilities, of our former subsidiary, FD, or of igourmet LLC, or of the liabilities related to any company whose assets we acquired or do business with.
We are a Smaller Reporting Company, and We Cannot be Certain if the Reduced Reporting Requirements Applicable to Smaller Reporting Companies Will Make our Common Stock Less Attractive to Investors.
We are a smaller reporting company, as defined in the Securities Act of 1933. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding historical financial statements, executive compensation in our periodic reports, registration statements, and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain a smaller reporting company until the beginning of a year in which we had a public float of $250 million held by non-affiliates or revenues below $100 million and a public float below $700 million, in each case as determined as of the last business day of the second quarter of the prior year.
Our Common Stock is Subject to the “Penny Stock” Rules of the SEC and the Trading Market in our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price, for warrants or options or conversion price for convertible notes, of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
●that a broker or dealer approve a person’s account for transactions in penny stocks; and
●the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
●obtain financial information and investment experience objectives of the person; and
●make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
●Sets forth the basis on which the broker or dealer made the suitability determination, and
●that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
ITEM 2. Properties
On March 8, 2013, we purchased 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 close to 10,000 square feet of combined office and warehouse space. The purchase price of the property was $770,000 and was financed in part by a five year mortgage in the amount of $546,000. In March 2018, the remaining balance under this mortgage was extended to February 28, 2023. The company relocated all of its Florida-based office and warehouse facilities into this facility on July 15, 2013.
On May 14, 2015, we 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. We have also recently completed an additional property improvement and upgrade buildout at the 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 for 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 packaging 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 proprietary private 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 were financed by a loan from Fifth Third Bank.
On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in 2021 was $9,400,000. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the Facility. The amount of the loan was $5,500,000, of which the Company drew down $3,600,000 for the acquisition of the Facility; the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years and maturity on September 2, 2025. Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase.
On October 5, 2020, the Company completed work to upgrade the Facility at a cost of $2,231,458 in order to better support the Company’s focus on e-commerce and logistics.
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ITEM 3. Legal Proceedings
On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. Since that time, other parties involved in the incident have joined as plaintiffs in the PA Action. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and indicates a demand and offer to settle for fifty million dollars. We expect that should a settlement occur the amount to resolve the Action would be substantially lower. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy (which has been fully tendered) and umbrella policy that covers one of the Company’s subsidiaries, we intend to further aggressively pursue the Company’s and its subsidiaries’ insurance coverage under their umbrella and other available policies. The Company has brought an action for declaratory judgement against one of the insurance companies under which it had an umbrella policy so that the court can compel it to provide liability coverage. In addition, the Company has been defending this action and believes that the likely outcome would result in the liabilities being covered by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations. On July 16, 2020, the court granted the Company's motion to stay the case through the final adjudication of an additional pending legal proceeding against the driver in connection with the events related to the case. It is not anticipated that the Company and its subsidiaries will be a party to any other legal proceedings in connection with this matter.
From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of 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 financial position or our business and the outcome of these matters cannot be ultimately predicted.
ITEM 4. Mine Safety Disclosure
Not Applicable.
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PART II
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Prices for our common stock are quoted on the OTCQB. Since March 2004, our common stock has traded under the symbol “IVFH”. Prior thereto, our common stock traded under the symbol “FBSN”. 35,371,480 shares of our common stock were outstanding as of April 15, 2021.
Security Holders
On April 15, 2021, there were approximately 56 record holders of our common stock. In addition, we believe there are at least several hundred additional beneficial owners of our common stock whose shares are held in “street name.”
Dividends
We have not paid dividends during the three most recently completed fiscal years, and have no current plans to pay dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business.
Recent Sales and Other Issuances of Our Equity Securities
During the year ended December 31, 2020, the Company had the following equity related, nonregistered transactions:
On January 29, 2020, the Company issued 38,943 shares of common stock with a fair value of $17,135 to an employee as a bonus.
On January 10, 2020, the Company issued 2,381 shares of common stock with a fair value of $1,119 to a service provider as payment for services.
On February 3, 2021, the Company issued an additional 2,381 shares of common stock with a fair value of $1,167 to a service provider as payment for services.
During the year ended December 31, 2020, the Company accrued the amount of $276,387 representing 775,748 shares of common stock issuable at an average price of $0.356 per share to its Chief Executive Officer pursuant to his compensation agreement.
During the year ended December 31, 2020, the Company accrued the amount of $17,116 representing 38,892 shares of common stock issuable at an average price of $0.44 per share to its Chief Strategy Officer pursuant to his compensation agreement.
During the year ended December 31, 2020, the Company accrued the amount of $35,000 to each of two directors (a total of $70,000) representing 69,928 shares of common stock issuance to each director (a total of 139,856 shares) pursuant to their service agreements.
All of the issuances described above were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 for the following reasons: (1) none of the issuances involved a public offering or public advertising for the payment of any commissions or fees; (2) the issuances to investors were to “accredited investors”; (3) the issuances upon conversion of notes were for notes held at least 12 months and did not involve the payment of any other consideration; and (4) all issuances to affiliates and to non-affiliates holding the securities for less than six months carried restrictive legends.
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Dilutive Securities
December 31, 2020
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 as of December 31, 2020:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.60
50,000
4.99
$
0.62
360,000
1.00
$
0.85
540,000
2.84
$
1.00
50,000
4.99
$
1.10
75,000
0.37
$
1.20
1,050,000
2.84
$
1.50
125,000
1.00
$
1.02
2,250,000
2.82
December 31, 2019
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 as of December 31, 2019:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.62
360,000
4.00
$
0.75
50,000
2.00
$
0.85
540,000
4.00
$
0.95
50,000
2.00
$
1.10
75,000
1.37
$
1.20
950,000
3.93
$
1.50
125,000
2.00
$
2.00
125,000
2.00
$
2.50
125,000
2.00
$
3.00
125,000
2.00
$
1.23
2,525,000
3.42
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2020, the following shares are issuable pursuant to outstanding stock options, warrants, and rights issued under the 2011 Stock Option Plan:
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants, and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
2,250,000
$ 1.02
93,580,000
Equity compensation plans not approved by shareholders
-
$ N/A
$ N/A
Index
ITEM 6. Selected Financial Data
Not Applicable.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 pandemic, 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.
Index
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, 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, 2020 and 2019.
(b) Embedded conversion features of notes payable:
There were no outstanding convertible notes outstanding at December 31, 2020 and 2019:
(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, 2020 and 2019:
December 31,
Number of options outstanding
2,250,000
2,525,000
Value at December 31
N/A
N/A
Number of options issued during the year
200,000
1,850,000
Value of options issued during the year
$ 16,498
$ 409,430
Number of options recognized during the year
200,000
1,850,000
Number of options exercised or expired during the year
475,000
375,000
Value of options recognized during the year
$ 142,512
$ 157,145
Revaluation (gain) during the period
$ N/A
$ N/A
Black-Scholes model variables:
Volatility
41.7-82.7
%
59.38-63.16
%
Dividends
Risk-free interest rates
0.37-1.37
%
1.79-2.49
%
Term (years)
3.00-5.00
3.00-4.93
Doubtful Accounts Receivable
The Company maintained an allowance in the amount of $343,832 for doubtful accounts receivable at December 31, 2020, and $95,284 at December 31, 2019. 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.
Index
Income Taxes
The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past. At December 31, 2020, the Company has a net operating loss carryforward of approximately $11,473,000.
Background
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger, we changed our name to that of Innovative Food Holdings, Inc. In January 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”), a Delaware corporation, for 500,000 shares of our common stock.
On November 2, 2012, the Company entered into an asset purchase agreement (the “Haley Acquisition”) with The Haley Group, LLC whereby we acquired all existing assets of The Haley Group, LLC and its customers. The Haley Acquisition was valued at a total cost of $119,645. On June 30, 2014, pursuant to a purchase agreement, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”), for $300,000, 100,000 four year options at a price of $1.46 per share, and up to an additional $225,000 in earn-outs if certain milestones are met. Pursuant to an Asset Purchase Agreement dated as of January 1, 2017 the Company’s wholly-owned subsidiary, Oasis Sales Corp. (“Oasis”), purchased substantially all of the assets of Oasis Sales and Marketing, L.L.C. for $300,000 cash; a $200,000 structured equity instrument which can be paid in cash or shares of the Company stock at the Company’s option, anytime under certain conditions, or is automatically payable via the issuance of 200,000 shares if the Company’s shares close above $1.00 for ten consecutive days; a $100,000 note; and up to an additional $400,000 in earn-outs over two years if certain milestones are met. The Agreement also contains claw-back provisions if certain revenue conditions are not met.
On August 15, 2014, pursuant to a merger agreement, the Company acquired The Fresh Diet, Inc. (“FD”). Effective February 23, 2016, the Company closed a transaction to sell 90% of our ownership in FD for consideration consisting primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations.
Effective January 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, 2019 and 2020 earnout milestones were 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.
Index
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 acquired certain assets of Mouth 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 the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, 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.
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings shareholders.
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 19 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, 2020 Compared to Year Ended December 31, 2019
Revenue
Revenue decreased by $6,226,938 or approximately 10.8% to $51,676,028 for the year ended December 31, 2020 from $57,902,966 prior year. The decrease in revenue is primarily attributable to a decrease in specialty foodservice revenues which was driven by the nationwide closures of restaurants and other foodservice establishments related to COVID-19. The decline in specialty foodservice was partially offset with revenues increases mainly associated with e-commerce. The increases in e-commerce revenues were driven by the Company’s ability to increase sales at its e-commerce properties and convert significant shifts in e-commerce specialty food, supermarket trends, and e-commerce grocery trends, driven initially by the COVID-19 pandemic, into e-commerce revenues.
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.
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.
Index
Cost of goods sold
Our cost of goods sold for the year ended December 31, 2020 was $37,859,500, a decrease of $3,395,576 or approximately 8.2% compared to cost of goods sold of $41,255,076 for the year ended December 31, 2019. Cost of goods sold was made up of the following expenses for the year ended December 31, 2020: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $24,092,859; shipping, delivery, handling, and purchase allowance expenses in the amount of $13,072,457; and cost of goods associated with logistics of $694,184. Total gross margin was approximately 27% of sales in 2020 compared to approximately 29% of sales in 2019. The decrease in gross margins from 2019 is primarily attributable to variation in product and revenue mix across our various selling channels including a decrease in higher gross margin revenues associated with National Brand Management and lower gross margins associated with foodservice revenues including revenue and margin variations driven by the COVID-19 pandemic.
In 2020, we continued to price our products in order to gain market share and increase the number of our end users and ecommerce customers. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold may increase and our gross margin decrease.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased by $3,067,690 or approximately 18.6% to $19,531,818 during the year ended December 31, 2020 compared to $16,464,128 for the year ended December 31, 2019. The increase in selling, general, and administrative expenses was primarily due to an increase in advertising and marketing costs of $1,370,345, increases in payroll and related costs of approximately $1,386,169 (net of an increase in non-cash compensation in the amount of $111,258), an increase in IT and computer costs of $210,456, an increase in insurance costs of $176,485 an increase in banking and credit card fees of $272,364, an increase in bad debt expense of $218,862, , an increase in office, facilities, and vehicles costs $133,842, and an increase in taxes of $98,290. These increases were partially offset by a decrease in amortization and depreciation of $530,157 and a decrease in professional fees of $25,048. The increases were driven mainly by additional costs including increases in costs including warehouse fulfillment costs associated with COVID-19, increased costs associated with additional personnel mainly related to warehouse operations, overall employee costs and insurance costs, increased legal, accounting, facility and IT costs including costs associated with the planned launch of new websites, and increased advertising associated with increased spending in digital marketing related to certain of the Company’s e-commerce websites.
Impairment of goodwill and intangible assets
During the year-ended December 31, 2020, the Company performed impairment tests of our goodwill and intangible assets that incorporated the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. As a result of impairment tests, the Company was required by applicable accounting rules to record an impairment of goodwill and intangible assets in the aggregate amount of $1,698,952. At December 31, 2020, the net carrying value of goodwill and other intangible assets on the Company’s balance sheet is $1,633,202. There was no such comparable charge during the prior period.
Other leasing income
On November 8, 2019 the Company purchased a logistics and warehouse facility located in Mountain Top, Pennsylvania. During the year ended December 31, 2020, the Company recognized revenue in the amount of $43,810 in connection with the lease of space in this facility compared to $3,125 during the year ended December 31, 2019. The increase was due to the Company recognizing a full year of activity during 2020 compared to the period from November 8, 2019 to December 31, 2019 during the prior year.
Gain on settlement of contingent liabilities
During the year ended December 31, 2019, the Company recorded a gain on settlement of contingent liabilities in the amount of $132,300 in connection with potential additional consideration under the igourmet Asset Purchase Agreement. There was no comparable transaction during the current year.
Gain on disposal of fixed assets
During the year ended December 31, 2020, the Company recorded a gain on the sale of warehouse equipment in the amount of $7,984, compared to a gain on sale of equipment of $12,495 during the prior period. This type of transaction occurs infrequently.
Index
Interest expense, net
Interest expense, net of interest income, increased by $193,661 or approximately 177.8% to $302,576 during the year ended December 31, 2020, compared to $108,915 during the year ended December 31, 2019. 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 $182,640 from $114,257 during the year ended December 31, 2019 to $296,897 during the year ended December 31, 2020. The Company also recorded interest expense in connection with the amortization of prepaid loan fees in the amount of $12,560 during the year ended December 31, 2020 compared to $1,819 during the prior period, an increase of $10,741. Interest income was $6,831 during the year ended December 31, 2020, a decrease of $330 compared to interest income of $7,161 during the prior year.
Net (loss) income
For the reasons above, the Company had a net loss for the year ended December 31, 2020 of $7,665,024 compared to a net income of $222,767 during the year ended December 31, 2019. The loss for the year ended December 31, 2020 includes a total of $3,159,751 in non-cash charges, including impairment of intangible assets in amount of $1,698,952; amortization of intangible assets in the amount of $212,902; depreciation expense of $491,039; charges for non-cash compensation in the amount of $525,436; and amortization of prepaid loan fees of $12,560. The income for the year ended December 31, 2019 includes a total of $1,650,096 in non-cash charges, including amortization of intangible assets in the amount of $899,757, depreciation expense of $334,342, charges for non-cash compensation in the amount of $414,178, and amortization of prepaid loan fees of $1,819.
Liquidity and Capital Resources at December 31, 2020
As of December 31, 2020, the Company had current assets of $11,446,921, consisting of cash and cash equivalents of $5,060,015; trade accounts receivable of $2,380,305; inventory of $3,719,786; and other current assets of $286,815. Also at December 31, 2020, the Company had current liabilities of $12,207,022, consisting of trade payables and accrued liabilities of $5,098,523, accrued interest of $28,873, deferred revenue of $2,917,676, line of credit of $2,000,000, current portion of notes payable (net of discount) of $1,741,571, current portion of operating leases of $87,375, current portion of financing leases of $146,004, and current portion of contingent liabilities of $187,000.
During the year ended December 31, 2020, the Company had cash used in operating activities of $1,759,883. Cash flow used in operations consisted of the Company’s consolidated net loss of $7,665,024 subtracted by impairment of intangible assets of $1,698,952, depreciation and amortization of $703,941, non-cash compensation in the amount of $525,436, amortization of right-of-use assets of $161,926, provision for doubtful accounts of $254,899, and amortization of prepaid loan fees in the amount of $12,560. These amounts were partially offset by a gain on the disposition of fixed assets in the amount of $7,984. The Company’s cash position increased by $2,555,411 as a result of changes in the components of current assets and current liabilities.
The Company had cash used in investing activities of $450,387 for the year ended December 31, 2020, which consisted of cash paid for the acquisition of property and equipment in the amount of $431,137, and cash paid for the acquisition of intangible assets in the amount of $19,250.
The Company had cash provided by financing activities of $3,304,235 for the year ended December 31, 2020, which consisted of proceeds for a line of credit in the amount of $2,000,000 and proceeds from a PPP loan in the amount of $1,650,221; these amounts were partially offset by principal payments on loans and notes payable in the amount of $278,668 and principal payments on financing leases in the amount of $67,318. The Company currently anticipates that up to 100% of this PPP loan will be eligible for government forgiveness under the PPP program, although there is no assurance of such eligibility.
The Company had net working capital deficit of $760,101 as of December 31, 2020. The Company had cash used in operations during the year ended December 31, 2020 in the amount of $1,759,883. This compares to cash generated from operating activities of $1,594,647 during the year ended December 31, 2019. 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 Notes 12, 13 and 14 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.
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.
Index
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.
2021 Plans
As 2020 began we put together a plan which we expected to try to implement in 2020. Those plans are described in the paragraphs below. However, in the interim period since those plans were prepared, as described above in “Business - Growth Strategy”, “Risk Factors” and elsewhere in this Report, in 2020 the world has been in the grip of a pandemic 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 of our primary customers have either been closed completely or are only partially open with significantly reduced operations. Accordingly, Foodservice revenues, which historically have been a significant overall portion of our revenues have 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 continuing throughout the year experienced unprecedented declines.
Conversely, we have experienced significant growth in our on-line e-commerce revenues as overall e-commerce grew and as demand for food products continued across the United States. Accordingly, we have focused our resources on meeting the growth of e-commerce revenues. While the percentage increase in e-commerce revenues was strong, the additional e-commerce revenues did not exceed the decrease in foodservice revenues commencing in the second half of March 2020 and continuing throughout the year and overall revenues and profits declined for that time frame.
In April 2020 we applied for and received a loan of approximately $1.6 million under a program established under a recent congressionally approved program which is administered by the U.S. Small Business Administration. In 2021 we applied for and received $1,748,414 in new loans under a similar government program administered by the U.S. Small Business Administration. In addition, between the government loans, the potential forgiveness of the government loans, cash on hand and our current expectations of incoming revenues, we believe we have sufficient resources to continue operating for at least the next 12 months. However, as we cannot predict at this time when quarantines, curfews, stay in place orders, and closures of non-essential businesses will end and general economic activity will resume, we cannot predict when our business will return to its pre-pandemic norms and the amount of economic stress we would experience. While we intend to continue to focus on executing on our strategic growth plans, given the current economic conditions, we are not able to determine the exact timeframe in 2021, if at all, that we can then again consider fully implementing portions of the plans described below.
During 2021, we plan to attempt to expand our business by expanding our focus to additional specialty foods markets. In addition, we will continue exploring potential acquisition and partnership opportunities and 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. 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 through leveraging the assets acquired from igourmet LLC and Mouth Foods, Inc. and through leveraging its overall capabilities in the consumer space, including leveraging its direct to consumer e-commerce capabilities to reach both additional customers in multiple channels, and to expand availability of its e-commerce capabilities to additional products and markets.
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.
Index
Transactions with Major Customers
The Company's largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 40% and 57% of total sales in each of the years ended December 31, 2020 and 2019; and approximately 32% of total sales in the fourth quarter of 2020 compared to 50% of total sales in the fourth quarter of 2019. 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.
Index
ITEM 8. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of:
Innovative Food Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Food Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill, Amortizable and Unamortizable Intangible Assets
As described in Note 9 to the consolidated financial statements, these assets are evaluated for impairment at least annually using valuation techniques to estimate fair value. The adverse impact of COVID-19 pandemic to the Company’s foodservice customer base was a triggering event and accordingly, the Company performed the impairment tests during the first quarter of 2020. The Company engaged a valuation specialist to assist in evaluating the fair values of these assets. These fair value estimates are sensitive to certain significant assumptions including future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses used by the valuation specialist.
Auditing management’s goodwill, amortizable and unamortizable intangible assets impairment tests was highly judgmental due to the significant assumptions used by management and the valuation methodologies used the valuation specialist in determining the fair values of these assets.
To test the estimated fair values of the goodwill, amortizable and unamortizable intangible assets, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions used by the Company and the valuation specialist.
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Contingencies
As described in Note 18 to the consolidated financial statements, the Company is involved in a number of legal proceedings and has made accruals with respect to certain of these matters. Where a liability is reasonably possible and may be material, such matters have been disclosed. Management exercised judgment and assessed the probability of occurrence based on the ability to predict the number of claims that may be filed and whether it can reasonably estimate any loss or range of loss that may arise from that proceeding.
Auditing management’s accounting for, and disclosure of, loss contingencies was highly judgmental as it involved our assessment of the significant judgments made by management when assessing the probability of occurrence or when determining whether an estimate of the loss or range of loss could be made.
To test the Company’s assessment of the probability of occurrence or determination of an estimate of loss, or range of loss, among other procedures, we read the legal documentations, reviewed opinions provided to the Company by certain outside legal counsel, read letters received directly by us from external counsel, and evaluated the current status of contingencies based on discussions with legal counsel. We also evaluated the appropriateness of the related disclosures.
/s/ Liggett & Webb, P.A.
LIGGETT & WEBB, P.A.
Certified Public Accountants
We have served as the Company’s auditor since 2012
Boynton Beach, Florida
April 15, 2021
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Innovative Food Holdings, Inc.
Consolidated Balance Sheets
December 31,
December 31,
ASSETS
Current assets
Cash and cash equivalents
$ 5,060,015
$ 3,966,050
Accounts receivable, net
2,380,305
3,309,830
Inventory
3,719,786
2,350,622
Other current assets
286,815
273,689
Total current assets
11,446,921
9,900,191
Property and equipment, net
8,550,401
6,645,389
Investments
496,575
435,225
Right of use assets, operating leases, net
246,737
193,733
Right of use assets, finance leases, net
776,439
174,631
Other amortizable intangible assets, net
100,380
1,342,741
Goodwill and other unamortizable intangible assets
1,532,822
2,183,065
Total assets
$ 23,150,275
$ 20,874,975
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
$ 5,098,523
$ 4,009,956
Accrued interest
28,873
16,973
Deferred revenue
2,917,676
499,776
Line of Credit
2,000,000
-
Notes payable - current portion, net of discount
1,741,571
727,766
Lease liability - operating leases, current
87,375
133,296
Lease liability - finance leases, current
146,004
29,832
Contingent liability - current portion
187,000
187,000
Total current liabilities
12,207,022
5,604,599
Lease liability - operating leases, non-current
159,362
60,437
Lease liability - finance leases, non-current
638,137
154,905
Contingent liability - long-term
116,600
156,600
Note payable - long term portion, net
6,151,345
3,881,037
Total liabilities
19,272,466
9,857,578
Commitments & Contingencies (see note 18)
-
-
Stockholders' equity
Common stock: $0.0001 par value; 500,000,000 shares authorized; 38,209,060 and 37,210,859 shares issued, and 35,371,480 and 34,373,279 shares outstanding at December 31, 2020 and December 31, 2019, respectively
3,817
3,718
Additional paid-in capital
37,415,155
36,889,818
Treasury stock: 2,623,171 and 2,623,171 shares outstanding at December 31, 2020 and December 31, 2019, respectively.
(1,141,370
)
(1,141,370
)
Accumulated deficit
(32,399,793
)
(24,734,769
)
Total stockholders' equity
3,877,809
11,017,397
Total liabilities and stockholders' equity
$ 23,150,275
$ 20,874,975
See notes to consolidated financial statements.
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Innovative Food Holdings, Inc.
Consolidated Statements of Operations
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Revenue
$ 51,676,028
$ 57,902,966
Cost of goods sold
37,859,500
41,255,076
Gross margin
13,816,528
16,647,890
Selling, general and administrative expenses
19,531,818
16,464,128
Impairment of intangible assets
1,698,952
-
Total operating expenses
21,230,770
16,464,128
Operating (loss) income
(7,414,242
)
183,762
Other income (expense):
Other leasing income
43,810
3,125
Gain on settlement of contingent liability
-
132,300
Gain on sale of fixed assets
7,984
12,495
Interest expense, net
(302,576
)
(108,915
)
Total other income (expense)
(250,782
)
39,005
Net (loss) income before taxes
(7,665,024
)
222,767
Provision for Income tax expense
-
-
Net (loss) income
$ (7,665,024
)
$ 222,767
Net (loss) income per share - basic
$ (0.22
)
$ 0.01
Net (loss) income per share - diluted
$ (0.22
)
$ 0.01
Weighted average shares outstanding - basic
34,871,785
34,116,335
Weighted average shares outstanding - diluted
34,871,785
34,116,335
See notes to consolidated financial statements.
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Innovative Food Holdings, Inc.
Consolidated Statements of Cash Flows
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Cash flows from operating activities:
Net (loss) income
$ (7,665,024
)
$ 222,767
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Impairment of intangible assets
1,698,952
-
Depreciation and amortization
703,941
1,234,098
Amortization of right-of-use asset
161,926
187,254
Amortization of prepaid loan fees
12,560
1,819
Stock based compensation
525,436
414,178
Gain on settlement of contingent liability
(132,300
)
Gain on sale of fixed assets
(7,984
)
(12,495
)
Provision for doubtful accounts
254,899
36,037
Changes in assets and liabilities:
Accounts receivable, net
674,626
(366,611
)
Inventory and other current assets, net
(1,443,640
)
(153,633
)
Accounts payable and accrued liabilities
1,108,451
414,326
Deferred revenue
2,417,900
(59,539
)
Contingent liabilities
(40,000
)
(4,000
)
Operating lease liability
(161,926
)
(187,254
)
Net cash (used in) provided by operating activities
(1,759,883
)
1,594,647
Cash flows from investing activities:
Cash paid for website development
(19,250
)
-
Cash received from the sale of fixed assets
-
12,495
Acquisition of property and equipment
(431,137
)
(1,049,604
)
Purchase of intangible assets
-
(84,000
)
Investment in food related company
-
(60,200
)
Net cash used in investing activities
(450,387
)
(1,181,309
)
Cash flows from financing activities:
Sales of common stock
-
250,000
Cash paid for acquisition of treasury stock
-
(125,000
)
Loan fees related to building acquisition financing
-
(72,916
)
Cash paid in settlement of contingent liabilities in connection with acquisitions
-
(350,576
)
Proceeds from line of credit
2,000,000
-
Proceeds from Payroll Protection Plan Loan
1,650,221
-
Principal payments on debt
(278,668
)
(880,752
)
Principal payments financing leases
(67,318
)
(27,861
)
Net cash provided by (used in) financing activities
3,304,235
(1,207,105
)
Increase (decrease) in cash and cash equivalents
1,093,965
(793,767
)
Cash and cash equivalents at beginning of year
3,966,050
4,759,817
Cash and cash equivalents at end of year
$ 5,060,015
$ 3,966,050
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
$ 201,679
$ 112,291
Taxes
$ -
$ -
Non-cash investing and financing activities:
Issuance of 131,136 shares of common stock previously accrued
$ -
$ 93,666
Right of use assets and liabilities - operating, upon adoption of ASU 2016-02
$ -
$ 338,581
Equipment financed under note payable
$ 1,900,000
$ -
Return of equipment and reduction in amount due under equipment financing loan
$ -
$ 33,075
Fair value of 19,048 shares of common stock issued for services
$ -
$ 10,405
Increase in right of use assets & liabilities
$ 214,930
$ 193,734
Investment in food related company
$ 61,350
$ 60,500
Capital lease for purchase of fixed assets
$ 677,021
$ 81,223
Note payable for acquisition of land and building
$ -
$ 3,600,000
See notes to consolidated financial statements.
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Innovative Food Holdings, Inc.
Consolidated Stockholders' Equity
For the Years Ended December 31, 2020 and 2019
Additional
Common Stock
Paid-in
Treasury Stock
Accumulated
Amount
Value
Capital
Amount
Value
Deficit
Total
Balance at December 31, 2018
36,296,218
$ 3,627
$ 36,132,065
2,373,171
$ (1,016,370
)
$ (24,957,536
)
$ 10,161,786
Common stock issued for services
19,048
10,403
-
-
-
10,405
Common stock sold for cash
349,650
249,965
-
-
-
250,000
Issuance of shares to employees, previously accrued
131,136
93,653
-
-
-
93,666
Fair value of vested stock and stock options issued to management
414,807
403,732
-
-
-
403,773
Treasury stock acquired
-
-
-
250,000
(125,000
)
-
(125,000
)
Net income for the year ended December 31, 2019
-
-
-
-
-
222,767
222,767
Balance - December 31, 2019
37,210,859
$ 3,718
$ 36,889,818
2,623,171
$ (1,141,370
)
$ (24,734,769
)
$ 11,017,397
Fair value of vested stock and stock options
954,496
505,920
-
-
-
506,015
Fair value of shares issued to employees and service providers
43,705
19,417
-
-
-
19,421
Net (loss) for the year ended December 31, 2020
-
-
-
-
-
(7,665,024
)
(7,665,024
)
Balance - December 31, 2020
38,209,060
$ 3,817
$ 37,415,155
2,623,171
$ (1,141,370
)
$ (32,399,793
)
$ 3,877,809
See notes to consolidated financial statements.
Index
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Our business is currently conducted by our wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods Group, Inc. (“Artisan”), Food Innovations (“FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers (“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 Food Properties, LLC (“IFP”), Innovative Gourmet, LLC (“Innovative Gourmet” or “igourmet”), Food Funding, LLC (“Food Funding”), Logistics Innovations, LLC (“L Innovations”), M Innovations, LLC (“M Innovations” or “Mouth”), P Innovations, LLC “(P Innovations”), and collectively with IVFH and its 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.
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-Packaged Goods (“CPG”) products through a variety of sales channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“D2C”) and direct to business (“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.forthegourmet.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.
Artisan is a supplier of over 1,500 unique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.
GFG is focused on expanding the Company’s program offerings to additional specialty foodservice customers.
IFP was formed to hold the Company’s real estate holdings including the recently acquired facility in Mountaintop, Pennsylvania.
L Innovations provides 3rd party warehouse and fulfillment services out of its location at the Company’s PA facility.
P Innovations focus is to leverage acquired assets to expand the Company’s subscription-based e-commerce business activities.
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 and assists in the enabling of the distribution of products via national broadline food distributors.
OFB and Oasis function 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 provides emerging and unique CPG specialty food brands with distribution and shelf placement access in all of the major metro markets in the food retail industry.
igourmet has been in the business of providing D2C specialty food via e-commerce through its own website at www.igourmet.com and through other channels such as www.amazon.com, www.ebay.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 approximately 100,000 square feet warehouse in Pennsylvania via igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.
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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 both consumers and corporate customers. Mouth also has launched a private label brand, including several award-winning products.
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. 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 and finance 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 consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, FII, FNM, OFB, GFG, GFW, Gourmeting, Haley, Oasis, Innovative Gourmet, Food Funding, IFP, L Innovations, M Innovations, P Innovations, and Gourmet. All material intercompany transactions have been eliminated upon consolidation of these entities.
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” 606. A five-step analysis must be met as 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 when (or as) performance obligations are 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. Adoption of ASC 606 had no material effect on the Company’s financial statements.
Warehouse and logistic services revenue primarily comprises of inventory management, order fulfilment and warehousing services. Warehouse & logistics services revenues are recognized at the point in time when the services are rendered to the customer.
Disaggregation of Revenue
The following table represents a disaggregation of revenue by from sales for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
Specialty foodservice
$ 27,544,188
$ 45,377,343
E-Commerce
22,371,386
10,704,419
National Brand Management
1,099,735
1,645,051
Warehouse and Logistic Services
660,719
176,153
Total
$ 51,676,028
$ 57,902,966
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.
We have also included all payroll costs as cost of goods sold in our leasing and logistics services business.
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Selling, general, and administrative expenses
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, amortization of intangible assets, depreciation, and other administrative costs including professional fees and costs associated with non-cash stock compensation. Advertising costs are expensed as incurred.
