Item 1A. Risk Factors
ITEM
1A. Risk Factors
Risks
Relating to Our Business and Industry
We have a history of losses requiring us to
seek additional sources of capital.
As
of December 31, 2024, we had an accumulated deficit of $36,209,764. 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 potential success is contingent upon the effective
development and commercialization of our services and products, as well as the continued expansion of our product portfolio and customer
base, for which we can provide no assurance. Any future success we may achieve will be influenced by numerous factors, including those
beyond our control or presently unforeseeable. 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, taxes, 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 rely on a few key customers for most of our revenue and if we were
to lose one or more of those clients 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, Inc. (“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, our wholly owned subsidiary, and USF 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 generated gross revenues
for us of $31,185,864 in the year ended December 31, 2024, and $34,070,052 in the year ended December 31, 2023. Those amounts contributed
43% and 48% of our total sales for each of 2024 and 2023, respectively. Other significant customers include Gate Gourmet and Sam’s
Club. During the years ended December 31, 2024 and 2023, sales to Gate Gourmet amounted to $11,574,069, or 16% of total sales, and $10,742,556,
or 15% of total sales, respectively. During the years ended December 31, 2024 and 2023, sales to Sam’s Club amounted to $5,520,214,
or 8% of total sales, and $0, 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 customers other than USF, if our relationship with
USF were to be materially changed and we may not be able to secure alternative revenue streams to mitigate the impact of such a loss,
which may result in us significantly curtailing our operations.
A variety of factors, including seasonality
and the economic environment, may cause our operating results to fluctuate, leading to volatility in our stock price.
Our operational results have fluctuated in the past
and may fluctuate in the future, depending upon a variety of factors, including changes in economic conditions, and shifts in the timing
of holiday related purchases. Although our annual sales have historically had a significant seasonal aspect, this has become less pronounced
following the divestment of the assets of igourmet.com and M Innovations LLC (“Mouth”). However, we have expanded our distribution
of specialty cheeses, which are more seasonally relevant during the fourth quarter. Due to the seasonal nature of this business, we would
be significantly and disproportionately affected by unforeseen events such as terrorist attacks or economic shocks (including those caused
by worldwide pandemics or other factors) that negatively impact the retail environment or consumer buying patterns during our key selling
season. Additionally, events such as pandemics, strikes, or weather-related delays that interfere with the shipment of goods during the
critical holiday season would adversely affect us.
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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.
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, 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 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.
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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.
Unanticipated
changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect
our financial condition and results of operations.
We
are subject to income taxes in the United States, and our domestic tax liabilities are subject to the allocation of expenses in differing
jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
● changes
in the valuation of our deferred tax assets and liabilities;
● expected
timing and amount of the release of any tax valuation allowances;
● tax
effects of stock-based compensation;
● costs
related to intercompany restructurings;
● changes
in tax laws, regulations or interpretations thereof; or
● lower
than anticipated future earnings in jurisdictions where we have lower statutory tax rates
and higher than anticipated future earnings in jurisdictions where we have higher statutory
tax rates.
Changes in domestic and international trade policies
could materially and adversely affect our business, financial condition, and results of operations. Any import tariffs may increase the
cost of key food products and ingredients that we rely on, leading to higher production costs and potential supply chain disruptions.
If we are unable to pass these increased costs on to customers through pricing adjustments, our profit margins could be adversely affected.
The evolving trade environment may also create uncertainty in supplier relationships, cause delays in sourcing raw materials, and result
in fluctuating commodity prices, further impacting our operations.
In addition,
we may be subject to audits of our income, sales and other transaction taxes by federal, state and local authorities. Outcomes from these
audits could have an adverse effect on our financial condition and results of operations.
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.
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, 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.
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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 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 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 fulfilment 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:
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.
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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.
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.
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.
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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 results of operations.
Pandemics
and epidemics, natural disasters, terrorist activities, political unrest, and other outbreaks could disrupt our operations, which could
materially and adversely affect our business, financial condition, and results of operations.
Global
pandemics, epidemics in China or elsewhere in the world, or fear of spread of contagious diseases, such as Ebola virus disease (EVD),
coronavirus disease 2019 (COVID-19), Middle East respiratory syndrome (MERS), severe acute respiratory syndrome (SARS), H1N1 flu, H7N9
flu, and avian flu, as well as hurricanes, earthquakes, tsunamis, or other natural disasters could disrupt our business operations, reduce
or restrict our supply of products and services, incur significant costs to protect our employees and facilities, or result in regional
or global economic distress, which may materially and adversely affect our business, financial condition, and results of operations.
Actual or threatened war, terrorist activities, political unrest, civil strife, and other geopolitical uncertainty could have a similar
adverse effect on our business, financial condition, and results of operations. Any one or more of these events may impede our production
and delivery efforts and adversely affect our sales results, or even for a prolonged period of time, which could materially and adversely
affect our business, financial condition, and results of operations.
