INNOVATIVE FOOD HOLDINGS INC

Previous wording

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts pursuant to the guidance of Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) as codified in Accounts Standards Codification (ASC) 326, Financial Instruments – Credit Losses. Under ASC 326, the Company utilizes a current and expected credit loss (CECL) impairment model. ASU 2016-13 became effective for us on January 1, 2023. 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 $69,359 and $46,477 at March 31, 2024 and December 31, 2023, respectively.

Current wording

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts pursuant to the guidance of Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) as codified in Accounts Standards Codification (ASC) 326, Financial Instruments – Credit Losses. Under ASC 326, the Company utilizes a current and expected credit loss (CECL) impairment model. ASU 2016-13 became effective for us on January 1, 2023. 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 $82,336 and $46,477 at June 30, 2024 and December 31, 2023, respectively.

Previous wording

We have built a team consisting of passionate, committed, and food-obsessed people: our average tenure (outside of seasonal workers) across the company is over five years. Our merchandising team has deep connections within the specialty food space around the globe. Our Chef Advisors, as ex-chefs themselves, go beyond customer service to offer our Professional Chefs customer support, menu ideas, and preparation guidance.

Current wording

We have built a team consisting of passionate, committed, and food-obsessed people: our average tenure (outside of seasonal workers) across the company is over five years. Our merchandising team has deep connections within the specialty food space around the globe. Our customer service and sales teams, as ex-chefs themselves, go beyond customer service to offer our Professional Chefs customer support, menu ideas, and preparation guidance.

Previous wording

Revenue decreased by $1.0 million or approximately 5.7% to $15.7 million for the three months ended March 31, 2024 from $16.7 million in the prior year. These revenue declines were driven primarily by our consumer eCommerce business sales declining by 41.7%, as we began the ramp-down of the business. In fact, this shift of focus to our Specialty Foodservice business has already begun to make an impact. After several quarters of decline our Specialty Foodservice business sales grew by 1.4%. While we expect this Specialty Foodservice revenue to generate positive growth for the year, Q2 will likely be our toughest quarter. As we’ve said previously, the B2B sales cycle is long, but we remain optimistic in how our sales efforts are progressing. Shortly after the close of the first quarter, we announced the signing of a contract with a new customer, Cheney Brothers, and conversations with other large potential customers continue. Within our Specialty Foodservice business, we also continue to build out our sourcing efforts, significantly ramping up the pace of our vendor and item onboarding, which we also expect to begin to contribute to revenue growth in the back half of 2024.

Current wording

Revenue decreased by $1.9 million or approximately 10.0% to $16.7 million for the three months ended June 30, 2024 from $18.5 million in the prior year. Our consumer eCommerce business contributed 62% of the revenue declines with revenues down 52.2%, as we intentionally continue to maintain the business operations on a shoestring. As we highlighted in our previous earnings call, the second quarter proved to be the most challenging period for the Specialty Foodservice business this year, as it was compared against our highest-performing quarter from the previous year. The Specialty Foodservice business accounted for 37% of the total revenue decline, with its sales dropping by 4.3%. These declines were driven by the continued challenges associated with the transition of the technology platform of one of our largest customers. We still expect the Specialty Foodservice revenue to generate positive growth for the year. As we’ve said previously, the B2B sales cycle is long, but we remain optimistic in how our sales efforts are progressing. Sales with our recently announced new customers have started to contribute to our performance, and conversations with other large potential customers continue. Within our Specialty Foodservice business, we also continue to build out our sourcing efforts, significantly ramping up the pace of our vendor and item onboarding, which we also expect to begin to contribute to revenue growth in the back half of 2024.

Previous wording

We also saw a decrease in our logistics business (from $248,569 in the three months ended March 31, 2023 to $208,211 in the three months ended March 31, 2024) as our existing customers experienced softness in demand and subsequently less volume throughput for our logistics services. Though small, we continue to seek new opportunities to leverage our logistics services in order to better leverage existing fixed assets.