Cash and Cash Equivalents
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
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 December 31, 2020 and 2019, the Company had cash deposits in excess of applicable government mandated insurance limits in the amount of $3,385,113 and $2,559,503, respectively. At December 31, 2020 and 2019, trade receivables from the Company’s largest customer amounted to 22% and 35%, respectively, of total trade receivables.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts receivable are presented net of an allowance for doubtful accounts of $343,832 and $95,284 at December 31, 2020, and 2019, respectively.
Property and Equipment
Property and equipment are valued at cost. Depreciation is provided over the estimated useful lives up to five years using the straight-line method. Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
The estimated service lives of property and equipment are as follows:
Computer Equipment
3 years
Warehouse Equipment
5 years
Warehouse Equipment - Heavy 10 years
Office Furniture and Fixtures
5 years
Vehicles 5 years
Buildings
30 years
Inventories
Inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.
Deferred Revenue
Certain customer arrangements in the Company's business such as gift cards and e-commerce subscription purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards issued by the Company generally have an expiration of five years from date of purchase. 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.
Index
The following table represents the changes in deferred revenue as reported on the Company’s consolidated balance sheets:
Balance acquired as of December 31, 2018
$ 559,315
Cash payments received
132,858
Net sales recognized
(192,397
)
Balance as of December 31, 2019
$ 499,776
Cash payments received
3,060,226
Net sales recognized
(642,326
)
Balance as of December 31, 2020
$ 2,917,676
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Cost Method Investments
The Company has made several investments in early stage private food related companies and are accounting for these investments under the cost method.
Basic and Diluted Income Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net 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.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.
Index
Dilutive shares at December 31, 2020:
Convertible notes and interest
At December 31, 2020 there were no convertible notes outstanding.
Warrants
At December 31, 2020 there were no warrants outstanding.
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 at December 31, 2020
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.60
50,000
4.99
$
0.62
360,000
1.00
$
0.85
540,000
2.84
$
1.00
50,000
4.99
$
1.10
75,000
0.37
$
1.20
1,050,000
2.84
$
1.50
125,000
1.00
$
1.02
2,250,000
2.82
Restricted Stock Awards
At December 31, 2020, there are 300,000 unvested restricted stock awards 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 year ended December 31, 2020, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 775,748 shares of common stock to its Chief Executive Officer; 38,892 to its Director of Strategic Acquisitions, an aggregate total of 139,854 shares to board members; 38,943 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2020, the amount of $380,638 was charged to operations in connection with these grants. Also during the year ended December 31, 2020, the Company issued 4,762 shares of restricted common stock with a fair value of $2,286 to a service provider, and charged this amount to operations.
Dilutive shares at December 31, 2019:
Convertible notes and interest
At December 31, 2019 there were no convertible notes outstanding.
Warrants
At December 31, 2019 there are no warrants outstanding.
Index
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 at December 31, 2019:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.62
360,000
4.00
$
0.75
50,000
2.00
$
0.85
540,000
4.00
$
0.95
50,000
2.00
$
1.10
75,000
1.37
$
1.20
950,000
3.93
$
1.50
125,000
2.00
$
2.00
125,000
2.00
$
2.50
125,000
2.00
$
3.00
125,000
2.00
2,525,000
3.42
Restricted Stock Awards
At December 31, 2019 there are 300,000 unvested restricted stock awards 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 year ended December 31, 2019, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 260,507 shares of common stock to its Chief Executive Officer; 30,392 to its Director of Strategic Acquisitions, an aggregate total of 291,090 shares to board members; and 100,000 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2019, the amount of $246,628 was charged to operations in connection with these grants. Also during the year ended December 31, 2019, the Company issued 19,048 shares of restricted common stock with a fair value of $10,405 to a service provider, and charged this amount to operations.
Options expense charged to operations during the year ended December 31, 2020 and 2019 are summarized in the table below:
December 31,
Option expense
$ 142,512
$ 157,145
During the year ended December 31, 2019, the Company also granted the following shares of restricted common stock pursuant to compensation agreements:
- 260,507 shares of common stock with a fair value of $150,000 to the Company’s Chief Executive Officer. These shares vested over the twelve month period ended December 31, 2019; the amount of $150,000 was charged to operations during the year ended December 31, 2019. 255,328 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
- 30,392 shares of restricted common stock with a fair value of $16,398 to Company’s Director of Strategic Acquisitions. These shares vested over the twelve month period ended December 31, 2019; the amount of $16,398 was charged to operations during the year ended December 31, 2019. 29,115 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
Index
- 100,000 shares of restricted common stock with a fair value of $100,000 to an employee. Vesting of these shares is scheduled as follows: 33,334 shares vested on December 31, 2019; 33,333 are scheduled to vest on December 31, 2020; and 33,333 are scheduled to vest on December 31, 2021. The amount of $30,231 was charged to operations during the year ended December 31, 2019. 33,334 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to an independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to a second independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
Reclassifications
Certain reclassifications have been made to conform prior period data to the current presentation.
Leases
Commencing in January 2019, based upon new accounting pronouncements (described in greater detail below), 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 consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within current and long-term liabilities.
ROU assets represent the right of 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.
New 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 became effective for the Company on January 1, 2020. The amendments in this ASU were applied on a prospective basis. The adoption of this ASU had no material effect on our financial condition, results of operations, cash flows or financial disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance 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 expense 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.
Index
We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected 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 consolidated balance sheet through the recognition of $338,581 of operating right-of-use assets and $338,581 of operating lease liabilities as of January 1, 2019. The adoption did not have a significant impact on our results of operations or cash flows. See Note 6 to our consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU relates to the accounting for non-employee share-based payments. The amendment in this update expands the scope of Topic 718 to include all share-based payment transactions in which a grantor acquired goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The ASU excludes share-based payment awards that relate to: (1) financing to the issuer; or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers. The share-based payments are to be measured at grant-date fair value of the equity instruments that the entity is obligated to issue when the goods or service has been delivered or rendered and all other conditions necessary to earn the right to benefit from the equity instruments have been satisfied. This standard became effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted the provisions of this ASU on January 1, 2019. The adoption had no impact on our results of operations, cash flows, or financial condition.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU reduces the number of accounting models for convertible debt instruments and convertible Preferred Stock. As well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. This standard is effective for us on January 1, 2022, including interim periods within such fiscal year. Adoption is either a modified retrospective method or a fully retrospective method of transition. We are currently assessing the impact the new guidance will have on our consolidated financial statements.
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 consolidated financial statements.
2. ACQUISITIONS
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Mouth Foods, Inc.
Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth Foods, Inc.’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 Foods, Inc., 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.
Index
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. At December 31, 2020, the Company maintains contingent liabilities in the aggregate amount of $120,000 on its balance sheet in connection with the MFI APA.
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 management’s estimates. 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.
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, 2019, and 2020 were 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.
Index
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.
3. ACCOUNTS RECEIVABLE
At December 31, 2020 and 2019, accounts receivable consists of:
Accounts receivable from customers
$ 2,724,137
$ 3,405,114
Allowance for doubtful accounts
(343,832
)
(95,284
)
Accounts receivable, net
$ 2,380,305
$ 3,309,830
During the years ended December 31, 2020 and 2019, the Company charged the amount of $254,899 and $36,037, respectively, to bad debt expense.
4. INVENTORY
Inventory consists of specialty food products. At December 31, 2020 and 2019, inventory consisted of the following:
Finished Goods Inventory
$ 3,719,786
$ 2,350,622
5. 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.
Index
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, National Association (“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. We have also recently completed an additional property improvement and upgrade buildout at the 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 for 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 added a packaging 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 private 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 were financed by a loan from Fifth Third Bank.
Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when the Company occupied the facility in October, 2015.
On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in 2021 was $9,400,000. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the Facility. The amount of the loan was $5,500,000, of which $3,600,000 had been utilized at December 31, 2019 in connection with the purchase of the Facility; the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years with the balance due at maturity on September 2, 2025. Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase. Depreciation on the building began when the Company commenced recognizing revenue from leasing and logistics services associated with the Facility. On October 5, 2020, the Company completed work to upgrade the Facility at a cost of $2,231,458 in order to better support the Company’s focus on e-commerce and logistics. Of the build out costs, $1,900,000 was funded by the loan described below (See Note 13).
A summary of property and equipment at December 31, 2020 and 2019 is as follows:
December 31,
December 31,
Land
$ 1,256,895
$ 1,256,895
Building
7,191,451
4,959,993
Computer and Office Equipment
578,362
549,703
Warehouse Equipment
373,150
345,973
Furniture and Fixtures
938,471
894,628
Vehicles
109,441
117,785
Total before accumulated depreciation
10,447,770
8,124,977
Less: accumulated depreciation
(1,897,369
)
(1,479,588
)
Total
$ 8,550,401
$ 6,645,389
Depreciation and amortization expense for property and equipment amounted to $491,039 and $334,342 for the years ended December 31, 2020 and 2019, respectively.
6. RIGHT OF USE ASSETS AND LEASE LIABILITIES - OPERATING LEASES
The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 4 years, some of which include options to extend.
The Company’s lease expense for the years ended December 31, 2020 and December 31, 2019 was entirely comprised of operating leases and amounted to $171,624 and $202,551, respectively. The Company’s ROU asset amortization for the years ended December 31, 2020 and December 31, 2019 was $161,926 and $187,254, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.
Index
Right of use assets - operating leases are summarized below:
December 31,
Warehouse equipment
12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Right of use assets, net
$ 246,737
Operating lease liabilities are summarized below:
December 31,
Warehouse equipment
$ 12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Lease liability
$ 246,737
Less: current portion
(87,375
)
Lease liability, non-current
$ 159,362
Maturity analysis under these lease agreements are as follows:
Year ended December 31, 2021
$ 100,613
Year ended December 31, 2022
60,599
Year ended December 31, 2023
53,496
Year ended December 31, 2024
53,762
Year ended December 31, 2025
9,004
Thereafter
-
Total
$ 277,474
Less: Present value discount
(30,737
)
Lease liability
$ 246,737
7. RIGHT OF USE ASSETS - FINANCING LEASES
The Company has financing leases for vehicles and warehouse equipment. See note 14. Right of use asset - financing leases are summarized below:
December 31,
December 31,
Vehicles
362,358
201,466
Warehouse Equipment
533,531
19,357
Total before accumulated depreciation
895,889
220,823
Less: accumulated depreciation
(119,450
)
(46,192
)
Total
$ 776,439
$ 174,631
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 December 31, 2020 the Company has investments in eight food related companies in the aggregate amount of $496,575. The Company does not have significant influence over the operations of these companies.
Index
The Company’s investments may take the form of debt, equity, or equity in the future including convertible notes and other instruments which provide for future equity under various scenarios including subsequent financings or initial public offerings. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments - Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence.
During the year ended December 31, 2020, the Company converted accounts receivable in the amount of $61,350 into an equity investment in a food related company. During the year ended December 31, 2019, the Company converted accounts receivable in the amount of $60,500 into an equity investment in a food related company, and made cash investments in three food related companies in the total amount of $35,200.
9. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet, OFB, Haley, and M Innovations (see note 2). These assets include non-compete agreements, customer relationships, trade names, internally developed technology, and goodwill. The Company has also capitalized the development of its website.
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 the Company’s 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.
COVID-19 has had a material negative impact on some of the Company’s foodservice customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. These actions have led to a significant decrease in demand for certain of the Company’s foodservice products. The adverse impact to the Company’s foodservice customer base was a triggering event and accordingly, as required by ASC 350, the Company performed interim goodwill and long-lived asset quantitative impairment tests during the first quarter of 2020. While the triggering event was a result of the negative impact related to foodservice customers, the applicable accounting rules then required an impairment test targeted specifically to any available carrying value of goodwill or intangible assets. During the first quarter of 2020, the Company performed the impairment tests on certain intangible assets and goodwill pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet and M Innovations (see note 2).
Goodwill Impairment Test
The Company estimated the fair value of the Company’s reporting unit using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. As a result of impairment test, it was calculated that the net carrying value of goodwill exceeded the fair value by $650,243, and the Company was required by ASC 350 to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of goodwill on the Company’s balance sheet is $0.
Index
Long-lived Impairment Test
Long-lived assets, including other intangible assets, were tested for recoverability at the asset group level. The Company estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful life of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. As a result of the impairment test, it was calculated that the net carrying values of other intangible assets exceeded the undiscounted cash flows for each of the Company’s asset groups by a total of $1,048,692, and the Company was required by the applicable accounting rules to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of other intangible assets on the Company’s balance sheet is $1,633,202.The following is the net book value of these assets:
December 31, 2020
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (505,900
)
$ -
Customer Relationships - amortizable
3,068,034
(3,068,034
)
-
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(875,643
)
-
Goodwill
650,243
(650,243
)
-
Website
103,250
(2,870
)
100,380
Total
$ 6,735,892
$ (5,102,690
)
$ 1,633,202
December 31, 2019
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (433,545
)
$ 72,355
Customer Relationships - amortizable
3,068,034
(2,427,612
)
640,422
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(329,679
)
545,964
Website
84,000
-
84,000
Goodwill
650,243
-
650,243
Total
$ 6,716,642
$ (3,190,836
)
$ 3,525,806
During the year ended December 31, 2020, the Company charged to operations amortization expense in the amount of $212,902 in addition to the impairment charge of $1,698,952. During the year ended December 31, 2019, the company charged to operations amortization expense in the amount of $899,756.
Amortization of finite life intangible assets as of December 31, 2020 is as follows:
$ 34,442
34,442
31,496
2024 and thereafter
-
Total
$ 100,380
The trade names are not considered finite-lived assets, and are not being amortized. The non-compete agreement is being amortized over a period of 48 months. The customer relationships acquired in these transactions are being amortized over periods of 24 to 36 months. The internally developed technology is being amortized over 60 months.
Index
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2020 and December 31, 2019 are as follows:
December 31,
December 31,
Trade payables and accrued liabilities
$ 4,914,050
$ 3,935,384
Accrued payroll and commissions
184,473
74,572
Total
$ 5,098,523
$ 4,009,956
11. ACCRUED INTEREST
At December 31, 2020, accrued interest on a note outstanding was $28,873. During the year ended December 31, 2020, the Company paid cash for interest in the aggregate amount of $125,396.
At December 31, 2019, accrued interest on a note outstanding was $16,973. During the year ended December 31, 2019, the Company paid cash for interest in the aggregate amount of $112,971.
12. REVOLVING CREDIT FACILITIES
December 31,
December 31,
Line of credit facility with Fifth Third Bank in the original amount of $2,000,000 with an interest rate of LIBOR plus 3.25% (the “Fifth Third Bank Line of Credit”). Effective August 1, 2019, this credit facility was extended to August 1, 2021. On March 20, 2020, the Company drew down the amount of $2,000,000. During the year ended December 31, 2020, the Company paid interest in the amount of $58,382 on the Fifth Third Bank Line of Credit.
$ 2,000,000
$ -
Total
$ 2,000,000
$ -
Index
13. NOTES PAYABLE
December 31,
December 31,
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 year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $54,600 and $5,743, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $54,060 and $11,111, respectively.
$ 122,850
$ 177,450
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 was originally due May 29, 2020. Effective May 29, 2020, the note was amended and renewed such that principal payments of $8,303 plus accrued interest were due beginning June 29, 2020 and continuing for sixty months; the entire principal balance and all accrued interest will be due on May 29, 2025. During the year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $81,667 and $17,532, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $98,000 and $30,031, respectively.
449,166
530,833
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. Monthly payments in the amount of $7,425 including principal and interest commenced in April, 2019. During the year ended December 31, 2019, equipment financed under the Artisan Equipment Loan in the amount of $33,075 was returned for credit. During the year ended December 31, 2020, the Company made payments of principal and interest on this loan in the amounts of $67,064 and $14,755, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $48,654 and $18,957, respectively.
242,765
309,829
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 year ended December 31, 2020, the Company accrued interest in the amount of $372 on this note; during the year ended December 31, 2020, the Company accrued interest in the amount of $380 on this note.
20,000
20,000
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% maturing November 5, 2023. During the year ended December 31, 2020, the Company made principal and interest payments in the amount of $9,737 and $1,723, respectively, on this loan; during the year ended December 31, 2019, the Company made principal and interest payments in the amount of $8,540 and $1,964, respectively, on this loan.
32,051
41,788
Index
December 31,
December 31,
Secured mortgage facility in the amount of $5,500,000 with Fifth Third Bank for the acquisition of land and building in Mountaintop, Pennsylvania dated November 8, 2019 (the “Fifth Third Mortgage Facility”). The Fifth Third Mortgage Facility is secured by the assets acquired. During the year ended December 31, 2019, the Company drew down $3,600,000 of this facility. During the year ended December 31, 2020, the Company drew down an additional $1,900,000 of this facility. The interest rate is LIBOR plus 2.75% with interest only due through September 30, 2020, thereafter with principal amortized at a 20 years amortization rate and the balance due on the maturity date of September 2, 2025. The Company prepaid loan fees in connection with this loan in the amount of $72,916 which are considered a discount to the loan and are being amortized over the term of the note; $12,560 of this discount was amortized to interest expense during the year ended December 31, 2020. During the year ended December 31, 2020 the Company made principal and interest payments in the amount of $65,600 and $154,955, respectively, on this loan; during the year ended December 31, 2019 the Company made principal and interest payments in the amount of $0 and $25,064, respectively, on this loan. The Company also has in place an interest rate swap agreement (the “Fifth Third Interest Rate Swap”) with Fifth Third bank in connection with the Fifth Third Mortgage Facility. Pursuant to the Fifth Third Interest Rate Swap, the Company pays an additional base rate of 0.59% reduced by the difference between an initial LIBOR rate of 0.1513% and the month-end LIBOR rate. During the year ended December 31, 2020, the Company paid an additional $6,084 of interest pursuant to the Fifth Third Interest Rate Swap.
5,434,400
3,600,000
Loan payable to Fifth Third Bank dated April 21, 2020 pursuant to the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the principal amount of $1,650,221. The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. During the year ended December 31, 2020, the Company accrued interest in the amount of $11,528 on the PPP Loan.
1,650,221
-
Total
7,951,453
4,679,900
Discount
(58,537
)
(71,097
)
Net of discount
$ 7,892,916
$ 4,608,803
Current portion
$ 1,800,108
$ 727,766
Long-term maturities
6,151,345
3,952,134
Total
$ 7,951,453
$ 4,679,900
Aggregate maturities of long-term notes payable as of December 31, 2020 are as follows:
For the year ended December 31,
$ 1,800,108
758,463
403,903
340,354
4,648,625
Thereafter
-
Total
$ 7,951,453
Index
14. LEASE LIABILITIES - FINANCING LEASES
December 31,
December 31,
Financing lease obligation under a lease agreement for warehouse furniture and equipment truck dated October 14, 2020 in the original amount of $514,173 payable in sixty monthly installments of $9,942 including interest at the rate of 6.01%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amount of $22,216 and $7,609, respectively.
$ 491,957
$ -
Financing lease obligation under a lease agreement for a truck dated March 31, 2020 in the original amount of $152,548 payable in eighty-four monthly installments of $2,188 including interest at the rate of 5.44%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $15,270 and $6,612, respectively.
137,278
-
Financing lease obligation under a lease agreement for a truck dated November 5, 2018 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 year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $19,683 and $8,225, respectively.
87,914
107,597
Financing lease obligation under a lease agreement for a truck dated August 23, 2019 in the original amount of $80,413 payable in eighty-four monthly installments of $1,148 including interest at the rate of 5.0%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $10,148 and $3,626, respectively.
66,992
77,140
Total
$ 784,141
$ 184,737
Current portion
$ 146,004
$ 29,832
Long-term maturities
638,137
154,905
Total
$ 784,141
$ 184,737
Aggregate maturities of lease liabilities - financing leases as of December 31, 2020 are as follows:
For the year ended December 31,
$ 146,004
140,205
163,740
162,981
133,692
Thereafter
37,519
Total
$ 784,141
Index
15. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2020:
Vesting of shares to officers
During the year ended December 31, 2020 in connection with stock based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the amount of $70,000 for the vesting of a total of 139,854 shares of common stock issuable to two of its independent board members, and $293,503 for the vesting of a total of 814,640 shares of common stock issuable to its Chief Executive Officer and its Director of Strategic Acquisitions pursuant to their employment agreements, which includes 330,758 shares with a market value of $113,887 received by the Chief Executive Officer subsequent to the expiration of a limited waiver provided through June 29, 2020 (see below). The Company also recognized non-cash compensation in the amount of $142,512 during the year ended December 31, 2020 in connection with stock options issuable to management and board members.
The chief executive officer provided a limited waiver through June 29, 2020 of certain rights and benefits contained in his employment agreement following a Change in Control (as defined in the employment agreement).
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share, and options to purchase 50,000 shares of common stock at a price of $1.00 per share; these options vest quarterly over two years and expire December 28, 2025.
For the year ended December 31, 2019:
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Sale of common stock to related party
On July 23, 2019, the Company entered into a subscription agreement to sell 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000. See note 17.
Stock based compensation to Officers
During the year ended December 31, 2019 in connection with stock-based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the aggregate total amount of $226,803 for the vesting of a total of 387,899 shares of common stock issuable to its Chief Executive Officer, its Director of Strategic Acquisitions and to its two independent board members. In January 2020, the Company issued, net of income taxes, an aggregate of 316,966 of these shares. See note 17.
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.
Index
In January 2019, the Company awarded the following stock options to four of its 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.
In July 2019, the Company awarded five-year options to purchase 50,000 shares of common stock to a director at a price of $1.20 per share, vesting quarterly over a one year period.
The Company recognized non-cash compensation in the amount of $157,145 during the year ended December 31, 2019 in connection with these options.
16. INCOME TAXES
Deferred income taxes result from the temporary differences primarily attributable to amortization of intangible assets and debt discount and an accumulation of net operating loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $4,963,000, which will expire in various years through 2037 and net operating loss carryforwards of $6,510,000 which are carried-forward indefinitely subject to limitation. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to significant changes in the Company’s ownership, the Company’s future use of its existing net operating losses may be limited.
The provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 consist of the following:
Current
$ -
$ -
Deferred
-
-
Total
$ -
$ -
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable statutory income tax rate of 27.6% for the years ended December 31, 2020 and 2019 to the loss before taxes as a result of the following differences:
Income (loss) before income taxes
$ (7,665,024
)
$ 222,767
Statutory tax rate
27.6
%
27.6
%
Total tax (benefit) at statutory rate
(2,115,000
)
61,400
Permanent difference
152,000
141,100
Change in tax estimates
1,100
(2,221,000 )
Changes in valuation allowance
1,961,900
2,018,500
Income tax expense
$ -
$ -
Deferred income taxes reflect the tax impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The change in tax estimates in 2019 was to correct the deferred tax assets associated with the net loss carryforwards.
Index
Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2020, and 2019 significant components of the Company’s deferred tax assets are as follows:
Deferred Tax Assets:
Net operating loss carryforwards
$ 3,166,700
$ 1,867,400
Allowance for doubtful accounts
94,900
26,300
Property and equipment
158,200
91,800
Intangible assets
607,500
79,900
Net deferred tax assets
4,027,300
2,065,400
Valuation allowance
(4,027,300
)
(2,065,400
)
Net deferred tax assets
$ -
$ -
The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
17. EQUITY
Common Stock
At December 31, 2020 and 2019 a total of 2,837,580 shares are deemed issued but not outstanding by the Company.
For the year ended December 31, 2020:
The Company charged the amount of $142,512 in connection with the vesting of stock options issuable to board members and employees in connection with their compensation agreements.
The Company charged the amount of $363,503 in connection with the vesting of 954,496 shares of common stock issuable to board members and employees in connection with their employment agreements. These shares are included in common stock outstanding at December 31, 2020.
The Company issued 38,943 shares of common stock with a fair value of $0.44 to an employee as a bonus. The fair value of $17,135 was charged to operations during the year ended December 31, 2020.
The Company issued 4,762 shares of common stock with an average fair value of $0.48 to a service provider; the fair value of $2,286 was charged to operations during the year ended December 31, 2020.
For the year ended December 31, 2019:
The Company issued a total of 131,136 shares of common stock to seven employees for previously accrued bonuses in the amount of $93,666.
The Company charged the amount of $157,145 in connection with the vesting of stock options issuable to board members and employees in connection with their employment agreements.
The Company charged the amount of $246,628 in connection with the vesting of 421,233 shares of common stock issuable to board members and employees in connection with their employment agreements. 414,807 of the vested shares, net of taxes due, are included in common stock outstanding at December 31, 2019.
The Company sold 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000.
The Company issued 19,048 shares of common stock with an average fair value of $0.546 to a service provider; the fair value of $10,405 was charged to operations during the year ended December 31, 2019.
The Company acquired 250,000 shares of common stock from an investor; the purchase price was $0.50 per share for a total of $125,000; these shares were retired to treasury during the year ended December 31, 2019.
Index
Treasury Stock
At December 31, 2020 and 2019, the Company had 2,623,171 shares of treasury stock.
Warrants
The Company had no warrants outstanding at December 31, 2020 or 2019.
Options
For the year ended December 31, 2020:
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023. Each grant of 50,000 options had a fair value of $1,216 on the date of the grant.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share with a fair value on the date of the grant of $7,775, and options to purchase 50,000 shares of common stock at a price of $1.00 per share with a fair value on the date of the grant of $6,291; these options vest quarterly over two years and expire December 28, 2025.
During the year ended December 31, 2020, an aggregate of 475,000 options to purchase shares of common stock at a weighted average price of $1.76 expired.
For the year ended December 31, 2019:
In January 1, 2019, the Company issued the following options:
-
Options to purchase 90,000 shares of common stock at a price of $0.62 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 360,000 options);
-
Options to purchase 135,000 shares of common stock at a price of $0.85 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 540,000 options);
-
Options to purchase 225,000 shares of common stock at a price of $1.20 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 900,000 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 as of December 31, 2020:
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
$
0.60
50,000
4.99
$
0.60
-
$
-
$
0.62
360,000
3.00
$
0.62
240,000
$
0.62
$
0.85
540,000
3.00
$
0.85
360,000
$
0.85
$
1.00
50,000
4.99
$
1.00
-
-
$
1.10
75,000
0.37
$
1.10
75,000
$
1.10
$
1.20
1,,050,000
2.84
$
1.20
650,000
$
1.20
$
1.50
125,000
1.00
$
1.50
125,000
$
1.50
2,250,000
2.82
$
1.02
1,450,000
$
1.04
Index
Transactions involving stock options are summarized as follows:
Number of Shares
Weighted Average
Exercise Price
Options outstanding at December 31, 2018
1,050,000
$ 1.80
Granted
1,850,000
0.98
Exercised
-
-
Cancelled / Expired
(375,000
)
1.43
Options outstanding at December 31, 2019
2,525,000
$ 1.23
Granted
200,000
1.00
Exercised
-
-
Cancelled / Expired
(475,000
)
1.76
Options outstanding at December 31, 2020
2,250,000
$ 1.02
Aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 and 2019 was $0. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $0.29 and $0.44 as of December 31, 2020 and 2019, respectively, and the exercise price multiplied by the number of options outstanding.
During the year ended December 31, 2020 and 2019, the Company charged $142,512 and $157,145, respectively, to operations related to recognized stock-based compensation expense for stock options.
The exercise price grant dates in relation to the market price during 2020 and 2019 are as follows:
Exercise price lower than market price
-
-
Exercise price equal to market price
-
-
Exercise price exceeded market price
$ 0.60 to 1.50
$ 0.62 to 1.20
As of December 31, 2020, and 2019, there were 800,000 and 1,675,000, respectively, non-vested options outstanding.
Accounting for warrants and stock options
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
December 31,
December 31,
Volatility
41.7-82.7
%
59.38-63.16
%
Dividends
$ -
$ -
Risk-free interest rates
0.37-1.37
%
1.79-2.49
%
Term (years)
3.00-5.00
3.00-4.93
Index
18. COMMITMENTS AND CONTINGENCIES
Contingent Liability
Pursuant to the igourmet Asset Purchase Agreement, the Company recorded contingent liabilities in the original amount of $787,800. This amount relates to certain performance based payments over the twenty-four months following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2018, the Company reduced this amount by $392,900 as the performance goals for the first year were not met. During the year ended December 31, 2019, the Company reduced this amount by $132,300 as the performance goals for the second year were not met. During the year ended December 31, 2019, the Company paid the amount of $39,000 in connection with the additional liabilities. During the year ended December 31, 2020, the Company paid the amount of $40,000 in connection with the additional liabilities. At December 31, 2020, the amount of $67,000 remains on the Company’s consolidated balance sheet as a current contingent liability, and $116,600 as a long term contingent liability.
Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of $240,576. These amounts relate to the estimate of certain performance based payments following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2019, the Company paid the amount of $120,576 in connection with these liabilities. At December 31, 2020, $120,000 is classified as a current contingent liability.
License Agreements
In May 2019, the Company entered into a royalty-based license agreement, through December 31, 2022 with a lifestyle brand, which provides the exclusive right, with certain carve-outs and limitations, to sell and promote branded gift baskets for certain channels including: retail, warehouse club stores, certain of the Company’s current e-commerce channels, and other e-commerce channels such as amazon.com (the “May 2019 License Agreement”). Pursuant to the May 2019 License Agreement, the Company paid an initial royalty deposit in the amount of $50,000 towards the minimum royalty, which is classified as other current assets on the Company’s balance sheet at December 31, 2019. Future royalty amounts owed for minimum payments in connection with the May 2019 License Agreement will be deducted from this deposit The royalty rate is 5% of net sales, and the Company is required, with certain exceptions and exclusions, to make minimum royalty payments of $100,000 through the end of 2020, $110,000 in 2021, and $125,000 in 2022, respectively. As of December 31, 2020, the Company has made the required minimum royalty payments.
Litigation
On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. Since that time, other parties involved in the incident have joined as plaintiffs in the PA Action. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and indicates a demand and offer to settle for fifty million dollars. We expect that should a settlement occur the amount to resolve the Action would be substantially lower. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy (which has been fully tendered) and umbrella policy that covers one of the Company’s subsidiaries, we intend to further aggressively pursue the Company’s and its subsidiaries’ insurance coverage under their umbrella and other available policies. The Company has brought an action for declaratory judgement against one of the insurance companies under which it had an umbrella policy so that the court can compel it to provide liability coverage. In addition, the Company has been defending this action and believes that the likely outcome would result in the liabilities being covered by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations. On July 16, 2020, the court granted the Company's motion to stay the case through the final adjudication of an additional pending legal proceeding against the driver in connection with the events related to the case. It is not anticipated that the Company and its subsidiaries will be a party to any other legal proceedings in connection with this matter.
From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of 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 financial position or our business and the outcome of these matters cannot be ultimately predicted.
Index
19. MAJOR CUSTOMER
The Company’s largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 40% and 57% of total sales in each of the years ended December 31, 2020 and 2019. A contract between our subsidiary, Food Innovations, and U.S. Foods 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 contract 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 December 31, 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.
20. FAIR VALUE MEASUREMENTS
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s stock option, convertible debt features and warrant instruments is determined using option pricing models.
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.” Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
Level 1 -
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 -
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 -
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions.
As December 31, 2020 and 2019, the Company did not have financial assets or liabilities that are required to be accounted for at fair value on a recurring basis.
21. SUBSEQUENT EVENTS
Subsequent to December 31, 2020, we applied for and received new loans in the amount of $1,748,814 under the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) . The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of this PPP Loan in whole or in part.
Index
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. We concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act were effective as of December 31, 2020 to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in SEC rules and forms and our disclosure controls and procedures are also effective to ensure that the information required to be disclosed in reports that we file under the Exchange Act is accumulated and communicated to our principal executive and financial officers to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Management has 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 December 31, 2020 at the reasonable assurance level. Management of the Company believes that this deficiency is primarily due to the smaller size of 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 recently named a new Chief Financial Officer and also expect to retain additional qualified personnel and accounting and systems consultants to continue to remediate this control deficiency in the future.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives.