We
are also vulnerable to natural disasters and other calamities. We cannot assure you that we are adequately protected from the effects
of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks, or similar
events. Any of the foregoing events may give rise to interruptions, damage to our property, delays in production, breakdowns, system
failures, technology platform failures, or internet failures, which could cause the loss or corruption of data or malfunctions of our
facilities, as well as adversely affect our business, financial condition, and results of operations.
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 Colorado, Illinois, Pennsylvania, 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 pandemic, inflation, bank failure, 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 ensure 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.
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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 subsidiaries, 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, as amended (the “Securities Act”). 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 Company’s fiscal year.
We
may not be able to realize benefits of acquisitions or successfully integrate the businesses we acquire.
Our
growth strategy includes growth through strategic acquisitions. If we are unable to integrate acquired businesses successfully or to
realize anticipated economic, operational, and other benefits and synergies in a timely manner, our profitability could be adversely
affected. Integration of an acquired business may be more difficult when we acquire a business in a market in which we have limited expertise
or with a company culture different from ours. A significant expansion of our business and operations, in terms of geography or magnitude,
could strain our administrative and operational resources. Additionally, we may be unable to retain qualified management and other key
personnel employed by acquired companies and may fail to build a network of acquired companies in new markets. We could face significantly
greater competition from broadline foodservice distributors in these markets than we face in our existing markets.
We
regularly evaluate opportunities to acquire other companies. To the extent our future growth includes acquisitions, we may not be able
to obtain any necessary financing for such acquisitions, consummate such potential acquisitions effectively, effectively and efficiently
integrate any acquired entities, or successfully expand into new markets.
In
connection with our acquisition of businesses in the future, if any, we may decide to consolidate the operations of any acquired business
with our existing operations or make other changes with respect to the acquired business, which could result in special charges or expenses.
Our results of operations also may be adversely affected by expenses we incur in making acquisitions, by amortization of acquisition-related
intangible assets with definite lives and by additional depreciation attributable to acquired assets. Moreover, in connection with contemplated
or completed acquisitions or divestitures, we may incur related asset impairment charges that reduce our profitability.
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We
rely on trademarks, trade secrets, and other forms of intellectual property protections, however, these protections may not be adequate.
We
rely on a combination of trademark, trade secret and other intellectual property laws in the United States. We have applied in the United
States and in certain countries for registration of a limited number of trademarks, some of which have been registered or issued. We
cannot guarantee that our applications will be approved by the applicable governmental authorities, or that third parties will not seek
to oppose or otherwise challenge our registrations or applications. We also rely on unregistered proprietary rights, including common
law trademark protection. However, third parties may use trademarks identical or confusingly similar to ours, or independently develop
trade secrets or know-how similar or equivalent to ours. If our proprietary information is divulged to third parties, including our competitors,
or our intellectual property rights are otherwise misappropriated or infringed, our competitive position could be harmed.
Our
products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or potentially prevent
us from selling our products.
We
cannot be certain that our products do not and will not infringe intellectual property rights of others. We may be subject to legal proceedings
and claims in the ordinary course of our business, including claims of alleged infringement of intellectual property rights of third
parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result
in costly litigation and divert the efforts of our management and personnel. Moreover, should we be found liable for infringement, we
may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and to cease making
or selling certain products. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling
our products.
Our business is subject to governmental regulation, which could impact
our operations.
Our business is subject to extensive federal and state regulations governing the delivery of fresh food products.
Various laws and regulatory frameworks, including but not limited to the FDA’s Food Safety Modernization Act, Pennsylvania’s
Solid Waste Management Act, Clean Streams Law, Air Pollution Control Act, Pennsylvania Food Code, FDA’s Fair Packaging and Labeling
Act, Nutrition Labeling and Education Act, PA Food Safety Act, and Pennsylvania’s Weights and Measures Act, impose stringent operational,
food safety, packaging, and labeling requirements on our company and third-party vendors.
Additionally, specialty
foodservice vendors are required to maintain a minimum of $3,000,000 in liability insurance coverage and comply with Hazard Analysis
and Critical Control Point (HACCP) standards. Compliance with these regulations is critical to our operations, as noncompliance could
result in significant penalties, legal liabilities, operational disruptions, and reputational harm.
While we currently maintain compliance with applicable
laws and regulations, we cannot guarantee that we will continue to be in compliance in the future, particularly as regulations evolve
or become more stringent. Regulatory changes or increased enforcement efforts could impose additional costs, limit our ability to operate
efficiently, or require modifications to our business practices. Any failure to comply with existing or future regulatory requirements
could adversely affect our net revenues, gross margins, and cash flows. Any regulatory actions or changes that increase our compliance
costs or restrict our ability to source, distribute, or label products effectively may materially impact our financial condition and results
of operations.