Current wording

We also saw a decrease in our logistics business (from $270,443 in the three months ended June 30, 2023 to $249,257 in the three months ended June 30, 2024) as our existing customers experienced softness in demand and subsequently less volume throughput for our logistics services. Though small, we continue to seek new opportunities to leverage our logistics services in order to better leverage existing fixed assets.

Previous wording

Our cost of goods sold for the three months ended March 31, 2024 was $11.9 million, a decrease of $1.0 million or approximately 7.8% compared to cost of goods sold of $12.9 million for the three months ended March 31, 2023. Cost of goods sold was made up of the following expenses for the three months ended March 31, 2024: cost of goods in the amount of $9.1 million ; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2.8 million. Gross margins as a percentage of sales increased during the current period to 24.4% compared to 22.6% during the comparable period, an improvement of 174 basis points, as we continued implementing our strategy to improve cost controls, better manage pricing, and focus more on product mix. Importantly, the improvement was driven by an improvement in gross margins in the Specialty Foodservice business. The enhancement in our financial performance was significantly influenced by the increased gross margins within our Specialty Foodservice sector. Additionally, our deliberate shift away from a pricier shipping supplier served to further elevate our margin levels.

Current wording

Our cost of goods sold for the three months ended June 30, 2024 was $12.7 million, a decrease of $1.3 million or approximately 9.6% compared to cost of goods sold of $14.0 million for the three months ended June 30, 2023. Cost of goods sold was made up of the following expenses for the three months ended June 30, 2024: cost of goods in the amount of $9.4 million; and shipping, delivery, handling, and purchase allowance expenses in the amount of $3.1 million; and cost of goods associated with logistics of $0.1 million. Gross margins as a percentage of sales decreased during the current period to 23.8% compared to 24.2% during the comparable period, a decline of 41 basis points, driven by our continued ramp down and liquidation efforts related to the consumer eCommerce business. However, after adjusting for these liquidation efforts in the amount of $0.1 million, gross margins continued to make forward progress, improving by 37 basis points vs. the comparable period, as we continued implementing our strategy to improve cost controls, better manage pricing, and focus more on product mix. Importantly, the improvement was driven by an improvement in gross margins in the Specialty Foodservice business. Additionally, we renegotiated a new contract with our shipping provider which reduced shipping expenses materially.

Previous wording

For the reasons above, the Company had net income from continuing operations for the three months ended March 31, 2024 of $1.4 million compared to a net loss from continuing operations of $(2.8) million during the three months ended March 31, 2023. The net income from continuing operations for the three months ended March 31, 2024 includes a net total of $354,524 in non-cash charges: non-cash compensation in the amount of $220,099, depreciation and amortization expense of $110,260, provision for doubtful accounts of $22,882, and amortization of the discount on notes payable term loans of $1,283. The net loss from continuing operations for the three months ended March 31, 2023 includes a total of $328,101 in non-cash charges, including non-cash compensation in the amount of $178,048, depreciation and amortization expense of $145,387, and provision for doubtful accounts of $4,666.

Current wording

For the reasons above, the Company had a net loss from continuing operations for the three months ended June 30, 2024 of $(102,958) compared to a net income from continuing operations of $82,760 during the three months ended June 30, 2023. The net loss from continuing operations for the three months ended June 30, 2024 includes a net total of $590,679 in non-cash charges: non-cash compensation in the amount of $518,119, depreciation and amortization expense of $58,302, provision for doubtful accounts of $12,973, and amortization of the discount on notes payable term loans of $1,285. The net loss from continuing operations for the three months ended June 30, 2023 includes a total of $261,257 in non-cash charges, including non-cash compensation in the amount of $72,804, depreciation and amortization expense of $141,485, provision for doubtful accounts of $46,239, and amortization of the discount on notes payable of $729.

