What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-18 compared with 2020-07-06 · 82 added, 50 removed, 153 unchanged (46% of the section changed)

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Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $317,277 for doubtful accounts receivable at March 31, 2020, and $95,284 at December 31, 2019.

The Company maintained an allowance in the amount of $316,978 for doubtful accounts receivable at June 30, 2020, and $95,284 at December 31, 2019.

The increase in the allowance was mainly due to the increased likelihood of certain uncollectible amounts associated with national brand management customers.

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(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.

GiftBox, a privately held Nevada corporation controlled by David Polinsky, a director of the Company, was in the business of subscription-based e-commerce.

The consideration for the assets purchased was a nominal amount of cash.

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As a result, during the preliminary purchase price allocation period, which may be up to one year from the asset purchase date, we may record adjustments to the assets acquired.

Transactions With a Major Customer

Transactions w ith a Major Customer

Transactions with a major customer and related economic dependence information is set forth immediately below and above in Note 2 to the Condensed Consolidated Financial Statements and also in our Annual Report on Form 10-K for the year ended December 31, 2019 (1) following our discussion of Liquidity and Capital Resources, (2) Concentrations of Credit Risk in Note 17 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors.

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Foods, a leading broadline distributor.

These sales amounted to $7,383,578 (55% of total sales) and $7,541,296 (59% of total sales) for the three months ended March 31, 2020 and 2019 respectively On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S.

These sales amounted to $3,188,119 (27% of total sales) and $8,669,200 (62% of total sales) for the three months ended June 30, 2020 and 2019 respectively;

These sales amounted to $10,571,697 (42% of total sales) and $16,210,496 (61% of total sales) for the six months ended June 30, 2020 and 2019 respectively.

On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S.

The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for a limited number of automatic annual renewals thereafter if no party gives the other 30 days’ notice of its intent not to renew.

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This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

During the three months ended March 31, 2020, the world has been in the grip of a coronavirus pandemic which has wreaked havoc on economies world-wide, including in the U.S., which is our primary market.

During the three and six months ended June 30, 2020, the world has been in the grip of a coronavirus 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.

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Accordingly, we have focused our resources on meeting the growth of e-commerce revenues.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Revenue increased by $446,705 or approximately 3.5% to $13,305,920 for the three months ended March 31, 2020 from $12,859,215 in the prior year.

The increase in revenues was attributable to an increase in revenues associated with ecommerce and logistics offset partially by a decrease in revenues associated with national brand management and foodservice.

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.

Three Months Ended June 30 , 2020 Compared to Three Months Ended June 30 , 2019

Revenue decreased by $1,927,802 or approximately 13.8% to $11,997,649 for the three months ended June 30, 2020 from $13,925,451 in the prior year.

The decrease in decrease in revenues 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 revenues.

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 foods, supermarket trends, and e-commerce grocery trends, driven initially by COVID-19, 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, with an expanded focus on the specialty food e-commerce space, and will implement a strategy which based on our analysis provides the most beneficial opportunity for growth.

Any changes in the food distribution and specialty foods operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.

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Cost of goods sold

Our cost of goods sold for the three months ended March 31, 2020 was $10,192,864, an increase of $1,311,484 or approximately 14.8% compared to cost of goods sold of $8,881,380 for the three months ended March 31, 2019.

Cost of goods sold is made up of the following expenses for the three months ended March 31, 2020:

Our cost of goods sold for the three months ended June 30, 2020 was $8,677,096, a decrease of $1,185,273 or approximately 12.0% compared to cost of goods sold of $9,862,369 for the three months ended June 30, 2019.

Cost of goods sold is made up of the following expenses for the three months ended June 30, 2020:

cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $5,242,029;

and shipping, delivery, handling, and purchase allowance expenses in the amount of $3,533,568.

shipping, delivery, handling, and purchase allowance expenses in the amount of $3,277,803;

and cost of goods associated with logistics of $157,264.

Total gross margin was approximately 27.7% of sales in 2020 compared to approximately 29.2% of sales in 2019.

The increase in cost of goods sold and 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 variations in both revenue mix and 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 increase sales, gain market share and increase the number of our end users and ecommerce customers.

We were successful in both increasing sales and increasing market share and increasing the number of our ecommerce customers.

The decrease in cost of goods sold is attributed mainly to a decrease in revenues compared to 2019.

The decrease in margins compared to 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 variations in both revenue mix and gross margins associated with foodservice and e-commerce revenues including revenue and margin variations driven by the COVID-19 pandemic.

In 2020, we continued to price our products in order to increase sales, gain market share and increase the number of our end users and e-commerce customers.

We were successful in both increasing sales and increasing market share and increasing the number of our e-commerce customers.