Changes in Internal Control over Financial Reporting
We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Index
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
ITEM 9B. Other Information
None.
Index
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Set forth below are the directors and executive officers of our Company, their respective names and ages, positions with our Company, principal occupations and business experiences during at least the past five years.
Name
Age
Position
Sam Klepfish
Chairman and Chief Executive Officer
Justin Wiernasz
Director of Strategic Acquisitions and Director
Joel Gold
Director
Hank Cohn
Director
David Polinsky
Director
James C. Pappas
Director
Mark Schmulen
Director
Richard Tang
Chief Financial Officer
Directors
Sam Klepfish
Mr. Klepfish has been a director since December 1, 2005. From November 2007 to present Mr. Klepfish is the CEO of Innovative Food Holdings and its subsidiaries. From March 2006 to November 2007 Mr. Klepfish was the interim president of the Company and its subsidiary. Since February 2005 Mr. Klepfish was also a Managing Partner at ISG Capital, a merchant bank. From May 2004 through February 2005 Mr. Klepfish served as a Managing Director of Technoprises, Ltd. From January 2001 to May 2004 he was a corporate finance analyst and consultant at Phillips Nizer, a New York law firm. Since January 2001 Mr. Klepfish has been a member of the steering committee of Tri-State Ventures, a New York investment group. From 1998 to December 2000, Mr. Klepfish was an asset manager for several investors in small-cap entities.
Joel Gold, Director
Mr. Gold is currently a partner in a merchant banking firm, and has served on the board and committees of numerous companies. Prior to that, he was an investment banker at Buckman, Buckman and Reid located in New Jersey, a position he held since May 2010. Prior there to, from October 2004, he was head of investment banking of Andrew Garrett, Inc. From January 2000 until September 2004, he served as Executive Vice President of Investment Banking of Berry Shino Securities, Inc., an investment banking firm also located in New York City. From January 1999 until December 1999, he was an Executive Vice President of Solid Capital Markets, an investment-banking firm also located in New York City. From September 1997 to January 1999, he served as a Senior Managing Director of Interbank Capital Group, LLC, an investment banking firm also located in New York City. From April 1996 to September 1997, Mr. Gold was an Executive Vice President of LT Lawrence & Co., and from March 1995 to April 1996, a Managing Director of Fechtor Detwiler & Co., Inc., a representative of the underwriters for the Company’s initial public offering. Mr. Gold was a Managing Director of Furman Selz Incorporated from January 1992 until March 1995. From April 1990 until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co., Inc. (“Bear Stearns”). For approximately 20 years before he became affiliated with Bear Stearns, he held various positions with Drexel Burnham Lambert, Inc.
Hank Cohn, Director
Mr. Cohn has been a director since October 29, 2010. Hank Cohn is currently CEO of P1 Billing, LLC, a revenue cycle management services provider to ambulatory medical clinics. P1 Billing is a spinoff of PracticeOne Inc., (formerly PracticeXpert, Inc., an OTCBB traded company), an integrated PMS and EMR software and services company for physicians. Mr. Cohn served as President and Chief Executive Officer of PracticeOne from December 2009 until December 2009, at which time he sold the company to Francison Partners, one of the largest, global technology focused, private equity firms in Silicon Valley. Prior to that, Mr. Cohn worked with a number of public companies. A partial list of his past and present board memberships include: Analytical Surveys, Inc., Kaching, Inc., and International Food and Wine, Inc., currently Evolution Resources Inc. Mr. Cohn also served as the executive vice president of Galaxy Ventures, LLC a closely-held investment fund concentrating in the areas of bond trading and early stage technology investments, where he acted as portfolio manager for investments.
Index
Justin Wiernasz, Director of Strategic Acquisitions
Mr. Wiernasz has been a director since November 1, 2013. Effective on May 11, 2018, Mr. Justin Wiernasz resigned his position of President of Innovative Food Holdings, Inc. which he held since July 31, 2008 and assumed the position of Director of Strategic Acquisitions. Prior thereto he was the Executive Vice President of Marketing and Sales and Chief Marketing Officer of our operating subsidiary, Food Innovations, Inc. since May 2007 and the President of Food Innovations and our Chief Marketing Officer since December 2007. Prior thereto, he was at USF, our largest customer, for 13 years. From 2005 to 2007 he was the Vice President of Sales & Marketing, USF, Boston, and prior thereto, from 2003 to 2005 he was a National Sales Trainer at USF, Charleston SC, from 1996 to 2003 he was the District Sales Manager at USF, Western Massachusetts and from 1993 to 1996 he was Territory Manager, USF, Northampton, Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner and operator J.J.’s food and spirit, a 110 seat restaurant.
Richard Tang , CFO
Richard Tang has been CFO at IVFH since December 29, 2020. Mr. Tang, has more than 25 years of experience in senior leadership roles, working in media, e-commerce, CPG and food-based sectors, most recently as CFO for Van Leeuwen Ice Cream LLC, a nationwide manufacturer of ultra-premium dairy and vegan ice cream distributed and sold through 2,000 supermarket and independent chain doors nationwide and multi-state brick and mortar locations. Prior thereto, from 2017 to 2019, Mr. Tang was CFO at Nutraceutical Wellness, Inc., a global subscription-based CPG e-commerce and business-to-business wellness vitamin and supplements consumer business. Prior thereto, from 2012-2016, Tang was Senior Vice President, Corporate Development at Fareportal, the third largest Online Travel Agency in North America. Mr. Tang has also held senior financial roles at The Condé Nast Publications, Time Warner, and Walt Disney Corporation. Mr. Tang holds a Master of Business Administration from Boston University Graduate School of Management and a Bachelor of Science from Boston College.
David Polinsky, Director
David A. Polinsky has been a director since July 24, 2019. Mr. Polinsky has served as Chief Financial Officer of Rafael Holdings, Inc. (NYSE: RFL) since December 2017. Mr. Polinsky co-founded Rafael Pharmaceuticals and served as its Vice President, General Counsel and Corporate Secretary from 2002 and as President, General Counsel and Secretary from 2016 through March 2018. He also served on Rafael Pharmaceutical’s Board from 2002 until 2014. Prior to joining Rafael Pharmaceuticals, from 1996 to 2002, he served as Vice President and General Counsel for a New York-based real estate focused investment and management company, Square Management Corp., leading the investment analysis in and management of residential, office, retail and development properties. Previously and in partnership with the Honorable Edward I. Koch, former Mayor of New York City, Mr. Polinsky founded in 1999 and served as CEO of a company that licensed and developed TheLaw.com as a leading consumer focused legal information site. Mr. Polinsky earned his Juris Doctorate from Fordham University School of Law in 1996 and his Bachelor of Arts from Yeshiva University in 1993. Mr. Polinsky also earned the CFA Institute’s Investment Foundations certificate.
James C. Pappas, Director
James C. Pappas has been a director since January 30, 2020. Mr. Pappas has served as the Managing Member of JCP Investment Management, LLC (“JCP Management”), an investment firm, and the sole member of JCP Investment Holdings, LLC (“JCP Holdings”), since June 2009. Mr. Pappas has also served as a director of Tandy Leather Factory, Inc. (NASDAQ:TLF), a retailer and wholesale distributor of a broad line of leather and related products, since June 2016. Mr. Pappas previously served as a director of each of Jamba, Inc. (formerly NASDAQ:JMBA), a leading health and wellness brand and the leading retailer of freshly squeezed juice, from January 2015 until the completion of its sale in September 2018, U.S. Geothermal Inc. (formerly NYSEMKT:HTM), a leading geothermal energy company, from September 2016 until the completion of its sale in April 2018, and The Pantry, Inc. (formerly NASDAQ:PTRY), a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country, from March 2014 until the completion of its sale in March 2015. He also previously served as Chairman of the board of directors of Morgan’s Foods, Inc. (formerly OTC:MRFD), a then publicly traded company, from January 2013 until May 2014, when the company was acquired by Apex Restaurant Management, Inc., after originally joining its board as a director in February 2012. From 2005 until 2007, Mr. Pappas worked for The Goldman Sachs Group, Inc. (NYSE:GS) (“Goldman Sachs”), a multinational investment banking and securities firm, in its Investment Banking / Leveraged Finance Division. As part of the Goldman Sachs Leveraged Finance Group, Mr. Pappas advised private equity groups and corporations on appropriate leveraged buyout, recapitalization and refinancing alternatives. Prior to Goldman Sachs, Mr. Pappas worked at Banc of America Securities, the investment banking arm of Bank of America Corporation (NYSE:BAC), a multinational banking and financial services corporation, where he focused on Consumer and Retail Investment Banking, providing advice on a wide range of transactions including mergers and acquisitions, financings, restructurings and buy-side engagements. Mr. Pappas received a BBA and a Masters in Finance from Texas A&M University.
Index
Mark Schmulen, Director
Mark Schmulen has been a director since January 30, 2020. Mr. Schmulen is a co-founder and has served as CEO of Chirp Systems, Inc., a venture-backed smart access solution for multifamily property owners, since October 2019. Mr. Schmulen has also served as the managing director of Jelly Capital, LLC, a private investment fund focused on early stage technology and real estate investments, since May 2015, and as an investment advisor representative for Forum Financial, LP, an independent investment advisor, since November 2016. Previously, he served as General Manager of Social Media for Constant Contact, Inc. (formerly NASDAQ:CTCT), a provider of digital marketing solutions, from May 2010 until May 2014. Prior to that, he was co-founder and served as CEO of Nutshell Mail, Inc., a social media marketing solution, from 2008 until its acquisition by Constant Contact, Inc. in 2010. Mr. Schmulen began his career as an investment banking analyst with JPMorgan Chase Bank. Currently, he serves on the board of directors for the Shlenker School, since August 2017 and is a Director of the HHF Foundation, benefiting early childhood education, since December 2014. Mr. Schmulen holds a B.S. from the University of Pennsylvania and an M.S. in Management from Stanford’s Graduate School of Business.
Qualification of Directors
We believe that all of our directors are qualified for their positions and each brings a benefit to the board. Messrs. Kelpfish and Wiernasz, as our officers, are uniquely qualified to bring management’s perspective to the board’s deliberations. Mr. Gold, with his lengthy career working for broker/dealers, bring a “Wall Street” perspective and Mr. Schmulen, with his private equity experience, and Messrs. Cohn and Polinsky, with their prior history of being executives and directors of other companies, bring a well-rounded background and wealth of general business experience to our board. Mr. Pappas, brings both his investment and corporate finance background and food industry experience to the board.
Committees
The Board of Directors currently has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The members of the Compensation Committee and of the Nominating and Corporate Governance Committee are Messrs. Gold, Cohn, Pappas and Schmulen and the members of the Audit Committee are Messrs. Gold, Cohn and Schmulen with Mr. Cohn designated as the Audit Committee Financial Expert. All of the members of each committee have been determined by the Board of Directors to be independent.
Agreements with Directors
Prior to Mr. Pappas’ appointment to the Board, as described in a Current Report on Form 8-K filed on January 30, 2020 (the “January 8-K”), the Company and Mr. Pappas entered into an Agreement (the “Agreement”) which, among other things, provided that (i) the Company (x) will support the continued directorships of the New Directors (as defined in the Agreement) at the next two annual meetings and (y) after 18 months will appoint another nominee of JCP (as defined in the Agreement”) to the Board and support such nominee at the next annual meeting, provided that such nominee shall be subject to the approval (which shall not be unreasonably withheld) of the Nominating and Corporate Governance Committee of the Board and the Board after exercising their good faith customary due diligence process and fiduciary duties; and (ii) JCP and the Company agreed to certain standstill provisions, as more fully described in the Agreement. As of the date hereof, the New Directors referred to in the Agreement are Messrs. Pappas and Schmulen.
Code of Ethics
We have adopted a Code of Ethics that applies to each of our employees, including our CEO, our principal financial officer, as well as members of our Board of Directors. A copy of such Code has been publicly filed with, and is available for free from, the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
During 2020, Messrs. Gold, Klepfish, Wiernasz and Cohn did not file a Form 4 in connection with the receipt of shares and Messrs. Pappas, Schmulen and Tang did not file a Form 4 in connection with the receipt of options and Mr. Tang did not file a Form 3. None of the unfiled Forms 4 related to the public sale of securities.
ITEM 11. Executive Compensation
The following table sets forth information concerning the compensation for services rendered to us for the two years ended December 31, 2020, of our Chief Executive Officer, our principal financial officer and our highest compensated officer whose annual compensation exceeded $100,000 in the fiscal year ended December 31, 2020, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
Index
SUMMARY COMPENSATION TABLE
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Sam Klepfish
$ 406,320
$ -
$ 276,387
(a)
$ -
$ -
$ -
$ 3,406
(b)
$ 686,113
CEO
$ 341,646
$ -
$ 150,000
(a)
$ -
$ -
$ -
$ 2,493
(b)
$ 494,139
Justin Wiernasz
$ 392,638
$ 10,000
(c)
$ 17,116
(a)
$ -
$ -
$ -
$ 26,086
(b)
$ 445,840
Director of Strategic Acquisitions
$ 376,955
$ 25,000
(c)
$ 16,398
(a)
$ -
$ -
$ -
$ 15,619
(b)
$ 433,972
Richard Tang
(d)
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Chief Financial Officer
$ -
$ -
$ -
$ -
$ -
$ -
Norma Vila,
(d)
$ 157,884
$ -
$ -
$ -
$ -
$ -
$ 3,241
(b)
$ 161,125
Principal Accounting Officer (e)
$ -
$ -
$ -
$ -
$ -
$ -
John McDonald,
(d)
$ 192,358
$ -
$ -
$ -
$ -
$ -
$ 6,592
(b)
$ 198,950
Principal Accounting Officer (f)
$ 210,477
$ -
$ -
$ -
$ -
$ -
$ 8,405
(b)
$ 218,882
(a) Consists of the portion of restricted stock awards which were recognized as a period cost during the year for services as an executive officer.
(b) Consists of cash payments for health care benefits.
(c) Consists of a cash bonus paid during the year for services performed in the previous year.
(d) Mr. Tang’s employment with the Company was effective December 29, 2020.
(e) Ms. Vila assumed the rule of Principal Accounting Officer effective November 12, 2020.
(f) Mr. McDonald’s employment with the Company ended effective November 18, 2020.
Index
Outstanding Equity Awards at Fiscal Year-End as of December 31, 2020
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised
Options (#)
Exercisable
Number of Securities Underlying Unexercised Options(#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
Sam Klepfish
300,000
(a)
$
87,000
(b)
(a) Restricted stock awards vest according to the following schedule: An additional 125,000 restricted stock awards will vest contingent upon the attainment of a stock price of $2.00 per share for 20 consecutive 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 consecutive trading days.
(b) Amounts are calculated by multiplying the number of shares shown in the table by $ 0.29 per share, which is the closing price of common stock on December 31, 2020 (the last trading day of the 2019 fiscal year).
Director Compensation
Name
Fees
Earned
or Paid
in Cash ($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Joel Gold
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Sam Klepfish
-
-
34,120
(b)
-
-
-
34,120
Hank Cohn
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Justin Wiernasz
-
-
34,120
(b)
-
-
-
34,120
David Polinsky
-
-
3,802
(c)
-
-
-
3,802
James C. Pappas
-
-
1,115
(d)
-
-
-
1,115
Mark Schmulen
-
-
1,115
(d)
-
-
-
1,115
(a) Represents the amount charged to operations during the year ended December 31, 2020 for 90,000 shares of the Company’s common stock with a fair value of $45,000; 55,545 shares of the Company’s common stock with a fair value of $18,515 vesting over a three-year period; and 64,240 shares of the Company’s common stock with a fair value of $30,000 vesting over a three-year period.
(b) Represents the amount charged to operations during the year ended December 31,2020 for the following: (i) five-year options to purchase 90,000 shares of the Company’s common stock at a price of $0.62 per share, vesting over three years; (ii) five-year options to purchase 135,000 shares of the Company’s common stock at a price of $0.85 per share, vesting over three years; and (iii) five year options to purchase 225,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over three years.
(c) Represents the amount charged to operations during the year ended December 31, 2020 for three-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
(d) Represents the amount charged to operations during the year ended December 31, 2020 for two-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
Index
Employment Agreements
Our subsidiary, Food Innovations, has employment agreements with certain officers and certain employees. The employment agreements provide for salaries and benefits, including stock grants and extend up to five years. In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause.
SAM KLEPFISH
Effective March 29, 2017, we entered into an employment agreement with Mr. Sam Klepfish, our CEO. This agreement, which ran through December 31, 2019, maintained the then-current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee comprised solely of independent directors, we entered into a new employment agreement with Mr. Sam Klepfish having an effective date of January 28, 2019 and terminating three years thereafter with up to two two-year extension periods. The first two year extension period was exercised in 2021. The agreement provides a base salary in the amount of $300,000 with annual increases of at least $25,000 and annual stock compensation of 50% of the base salary. The agreement also provides for additional bonuses of up to 25% of base compensation, based on increases in EBITDA (as defined in the agreement) and increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
JUSTIN WIERNASZ
Effective March 29, 2017, we entered into an employment agreement with Mr. Wiernasz, our Director of Strategic Acquisitions. This agreement, which ran through December 31, 2019, maintained the current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee, we entered into a new employment agreement with Mr. Justin Wiernasz, having an effective date of January 28, 2019 and terminating three years thereafter with up to two extension periods; one for two years and one for one year. The agreement provides a base salary in the amount of $326,000 with annual increases of at least 5% and annual stock compensation of 5% of the base salary. This agreement was further modified to a base salary of $350,000 in 2019. The agreement also provides for additional bonuses of up to 35% of base compensation, and based upon increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
RICHARD TANG
Effective December 29, 2020, we entered into a letter agreement with Mr. Richard Tang to become our CFO. The agreement provides a base salary in the amount of $200,000 for 2021 and base compensation for 2022 to target an increase of 20%-25% with a targeted 15-20% bonus structure based on milestones to be determined by the Company’s Board of Directors in its sole discretion. For 2021, Mr. Tang will have the opportunity to earn a performance stock bonus of $40,000 and a cash bonus of $25,000 based upon satisfying certain specified milestones and an additional bonus equal to up to 10% of combined base salary and bonus based upon criteria to be determined by the Company’s Board of Directors. The agreement also provided for a one-time stock option grant in the amount of 100,000 shares (half of which is exercisable $0.60 and half at $1.00), which vests in two years. Similar to our other employees, Mr. Tang’s employment is at-will and he is subject to the Company’s rules, regulations and policies, including specifically and without limitation, confidentiality and provisions.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of a compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of our Compensation Committee.
Index
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information as of April 15, 2021, with respect to the beneficial ownership of our common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each Named Officer, and (4) all our directors and executive officers as a group. Unless otherwise stated, each person listed below uses the Company’s address. Pursuant to SEC rules, includes shares that the person has the right to receive within 60 days from May 11, 2020.
Name and Address of Beneficial Owners
Number of Shares Beneficially Owned
Percent of Class
Sam Klepfish (Officer, Director)
(1)
3,540,204
9.9
%
Joel Gold (Director)
(2)
829,997
2.3
%
Justin Wiernasz (Officer, Director)
(3)
1,993,364
5.6
%
Richard Tang (Officer)
(4)
12,500
0.1
%
Hank Cohn (Director)
(3)
705,943
2.0
%
David Polinsky (Director)
(5)
699,650
2.0
%
James C. Pappas (Director)
(6)
4,724,935
13.3
%
Mark Schmulen (Director)
(5)
50,000
0.1
%
A group consisting of Denver J. Smith, CRC Founders Fund, LP, Donald E. Smith, Richard G. Hill, Samuel N. Jurrens, 73114 Investments, LLC, Youth Properties, LLC, and Paratus Capital, LLC
(7)
2,774,620
7.82
%
Insight Wealth Management
(8)
2,913,021
8.2
%
All officers and directors as a whole (7 persons)
(9)
9,774,043
34.1
%
(1)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 16,250 shares of common stock owned by Mr. Klepfish's spouse, ownership of which is disclaimed by Mr. Klepfish.
(2)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 18,400 shares of common stock held by Mr. Gold’s spouse.
(3)
(4)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021.
Includes options to purchase 12,500 shares of common stock exercisable at June 15, 2021.
(5)
Includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021.
(6)
Includes 4,561,443 shares held by JCP Investment Partnership, LP and 113,492 shares held by JCP Investment Management, LLC. This information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on September 17, 2020. Also includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021. The address of JCP Investment Partnership, LP and JCP Investment Management, LLC is 1177 West Loop South, suite 1320, Houston, TX 77027. Information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on February 27, 2019.
(7)
Pursuant to a Schedule 13D/A filed on January 11, 2021 with the Securities and Exchange Commission, Mr. Denver Smith is part of a group which reports beneficially owning an aggregate of 2,774,620, although Mr. Denver Smith only has sole voting and dispositive power over 765,637 of such shares. Mr. Smith’s address is 350 S Race Street, Denver, Colorado 80209.
(8)
Pursuant to a Schedule 13G filed on February 8, 2021 with the Securities Exchange Commission, the address of The Address of Insight Wealth Management is 1175 Peachtree St NE Suite 350, Atlanta, GA 30361. Amount consists of 1,233,273 shares with sole voting and dispositive power, and 1,679,748 shares with shared dispositive power. The issuer retains sole voting power for 1,679,748 shares.
(8)
Consists of 11,144,093 shares of common stock held by officers and directors. Also includes options to purchase 1,412,500 shares of common stock exercisable at June 15, 2021.
Index
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
We are not currently subject to the requirements of any stock exchange or national securities association with respect to having a majority of “independent directors”. Messrs. Gold, Cohn, Polinsky, Pappas and Schmulen are “independent” and only Messrs. Klepfish and Wiernasz, by virtue of being our Officers, are not independent. Mr. Klepfish and Mr. Wiernasz do not participate in board discussions concerning their compensation.
ITEM 14. Principal Accountant Fees and Services
Audit Fees
The Company engaged Liggett & Webb P.A. (“LW”) as our independent registered public accounting firm since November 9, 2012. During the year ended December 31, 2020 and 2019, LW billed us audit fees of approximately $144,000 and $144,000, respectively.
Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by LW that are reasonably related to the performance of the audit or review of our consolidated financial statements including our quarterly interim reviews on Form 10-Q and are reported under Audit Fees above.
Tax Fees
LW tax fees were $20,000 and $20,000 for the years ended December 31, 2020 and 2019, respectively.
All Other Fees
LW has not billed any other fees since their engagement on November 9, 2012.
For the fiscal years ended December 31, 2020 and 2019 the board of directors considered the audit fees, audit-related fees, tax fees and other fees paid to our accountants, as disclosed above, and determined that the payment of such fees was compatible with maintaining the independence of the accountants. Our board of directors pre-approves all auditing services and all permitted non-auditing services (including the fees and terms thereof) to be performed by our independent registered public accounting firm, except for de minimis non-audit services that are approved by the board of directors prior to the completion of the audit.
Index
PART IV
ITEM 15. Exhibits
EXHIBIT NUMBER
3.1
Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005)
3.2
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011)
3.2.1
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s current report Form 8-K filed with the Securities and Exchange Commission on January 23, 2018)
10.1
Employment Agreement with Sam Klepfish (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.2
Employment Agreement Justin Wiernasz (incorporated by reference to exhibit 10.2 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.3
Loan Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (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 March 15, 2013)
10.4
Security Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.5
Mortgage by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.6
Note by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.7
Employment Agreement with Sam Klepfish dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.8
Employment Agreement with Justin Wiernasz dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.9
Asset Purchase Agreement dated as of January 22, 2018 by and among Innovative Gourmet, LLC, a subsidiary of the registrant, and igourmet LLC and igourmet NY LLC (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.10
Loan Sale Agreement dated as of January 10, 2018 between Food Funding, LLC, a subsidiary of the registrant and UPS Capital Business Credit (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.11
Fifth Amendment to Restated Loan Agreement dated February 28, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.12
Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of February 28, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
Index
10.13
Draw Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of March 13, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.14
Master Loan and Security Agreement dated March 13, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.15
Employment Agreement with Sam Klepfish dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.16
Employment Agreement with Justin Wiernasz dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.17
Form of Director Agreement dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.18
Eighth Amendment to Restated Loan Agreement dated as of November 9, 2019 between Fifth Third Bank, National Association, and the Registrant and certain of its subsidiaries (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.19
Promissory Note effective November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.20
Mortgage, Assignment of Leases, Fixture Filing and Security Agreement date as of November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.21
Agreement for Purchase and Sale of Real Estate dated as of August 9, 2019 (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2019).
Code of Ethics (incorporated by reference to exhibit 14 of the Company’s Form 10-KSB/A for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 31, 2008)
Subsidiaries of the Company
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Principal Accounting Officer
32.1
Rule 1350 Certification of Chief Executive Officer
32.2
Rule 1350 Certification of Principal Accounting Officer
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
Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INNOVATIVE FOOD HOLDINGS, INC.
By: /s/ Sam Klepfish
Sam Klepfish,
Chief Executive Officer and Director
Dated: April 15, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Sam Klepfish
CEO and Director
April 15, 2021
Sam Klepfish
(Chief Executive Officer)
/s/ Norma Vila
Controller
April 15, 2021
Norma Vila
(Principal Accounting Officer)
/s/ Hank Cohn
Director
April 15, 2021
Hank Cohn
/s/ Justin Wiernasz
Director
April 15, 2021
Justin Wiernasz
/s/David Polinsky
Director
April 15, 2021
David Polinsky
/s/ James C. Pappas
Director
April 15, 2021
James C. Pappas

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
ITEM 2. Properties
On March 8, 2013, we purchased 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 close to 10,000 square feet of combined office and warehouse space. The purchase price of the property was $770,000 and was financed in part by a five year mortgage in the amount of $546,000. In March 2018, the remaining balance under this mortgage was extended to February 28, 2023. The company relocated all of its Florida-based office and warehouse facilities into this facility on July 15, 2013.
On May 14, 2015, we 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. We have also recently completed an additional property improvement and upgrade buildout at the 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 for 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 packaging 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 proprietary private 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 were financed by a loan from Fifth Third Bank.
On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in 2021 was $9,400,000. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the Facility. The amount of the loan was $5,500,000, of which the Company drew down $3,600,000 for the acquisition of the Facility; the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years and maturity on September 2, 2025. Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase.
On October 5, 2020, the Company completed work to upgrade the Facility at a cost of $2,231,458 in order to better support the Company’s focus on e-commerce and logistics.
Index

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. Since that time, other parties involved in the incident have joined as plaintiffs in the PA Action. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and indicates a demand and offer to settle for fifty million dollars. We expect that should a settlement occur the amount to resolve the Action would be substantially lower. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy (which has been fully tendered) and umbrella policy that covers one of the Company’s subsidiaries, we intend to further aggressively pursue the Company’s and its subsidiaries’ insurance coverage under their umbrella and other available policies. The Company has brought an action for declaratory judgement against one of the insurance companies under which it had an umbrella policy so that the court can compel it to provide liability coverage. In addition, the Company has been defending this action and believes that the likely outcome would result in the liabilities being covered by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations. On July 16, 2020, the court granted the Company's motion to stay the case through the final adjudication of an additional pending legal proceeding against the driver in connection with the events related to the case. It is not anticipated that the Company and its subsidiaries will be a party to any other legal proceedings in connection with this matter.
From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of 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 financial position or our business and the outcome of these matters cannot be ultimately predicted.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosure
Not Applicable.
Index
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Prices for our common stock are quoted on the OTCQB. Since March 2004, our common stock has traded under the symbol “IVFH”. Prior thereto, our common stock traded under the symbol “FBSN”. 35,371,480 shares of our common stock were outstanding as of April 15, 2021.
Security Holders
On April 15, 2021, there were approximately 56 record holders of our common stock. In addition, we believe there are at least several hundred additional beneficial owners of our common stock whose shares are held in “street name.”
Dividends
We have not paid dividends during the three most recently completed fiscal years, and have no current plans to pay dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business.
Recent Sales and Other Issuances of Our Equity Securities
During the year ended December 31, 2020, the Company had the following equity related, nonregistered transactions:
On January 29, 2020, the Company issued 38,943 shares of common stock with a fair value of $17,135 to an employee as a bonus.
On January 10, 2020, the Company issued 2,381 shares of common stock with a fair value of $1,119 to a service provider as payment for services.
On February 3, 2021, the Company issued an additional 2,381 shares of common stock with a fair value of $1,167 to a service provider as payment for services.
During the year ended December 31, 2020, the Company accrued the amount of $276,387 representing 775,748 shares of common stock issuable at an average price of $0.356 per share to its Chief Executive Officer pursuant to his compensation agreement.
During the year ended December 31, 2020, the Company accrued the amount of $17,116 representing 38,892 shares of common stock issuable at an average price of $0.44 per share to its Chief Strategy Officer pursuant to his compensation agreement.
During the year ended December 31, 2020, the Company accrued the amount of $35,000 to each of two directors (a total of $70,000) representing 69,928 shares of common stock issuance to each director (a total of 139,856 shares) pursuant to their service agreements.
All of the issuances described above were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 for the following reasons: (1) none of the issuances involved a public offering or public advertising for the payment of any commissions or fees; (2) the issuances to investors were to “accredited investors”; (3) the issuances upon conversion of notes were for notes held at least 12 months and did not involve the payment of any other consideration; and (4) all issuances to affiliates and to non-affiliates holding the securities for less than six months carried restrictive legends.
Index
Dilutive Securities
December 31, 2020
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 as of December 31, 2020:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.60
50,000
4.99
$
0.62
360,000
1.00
$
0.85
540,000
2.84
$
1.00
50,000
4.99
$
1.10
75,000
0.37
$
1.20
1,050,000
2.84
$
1.50
125,000
1.00
$
1.02
2,250,000
2.82
December 31, 2019
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 as of December 31, 2019:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.62
360,000
4.00
$
0.75
50,000
2.00
$
0.85
540,000
4.00
$
0.95
50,000
2.00
$
1.10
75,000
1.37
$
1.20
950,000
3.93
$
1.50
125,000
2.00
$
2.00
125,000
2.00
$
2.50
125,000
2.00
$
3.00
125,000
2.00
$
1.23
2,525,000
3.42
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2020, the following shares are issuable pursuant to outstanding stock options, warrants, and rights issued under the 2011 Stock Option Plan:
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants, and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
2,250,000
$ 1.02
93,580,000
Equity compensation plans not approved by shareholders
-
$ N/A
$ N/A
Index

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. Selected Financial Data
Not Applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 pandemic, 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.
Index
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, 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, 2020 and 2019.
(b) Embedded conversion features of notes payable:
There were no outstanding convertible notes outstanding at December 31, 2020 and 2019:
(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, 2020 and 2019:
December 31,
Number of options outstanding
2,250,000
2,525,000
Value at December 31
N/A
N/A
Number of options issued during the year
200,000
1,850,000
Value of options issued during the year
$ 16,498
$ 409,430
Number of options recognized during the year
200,000
1,850,000
Number of options exercised or expired during the year
475,000
375,000
Value of options recognized during the year
$ 142,512
$ 157,145
Revaluation (gain) during the period
$ N/A
$ N/A
Black-Scholes model variables:
Volatility
41.7-82.7
%
59.38-63.16
%
Dividends
Risk-free interest rates
0.37-1.37
%
1.79-2.49
%
Term (years)
3.00-5.00
3.00-4.93
Doubtful Accounts Receivable
The Company maintained an allowance in the amount of $343,832 for doubtful accounts receivable at December 31, 2020, and $95,284 at December 31, 2019. 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.
Index
Income Taxes
The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past. At December 31, 2020, the Company has a net operating loss carryforward of approximately $11,473,000.
Background
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger, we changed our name to that of Innovative Food Holdings, Inc. In January 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”), a Delaware corporation, for 500,000 shares of our common stock.