Previous wording

For the three months ended March 31, 2024, the Company had a net loss from discontinued operations in the amount of $10,105, a decrease in the amount of $31,946 or approximately 76% compared to a net loss from discontinue operations in the amount of $42,051 for the three months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024, the Company had a net loss from discontinued operations in the amount of $(366), a decrease in the amount of $68,923 or approximately 99.5% compared to a net loss from discontinue operations in the amount of $(69,289) for the three months ended June 30, 2023.

Previous wording

Selling, general, and administrative expenses (“SG&A”) decreased by $0.4 million or 9.7% to $4.0million during the three months ended March 31, 2024 compared to $4.4 million for the three months ended March 31, 2023. The decrease in selling, general, and administrative expenses was primarily due to a decrease in legal and professional fees of $0.2 million, a decrease in advertising of $0.2 million, and a decrease in payroll and related costs of $0.1 million. These decreases were partially offset by an increase in real estate commissions of $0.1 million related to the sale of the Race Track Road Facility. Selling, general, and administrative expenses as a percentage of sales increased from 26.7% of sales during the three months ended March 31, 2023 to 25.5% of sales during the current quarter.

Current wording

Selling, general, and administrative expenses decreased by $0.7 million or approximately 8.7% to $7.9 million during the six months ended June 30, 2024 compared to $8.6 million for the six months ended June 30, 2023. The decrease in selling, general, and administrative expenses was primarily due to a decrease in payroll and related costs of $0.4 million; advertising costs of $0.3 million; office, facilities, and vehicles of $0.2 million; amortization and depreciation of $0.1 million; legal and professional fees of $78,408; computer and IT costs of $56,141, and insurance costs of $35,090. These decreases were partially offset by increases in non-cash compensation of $0.5 million, taxes of $25,005, and bad debt expense of $16,963. Selling, general, and administrative expenses as a percentage of sales decreased from 24.5% of sales during the six months ended June 30, 2023 to 24.3% of sales during the current period as we continued to thoughtfully reduce our expense structure.

Previous wording

During the three months ended March 31, 2023, the Company entered into a separation agreement with its Prior CEO and current board member with a total cost of $1,819,199 consisting of $1,251,199 in cash payments, $1,199 of Cobra health insurance payments, and stock grants with a value of $568,000. Also, during the three months ended March 31, 2023, the Company entered into a separation agreement with its prior Director of Strategic Acquisitions and board member consisting of cash payments of $100,000 and $26,451 of Cobra health insurance payments. The aggregate separation costs charged to operations during the three months ended March 31, 2023 was $1,945,650; there were no such costs during the current period.

Current wording

During the six months ended June 30, 2023, the Company entered into a separation agreement with its Prior CEO and current board member with a total cost of $1,819,199 consisting of $1,251,199 in cash payments, $1,199 of Cobra health insurance payments, and stock grants with a value of $568,000. Also during the six months ended June 30, 2023, the Company entered into a separation agreement with its prior Director of Strategic Acquisitions and board member consisting of cash payments of $100,000 and $26,451 of Cobra health insurance payments. The aggregate separation costs for the six months ended June 30, 2023 was $1,945,650; there were no such costs during the current period.

Previous wording

Interest expense, net of interest income, increased by $42,729 or approximately 24.7% to $215,450 during the three months ended March 31, 2024, compared to $172,721 during the three months ended March 31, 2023. The increase was due to an increase in interest accrued or paid on the Company’s commercial loans and notes payable in the amount of $54,367 due to higher interest rates and higher balances under the MapleMark term loans, backed by the USDA. Interest expense also increased due to an increase in the amortization of prepaid loan fees in the amount of $1,283. This increase was partially offset by an increase in interest income in the amount of $12,921.

Current wording

Interest expense, net of interest income, increased by $42,576 or approximately 11.1% to $424,937 during the six months ended June 30, 2024, compared to $382,361 during the six months ended June 30, 2023. 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 $67,414 due to higher interest rates under the MapleMark term loans. The increase in interest expense was partially offset by interest income in the amount of $30,177, an increase in the amount of $26,114 compared to $4,063 in the prior period.