We currently expect, if market conditions, overall economic conditions, and our product revenue mix remain constant, that our cost of goods sold may increase and may result in a decrease in profit margin.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $877,601 or approximately 21.8% to $4,895,430 during the three months ended June 30, 2020 compared to $4,017,829 for the three months ended June 30, 2019.

The increase in selling, general, and administrative expenses was primarily due to increases in payroll and related costs of approximately $535,377, increases in advertising costs of $420,045, increases in professional and legal fees in the amount of $184,118, increases in taxes in the amount of $73,895;

increases in banking and credit card fees of $61,400, and increases in insurance costs of $50,318.

These increases were partially offset by a decrease in depreciation and amortization of $207,950;

a decrease in office, facility, and vehicle costs of $144,706, and a decrease in travel and entertainment costs of $67,617.

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 associated with 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 significant increased advertising associated with increased spending in digital marketing related to certain of the Company’s e-commerce websites.

Interest expense, net

Interest expense, net of interest income, increased by $67,497 or approximately 291.6% to $90,646 during the three months ended June 30, 2020, compared to $23,149 during the three months ended June 30, 2019.

Interest accrued or paid on the Company’s commercial loans and notes payable increased by $64,429 to $89,221 during the current period, compared to $24,792 during the prior period, primarily due to interest on the Company’s mortgage on the logistics and warehouse facility in Mountaintop, Pennsylvania, which was $33,407 during the three months ended June 30, 2020 compared to $0 during the prior period, and the interest on the credit line with Fifth Third Bank in the amount of $19,118 during the three months ended June 30, 2020, compared to $0 during the prior period.

Interest expense also increased by the amortization of the discount on notes payable, which was $3,123 during the current period, compared to $0 during the comparable period of 2019.

Interest income increased by $55 to $1,698 during the current period compared to $1,643 during the prior period.

Net (loss) income

For the reasons above, the Company had a net loss for the three months ended June 30, 2020 of $(1,654,546) which is an increase of approximately $1,676,650 or 7,585% compared to net income of $22,104 during the three months ended June 30, 2019.

The loss for the three months ended June 30, 2020 includes a total of $272,999 in non-cash charges, including depreciation expense of $117,931 and charges for non-cash compensation in the amount of $155,068.

The income for the three months ended June 30, 2019 includes a total of $421,989 in non-cash charges, including amortization of intangible assets in the amount of $250,567, depreciation expense of $75,314, and non-cash compensation of $96,108.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Revenue decreased by $1,481,097 or approximately 5.5% to $25,303,569 for the six months ended June 30, 2020 from $26,784,666 in the prior year.

The decrease in revenues 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.

Currently, a small portion of our revenues comes from imported products or international sales.

Our current sales from such markets may be hampered and negatively impacted by any economic tariffs that may be imposed in the United States or in foreign countries.

See “Transactions with Major Customers” and the Securities and Exchange Commission’s (“SEC”) mandated FR-60 disclosures following the “Liquidity and Capital Resources” section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future results.

Cost of goods sold

Our cost of goods sold for the six months ended June 30, 2020 was $18,869,960, an increase of $126,211 or approximately 0.7% compared to cost of goods sold of $18,743,749 for the six months ended June 30, 2019.

Cost of goods sold is made up of the following expenses for the six months ended June 30, 2020:

cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $11,901,325, shipping, delivery, handling, and purchase allowance expenses in the amount of $6,626,403, and cost of goods associated with logistics of $342,232.

Total gross margin was approximately 25.4% of sales in 2020 compared to approximately 30.0% of sales in 2019.

The increase in cost of goods sold and 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 variations in both revenue mix and gross margins associated with foodservice and e-commerce revenues including revenue and margin variations driven by the COVID-19 pandemic.

In 2020, we continued to price our products in order to increase sales, gain market share and increase the number of our end users and e-commerce customers.

We were successful in both increasing sales and increasing market share and increasing the number of our e-commerce customers.

Impairment of goodwill and intangible assets

As of March 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.

During the first quarter of 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 March 31, 2020, the net carrying value of goodwill and other intangible assets on the Company’s balance sheet is $1,616,822.

At June 30, 2020, the net carrying value of goodwill and other intangible assets on the Company’s balance sheet is $1,630,822.

There was no such comparable charge during the prior period.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $823,764 or approximately 21.7% to $4,612,761 during the three months ended March 31, 2020 compared to $3,788,997 for the three months ended March 31, 2019.

The increase in selling, general, and administrative expenses was primarily due to an increase in uncollectible debt allowance of $221,189, increases in advertising in the amount of $131,767, increases in payroll and related costs of approximately $163,319, increases in professional and legal fees in the amount of $113,447, increases in computer and information technology costs of $85,973, increases in office and facility costs of $30,755, increased insurance costs of $52,266, increased banking costs and processing fees of $39,124, and increases in depreciation and amortization expense of $19,360.

