Fresh DietInnovative Food Holdings (OOTC:IVFH) acquired The Fresh Diet (“FD”) in August 2014.  The purchase price consisted of 10.0 million shares of the company’s common stock valued at $14.0 million and the assumption of a majority of FD’s current liabilities consisting of $3.8 million deferred revenue, $2.1 million short term commercial loans and other liabilities for routine business expenses.  In addition, there were interest free loans of approximately $2.2 million to former FD shareholders.

In November 2015, the company announced its intention to spin-off FD as a separate public company.  IVFH was to retain 10% to 19.9% of FD and distribute 70% to 85% of the FD shares to IVFH shareholders.  The financial backing for the planned spin-off was detailed in an 8-K filing regarding a term sheet the company entered with an institutional investor who agreed to provide, subject to certain conditions, $1.0 million direct funding to FD.  At the time of the filing, the company had received $342,000 and expected to receive the balance within 30 days following execution of a definitive purchase agreement.

An 8-K filing on February 12, 2016, disclosed that subsequent to the announcement regarding the proposed spinoff, discussions were initiated by several interested parties regarding the possible acquisition of FD.  Management determined that one of the offers was the most likely way to maximize value for IVFH shareholders and, on February 9, 2016, entered a letter of intent to sell a controlling interest in FD.  The company contemplates closing the transaction within 21 days.  Upon closing, IVFH will hold a non-controlling interest in FD and carry the investment as an asset on its balance sheet.

GeoInvesting’s Take on Innovative Food Holding’s Acquisition of Fresh Diet

Our take on this story is that the acquisition of Fresh Diet clearly did not work out as expected.  It became far more difficult of management to guide FD to profitability than anticipated.  FD’s operating losses, unsustainable drain on cash flows, and distraction from IVFH’s growing and consistently profitable direct to chef business is compelling the company to dispose of its majority stake in FD.                

Although the terms of the proposed sale of the company’s majority stake in FD have not been disclosed, we anticipate the buyer will assume FD’s debt and other liabilities.  There will no doubt be adjustments to the carrying values of goodwill and other intangible assets, and FD’s liabilities that will materially impact the IVFH’s financial statements in Q1 2016.  In the short term, uncertainties concerning the ultimate disposition of FD and its impact on IVFH’s financial statements could serve as a drag on the share price until investors have clarity.  We believe, however, that once the dust settles that IVFH and its shareholders will benefit from the sale of FD.  IVFH should come out the other side of the Fresh Diet experience a more focused and profitable company.     

Here is a look at actual Q3 2015 financial results and what our modeling suggest results would of looked like excluding FD.   

Acutal:

  • Sales of $12.1 million
  • Net loss of $0.13

Without FD:

  • Sales of $7.6 million
  • EPS of $0.01