On November 2, 2012, the Company entered into an asset purchase agreement (the “Haley Acquisition”) with The Haley Group, LLC whereby we acquired all existing assets of The Haley Group, LLC and its customers. The Haley Acquisition was valued at a total cost of $119,645. On June 30, 2014, pursuant to a purchase agreement, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”), for $300,000, 100,000 four year options at a price of $1.46 per share, and up to an additional $225,000 in earn-outs if certain milestones are met. Pursuant to an Asset Purchase Agreement dated as of January 1, 2017 the Company’s wholly-owned subsidiary, Oasis Sales Corp. (“Oasis”), purchased substantially all of the assets of Oasis Sales and Marketing, L.L.C. for $300,000 cash; a $200,000 structured equity instrument which can be paid in cash or shares of the Company stock at the Company’s option, anytime under certain conditions, or is automatically payable via the issuance of 200,000 shares if the Company’s shares close above $1.00 for ten consecutive days; a $100,000 note; and up to an additional $400,000 in earn-outs over two years if certain milestones are met. The Agreement also contains claw-back provisions if certain revenue conditions are not met.
On August 15, 2014, pursuant to a merger agreement, the Company acquired The Fresh Diet, Inc. (“FD”). Effective February 23, 2016, the Company closed a transaction to sell 90% of our ownership in FD for consideration consisting primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations.
Effective January 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, 2019 and 2020 earnout milestones were 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.
Index
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 acquired certain assets of Mouth 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 the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. Mouth, 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.
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings shareholders.
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 19 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, 2020 Compared to Year Ended December 31, 2019
Revenue
Revenue decreased by $6,226,938 or approximately 10.8% to $51,676,028 for the year ended December 31, 2020 from $57,902,966 prior year. The decrease in revenue is primarily attributable to a decrease in specialty foodservice revenues which was driven by the nationwide closures of restaurants and other foodservice establishments related to COVID-19. The decline in specialty foodservice was partially offset with revenues increases mainly associated with e-commerce. The increases in e-commerce revenues were driven by the Company’s ability to increase sales at its e-commerce properties and convert significant shifts in e-commerce specialty food, supermarket trends, and e-commerce grocery trends, driven initially by the COVID-19 pandemic, into e-commerce revenues.
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.
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.
Index
Cost of goods sold
Our cost of goods sold for the year ended December 31, 2020 was $37,859,500, a decrease of $3,395,576 or approximately 8.2% compared to cost of goods sold of $41,255,076 for the year ended December 31, 2019. Cost of goods sold was made up of the following expenses for the year ended December 31, 2020: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $24,092,859; shipping, delivery, handling, and purchase allowance expenses in the amount of $13,072,457; and cost of goods associated with logistics of $694,184. Total gross margin was approximately 27% of sales in 2020 compared to approximately 29% of sales in 2019. The decrease in gross margins from 2019 is primarily attributable to variation in product and revenue mix across our various selling channels including a decrease in higher gross margin revenues associated with National Brand Management and lower gross margins associated with foodservice revenues including revenue and margin variations driven by the COVID-19 pandemic.
In 2020, we continued to price our products in order to gain market share and increase the number of our end users and ecommerce customers. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold may increase and our gross margin decrease.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased by $3,067,690 or approximately 18.6% to $19,531,818 during the year ended December 31, 2020 compared to $16,464,128 for the year ended December 31, 2019. The increase in selling, general, and administrative expenses was primarily due to an increase in advertising and marketing costs of $1,370,345, increases in payroll and related costs of approximately $1,386,169 (net of an increase in non-cash compensation in the amount of $111,258), an increase in IT and computer costs of $210,456, an increase in insurance costs of $176,485 an increase in banking and credit card fees of $272,364, an increase in bad debt expense of $218,862, , an increase in office, facilities, and vehicles costs $133,842, and an increase in taxes of $98,290. These increases were partially offset by a decrease in amortization and depreciation of $530,157 and a decrease in professional fees of $25,048. The increases were driven mainly by additional costs including increases in costs including warehouse fulfillment costs associated with COVID-19, increased costs associated with additional personnel mainly related to warehouse operations, overall employee costs and insurance costs, increased legal, accounting, facility and IT costs including costs associated with the planned launch of new websites, and increased advertising associated with increased spending in digital marketing related to certain of the Company’s e-commerce websites.
Impairment of goodwill and intangible assets
During the year-ended December 31, 2020, the Company performed impairment tests of our goodwill and intangible assets that incorporated the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. As a result of impairment tests, the Company was required by applicable accounting rules to record an impairment of goodwill and intangible assets in the aggregate amount of $1,698,952. At December 31, 2020, the net carrying value of goodwill and other intangible assets on the Company’s balance sheet is $1,633,202. There was no such comparable charge during the prior period.
Other leasing income
On November 8, 2019 the Company purchased a logistics and warehouse facility located in Mountain Top, Pennsylvania. During the year ended December 31, 2020, the Company recognized revenue in the amount of $43,810 in connection with the lease of space in this facility compared to $3,125 during the year ended December 31, 2019. The increase was due to the Company recognizing a full year of activity during 2020 compared to the period from November 8, 2019 to December 31, 2019 during the prior year.
Gain on settlement of contingent liabilities
During the year ended December 31, 2019, the Company recorded a gain on settlement of contingent liabilities in the amount of $132,300 in connection with potential additional consideration under the igourmet Asset Purchase Agreement. There was no comparable transaction during the current year.
Gain on disposal of fixed assets
During the year ended December 31, 2020, the Company recorded a gain on the sale of warehouse equipment in the amount of $7,984, compared to a gain on sale of equipment of $12,495 during the prior period. This type of transaction occurs infrequently.
Index
Interest expense, net
Interest expense, net of interest income, increased by $193,661 or approximately 177.8% to $302,576 during the year ended December 31, 2020, compared to $108,915 during the year ended December 31, 2019. 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 $182,640 from $114,257 during the year ended December 31, 2019 to $296,897 during the year ended December 31, 2020. The Company also recorded interest expense in connection with the amortization of prepaid loan fees in the amount of $12,560 during the year ended December 31, 2020 compared to $1,819 during the prior period, an increase of $10,741. Interest income was $6,831 during the year ended December 31, 2020, a decrease of $330 compared to interest income of $7,161 during the prior year.
Net (loss) income
For the reasons above, the Company had a net loss for the year ended December 31, 2020 of $7,665,024 compared to a net income of $222,767 during the year ended December 31, 2019. The loss for the year ended December 31, 2020 includes a total of $3,159,751 in non-cash charges, including impairment of intangible assets in amount of $1,698,952; amortization of intangible assets in the amount of $212,902; depreciation expense of $491,039; charges for non-cash compensation in the amount of $525,436; and amortization of prepaid loan fees of $12,560. The income for the year ended December 31, 2019 includes a total of $1,650,096 in non-cash charges, including amortization of intangible assets in the amount of $899,757, depreciation expense of $334,342, charges for non-cash compensation in the amount of $414,178, and amortization of prepaid loan fees of $1,819.
Liquidity and Capital Resources at December 31, 2020
As of December 31, 2020, the Company had current assets of $11,446,921, consisting of cash and cash equivalents of $5,060,015; trade accounts receivable of $2,380,305; inventory of $3,719,786; and other current assets of $286,815. Also at December 31, 2020, the Company had current liabilities of $12,207,022, consisting of trade payables and accrued liabilities of $5,098,523, accrued interest of $28,873, deferred revenue of $2,917,676, line of credit of $2,000,000, current portion of notes payable (net of discount) of $1,741,571, current portion of operating leases of $87,375, current portion of financing leases of $146,004, and current portion of contingent liabilities of $187,000.
During the year ended December 31, 2020, the Company had cash used in operating activities of $1,759,883. Cash flow used in operations consisted of the Company’s consolidated net loss of $7,665,024 subtracted by impairment of intangible assets of $1,698,952, depreciation and amortization of $703,941, non-cash compensation in the amount of $525,436, amortization of right-of-use assets of $161,926, provision for doubtful accounts of $254,899, and amortization of prepaid loan fees in the amount of $12,560. These amounts were partially offset by a gain on the disposition of fixed assets in the amount of $7,984. The Company’s cash position increased by $2,555,411 as a result of changes in the components of current assets and current liabilities.
The Company had cash used in investing activities of $450,387 for the year ended December 31, 2020, which consisted of cash paid for the acquisition of property and equipment in the amount of $431,137, and cash paid for the acquisition of intangible assets in the amount of $19,250.
The Company had cash provided by financing activities of $3,304,235 for the year ended December 31, 2020, which consisted of proceeds for a line of credit in the amount of $2,000,000 and proceeds from a PPP loan in the amount of $1,650,221; these amounts were partially offset by principal payments on loans and notes payable in the amount of $278,668 and principal payments on financing leases in the amount of $67,318. The Company currently anticipates that up to 100% of this PPP loan will be eligible for government forgiveness under the PPP program, although there is no assurance of such eligibility.
The Company had net working capital deficit of $760,101 as of December 31, 2020. The Company had cash used in operations during the year ended December 31, 2020 in the amount of $1,759,883. This compares to cash generated from operating activities of $1,594,647 during the year ended December 31, 2019. 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 Notes 12, 13 and 14 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.
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.
Index
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.
2021 Plans
As 2020 began we put together a plan which we expected to try to implement in 2020. Those plans are described in the paragraphs below. However, in the interim period since those plans were prepared, as described above in “Business - Growth Strategy”, “Risk Factors” and elsewhere in this Report, in 2020 the world has been in the grip of a pandemic 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 of our primary customers have either been closed completely or are only partially open with significantly reduced operations. Accordingly, Foodservice revenues, which historically have been a significant overall portion of our revenues have 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 continuing throughout the year experienced unprecedented declines.
Conversely, we have experienced significant growth in our on-line e-commerce revenues as overall e-commerce grew and as demand for food products continued across the United States. Accordingly, we have focused our resources on meeting the growth of e-commerce revenues. While the percentage increase in e-commerce revenues was strong, the additional e-commerce revenues did not exceed the decrease in foodservice revenues commencing in the second half of March 2020 and continuing throughout the year and overall revenues and profits declined for that time frame.
In April 2020 we applied for and received a loan of approximately $1.6 million under a program established under a recent congressionally approved program which is administered by the U.S. Small Business Administration. In 2021 we applied for and received $1,748,414 in new loans under a similar government program administered by the U.S. Small Business Administration. In addition, between the government loans, the potential forgiveness of the government loans, cash on hand and our current expectations of incoming revenues, we believe we have sufficient resources to continue operating for at least the next 12 months. However, as we cannot predict at this time when quarantines, curfews, stay in place orders, and closures of non-essential businesses will end and general economic activity will resume, we cannot predict when our business will return to its pre-pandemic norms and the amount of economic stress we would experience. While we intend to continue to focus on executing on our strategic growth plans, given the current economic conditions, we are not able to determine the exact timeframe in 2021, if at all, that we can then again consider fully implementing portions of the plans described below.
During 2021, we plan to attempt to expand our business by expanding our focus to additional specialty foods markets. In addition, we will continue exploring potential acquisition and partnership opportunities and 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. 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 through leveraging the assets acquired from igourmet LLC and Mouth Foods, Inc. and through leveraging its overall capabilities in the consumer space, including leveraging its direct to consumer e-commerce capabilities to reach both additional customers in multiple channels, and to expand availability of its e-commerce capabilities to additional products and markets.
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.
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Transactions with Major Customers
The Company's largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 40% and 57% of total sales in each of the years ended December 31, 2020 and 2019; and approximately 32% of total sales in the fourth quarter of 2020 compared to 50% of total sales in the fourth quarter of 2019. 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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ITEM 8. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of:
Innovative Food Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Food Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill, Amortizable and Unamortizable Intangible Assets
As described in Note 9 to the consolidated financial statements, these assets are evaluated for impairment at least annually using valuation techniques to estimate fair value. The adverse impact of COVID-19 pandemic to the Company’s foodservice customer base was a triggering event and accordingly, the Company performed the impairment tests during the first quarter of 2020. The Company engaged a valuation specialist to assist in evaluating the fair values of these assets. These fair value estimates are sensitive to certain significant assumptions including future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses used by the valuation specialist.
Auditing management’s goodwill, amortizable and unamortizable intangible assets impairment tests was highly judgmental due to the significant assumptions used by management and the valuation methodologies used the valuation specialist in determining the fair values of these assets.
To test the estimated fair values of the goodwill, amortizable and unamortizable intangible assets, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions used by the Company and the valuation specialist.
Index
Contingencies
As described in Note 18 to the consolidated financial statements, the Company is involved in a number of legal proceedings and has made accruals with respect to certain of these matters. Where a liability is reasonably possible and may be material, such matters have been disclosed. Management exercised judgment and assessed the probability of occurrence based on the ability to predict the number of claims that may be filed and whether it can reasonably estimate any loss or range of loss that may arise from that proceeding.
Auditing management’s accounting for, and disclosure of, loss contingencies was highly judgmental as it involved our assessment of the significant judgments made by management when assessing the probability of occurrence or when determining whether an estimate of the loss or range of loss could be made.
To test the Company’s assessment of the probability of occurrence or determination of an estimate of loss, or range of loss, among other procedures, we read the legal documentations, reviewed opinions provided to the Company by certain outside legal counsel, read letters received directly by us from external counsel, and evaluated the current status of contingencies based on discussions with legal counsel. We also evaluated the appropriateness of the related disclosures.
/s/ Liggett & Webb, P.A.
LIGGETT & WEBB, P.A.
Certified Public Accountants
We have served as the Company’s auditor since 2012
Boynton Beach, Florida
April 15, 2021
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Innovative Food Holdings, Inc.
Consolidated Balance Sheets
December 31,
December 31,
ASSETS
Current assets
Cash and cash equivalents
$ 5,060,015
$ 3,966,050
Accounts receivable, net
2,380,305
3,309,830
Inventory
3,719,786
2,350,622
Other current assets
286,815
273,689
Total current assets
11,446,921
9,900,191
Property and equipment, net
8,550,401
6,645,389
Investments
496,575
435,225
Right of use assets, operating leases, net
246,737
193,733
Right of use assets, finance leases, net
776,439
174,631
Other amortizable intangible assets, net
100,380
1,342,741
Goodwill and other unamortizable intangible assets
1,532,822
2,183,065
Total assets
$ 23,150,275
$ 20,874,975
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
$ 5,098,523
$ 4,009,956
Accrued interest
28,873
16,973
Deferred revenue
2,917,676
499,776
Line of Credit
2,000,000
-
Notes payable - current portion, net of discount
1,741,571
727,766
Lease liability - operating leases, current
87,375
133,296
Lease liability - finance leases, current
146,004
29,832
Contingent liability - current portion
187,000
187,000
Total current liabilities
12,207,022
5,604,599
Lease liability - operating leases, non-current
159,362
60,437
Lease liability - finance leases, non-current
638,137
154,905
Contingent liability - long-term
116,600
156,600
Note payable - long term portion, net
6,151,345
3,881,037
Total liabilities
19,272,466
9,857,578
Commitments & Contingencies (see note 18)
-
-
Stockholders' equity
Common stock: $0.0001 par value; 500,000,000 shares authorized; 38,209,060 and 37,210,859 shares issued, and 35,371,480 and 34,373,279 shares outstanding at December 31, 2020 and December 31, 2019, respectively
3,817
3,718
Additional paid-in capital
37,415,155
36,889,818
Treasury stock: 2,623,171 and 2,623,171 shares outstanding at December 31, 2020 and December 31, 2019, respectively.
(1,141,370
)
(1,141,370
)
Accumulated deficit
(32,399,793
)
(24,734,769
)
Total stockholders' equity
3,877,809
11,017,397
Total liabilities and stockholders' equity
$ 23,150,275
$ 20,874,975
See notes to consolidated financial statements.
Index
Innovative Food Holdings, Inc.
Consolidated Statements of Operations
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Revenue
$ 51,676,028
$ 57,902,966
Cost of goods sold
37,859,500
41,255,076
Gross margin
13,816,528
16,647,890
Selling, general and administrative expenses
19,531,818
16,464,128
Impairment of intangible assets
1,698,952
-
Total operating expenses
21,230,770
16,464,128
Operating (loss) income
(7,414,242
)
183,762
Other income (expense):
Other leasing income
43,810
3,125
Gain on settlement of contingent liability
-
132,300
Gain on sale of fixed assets
7,984
12,495
Interest expense, net
(302,576
)
(108,915
)
Total other income (expense)
(250,782
)
39,005
Net (loss) income before taxes
(7,665,024
)
222,767
Provision for Income tax expense
-
-
Net (loss) income
$ (7,665,024
)
$ 222,767
Net (loss) income per share - basic
$ (0.22
)
$ 0.01
Net (loss) income per share - diluted
$ (0.22
)
$ 0.01
Weighted average shares outstanding - basic
34,871,785
34,116,335
Weighted average shares outstanding - diluted
34,871,785
34,116,335
See notes to consolidated financial statements.
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Innovative Food Holdings, Inc.
Consolidated Statements of Cash Flows
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Cash flows from operating activities:
Net (loss) income
$ (7,665,024
)
$ 222,767
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Impairment of intangible assets
1,698,952
-
Depreciation and amortization
703,941
1,234,098
Amortization of right-of-use asset
161,926
187,254
Amortization of prepaid loan fees
12,560
1,819
Stock based compensation
525,436
414,178
Gain on settlement of contingent liability
(132,300
)
Gain on sale of fixed assets
(7,984
)
(12,495
)
Provision for doubtful accounts
254,899
36,037
Changes in assets and liabilities:
Accounts receivable, net
674,626
(366,611
)
Inventory and other current assets, net
(1,443,640
)
(153,633
)
Accounts payable and accrued liabilities
1,108,451
414,326
Deferred revenue
2,417,900
(59,539
)
Contingent liabilities
(40,000
)
(4,000
)
Operating lease liability
(161,926
)
(187,254
)
Net cash (used in) provided by operating activities
(1,759,883
)
1,594,647
Cash flows from investing activities:
Cash paid for website development
(19,250
)
-
Cash received from the sale of fixed assets
-
12,495
Acquisition of property and equipment
(431,137
)
(1,049,604
)
Purchase of intangible assets
-
(84,000
)
Investment in food related company
-
(60,200
)
Net cash used in investing activities
(450,387
)
(1,181,309
)
Cash flows from financing activities:
Sales of common stock
-
250,000
Cash paid for acquisition of treasury stock
-
(125,000
)
Loan fees related to building acquisition financing
-
(72,916
)
Cash paid in settlement of contingent liabilities in connection with acquisitions
-
(350,576
)
Proceeds from line of credit
2,000,000
-
Proceeds from Payroll Protection Plan Loan
1,650,221
-
Principal payments on debt
(278,668
)
(880,752
)
Principal payments financing leases
(67,318
)
(27,861
)
Net cash provided by (used in) financing activities
3,304,235
(1,207,105
)
Increase (decrease) in cash and cash equivalents
1,093,965
(793,767
)
Cash and cash equivalents at beginning of year
3,966,050
4,759,817
Cash and cash equivalents at end of year
$ 5,060,015
$ 3,966,050
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
$ 201,679
$ 112,291
Taxes
$ -
$ -
Non-cash investing and financing activities:
Issuance of 131,136 shares of common stock previously accrued
$ -
$ 93,666
Right of use assets and liabilities - operating, upon adoption of ASU 2016-02
$ -
$ 338,581
Equipment financed under note payable
$ 1,900,000
$ -
Return of equipment and reduction in amount due under equipment financing loan
$ -
$ 33,075
Fair value of 19,048 shares of common stock issued for services
$ -
$ 10,405
Increase in right of use assets & liabilities
$ 214,930
$ 193,734
Investment in food related company
$ 61,350
$ 60,500
Capital lease for purchase of fixed assets
$ 677,021
$ 81,223
Note payable for acquisition of land and building
$ -
$ 3,600,000
See notes to consolidated financial statements.
Index
Innovative Food Holdings, Inc.
Consolidated Stockholders' Equity
For the Years Ended December 31, 2020 and 2019
Additional
Common Stock
Paid-in
Treasury Stock
Accumulated
Amount
Value
Capital
Amount
Value
Deficit
Total
Balance at December 31, 2018
36,296,218
$ 3,627
$ 36,132,065
2,373,171
$ (1,016,370
)
$ (24,957,536
)
$ 10,161,786
Common stock issued for services
19,048
10,403
-
-
-
10,405
Common stock sold for cash
349,650
249,965
-
-
-
250,000
Issuance of shares to employees, previously accrued
131,136
93,653
-
-
-
93,666
Fair value of vested stock and stock options issued to management
414,807
403,732
-
-
-
403,773
Treasury stock acquired
-
-
-
250,000
(125,000
)
-
(125,000
)
Net income for the year ended December 31, 2019
-
-
-
-
-
222,767
222,767
Balance - December 31, 2019
37,210,859
$ 3,718
$ 36,889,818
2,623,171
$ (1,141,370
)
$ (24,734,769
)
$ 11,017,397
Fair value of vested stock and stock options
954,496
505,920
-
-
-
506,015
Fair value of shares issued to employees and service providers
43,705
19,417
-
-
-
19,421
Net (loss) for the year ended December 31, 2020
-
-
-
-
-
(7,665,024
)
(7,665,024
)
Balance - December 31, 2020
38,209,060
$ 3,817
$ 37,415,155
2,623,171
$ (1,141,370
)
$ (32,399,793
)
$ 3,877,809
See notes to consolidated financial statements.
Index
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Our business is currently conducted by our wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods Group, Inc. (“Artisan”), Food Innovations (“FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers (“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 Food Properties, LLC (“IFP”), Innovative Gourmet, LLC (“Innovative Gourmet” or “igourmet”), Food Funding, LLC (“Food Funding”), Logistics Innovations, LLC (“L Innovations”), M Innovations, LLC (“M Innovations” or “Mouth”), P Innovations, LLC “(P Innovations”), and collectively with IVFH and its 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.
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-Packaged Goods (“CPG”) products through a variety of sales channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“D2C”) and direct to business (“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.forthegourmet.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.
Artisan is a supplier of over 1,500 unique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.
GFG is focused on expanding the Company’s program offerings to additional specialty foodservice customers.
IFP was formed to hold the Company’s real estate holdings including the recently acquired facility in Mountaintop, Pennsylvania.
L Innovations provides 3rd party warehouse and fulfillment services out of its location at the Company’s PA facility.
P Innovations focus is to leverage acquired assets to expand the Company’s subscription-based e-commerce business activities.
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 and assists in the enabling of the distribution of products via national broadline food distributors.
OFB and Oasis function 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 provides emerging and unique CPG specialty food brands with distribution and shelf placement access in all of the major metro markets in the food retail industry.
igourmet has been in the business of providing D2C specialty food via e-commerce through its own website at www.igourmet.com and through other channels such as www.amazon.com, www.ebay.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 approximately 100,000 square feet warehouse in Pennsylvania via igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.
Index
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 both consumers and corporate customers. Mouth also has launched a private label brand, including several award-winning products.
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. 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 and finance 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 consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, FII, FNM, OFB, GFG, GFW, Gourmeting, Haley, Oasis, Innovative Gourmet, Food Funding, IFP, L Innovations, M Innovations, P Innovations, and Gourmet. All material intercompany transactions have been eliminated upon consolidation of these entities.
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” 606. A five-step analysis must be met as 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 when (or as) performance obligations are 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. Adoption of ASC 606 had no material effect on the Company’s financial statements.
Warehouse and logistic services revenue primarily comprises of inventory management, order fulfilment and warehousing services. Warehouse & logistics services revenues are recognized at the point in time when the services are rendered to the customer.
Disaggregation of Revenue
The following table represents a disaggregation of revenue by from sales for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
Specialty foodservice
$ 27,544,188
$ 45,377,343
E-Commerce
22,371,386
10,704,419
National Brand Management
1,099,735
1,645,051
Warehouse and Logistic Services
660,719
176,153
Total
$ 51,676,028
$ 57,902,966
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.
We have also included all payroll costs as cost of goods sold in our leasing and logistics services business.
Index
Selling, general, and administrative expenses
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, amortization of intangible assets, depreciation, and other administrative costs including professional fees and costs associated with non-cash stock compensation. Advertising costs are expensed as incurred.
Cash and Cash Equivalents
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
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 December 31, 2020 and 2019, the Company had cash deposits in excess of applicable government mandated insurance limits in the amount of $3,385,113 and $2,559,503, respectively. At December 31, 2020 and 2019, trade receivables from the Company’s largest customer amounted to 22% and 35%, respectively, of total trade receivables.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts receivable are presented net of an allowance for doubtful accounts of $343,832 and $95,284 at December 31, 2020, and 2019, respectively.
Property and Equipment
Property and equipment are valued at cost. Depreciation is provided over the estimated useful lives up to five years using the straight-line method. Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
The estimated service lives of property and equipment are as follows:
Computer Equipment
3 years
Warehouse Equipment
5 years
Warehouse Equipment - Heavy 10 years
Office Furniture and Fixtures
5 years
Vehicles 5 years
Buildings
30 years
Inventories
Inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.
Deferred Revenue
Certain customer arrangements in the Company's business such as gift cards and e-commerce subscription purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards issued by the Company generally have an expiration of five years from date of purchase. 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.
Index
The following table represents the changes in deferred revenue as reported on the Company’s consolidated balance sheets:
Balance acquired as of December 31, 2018
$ 559,315
Cash payments received
132,858
Net sales recognized
(192,397
)
Balance as of December 31, 2019
$ 499,776
Cash payments received
3,060,226
Net sales recognized
(642,326
)
Balance as of December 31, 2020
$ 2,917,676
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Cost Method Investments
The Company has made several investments in early stage private food related companies and are accounting for these investments under the cost method.
Basic and Diluted Income Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net 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.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.
Index
Dilutive shares at December 31, 2020:
Convertible notes and interest
At December 31, 2020 there were no convertible notes outstanding.
Warrants
At December 31, 2020 there were no warrants outstanding.
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 at December 31, 2020
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.60
50,000
4.99
$
0.62
360,000
1.00
$
0.85
540,000
2.84
$
1.00
50,000
4.99
$
1.10
75,000
0.37
$
1.20
1,050,000
2.84
$
1.50
125,000
1.00
$
1.02
2,250,000
2.82
Restricted Stock Awards
At December 31, 2020, there are 300,000 unvested restricted stock awards 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 year ended December 31, 2020, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 775,748 shares of common stock to its Chief Executive Officer; 38,892 to its Director of Strategic Acquisitions, an aggregate total of 139,854 shares to board members; 38,943 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2020, the amount of $380,638 was charged to operations in connection with these grants. Also during the year ended December 31, 2020, the Company issued 4,762 shares of restricted common stock with a fair value of $2,286 to a service provider, and charged this amount to operations.
Dilutive shares at December 31, 2019:
Convertible notes and interest
At December 31, 2019 there were no convertible notes outstanding.
Warrants
At December 31, 2019 there are no warrants outstanding.
Index
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 at December 31, 2019:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.62
360,000
4.00
$
0.75
50,000
2.00
$
0.85
540,000
4.00
$
0.95
50,000
2.00
$
1.10
75,000
1.37
$
1.20
950,000
3.93
$
1.50
125,000
2.00
$
2.00
125,000
2.00
$
2.50
125,000
2.00
$
3.00
125,000
2.00
2,525,000
3.42
Restricted Stock Awards
At December 31, 2019 there are 300,000 unvested restricted stock awards 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 year ended December 31, 2019, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 260,507 shares of common stock to its Chief Executive Officer; 30,392 to its Director of Strategic Acquisitions, an aggregate total of 291,090 shares to board members; and 100,000 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2019, the amount of $246,628 was charged to operations in connection with these grants. Also during the year ended December 31, 2019, the Company issued 19,048 shares of restricted common stock with a fair value of $10,405 to a service provider, and charged this amount to operations.
Options expense charged to operations during the year ended December 31, 2020 and 2019 are summarized in the table below:
December 31,
Option expense
$ 142,512
$ 157,145
During the year ended December 31, 2019, the Company also granted the following shares of restricted common stock pursuant to compensation agreements:
- 260,507 shares of common stock with a fair value of $150,000 to the Company’s Chief Executive Officer. These shares vested over the twelve month period ended December 31, 2019; the amount of $150,000 was charged to operations during the year ended December 31, 2019. 255,328 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
- 30,392 shares of restricted common stock with a fair value of $16,398 to Company’s Director of Strategic Acquisitions. These shares vested over the twelve month period ended December 31, 2019; the amount of $16,398 was charged to operations during the year ended December 31, 2019. 29,115 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
Index
- 100,000 shares of restricted common stock with a fair value of $100,000 to an employee. Vesting of these shares is scheduled as follows: 33,334 shares vested on December 31, 2019; 33,333 are scheduled to vest on December 31, 2020; and 33,333 are scheduled to vest on December 31, 2021. The amount of $30,231 was charged to operations during the year ended December 31, 2019. 33,334 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to an independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to a second independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
Reclassifications
Certain reclassifications have been made to conform prior period data to the current presentation.
Leases
Commencing in January 2019, based upon new accounting pronouncements (described in greater detail below), 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 consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within current and long-term liabilities.
ROU assets represent the right of 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.
New 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 became effective for the Company on January 1, 2020. The amendments in this ASU were applied on a prospective basis. The adoption of this ASU had no material effect on our financial condition, results of operations, cash flows or financial disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance 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 expense 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.
Index
We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected 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 consolidated balance sheet through the recognition of $338,581 of operating right-of-use assets and $338,581 of operating lease liabilities as of January 1, 2019. The adoption did not have a significant impact on our results of operations or cash flows. See Note 6 to our consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU relates to the accounting for non-employee share-based payments. The amendment in this update expands the scope of Topic 718 to include all share-based payment transactions in which a grantor acquired goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The ASU excludes share-based payment awards that relate to: (1) financing to the issuer; or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers. The share-based payments are to be measured at grant-date fair value of the equity instruments that the entity is obligated to issue when the goods or service has been delivered or rendered and all other conditions necessary to earn the right to benefit from the equity instruments have been satisfied. This standard became effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted the provisions of this ASU on January 1, 2019. The adoption had no impact on our results of operations, cash flows, or financial condition.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU reduces the number of accounting models for convertible debt instruments and convertible Preferred Stock. As well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. This standard is effective for us on January 1, 2022, including interim periods within such fiscal year. Adoption is either a modified retrospective method or a fully retrospective method of transition. We are currently assessing the impact the new guidance will have on our consolidated financial statements.
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 consolidated financial statements.
2. ACQUISITIONS
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Mouth Foods, Inc.
Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth Foods, Inc.’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 Foods, Inc., 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.
Index
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. At December 31, 2020, the Company maintains contingent liabilities in the aggregate amount of $120,000 on its balance sheet in connection with the MFI APA.
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 management’s estimates. 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.
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, 2019, and 2020 were 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.
Index
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.
3. ACCOUNTS RECEIVABLE
At December 31, 2020 and 2019, accounts receivable consists of:
Accounts receivable from customers
$ 2,724,137
$ 3,405,114
Allowance for doubtful accounts
(343,832
)
(95,284
)
Accounts receivable, net
$ 2,380,305
$ 3,309,830
During the years ended December 31, 2020 and 2019, the Company charged the amount of $254,899 and $36,037, respectively, to bad debt expense.
4. INVENTORY
Inventory consists of specialty food products. At December 31, 2020 and 2019, inventory consisted of the following:
Finished Goods Inventory
$ 3,719,786
$ 2,350,622
5. 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.
Index
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, National Association (“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. We have also recently completed an additional property improvement and upgrade buildout at the 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 for 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 added a packaging 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 private 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 were financed by a loan from Fifth Third Bank.
Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when the Company occupied the facility in October, 2015.