These increases were partially offset by a decrease in travel and entertainment costs of $39,047.

The increases were driven mainly by additional costs including increases in costs associated with COVID-19, increased costs associated with additional personnel, accrued bonuses, 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.

Selling, general, and administrative expenses increased by $1,701,365 or approximately 21.8% to $9,508,191 during the six months ended June 30, 2020 compared to $7,806,826 for the six months ended June 30, 2019.

The increase in selling, general, and administrative expenses was primarily due to increases in payroll and related costs of approximately $698,696, increases in advertising costs of $551,812, increases in professional and legal fees in the amount of $297,548, an increase in allowance for doubtful accounts of $221,829, increases in insurance costs of $102,854, increases in banking and credit card fees of $100,524, increase in computer and IT costs of $88,856, and increased taxes in the amount of $57,413.

These increases were partially offset by a decrease in depreciation and amortization of $188,590, a decrease in office, facility, and vehicle costs of $113,951, and a decrease in travel and entertainment costs of $106,664.

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 significant increased advertising associated with increased spending in digital marketing related to certain of the Company’s e-commerce websites.

Interest expense, net

Interest expense, net of interest income, increased by $40,942 or approximately 160.7% to $66,420 during the three months ended March 31, 2020, compared to $25,478 during the three months ended March 31, 2019.

Interest accrued or paid on the Company’s commercial loans and notes payable increased by $37,999 to $64,995 during the current period, compared to $26,996 during the prior period, primarily due to interest on the Company’s mortgage on the logistics and warehouse facility in Mountaintop, Pennsylvania, which was $41,487 during the three months ended March 31, 2020 compared to $0 during the prior period.

Interest expense, net of interest income, increased by $108,439 or approximately 223.0% to $157,066 during the six months ended June 30, 2020, compared to $48,627 during the six months ended June 30, 2019.

Interest accrued or paid on the Company’s commercial loans and notes payable increased by $102,428 to $154,216 during the current period, compared to $51,788 during the prior period, primarily due to interest on the Company’s mortgage on the logistics and warehouse facility in Mountaintop, Pennsylvania, which was $74,894 during the six months ended June 30, 2020 compared to $0 during the prior period, and the interest on the credit line with Fifth Third Bank in the amount of $22,604 during the six months ended June 30, 2020, compared to $0 during the prior period.

Interest expense also increased by the amortization of the discount on notes payable, which was $6,246 during the current period, compared to $0 during the comparable period of 2019.

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Net (loss) income

For the reasons above, the Company had a net loss for the three months ended March 31, 2020 of $(3,254,198) which is a loss of approximately $3,417,558 or 2,092% compared to net income of $163,360 during the three months ended March 31, 2019.

The loss for the three months ended March 31, 2020 includes a total of $2,316,016 in non-cash charges, including impairment of intangible assets in the amount of $1,698,952, uncollectible debt allowance of $223,335, amortization of intangible assets in the amount of $210,032, depreciation expense of $114,533, charges for non-cash compensation in the amount of $66,041, and amortization of the discount on notes payable of $3,123.

The income for the three months ended March 31, 2019 includes a total of $405,349 in non-cash charges, including amortization of intangible assets in the amount of $229,130, depreciation expense of $76,075, and non-cash compensation of $100,144.

Liquidity and Capital Resources at March 31 , 20 20

As of March 31, 2020, the Company had current assets of $10,191,633, consisting of cash and cash equivalents of $5,071,543;

trade accounts receivable of $1,860,038;

inventory of $2,941,435;

and other current assets of $318,617.

Also at March 31, 2020, the Company had current liabilities of $7,328,231, consisting of trade payables and accrued liabilities of $3,828,998;

accrued interest of $20,552;

deferred revenue of $358,456;

line of credit of $2,000,000;

lease liabilities – operating leases, current portion of $134,459;

lease liabilities – financing leases, current portion of $47,261;

and current portion of notes payable of $751,505.

During the three months ended March 31, 2020, the Company had cash used in operating activities of $693,165.

Cash used in operations consisted of the Company’s consolidated net loss of $3,254,198 plus non-cash compensation in the amount of $66,041;

depreciation and amortization of $324,565;

impairment of goodwill and intangible assets of $1,698,952;

For the reasons above, the Company had a net loss for the six months ended June 30, 2020 of $(4,908,744) which is an increase of approximately $5,094,208 or 2,747% compared to net income of $185,464 during the six months ended June 30, 2019.

