10-Q 1 innovativefood10q063016.htm 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
 

 
FORM 10-Q
 

 
  Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the quarterly period ended June 30, 2016

  Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________.

Commission File Number: 0-9376

INNOVATIVE FOOD HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)

Florida
(State or Other Jurisdiction of Incorporation or Organization)
20-1167761
(IRS Employer I.D. No.)

28411 Race Track Rd.
Bonita Springs, Florida 34135
(Address of Principal Executive Offices)

(239) 596-0204
(Registrant's Telephone Number, Including Area Code)

                                                                                                    
 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES   NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES   NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
(Check One):
Large Accelerated filer
Accelerated filer                   
Non-accelerated filer    
(Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):   YES   NO
 
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 25,501,819  shares of common stock issued and 24,768,157  shares of common stock outstanding as of August 9, 2016.
 

 
INNOVATIVE FOOD HOLDINGS, INC.
TABLE OF CONTENTS TO FORM 10-Q

 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
3
 
3
 
4
 
5
 
6
Item 2.
23
Item 4.
28
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
29
Item 2.
29
Item 3.
29
Item 4.
29
Item 5.
29
Item 6.
30
 
31
 
 
PART I. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Innovative Food Holdings, Inc.
Condensed Consolidated Balance Sheets
 
   
June 30,
   
December 31,
 
   
2016
   
2015
 
   
(unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
1,699,602
   
$
1,645,320
 
Accounts receivable, net
   
1,532,535
     
1,650,584
 
Inventory
   
868,911
     
920,885
 
Current assets - discontinued operations
   
-
     
1,767,333
 
Other current assets
   
70,445
     
68,559
 
Total current assets
   
4,171,493
     
6,052,681
 
                 
Property and equipment, net
   
2,123,868
     
2,193,463
 
Investment
   
150,000
     
150,000
 
Non-current assets - discontinued operations
   
-
     
4,665,554
 
Intangible assets, net
   
808,818
     
940,452
 
Total assets
 
$
7,254,179
   
$
14,002,150
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
Current liabilities
               
Accounts payable and accrued liabilities
 
$
1,621,155
   
$
1,702,526
 
Accrued liabilities - related parties
   
-
     
458,710
 
Accrued interest
   
1,500
     
9,230
 
Revolving credit facilities
   
1,300,000
     
1,380,000
 
Notes payable, current portion, net of discount
   
255,625
     
897,615
 
Current liabilities - discontinued operations
   
-
     
10,512,255
 
Contingent liabilities
   
60,000
     
91,000
 
Total current liabilities
   
3,238,280
     
15,051,336
 
                 
Accrued interest – long term
   
620,669
     
614,465
 
Note payable - long term portion, net of discount
   
1,367,005
     
1,254,042
 
Notes payable - related parties, long term portion
   
164,650
     
164,650
 
Long term liabilities - discontinued operations
   
-
     
2,301,151
 
Total liabilities
   
5,390,604
     
19,385,644
 
                 
Stockholders' equity (deficit)
               
Common stock, $0.0001 par value; 500,000,000 shares authorized; 25,206,819 and 24,248,486 shares issued;
  24,473,157 and 23,547,823 shares outstanding at June 30, 2016 and December 31, 2015, respectively
   
2,519
     
2,423
 
Additional paid-in capital
   
34,203,219
     
32,344,584
 
Treasury stock,  519,254 and 486,254 shares outstanding at June 30, 2016 and December 31, 2015
   
(174,949
)
   
(160,099
)
Accumulated deficit
   
(32,167,214
)
   
(37,570,402
)
Total stockholder's equity (deficit)
   
1,863,575
     
(5,383,494
)
Total liabilities and stockholders' equity (deficit)
 
$
7,254,179
   
$
14,002,150
 
 
See notes to these unaudited condensed consolidated financial statements. 

Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
 
 
 
For the Three
   
For the Three
   
For the Six
   
For the Six
 
 
 
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2016
   
2015
   
2016
   
2015
 
 
                       
 
                       
Revenue
 
$
8,303,227
   
$
7,633,650
   
$
16,318,568
   
$
14,210,498
 
Cost of goods sold
   
5,904,630
     
5,330,708
     
11,575,368
     
9,994,427
 
Gross margin
   
2,398,597
     
2,302,942
     
4,743,200
     
4,216,071
 
 
                               
Selling, general and administrative expenses
   
1,710,445
     
2,055,790
     
3,542,753
     
4,002,747
 
      Total operating expenses
   
1,710,445
     
2,055,790
     
3,542,753
     
4,002,747
 
 
                               
Operating income (loss)
   
688,152
     
247,152
     
1,200,447
     
213,324
 
 
                               
Other (income) expense:
                               
  Interest expense, net
   
112,889
     
111,449
     
244,538
     
220,568
 
   Other (income)
   
-
     
-
     
-
     
-
 
      Total other (income) expense
   
112,889
     
111,449
     
244,538
     
220,568
 
 
                               
Net income (loss) before taxes
   
575,263
     
135,703
     
955,909
     
(7,244
)
 
                               
  Income tax expense
   
-
     
-
     
-
     
-
 
 
                               
Net income  (loss) from continuing operations
 
$
575,263
   
$
135,703
   
$
955,909
   
$
(7,244
)
 
                               
Less net income attributable to noncontrolling interest in variable interest entities
   
-
     
-
     
-
     
(1,544
)
 
                               
Net income (loss) from discontinued operations
   
-
     
(2,087,056
)
   
4,447,279
     
(3,960,763
)
 
                               
Consolidated net income (loss)
 
$
575,263
   
$
(1,951,353
)
 
$
5,403,188
   
$
(3,968,007
)
 
                               
Net income (loss) per share from continuing operations – basic
 
$
0.023
   
$
0.006
   
$
0.038
   
$
(0.000
)
 
                               
Net income (loss) per share from discontinued operations – basic
 
$
-
   
$
(0.092
)
 
$
0.179
   
$
(0.183
)
 
                               
Net income (loss) per share from continuing operations – diluted
 
$
0.020
   
$
0.005
   
$
0.035
   
$
(0.000
)
 
                               
Net income (loss) per share from discontinued operations – diluted
 
$
-
   
$
(0.092
)
 
$
0.140
   
$
(0.183
)
 
                               
 
                               
Weighted average shares outstanding - basic
   
25,001,319
     
22,785,765
     
24,841,416
     
21,623,103
 
 
                               
Weighted average shares outstanding - diluted
   
31,883,014
     
27,168,648
     
31,839,607
     
31,503,772
 
 
 
 See notes to these unaudited condensed consolidated financial statements.

Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
 
   
For The Six Months Ended
   
For The Six Months Ended
 
   
June 30,
   
June 30,
 
   
2016
   
2015
 
Cash flows from operating activities:
           
Net income (loss)
 
$
5,403,188
   
$
(3,968,007
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Gain on sale of discontinued operations
   
(7,201,196
)
   
-
 
Depreciation and amortization
   
320,854
     
608,839
 
Non-cash compensation
   
477,893
     
2,284,110
 
Non-cash compensation – FD employees
   
1,028,908
     
-
 
Amortization of discount on notes payable
   
185,018
     
198,314
 
Increase (decrease) in allowance for doubtful accounts
   
15,203
     
-
 
Changes in assets and liabilities:
               
Accounts receivable, net
   
102,846
     
(223,720
)
Deferred revenue
   
289,254
     
(638,812
)
Inventory and other current assets, net
   
135,592
     
(1,442
)
Accounts payable and accrued expenses - related party
   
(146,018
)
   
(329,927
)
Due from related party
   
110
     
-
 
Accounts payable and accrued expenses
   
250,956
 
   
(172,357
)
Contingent liability
   
(31,000
)
   
(2,500
)
Net cash provided by (used in) operating activities
   
831,608
     
(2,245,502
)
                 
Cash flows from investing activities:
               
                 
Cash decrease due to sale of discontinued operations
   
(470,482
)
   
-
 
Cash paid to re-acquire shares issued in acquisition of The Fresh Diet
   
-
     
(3,000,000
)
Acquisition of property and equipment
   
(9,695
)
   
(1,094,054
)
Net cash used in investing activities
   
(480,177
)
   
(4,094,054
)
                 
Cash flows from financing activities:
               
Common stock sold for cash
   
-
     
4,288,596
 
Common stock sold for exercise of options and warrants
   
-
     
481,860
 
Payments made for the repurchase of common stock
   
(14,850
)
   
-
 
Borrowings on revolving credit facilities
   
805,959
     
1,986,824
 
Payments made on revolving credit facilities
   
(841,831
)
   
(2,214,991
)
Borrowings made on debt
   
-
     
980,000
 
Principal payments on debt
   
(730,302
)
   
(382,560
)
Principal payments capital leases
   
(8,094
)
   
(115,193
)
Net cash (used in) provided by financing activities
   
(789,118
)
   
5,024,536
 
                 
(Decrease) in cash and cash equivalents
   
(437,687
)
   
(1,315,020
)
                 
Cash and cash equivalents at beginning of period
   
2,137,289
     
3,112,526
 
                 
Cash and cash equivalents at end of period
 
$
1,699,602
   
$
1,797,506
 
Cash and cash equivalents at end of period – discontinued operations
 
$
-
   
$
200,989
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
68,182
   
$
44,348
 
                 
Taxes
 
$
-
   
$
-
 
 
 
Non-cash transactions:
Fair value of 25,000 shares of common stock issued to a service provider, previously accrued
 
$
34,000
 
 
$
-
 
Equipment acquired under capital lease
 
$
9,217
 
 
$
-
 
Par value of 300,000 shares issued for exercise of RSUs
 
$
30
   
$
-
 
 
 See notes to these unaudited condensed consolidated financial statements. 

INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)
 
1. BASIS OF PRESENTATION
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, some of which are non-operating, Artisan Specialty Foods, Inc. (“Artisan”), Food Innovations, Inc. (“Food Innovations” or “FII”), Food New Media Group, Inc. (“FNM”), Organic Food Brokers, Inc. (“OFB”), Gourmet Food Service Group, Inc. (“GFG”), Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc., The Haley Group, Inc. (“Haley”), 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.), (“Gourmet” and collectively with IVFH and the other subsidiaries, the “Company” or “IVFH”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All material intercompany transactions have been eliminated upon consolidation of these entities.
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission and with the instructions to Form 10-Q.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s audited financial statements and related notes as contained in Form 10-K for the year ended December 31, 2015. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations to be expected for the full year.

Discontinued Operations

On February 23, 2016, the Company consummated the sale of 90% of its ownership in The Fresh Diet, Inc. (“FD”).  As a result of the sale, the results of operations from January 1, 2016 through February 22, 2016 and from January 1, 2015 through June 30, 2015 have been included in “Net loss from discontinued operations” in our consolidated statements of operations. Additionally, these assets and liabilities have been presented as discontinued operations in our  consolidated balance sheet as of December 31, 2015.  See Note 3 - Discontinued Operations for additional information.

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
Our business is currently conducted by our wholly-owned subsidiaries, Artisan , FII,  FNM, OFB, GFG,   Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc., Haley,  and  Gourmet.  Since its incorporation, the Company primarily through FII’s relationship with US Food, Inc.  (“U.S. Foods” or “USF”), has been in the business of providing premium restaurants, within 24 – 72 hours, with the freshest origin-specific perishables, specialty food products, and healthcare products shipped directly from our network of vendors and from our warehouses. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses.  Gourmet has been in the business of providing consumers with gourmet food products shipped directly from our network of vendors and from our warehouses within 24 – 72 hours. GFG is focused on expanding the Company’s program offerings to additional customers.  In our business model, we receive orders from our customers and then work closely with our suppliers and our warehouse facilities to have the orders fulfilled.  In order to maintain freshness and quality, we carefully select our suppliers based upon, among other factors, their quality, uniqueness, reliability and access to overnight courier services.
 
Artisan is a supplier of over 1,500 niche gourmet products to over 500 customers in the Greater Chicago area.    Haley is a dedicated foodservice consulting and advisory firm that works closely with companies to access private label and manufacturers’ label food service opportunities with the intent of helping them launch and commercialize new products in the foodservice industry. OFB is an outsourced national sales and brand management team for emerging organic and specialty food CPG companies and provides  emerging CPG specialty food brands distribution and shelf placement access in all of the  major metro markets in the food retail industry.  
 
 
Use of Estimates
 
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounts subject to estimate and judgements are accounts receivable reserves, income taxes, intangible assets, contingent liabilities, and equity based instruments. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Innovative Food Holdings, Inc., and its wholly owned operating subsidiaries, Artisan, Food Innovations, FNM, OFB, GFG, Gourmet Foodservice Warehouse, Inc., Gourmeting, Inc., Haley, and Gourmet.  All accounts of FD have been included under discontinued operations.  All material intercompany transactions have been eliminated upon consolidation of these entities.

Concentration Risk
 
Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC) limits. At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of June 30, 2016, the cash balance in excess of the FDIC limits was $746,613. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.
 
Revenue Recognition
 
The Company recognizes revenue upon product delivery. All of our products are shipped either same day or overnight or through longer shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
 
For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling   price is fixed and  determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
    
Cost of Goods Sold
 
We have included in cost of goods sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of food and raw materials,  packing and handling, shipping, and delivery costs.

Basic and Diluted Earnings Per Share
 
Basic net earnings (loss) per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings (loss) per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
 
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation. For the three and six  months ended June 30, 2016, the company did not include the following in the calculation of weighted-average fully-diluted shares outstanding because the result would have been anti-dilutive: 2,742,503 shares underlying warrants and 1,290,000 shares underlying options.  For the three and six months ended June 30, 2015, fully-diluted earnings per share was the same as basic earnings per share because the effect of the exercise of any of the dilutive securities would have been anti-dilutive, and the following were  not  included in the calculation of fully-diluted earnings per share: 5,682,320 shares underlying convertible notes payable and accrued interest; 3,120,000 shares from the exercise of options; and 4,071,199 shares from the exercise of warrants.

Dilutive shares at June 30, 2016:
 
Convertible notes and interest:
At June 30, 2016, the Company had outstanding convertible notes payable in the aggregate principal amount of $812,215  with accrued interest of $620,669  convertible at the rate of $0.25 per share into an aggregate of  5,731,536  shares of common stock, and a convertible note payable in the amount of $100,000  convertible at the rate of $1.54 into 64,935 shares of common stock.
 
Warrants:
At June 30, 2016, the Company had outstanding warrants for holders to purchase the following additional shares: 2,294,491 shares at a price of $0.575 per share; 448,010 shares at a price of $0.55 per share; 94,783 shares at a price of $0.25 per share; and 700,000 shares at a price of $0.01 per share.

Stock options:
At June 30, 2016, the Company had outstanding options for holders to purchase the following additional shares: 30,000 shares at a price of $3.40 per share; 20,000 shares at a price of $2.40 per share; 500,000 shares at a price of $2.00 per share; 15,000 shares at a price of $1.90 per share; 310,000 shares at a price of $1.60 per share; 100,000 shares at a price of $1.46 per share; 15,000 shares at a price of $1.44 per share; 75,000 shares at a price of $1.31 per share; 225,000 shares at a price of $0.57 per share; 92,500 shares at a price of $0.48 per share; 92,500 shares at a price of $0.474 per share; 92,500 shares at a price of $0.45 per share; 275,000 shares at a price of $0.40 per share; 92,500 shares at a price of $0.38 per share; and 1,170,000 shares at a price of $0.35 per share.

RSUs:
At June 30, 2016, the Company has issued restricted stock units (“RSUs”) for the potential issuance of shares of the Company’s common stock for the purpose of aligning executives and employees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to members of the board of directors of the Company (“Board RSUs”); certain RSUs were issued to the executive officers of the Company (“Executive RSUs”); certain RSUs were issued to employees of the Company (“Employee RSUs”); and certain RSUs were issued to employees of The Fresh Diet (“FD RSUs”).

At June 30, 2016, the following Board RSUs were outstanding: a total of 370,000  RSUs were vested; 270,000 RSUs vest on July 1, 2016; and 270,000 RSUs vest on July 1, 2017.  

At June 30, 2016, the following Executive RSUs were outstanding: a total of 1,137,072 RSUs were vested; 600,000 RSUs will vest on December 31, 2016; and 800,000 RSUs will vest on July 1, 2017. An additional 125,000 RSUs will vest contingent upon the attainment of a stock price of $2.00 per share for 20 straight trading days, and an additional 175,000 RSUs will vest contingent  upon the attainment of a stock price of $3.00  per share for 20 straight trading days. The Company estimated that the stock-price goals of the Company’s stock price closing above $2.00 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value; the Company also estimated that the likelihood of the Company’s stock closing above $3.00 per share for 20 straight days is 70%, and these RSUs were valued at 70% of their face value

During the three months ended June 30, 2016, pursuant to separation agreements related to The Fresh Diet, a total of 200,000 Employee RSUs were exercised and an additional 900,000 RSUs were cancelled.  At June 30, 2016, the following FD RSUs were outstanding: A total of 300,000 RSUs were vested; 300,000 RSUs vest on December 31, 2016; and 400,000 RSUs will vest on July 1, 2017. 

At June 30, 2016, a total of 251,174 Employee RSUs were outstanding, all of which were vested.

We recognized stock-based compensation expense for RSUs in a straight-line manner over the vesting period of the grant. This resulted in stock-based compensation expense (continuing operations) of $230,350  and $545,966  related to recognition of RSUs during the three months ended June 30, 2016 and 2015, respectively, and $468,018 and $1,091,931  related to recognition of RSUs during the six months ended June 30, 2016 and 2015, respectively. 

Dilutive shares at June 30, 2015:

Convertible notes and interest:
At June 30, 2015, the Company had outstanding convertible notes payable in the aggregate principal amount of $758,065 with accrued interest of $662,653 convertible at the rate of $0.25 per share into an aggregate of 5,682,872 shares of common stock, and a convertible note payable in the amount of $200,000 convertible at the rate of $1.54 per share into 129,871 shares of common stock.  