On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in 2021 was $9,400,000. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the Facility. The amount of the loan was $5,500,000, of which $3,600,000 had been utilized at December 31, 2019 in connection with the purchase of the Facility; the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years with the balance due at maturity on September 2, 2025. Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase. Depreciation on the building began when the Company commenced recognizing revenue from leasing and logistics services associated with the Facility. On October 5, 2020, the Company completed work to upgrade the Facility at a cost of $2,231,458 in order to better support the Company’s focus on e-commerce and logistics. Of the build out costs, $1,900,000 was funded by the loan described below (See Note 13).
A summary of property and equipment at December 31, 2020 and 2019 is as follows:
December 31,
December 31,
Land
$ 1,256,895
$ 1,256,895
Building
7,191,451
4,959,993
Computer and Office Equipment
578,362
549,703
Warehouse Equipment
373,150
345,973
Furniture and Fixtures
938,471
894,628
Vehicles
109,441
117,785
Total before accumulated depreciation
10,447,770
8,124,977
Less: accumulated depreciation
(1,897,369
)
(1,479,588
)
Total
$ 8,550,401
$ 6,645,389
Depreciation and amortization expense for property and equipment amounted to $491,039 and $334,342 for the years ended December 31, 2020 and 2019, respectively.
6. RIGHT OF USE ASSETS AND LEASE LIABILITIES - OPERATING LEASES
The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 4 years, some of which include options to extend.
The Company’s lease expense for the years ended December 31, 2020 and December 31, 2019 was entirely comprised of operating leases and amounted to $171,624 and $202,551, respectively. The Company’s ROU asset amortization for the years ended December 31, 2020 and December 31, 2019 was $161,926 and $187,254, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.
Index
Right of use assets - operating leases are summarized below:
December 31,
Warehouse equipment
12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Right of use assets, net
$ 246,737
Operating lease liabilities are summarized below:
December 31,
Warehouse equipment
$ 12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Lease liability
$ 246,737
Less: current portion
(87,375
)
Lease liability, non-current
$ 159,362
Maturity analysis under these lease agreements are as follows:
Year ended December 31, 2021
$ 100,613
Year ended December 31, 2022
60,599
Year ended December 31, 2023
53,496
Year ended December 31, 2024
53,762
Year ended December 31, 2025
9,004
Thereafter
-
Total
$ 277,474
Less: Present value discount
(30,737
)
Lease liability
$ 246,737
7. RIGHT OF USE ASSETS - FINANCING LEASES
The Company has financing leases for vehicles and warehouse equipment. See note 14. Right of use asset - financing leases are summarized below:
December 31,
December 31,
Vehicles
362,358
201,466
Warehouse Equipment
533,531
19,357
Total before accumulated depreciation
895,889
220,823
Less: accumulated depreciation
(119,450
)
(46,192
)
Total
$ 776,439
$ 174,631
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 December 31, 2020 the Company has investments in eight food related companies in the aggregate amount of $496,575. The Company does not have significant influence over the operations of these companies.
Index
The Company’s investments may take the form of debt, equity, or equity in the future including convertible notes and other instruments which provide for future equity under various scenarios including subsequent financings or initial public offerings. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments - Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence.
During the year ended December 31, 2020, the Company converted accounts receivable in the amount of $61,350 into an equity investment in a food related company. During the year ended December 31, 2019, the Company converted accounts receivable in the amount of $60,500 into an equity investment in a food related company, and made cash investments in three food related companies in the total amount of $35,200.
9. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet, OFB, Haley, and M Innovations (see note 2). These assets include non-compete agreements, customer relationships, trade names, internally developed technology, and goodwill. The Company has also capitalized the development of its website.
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 the Company’s 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.
COVID-19 has had a material negative impact on some of the Company’s foodservice customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. These actions have led to a significant decrease in demand for certain of the Company’s foodservice products. The adverse impact to the Company’s foodservice customer base was a triggering event and accordingly, as required by ASC 350, the Company performed interim goodwill and long-lived asset quantitative impairment tests during the first quarter of 2020. While the triggering event was a result of the negative impact related to foodservice customers, the applicable accounting rules then required an impairment test targeted specifically to any available carrying value of goodwill or intangible assets. During the first quarter of 2020, the Company performed the impairment tests on certain intangible assets and goodwill pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet and M Innovations (see note 2).
Goodwill Impairment Test
The Company estimated the fair value of the Company’s reporting unit using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. As a result of impairment test, it was calculated that the net carrying value of goodwill exceeded the fair value by $650,243, and the Company was required by ASC 350 to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of goodwill on the Company’s balance sheet is $0.
Index
Long-lived Impairment Test
Long-lived assets, including other intangible assets, were tested for recoverability at the asset group level. The Company estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful life of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. As a result of the impairment test, it was calculated that the net carrying values of other intangible assets exceeded the undiscounted cash flows for each of the Company’s asset groups by a total of $1,048,692, and the Company was required by the applicable accounting rules to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of other intangible assets on the Company’s balance sheet is $1,633,202.The following is the net book value of these assets:
December 31, 2020
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (505,900
)
$ -
Customer Relationships - amortizable
3,068,034
(3,068,034
)
-
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(875,643
)
-
Goodwill
650,243
(650,243
)
-
Website
103,250
(2,870
)
100,380
Total
$ 6,735,892
$ (5,102,690
)
$ 1,633,202
December 31, 2019
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (433,545
)
$ 72,355
Customer Relationships - amortizable
3,068,034
(2,427,612
)
640,422
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(329,679
)
545,964
Website
84,000
-
84,000
Goodwill
650,243
-
650,243
Total
$ 6,716,642
$ (3,190,836
)
$ 3,525,806
During the year ended December 31, 2020, the Company charged to operations amortization expense in the amount of $212,902 in addition to the impairment charge of $1,698,952. During the year ended December 31, 2019, the company charged to operations amortization expense in the amount of $899,756.
Amortization of finite life intangible assets as of December 31, 2020 is as follows:
$ 34,442
34,442
31,496
2024 and thereafter
-
Total
$ 100,380
The trade names are not considered finite-lived assets, and are not being amortized. The non-compete agreement is being amortized over a period of 48 months. The customer relationships acquired in these transactions are being amortized over periods of 24 to 36 months. The internally developed technology is being amortized over 60 months.
Index
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2020 and December 31, 2019 are as follows:
December 31,
December 31,
Trade payables and accrued liabilities
$ 4,914,050
$ 3,935,384
Accrued payroll and commissions
184,473
74,572
Total
$ 5,098,523
$ 4,009,956
11. ACCRUED INTEREST
At December 31, 2020, accrued interest on a note outstanding was $28,873. During the year ended December 31, 2020, the Company paid cash for interest in the aggregate amount of $125,396.
At December 31, 2019, accrued interest on a note outstanding was $16,973. During the year ended December 31, 2019, the Company paid cash for interest in the aggregate amount of $112,971.
12. REVOLVING CREDIT FACILITIES
December 31,
December 31,
Line of credit facility with Fifth Third Bank in the original amount of $2,000,000 with an interest rate of LIBOR plus 3.25% (the “Fifth Third Bank Line of Credit”). Effective August 1, 2019, this credit facility was extended to August 1, 2021. On March 20, 2020, the Company drew down the amount of $2,000,000. During the year ended December 31, 2020, the Company paid interest in the amount of $58,382 on the Fifth Third Bank Line of Credit.
$ 2,000,000
$ -
Total
$ 2,000,000
$ -
Index
13. NOTES PAYABLE
December 31,
December 31,
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 year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $54,600 and $5,743, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $54,060 and $11,111, respectively.
$ 122,850
$ 177,450
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 was originally due May 29, 2020. Effective May 29, 2020, the note was amended and renewed such that principal payments of $8,303 plus accrued interest were due beginning June 29, 2020 and continuing for sixty months; the entire principal balance and all accrued interest will be due on May 29, 2025. During the year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $81,667 and $17,532, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $98,000 and $30,031, respectively.
449,166
530,833
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. Monthly payments in the amount of $7,425 including principal and interest commenced in April, 2019. During the year ended December 31, 2019, equipment financed under the Artisan Equipment Loan in the amount of $33,075 was returned for credit. During the year ended December 31, 2020, the Company made payments of principal and interest on this loan in the amounts of $67,064 and $14,755, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $48,654 and $18,957, respectively.
242,765
309,829
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 year ended December 31, 2020, the Company accrued interest in the amount of $372 on this note; during the year ended December 31, 2020, the Company accrued interest in the amount of $380 on this note.
20,000
20,000
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% maturing November 5, 2023. During the year ended December 31, 2020, the Company made principal and interest payments in the amount of $9,737 and $1,723, respectively, on this loan; during the year ended December 31, 2019, the Company made principal and interest payments in the amount of $8,540 and $1,964, respectively, on this loan.
32,051
41,788
Index
December 31,
December 31,
Secured mortgage facility in the amount of $5,500,000 with Fifth Third Bank for the acquisition of land and building in Mountaintop, Pennsylvania dated November 8, 2019 (the “Fifth Third Mortgage Facility”). The Fifth Third Mortgage Facility is secured by the assets acquired. During the year ended December 31, 2019, the Company drew down $3,600,000 of this facility. During the year ended December 31, 2020, the Company drew down an additional $1,900,000 of this facility. The interest rate is LIBOR plus 2.75% with interest only due through September 30, 2020, thereafter with principal amortized at a 20 years amortization rate and the balance due on the maturity date of September 2, 2025. The Company prepaid loan fees in connection with this loan in the amount of $72,916 which are considered a discount to the loan and are being amortized over the term of the note; $12,560 of this discount was amortized to interest expense during the year ended December 31, 2020. During the year ended December 31, 2020 the Company made principal and interest payments in the amount of $65,600 and $154,955, respectively, on this loan; during the year ended December 31, 2019 the Company made principal and interest payments in the amount of $0 and $25,064, respectively, on this loan. The Company also has in place an interest rate swap agreement (the “Fifth Third Interest Rate Swap”) with Fifth Third bank in connection with the Fifth Third Mortgage Facility. Pursuant to the Fifth Third Interest Rate Swap, the Company pays an additional base rate of 0.59% reduced by the difference between an initial LIBOR rate of 0.1513% and the month-end LIBOR rate. During the year ended December 31, 2020, the Company paid an additional $6,084 of interest pursuant to the Fifth Third Interest Rate Swap.
5,434,400
3,600,000
Loan payable to Fifth Third Bank dated April 21, 2020 pursuant to the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the principal amount of $1,650,221. The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. During the year ended December 31, 2020, the Company accrued interest in the amount of $11,528 on the PPP Loan.
1,650,221
-
Total
7,951,453
4,679,900
Discount
(58,537
)
(71,097
)
Net of discount
$ 7,892,916
$ 4,608,803
Current portion
$ 1,800,108
$ 727,766
Long-term maturities
6,151,345
3,952,134
Total
$ 7,951,453
$ 4,679,900
Aggregate maturities of long-term notes payable as of December 31, 2020 are as follows:
For the year ended December 31,
$ 1,800,108
758,463
403,903
340,354
4,648,625
Thereafter
-
Total
$ 7,951,453
Index
14. LEASE LIABILITIES - FINANCING LEASES
December 31,
December 31,
Financing lease obligation under a lease agreement for warehouse furniture and equipment truck dated October 14, 2020 in the original amount of $514,173 payable in sixty monthly installments of $9,942 including interest at the rate of 6.01%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amount of $22,216 and $7,609, respectively.
$ 491,957
$ -
Financing lease obligation under a lease agreement for a truck dated March 31, 2020 in the original amount of $152,548 payable in eighty-four monthly installments of $2,188 including interest at the rate of 5.44%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $15,270 and $6,612, respectively.
137,278
-
Financing lease obligation under a lease agreement for a truck dated November 5, 2018 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 year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $19,683 and $8,225, respectively.
87,914
107,597
Financing lease obligation under a lease agreement for a truck dated August 23, 2019 in the original amount of $80,413 payable in eighty-four monthly installments of $1,148 including interest at the rate of 5.0%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $10,148 and $3,626, respectively.
66,992
77,140
Total
$ 784,141
$ 184,737
Current portion
$ 146,004
$ 29,832
Long-term maturities
638,137
154,905
Total
$ 784,141
$ 184,737
Aggregate maturities of lease liabilities - financing leases as of December 31, 2020 are as follows:
For the year ended December 31,
$ 146,004
140,205
163,740
162,981
133,692
Thereafter
37,519
Total
$ 784,141
Index
15. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2020:
Vesting of shares to officers
During the year ended December 31, 2020 in connection with stock based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the amount of $70,000 for the vesting of a total of 139,854 shares of common stock issuable to two of its independent board members, and $293,503 for the vesting of a total of 814,640 shares of common stock issuable to its Chief Executive Officer and its Director of Strategic Acquisitions pursuant to their employment agreements, which includes 330,758 shares with a market value of $113,887 received by the Chief Executive Officer subsequent to the expiration of a limited waiver provided through June 29, 2020 (see below). The Company also recognized non-cash compensation in the amount of $142,512 during the year ended December 31, 2020 in connection with stock options issuable to management and board members.
The chief executive officer provided a limited waiver through June 29, 2020 of certain rights and benefits contained in his employment agreement following a Change in Control (as defined in the employment agreement).
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share, and options to purchase 50,000 shares of common stock at a price of $1.00 per share; these options vest quarterly over two years and expire December 28, 2025.
For the year ended December 31, 2019:
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Sale of common stock to related party
On July 23, 2019, the Company entered into a subscription agreement to sell 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000. See note 17.
Stock based compensation to Officers
During the year ended December 31, 2019 in connection with stock-based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the aggregate total amount of $226,803 for the vesting of a total of 387,899 shares of common stock issuable to its Chief Executive Officer, its Director of Strategic Acquisitions and to its two independent board members. In January 2020, the Company issued, net of income taxes, an aggregate of 316,966 of these shares. See note 17.
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.
Index
In January 2019, the Company awarded the following stock options to four of its 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.
In July 2019, the Company awarded five-year options to purchase 50,000 shares of common stock to a director at a price of $1.20 per share, vesting quarterly over a one year period.
The Company recognized non-cash compensation in the amount of $157,145 during the year ended December 31, 2019 in connection with these options.
16. INCOME TAXES
Deferred income taxes result from the temporary differences primarily attributable to amortization of intangible assets and debt discount and an accumulation of net operating loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $4,963,000, which will expire in various years through 2037 and net operating loss carryforwards of $6,510,000 which are carried-forward indefinitely subject to limitation. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to significant changes in the Company’s ownership, the Company’s future use of its existing net operating losses may be limited.
The provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 consist of the following:
Current
$ -
$ -
Deferred
-
-
Total
$ -
$ -
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable statutory income tax rate of 27.6% for the years ended December 31, 2020 and 2019 to the loss before taxes as a result of the following differences:
Income (loss) before income taxes
$ (7,665,024
)
$ 222,767
Statutory tax rate
27.6
%
27.6
%
Total tax (benefit) at statutory rate
(2,115,000
)
61,400
Permanent difference
152,000
141,100
Change in tax estimates
1,100
(2,221,000 )
Changes in valuation allowance
1,961,900
2,018,500
Income tax expense
$ -
$ -
Deferred income taxes reflect the tax impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The change in tax estimates in 2019 was to correct the deferred tax assets associated with the net loss carryforwards.
Index
Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2020, and 2019 significant components of the Company’s deferred tax assets are as follows:
Deferred Tax Assets:
Net operating loss carryforwards
$ 3,166,700
$ 1,867,400
Allowance for doubtful accounts
94,900
26,300
Property and equipment
158,200
91,800
Intangible assets
607,500
79,900
Net deferred tax assets
4,027,300
2,065,400
Valuation allowance
(4,027,300
)
(2,065,400
)
Net deferred tax assets
$ -
$ -
The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
17. EQUITY
Common Stock
At December 31, 2020 and 2019 a total of 2,837,580 shares are deemed issued but not outstanding by the Company.
For the year ended December 31, 2020:
The Company charged the amount of $142,512 in connection with the vesting of stock options issuable to board members and employees in connection with their compensation agreements.
The Company charged the amount of $363,503 in connection with the vesting of 954,496 shares of common stock issuable to board members and employees in connection with their employment agreements. These shares are included in common stock outstanding at December 31, 2020.
The Company issued 38,943 shares of common stock with a fair value of $0.44 to an employee as a bonus. The fair value of $17,135 was charged to operations during the year ended December 31, 2020.
The Company issued 4,762 shares of common stock with an average fair value of $0.48 to a service provider; the fair value of $2,286 was charged to operations during the year ended December 31, 2020.
For the year ended December 31, 2019:
The Company issued a total of 131,136 shares of common stock to seven employees for previously accrued bonuses in the amount of $93,666.
The Company charged the amount of $157,145 in connection with the vesting of stock options issuable to board members and employees in connection with their employment agreements.
The Company charged the amount of $246,628 in connection with the vesting of 421,233 shares of common stock issuable to board members and employees in connection with their employment agreements. 414,807 of the vested shares, net of taxes due, are included in common stock outstanding at December 31, 2019.
The Company sold 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000.
The Company issued 19,048 shares of common stock with an average fair value of $0.546 to a service provider; the fair value of $10,405 was charged to operations during the year ended December 31, 2019.
The Company acquired 250,000 shares of common stock from an investor; the purchase price was $0.50 per share for a total of $125,000; these shares were retired to treasury during the year ended December 31, 2019.
Index
Treasury Stock
At December 31, 2020 and 2019, the Company had 2,623,171 shares of treasury stock.
Warrants
The Company had no warrants outstanding at December 31, 2020 or 2019.
Options
For the year ended December 31, 2020:
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023. Each grant of 50,000 options had a fair value of $1,216 on the date of the grant.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share with a fair value on the date of the grant of $7,775, and options to purchase 50,000 shares of common stock at a price of $1.00 per share with a fair value on the date of the grant of $6,291; these options vest quarterly over two years and expire December 28, 2025.
During the year ended December 31, 2020, an aggregate of 475,000 options to purchase shares of common stock at a weighted average price of $1.76 expired.
For the year ended December 31, 2019:
In January 1, 2019, the Company issued the following options:
-
Options to purchase 90,000 shares of common stock at a price of $0.62 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 360,000 options);
-
Options to purchase 135,000 shares of common stock at a price of $0.85 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 540,000 options);
-
Options to purchase 225,000 shares of common stock at a price of $1.20 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 900,000 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 as of December 31, 2020:
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
$
0.60
50,000
4.99
$
0.60
-
$
-
$
0.62
360,000
3.00
$
0.62
240,000
$
0.62
$
0.85
540,000
3.00
$
0.85
360,000
$
0.85
$
1.00
50,000
4.99
$
1.00
-
-
$
1.10
75,000
0.37
$
1.10
75,000
$
1.10
$
1.20
1,,050,000
2.84
$
1.20
650,000
$
1.20
$
1.50
125,000
1.00
$
1.50
125,000
$
1.50
2,250,000
2.82
$
1.02
1,450,000
$
1.04
Index
Transactions involving stock options are summarized as follows:
Number of Shares
Weighted Average
Exercise Price
Options outstanding at December 31, 2018
1,050,000
$ 1.80
Granted
1,850,000
0.98
Exercised
-
-
Cancelled / Expired
(375,000
)
1.43
Options outstanding at December 31, 2019
2,525,000
$ 1.23
Granted
200,000
1.00
Exercised
-
-
Cancelled / Expired
(475,000
)
1.76
Options outstanding at December 31, 2020
2,250,000
$ 1.02
Aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 and 2019 was $0. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $0.29 and $0.44 as of December 31, 2020 and 2019, respectively, and the exercise price multiplied by the number of options outstanding.
During the year ended December 31, 2020 and 2019, the Company charged $142,512 and $157,145, respectively, to operations related to recognized stock-based compensation expense for stock options.
The exercise price grant dates in relation to the market price during 2020 and 2019 are as follows:
Exercise price lower than market price
-
-
Exercise price equal to market price
-
-
Exercise price exceeded market price
$ 0.60 to 1.50
$ 0.62 to 1.20
As of December 31, 2020, and 2019, there were 800,000 and 1,675,000, respectively, non-vested options outstanding.
Accounting for warrants and stock options
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
December 31,
December 31,
Volatility
41.7-82.7
%
59.38-63.16
%
Dividends
$ -
$ -
Risk-free interest rates
0.37-1.37
%
1.79-2.49
%
Term (years)
3.00-5.00
3.00-4.93
Index
18. COMMITMENTS AND CONTINGENCIES
Contingent Liability
Pursuant to the igourmet Asset Purchase Agreement, the Company recorded contingent liabilities in the original amount of $787,800. This amount relates to certain performance based payments over the twenty-four months following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2018, the Company reduced this amount by $392,900 as the performance goals for the first year were not met. During the year ended December 31, 2019, the Company reduced this amount by $132,300 as the performance goals for the second year were not met. During the year ended December 31, 2019, the Company paid the amount of $39,000 in connection with the additional liabilities. During the year ended December 31, 2020, the Company paid the amount of $40,000 in connection with the additional liabilities. At December 31, 2020, the amount of $67,000 remains on the Company’s consolidated balance sheet as a current contingent liability, and $116,600 as a long term contingent liability.
Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of $240,576. These amounts relate to the estimate of certain performance based payments following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2019, the Company paid the amount of $120,576 in connection with these liabilities. At December 31, 2020, $120,000 is classified as a current contingent liability.
License Agreements
In May 2019, the Company entered into a royalty-based license agreement, through December 31, 2022 with a lifestyle brand, which provides the exclusive right, with certain carve-outs and limitations, to sell and promote branded gift baskets for certain channels including: retail, warehouse club stores, certain of the Company’s current e-commerce channels, and other e-commerce channels such as amazon.com (the “May 2019 License Agreement”). Pursuant to the May 2019 License Agreement, the Company paid an initial royalty deposit in the amount of $50,000 towards the minimum royalty, which is classified as other current assets on the Company’s balance sheet at December 31, 2019. Future royalty amounts owed for minimum payments in connection with the May 2019 License Agreement will be deducted from this deposit The royalty rate is 5% of net sales, and the Company is required, with certain exceptions and exclusions, to make minimum royalty payments of $100,000 through the end of 2020, $110,000 in 2021, and $125,000 in 2022, respectively. As of December 31, 2020, the Company has made the required minimum royalty payments.
Litigation
On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. Since that time, other parties involved in the incident have joined as plaintiffs in the PA Action. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and indicates a demand and offer to settle for fifty million dollars. We expect that should a settlement occur the amount to resolve the Action would be substantially lower. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy (which has been fully tendered) and umbrella policy that covers one of the Company’s subsidiaries, we intend to further aggressively pursue the Company’s and its subsidiaries’ insurance coverage under their umbrella and other available policies. The Company has brought an action for declaratory judgement against one of the insurance companies under which it had an umbrella policy so that the court can compel it to provide liability coverage. In addition, the Company has been defending this action and believes that the likely outcome would result in the liabilities being covered by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations. On July 16, 2020, the court granted the Company's motion to stay the case through the final adjudication of an additional pending legal proceeding against the driver in connection with the events related to the case. It is not anticipated that the Company and its subsidiaries will be a party to any other legal proceedings in connection with this matter.
From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of 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 financial position or our business and the outcome of these matters cannot be ultimately predicted.
Index
19. MAJOR CUSTOMER
The Company’s largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 40% and 57% of total sales in each of the years ended December 31, 2020 and 2019. A contract between our subsidiary, Food Innovations, and U.S. Foods 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 contract 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 December 31, 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.
20. FAIR VALUE MEASUREMENTS
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s stock option, convertible debt features and warrant instruments is determined using option pricing models.
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.” Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
Level 1 -
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 -
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 -
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions.
As December 31, 2020 and 2019, the Company did not have financial assets or liabilities that are required to be accounted for at fair value on a recurring basis.
21. SUBSEQUENT EVENTS
Subsequent to December 31, 2020, we applied for and received new loans in the amount of $1,748,814 under the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) . The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of this PPP Loan in whole or in part.
Index
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. We concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act were effective as of December 31, 2020 to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in SEC rules and forms and our disclosure controls and procedures are also effective to ensure that the information required to be disclosed in reports that we file under the Exchange Act is accumulated and communicated to our principal executive and financial officers to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Management has 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 December 31, 2020 at the reasonable assurance level. Management of the Company believes that this deficiency is primarily due to the smaller size of 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 recently named a new Chief Financial Officer and also expect to retain additional qualified personnel and accounting and systems consultants to continue to remediate this control deficiency in the future.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives.
Changes in Internal Control over Financial Reporting
We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Index
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
ITEM 9B. Other Information
None.
Index
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Set forth below are the directors and executive officers of our Company, their respective names and ages, positions with our Company, principal occupations and business experiences during at least the past five years.
Name
Age
Position
Sam Klepfish
Chairman and Chief Executive Officer
Justin Wiernasz
Director of Strategic Acquisitions and Director
Joel Gold
Director
Hank Cohn
Director
David Polinsky
Director
James C. Pappas
Director
Mark Schmulen
Director
Richard Tang
Chief Financial Officer
Directors
Sam Klepfish
Mr. Klepfish has been a director since December 1, 2005. From November 2007 to present Mr. Klepfish is the CEO of Innovative Food Holdings and its subsidiaries. From March 2006 to November 2007 Mr. Klepfish was the interim president of the Company and its subsidiary. Since February 2005 Mr. Klepfish was also a Managing Partner at ISG Capital, a merchant bank. From May 2004 through February 2005 Mr. Klepfish served as a Managing Director of Technoprises, Ltd. From January 2001 to May 2004 he was a corporate finance analyst and consultant at Phillips Nizer, a New York law firm. Since January 2001 Mr. Klepfish has been a member of the steering committee of Tri-State Ventures, a New York investment group. From 1998 to December 2000, Mr. Klepfish was an asset manager for several investors in small-cap entities.
Joel Gold, Director
Mr. Gold is currently a partner in a merchant banking firm, and has served on the board and committees of numerous companies. Prior to that, he was an investment banker at Buckman, Buckman and Reid located in New Jersey, a position he held since May 2010. Prior there to, from October 2004, he was head of investment banking of Andrew Garrett, Inc. From January 2000 until September 2004, he served as Executive Vice President of Investment Banking of Berry Shino Securities, Inc., an investment banking firm also located in New York City. From January 1999 until December 1999, he was an Executive Vice President of Solid Capital Markets, an investment-banking firm also located in New York City. From September 1997 to January 1999, he served as a Senior Managing Director of Interbank Capital Group, LLC, an investment banking firm also located in New York City. From April 1996 to September 1997, Mr. Gold was an Executive Vice President of LT Lawrence & Co., and from March 1995 to April 1996, a Managing Director of Fechtor Detwiler & Co., Inc., a representative of the underwriters for the Company’s initial public offering. Mr. Gold was a Managing Director of Furman Selz Incorporated from January 1992 until March 1995. From April 1990 until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co., Inc. (“Bear Stearns”). For approximately 20 years before he became affiliated with Bear Stearns, he held various positions with Drexel Burnham Lambert, Inc.
Hank Cohn, Director
Mr. Cohn has been a director since October 29, 2010. Hank Cohn is currently CEO of P1 Billing, LLC, a revenue cycle management services provider to ambulatory medical clinics. P1 Billing is a spinoff of PracticeOne Inc., (formerly PracticeXpert, Inc., an OTCBB traded company), an integrated PMS and EMR software and services company for physicians. Mr. Cohn served as President and Chief Executive Officer of PracticeOne from December 2009 until December 2009, at which time he sold the company to Francison Partners, one of the largest, global technology focused, private equity firms in Silicon Valley. Prior to that, Mr. Cohn worked with a number of public companies. A partial list of his past and present board memberships include: Analytical Surveys, Inc., Kaching, Inc., and International Food and Wine, Inc., currently Evolution Resources Inc. Mr. Cohn also served as the executive vice president of Galaxy Ventures, LLC a closely-held investment fund concentrating in the areas of bond trading and early stage technology investments, where he acted as portfolio manager for investments.
Index
Justin Wiernasz, Director of Strategic Acquisitions
Mr. Wiernasz has been a director since November 1, 2013. Effective on May 11, 2018, Mr. Justin Wiernasz resigned his position of President of Innovative Food Holdings, Inc. which he held since July 31, 2008 and assumed the position of Director of Strategic Acquisitions. Prior thereto he was the Executive Vice President of Marketing and Sales and Chief Marketing Officer of our operating subsidiary, Food Innovations, Inc. since May 2007 and the President of Food Innovations and our Chief Marketing Officer since December 2007. Prior thereto, he was at USF, our largest customer, for 13 years. From 2005 to 2007 he was the Vice President of Sales & Marketing, USF, Boston, and prior thereto, from 2003 to 2005 he was a National Sales Trainer at USF, Charleston SC, from 1996 to 2003 he was the District Sales Manager at USF, Western Massachusetts and from 1993 to 1996 he was Territory Manager, USF, Northampton, Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner and operator J.J.’s food and spirit, a 110 seat restaurant.
Richard Tang , CFO
Richard Tang has been CFO at IVFH since December 29, 2020. Mr. Tang, has more than 25 years of experience in senior leadership roles, working in media, e-commerce, CPG and food-based sectors, most recently as CFO for Van Leeuwen Ice Cream LLC, a nationwide manufacturer of ultra-premium dairy and vegan ice cream distributed and sold through 2,000 supermarket and independent chain doors nationwide and multi-state brick and mortar locations. Prior thereto, from 2017 to 2019, Mr. Tang was CFO at Nutraceutical Wellness, Inc., a global subscription-based CPG e-commerce and business-to-business wellness vitamin and supplements consumer business. Prior thereto, from 2012-2016, Tang was Senior Vice President, Corporate Development at Fareportal, the third largest Online Travel Agency in North America. Mr. Tang has also held senior financial roles at The Condé Nast Publications, Time Warner, and Walt Disney Corporation. Mr. Tang holds a Master of Business Administration from Boston University Graduate School of Management and a Bachelor of Science from Boston College.
David Polinsky, Director
David A. Polinsky has been a director since July 24, 2019. Mr. Polinsky has served as Chief Financial Officer of Rafael Holdings, Inc. (NYSE: RFL) since December 2017. Mr. Polinsky co-founded Rafael Pharmaceuticals and served as its Vice President, General Counsel and Corporate Secretary from 2002 and as President, General Counsel and Secretary from 2016 through March 2018. He also served on Rafael Pharmaceutical’s Board from 2002 until 2014. Prior to joining Rafael Pharmaceuticals, from 1996 to 2002, he served as Vice President and General Counsel for a New York-based real estate focused investment and management company, Square Management Corp., leading the investment analysis in and management of residential, office, retail and development properties. Previously and in partnership with the Honorable Edward I. Koch, former Mayor of New York City, Mr. Polinsky founded in 1999 and served as CEO of a company that licensed and developed TheLaw.com as a leading consumer focused legal information site. Mr. Polinsky earned his Juris Doctorate from Fordham University School of Law in 1996 and his Bachelor of Arts from Yeshiva University in 1993. Mr. Polinsky also earned the CFA Institute’s Investment Foundations certificate.