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Risks
Relating to Our Indebtedness
The
loss of availability of our bank loans could adversely impact our business and financial condition.
We
currently have multiple loans with MapleMark 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 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, or bank failures, inflation, recession,
or other significant economic turmoil, 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.
Our
ability to generate sufficient cash to service our indebtedness depends on many factors, some of which are not within our control.
Our
ability to make payments on our indebtedness will depend on our ability to generate cash in the future. To a certain extent, this ability
is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If we
are unable to generate sufficient cash flow to service our debt, we may need to restructure or refinance all or a portion of our debt,
sell material assets or operations, or raise additional debt or equity capital. We may not be able to affect any of these actions on
a timely basis, on commercially reasonable terms, or at all, and these actions may not be sufficient to meet our debt service requirements.
In addition, any refinancing of our indebtedness could be at a higher interest rate, and the terms of our existing or future debt arrangements
may restrict us from effecting any of these alternatives. Our failure to make the required interest and principal payments on our indebtedness
would result in an event of default under the agreement governing such indebtedness, which may result in the acceleration of some or
all of our outstanding indebtedness.
Despite
our level of indebtedness, we and our subsidiaries will still be able to incur significant additional amounts of debt, which could further
exacerbate the risks associated with our level of indebtedness.
We
and our subsidiaries may incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness
contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications
and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions
could be substantial.
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The
agreements governing our outstanding indebtedness contain restrictions that limit our flexibility in operating our business.
The
agreements governing our outstanding indebtedness contain various covenants that limit our ability to engage in specified types of transactions.
These covenants limit the ability of our subsidiaries to, among other things:
● incur,
assume, or permit to exist additional indebtedness or guarantees;
● incur
liens;
● make
investments and loans;
● pay
dividends, make payments, or redeem or repurchase capital stock;
● engage
in mergers, liquidations, dissolutions, asset sales, and other dispositions (including sale
leaseback transactions);
● amend
or otherwise alter terms of certain indebtedness;
● enter
into agreements limiting subsidiary distributions or containing negative pledge clauses;
● engage
in certain transactions with affiliates;
● alter
the business that we conduct;
● change
our fiscal year; and
● engage
in any activities other than permitted activities.
As
a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity
financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur
could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the
future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
A
breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default
provisions, and acceleration of amounts due, and exercise of lender’s rights and remedies, including rights with respect to the
collateral securing the obligations.
We
utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness,
and we are exposed to risks related to counterparty credit worthiness or non-performance of these instruments.
We
enter into pay-fixed interest rate swaps to limit our exposure to changes in variable interest rates. Such instruments may result in
economic losses should interest rates decline to a point lower than our fixed rate commitments. We are also exposed to credit-related
losses, which could affect the results of operations in the event of fluctuations in the fair value of the interest rate swaps due to
a change in the credit worthiness or non-performance by the counterparties to the interest rate swaps.
Risk
Relating to Our Securities
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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Our
common stock is subject to the “ penny stock ” rules of the Securities and Exchange Commission (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
SEC 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 SEC 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.
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.
The
market price of our common stock has been and will likely continue to be volatile, and you could lose all or part of your investment.
The
market price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control
and may not be related to our operating performance. In addition to the factors discussed in this “ Risk Factors ” section
and elsewhere in this Annual Report on Form 10-K, factors that could cause fluctuations in the market price of our common stock include
the following:
● general
economic, regulatory, and market conditions;
● public
health crises and related measures to protect the public health;
● sales
of shares of our common stock by us or our stockholders;
● issuance
of shares of our common stock, whether in connection with an acquisition or disposition of
our subsidiaries or assets;
● short
selling of our common stock or related derivative securities;
● from
time to time we make investments in equity that is, or may become, publicly held, and we
may experience volatility due to changes in the market prices of such equity investments;
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● reports
by securities or industry analysts, media or other third parties, that are interpreted either
negatively or positively by investors, failure of securities analysts to maintain coverage
and/or to provide accurate consensus results of us, changes in financial estimates by securities
analysts who follow us, or our failure to meet these estimates or the expectations of investors;
● the
financial or other projections we may provide to the public, any changes in those projections,
or our failure to meet those projections;
● announcements
by us or our competitors of new products or services;
● rumors
and market speculation involving us or other companies in our industry;
● actual
or perceived security incidents that we or our service providers may suffer; and
● actual
or anticipated developments in our business, our competitors’ businesses, or the competitive
landscape generally.
In
addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities,
securities class action litigation has often been instituted against these companies. Such litigation could result in substantial costs
and a diversion of our management’s attention and resources.