Warrants:
Also at June 30, 2015, the Company had outstanding warrants for holders to purchase the following additional shares: 2,828,405 shares at a price of $0.575 per share; 448,011 shares at a price of $0.55 per share; 94,783 shares at a price of $0.25 per share; and 700,000 shares at a price of $0.01 per share.

Stock Options:
Also at June 30, 2015, the Company had outstanding options for holders to purchase the following additional shares: 30,000 shares at a price of $3.40 per share; 20,000 shares at a price of $2.40 per share; 500,000 shares at a price of $2.00 per share; 15,000 shares at a price of $1.90 per share; 310,000 shares at a price of $1.60 per share; 15,000 shares at a price of $1.50 per share; 100,000 shares at a price of $1.46 per share; 15,000 shares at a price of $1.44 per share; 75,000 shares at a price of $1.31 per share; 225,000 shares at a price of $0.57 per share; 92,500 shares at a price of $0.48 per share; 92,500 shares at a price of $0.474 per share; 92,500 shares at a price of $0.45 per share; 275,000 shares at a price of $0.40 per share; 92,500 shares at a price of $0.38 per share; and 1,170,000  shares at a price of $0.35 per share.

RSUs:
Also at June 30, 2015, the Company has issued restricted stock units ("RSUs") for the potential issuance of shares of the Company's common stock for the purpose of aligning executives and employees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to employees of The Fresh Diet ("Employee RSUs") and certain RSUs were issued to the executive officers of the Company ("Executive RSUs") and certain RSUs were issued to members of the board of directors of the Company ("Board RSUs").  With respect to the Executive RSUs,  the Company's executive officers were awarded an aggregate number of RSUs which vest according to the following schedule, provided the performance conditions are met: 322,466 RSU's vested on January 1, 2015, 390,000 RSUs vested on  July 1, 2015 and 300,000 RSU's vested on December 31, 2015; 75,000 RSU’s vested on May 1, 2016, 90,000 RSU's vest on July 1, 2016 and 600,000 RSUs vest on December 31, 2016 and 890,000 RSUs vest on July 1, 2017 and 300,000 RSU's vest solely upon the achievement of performance goals and the continued employment with the Company.   The members of the Company's Board of Directors were awarded the aggregate number of RSU's which vest according to the following schedule:  270,000 RSU's vest on July 1, 2015; 270,000 RSU's vest on July 1, 2016; and 270,000 RSU's vest on July 1, 2017. 

The Employee RSUs issued to certain nonexecutive employees of the Company were issued either partially in lieu of salary, future bonuses or a combination of both bonus and salary. The Employee RSUs vest according to the following schedule: On July 1, 2015 600,000 will vest and on December 31, 2015 an additional 600,000 shares will vest. On December 31, 2016 an additional 1.2 million shares will vest and an additional 1.6 million shares will vest on July 1, 2017. Vesting is contingent on being an employee of the Company at the time of vesting. In addition, there are restrictions on the sale of such vested stock including aggregate volume restrictions and no Employee RSU shares can be sold below $2.50 per share. In addition, up to an additional 25,000 shares will vest on a monthly basis. Vesting is contingent on employment by the Company at the time of vesting, and the Company stock price closing above $2.50 per share for 20 straight days. In addition, there are restrictions on the sale of such vested stock including aggregate volume restrictions and no shares can be sold below $2.50 per share.
 
The FD RSUs issued to certain nonexecutive employees of FD  were issued either partially in lieu of salary, future bonuses, or a combination of both bonus and salary. At June 30, 2015, the FD  RSUs were scheduled to vest as follows: On July 1, 2015, 600,000 RSUs will vest; on December 31, 2015 an additional 600,000 RSUs will vest; on December 31, 2016 an additional 1,200,000 RSUs will vest; and on July 1, 2017, an additional 1,600,000 RSUs will vest.  An additional 350,000 RSUs will vest if the price of the Company's common stock closes above $2.50 per share for twenty consecutive trading days. In addition there are restrictions on the sale of such vested stock, including aggregate volume restrictions, and shares cannot be sold below $2.50 per share.
 
The Company estimated that the stock-price goals of the Company's stock price closing above $2.50 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value. The Company estimated that the revenue targets had a 100% likelihood of achievement, and these RSUs were valued at 100% of their face value.  We recognized stock-based compensation expense of in a straight-line manner over the vesting period of the RSUs. This resulted in stock-based compensation expense (continuing operations) of $545,966  and $1,091,391,  respectively, related to recognition of RSUs during the three and six months ended June 30, 2015.

Fully-diluted earnings per share was the same as basic earnings per share for the three and six months ended  June 30, 2015 because the effect of the exercise of above instruments would be anti-dilutive

Significant Recent Accounting Pronouncements

In January 2016, FASB amended the guidance for recognition and measurement of financial assets and liabilities. These amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The adoption of this guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption of certain provisions of this guidance is permitted as of the beginning of the fiscal year of adoption. Entities should apply these amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair value should be applied prospectively to equity investments that exist as of the date of adoption. The Company does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows.

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 816).” ASU 2016-09 simplifies several aspects of accounting for share-based compensation including the tax consequences, classification of awards as equity or liabilities, forfeitures and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted.  The Company is currently evaluating the effects of adoption this ASU. The Company does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying unaudited condensed consolidated financial statements.
 
3.  DISCONTINUED OPERATIONS

Effective February 23, 2016, the Company closed a transaction to sell 90% of its ownership in FD  to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD who was appointed Interim CEO of FD prior thereto.  The consideration to Innovative Food Holdings consisted primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations.
 
ASC 360-10-45-9 requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which a set of criteria have been met, including criteria that the sale of the asset (disposal group) is probable and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. This criteria was achieved on February 9, 2016. Additionally, the discontinued operations are comprised of the entirety of The Fresh Diet, excluding corporate services expenses. Lastly, for comparability purposes certain prior period line items relating to the assets held for sale have been reclassified and presented as discontinued operations for all periods presented in the accompanying condensed consolidated statements of operations and the condensed consolidated balance sheets.
  
The following information presents the major classes of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheet: 
 
 
 
December 31,
 
 
 
2015
 
Current assets - discontinued operations:
     
Cash and cash equivalents
 
$
491,969
 
Inventory
   
173,987
 
Other current assets
   
640,137
 
Due from related parties
   
461,240
 
Total current assets - discontinued operations
 
$
1,767,333
 
 
       
Noncurrent assets - discontinued operations:
       
Property and equipment, net
 
$
802,843
 
Intangible assets, net
   
3,862,711
 
Total noncurrent assets - discontinued operations
 
$
4,665,554
 
 
       
Current liabilities - discontinued operations:
       
Accounts payable and accrued liabilities
 
$
3,022,466
 
Deferred revenue
   
5,035,906
 
Accrued liabilities - related parties
   
135,935
 
Accrued interest
   
58,943
 
Revolving credit facilities
   
211,211
 
Notes payable, current portion
   
528,594
 
Deferred tax liability
   
1,069,200
 
Contingent liabilities
   
450,000
 
Total current liabilities - discontinued operations:
 
$
10,512,255
 
 
       
Long term liabilities - discontinued operations:
       
Note payable - long term portion
   
101,181
 
Notes payable - related parties, long term portion
   
2,199,970
 
Total long term liabilities - discontinued operations
 
$
2,301,151
 
 

The following information presents the major classes of line items constituting the after-tax loss from discontinued operations in the consolidated statements of operations.  The three and six months ended June 30, 2016 includes the results from discontinued operations from January 2, 1016 through the date of disposal (February 22, 2016):
 
 
 
Three Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2016
   
2015
 
Revenue
   
-
     
4,898,851
 
Cost of goods sold
   
-
     
3,440,094
 
Gross margin
   
-
     
1,458,757
 
 
               
Selling, general and administrative expenses
   
-
     
3,525,100
 
Total operating expenses
   
-
     
3,525,100
 
 
               
Operating loss
   
-
     
(2,066,343
)
 
               
Other (income) expense:
               
Gain on sale of discontinued operations
   
-
     
-
 
Interest expense, net
   
-
     
20,713
 
Total other (income) expense
   
-
     
20,713
 
 
               
Income (loss) from discontinued operations, net of tax
 
$
-
   
$
(2,087,056
)
  

 
 
 
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2016
   
2015
 
Revenue
   
2,389,950
     
9,503,820
 
Cost of goods sold
   
1,764,834
     
6,961,680
 
Gross margin
   
625,116
     
2,542,140
 
 
               
Selling, general and administrative expenses
   
3,368,213
     
6,459,539
 
Total operating expenses
   
3,368,213
     
6,459,539
 
 
               
Operating loss
   
(2,743,097
)
   
(3,917,399
)
 
               
Other (income) expense:
               
Gain on sale is discontinued operations
   
(7,201,196
)
   
-
 
Interest expense, net
   
10,820
     
43,364
 
Total other (income) expense
   
(7,190,376
)
   
43,364
 
 
               
Income (loss) from discontinued operations, net of tax
 
$
4,447,279
   
$
(3,960,763
)

The following information presents the major classes of line items constituting significant operating and investing cash flow activities in the consolidated statements of cash flows relating to discontinued operations:
 