James C. Pappas, Director
James C. Pappas has been a director since January 30, 2020. Mr. Pappas has served as the Managing Member of JCP Investment Management, LLC (“JCP Management”), an investment firm, and the sole member of JCP Investment Holdings, LLC (“JCP Holdings”), since June 2009. Mr. Pappas has also served as a director of Tandy Leather Factory, Inc. (NASDAQ:TLF), a retailer and wholesale distributor of a broad line of leather and related products, since June 2016. Mr. Pappas previously served as a director of each of Jamba, Inc. (formerly NASDAQ:JMBA), a leading health and wellness brand and the leading retailer of freshly squeezed juice, from January 2015 until the completion of its sale in September 2018, U.S. Geothermal Inc. (formerly NYSEMKT:HTM), a leading geothermal energy company, from September 2016 until the completion of its sale in April 2018, and The Pantry, Inc. (formerly NASDAQ:PTRY), a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country, from March 2014 until the completion of its sale in March 2015. He also previously served as Chairman of the board of directors of Morgan’s Foods, Inc. (formerly OTC:MRFD), a then publicly traded company, from January 2013 until May 2014, when the company was acquired by Apex Restaurant Management, Inc., after originally joining its board as a director in February 2012. From 2005 until 2007, Mr. Pappas worked for The Goldman Sachs Group, Inc. (NYSE:GS) (“Goldman Sachs”), a multinational investment banking and securities firm, in its Investment Banking / Leveraged Finance Division. As part of the Goldman Sachs Leveraged Finance Group, Mr. Pappas advised private equity groups and corporations on appropriate leveraged buyout, recapitalization and refinancing alternatives. Prior to Goldman Sachs, Mr. Pappas worked at Banc of America Securities, the investment banking arm of Bank of America Corporation (NYSE:BAC), a multinational banking and financial services corporation, where he focused on Consumer and Retail Investment Banking, providing advice on a wide range of transactions including mergers and acquisitions, financings, restructurings and buy-side engagements. Mr. Pappas received a BBA and a Masters in Finance from Texas A&M University.
Index
Mark Schmulen, Director
Mark Schmulen has been a director since January 30, 2020. Mr. Schmulen is a co-founder and has served as CEO of Chirp Systems, Inc., a venture-backed smart access solution for multifamily property owners, since October 2019. Mr. Schmulen has also served as the managing director of Jelly Capital, LLC, a private investment fund focused on early stage technology and real estate investments, since May 2015, and as an investment advisor representative for Forum Financial, LP, an independent investment advisor, since November 2016. Previously, he served as General Manager of Social Media for Constant Contact, Inc. (formerly NASDAQ:CTCT), a provider of digital marketing solutions, from May 2010 until May 2014. Prior to that, he was co-founder and served as CEO of Nutshell Mail, Inc., a social media marketing solution, from 2008 until its acquisition by Constant Contact, Inc. in 2010. Mr. Schmulen began his career as an investment banking analyst with JPMorgan Chase Bank. Currently, he serves on the board of directors for the Shlenker School, since August 2017 and is a Director of the HHF Foundation, benefiting early childhood education, since December 2014. Mr. Schmulen holds a B.S. from the University of Pennsylvania and an M.S. in Management from Stanford’s Graduate School of Business.
Qualification of Directors
We believe that all of our directors are qualified for their positions and each brings a benefit to the board. Messrs. Kelpfish and Wiernasz, as our officers, are uniquely qualified to bring management’s perspective to the board’s deliberations. Mr. Gold, with his lengthy career working for broker/dealers, bring a “Wall Street” perspective and Mr. Schmulen, with his private equity experience, and Messrs. Cohn and Polinsky, with their prior history of being executives and directors of other companies, bring a well-rounded background and wealth of general business experience to our board. Mr. Pappas, brings both his investment and corporate finance background and food industry experience to the board.
Committees
The Board of Directors currently has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The members of the Compensation Committee and of the Nominating and Corporate Governance Committee are Messrs. Gold, Cohn, Pappas and Schmulen and the members of the Audit Committee are Messrs. Gold, Cohn and Schmulen with Mr. Cohn designated as the Audit Committee Financial Expert. All of the members of each committee have been determined by the Board of Directors to be independent.
Agreements with Directors
Prior to Mr. Pappas’ appointment to the Board, as described in a Current Report on Form 8-K filed on January 30, 2020 (the “January 8-K”), the Company and Mr. Pappas entered into an Agreement (the “Agreement”) which, among other things, provided that (i) the Company (x) will support the continued directorships of the New Directors (as defined in the Agreement) at the next two annual meetings and (y) after 18 months will appoint another nominee of JCP (as defined in the Agreement”) to the Board and support such nominee at the next annual meeting, provided that such nominee shall be subject to the approval (which shall not be unreasonably withheld) of the Nominating and Corporate Governance Committee of the Board and the Board after exercising their good faith customary due diligence process and fiduciary duties; and (ii) JCP and the Company agreed to certain standstill provisions, as more fully described in the Agreement. As of the date hereof, the New Directors referred to in the Agreement are Messrs. Pappas and Schmulen.
Code of Ethics
We have adopted a Code of Ethics that applies to each of our employees, including our CEO, our principal financial officer, as well as members of our Board of Directors. A copy of such Code has been publicly filed with, and is available for free from, the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
During 2020, Messrs. Gold, Klepfish, Wiernasz and Cohn did not file a Form 4 in connection with the receipt of shares and Messrs. Pappas, Schmulen and Tang did not file a Form 4 in connection with the receipt of options and Mr. Tang did not file a Form 3. None of the unfiled Forms 4 related to the public sale of securities.
ITEM 11. Executive Compensation
The following table sets forth information concerning the compensation for services rendered to us for the two years ended December 31, 2020, of our Chief Executive Officer, our principal financial officer and our highest compensated officer whose annual compensation exceeded $100,000 in the fiscal year ended December 31, 2020, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
Index
SUMMARY COMPENSATION TABLE
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Sam Klepfish
$ 406,320
$ -
$ 276,387
(a)
$ -
$ -
$ -
$ 3,406
(b)
$ 686,113
CEO
$ 341,646
$ -
$ 150,000
(a)
$ -
$ -
$ -
$ 2,493
(b)
$ 494,139
Justin Wiernasz
$ 392,638
$ 10,000
(c)
$ 17,116
(a)
$ -
$ -
$ -
$ 26,086
(b)
$ 445,840
Director of Strategic Acquisitions
$ 376,955
$ 25,000
(c)
$ 16,398
(a)
$ -
$ -
$ -
$ 15,619
(b)
$ 433,972
Richard Tang
(d)
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Chief Financial Officer
$ -
$ -
$ -
$ -
$ -
$ -
Norma Vila,
(d)
$ 157,884
$ -
$ -
$ -
$ -
$ -
$ 3,241
(b)
$ 161,125
Principal Accounting Officer (e)
$ -
$ -
$ -
$ -
$ -
$ -
John McDonald,
(d)
$ 192,358
$ -
$ -
$ -
$ -
$ -
$ 6,592
(b)
$ 198,950
Principal Accounting Officer (f)
$ 210,477
$ -
$ -
$ -
$ -
$ -
$ 8,405
(b)
$ 218,882
(a) Consists of the portion of restricted stock awards which were recognized as a period cost during the year for services as an executive officer.
(b) Consists of cash payments for health care benefits.
(c) Consists of a cash bonus paid during the year for services performed in the previous year.
(d) Mr. Tang’s employment with the Company was effective December 29, 2020.
(e) Ms. Vila assumed the rule of Principal Accounting Officer effective November 12, 2020.
(f) Mr. McDonald’s employment with the Company ended effective November 18, 2020.
Index
Outstanding Equity Awards at Fiscal Year-End as of December 31, 2020
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised
Options (#)
Exercisable
Number of Securities Underlying Unexercised Options(#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
Sam Klepfish
300,000
(a)
$
87,000
(b)
(a) Restricted stock awards vest according to the following schedule: An additional 125,000 restricted stock awards will vest contingent upon the attainment of a stock price of $2.00 per share for 20 consecutive 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 consecutive trading days.
(b) Amounts are calculated by multiplying the number of shares shown in the table by $ 0.29 per share, which is the closing price of common stock on December 31, 2020 (the last trading day of the 2019 fiscal year).
Director Compensation
Name
Fees
Earned
or Paid
in Cash ($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Joel Gold
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Sam Klepfish
-
-
34,120
(b)
-
-
-
34,120
Hank Cohn
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Justin Wiernasz
-
-
34,120
(b)
-
-
-
34,120
David Polinsky
-
-
3,802
(c)
-
-
-
3,802
James C. Pappas
-
-
1,115
(d)
-
-
-
1,115
Mark Schmulen
-
-
1,115
(d)
-
-
-
1,115
(a) Represents the amount charged to operations during the year ended December 31, 2020 for 90,000 shares of the Company’s common stock with a fair value of $45,000; 55,545 shares of the Company’s common stock with a fair value of $18,515 vesting over a three-year period; and 64,240 shares of the Company’s common stock with a fair value of $30,000 vesting over a three-year period.
(b) Represents the amount charged to operations during the year ended December 31,2020 for the following: (i) five-year options to purchase 90,000 shares of the Company’s common stock at a price of $0.62 per share, vesting over three years; (ii) five-year options to purchase 135,000 shares of the Company’s common stock at a price of $0.85 per share, vesting over three years; and (iii) five year options to purchase 225,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over three years.
(c) Represents the amount charged to operations during the year ended December 31, 2020 for three-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
(d) Represents the amount charged to operations during the year ended December 31, 2020 for two-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
Index
Employment Agreements
Our subsidiary, Food Innovations, has employment agreements with certain officers and certain employees. The employment agreements provide for salaries and benefits, including stock grants and extend up to five years. In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause.
SAM KLEPFISH
Effective March 29, 2017, we entered into an employment agreement with Mr. Sam Klepfish, our CEO. This agreement, which ran through December 31, 2019, maintained the then-current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee comprised solely of independent directors, we entered into a new employment agreement with Mr. Sam Klepfish having an effective date of January 28, 2019 and terminating three years thereafter with up to two two-year extension periods. The first two year extension period was exercised in 2021. The agreement provides a base salary in the amount of $300,000 with annual increases of at least $25,000 and annual stock compensation of 50% of the base salary. The agreement also provides for additional bonuses of up to 25% of base compensation, based on increases in EBITDA (as defined in the agreement) and increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
JUSTIN WIERNASZ
Effective March 29, 2017, we entered into an employment agreement with Mr. Wiernasz, our Director of Strategic Acquisitions. This agreement, which ran through December 31, 2019, maintained the current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee, we entered into a new employment agreement with Mr. Justin Wiernasz, having an effective date of January 28, 2019 and terminating three years thereafter with up to two extension periods; one for two years and one for one year. The agreement provides a base salary in the amount of $326,000 with annual increases of at least 5% and annual stock compensation of 5% of the base salary. This agreement was further modified to a base salary of $350,000 in 2019. The agreement also provides for additional bonuses of up to 35% of base compensation, and based upon increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
RICHARD TANG
Effective December 29, 2020, we entered into a letter agreement with Mr. Richard Tang to become our CFO. The agreement provides a base salary in the amount of $200,000 for 2021 and base compensation for 2022 to target an increase of 20%-25% with a targeted 15-20% bonus structure based on milestones to be determined by the Company’s Board of Directors in its sole discretion. For 2021, Mr. Tang will have the opportunity to earn a performance stock bonus of $40,000 and a cash bonus of $25,000 based upon satisfying certain specified milestones and an additional bonus equal to up to 10% of combined base salary and bonus based upon criteria to be determined by the Company’s Board of Directors. The agreement also provided for a one-time stock option grant in the amount of 100,000 shares (half of which is exercisable $0.60 and half at $1.00), which vests in two years. Similar to our other employees, Mr. Tang’s employment is at-will and he is subject to the Company’s rules, regulations and policies, including specifically and without limitation, confidentiality and provisions.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of a compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of our Compensation Committee.
Index
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information as of April 15, 2021, with respect to the beneficial ownership of our common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each Named Officer, and (4) all our directors and executive officers as a group. Unless otherwise stated, each person listed below uses the Company’s address. Pursuant to SEC rules, includes shares that the person has the right to receive within 60 days from May 11, 2020.
Name and Address of Beneficial Owners
Number of Shares Beneficially Owned
Percent of Class
Sam Klepfish (Officer, Director)
(1)
3,540,204
9.9
%
Joel Gold (Director)
(2)
829,997
2.3
%
Justin Wiernasz (Officer, Director)
(3)
1,993,364
5.6
%
Richard Tang (Officer)
(4)
12,500
0.1
%
Hank Cohn (Director)
(3)
705,943
2.0
%
David Polinsky (Director)
(5)
699,650
2.0
%
James C. Pappas (Director)
(6)
4,724,935
13.3
%
Mark Schmulen (Director)
(5)
50,000
0.1
%
A group consisting of Denver J. Smith, CRC Founders Fund, LP, Donald E. Smith, Richard G. Hill, Samuel N. Jurrens, 73114 Investments, LLC, Youth Properties, LLC, and Paratus Capital, LLC
(7)
2,774,620
7.82
%
Insight Wealth Management
(8)
2,913,021
8.2
%
All officers and directors as a whole (7 persons)
(9)
9,774,043
34.1
%
(1)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 16,250 shares of common stock owned by Mr. Klepfish's spouse, ownership of which is disclaimed by Mr. Klepfish.
(2)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 18,400 shares of common stock held by Mr. Gold’s spouse.
(3)
(4)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021.
Includes options to purchase 12,500 shares of common stock exercisable at June 15, 2021.
(5)
Includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021.
(6)
Includes 4,561,443 shares held by JCP Investment Partnership, LP and 113,492 shares held by JCP Investment Management, LLC. This information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on September 17, 2020. Also includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021. The address of JCP Investment Partnership, LP and JCP Investment Management, LLC is 1177 West Loop South, suite 1320, Houston, TX 77027. Information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on February 27, 2019.
(7)
Pursuant to a Schedule 13D/A filed on January 11, 2021 with the Securities and Exchange Commission, Mr. Denver Smith is part of a group which reports beneficially owning an aggregate of 2,774,620, although Mr. Denver Smith only has sole voting and dispositive power over 765,637 of such shares. Mr. Smith’s address is 350 S Race Street, Denver, Colorado 80209.
(8)
Pursuant to a Schedule 13G filed on February 8, 2021 with the Securities Exchange Commission, the address of The Address of Insight Wealth Management is 1175 Peachtree St NE Suite 350, Atlanta, GA 30361. Amount consists of 1,233,273 shares with sole voting and dispositive power, and 1,679,748 shares with shared dispositive power. The issuer retains sole voting power for 1,679,748 shares.
(8)
Consists of 11,144,093 shares of common stock held by officers and directors. Also includes options to purchase 1,412,500 shares of common stock exercisable at June 15, 2021.
Index
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
We are not currently subject to the requirements of any stock exchange or national securities association with respect to having a majority of “independent directors”. Messrs. Gold, Cohn, Polinsky, Pappas and Schmulen are “independent” and only Messrs. Klepfish and Wiernasz, by virtue of being our Officers, are not independent. Mr. Klepfish and Mr. Wiernasz do not participate in board discussions concerning their compensation.
ITEM 14. Principal Accountant Fees and Services
Audit Fees
The Company engaged Liggett & Webb P.A. (“LW”) as our independent registered public accounting firm since November 9, 2012. During the year ended December 31, 2020 and 2019, LW billed us audit fees of approximately $144,000 and $144,000, respectively.
Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by LW that are reasonably related to the performance of the audit or review of our consolidated financial statements including our quarterly interim reviews on Form 10-Q and are reported under Audit Fees above.
Tax Fees
LW tax fees were $20,000 and $20,000 for the years ended December 31, 2020 and 2019, respectively.
All Other Fees
LW has not billed any other fees since their engagement on November 9, 2012.
For the fiscal years ended December 31, 2020 and 2019 the board of directors considered the audit fees, audit-related fees, tax fees and other fees paid to our accountants, as disclosed above, and determined that the payment of such fees was compatible with maintaining the independence of the accountants. Our board of directors pre-approves all auditing services and all permitted non-auditing services (including the fees and terms thereof) to be performed by our independent registered public accounting firm, except for de minimis non-audit services that are approved by the board of directors prior to the completion of the audit.
Index
PART IV
ITEM 15. Exhibits
EXHIBIT NUMBER
3.1
Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005)
3.2
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011)
3.2.1
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s current report Form 8-K filed with the Securities and Exchange Commission on January 23, 2018)
10.1
Employment Agreement with Sam Klepfish (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.2
Employment Agreement Justin Wiernasz (incorporated by reference to exhibit 10.2 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.3
Loan Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (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 March 15, 2013)
10.4
Security Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.5
Mortgage by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.6
Note by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.7
Employment Agreement with Sam Klepfish dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.8
Employment Agreement with Justin Wiernasz dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.9
Asset Purchase Agreement dated as of January 22, 2018 by and among Innovative Gourmet, LLC, a subsidiary of the registrant, and igourmet LLC and igourmet NY LLC (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.10
Loan Sale Agreement dated as of January 10, 2018 between Food Funding, LLC, a subsidiary of the registrant and UPS Capital Business Credit (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.11
Fifth Amendment to Restated Loan Agreement dated February 28, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.12
Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of February 28, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
Index
10.13
Draw Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of March 13, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.14
Master Loan and Security Agreement dated March 13, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.15
Employment Agreement with Sam Klepfish dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.16
Employment Agreement with Justin Wiernasz dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.17
Form of Director Agreement dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.18
Eighth Amendment to Restated Loan Agreement dated as of November 9, 2019 between Fifth Third Bank, National Association, and the Registrant and certain of its subsidiaries (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.19
Promissory Note effective November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.20
Mortgage, Assignment of Leases, Fixture Filing and Security Agreement date as of November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.21
Agreement for Purchase and Sale of Real Estate dated as of August 9, 2019 (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2019).
Code of Ethics (incorporated by reference to exhibit 14 of the Company’s Form 10-KSB/A for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 31, 2008)
Subsidiaries of the Company
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Principal Accounting Officer
32.1
Rule 1350 Certification of Chief Executive Officer
32.2
Rule 1350 Certification of Principal Accounting Officer
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
Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INNOVATIVE FOOD HOLDINGS, INC.
By: /s/ Sam Klepfish
Sam Klepfish,
Chief Executive Officer and Director
Dated: April 15, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Sam Klepfish
CEO and Director
April 15, 2021
Sam Klepfish
(Chief Executive Officer)
/s/ Norma Vila
Controller
April 15, 2021
Norma Vila
(Principal Accounting Officer)
/s/ Hank Cohn
Director
April 15, 2021
Hank Cohn
/s/ Justin Wiernasz
Director
April 15, 2021
Justin Wiernasz
/s/David Polinsky
Director
April 15, 2021
David Polinsky
/s/ James C. Pappas
Director
April 15, 2021
James C. Pappas

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of:
Innovative Food Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innovative Food Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill, Amortizable and Unamortizable Intangible Assets
As described in Note 9 to the consolidated financial statements, these assets are evaluated for impairment at least annually using valuation techniques to estimate fair value. The adverse impact of COVID-19 pandemic to the Company’s foodservice customer base was a triggering event and accordingly, the Company performed the impairment tests during the first quarter of 2020. The Company engaged a valuation specialist to assist in evaluating the fair values of these assets. These fair value estimates are sensitive to certain significant assumptions including future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses used by the valuation specialist.
Auditing management’s goodwill, amortizable and unamortizable intangible assets impairment tests was highly judgmental due to the significant assumptions used by management and the valuation methodologies used the valuation specialist in determining the fair values of these assets.
To test the estimated fair values of the goodwill, amortizable and unamortizable intangible assets, we performed audit procedures that included, among others, evaluating the methodologies used in the valuation model and the significant assumptions used by the Company and the valuation specialist.
Index
Contingencies
As described in Note 18 to the consolidated financial statements, the Company is involved in a number of legal proceedings and has made accruals with respect to certain of these matters. Where a liability is reasonably possible and may be material, such matters have been disclosed. Management exercised judgment and assessed the probability of occurrence based on the ability to predict the number of claims that may be filed and whether it can reasonably estimate any loss or range of loss that may arise from that proceeding.
Auditing management’s accounting for, and disclosure of, loss contingencies was highly judgmental as it involved our assessment of the significant judgments made by management when assessing the probability of occurrence or when determining whether an estimate of the loss or range of loss could be made.
To test the Company’s assessment of the probability of occurrence or determination of an estimate of loss, or range of loss, among other procedures, we read the legal documentations, reviewed opinions provided to the Company by certain outside legal counsel, read letters received directly by us from external counsel, and evaluated the current status of contingencies based on discussions with legal counsel. We also evaluated the appropriateness of the related disclosures.
/s/ Liggett & Webb, P.A.
LIGGETT & WEBB, P.A.
Certified Public Accountants
We have served as the Company’s auditor since 2012
Boynton Beach, Florida
April 15, 2021
Index
Innovative Food Holdings, Inc.
Consolidated Balance Sheets
December 31,
December 31,
ASSETS
Current assets
Cash and cash equivalents
$ 5,060,015
$ 3,966,050
Accounts receivable, net
2,380,305
3,309,830
Inventory
3,719,786
2,350,622
Other current assets
286,815
273,689
Total current assets
11,446,921
9,900,191
Property and equipment, net
8,550,401
6,645,389
Investments
496,575
435,225
Right of use assets, operating leases, net
246,737
193,733
Right of use assets, finance leases, net
776,439
174,631
Other amortizable intangible assets, net
100,380
1,342,741
Goodwill and other unamortizable intangible assets
1,532,822
2,183,065
Total assets
$ 23,150,275
$ 20,874,975
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
$ 5,098,523
$ 4,009,956
Accrued interest
28,873
16,973
Deferred revenue
2,917,676
499,776
Line of Credit
2,000,000
-
Notes payable - current portion, net of discount
1,741,571
727,766
Lease liability - operating leases, current
87,375
133,296
Lease liability - finance leases, current
146,004
29,832
Contingent liability - current portion
187,000
187,000
Total current liabilities
12,207,022
5,604,599
Lease liability - operating leases, non-current
159,362
60,437
Lease liability - finance leases, non-current
638,137
154,905
Contingent liability - long-term
116,600
156,600
Note payable - long term portion, net
6,151,345
3,881,037
Total liabilities
19,272,466
9,857,578
Commitments & Contingencies (see note 18)
-
-
Stockholders' equity
Common stock: $0.0001 par value; 500,000,000 shares authorized; 38,209,060 and 37,210,859 shares issued, and 35,371,480 and 34,373,279 shares outstanding at December 31, 2020 and December 31, 2019, respectively
3,817
3,718
Additional paid-in capital
37,415,155
36,889,818
Treasury stock: 2,623,171 and 2,623,171 shares outstanding at December 31, 2020 and December 31, 2019, respectively.
(1,141,370
)
(1,141,370
)
Accumulated deficit
(32,399,793
)
(24,734,769
)
Total stockholders' equity
3,877,809
11,017,397
Total liabilities and stockholders' equity
$ 23,150,275
$ 20,874,975
See notes to consolidated financial statements.
Index
Innovative Food Holdings, Inc.
Consolidated Statements of Operations
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Revenue
$ 51,676,028
$ 57,902,966
Cost of goods sold
37,859,500
41,255,076
Gross margin
13,816,528
16,647,890
Selling, general and administrative expenses
19,531,818
16,464,128
Impairment of intangible assets
1,698,952
-
Total operating expenses
21,230,770
16,464,128
Operating (loss) income
(7,414,242
)
183,762
Other income (expense):
Other leasing income
43,810
3,125
Gain on settlement of contingent liability
-
132,300
Gain on sale of fixed assets
7,984
12,495
Interest expense, net
(302,576
)
(108,915
)
Total other income (expense)
(250,782
)
39,005
Net (loss) income before taxes
(7,665,024
)
222,767
Provision for Income tax expense
-
-
Net (loss) income
$ (7,665,024
)
$ 222,767
Net (loss) income per share - basic
$ (0.22
)
$ 0.01
Net (loss) income per share - diluted
$ (0.22
)
$ 0.01
Weighted average shares outstanding - basic
34,871,785
34,116,335
Weighted average shares outstanding - diluted
34,871,785
34,116,335
See notes to consolidated financial statements.
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Innovative Food Holdings, Inc.
Consolidated Statements of Cash Flows
For the
For the
Year Ended
Year Ended
December 31,
December 31,
Cash flows from operating activities:
Net (loss) income
$ (7,665,024
)
$ 222,767
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Impairment of intangible assets
1,698,952
-
Depreciation and amortization
703,941
1,234,098
Amortization of right-of-use asset
161,926
187,254
Amortization of prepaid loan fees
12,560
1,819
Stock based compensation
525,436
414,178
Gain on settlement of contingent liability
(132,300
)
Gain on sale of fixed assets
(7,984
)
(12,495
)
Provision for doubtful accounts
254,899
36,037
Changes in assets and liabilities:
Accounts receivable, net
674,626
(366,611
)
Inventory and other current assets, net
(1,443,640
)
(153,633
)
Accounts payable and accrued liabilities
1,108,451
414,326
Deferred revenue
2,417,900
(59,539
)
Contingent liabilities
(40,000
)
(4,000
)
Operating lease liability
(161,926
)
(187,254
)
Net cash (used in) provided by operating activities
(1,759,883
)
1,594,647
Cash flows from investing activities:
Cash paid for website development
(19,250
)
-
Cash received from the sale of fixed assets
-
12,495
Acquisition of property and equipment
(431,137
)
(1,049,604
)
Purchase of intangible assets
-
(84,000
)
Investment in food related company
-
(60,200
)
Net cash used in investing activities
(450,387
)
(1,181,309
)
Cash flows from financing activities:
Sales of common stock
-
250,000
Cash paid for acquisition of treasury stock
-
(125,000
)
Loan fees related to building acquisition financing
-
(72,916
)
Cash paid in settlement of contingent liabilities in connection with acquisitions
-
(350,576
)
Proceeds from line of credit
2,000,000
-
Proceeds from Payroll Protection Plan Loan
1,650,221
-
Principal payments on debt
(278,668
)
(880,752
)
Principal payments financing leases
(67,318
)
(27,861
)
Net cash provided by (used in) financing activities
3,304,235
(1,207,105
)
Increase (decrease) in cash and cash equivalents
1,093,965
(793,767
)
Cash and cash equivalents at beginning of year
3,966,050
4,759,817
Cash and cash equivalents at end of year
$ 5,060,015
$ 3,966,050
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
$ 201,679
$ 112,291
Taxes
$ -
$ -
Non-cash investing and financing activities:
Issuance of 131,136 shares of common stock previously accrued
$ -
$ 93,666
Right of use assets and liabilities - operating, upon adoption of ASU 2016-02
$ -
$ 338,581
Equipment financed under note payable
$ 1,900,000
$ -
Return of equipment and reduction in amount due under equipment financing loan
$ -
$ 33,075
Fair value of 19,048 shares of common stock issued for services
$ -
$ 10,405
Increase in right of use assets & liabilities
$ 214,930
$ 193,734
Investment in food related company
$ 61,350
$ 60,500
Capital lease for purchase of fixed assets
$ 677,021
$ 81,223
Note payable for acquisition of land and building
$ -
$ 3,600,000
See notes to consolidated financial statements.
Index
Innovative Food Holdings, Inc.
Consolidated Stockholders' Equity
For the Years Ended December 31, 2020 and 2019
Additional
Common Stock
Paid-in
Treasury Stock
Accumulated
Amount
Value
Capital
Amount
Value
Deficit
Total
Balance at December 31, 2018
36,296,218
$ 3,627
$ 36,132,065
2,373,171
$ (1,016,370
)
$ (24,957,536
)
$ 10,161,786
Common stock issued for services
19,048
10,403
-
-
-
10,405
Common stock sold for cash
349,650
249,965
-
-
-
250,000
Issuance of shares to employees, previously accrued
131,136
93,653
-
-
-
93,666
Fair value of vested stock and stock options issued to management
414,807
403,732
-
-
-
403,773
Treasury stock acquired
-
-
-
250,000
(125,000
)
-
(125,000
)
Net income for the year ended December 31, 2019
-
-
-
-
-
222,767
222,767
Balance - December 31, 2019
37,210,859
$ 3,718
$ 36,889,818
2,623,171
$ (1,141,370
)
$ (24,734,769
)
$ 11,017,397
Fair value of vested stock and stock options
954,496
505,920
-
-
-
506,015
Fair value of shares issued to employees and service providers
43,705
19,417
-
-
-
19,421
Net (loss) for the year ended December 31, 2020
-
-
-
-
-
(7,665,024
)
(7,665,024
)
Balance - December 31, 2020
38,209,060
$ 3,817
$ 37,415,155
2,623,171
$ (1,141,370
)
$ (32,399,793
)
$ 3,877,809
See notes to consolidated financial statements.
Index
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Our business is currently conducted by our wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods Group, Inc. (“Artisan”), Food Innovations (“FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers (“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 Food Properties, LLC (“IFP”), Innovative Gourmet, LLC (“Innovative Gourmet” or “igourmet”), Food Funding, LLC (“Food Funding”), Logistics Innovations, LLC (“L Innovations”), M Innovations, LLC (“M Innovations” or “Mouth”), P Innovations, LLC “(P Innovations”), and collectively with IVFH and its 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.
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-Packaged Goods (“CPG”) products through a variety of sales channels ranging from national partnership based and regionally based foodservice related sales channels to e-commerce sales channels offering products both direct to consumers (“D2C”) and direct to business (“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.forthegourmet.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.
Artisan is a supplier of over 1,500 unique specialty foodservice products to over 500 customers such as chefs, restaurants, etc. in the Greater Chicago area and serves as a national fulfillment center for certain of the Company’s other subsidiaries.
GFG is focused on expanding the Company’s program offerings to additional specialty foodservice customers.
IFP was formed to hold the Company’s real estate holdings including the recently acquired facility in Mountaintop, Pennsylvania.
L Innovations provides 3rd party warehouse and fulfillment services out of its location at the Company’s PA facility.
P Innovations focus is to leverage acquired assets to expand the Company’s subscription-based e-commerce business activities.
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 and assists in the enabling of the distribution of products via national broadline food distributors.
OFB and Oasis function 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 provides emerging and unique CPG specialty food brands with distribution and shelf placement access in all of the major metro markets in the food retail industry.
igourmet has been in the business of providing D2C specialty food via e-commerce through its own website at www.igourmet.com and through other channels such as www.amazon.com, www.ebay.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 approximately 100,000 square feet warehouse in Pennsylvania via igourmet.com owned trucks and via third party carrier directly to thousands of customers nationwide.
Index
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 both consumers and corporate customers. Mouth also has launched a private label brand, including several award-winning products.
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. 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 and finance 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 consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, FII, FNM, OFB, GFG, GFW, Gourmeting, Haley, Oasis, Innovative Gourmet, Food Funding, IFP, L Innovations, M Innovations, P Innovations, and Gourmet. All material intercompany transactions have been eliminated upon consolidation of these entities.
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” 606. A five-step analysis must be met as 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 when (or as) performance obligations are 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. Adoption of ASC 606 had no material effect on the Company’s financial statements.
Warehouse and logistic services revenue primarily comprises of inventory management, order fulfilment and warehousing services. Warehouse & logistics services revenues are recognized at the point in time when the services are rendered to the customer.
Disaggregation of Revenue
The following table represents a disaggregation of revenue by from sales for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
Specialty foodservice
$ 27,544,188
$ 45,377,343
E-Commerce
22,371,386
10,704,419
National Brand Management
1,099,735
1,645,051
Warehouse and Logistic Services
660,719
176,153
Total
$ 51,676,028
$ 57,902,966
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.
We have also included all payroll costs as cost of goods sold in our leasing and logistics services business.
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Selling, general, and administrative expenses
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, amortization of intangible assets, depreciation, and other administrative costs including professional fees and costs associated with non-cash stock compensation. Advertising costs are expensed as incurred.
Cash and Cash Equivalents
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
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 December 31, 2020 and 2019, the Company had cash deposits in excess of applicable government mandated insurance limits in the amount of $3,385,113 and $2,559,503, respectively. At December 31, 2020 and 2019, trade receivables from the Company’s largest customer amounted to 22% and 35%, respectively, of total trade receivables.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts receivable are presented net of an allowance for doubtful accounts of $343,832 and $95,284 at December 31, 2020, and 2019, respectively.