Previous wording

During the three months ended March 31, 2024, the Company sold its property located in Bonita Springs, Florida for a gain in the amount of $1,807,516. There was no comparable transaction in the prior period.

Current wording

During the six months ended June 30, 2024, the Company sold its property located in Bonita Springs, Florida for a gain in the amount of $1,807,516. There was no comparable transaction in the prior period.

Previous wording

During the three months ended March 31, 2024, the Company sold its subsidiary Haley Group, Inc.; consideration for the sale was the return to the Company of 21,126 shares of the Company’s common stock with a market value at the time of the sale of $21,126. The Company recorded a gain on the sale of Haley in the amount of $21,126. There was no comparable transaction in the prior period.

Current wording

During the six months ended June 30, 2024, the Company sold its subsidiary Haley Group, Inc.; consideration for the sale was the return to the Company of 21,126 shares of the Company’s common stock with a market value at the time of the sale of $21,126. The Company recorded a gain on the sale of Haley in the amount of $21,126. There was no comparable transaction in the prior period.

Previous wording

During the three months ended March 31, 2024 and March 31, 2023, the Company recognized income in the amount of $1,900 in connection with the lease of space in our Mountaintop warehouse facility.

Current wording

During the six months ended June 30, 2024, the Company recognized income in the amount of $3,800 in connection with the lease of space in our Mountaintop warehouse facility; this amount was unchanged compared to the prior period.

Previous wording

As of March 31, 2024, the Company had current assets of $17,533,707, consisting of cash and cash equivalents of $4,272,243, trade accounts receivable, net, of $4,109,274, inventory of $2,840,682, other current assets of $348,926, assets held for sale of $5,941,933, and current assets – discontinued operations of $20,649. Also at March 31, 2024, the Company had current liabilities of $5,482,266, consisting of trade payables and accrued liabilities of $3,111,671, current portion of accrued separation costs – related parties of $418,635, accrued interest of $93,829, deferred revenue of $1,227,936, liability for stock appreciation rights of $373,918, current portion of notes payable of $100,237, current portion of operating lease liability of $17,422, current portion of financing lease liability of $136,096, and current liabilities - discontinued operations of $2,522.

Current wording

As of June 30, 2024, the Company had current assets of $18,088,313, consisting of cash and cash equivalents of $3,866,448, trade accounts receivable, net, of $5,198,153, inventory of $2,762,071, other current assets of $299,424, assets held for sale of $5,941,933, and current assets – discontinued operations of $20,284. Also at June 30, 2024, the Company had current liabilities of $6,178,109, consisting of trade payables and accrued liabilities of $3,222,324, current portion of accrued separation costs – related parties of $342,666, accrued interest of $89,990, deferred revenue of $1,440,803, liability for stock appreciation rights of $786,768, current portion of notes payable of $122,717, current portion of operating lease liability of $15,927, current portion of financing lease liability of $154,392, and current liabilities - discontinued operations of $2,522.

Previous wording

During the three months ended March 31, 2024, the Company had cash used in operating activities of $3,157,213. Cash flow used in operations consisted of the Company’s consolidated net income of $1,425,874 less gain on disposition of assets of $1,807,516 and gain on sale of subsidiary of $21,126, plus non-cash charges for depreciation and amortization of $110,260, increase in value of stock appreciation rights of $118,898, stock-based compensation in the amount of $103,325, provision for doubtful accounts of $22,882, amortization of right-of-use assets of $4,175, and amortization of discount on notes payable of $1,283. The Company’s cash position also decreased by $3,115,178 as a result of changes in the components of current assets and current liabilities, primarily the result of a net paydown of $3,114,335 in accounts payable and accrued liabilities. Excluding $128,610 in payments associated with the separation and hiring of key officers referenced earlier, the Company would have recorded cash used in operating activities of $3,028,603 for the three months ended March 31, 2024, an improvement of $128,608 compared to the three months ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, the Company had cash used in operating activities of $3,483,218. Cash flow used in operations consisted of the Company’s consolidated net income of $1,322,550 less gain on disposition of assets of $1,807,516 and gain on sale of subsidiary of $21,126, plus non-cash charges for depreciation and amortization of $168,562, increase in value of stock appreciation rights of $531,748, stock-based compensation in the amount of $208,504, provision for doubtful accounts of $35,855, amortization of right-of-use assets of $8,421, and amortization of discount on notes payable of $2,568. The Company’s cash position also decreased by $3,932,784 as a result of changes in the components of current assets and current liabilities, primarily the result of a net paydown of $3,037,522 in accounts payable and accrued liabilities. Excluding $287,913 in payments associated with the separation and hiring of key officers referenced earlier, the Company would have recorded cash used in operating activities of $3,195,305 for the six months ended June 30, 2024, a decrease of $1,315,166 compared to the six months ended June 30, 2023.