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
Cash Flow: Major line items
       
 
       
Depreciation and Amortization
   
39,509
     
202,216
 
Non-cash compensation
   
1,028,908
     
372,530
 
Purchase of equipment
   
(6,296
)
   
(18,530
)
Cash from revolving credit facilities
   
685,959
     
954,120
 
Payments made on revolving credit facilities
   
(641,831
)
   
(1,314,991
)
Principal payments made on notes payable
   
(7,074
)
   
(32,703
)
Principal payments made on capital leases
   
(8,094
)
   
(59,459
)
 

The components of the gain on sale and income from discontinued operations are as follows:

 
 
February 22, 2016
 
 
     
Receivable due from buyer, net of reserve of $8,700,000
 
$
-
 
Net proceeds  from sale of assets and liabilities
   
-
 
 
       
Assets sold
   
(6,225,073
)
Liabilities sold
   
13,426,269
 
   Net liabilities sold
   
7,201,196
 
 
       
Gain on sale
   
7,201,196
 
 
       
 
       
Loss from discontinued operations before income tax
   
(2,753,917
)
Income tax expense
   
-
 
 
       
Income from discontinued operations
 
$
4,447,279
 

4. ACCOUNTS RECEIVABLE
 
At June 30, 2016 and December 31, 2015, accounts receivable consists of:
 
   
June 30,
2016
   
December 31,
2015
 
Accounts receivable from customers
 
$
1,587,578
   
$
1,706,948
 
Allowance for doubtful accounts
   
(55,043
)
   
(56,364
)
Accounts receivable, net
 
$
1,532,535
   
$
1,650,584
 
 
5. INVENTORY

Inventory consists primarily of specialty food products.    At June 30, 2016 and December 31, 2015, inventory consisted of the following:
 
 
June 30,
2016
 
December 31,
2015
 
Finished Goods Inventory
 
$
868,911
   
$
920,885
 
  
6. PROPERTY AND EQUIPMENT

The Company owns a building and property located at 28411 Race Track Road, Bonita Springs, Florida 34135 and with respect thereto has entered into each of a Loan Agreement, Mortgage, Security Agreement and Note with Fifth Third Bank, each with an effective date of February 26, 2013.  The property consists of approximately 1.1 acres of land and approximately 10,000 square feet of combined office and warehouse space, and was purchased as part of a bank short sale.  The Company moved its operations to these premises on July 15, 2013. The purchase price of the property was $792,758 and was financed in part by a five year mortgage in the amount of $546,000 carrying an annual interest rate of 3% above LIBOR Rate, as such term is defined in the Note.

The Company also owns a building and property located at 2528 S. 27th Avenue, Broadview, Illinois 60155. The property consists of approximately 1.33 acres of land and approximately 28,711 square feet of combined office and warehouse space. The purchase price of $914,350 was initially financed primarily by a draw-down of $900,000 on the Company’s credit facility with Fifth Third Bank. On May 29, 2015, a permanent financing facility was provided by Fifth Third Bank in the form of a loan in the amount of $980,000. $900,000 of this amount was used to pay the balance of the credit facility; the additional $80,000 was used for refrigeration and other up-fit expenses at the property. The interest on the loan is at the LIBOR rate plus 3.0%.  The building is used for office and warehouse space for the Company’s Artisan subsidiary.
 
A summary of property and equipment at June 30, 2016 and December 31, 2015, was as follows:
 
 
 
June 30,
2016
   
December 31,
2015
 
Land
 
$
385,523
   
$
385,523
 
Building
   
1,326,165
     
1,326,165
 
Computer and Office Equipment
   
466,177
     
466,177
 
Warehouse Equipment
   
206,778
     
197,561
 
Furniture, Fixtures
   
454,744
     
451,346
 
Vehicles
   
40,064
     
40,064
 
Total before accumulated depreciation
   
2,879,451
     
2,866,836
 
Less: accumulated depreciation
   
(755,583
)
   
(673,373
)
Total
 
$
2,123,868
   
$
2,193,463
 

Depreciation and amortization expense for property and equipment amounted to $45,852 and $15,514  for the three months ended  June 30, 2016 and 2015, respectively.  Depreciation and amortization expense for property and equipment amounted to $82,211 and $33,253  for the six months ended  June 30, 2016 and 2015, respectively.  

7. INVESTMENTS
 
The Company has made investments in certain early stage food related companies which it expects can benefit from synergies with the Company’s various operating businesses. As of June 30, 2016 and December 31, 2015, the Company had made investments in two such companies in the aggregate amount of $150,000.  The Company does not have significant influence over the operations of the companies it invests in.
 
8.   INTANGIBLE ASSETS

The Company acquired certain intangible assets pursuant to the acquisition of Artisan and OFB, and the acquisition of certain assets of The Haley Group, LLC. The following is the net book value of these assets:
 
 
June 30, 2016
 
 
   
Accumulated
     
 
Gross
 
Amortization
 
Net
 
Trade Name
 
$
217,000
   
$
-
   
$
217,000
 
Non-Compete Agreement
   
244,000
     
(244,000
)
   
-
 
Customer Relationships
   
1,130,994
     
(690,176
)
   
440,818
 
Goodwill
   
151,000
     
-
     
151,000
 
Total
 
$
1,742,994
   
$
(934,176
)
 
$
808,818
 
 
 
December 31, 2015
 
 
   
Accumulated
     
 
Gross
 
Amortization
 
Net
 
Trade Name
 
$
217,000
   
$
-
   
$
217,000
 
Non-Compete Agreement
   
244,000
     
(213,500
)
   
30,500
 
Customer Relationships
   
1,130,994
     
(589,042
)
   
541,952
 
Goodwill
   
151,000
     
-
     
151,000
 
Total
 
$
1,742,994
   
$
(802,542
)
 
$
940,452
 
 
Amortization expense charged to continuing operations for the three months ended June 30, 2016 and 2015 was $65,817 and  $75,770, respectively.  Amortization expense charged to continuing operations for the six months ended June 30, 2016 and 2015 was $131,634 and $151,557, respectively.

The trade names are not considered finite-lived assets, and are not being amortized.  The non-compete agreements are being amortized over a period of 48 months.  The customer relationships acquired in the Artisan, Haley, and OFB transactions are being amortized over periods of 60, 36, and 60  months, respectively.

As detailed in ASC 350, the Company tests for goodwill impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.  As detailed in ASC 350-20-35-3A, in performing its testing for goodwill impairment, management has completed a qualitative analysis to determine whether it was more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. To complete this review, management followed the steps in ASC 350-20-35-3C to evaluate the fair value of goodwill and considered all known events and circumstances that might trigger an impairment of goodwill. The analysis completed in 2015 determined that there was no impairment to goodwill assets related to the Artisan and Haley transactions.
   
9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at June 30, 2016 and December 31, 2015 are as follows:
 
 
 
June 30,
2016
   
December 31,
2015
 
Trade payables
 
$
1,215,451
   
$
1,623,856
 
Accrued costs of discontinued operations
   
327,046
     
-
 
Accrued payroll and commissions
   
78,658
     
78,670
 
Total
 
$
1,621,155
   
$
1,702,526
 
 
At June 30, 2016 and December 31, 2015, accrued liabilities to related parties of consisted of accrued payroll, accrued bonus, and payroll related benefits. 

10. ACCRUED INTEREST

At June 30 2016, accrued interest was $622,169.  Of this amount, $620,669 is convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share, or a total of 2,482,676 shares. During the six months ended June 30, 2016, the Company paid cash for interest in the aggregate amount of $68,082.  The due date of accrued interest in the amount of $620,669 was extended to July 1, 2017 pursuant to an amendment to the September 2015 Notes Payable Extension Agreement (See Note 12) and is classified as a long-term liability on the Company’s balance sheet at June 30, 2016.
   
At December 31, 2015, accrued interest was $623,695.  Of this amount, $614,465  is convertible at the option of the note holders into the Company’s common stock a price of $0.25 per share, or a total of 2,457,860  shares. During the twelve months ended December 31, 2015, the Company paid cash for interest in the aggregate amount of $68,754.  The due date of accrued interest in the amount of $614,465 was extended to July 1, 2017 pursuant to an amendment to the September 2015 Notes Payable Extension Agreement (See Note 12) and is classified as a long-term liability on the Company’s balance sheet at December 31, 2015.
 
11. REVOLVING CREDIT FACILITIES
 
 
June 30,
2016
 
December 31,
2015
 
 
       
Line of credit facility with Fifth Third Bank in the original amount of $1,000,000. In August 2015, the amount of the credit facility was increased to $1,500,000 and the due date was extended to August 1, 2016. Interest on the line of credit is LIBOR plus 3.25%. During the three and six months ended June 30, 2016, the Company made net borrowings in the amount of $0 and $120,000 from this facility. During the three months and six months ended June 30, 2016, the Company made principal payments in the net amount of $0 and $200,000, respectively.  During the three and six months ended June 30, 2016, the Company  recorded interest in the amount of $9,173 and $21,201, respectively.
 
