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Monday, May 20, 2019 5:11:40 PM
Here's from "Management Discussion" section of the 10-Q:
RESULTS OF OPERATIONS
This discussion may contain forward looking-statements that involve risks and uncertainties. [...]
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Revenue
Revenue increased by $1,942,671 or approximately 17.8% to $12,859,215 for the three months ended March 31, 2019 from $10,916,544 in the prior year. The increase in revenues was attributable to an increase in revenues associated with foodservice and ecommerce offset partially by a decrease in revenues associated with national brand management.
We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products, private label products and additional sales channel opportunities in both the foodservice and consumer space and will implement a strategy which based on our analysis provides the most beneficial opportunity for growth.
Any changes in the food distribution and specialty foods operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.
Currently, a small portion of our revenues comes from imported products or international sales. Our current sales from such markets may be hampered and negatively impacted by any economic tariffs that may be imposed in the United States or in foreign countries.
See “Transactions with Major Customers” and the Securities and Exchange Commission’s (“SEC”) mandated FR-60 disclosures following the “Liquidity and Capital Resources” section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future results.
Cost of goods sold
Our cost of goods sold for the three months ended March 31, 2019 was $8,881,380, an increase of $1,443,949 or approximately 19.4% compared to cost of goods sold of $7,437,431 for the three months ended March 31, 2018. Cost of goods sold is made up of the following expenses for the three months ended March 31, 2019: cost of goods of specialty, meat, game, cheese, seafood, poultry and other sales categories in the amount of $6,248,748; and shipping, delivery, handling, and purchase allowance expenses in the amount of $2,632,632. Total gross margin was approximately 30.9% of sales in 2019 compared to approximately 31.9% of sales in 2018. The increase in cost of goods sold is primary attributable to an increase in sales. The decrease in gross margins from 2018 are primarily attributable to variation in product and revenue mix across our various selling channels including a decrease in higher gross margin revenues associated with National Brand Management.
In 2019, we continued to price our products in order to increase sales, gain market share and increase the number of our end users and ecommerce customers. We were successful in both increasing sales and increasing market share and increasing the number of our ecommerce customers. We currently expect, if market conditions and our product revenue mix remain constant, that our cost of goods sold may increase.
Selling, general, and administrative expenses
Selling, general, and administrative expenses increased by $785,180 or approximately 26.1% to $3,788,997 during the three months ended March 31, 2019 compared to $3,003,817 for the three months ended March 31, 2018. The increase in selling, general, and administrative expenses was primarily due to an increase in payroll and related costs of approximately $634,125 (including an increase in non-cash compensation in the amount of $91,357), an increase in depreciation and amortization of $66,792, an increase in advertising and marketing of $66,060, an increase in travel and entertainment of $65,522, and an increase in computer and IT costs in the amount of $37,024. Professional fees decreased by $172,532 during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decrease in acquisition activity in the current period compared to the three months ended March 31, 2018. The increase in payroll and related costs were driven mainly by increases associated with Mouth, which was acquired in 2019 and increases in payroll at Innovative Gourmet The increases in payroll expenses at Innovative Gourmet were driven mainly by an increase in the time periods incorporating payroll expenses compared to the prior year as well as additional personnel added to support Innovative Gourmet sales growth.
Interest expense, net
Interest expense, net of interest income, decreased by $1,270 or approximately 4.7% to $25,478 during the three months ended March 31, 2019, compared to $26,748 during the three months ended March 31, 2018. Interest accrued or paid on the Company’s commercial loans and notes payable decreased by $2,936 to $26,996 during the current period, compared to $29,932 during the prior year; interest income decreased by $1,666 to $1,518 during the current period compared to $3,184 during the prior period.
Net income
For the reasons above, the Company had net income for the three months ended March 31, 2019 of $163,360 which is a decrease of approximately $285,188 or 63.6% compared to a net income of $448,548 during the three months ended March 31, 2018. The income for the three months ended March 31, 2019 includes a total of $405,349 in non-cash charges, including amortization of intangible assets in the amount of $229,130, depreciation expense of $76,075, and charges for non-cash compensation in the amount of $100,144. The income for the three months ended March 31, 2018 includes a total of $247,200 in non-cash charges, including amortization of intangible assets in the amount of $189,146, depreciation expense of $49,267, charges for non-cash compensation in the amount of $8,787.
Liquidity and Capital Resources at March 31, 2019
As of March 31, 2019, the Company had current assets of $8,678,873, consisting of cash and cash equivalents of $3,140,799; trade accounts receivable of $3,248,519; inventory of $2,123,330; and other current assets of $166,225. Also at March 31, 2019, the Company had current liabilities of $3,644,024, consisting of trade payables and accrued liabilities of $2,098,702; accrued interest of $18,285; deferred revenue of $264,157; lease liabilities – operating leases, current portion of $135,991; lease liabilities – financing leases, current portion of $22,481; current portion of notes payable of $668,833; and current portion of contingent liability of $447,569.
During the three months ended March 31, 2019, the Company had cash used in operating activities of $1,315,513. Cash used in operations consisted of the Company’s consolidated net income of $163,360 plus non-cash compensation in the amount of $100,144; and depreciation and amortization of $305,205. These amounts were partially offset by a decrease in provision for doubtful accounts of $830 and by a change in the components of current assets and liabilities in the amount of $1,922,145.
The Company had cash used in investing activities of $2,705 for the three months ended March 31, 2019, which consisted of cash paid in the for the acquisition of property and equipment.
The Company had cash used in financing activities of $300,800 for the three months ended March 31, 2019, which consisted of principal payments made on notes payable of $294,734 and principal payments on financing leases of $6,066.
The Company had net working capital of $5,034,849 as of March 31, 2019. The Company had cash used by operations during the three months ended March 31, 2019 in the amount of $1,315,513. This compares to cash generated from operating activities of $870,396 during the three months ended March 31, 2018. 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.
If the Company’s cash flow from operations is insufficient to fully implement its business plan, the Company may require additional financing in order to execute its operating plan. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.
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.
2019 Plans
During 2019, in addition to our efforts to increase sales in our existing foodservice operations we plan to attempt to expand our business by expanding our focus to additional specialty foods markets in both the consumer and foodservice sector, exploring potential acquisition and partnership opportunities and continuing to extend our focus in the specialty food market through the growth of the Company’s existing sales channels and through a variety of additional sales channel relationships which are currently being explored. In addition, we are currently exploring the introduction of a variety of new product categories and new product lines, including private label products and proprietary branded products to leverage our existing foodservice and consumer customer base.
Furthermore, the Company intends to expand its activities in the direct to consumer space and the overall consumer packaged goods (CPG) space through leveraging the assets acquired from iGourmet LLC and Mouth Foods, Inc. and through leveraging its overall capabilities in the consumer space.
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
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