Property and Equipment
Property and equipment are valued at cost. Depreciation is provided over the estimated useful lives up to five years using the straight-line method. Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
The estimated service lives of property and equipment are as follows:
Computer Equipment
3 years
Warehouse Equipment
5 years
Warehouse Equipment - Heavy 10 years
Office Furniture and Fixtures
5 years
Vehicles 5 years
Buildings
30 years
Inventories
Inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.
Deferred Revenue
Certain customer arrangements in the Company's business such as gift cards and e-commerce subscription purchases result in deferred revenues when cash payments are received in advance of performance. Gift cards issued by the Company generally have an expiration of five years from date of purchase. 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.
Index
The following table represents the changes in deferred revenue as reported on the Company’s consolidated balance sheets:
Balance acquired as of December 31, 2018
$ 559,315
Cash payments received
132,858
Net sales recognized
(192,397
)
Balance as of December 31, 2019
$ 499,776
Cash payments received
3,060,226
Net sales recognized
(642,326
)
Balance as of December 31, 2020
$ 2,917,676
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
The Company adopted ASC 820-10, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Cost Method Investments
The Company has made several investments in early stage private food related companies and are accounting for these investments under the cost method.
Basic and Diluted Income Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net 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.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.
Index
Dilutive shares at December 31, 2020:
Convertible notes and interest
At December 31, 2020 there were no convertible notes outstanding.
Warrants
At December 31, 2020 there were no warrants outstanding.
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 at December 31, 2020
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.60
50,000
4.99
$
0.62
360,000
1.00
$
0.85
540,000
2.84
$
1.00
50,000
4.99
$
1.10
75,000
0.37
$
1.20
1,050,000
2.84
$
1.50
125,000
1.00
$
1.02
2,250,000
2.82
Restricted Stock Awards
At December 31, 2020, there are 300,000 unvested restricted stock awards 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 year ended December 31, 2020, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 775,748 shares of common stock to its Chief Executive Officer; 38,892 to its Director of Strategic Acquisitions, an aggregate total of 139,854 shares to board members; 38,943 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2020, the amount of $380,638 was charged to operations in connection with these grants. Also during the year ended December 31, 2020, the Company issued 4,762 shares of restricted common stock with a fair value of $2,286 to a service provider, and charged this amount to operations.
Dilutive shares at December 31, 2019:
Convertible notes and interest
At December 31, 2019 there were no convertible notes outstanding.
Warrants
At December 31, 2019 there are no warrants outstanding.
Index
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 at December 31, 2019:
Weighted
Average
Remaining
Exercise
Number
Contractual
Price
of Options
Life (years)
$
0.62
360,000
4.00
$
0.75
50,000
2.00
$
0.85
540,000
4.00
$
0.95
50,000
2.00
$
1.10
75,000
1.37
$
1.20
950,000
3.93
$
1.50
125,000
2.00
$
2.00
125,000
2.00
$
2.50
125,000
2.00
$
3.00
125,000
2.00
2,525,000
3.42
Restricted Stock Awards
At December 31, 2019 there are 300,000 unvested restricted stock awards 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 year ended December 31, 2019, the Company incurred obligations to issue the following shares of common stock pursuant to employment agreements: an aggregate total of 260,507 shares of common stock to its Chief Executive Officer; 30,392 to its Director of Strategic Acquisitions, an aggregate total of 291,090 shares to board members; and 100,000 shares to an employee. These restricted stock grants are being amortized over their vesting periods of one to three years. During the year ended December 31, 2019, the amount of $246,628 was charged to operations in connection with these grants. Also during the year ended December 31, 2019, the Company issued 19,048 shares of restricted common stock with a fair value of $10,405 to a service provider, and charged this amount to operations.
Options expense charged to operations during the year ended December 31, 2020 and 2019 are summarized in the table below:
December 31,
Option expense
$ 142,512
$ 157,145
During the year ended December 31, 2019, the Company also granted the following shares of restricted common stock pursuant to compensation agreements:
- 260,507 shares of common stock with a fair value of $150,000 to the Company’s Chief Executive Officer. These shares vested over the twelve month period ended December 31, 2019; the amount of $150,000 was charged to operations during the year ended December 31, 2019. 255,328 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
- 30,392 shares of restricted common stock with a fair value of $16,398 to Company’s Director of Strategic Acquisitions. These shares vested over the twelve month period ended December 31, 2019; the amount of $16,398 was charged to operations during the year ended December 31, 2019. 29,115 shares, net of taxes, were issued in January 2020, and are included in common stock issued and outstanding at December 31, 2019.
Index
- 100,000 shares of restricted common stock with a fair value of $100,000 to an employee. Vesting of these shares is scheduled as follows: 33,334 shares vested on December 31, 2019; 33,333 are scheduled to vest on December 31, 2020; and 33,333 are scheduled to vest on December 31, 2021. The amount of $30,231 was charged to operations during the year ended December 31, 2019. 33,334 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to an independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
- 145,545 shares of restricted common stock with a fair value of $75,000 to a second independent director with a fair value of $150,000. These shares are scheduled to vest quarterly over a three year period beginning January 1, 2019. The amount of $25,000 was charged to operations during the year ended December 31, 2019. 48,515 of these shares were vested at December 31, 2019, and are included in common stock issued and outstanding at December 31, 2019.
Reclassifications
Certain reclassifications have been made to conform prior period data to the current presentation.
Leases
Commencing in January 2019, based upon new accounting pronouncements (described in greater detail below), 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 consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities are presented within current and long-term liabilities.
ROU assets represent the right of 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.
New 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 became effective for the Company on January 1, 2020. The amendments in this ASU were applied on a prospective basis. The adoption of this ASU had no material effect on our financial condition, results of operations, cash flows or financial disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance 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 expense 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.
Index
We adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected 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 consolidated balance sheet through the recognition of $338,581 of operating right-of-use assets and $338,581 of operating lease liabilities as of January 1, 2019. The adoption did not have a significant impact on our results of operations or cash flows. See Note 6 to our consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU relates to the accounting for non-employee share-based payments. The amendment in this update expands the scope of Topic 718 to include all share-based payment transactions in which a grantor acquired goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The ASU excludes share-based payment awards that relate to: (1) financing to the issuer; or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers. The share-based payments are to be measured at grant-date fair value of the equity instruments that the entity is obligated to issue when the goods or service has been delivered or rendered and all other conditions necessary to earn the right to benefit from the equity instruments have been satisfied. This standard became effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted the provisions of this ASU on January 1, 2019. The adoption had no impact on our results of operations, cash flows, or financial condition.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. This ASU reduces the number of accounting models for convertible debt instruments and convertible Preferred Stock. As well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. This standard is effective for us on January 1, 2022, including interim periods within such fiscal year. Adoption is either a modified retrospective method or a fully retrospective method of transition. We are currently assessing the impact the new guidance will have on our consolidated financial statements.
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 consolidated financial statements.
2. ACQUISITIONS
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Mouth Foods, Inc.
Effective July 6, 2018, M Innovations acquired certain assets of Mouth Foods, Inc. from MFI (assignment for the benefit of creditors), LLC (“MFI”), the assignee of Mouth Foods, Inc.’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 Foods, Inc., 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.
Index
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. At December 31, 2020, the Company maintains contingent liabilities in the aggregate amount of $120,000 on its balance sheet in connection with the MFI APA.
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 management’s estimates. 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.
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, 2019, and 2020 were 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.
Index
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.
3. ACCOUNTS RECEIVABLE
At December 31, 2020 and 2019, accounts receivable consists of:
Accounts receivable from customers
$ 2,724,137
$ 3,405,114
Allowance for doubtful accounts
(343,832
)
(95,284
)
Accounts receivable, net
$ 2,380,305
$ 3,309,830
During the years ended December 31, 2020 and 2019, the Company charged the amount of $254,899 and $36,037, respectively, to bad debt expense.
4. INVENTORY
Inventory consists of specialty food products. At December 31, 2020 and 2019, inventory consisted of the following:
Finished Goods Inventory
$ 3,719,786
$ 2,350,622
5. 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.
Index
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, National Association (“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. We have also recently completed an additional property improvement and upgrade buildout at the 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 for 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 added a packaging 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 private 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 were financed by a loan from Fifth Third Bank.
Depreciation on the building and the related improvements, furniture, fixtures, and equipment began when the Company occupied the facility in October, 2015.
On November 8, 2019 the Company, through a newly formed wholly-owned subsidiary, purchased a logistics and warehouse facility (the “Facility”) for $4.5 million. The Facility is approximately 200,000 square feet and is situated on approximately 15 acres in Mountain Top, Pennsylvania. The Facility’s appraised value by a third party appraisal firm in 2021 was $9,400,000. Related to the Facility purchase, the Company entered into a commercial loan agreement for both the purchase price and planned improvements to the Facility. The amount of the loan was $5,500,000, of which $3,600,000 had been utilized at December 31, 2019 in connection with the purchase of the Facility; the lender was Fifth Third Bank and the loan is secured by a mortgage on the property and other Company assets. The interest on the loan is LIBOR plus 2.75%, with interest only payments due through September 30, 2020, thereafter with principal amortized over 20 years with the balance due at maturity on September 2, 2025. Related to Facility purchase, the Company also acquired certain leases from certain tenants of the Facility, all of which were in good standing at the time of purchase. Depreciation on the building began when the Company commenced recognizing revenue from leasing and logistics services associated with the Facility. On October 5, 2020, the Company completed work to upgrade the Facility at a cost of $2,231,458 in order to better support the Company’s focus on e-commerce and logistics. Of the build out costs, $1,900,000 was funded by the loan described below (See Note 13).
A summary of property and equipment at December 31, 2020 and 2019 is as follows:
December 31,
December 31,
Land
$ 1,256,895
$ 1,256,895
Building
7,191,451
4,959,993
Computer and Office Equipment
578,362
549,703
Warehouse Equipment
373,150
345,973
Furniture and Fixtures
938,471
894,628
Vehicles
109,441
117,785
Total before accumulated depreciation
10,447,770
8,124,977
Less: accumulated depreciation
(1,897,369
)
(1,479,588
)
Total
$ 8,550,401
$ 6,645,389
Depreciation and amortization expense for property and equipment amounted to $491,039 and $334,342 for the years ended December 31, 2020 and 2019, respectively.
6. RIGHT OF USE ASSETS AND LEASE LIABILITIES - OPERATING LEASES
The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 4 years, some of which include options to extend.
The Company’s lease expense for the years ended December 31, 2020 and December 31, 2019 was entirely comprised of operating leases and amounted to $171,624 and $202,551, respectively. The Company’s ROU asset amortization for the years ended December 31, 2020 and December 31, 2019 was $161,926 and $187,254, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.
Index
Right of use assets - operating leases are summarized below:
December 31,
Warehouse equipment
12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Right of use assets, net
$ 246,737
Operating lease liabilities are summarized below:
December 31,
Warehouse equipment
$ 12,695
Office
186,302
Office equipment
1,812
Vehicles
45,928
Lease liability
$ 246,737
Less: current portion
(87,375
)
Lease liability, non-current
$ 159,362
Maturity analysis under these lease agreements are as follows:
Year ended December 31, 2021
$ 100,613
Year ended December 31, 2022
60,599
Year ended December 31, 2023
53,496
Year ended December 31, 2024
53,762
Year ended December 31, 2025
9,004
Thereafter
-
Total
$ 277,474
Less: Present value discount
(30,737
)
Lease liability
$ 246,737
7. RIGHT OF USE ASSETS - FINANCING LEASES
The Company has financing leases for vehicles and warehouse equipment. See note 14. Right of use asset - financing leases are summarized below:
December 31,
December 31,
Vehicles
362,358
201,466
Warehouse Equipment
533,531
19,357
Total before accumulated depreciation
895,889
220,823
Less: accumulated depreciation
(119,450
)
(46,192
)
Total
$ 776,439
$ 174,631
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 December 31, 2020 the Company has investments in eight food related companies in the aggregate amount of $496,575. The Company does not have significant influence over the operations of these companies.
Index
The Company’s investments may take the form of debt, equity, or equity in the future including convertible notes and other instruments which provide for future equity under various scenarios including subsequent financings or initial public offerings. The Company has evaluated the guidance in Accounting Standards Codification (“ASC”) No. 325-20 Investments - Other, in determining to account for the investment using the cost method since the equity securities are not marketable and do not give the Company significant influence.
During the year ended December 31, 2020, the Company converted accounts receivable in the amount of $61,350 into an equity investment in a food related company. During the year ended December 31, 2019, the Company converted accounts receivable in the amount of $60,500 into an equity investment in a food related company, and made cash investments in three food related companies in the total amount of $35,200.
9. INTANGIBLE ASSETS
The Company acquired certain intangible assets pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet, OFB, Haley, and M Innovations (see note 2). These assets include non-compete agreements, customer relationships, trade names, internally developed technology, and goodwill. The Company has also capitalized the development of its website.
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 the Company’s 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.
COVID-19 has had a material negative impact on some of the Company’s foodservice customers. In an effort to limit the spread of the virus, federal, state and local governments have implemented measures that have resulted in the closure of non-essential businesses in many of the markets the Company serves, which has forced its customers in those markets to either transition their establishments to take-out service, delivery service or temporarily cease operations. These actions have led to a significant decrease in demand for certain of the Company’s foodservice products. The adverse impact to the Company’s foodservice customer base was a triggering event and accordingly, as required by ASC 350, the Company performed interim goodwill and long-lived asset quantitative impairment tests during the first quarter of 2020. While the triggering event was a result of the negative impact related to foodservice customers, the applicable accounting rules then required an impairment test targeted specifically to any available carrying value of goodwill or intangible assets. During the first quarter of 2020, the Company performed the impairment tests on certain intangible assets and goodwill pursuant to the acquisitions through Artisan, Oasis, Innovative Gourmet and M Innovations (see note 2).
Goodwill Impairment Test
The Company estimated the fair value of the Company’s reporting unit using an income approach that incorporates the use of a discounted cash flow model that involves many management assumptions that are based upon future growth projections which include estimates of COVID-19’s impact on our business. Assumptions include estimates of future revenues, growth rates which take into account estimated inflation rates, estimates of future levels of gross profit and operating profit, projected capital expenditures and discount rates based upon industry and competitor analyses. As a result of impairment test, it was calculated that the net carrying value of goodwill exceeded the fair value by $650,243, and the Company was required by ASC 350 to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of goodwill on the Company’s balance sheet is $0.
Index
Long-lived Impairment Test
Long-lived assets, including other intangible assets, were tested for recoverability at the asset group level. The Company estimated the net undiscounted cash flows expected to be generated from the asset group over the expected useful life of the asset group’s primary asset. Key assumptions include future revenues, growth rates, estimates of future levels of gross profit and operating profit and projected capital expenditures necessary to maintain the operating capacity of each asset group. As a result of the impairment test, it was calculated that the net carrying values of other intangible assets exceeded the undiscounted cash flows for each of the Company’s asset groups by a total of $1,048,692, and the Company was required by the applicable accounting rules to record an impairment charge to operations during the year ended December 31, 2020. At December 31, 2020, the net carrying value of other intangible assets on the Company’s balance sheet is $1,633,202.The following is the net book value of these assets:
December 31, 2020
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (505,900
)
$ -
Customer Relationships - amortizable
3,068,034
(3,068,034
)
-
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(875,643
)
-
Goodwill
650,243
(650,243
)
-
Website
103,250
(2,870
)
100,380
Total
$ 6,735,892
$ (5,102,690
)
$ 1,633,202
December 31, 2019
Accumulated
Cost
Amortization
Net
Non-Compete Agreement - amortizable
$ 505,900
$ (433,545
)
$ 72,355
Customer Relationships - amortizable
3,068,034
(2,427,612
)
640,422
Trade Name
1,532,822
-
1,532,822
Internally Developed Technology
875,643
(329,679
)
545,964
Website
84,000
-
84,000
Goodwill
650,243
-
650,243
Total
$ 6,716,642
$ (3,190,836
)
$ 3,525,806
During the year ended December 31, 2020, the Company charged to operations amortization expense in the amount of $212,902 in addition to the impairment charge of $1,698,952. During the year ended December 31, 2019, the company charged to operations amortization expense in the amount of $899,756.
Amortization of finite life intangible assets as of December 31, 2020 is as follows:
$ 34,442
34,442
31,496
2024 and thereafter
-
Total
$ 100,380
The trade names are not considered finite-lived assets, and are not being amortized. The non-compete agreement is being amortized over a period of 48 months. The customer relationships acquired in these transactions are being amortized over periods of 24 to 36 months. The internally developed technology is being amortized over 60 months.
Index
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2020 and December 31, 2019 are as follows:
December 31,
December 31,
Trade payables and accrued liabilities
$ 4,914,050
$ 3,935,384
Accrued payroll and commissions
184,473
74,572
Total
$ 5,098,523
$ 4,009,956
11. ACCRUED INTEREST
At December 31, 2020, accrued interest on a note outstanding was $28,873. During the year ended December 31, 2020, the Company paid cash for interest in the aggregate amount of $125,396.
At December 31, 2019, accrued interest on a note outstanding was $16,973. During the year ended December 31, 2019, the Company paid cash for interest in the aggregate amount of $112,971.
12. REVOLVING CREDIT FACILITIES
December 31,
December 31,
Line of credit facility with Fifth Third Bank in the original amount of $2,000,000 with an interest rate of LIBOR plus 3.25% (the “Fifth Third Bank Line of Credit”). Effective August 1, 2019, this credit facility was extended to August 1, 2021. On March 20, 2020, the Company drew down the amount of $2,000,000. During the year ended December 31, 2020, the Company paid interest in the amount of $58,382 on the Fifth Third Bank Line of Credit.
$ 2,000,000
$ -
Total
$ 2,000,000
$ -
Index
13. NOTES PAYABLE
December 31,
December 31,
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 year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $54,600 and $5,743, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $54,060 and $11,111, respectively.
$ 122,850
$ 177,450
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 was originally due May 29, 2020. Effective May 29, 2020, the note was amended and renewed such that principal payments of $8,303 plus accrued interest were due beginning June 29, 2020 and continuing for sixty months; the entire principal balance and all accrued interest will be due on May 29, 2025. During the year ended December 31, 2020, the Company made payments of principal and interest on this note in the amounts of $81,667 and $17,532, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $98,000 and $30,031, respectively.
449,166
530,833
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. Monthly payments in the amount of $7,425 including principal and interest commenced in April, 2019. During the year ended December 31, 2019, equipment financed under the Artisan Equipment Loan in the amount of $33,075 was returned for credit. During the year ended December 31, 2020, the Company made payments of principal and interest on this loan in the amounts of $67,064 and $14,755, respectively; during the year ended December 31, 2019, the Company made principal and interest payments in the amounts of $48,654 and $18,957, respectively.
242,765
309,829
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 year ended December 31, 2020, the Company accrued interest in the amount of $372 on this note; during the year ended December 31, 2020, the Company accrued interest in the amount of $380 on this note.
20,000
20,000
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% maturing November 5, 2023. During the year ended December 31, 2020, the Company made principal and interest payments in the amount of $9,737 and $1,723, respectively, on this loan; during the year ended December 31, 2019, the Company made principal and interest payments in the amount of $8,540 and $1,964, respectively, on this loan.
32,051
41,788
Index
December 31,
December 31,
Secured mortgage facility in the amount of $5,500,000 with Fifth Third Bank for the acquisition of land and building in Mountaintop, Pennsylvania dated November 8, 2019 (the “Fifth Third Mortgage Facility”). The Fifth Third Mortgage Facility is secured by the assets acquired. During the year ended December 31, 2019, the Company drew down $3,600,000 of this facility. During the year ended December 31, 2020, the Company drew down an additional $1,900,000 of this facility. The interest rate is LIBOR plus 2.75% with interest only due through September 30, 2020, thereafter with principal amortized at a 20 years amortization rate and the balance due on the maturity date of September 2, 2025. The Company prepaid loan fees in connection with this loan in the amount of $72,916 which are considered a discount to the loan and are being amortized over the term of the note; $12,560 of this discount was amortized to interest expense during the year ended December 31, 2020. During the year ended December 31, 2020 the Company made principal and interest payments in the amount of $65,600 and $154,955, respectively, on this loan; during the year ended December 31, 2019 the Company made principal and interest payments in the amount of $0 and $25,064, respectively, on this loan. The Company also has in place an interest rate swap agreement (the “Fifth Third Interest Rate Swap”) with Fifth Third bank in connection with the Fifth Third Mortgage Facility. Pursuant to the Fifth Third Interest Rate Swap, the Company pays an additional base rate of 0.59% reduced by the difference between an initial LIBOR rate of 0.1513% and the month-end LIBOR rate. During the year ended December 31, 2020, the Company paid an additional $6,084 of interest pursuant to the Fifth Third Interest Rate Swap.
5,434,400
3,600,000
Loan payable to Fifth Third Bank dated April 21, 2020 pursuant to the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the principal amount of $1,650,221. The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. During the year ended December 31, 2020, the Company accrued interest in the amount of $11,528 on the PPP Loan.
1,650,221
-
Total
7,951,453
4,679,900
Discount
(58,537
)
(71,097
)
Net of discount
$ 7,892,916
$ 4,608,803
Current portion
$ 1,800,108
$ 727,766
Long-term maturities
6,151,345
3,952,134
Total
$ 7,951,453
$ 4,679,900
Aggregate maturities of long-term notes payable as of December 31, 2020 are as follows:
For the year ended December 31,
$ 1,800,108
758,463
403,903
340,354
4,648,625
Thereafter
-
Total
$ 7,951,453
Index
14. LEASE LIABILITIES - FINANCING LEASES
December 31,
December 31,
Financing lease obligation under a lease agreement for warehouse furniture and equipment truck dated October 14, 2020 in the original amount of $514,173 payable in sixty monthly installments of $9,942 including interest at the rate of 6.01%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amount of $22,216 and $7,609, respectively.
$ 491,957
$ -
Financing lease obligation under a lease agreement for a truck dated March 31, 2020 in the original amount of $152,548 payable in eighty-four monthly installments of $2,188 including interest at the rate of 5.44%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $15,270 and $6,612, respectively.
137,278
-
Financing lease obligation under a lease agreement for a truck dated November 5, 2018 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 year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $19,683 and $8,225, respectively.
87,914
107,597
Financing lease obligation under a lease agreement for a truck dated August 23, 2019 in the original amount of $80,413 payable in eighty-four monthly installments of $1,148 including interest at the rate of 5.0%. During the year ended December 31, 2020, the Company made principal and interest payments on this lease obligation in the amounts of $10,148 and $3,626, respectively.
66,992
77,140
Total
$ 784,141
$ 184,737
Current portion
$ 146,004
$ 29,832
Long-term maturities
638,137
154,905
Total
$ 784,141
$ 184,737
Aggregate maturities of lease liabilities - financing leases as of December 31, 2020 are as follows:
For the year ended December 31,
$ 146,004
140,205
163,740
162,981
133,692
Thereafter
37,519
Total
$ 784,141
Index
15. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2020:
Vesting of shares to officers
During the year ended December 31, 2020 in connection with stock based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the amount of $70,000 for the vesting of a total of 139,854 shares of common stock issuable to two of its independent board members, and $293,503 for the vesting of a total of 814,640 shares of common stock issuable to its Chief Executive Officer and its Director of Strategic Acquisitions pursuant to their employment agreements, which includes 330,758 shares with a market value of $113,887 received by the Chief Executive Officer subsequent to the expiration of a limited waiver provided through June 29, 2020 (see below). The Company also recognized non-cash compensation in the amount of $142,512 during the year ended December 31, 2020 in connection with stock options issuable to management and board members.
The chief executive officer provided a limited waiver through June 29, 2020 of certain rights and benefits contained in his employment agreement following a Change in Control (as defined in the employment agreement).
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share, and options to purchase 50,000 shares of common stock at a price of $1.00 per share; these options vest quarterly over two years and expire December 28, 2025.
For the year ended December 31, 2019:
GBC Sub, Inc. (d/b/a TheGiftBox)
Effective July 23, 2019, P Innovations acquired certain assets of GBC Sub, Inc. (d/b/a The GiftBox) (“GiftBox”) (the “GiftBox Asset Purchase Agreement”). GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based ecommerce. The consideration for the assets purchased was a nominal amount of cash. The GiftBox Asset Purchase Agreement also provides the sellers the option to acquire 30% of P Innovations subject to dilution for a period of thirty-six months following the date of the Giftbox Asset Purchase Agreement; the option will only be exercisable if there is a spinoff of P Innovations to Innovative Food Holdings’ shareholders.
Sale of common stock to related party
On July 23, 2019, the Company entered into a subscription agreement to sell 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000. See note 17.
Stock based compensation to Officers
During the year ended December 31, 2019 in connection with stock-based compensation based upon the terms of employment agreements with its employees and compensation agreements with the Company’s independent board members, the Company charged to operations the aggregate total amount of $226,803 for the vesting of a total of 387,899 shares of common stock issuable to its Chief Executive Officer, its Director of Strategic Acquisitions and to its two independent board members. In January 2020, the Company issued, net of income taxes, an aggregate of 316,966 of these shares. See note 17.
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.
Index
In January 2019, the Company awarded the following stock options to four of its 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.
In July 2019, the Company awarded five-year options to purchase 50,000 shares of common stock to a director at a price of $1.20 per share, vesting quarterly over a one year period.
The Company recognized non-cash compensation in the amount of $157,145 during the year ended December 31, 2019 in connection with these options.
16. INCOME TAXES
Deferred income taxes result from the temporary differences primarily attributable to amortization of intangible assets and debt discount and an accumulation of net operating loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $4,963,000, which will expire in various years through 2037 and net operating loss carryforwards of $6,510,000 which are carried-forward indefinitely subject to limitation. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to significant changes in the Company’s ownership, the Company’s future use of its existing net operating losses may be limited.
The provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 consist of the following:
Current
$ -
$ -
Deferred
-
-
Total
$ -
$ -
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable statutory income tax rate of 27.6% for the years ended December 31, 2020 and 2019 to the loss before taxes as a result of the following differences:
Income (loss) before income taxes
$ (7,665,024
)
$ 222,767
Statutory tax rate
27.6
%
27.6
%
Total tax (benefit) at statutory rate
(2,115,000
)
61,400
Permanent difference
152,000
141,100
Change in tax estimates
1,100
(2,221,000 )
Changes in valuation allowance
1,961,900
2,018,500
Income tax expense
$ -
$ -
Deferred income taxes reflect the tax impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The change in tax estimates in 2019 was to correct the deferred tax assets associated with the net loss carryforwards.
Index
Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2020, and 2019 significant components of the Company’s deferred tax assets are as follows:
Deferred Tax Assets:
Net operating loss carryforwards
$ 3,166,700
$ 1,867,400
Allowance for doubtful accounts
94,900
26,300
Property and equipment
158,200
91,800
Intangible assets
607,500
79,900
Net deferred tax assets
4,027,300
2,065,400
Valuation allowance
(4,027,300
)
(2,065,400
)
Net deferred tax assets
$ -
$ -
The Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
17. EQUITY
Common Stock
At December 31, 2020 and 2019 a total of 2,837,580 shares are deemed issued but not outstanding by the Company.
For the year ended December 31, 2020:
The Company charged the amount of $142,512 in connection with the vesting of stock options issuable to board members and employees in connection with their compensation agreements.
The Company charged the amount of $363,503 in connection with the vesting of 954,496 shares of common stock issuable to board members and employees in connection with their employment agreements. These shares are included in common stock outstanding at December 31, 2020.
The Company issued 38,943 shares of common stock with a fair value of $0.44 to an employee as a bonus. The fair value of $17,135 was charged to operations during the year ended December 31, 2020.
The Company issued 4,762 shares of common stock with an average fair value of $0.48 to a service provider; the fair value of $2,286 was charged to operations during the year ended December 31, 2020.
For the year ended December 31, 2019:
The Company issued a total of 131,136 shares of common stock to seven employees for previously accrued bonuses in the amount of $93,666.
The Company charged the amount of $157,145 in connection with the vesting of stock options issuable to board members and employees in connection with their employment agreements.
The Company charged the amount of $246,628 in connection with the vesting of 421,233 shares of common stock issuable to board members and employees in connection with their employment agreements. 414,807 of the vested shares, net of taxes due, are included in common stock outstanding at December 31, 2019.
The Company sold 349,650 restricted shares of common stock to Pet Box LLC, a company controlled by David Polinsky, a director of the Company. The purchase price was $0.715 per share for a total of $250,000.
The Company issued 19,048 shares of common stock with an average fair value of $0.546 to a service provider; the fair value of $10,405 was charged to operations during the year ended December 31, 2019.
The Company acquired 250,000 shares of common stock from an investor; the purchase price was $0.50 per share for a total of $125,000; these shares were retired to treasury during the year ended December 31, 2019.
Index
Treasury Stock
At December 31, 2020 and 2019, the Company had 2,623,171 shares of treasury stock.
Warrants
The Company had no warrants outstanding at December 31, 2020 or 2019.
Options
For the year ended December 31, 2020:
On January 30, 2020, the Company issued to each of two directors options to purchase 50,000 shares of common stock (an aggregate of 100,000 options) at a price of $1.20 per share, vesting January 30, 2021, and expiring January 30, 2023. Each grant of 50,000 options had a fair value of $1,216 on the date of the grant.
On December 29, 2020, the Company issued to its Chief Financial Officer options to purchase 50,000 shares of common stock at a price of $0.60 per share with a fair value on the date of the grant of $7,775, and options to purchase 50,000 shares of common stock at a price of $1.00 per share with a fair value on the date of the grant of $6,291; these options vest quarterly over two years and expire December 28, 2025.
During the year ended December 31, 2020, an aggregate of 475,000 options to purchase shares of common stock at a weighted average price of $1.76 expired.
For the year ended December 31, 2019:
In January 1, 2019, the Company issued the following options:
-
Options to purchase 90,000 shares of common stock at a price of $0.62 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 360,000 options);
-
Options to purchase 135,000 shares of common stock at a price of $0.85 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 540,000 options);
-
Options to purchase 225,000 shares of common stock at a price of $1.20 per share, vesting quarterly over three years, and expiring December 31, 2023 issued to four of its directors (a total of 900,000 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 as of December 31, 2020:
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
$
0.60
50,000
4.99
$
0.60
-
$
-
$
0.62
360,000
3.00
$
0.62
240,000
$
0.62
$
0.85
540,000
3.00
$
0.85
360,000
$
0.85
$
1.00
50,000
4.99
$
1.00
-
-
$
1.10
75,000
0.37
$
1.10
75,000
$
1.10
$
1.20
1,,050,000
2.84
$
1.20
650,000
$
1.20
$
1.50
125,000
1.00
$
1.50
125,000
$
1.50
2,250,000
2.82
$
1.02
1,450,000
$
1.04
Index
Transactions involving stock options are summarized as follows:
Number of Shares
Weighted Average
Exercise Price
Options outstanding at December 31, 2018
1,050,000
$ 1.80
Granted
1,850,000
0.98
Exercised
-
-
Cancelled / Expired
(375,000
)
1.43
Options outstanding at December 31, 2019
2,525,000
$ 1.23
Granted
200,000
1.00
Exercised
-
-
Cancelled / Expired
(475,000
)
1.76
Options outstanding at December 31, 2020
2,250,000
$ 1.02
Aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 and 2019 was $0. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $0.29 and $0.44 as of December 31, 2020 and 2019, respectively, and the exercise price multiplied by the number of options outstanding.
During the year ended December 31, 2020 and 2019, the Company charged $142,512 and $157,145, respectively, to operations related to recognized stock-based compensation expense for stock options.