$
1,300,000
   
$
1,380,000
 
 
               
Total 
 
$
1,300,000
   
$
1,380,000
 


12.  NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
 
 
 
June 30,
2016
   
December 31,
2015
 
Secured mortgage note payable for the acquisition of land and building in Bonita Springs, Florida in the amount of $546,000. Principal payments of $4,550 and interest at the rate of Libor plus 3% are due monthly. The balance of the principal amount will be due February 28, 2018. During the three months ended June 30, 2016, the Company made payments of principal and interest in the amounts of $13,650 and $3,055,  respectively. During the six months ended June 30, 2016, the Company made payments of principal and interest in the amounts of $27,300 and $6,187,  respectively.
 
$
364,000
   
$
391,300
 
 
               
Secured mortgage note payable for the acquisition of land and building in Broadview, Illinois in the amount of $980,000. Payments of $8,167 including principal and interest at the rate of LIBOR plus 2.75% are due monthly through April 2020, the remaining principal balance in the amount of $490,000 will be due May 29, 2020. During the three months ended June 30, 2016, the Company made payments of principal and interest in the amounts of $24,500  and $6,731,  respectively. During the six months ended June 30, 2016, the Company made payments of principal and interest in the amounts of $49,000  and $13,574,  respectively.
   
873,833
     
922,833
 
 
               
A total of 17 convertible notes payable (the “Convertible Notes Payable”). Certain of the Convertible Notes Payable contain cross default provisions, and are secured by subordinated interest in a majority of the Company’s assets. The Convertible Notes Payable bear interest at the rate of 1.9% per annum; principal and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share; however, the interest may be paid in cash by the Company and certain limited amounts of principle may also be prepaid in cash. Effective May 13, 2014, the due date of these notes was extended from May 15, 2014 to December 31, 2015, and a discount to the notes in the aggregate amount of $732,565 was recorded to recognize the value of the beneficial conversion feature embedded in the extension of the term of the notes.  In  March 2015 the notes were further extended to January 1, 2016.  On September 30, 2015, the notes and accrued interest in the amount of $614,465 were further extended to July 1, 2017, and a discount in the amount of $647,565 was recorded to recognize the value of the beneficial conversion featured embedded in the extension of the term of the notes.  During the three and six months ended June 30, 2016, $92,509 and $185,018, respectively,  of this discount was charged to operations. During the three and six months ended June 30, 2016, the Company accrued interest in the amount of $3,102  and $6,204, respectively, on these notes.
   
647,565
     
647,565
 
 
               
An unsecured note to Sam Klepfish for $164,650 which may not be prepaid without Mr. Klepfish’s consent, originally carrying an  interest rate of 8% per annum and  no due date.  As of July 1, 2014, the interest rate was reduced to 1.9% and as of November 17, 2014 the interest rate was further reduced to 0%. During the three months ended December 31, 2015, interest in the amount of $54,150 was capitalized, and the aggregate principal amount of $164,650 was extended to July 1, 2017. This note and accrued interest are convertible into common stock of the Company at a conversion price of $0.25 per share.
   
164,650
     
164,650
 
 


 
  June 30,
2016
    December 31,
2015
 
Promissory note in the amount of $200,000 bearing interest at the rate of 1% per annum issued in connection with the OFB acquisition. Principal in the amount of $100,000 was due June 30, 2015; this payment was made in July 2015 within the 5 day grace period stipulated in the note agreement. During the three months ended March 31, 2016, the Company paid accrued interest in the amount of $0 on this note. The note is convertible into shares of the Company’s common stock at the conversion price of $1.54 per share. During the three and six months ended June 30, 2016, the Company accrued interest in the amount of $250 and $500, respectively, on this note.  In July 2016, the Company made a principal payment in the amount of $100,000  which satisfied this note in full.
   
100,000
     
100,000
 
 
               
Promissory note payable to Alpha Capital in the amount of $469,010 dated November 6, 2015 bearing interest at the rate of 9.9% per annum.  This note is unsecured, and became due December 6, 2015. During the six months ended June 30, 2016 the  Company accrued interest expense in the amount of $9,525, on this note. During the six months ended June 30, 2016, the Company paid principal and accrued interest in the amounts of $469,010 and $15,798, respectively, which satisfied this note in full.
   
-
     
469,010
 
 
               
Promissory note payable to Alpha Capital in the amount of $176,005 dated November 20, 2015 bearing interest at the rate of 9.9% per annum.  This note is unsecured, and became due December 20, 2015. During the six months ended June 30, 2016, the  Company accrued interest expense in the amount of $3,533 on this note.  During the six months ended June 30, 2016, the Company paid principal and accrued interest in the amounts of $176,005 and $5,490, respectively, which satisfied this note in full.
   
-
     
176,005
 
 
               
Capital lease obligations under a lease agreement for a forklift payable in thirty-six monthly installments of $274 including interest at the rate of 4.46%. During the three months ended June 30, 2016, the Company made principal and interest payments in the amount of $735 and $87, respectively. During the six months ended June 30, 2016, the Company made principal and interest payments in the amount of $1,463 and $181, respectively.
   
7,270
     
-
 
 
               
Total
 
$
2,157,318
   
$
2,871,363
 
 
               
Less: Discount
   
(370,038
)
   
(555,056
)
 
               
Net
 
$
1,787,280
   
$
2,316,307
 
  
Current maturities, net of discount
 
$
255,625
   
$
897,615
 
Long-term portion, net of discount
   
1,531,655
     
1,418,692
 
Total
 
$
1,787,280
   
$
2,316,307
 
 

 
For the Three Months Ended
June 30,
 
 
2016
 
2015
 
Discount on Notes Payable amortized to interest expense:
 
$
92,509
 
 
$
99,157
 

 
For the Six Months Ended
June 30,
 
 
2016
 
2015
 
Discount on Notes Payable amortized to interest expense:
 
$
185,018
   
$
198,314
 


At June 30, 2016 and December 31, 2015, the Company had unamortized discounts to notes payable in the aggregate amount of $370,038 and $555,056,  respectively.
 

Beneficial Conversion Features

The Company calculates the fair value of any beneficial conversion features embedded in its convertible notes via the Black-Scholes valuation method. The Company also calculates the fair value of any detachable warrants offered with its convertible notes via the Black-Scholes valuation method.  The instruments were considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features did not exceed the face value of the notes. These discounts were amortized to interest expense via the effective interest method over the term of the notes.  

13.  RELATED PARTY TRANSACTIONS

For the six months ended June 30, 2016:

At December 31, 2015, the Company had an accrued liability in the amount of $160,150 representing an aggregate of 210,520 shares of common stock to be issued to officers, directors, and employees for services performed during 2013; during the three months ended March 31, 2016, the Company issued 210,520 RSUs in satisfaction of this liability.  Also at December 31, 2015, the Company had an accrued liability in the amount of $157,780 representing 244,620 RSUs to be issued to officers and employees as a bonus for services performed in 2015;  during the three months ended March 31, 2016, the Company issued an aggregate of 244,620  RSUs  in satisfaction of this liability.

For the six months ended June 30, 2015:

During the six months ended June 30, 2015, the Company extended the expiration date to December 31, 2015 of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees.  The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to operations during the period ended June 30, 2015. (See note 15).
 
At June 30, 2015, the Company has loans receivable outstanding in the aggregate amount of $426,342 from four individuals who were previously owners of The Fresh Diet. The Company also has a loan receivable in the amount of $34,899 from a previously related entity.
 
14.  COMMITMENTS AND CONTINGENT LIABILITIES

Contingent Liability
 
Pursuant to the OFB acquisition, the Company is contingently liable for certain performance-based payments over the twenty-four months following the acquisition date. The Company believes it is likely that these payments will be made, and accordingly recorded the entire amount of $225,000 as a contingent liability on its balance sheet at acquisition with $91,000 outstanding at December 31,2015. During the three months ended June 30, 2016 and 2015, payments were made in the aggregate amount of $31,000 and $26,250, respectively. During the six months ended June 30, 2016 and 2015, payments in the aggregate amount of $31,000 and $52,500, respectively, have been made under this contingent liability; at June 30, 2016, the balance of the contingent liability is $60,000 related to the OFB acquisition.

Litigation

From time to time, the Company may be involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 
15. EQUITY

Common Stock

At June 30, 2016 and December 31, 2015, a total of 733,662  shares are deemed issued but not outstanding by the Company.
  
Six months ended June 30, 2016:

The Company issued 25,000 shares of common stock with a fair value of $34,000 to a service provider.  The value of these shares was accrued during the twelve months ended December 31, 2015.

The Company issued an aggregate of 600,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued as follows: 300,000 of these shares were issued for the exercise of RSUs held by the employee, and an additional 300,000 shares were charged to discontinued operations at the fair value of $147,000.
 
The Company issued 133,333 shares of common stock to an employee of The Fresh Diet pursuant to an employee agreement.  The fair value of these shares in the amount of $67,987 was charged to discontinued operations during the period.

The Company issued 200,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement.   These shares were issued via the exercise of RSUs; the par value of $20 was charged to additional paid-in capital during the period.

The Company repurchased 33,000 shares of common stock at a share price of $0.45 per share.  The value of these shares in the amount of $14,850 has been recorded in treasury stock.