Previous wording

The Company had cash provided by investing activities of $2,099,779 for the three months ended March 31, 2024, which consisted of cash received from the sale of our Bonita Springs property in the amount of $2,101,185 net of the payoff of the related secured loan in the amount of $353,815 including accrued interest. The Company also purchased property and equipment in the amount of $1,406 during the period.

Current wording

The Company had cash provided by investing activities of $2,085,328 for the six months ended June 30, 2024, which consisted of cash received from the sale of our Bonita Springs property in the amount of $2,101,185 net of the payoff of the related secured loan in the amount of $353,815 including accrued interest. The Company also purchased property and equipment in the amount of $15,857 during the period.

Previous wording

The Company had cash used in financing activities of $72,685 for the three months ended March 31, 2024, which consisted of payments on notes payable and financing lease in the amount of $22,708 and $49,977, respectively.

Current wording

The Company had cash used in financing activities of $138,389 for the six months ended June 30, 2024, which consisted of payments on notes payable and financing lease in the amount of $43,548 and $94,841, respectively.

Previous wording

At March 31, 2024, we had positive net working capital in the amount of $12,051,441 compared to net working capital of $5,000,156 at the December 31, 2023, an improvement of $7,051,285. The Company reported a profit from continuing operations in the amount of $1,435,979 for the three months ended March 31, 2024 compared to a loss from continuing operations of $2,786,715 during the comparable period of the prior year. In addition, the Company continues to maintain the untapped $3 million revolver with MapleMark. Due to the Company’s improved operations performance along with its restructured balance sheet, we believe that any issues regarding our near-term liquidity have been resolved.

Current wording

At June 30, 2024, we had positive net working capital in the amount of $11,910,204 compared to net working capital of $5,000,156 at the December 31, 2023, an improvement of $6,910,048. The Company reported a profit from continuing operations in the amount of $1,333,021 for the six months ended June 30, 2024 compared to a loss from continuing operations of $2,703,955 during the comparable period of the prior year. In addition, the Company continues to maintain the untapped $3 million revolver with MapleMark. Due to the Company’s improved operations performance along with its restructured balance sheet, we believe that any issues regarding our near-term liquidity have been resolved.

Previous wording

The Company’s largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 49% and 47% of total sales in the three months ended March 31, 2024 and 2023, respectively. In addition, Gate Gourmet, the leading global provider of airline catering solutions and provisioning services for airlines, in partnership with igourmet, represented 16% of total sales for the three months ended March 31, 2024 and 2023.

Current wording

The Company’s largest customer, U.S. Foods, Inc. and its affiliates, accounted for approximately 48% and 47% of total sales in the three months ended June 30, 2024 and 2023, respectively, and 49% and 47% of total sales in the six months ended June 30, 2024 and 2023, respectively. In addition, Gate Gourmet, the leading global provider of airline catering solutions and provisioning services for airlines, represented 18% and 16% of total sales for the three months ended June 30, 2024 and 2023, respectively, and 17% and 16% of total sales for the six months ended June 30, 2024 and 2023, respectively.