The exercise price grant dates in relation to the market price during 2020 and 2019 are as follows:
Exercise price lower than market price
-
-
Exercise price equal to market price
-
-
Exercise price exceeded market price
$ 0.60 to 1.50
$ 0.62 to 1.20
As of December 31, 2020, and 2019, there were 800,000 and 1,675,000, respectively, non-vested options outstanding.
Accounting for warrants and stock options
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
December 31,
December 31,
Volatility
41.7-82.7
%
59.38-63.16
%
Dividends
$ -
$ -
Risk-free interest rates
0.37-1.37
%
1.79-2.49
%
Term (years)
3.00-5.00
3.00-4.93
Index
18. COMMITMENTS AND CONTINGENCIES
Contingent Liability
Pursuant to the igourmet Asset Purchase Agreement, the Company recorded contingent liabilities in the original amount of $787,800. This amount relates to certain performance based payments over the twenty-four months following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2018, the Company reduced this amount by $392,900 as the performance goals for the first year were not met. During the year ended December 31, 2019, the Company reduced this amount by $132,300 as the performance goals for the second year were not met. During the year ended December 31, 2019, the Company paid the amount of $39,000 in connection with the additional liabilities. During the year ended December 31, 2020, the Company paid the amount of $40,000 in connection with the additional liabilities. At December 31, 2020, the amount of $67,000 remains on the Company’s consolidated balance sheet as a current contingent liability, and $116,600 as a long term contingent liability.
Pursuant to the Mouth Foods LLC Asset Acquisition, the Company recorded contingent liabilities in the amount of $240,576. These amounts relate to the estimate of certain performance based payments following the acquisition date as well as to certain additional liabilities that the Company has evaluated and has recorded on a contingent basis. During the year ended December 31, 2019, the Company paid the amount of $120,576 in connection with these liabilities. At December 31, 2020, $120,000 is classified as a current contingent liability.
License Agreements
In May 2019, the Company entered into a royalty-based license agreement, through December 31, 2022 with a lifestyle brand, which provides the exclusive right, with certain carve-outs and limitations, to sell and promote branded gift baskets for certain channels including: retail, warehouse club stores, certain of the Company’s current e-commerce channels, and other e-commerce channels such as amazon.com (the “May 2019 License Agreement”). Pursuant to the May 2019 License Agreement, the Company paid an initial royalty deposit in the amount of $50,000 towards the minimum royalty, which is classified as other current assets on the Company’s balance sheet at December 31, 2019. Future royalty amounts owed for minimum payments in connection with the May 2019 License Agreement will be deducted from this deposit The royalty rate is 5% of net sales, and the Company is required, with certain exceptions and exclusions, to make minimum royalty payments of $100,000 through the end of 2020, $110,000 in 2021, and $125,000 in 2022, respectively. As of December 31, 2020, the Company has made the required minimum royalty payments.
Litigation
On September 16, 2019, an action (the “PA Action”) was filed in the Court of Common Pleas of Philadelphia County, Trial Division, against, among others, the Company and its wholly-owned subsidiaries, Innovative Gourmet LLC and Food Innovations, Inc. Since that time, other parties involved in the incident have joined as plaintiffs in the PA Action. The complaint in the PA Action alleges, inter alia, wrongful death and negligence by a driver employed by Innovative Gourmet and indicates a demand and offer to settle for fifty million dollars. We expect that should a settlement occur the amount to resolve the Action would be substantially lower. The Company and its subsidiaries had auto and umbrella insurance policies, among others, that were in effect for the relevant period. While the initial response from the relevant insurance companies has been to provide coverage only under an auto policy (which has been fully tendered) and umbrella policy that covers one of the Company’s subsidiaries, we intend to further aggressively pursue the Company’s and its subsidiaries’ insurance coverage under their umbrella and other available policies. The Company has brought an action for declaratory judgement against one of the insurance companies under which it had an umbrella policy so that the court can compel it to provide liability coverage. In addition, the Company has been defending this action and believes that the likely outcome would result in the liabilities being covered by its insurance carriers. However, if the Company was found responsible for damages in excess of its available insurance coverage, such damages in excess of the coverage could have a material adverse effect on the Company’s operations. On July 16, 2020, the court granted the Company's motion to stay the case through the final adjudication of an additional pending legal proceeding against the driver in connection with the events related to the case. It is not anticipated that the Company and its subsidiaries will be a party to any other legal proceedings in connection with this matter.
From time to time, the Company has become and may become involved in certain lawsuits and legal proceedings which arise in the ordinary course of 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 financial position or our business and the outcome of these matters cannot be ultimately predicted.
Index
19. MAJOR CUSTOMER
The Company’s largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 40% and 57% of total sales in each of the years ended December 31, 2020 and 2019. A contract between our subsidiary, Food Innovations, and U.S. Foods 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 contract 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 December 31, 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.
20. FAIR VALUE MEASUREMENTS
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of the Company’s stock option, convertible debt features and warrant instruments is determined using option pricing models.
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.” Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
Level 1 -
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 -
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 -
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions.
As December 31, 2020 and 2019, the Company did not have financial assets or liabilities that are required to be accounted for at fair value on a recurring basis.
21. SUBSEQUENT EVENTS
Subsequent to December 31, 2020, we applied for and received new loans in the amount of $1,748,814 under the Paycheck Protection Program (the “PPP Loan”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) . The term of the PPP Loan is two years, and the annual interest rate is 1%. Under the terms of the CARES Act, PPP Loan recipients can apply for, and be granted forgiveness for, all or a portion of loans granted under the Paycheck Protection Program. No assurance is provided that the Company will obtain forgiveness of this PPP Loan in whole or in part.
Index

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. We concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act were effective as of December 31, 2020 to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in SEC rules and forms and our disclosure controls and procedures are also effective to ensure that the information required to be disclosed in reports that we file under the Exchange Act is accumulated and communicated to our principal executive and financial officers to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Management has 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 December 31, 2020 at the reasonable assurance level. Management of the Company believes that this deficiency is primarily due to the smaller size of 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 recently named a new Chief Financial Officer and also expect to retain additional qualified personnel and accounting and systems consultants to continue to remediate this control deficiency in the future.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives.
Changes in Internal Control over Financial Reporting
We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Index
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None.
Index
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance
Set forth below are the directors and executive officers of our Company, their respective names and ages, positions with our Company, principal occupations and business experiences during at least the past five years.
Name
Age
Position
Sam Klepfish
Chairman and Chief Executive Officer
Justin Wiernasz
Director of Strategic Acquisitions and Director
Joel Gold
Director
Hank Cohn
Director
David Polinsky
Director
James C. Pappas
Director
Mark Schmulen
Director
Richard Tang
Chief Financial Officer
Directors
Sam Klepfish
Mr. Klepfish has been a director since December 1, 2005. From November 2007 to present Mr. Klepfish is the CEO of Innovative Food Holdings and its subsidiaries. From March 2006 to November 2007 Mr. Klepfish was the interim president of the Company and its subsidiary. Since February 2005 Mr. Klepfish was also a Managing Partner at ISG Capital, a merchant bank. From May 2004 through February 2005 Mr. Klepfish served as a Managing Director of Technoprises, Ltd. From January 2001 to May 2004 he was a corporate finance analyst and consultant at Phillips Nizer, a New York law firm. Since January 2001 Mr. Klepfish has been a member of the steering committee of Tri-State Ventures, a New York investment group. From 1998 to December 2000, Mr. Klepfish was an asset manager for several investors in small-cap entities.
Joel Gold, Director
Mr. Gold is currently a partner in a merchant banking firm, and has served on the board and committees of numerous companies. Prior to that, he was an investment banker at Buckman, Buckman and Reid located in New Jersey, a position he held since May 2010. Prior there to, from October 2004, he was head of investment banking of Andrew Garrett, Inc. From January 2000 until September 2004, he served as Executive Vice President of Investment Banking of Berry Shino Securities, Inc., an investment banking firm also located in New York City. From January 1999 until December 1999, he was an Executive Vice President of Solid Capital Markets, an investment-banking firm also located in New York City. From September 1997 to January 1999, he served as a Senior Managing Director of Interbank Capital Group, LLC, an investment banking firm also located in New York City. From April 1996 to September 1997, Mr. Gold was an Executive Vice President of LT Lawrence & Co., and from March 1995 to April 1996, a Managing Director of Fechtor Detwiler & Co., Inc., a representative of the underwriters for the Company’s initial public offering. Mr. Gold was a Managing Director of Furman Selz Incorporated from January 1992 until March 1995. From April 1990 until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co., Inc. (“Bear Stearns”). For approximately 20 years before he became affiliated with Bear Stearns, he held various positions with Drexel Burnham Lambert, Inc.
Hank Cohn, Director
Mr. Cohn has been a director since October 29, 2010. Hank Cohn is currently CEO of P1 Billing, LLC, a revenue cycle management services provider to ambulatory medical clinics. P1 Billing is a spinoff of PracticeOne Inc., (formerly PracticeXpert, Inc., an OTCBB traded company), an integrated PMS and EMR software and services company for physicians. Mr. Cohn served as President and Chief Executive Officer of PracticeOne from December 2009 until December 2009, at which time he sold the company to Francison Partners, one of the largest, global technology focused, private equity firms in Silicon Valley. Prior to that, Mr. Cohn worked with a number of public companies. A partial list of his past and present board memberships include: Analytical Surveys, Inc., Kaching, Inc., and International Food and Wine, Inc., currently Evolution Resources Inc. Mr. Cohn also served as the executive vice president of Galaxy Ventures, LLC a closely-held investment fund concentrating in the areas of bond trading and early stage technology investments, where he acted as portfolio manager for investments.
Index
Justin Wiernasz, Director of Strategic Acquisitions
Mr. Wiernasz has been a director since November 1, 2013. Effective on May 11, 2018, Mr. Justin Wiernasz resigned his position of President of Innovative Food Holdings, Inc. which he held since July 31, 2008 and assumed the position of Director of Strategic Acquisitions. Prior thereto he was the Executive Vice President of Marketing and Sales and Chief Marketing Officer of our operating subsidiary, Food Innovations, Inc. since May 2007 and the President of Food Innovations and our Chief Marketing Officer since December 2007. Prior thereto, he was at USF, our largest customer, for 13 years. From 2005 to 2007 he was the Vice President of Sales & Marketing, USF, Boston, and prior thereto, from 2003 to 2005 he was a National Sales Trainer at USF, Charleston SC, from 1996 to 2003 he was the District Sales Manager at USF, Western Massachusetts and from 1993 to 1996 he was Territory Manager, USF, Northampton, Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner and operator J.J.’s food and spirit, a 110 seat restaurant.
Richard Tang , CFO
Richard Tang has been CFO at IVFH since December 29, 2020. Mr. Tang, has more than 25 years of experience in senior leadership roles, working in media, e-commerce, CPG and food-based sectors, most recently as CFO for Van Leeuwen Ice Cream LLC, a nationwide manufacturer of ultra-premium dairy and vegan ice cream distributed and sold through 2,000 supermarket and independent chain doors nationwide and multi-state brick and mortar locations. Prior thereto, from 2017 to 2019, Mr. Tang was CFO at Nutraceutical Wellness, Inc., a global subscription-based CPG e-commerce and business-to-business wellness vitamin and supplements consumer business. Prior thereto, from 2012-2016, Tang was Senior Vice President, Corporate Development at Fareportal, the third largest Online Travel Agency in North America. Mr. Tang has also held senior financial roles at The Condé Nast Publications, Time Warner, and Walt Disney Corporation. Mr. Tang holds a Master of Business Administration from Boston University Graduate School of Management and a Bachelor of Science from Boston College.
David Polinsky, Director
David A. Polinsky has been a director since July 24, 2019. Mr. Polinsky has served as Chief Financial Officer of Rafael Holdings, Inc. (NYSE: RFL) since December 2017. Mr. Polinsky co-founded Rafael Pharmaceuticals and served as its Vice President, General Counsel and Corporate Secretary from 2002 and as President, General Counsel and Secretary from 2016 through March 2018. He also served on Rafael Pharmaceutical’s Board from 2002 until 2014. Prior to joining Rafael Pharmaceuticals, from 1996 to 2002, he served as Vice President and General Counsel for a New York-based real estate focused investment and management company, Square Management Corp., leading the investment analysis in and management of residential, office, retail and development properties. Previously and in partnership with the Honorable Edward I. Koch, former Mayor of New York City, Mr. Polinsky founded in 1999 and served as CEO of a company that licensed and developed TheLaw.com as a leading consumer focused legal information site. Mr. Polinsky earned his Juris Doctorate from Fordham University School of Law in 1996 and his Bachelor of Arts from Yeshiva University in 1993. Mr. Polinsky also earned the CFA Institute’s Investment Foundations certificate.
James C. Pappas, Director
James C. Pappas has been a director since January 30, 2020. Mr. Pappas has served as the Managing Member of JCP Investment Management, LLC (“JCP Management”), an investment firm, and the sole member of JCP Investment Holdings, LLC (“JCP Holdings”), since June 2009. Mr. Pappas has also served as a director of Tandy Leather Factory, Inc. (NASDAQ:TLF), a retailer and wholesale distributor of a broad line of leather and related products, since June 2016. Mr. Pappas previously served as a director of each of Jamba, Inc. (formerly NASDAQ:JMBA), a leading health and wellness brand and the leading retailer of freshly squeezed juice, from January 2015 until the completion of its sale in September 2018, U.S. Geothermal Inc. (formerly NYSEMKT:HTM), a leading geothermal energy company, from September 2016 until the completion of its sale in April 2018, and The Pantry, Inc. (formerly NASDAQ:PTRY), a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country, from March 2014 until the completion of its sale in March 2015. He also previously served as Chairman of the board of directors of Morgan’s Foods, Inc. (formerly OTC:MRFD), a then publicly traded company, from January 2013 until May 2014, when the company was acquired by Apex Restaurant Management, Inc., after originally joining its board as a director in February 2012. From 2005 until 2007, Mr. Pappas worked for The Goldman Sachs Group, Inc. (NYSE:GS) (“Goldman Sachs”), a multinational investment banking and securities firm, in its Investment Banking / Leveraged Finance Division. As part of the Goldman Sachs Leveraged Finance Group, Mr. Pappas advised private equity groups and corporations on appropriate leveraged buyout, recapitalization and refinancing alternatives. Prior to Goldman Sachs, Mr. Pappas worked at Banc of America Securities, the investment banking arm of Bank of America Corporation (NYSE:BAC), a multinational banking and financial services corporation, where he focused on Consumer and Retail Investment Banking, providing advice on a wide range of transactions including mergers and acquisitions, financings, restructurings and buy-side engagements. Mr. Pappas received a BBA and a Masters in Finance from Texas A&M University.
Index
Mark Schmulen, Director
Mark Schmulen has been a director since January 30, 2020. Mr. Schmulen is a co-founder and has served as CEO of Chirp Systems, Inc., a venture-backed smart access solution for multifamily property owners, since October 2019. Mr. Schmulen has also served as the managing director of Jelly Capital, LLC, a private investment fund focused on early stage technology and real estate investments, since May 2015, and as an investment advisor representative for Forum Financial, LP, an independent investment advisor, since November 2016. Previously, he served as General Manager of Social Media for Constant Contact, Inc. (formerly NASDAQ:CTCT), a provider of digital marketing solutions, from May 2010 until May 2014. Prior to that, he was co-founder and served as CEO of Nutshell Mail, Inc., a social media marketing solution, from 2008 until its acquisition by Constant Contact, Inc. in 2010. Mr. Schmulen began his career as an investment banking analyst with JPMorgan Chase Bank. Currently, he serves on the board of directors for the Shlenker School, since August 2017 and is a Director of the HHF Foundation, benefiting early childhood education, since December 2014. Mr. Schmulen holds a B.S. from the University of Pennsylvania and an M.S. in Management from Stanford’s Graduate School of Business.
Qualification of Directors
We believe that all of our directors are qualified for their positions and each brings a benefit to the board. Messrs. Kelpfish and Wiernasz, as our officers, are uniquely qualified to bring management’s perspective to the board’s deliberations. Mr. Gold, with his lengthy career working for broker/dealers, bring a “Wall Street” perspective and Mr. Schmulen, with his private equity experience, and Messrs. Cohn and Polinsky, with their prior history of being executives and directors of other companies, bring a well-rounded background and wealth of general business experience to our board. Mr. Pappas, brings both his investment and corporate finance background and food industry experience to the board.
Committees
The Board of Directors currently has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. The members of the Compensation Committee and of the Nominating and Corporate Governance Committee are Messrs. Gold, Cohn, Pappas and Schmulen and the members of the Audit Committee are Messrs. Gold, Cohn and Schmulen with Mr. Cohn designated as the Audit Committee Financial Expert. All of the members of each committee have been determined by the Board of Directors to be independent.
Agreements with Directors
Prior to Mr. Pappas’ appointment to the Board, as described in a Current Report on Form 8-K filed on January 30, 2020 (the “January 8-K”), the Company and Mr. Pappas entered into an Agreement (the “Agreement”) which, among other things, provided that (i) the Company (x) will support the continued directorships of the New Directors (as defined in the Agreement) at the next two annual meetings and (y) after 18 months will appoint another nominee of JCP (as defined in the Agreement”) to the Board and support such nominee at the next annual meeting, provided that such nominee shall be subject to the approval (which shall not be unreasonably withheld) of the Nominating and Corporate Governance Committee of the Board and the Board after exercising their good faith customary due diligence process and fiduciary duties; and (ii) JCP and the Company agreed to certain standstill provisions, as more fully described in the Agreement. As of the date hereof, the New Directors referred to in the Agreement are Messrs. Pappas and Schmulen.
Code of Ethics
We have adopted a Code of Ethics that applies to each of our employees, including our CEO, our principal financial officer, as well as members of our Board of Directors. A copy of such Code has been publicly filed with, and is available for free from, the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
During 2020, Messrs. Gold, Klepfish, Wiernasz and Cohn did not file a Form 4 in connection with the receipt of shares and Messrs. Pappas, Schmulen and Tang did not file a Form 4 in connection with the receipt of options and Mr. Tang did not file a Form 3. None of the unfiled Forms 4 related to the public sale of securities.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The following table sets forth information concerning the compensation for services rendered to us for the two years ended December 31, 2020, of our Chief Executive Officer, our principal financial officer and our highest compensated officer whose annual compensation exceeded $100,000 in the fiscal year ended December 31, 2020, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
Index
SUMMARY COMPENSATION TABLE
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Sam Klepfish
$ 406,320
$ -
$ 276,387
(a)
$ -
$ -
$ -
$ 3,406
(b)
$ 686,113
CEO
$ 341,646
$ -
$ 150,000
(a)
$ -
$ -
$ -
$ 2,493
(b)
$ 494,139
Justin Wiernasz
$ 392,638
$ 10,000
(c)
$ 17,116
(a)
$ -
$ -
$ -
$ 26,086
(b)
$ 445,840
Director of Strategic Acquisitions
$ 376,955
$ 25,000
(c)
$ 16,398
(a)
$ -
$ -
$ -
$ 15,619
(b)
$ 433,972
Richard Tang
(d)
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Chief Financial Officer
$ -
$ -
$ -
$ -
$ -
$ -
Norma Vila,
(d)
$ 157,884
$ -
$ -
$ -
$ -
$ -
$ 3,241
(b)
$ 161,125
Principal Accounting Officer (e)
$ -
$ -
$ -
$ -
$ -
$ -
John McDonald,
(d)
$ 192,358
$ -
$ -
$ -
$ -
$ -
$ 6,592
(b)
$ 198,950
Principal Accounting Officer (f)
$ 210,477
$ -
$ -
$ -
$ -
$ -
$ 8,405
(b)
$ 218,882
(a) Consists of the portion of restricted stock awards which were recognized as a period cost during the year for services as an executive officer.
(b) Consists of cash payments for health care benefits.
(c) Consists of a cash bonus paid during the year for services performed in the previous year.
(d) Mr. Tang’s employment with the Company was effective December 29, 2020.
(e) Ms. Vila assumed the rule of Principal Accounting Officer effective November 12, 2020.
(f) Mr. McDonald’s employment with the Company ended effective November 18, 2020.
Index
Outstanding Equity Awards at Fiscal Year-End as of December 31, 2020
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised
Options (#)
Exercisable
Number of Securities Underlying Unexercised Options(#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
Sam Klepfish
300,000
(a)
$
87,000
(b)
(a) Restricted stock awards vest according to the following schedule: An additional 125,000 restricted stock awards will vest contingent upon the attainment of a stock price of $2.00 per share for 20 consecutive 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 consecutive trading days.
(b) Amounts are calculated by multiplying the number of shares shown in the table by $ 0.29 per share, which is the closing price of common stock on December 31, 2020 (the last trading day of the 2019 fiscal year).
Director Compensation
Name
Fees
Earned
or Paid
in Cash ($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Joel Gold
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Sam Klepfish
-
-
34,120
(b)
-
-
-
34,120
Hank Cohn
30,000
35,000
(a)
34,120
(b)
-
-
-
99,120
Justin Wiernasz
-
-
34,120
(b)
-
-
-
34,120
David Polinsky
-
-
3,802
(c)
-
-
-
3,802
James C. Pappas
-
-
1,115
(d)
-
-
-
1,115
Mark Schmulen
-
-
1,115
(d)
-
-
-
1,115
(a) Represents the amount charged to operations during the year ended December 31, 2020 for 90,000 shares of the Company’s common stock with a fair value of $45,000; 55,545 shares of the Company’s common stock with a fair value of $18,515 vesting over a three-year period; and 64,240 shares of the Company’s common stock with a fair value of $30,000 vesting over a three-year period.
(b) Represents the amount charged to operations during the year ended December 31,2020 for the following: (i) five-year options to purchase 90,000 shares of the Company’s common stock at a price of $0.62 per share, vesting over three years; (ii) five-year options to purchase 135,000 shares of the Company’s common stock at a price of $0.85 per share, vesting over three years; and (iii) five year options to purchase 225,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over three years.
(c) Represents the amount charged to operations during the year ended December 31, 2020 for three-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
(d) Represents the amount charged to operations during the year ended December 31, 2020 for two-year options to purchase 50,000 shares of the Company’s common stock at a price of $1.20 per share, vesting over one year.
Index
Employment Agreements
Our subsidiary, Food Innovations, has employment agreements with certain officers and certain employees. The employment agreements provide for salaries and benefits, including stock grants and extend up to five years. In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause.
SAM KLEPFISH
Effective March 29, 2017, we entered into an employment agreement with Mr. Sam Klepfish, our CEO. This agreement, which ran through December 31, 2019, maintained the then-current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee comprised solely of independent directors, we entered into a new employment agreement with Mr. Sam Klepfish having an effective date of January 28, 2019 and terminating three years thereafter with up to two two-year extension periods. The first two year extension period was exercised in 2021. The agreement provides a base salary in the amount of $300,000 with annual increases of at least $25,000 and annual stock compensation of 50% of the base salary. The agreement also provides for additional bonuses of up to 25% of base compensation, based on increases in EBITDA (as defined in the agreement) and increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
JUSTIN WIERNASZ
Effective March 29, 2017, we entered into an employment agreement with Mr. Wiernasz, our Director of Strategic Acquisitions. This agreement, which ran through December 31, 2019, maintained the current base salary and provided for all bonuses and salary increases to be approved by the compensation committee.
As of January 28, 2019, upon approval by the Company’s compensation committee, we entered into a new employment agreement with Mr. Justin Wiernasz, having an effective date of January 28, 2019 and terminating three years thereafter with up to two extension periods; one for two years and one for one year. The agreement provides a base salary in the amount of $326,000 with annual increases of at least 5% and annual stock compensation of 5% of the base salary. This agreement was further modified to a base salary of $350,000 in 2019. The agreement also provides for additional bonuses of up to 35% of base compensation, and based upon increases in our stock price as reflected in our market capitalization and other perquisites and benefits as detailed therein. The agreement also contains change of control, confidentiality, non-compete and non-solicitation provisions.
RICHARD TANG
Effective December 29, 2020, we entered into a letter agreement with Mr. Richard Tang to become our CFO. The agreement provides a base salary in the amount of $200,000 for 2021 and base compensation for 2022 to target an increase of 20%-25% with a targeted 15-20% bonus structure based on milestones to be determined by the Company’s Board of Directors in its sole discretion. For 2021, Mr. Tang will have the opportunity to earn a performance stock bonus of $40,000 and a cash bonus of $25,000 based upon satisfying certain specified milestones and an additional bonus equal to up to 10% of combined base salary and bonus based upon criteria to be determined by the Company’s Board of Directors. The agreement also provided for a one-time stock option grant in the amount of 100,000 shares (half of which is exercisable $0.60 and half at $1.00), which vests in two years. Similar to our other employees, Mr. Tang’s employment is at-will and he is subject to the Company’s rules, regulations and policies, including specifically and without limitation, confidentiality and provisions.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of a compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a director or a member of our Compensation Committee.
Index

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information as of April 15, 2021, with respect to the beneficial ownership of our common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each Named Officer, and (4) all our directors and executive officers as a group. Unless otherwise stated, each person listed below uses the Company’s address. Pursuant to SEC rules, includes shares that the person has the right to receive within 60 days from May 11, 2020.
Name and Address of Beneficial Owners
Number of Shares Beneficially Owned
Percent of Class
Sam Klepfish (Officer, Director)
(1)
3,540,204
9.9
%
Joel Gold (Director)
(2)
829,997
2.3
%
Justin Wiernasz (Officer, Director)
(3)
1,993,364
5.6
%
Richard Tang (Officer)
(4)
12,500
0.1
%
Hank Cohn (Director)
(3)
705,943
2.0
%
David Polinsky (Director)
(5)
699,650
2.0
%
James C. Pappas (Director)
(6)
4,724,935
13.3
%
Mark Schmulen (Director)
(5)
50,000
0.1
%
A group consisting of Denver J. Smith, CRC Founders Fund, LP, Donald E. Smith, Richard G. Hill, Samuel N. Jurrens, 73114 Investments, LLC, Youth Properties, LLC, and Paratus Capital, LLC
(7)
2,774,620
7.82
%
Insight Wealth Management
(8)
2,913,021
8.2
%
All officers and directors as a whole (7 persons)
(9)
9,774,043
34.1
%
(1)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 16,250 shares of common stock owned by Mr. Klepfish's spouse, ownership of which is disclaimed by Mr. Klepfish.
(2)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021. Also includes 18,400 shares of common stock held by Mr. Gold’s spouse.
(3)
(4)
Includes options to purchase 312,500 shares of common stock exercisable at June 15, 2021.
Includes options to purchase 12,500 shares of common stock exercisable at June 15, 2021.
(5)
Includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021.
(6)
Includes 4,561,443 shares held by JCP Investment Partnership, LP and 113,492 shares held by JCP Investment Management, LLC. This information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on September 17, 2020. Also includes options to purchase 50,000 shares of common stock exercisable at June 15, 2021. The address of JCP Investment Partnership, LP and JCP Investment Management, LLC is 1177 West Loop South, suite 1320, Houston, TX 77027. Information gathered from a Schedule 13D/A filed with the Securities and Exchange Commission on February 27, 2019.
(7)
Pursuant to a Schedule 13D/A filed on January 11, 2021 with the Securities and Exchange Commission, Mr. Denver Smith is part of a group which reports beneficially owning an aggregate of 2,774,620, although Mr. Denver Smith only has sole voting and dispositive power over 765,637 of such shares. Mr. Smith’s address is 350 S Race Street, Denver, Colorado 80209.
(8)
Pursuant to a Schedule 13G filed on February 8, 2021 with the Securities Exchange Commission, the address of The Address of Insight Wealth Management is 1175 Peachtree St NE Suite 350, Atlanta, GA 30361. Amount consists of 1,233,273 shares with sole voting and dispositive power, and 1,679,748 shares with shared dispositive power. The issuer retains sole voting power for 1,679,748 shares.
(8)
Consists of 11,144,093 shares of common stock held by officers and directors. Also includes options to purchase 1,412,500 shares of common stock exercisable at June 15, 2021.
Index

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
We are not currently subject to the requirements of any stock exchange or national securities association with respect to having a majority of “independent directors”. Messrs. Gold, Cohn, Polinsky, Pappas and Schmulen are “independent” and only Messrs. Klepfish and Wiernasz, by virtue of being our Officers, are not independent. Mr. Klepfish and Mr. Wiernasz do not participate in board discussions concerning their compensation.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
Audit Fees
The Company engaged Liggett & Webb P.A. (“LW”) as our independent registered public accounting firm since November 9, 2012. During the year ended December 31, 2020 and 2019, LW billed us audit fees of approximately $144,000 and $144,000, respectively.
Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by LW that are reasonably related to the performance of the audit or review of our consolidated financial statements including our quarterly interim reviews on Form 10-Q and are reported under Audit Fees above.
Tax Fees
LW tax fees were $20,000 and $20,000 for the years ended December 31, 2020 and 2019, respectively.
All Other Fees
LW has not billed any other fees since their engagement on November 9, 2012.
For the fiscal years ended December 31, 2020 and 2019 the board of directors considered the audit fees, audit-related fees, tax fees and other fees paid to our accountants, as disclosed above, and determined that the payment of such fees was compatible with maintaining the independence of the accountants. Our board of directors pre-approves all auditing services and all permitted non-auditing services (including the fees and terms thereof) to be performed by our independent registered public accounting firm, except for de minimis non-audit services that are approved by the board of directors prior to the completion of the audit.
Index
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits
EXHIBIT NUMBER
3.1
Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005)
3.2
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011)
3.2.1
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s current report Form 8-K filed with the Securities and Exchange Commission on January 23, 2018)
10.1
Employment Agreement with Sam Klepfish (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.2
Employment Agreement Justin Wiernasz (incorporated by reference to exhibit 10.2 of the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 21, 2012)
10.3
Loan Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (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 March 15, 2013)
10.4
Security Agreement between the registrant and Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.5
Mortgage by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.6
Note by registrant in favor of Fifth Third Bank effective February 26, 2013 (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2013)
10.7
Employment Agreement with Sam Klepfish dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.8
Employment Agreement with Justin Wiernasz dated as of March 29, 2017 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2017)
10.9
Asset Purchase Agreement dated as of January 22, 2018 by and among Innovative Gourmet, LLC, a subsidiary of the registrant, and igourmet LLC and igourmet NY LLC (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.10
Loan Sale Agreement dated as of January 10, 2018 between Food Funding, LLC, a subsidiary of the registrant and UPS Capital Business Credit (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 30, 2018)
10.11
Fifth Amendment to Restated Loan Agreement dated February 28, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.12
Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of February 28, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
Index
10.13
Draw Promissory Note of the registrant and its subsidiaries in favor of Fifth Third Bank dated as of March 13, 2018 (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.14
Master Loan and Security Agreement dated March 13, 2018 between Fifth Third Bank and the registrant and its subsidiaries (incorporated by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 29, 2018).
10.15
Employment Agreement with Sam Klepfish dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.16
Employment Agreement with Justin Wiernasz dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.17
Form of Director Agreement dated as of January 28, 2019 (incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 1, 2019)
10.18
Eighth Amendment to Restated Loan Agreement dated as of November 9, 2019 between Fifth Third Bank, National Association, and the Registrant and certain of its subsidiaries (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.19
Promissory Note effective November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.20
Mortgage, Assignment of Leases, Fixture Filing and Security Agreement date as of November 9, 2019 between Fifth Third Bank, National Association, and Innovative Food Properties, LLC, a wholly-owned subsidiary of the Registrant (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019).
10.21
Agreement for Purchase and Sale of Real Estate dated as of August 9, 2019 (incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2019).
Code of Ethics (incorporated by reference to exhibit 14 of the Company’s Form 10-KSB/A for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 31, 2008)
Subsidiaries of the Company
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Principal Accounting Officer
32.1
Rule 1350 Certification of Chief Executive Officer
32.2
Rule 1350 Certification of Principal Accounting Officer
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
Index