Six months ended June 30, 2015:

The Company sold 3,178,420 shares of common stock at a price of $0.9646 per share and an additional 943,829 shares at a price of $1.30 per share  in a private placement for net cash proceeds of $4,288,596.

The Company paid $3,000,000 cash  for the purpose of acquiring, in a block sale, the shares of Monolith Ventures Ltd, a former shareholder of The Fresh Diet, who agreed to sell its position of 3,110,063 shares at a price of $0.9646 per share. The Company cancelled these 3,110,063 shares during the three months ended March 31, 2015.

The Company issued 727,272 shares of common stock pursuant to the exercise of warrants for cash of $400,000.
 
The Company issued 40,000 shares of common stock pursuant to the exercise of stock options for cash of $15,200.

The Company agreed to issue  150,000 shares of common stock Michael Ferrone  pursuant to the exercise of 150,000 stock options with a weighted average exercise price of $0.444 per share, for cash proceeds of $66,600.

The Company agreed to issue  30,000 shares of common stock with a fair value of $39,000 (or $1.30 per share) to a service provide

Warrants
 
The following table summarizes the significant terms of warrants outstanding at June 30, 2016. These warrants may be settled in cash and, unless the underlying shares are registered, via cashless conversion, into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:
 
       
Weighted
 
Weighted
     
Weighted
 
       
average
 
average
     
average
 
Range of
 
Number of
 
remaining
 
exercise
     
exercise
 
exercise
 
warrants
 
contractual
 
price of
 
Number of
 
price of
 
Prices
 
Outstanding
 
life (years)
 
outstanding Warrants
 
warrants Exercisable
 
exercisable Warrants
 
 
$
0.010
     
700,000
     
3.88
   
$
0.010
     
700,000
   
$
0.010
 
                                               
 
$
0.250
     
94,783
     
1.00
   
$
0.250
     
94,783
   
$
0.250
 
                                               
 
$
0.550
     
448,010
     
1.00
   
$
0.550
     
448,011
   
$
0.550
 
                                               
 
$
0.575
     
2,294,491
     
1.00
   
$
0.575
     
2,294,491
   
$
0.575
 
           
3,537,284
     
1.57
   
$
0.451
     
3,537,284
   
$
0.451
 
 
Transactions involving warrants are summarized as follows:
 
 
 
Number of
   
Weighted Average
 
 
 
Warrants
   
Exercise Price
 
Warrants outstanding at December 31, 2015
   
3,537,284
   
$
0.451
 
 
               
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
-
     
-
 
 
               
Warrants outstanding at June 30, 2016
   
3,537,284
   
$
0.451
 
 

Options
The following table summarizes the options outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by the Company:  
 
                 
Weighted
         
Weighted
 
           
Weighted
   
average
         
average
 
           
average
   
exercise
         
exercise
 
Range of
   
Number of
   
Remaining
   
price of
   
Number of
   
price of
 
exercise
   
options
   
contractual
   
outstanding
   
options
   
exercisable
 
Prices
   
Outstanding
   
life (years)
   
Options
   
Exercisable
   
Options
 
$
0.350
     
1,170,000
     
1.17
   
$
0.350
     
1,170,000
   
$
0.350
 
                                             
$
0.380
     
92,500
     
0.50
   
$
0.380
     
92,500
   
$
0.380
 
                                             
$
0.400
     
275,000
     
0.51
   
$
0.400
     
275,000
   
$
0.400
 
                                             
$
0.450
     
92,500
     
0.50
   
$
0.450
     
92,500
   
$
0.450
 
                                             
$
0.474
     
92,500
     
0.50
   
$
0.474
     
92,500
   
$
0.474
 
                                             
$
0.480
     
92,500
     
0.50
   
$
0.480
     
92,500
   
$
0.480
 
                                             
$
0.570
     
225,000
     
1.51
   
$
0.570
     
225,000
   
$
0.570
 
                                             
$
1.310
     
75,000
     
2.17
   
$
1.310
     
25,000
   
$
1.310
 
                                             
$
1.440
     
15,000
     
0.34
   
$
1.440
     
15,000
   
$
1.440
 
                                             
$
1.460
     
100,000
     
2.00
   
$
1.460
     
100,000
   
$
1.460
 
                                             
$
1.600
     
310,000
     
1.51
   
$
1.600
     
310,000
   
$
1.600
 
                                             
$
1.900
     
15,000
     
1.34
   
$
1.900
     
15,000
   
$
1.900
 
                                             
$
2.000
     
500,000
     
0.67
   
$
2.000
     
500,000
   
$
2.000
 
                                             
$
2.400
     
20,000
     
1.92
   
$
2.400
     
20,000
   
$
2.400
 
                                             
$
3.400
     
30,000
     
1.92
   
$
3.400
     
30,000
   
$
3.400
 
         
3,105,000
     
1.07
   
$
0.887
     
3,055,000
   
$
0.880
 
  
Transactions involving stock options are summarized as follows:
 
 
 
Number of Shares
   
Weighted Average
Exercise Price
 
Options outstanding  at December 31, 2015
   
3,105,000
   
$
0.887
 
 
               
Granted
   
-
   
$
-
 
Exercised
   
-
   
$
-
 
Cancelled / Expired
   
-
   
$
-
 
 
               
Options outstanding at June 30, 2016
   
3,105,000
   
$
0.887
 
 
Aggregate intrinsic value of options outstanding and exercisable at June 30, 2016 and 2015 was $106,475 and $1,553,630, respectively.  Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.43 and $1.16 as of June 30, 2016 and 2015, respectively, and the exercise price multiplied by the number of options outstanding.
 
During the six months ended June 30, 2015, the Company extended the expiration date of certain options to purchase a total of 277,500 shares of the Company’s common stock which were held by board members and key employees. The expiration dates of options to purchase 92,500 shares of common stock at a price of $0.38 per share were extended from March 31, 2015 to December 31, 2015; the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.45 per share were extended from June 30, 2015 to December 31, 2015; and the expiration dates of options to purchase 92,500 shares of common stock at a price of $0.474 per share were extended from September 30, 2015 to December 31, 2015.  The Company valued the options at the extended due dates using the Black-Scholes valuation model, and charged the amount of $146 to  operations during the period ended March 31, 2015.
 
During the three months ended June 30, 2016, and 2015 the Company charged a total of $4,938 and $16,851, respectively, to operations related to recognized stock-based compensation expense for employee stock options. During the six months ended June 30, 2016, and 2015 the Company charged a total of $9,875 and $85,911, respectively, to operations related to recognized stock-based compensation expense for employee stock options.
 
Accounting for warrants and stock options

The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables: 
 
 
 
June 30,
 
 
 
2015
 
Volatility
   
47.35
%
Dividends
 
$
-
 
Risk-free interest rates
   
0.99
%
Term (years)
   
3.00
 
 
Restricted Stock Units (“RSUs”)

At June 30, 2016, the Company has issued restricted stock units (“RSUs”) for the potential issuance of shares of the Company’s common stock for the purpose of aligning executives and employees of the Company and  for the purpose of compensation for serving as members of the Board of Directors of the Company and for the purposes of retaining qualified personnel at compensation levels that otherwise would not be available should the company have been required to pay certain salaries in cash only. Certain of the RSUs were issued to members of the board of directors of the Company (“Board RSUs”); certain RSUs were issued to the executive officers of the Company (“Executive RSUs”); certain RSUs were issued to employees of the Company (“Employee RSUs”); and certain RSUs were issued to employees of The Fresh Diet (“FD RSUs”).

At June 30, 2016, the following Board RSUs were outstanding: a total of 370,000  RSUs were vested; 270,000 RSUs vest on July 1, 2016; and 270,000 RSUs vest on July 1, 2017.  

At June 30, 2016, the following Executive RSUs were outstanding: a total of 1,137,072 RSUs were vested; 600,000 RSUs will vest on December 31, 2016; and 800,000 RSUs will vest on July 1, 2017. An additional 125,000 RSUs will vest contingent upon the attainment of a stock price of $2.00 per share for 20 straight trading days, and an additional 175,000 RSUs will vest contingent  upon the attainment of a stock price of $3.00  per share for 20 straight trading days. The Company estimated that the stock-price goals of the Company’s stock price closing above $2.00 per share for 20 straight days have a 90% likelihood of achievement, and these RSUs were valued at 90% of their face value; the Company also estimated that the likelihood of the Company’s stock closing above $3.00 per share for 20 straight days is 70%, and these RSUs were valued at 70% of their face value

During the three months ended June 30, 2016, pursuant to separation agreements related to The Fresh Diet, a total of 200,000 Employee RSUs were exercised and an additional 900,000 RSUs were cancelled.  At June 30, 2016, the following FD RSUs were outstanding: A total of 300,000 RSUs were vested; 300,000 RSUs vest on December 31, 2016; and 400,000 RSUs will vest on July 1, 2017. 
 
At June 30, 2016, a total of 251,174 Employee RSUs were outstanding, all of which were vested

RSUs expense during the three and six months ended June 30, 2016 and 2015 are summarized in the table below:

 
 
Three Months Ended June 30,
 
 
 
2016
   
2015
 
 
       
RSUs expense – Continuing operations
 
$
230,350
   
$
545,966
 
RSUs expense – Discontinued operations
   
-
     
526,582
 
Total
 
$
230,350
   
$
1,072,548
 
 
   
Six Months Ended June 30,
 
   
2016
   
2015
 
         
RSUs expense – Continuing operations
 
$
468,018
   
$
1,091,931
 
RSUs expense – Discontinued operations
   
813,908
     
1,053,165
 
Total
 
$
1,281,926
   
$
2,145,096
 
 
16.  SUBSEQUENT EVENTS

In August 2016, the Company issued 95,000 shares of common stock to an individual who was previously a director of the Company for the exercise of RSUs.
 
In August 2016, the Company renewed a $1.5 million revolving credit facility with Fifth Third Bank with a maturity date of August 1, 2017  and a received a $1.2 million term credit facility from, Fifth Third Bank, maturing on February 5, 2018, both pursuant to the terms of a Restated Loan Agreement and Security Agreement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD LOOKING STATEMENTS
 
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and operational references, appearing elsewhere in this document. 
 
Certain information contained in this discussion and elsewhere in this report may include "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. The safe harbor created by the Private Securities Litigation Reform Act will not apply to certain  "forward looking statements” because we issued "penny stock" (as defined in Section 3(a)(51) of the Securities Exchange Act of 1934 and Rule 3(a)(51-1) under the Exchange Act) during the three year period preceding the date(s) on which those forward looking statements were first made, except to the extent otherwise specifically provided by rule, regulation or order of the Securities and Exchange Commission. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on our behalf.  For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may",  "will", "expect", "believe",  "explore",  "consider",  "anticipate",  "intend", "could", "estimate",  "plan", "propose" or "continue" or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:
 
 Our ability to raise capital necessary to sustain our anticipated operations and implement our business plan,
 
 
 Our ability to implement our business plan,
 
 Our ability to generate sufficient cash to pay our lenders and other creditors,
 
 Our dependence on one major customer,
 
 
 Our ability to employ and retain qualified management and employees,
 
 Our dependence on the efforts and abilities of our current employees and executive officers,
 
 Changes in government regulations that are applicable to our current  or anticipated business,
 
 Changes in the demand for our services,
 
 The costs and potential liabilities arising  from lawsuits which may be brought against us with respect to our current and past business activities,
 
 The degree and nature of our competition,
 
 The lack of diversification of our business plan,
 
 The general volatility of the capital markets and the establishment of a market for our shares, and
 
 Disruption in the economic and financial conditions primarily from the impact of past terrorist attacks in the United States, threats of future attacks, police and military activities overseas and other disruptive worldwide political and economic events and environmental weather conditions.
 
We are also subject to other risks detailed from time to time in our other filings with Securities and Exchange Commission and elsewhere in this report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Critical Accounting Policy and Estimates
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of these financial statements included in this report requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

Doubtful Accounts Receivable
 
The Company maintained an allowance in the amount of $55,043  for doubtful accounts receivable at June 30, 2016, and $36,440 at June 30, 2015. The Company has an operational relationship of several years with our major customers, and we believe this experience provides us with a solid foundation from which to estimate our expected losses on accounts receivable. Should our sales mix change or if we develop new lines of business or new customers, these estimates and our estimation process will change accordingly. These estimates have been accurate in the past.
 
Income Taxes
 
The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past.
 
Background
 
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger, we changed our name to that of Innovative Food Holdings, Inc. In January 2004, we also acquired Food Innovations, Inc. (“FII” or “Food Innovations”), a Delaware corporation, for 500,000 shares of our common stock.
 
On May 18, 2012, the Company executed a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Artisan Specialty Foods, Inc., an Illinois corporation (“Artisan”), from its owner, Mr. David Vohaska.  The purchase price was $1.2 million, with up to another $300,000 (with a fair value of $131,000) payable in the event certain financial milestones were  met over the next one or two years.  Those milestones have been met. The purchase price was primarily financed via a loan from Alpha Capital in the principal amount of $1,200,000. The loan was repaid in November 2013 via the issuance of a loan from Fifth Third Bank which has been paid in full.  Prior to the acquisition, Artisan was a supplier and had sold products to the Company.

Pursuant to an asset purchase agreement, effective November 2, 2012, the Company purchased the outstanding assets of The Haley Group, LLC (“Haley”). Pursuant to a purchase agreement, effective June 30, 2014, the Company purchased 100% of the membership interest of Organic Food Brokers, LLC, a Colorado limited liability company (“OFB”).

On August 15, 2014, pursuant to a merger agreement (the “Fresh Diet Merger Agreement”), the Company acquired The Fresh Diet, Inc. (“The Fresh Diet” or “FD”) through a reverse triangular merger as the registrant created a subsidiary corporation (FD Acquisition Corp) that merged with and into FD with FD being the surviving corporation and becoming a wholly-owned subsidiary of the Company. The purchase price consisted of 10,000,000 shares of the Company’s common stock valued at $14,000,000. The majority of FD’s current liabilities consisted of approximately $3.8 million of deferred revenues and approximately $2.1 million in short term commercial loans and there were additional ordinary course of business expenses such as trade payables, payroll and sales taxes which varied  from month to month. In addition, it had  some long term obligations the bulk of which consisted of interest free loans from FD’s former shareholders in the amount of approximately $2.2 million which were  not due for three years.  Prior to the merger FD had purchased an immaterial amount of product from the Company.  FD operated as an independent subsidiary subject to oversight of its board of directors and the Company’s President and CEO.  Effective February 23, 2016,  the Company closed a transaction to sell 90% of our ownership in FD to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD who was appointed Interim CEO of FD on February 9, 2016.  The consideration to Innovative Food Holdings consisted primarily of a restructuring of our loans, which includes the ability to convert to additional amounts of FD under certain circumstances. There is no continuing cash inflows or outflows from or to the discontinued operations.

Transactions With 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, 2015 (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.

Relationship with U.S. Foods

We have historically sold the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of U.S. Foods, a leading broadline distributor.  These sales amounted to $6,236,917 (75% of total sales) and $5,411,326 (71% of total sales) for the three months ended June 30, 2016 and 2015, respectively;  and  $11,805,710 (72% of total sales) and $10,165,870 (72% of total sales) for the six months ended June 30, 2016 and 2015, respectively. On January 26, 2015 we executed a contract between Food Innovations, Inc., our wholly-owned subsidiary, and U.S. Foods.  The term of the Agreement is from January 1, 2015 through December 31, 2016 and provides for up to three (3) automatic annual renewals thereafter if no party gives the other 30 days’ notice of its intent not to renew. 
 
RESULTS OF OPERATIONS

Prior year balances have been recast to reflect the sale of 90% of our interest in The Fresh Diet, Inc. in February 2016.  Results of discontinued operations are excluded from the accompanying results of operations for all periods presented, unless otherwise noted.  See Note 3 – discontinued operations in the accompanying notes to consolidated financial statements.
 
This discussion may contain forward looking-statements that involve risks and uncertainties. Our future results could differ materially from the forward looking-statements discussed in this report. This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
 
Revenue
Revenue increased by $669,577 or approximately 9% to $8,303,227 for the three months ended June 30, 2016 from $7,633,650  in the prior year. 
 
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities in both the foodservice and consumer space and will implement that strategy if, based on our analysis, we deem it beneficial to us.
 
Any changes in the food distribution and specialty foods  operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.
  
Currently, a small portion of our revenues comes from imported products or international sales. Our current sales from such segments 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 three months ended June 30, 2016 was $5,904,630, an increase of $573,922  or approximately 11% compared to cost of goods sold of $5,330,708 for the three months ended June 30, 2015. Cost of goods sold is made up of the following expenses for the three months ended June 30, 2016: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $4,186,828; and shipping, delivery, handling, and purchase allowance expenses in the amount of $1,702,079.  Total gross margin was approximately 29% of sales in 2016, compared to approximately 30% of sales in 2015. The decrease  in gross margins from 2015 are primarily attributable to variation in product and revenue mix across our various selling channels.

In 2016, we continued to price our products in order to gain market share, optimize gross profit dollars and increase the number of our end users. We were successful in both increasing sales and increasing market share.  We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold will either remain stable or possibly improve slightly.

Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased by $345,345 or approximately 17% to $1,710,445 during the three months ended June 30, 2016 compared to $2,055,790 for the three months ended June 30, 2015. During the three months ended June 30, 2016 the decrease in selling, general, and administrative expenses was mainly associated with a decrease in  share based compensation  of $254,947.

Interest expense, net
Interest expense, net of interest income, increased by $1,440  or approximately 1%  to $112,889  during the three months ended June 30, 2016, compared to $111,449  during the three months ended June 30, 2015.  The increase was due primarily to increased loan balances, including real estate loans, with our commercial bank. Approximately 21%  or $23,284 of the interest expense was accrued or paid interest on the company's notes payable; approximately 82%  or $92,509 of the interest was a non-cash GAAP accounting charge associated with the amortization of the discounts on the Company's notes payable.  The Company also had $2,904 of interest income during the period.

Net income from continuing operations
For the reasons above, the Company had a net income from continuing operations for the three months ended June 30, 2016 of $575,263, which is an increase of $439,560  or approximately 324% compared to net income of $135,703 during the three months ended June 30, 2015.  The income  for the three months ended June 30, 2016 includes a total of $439,466 in non-cash charges, including amortization of intangible assets in the amount of $65,817, depreciation expense of $45,852, charges for non-cash compensation in the amount of $235,288, and amortization of the discount on notes payable in the amount of $92,509. The income for the three months ended June 30, 2015 included a total of $775,120 in non-cash charges, including amortization of intangible assets in the amount of $75,788, depreciation expense of $17,739, charges for non-cash compensation in the amount of $582,436, and amortization of the discount on notes payable in the amount of $99,157.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
 
Revenue
Revenue increased by $2,108,070  or approximately 15% to $16,318,568  for the six months ended June 30, 2016 from $14,210,498  in the prior year. 
 
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities in both the foodservice and consumer space and will implement that strategy if, based on our analysis, we deem it beneficial to us.
 
Any changes in the food distribution and specialty foods operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.
  
Currently, a small portion of our revenues comes from imported products or international sales. Our current sales from such segments 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, 2016 was $11,575,368,  an increase of $1,580,941  or approximately  16% compared to cost of goods sold of $9,994,427 for the six months ended June 30, 2015. Cost of goods sold is made up of the following expenses for the six months ended June 30 2016: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $8,217,480; and shipping, delivery, handling, and purchase allowance expenses in the amount of $3,342,165.  Total gross margin was approximately 29.1% of sales in 2016, compared to approximately 29.7% % of sales in 2015. The  decrease  in gross margins from 2015 are primarily attributable to variation in product and revenue mix across our various selling channels.
 
In 2016, we continued to price our products in order to gain market share, optimize gross profit dollars and increase the number of our end users. We were successful in both increasing sales and increasing market share.  We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold will either remain stable or possibly improve slightly.


Selling, general, and administrative expenses
Selling, general, and administrative expenses decreased by $459,994   or approximately  11% to $3,542,753   during the six months ended June 30, 2016 compared to $4,002,747 for the six months ended June 30, 2015. During the six months ended June 30, 2016, the decrease in selling, general, and administrative expenses was mainly associated with a decrease in share based compensation of  $399,415.
 
Interest expense, net
Interest expense, net of interest income, increased by $23,970  or approximately 11%  to $244,538   during the six months ended June 30, 2016, compared to $220,568  during the six months ended June 30, 2015.  The increase was due primarily to increased loan balances, including real estate loans, with our commercial bank. Approximately 26%  or $62,674  of the interest expense was accrued or paid interest on the company's notes payable; approximately 76%  or $185,018 of the interest was a non-cash GAAP accounting charge associated with the amortization of the discounts on the Company's notes payable.  The Company also had $3,154 of interest income during the period.

Net income  from continuing operations
For the reasons above, the Company had a net income from continuing operations for the six months ended June 30, 2016 of $955,909,  which is an increase of $963,153 compared to a net loss of ($7,244) during the six months ended June 30, 2015. The income  for the six months ended June 30, 2016 includes a total of $876,756  in non-cash charges, including amortization of intangible assets in the amount of $131,634, depreciation expense of $82,211, charges for non-cash compensation in the amount of $477,893, and amortization of the discount on notes payable in the amount of $185,018. The loss for the six months ended June 30, 2015 included a total of $1,561,368 in non-cash charges, including amortization of intangible assets in the amount of $151,576, depreciation expense of $33,253, charges for non-cash compensation in the amount of $1,178,225, and amortization of the discount on notes payable in the amount of $198,314.

Liquidity and Capital Resources at June 30, 2016

As of June 30, 2016, the Company had current assets of $4,171,493,  consisting of cash and cash equivalents of $1,699,602; trade accounts receivable, net, of $1,532,535; inventory of $868,911; and other current assets of $70,445. Also at June 30, 2016, the Company had current liabilities of $3,238,280, consisting of accounts payable and accrued liabilities of $1,621,155  (of which $0 was payable to related parties); accrued interest of $1,500;  current portion of notes payable of $255,625; contingent liabilities of $60,000; and amount due under revolving credit facilities of $1,300,000.  

During the six months ended June 30, 2016, the Company had cash provided by operating activities of $831,608.  This consisted of the Company's consolidated net income of $5,403,188,   reduced by gain on sale of discontinued operations of $7,201,196,  and increased by stock based compensation in the amount of $1,506,801  (including $1,028,908 charged to discontinued operations); amortization of discount on notes payable of $185,018; depreciation and amortization of $320,854; and increase in allowance for bad debt of $15,203.    The Company's cash position also increased by $601,740  as a result of changes in the components of current assets and current liabilities.  

The Company had cash used in investing activities of $480,177 for the six months ended June 30, 2016, which consisted of $470,482 cash disposed in the sale of discontinued operations, and $9,695 for the acquisition of property and equipment.   The Company had cash used in financing activities of $789,118 for the six months ended June 30, 2016,  consisting of borrowings on revolving credit facilities of $805,959, offset by payments made on revolving credit facilities of $841,831; principal payments on notes payable of $730,302, principal payments on capital leases of $8,094, and payments for the repurchase of common stock in the amount of $14,850.
 
The Company had a net working capital of $933,213 as of June 30, 2016. We generated positive cash flow from operating activities of $831,608 for the six months ended June 30, 2016. We generated negative  cash flow from operations during the year ended December 31, 2015, which includes the results of The Fresh Diet.   The Company intends to continue to focus on increasing market share and cash flow from operations by focusing its sales activities on specific market segments and new product lines.  Currently, we do not have any material long-term obligations other than those described in Note 12 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. 
 
In February 2016, we completed the sale of The Fresh Diet to New Fresh Co., LLC, a Florida limited liability company controlled by the former founder of FD.  See Note 3.
  
If the Company’s cash flow from operations is insufficient, the Company may require additional financing in order to execute its operating plan and continue as a going concern.  The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. The Company expects that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders.
 
In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The Company has not made any adjustments to the financial statements which would be necessary should the Company not be able to continue as a going concern. 

2016 Plans
 
During 2016, 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, explore  potential acquisition opportunities and continue  to extend our focus in the  specialty food market through the growth of the Company’s existing sales channels and through a variety of  additional 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, to leverage our existing foodservice and consumer customer base.
 
No assurances can be given that any of these plans will come to fruition or that if implemented that they will necessarily yield positive results.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Inflation
 
In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.
 
RISK FACTORS

The Company’s business and success is subject to numerous risk factors as detailed in its Annual Report on Form 10-K for the year ended December 31, 2015 which is available at no cost at www.sec.gov.

ITEM 4 - CONTROLS AND PROCEDURES
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
 
(a) Evaluation of disclosure controls and procedures
 
Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The conclusions notwithstanding, you are advised that no system is foolproof.
 
(b) Changes in internal control over financial reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  
 

PART II.  OTHER INFORMATION
 
Item 1. Legal Proceedings
 
From time to time, the Company may be involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The Company issued 25,000 shares of common stock with a fair value of $34,000 to a service provider.  The value of these shares was accrued during the twelve months ended December 31, 2015.

The Company issued an aggregate of 600,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued as follows: 300,000 of these shares were issued for the exercise of RSUs held by the employee, and an additional 300,000 shares were charged to discontinued operations at the fair value of $147,000.
 
The Company issued 133,333 shares of common stock to an employee of The Fresh Diet pursuant to an employment  agreement. The fair value of $68,000 was charged to discontinued operations.

The Company issued 200,000 shares of common stock to an employee of The Fresh Diet pursuant to a separation agreement. These shares were issued for the exercise of RSUs held by the employee.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
Item 5. Other Information
 
None.
 
 
Item 6. Exhibits
 
3.1
Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
3.2
Amended Bylaws of the Company (incorporated by reference to exhibit 3.2 of the Company’s annual report Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011).
 
 
4.1
Form of Convertible Note (incorporated by reference to exhibit 4.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
4.2
Form of Convertible Note (incorporated by reference to exhibit 4.2 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
4.3
Form of Warrant - Class A (incorporated by reference to exhibit 4.3 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
4.4
Form of Warrant - Class B (incorporated by reference to exhibit 4.4 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
4.5
Form of Warrant - Class C (incorporated by reference to exhibit 4.5 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
 
 
4.6
Secured Convertible Promissory Note dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
 
 
4.7
Class B Common Stock Purchase Warrant dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
 
 
4.8
Subscription Agreement between the Registrant and Alpha Capital Anstalt dated December 31, 2008 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
 
 
4.9
Amendment, Waiver, and Consent Agreement effective January 1, 2009 between the Registrant and Alpha Capital Anstalt (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURE
 
TITLE
 
DATE
 
 
 
 
 
/s/ Sam Klepfish
 
Chief Executive Officer
 
August 15, 2016
Sam Klepfish
 
 
 
 
 
 
 
 
 
/s/ John McDonald
 
Principal Financial Officer
 
August 15, 2016
John McDonald
 
 
 
 
 
 

31