The loss for the six months ended June 30, 2020 includes a total of $2,590,632 in non-cash charges, including impairment of intangible assets in the amount of $1,698,952, uncollectible debt allowance of $221,799, amortization of intangible assets in the amount of $210,032, depreciation expense of $232,433, charges for non-cash compensation in the amount of $221,109, and amortization of the discount on notes payable of $6,246.

The income for the six months ended June 30, 2019 includes a total of $827,338 in non-cash charges, including amortization of intangible assets in the amount of $479,697, depreciation expense of $151,389, and non-cash compensation of $196,252.

Liquidity and Capital Resources at June 30 , 2020

As of June 30, 2020, the Company had current assets of $10,301,805, consisting of cash and cash equivalents of $5,258,069, trade accounts receivable of $1,870,850, inventory of $2,830,047, and other current assets of $342,839.

Also at June 30, 2020, the Company had current liabilities of $7,483,913, consisting of trade payables and accrued liabilities of $3,822,730, accrued interest of $44,259, deferred revenue of $227,821, line of credit of $2,000,000, lease liabilities – operating leases, current portion of $99,972, lease liabilities – financing leases, current portion of $49,666, current portion of contingent liabilities of $187,000, and current portion of notes payable of $1,052,465.

During the six months ended June 30, 2020, the Company had cash used in operating activities of $2,135,462.

Cash used in operations consisted of the Company’s consolidated net loss of $(4,908,744) plus non-cash compensation in the amount of $221,109, depreciation and amortization of $442,465, impairment of goodwill and intangible assets of $1,698,952;

amortization of right-of-use asset of $107,271, amortization of prepaid loan fees of $6,246 and provision for doubtful accounts of $221,799.

The Company’s cash position also increased due to a change in the components of current assets and liabilities in the amount of $75,440.

The Company had cash used in investing activities of $285,599 for the three months ended March 31, 2020, which consisted of cash paid for the acquisition of property and equipment.

The Company had cash flow from financing activities of $2,084,257 for the three months ended March 31, 2020, which consisted of advances on a line of credit in the amount of $2,000,000 and proceeds from notes payable in the amount of $150,786, partially offset by principal payments made on notes payable of $57,775 and principal payments on financing leases of $8,754.

The Company had net working capital of $2,863,402 as of March 31, 2020.

The Company used cash in operations during the three months ended March 31, 2020 in the amount of $693,165.

This compares to cash used in operations of $1,315,513 during the three months ended March 31, 2019.

The Company had cash used in investing activities of $104,207 for the six months ended June 30, 2020, which consisted of cash paid for the acquisition of property and equipment of $90,207 and cash paid for website development of $14,000.

The Company had cash flow from financing activities of $3,531,688 for the six months ended June 30, 2020, which consisted of advances on a line of credit in the amount of $2,000,000 and proceeds from the PPP Loan of $1,650,221, partially offset by principal payments made on notes payable of $97,860 and principal payments on financing leases of $20,673.

The Company had net working capital of $2,817,892 as of June 30, 2020.

The Company used cash in operations during the six months ended June 30, 2020 in the amount of $2,135,462.

This compares to cash used in operations of $858,947 during the six months ended June 30, 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.

As of March 31, 2020, 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 of June 30, 2020, 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 and other consumer and food service oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.

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During 2020, in addition to our efforts to increase sales in our existing foodservice operations we plan to attempt to expand our business by expanding our focus to additional specialty foods markets in both the consumer and foodservice sector, exploring potential acquisition and partnership opportunities and continuing to extend our focus in the specialty food market through the growth of the Company’s existing sales channels and through a variety of additional sales channel relationships which are currently being explored.

In addition, we are currently exploring the introduction of a variety of new product categories and new product lines, including private label products and proprietary branded products to leverage our existing foodservice and consumer customer base.

Furthermore, the Company intends to expand its activities in the direct to consumer space and the overall consumer packaged goods (CPG) space through building the market share of igourmet LLC and Mouth Foods, Inc.

We are also currently exploring the introduction of a variety of new product categories and new product lines, including private label products and proprietary branded products, including products which could leverage the new capabilities of our facility in Mountaintop PA to leverage our existing foodservice and consumer customer base.

In addition, the COVID-19 pandemic had accelerated shift towards e-commerce channels and we plan on continuing expanding our e-commerce activities through both our existing web properties, the launch or relaunch of additional web properties or e-commerce areas within our existing sites, leveraging our fulfillment capabilities to partner in both wholesale and direct to consumer in the e-commerce area.

and the expansion of third-party partnerships or other strategic relationships within the e-commerce space.

Overall, the Company intends to expand its activities in the direct to consumer space and the overall consumer packaged goods (CPG) space through building the market share of igourmet LLC and Mouth Foods, Inc.

and through leveraging its overall capabilities in the consumer space.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis