Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

References in this report to "we," "our," "us," or the "Company" refer to Innovative Food Holdings, Inc. and all of its wholly-owned subsidiaries.

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 (the "Private Securities Litigation Reform Act"), 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, as amended (the "Exchange Act"), 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 (the "SEC"). 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, including sale and acquisition of certain operations,
	●	The potential impact on future revenue and operations resulting from changes to our business plan, including our decision to exit certain business lines such as cheese and logistics,
	●	Our ability to generate sufficient cash to pay our lenders and other creditors,
	●	Our dependence on two major customers,
	●	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 and different food trends,
	●	The imposition of tariffs or other trade restrictions that may increase costs or disrupt our supply chain,
	●	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, health pandemics, rising inflation and energy costs, and environmental weather conditions.

We are also subject to other risks detailed from time to time in our other filings with the SEC 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 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, among others, doubtful accounts receivable, inventory, valuation of stock-based services, operating right of use assets and liabilities, impairment of intangible assets, 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.

Stock Options and Stock Appreciation Rights

The Company accounts for options in accordance with FASB ASC 718-40. Options are valued upon issuance utilizing the Black-Scholes valuation model. Option expense is recognized over the requisite service period of the related option award. The following table illustrates certain key information regarding our options, SARS, and valuation assumptions:

		Six Months Ended				Year Ended
		June 30,				December 31,
		2026				2025
Volatility			66.47	%			77.84-205.63	%
Dividends			0	%			0	%
Risk-free interest rates			3.68	%			3.48-4.10	%
Term (in years)			-				1.00-2.00

As of June 30, 2026, no SARs were executed and all SARs were expired.

Allowance for Credit Losses

The Company maintained an allowance in the amount of $259,446 and $218,319 for credit losses at June 30, 2026 and December 31, 2025, respectively. 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 uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets ("ROU assets") and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet.

ROU assets represent the right of use to an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.

Our Business Activities

We build dynamic scalable businesses by selling specialty foods that are difficult to find through traditional channels. Our expertise is forging close relationships with the producers, growers, makers and distributors of specialty products, then carefully selecting our suppliers based on their quality, uniqueness and reliability.

Our team is adept at evaluating and certifying the food safety and supply chain capabilities of small batch producers who do not typically sell through broad-based sales channels. We seek out the freshest, most unique, origin-specific gourmet cheese, meat, produce, and premium ingredients available, and distribute them directly from our robust network of vendors and warehouses within 24 - 72 hours of an order being placed. We also source, package, and brand a meaningful segment of these products ourselves, enabling us to better control the assortment, offer more flexibility and variety to our customers, and capture additional margin.

We leverage this unique, premium assortment to serve the needs of Professional Chefs in settings such as restaurants, hotels, country clubs, national chain accounts, casinos, hospitals and catering houses. We provide these premium customers with products that cannot typically be found through their broadline distributor's warehouse assortment. We distribute these products directly to Professional Chefs in Chicago through our subsidiary, Artisan Specialty Foods, Inc., and nationally through our e-commerce businesses on Amazon.com and our own website. We also drop ship specialty foods to Professional Chefs nationally through the websites of broadline distributors, such as U.S. Foods, Inc. Lastly, we sell these foods to large retailers for resale on their shelves to the end customer. Between this variety of sales channels, we are able to serve our Professional Chef customers wherever they are located.

We operate our airline catering distribution business out of our owned 28,000 square foot facility in the greater Chicago area. Additionally, we operate a warehouse in Denver, Colorado, measuring approximately 20,000 square feet. In March 2026, we sold our facility in Mountain Top, Pennsylvania, which previously supported both our retail and airline catering operations. In connection with this sale, our airline catering operations have been relocated to the Chicago facility, and our retail business is being wound down.

Our facilities have the capabilities to pack and ship frozen, refrigerated, and ambient products, enabling us to offer a broad range of specialty foods. We maintain GFSI/SQF certifications, ensuring compatibility with the highest global standards for food handling and meeting the quality and food safety expectations of our premium customers. These warehouses are equipped to ship packages and pallets of all sizes via overnight carriers. We also utilize our own fleet of trucks to deliver directly to Professional Chef customers within our delivery footprint.

Our proprietary technology platform underpins our entire business, driving transparency and efficiency up and down the supply chain. Orders flow in real time, whether to our warehouses or to our vendor partners, to allow for fast handling and fulfillment. Our picking is enabled by efficient scan-based, handheld devices, ensuring order and inventory accuracy. Our warehouse management software optimizes pick routes for common items and order types, recommends a box size, and calculates the appropriate amount of packaging and ice required based on forecasted temperatures along the delivery route.

We have built a team consisting of passionate, committed, and food-obsessed people: our average tenure (outside of seasonal workers) across the Company is over five years. Our merchandising team has deep connections within the specialty food space around the globe. Our customer service and sales teams, as ex-chefs themselves, go beyond customer service to offer our Professional Chefs customer support, menu ideas, and preparation guidance.

RESULTS OF OPERATIONS

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.

Financial highlights for the fiscal quarter ended June 30, 2026: we reported revenue of $13.1 million, a 21.5% decrease compared to $16.6 million in 2025.

Three Months Ended June 30, 2026

Revenue Breakdown:

●

Digital Channels: Largely comprised of our distributor relationships and supported by our drop-ship model generated $7.1 million, or 54% of total revenue, in the current period, compared to $8.5 million in the prior year period, a decrease of approximately 17%. This decrease was primarily driven by continued headwinds in our legacy drop-ship business, where increased competition in online marketplace channels has resulted in lower order volumes and pricing pressure.

●

National Distribution: Revenue was $2.8 million, 21% of total revenue, compared to $4.0 million in the prior year period. The decrease was primarily driven by stiffer competition and airline menu cycle changes.

●

Local Distribution: Consists mainly of local sales team relationships and our local fleet delivering direct from warehouse. This category generated $3.2 million, or 25% of total revenue, which is a 24% decrease from $4.2 million in 2025. This decrease was primarily driven by customer attrition following prior year operational transitions; however, these strategic customer attrition efforts have stabilized.

Cost of goods sold for the three months ended June 30, 2026 decreased by approximately 22% to $9.6 million compared to $12.4 million in the prior year period, which is primarily due to a 21.5% decrease in revenue. Gross profit declined by 20.1% to $3.4 million, while gross margin increased to 26.2% from 25.7%.

Operating Expenses

Total operating expenses decreased by $429 thousand, or 12.4%, primarily due to the factors described below:

●

Payroll and related costs decreased by $738 thousand to $1.8 million. This decrease was primarily due to a reduction in headcount from organizational restructuring, largely at the executive level.

●

Professional fees increased by $153 thousand to $454 thousand primarily due to consulting fees associated with our back-office transformation efforts.

●

Share-based compensation increased by $210 thousand to $23 thousand, due to revaluation of stock options and other equity-based incentives offered to attract and retain key personnel.

Six Months Ended June 30, 2026

Revenue Breakdown:

●

Digital Channels: Largely comprised of our distributor relationships and supported by our drop-ship model generated $13.7 million, or 54% of total revenue, in the current period, compared to $16.2 million in the prior year period, a decrease of approximately 15%. This decrease was primarily driven by continued headwinds in our legacy drop-ship business, where increased competition in online marketplace channels has resulted in lower order volumes and pricing pressure.

●

National Distribution: Revenue was $5.3 million, 21% of total revenue, compared to $6.8 million in the prior year period. The decrease was primarily driven by stiffer competition and airline menu cycle changes.

●

Local Distribution: Consists mainly of local sales team relationships and our local fleet delivering direct from warehouse. This category generated $6.3 million, or 25% of total revenue, which is a 28% decrease from $8.7 million in 2025. This decrease was primarily driven by customer attrition following prior year operational transitions; however, these strategic customer attrition efforts have stabilized.

Cost of goods sold for the six months ended June 30, 2026 decreased by approximately 20% to $18.7 million compared to $23.5 million in the prior year period, which is primarily due to a 21% decrease in revenue. Gross margin remained flat at approximately 26%.

Operating Expenses

Total operating expenses decreased by $1.3 million, or 18.5%, primarily due to the factors described below:

●

Payroll and related costs decreased by $1.2 million to $3.7 million. This decrease was primarily due to a reduction in headcount from organizational restructuring, largely at the executive level.

●

Professional fees decreased by $123 thousand to $704 thousand primarily due to the discontinuation of strategic growth initiatives that did not yield desired results.

●

Share-based compensation increased by $56 thousand to $32 thousand, due to revaluation of stock options and other equity-based incentives offered to attract and retain key personnel.

Liquidity and Capital Resources at June 30, 2026

As of June 30, 2026, we had current assets of $10.1 million and current liabilities of $3.5 million. Net working capital was $6.6 million.

We believe we have sufficient liquidity to fund operations for at least the next twelve months. With the sale of the Pennsylvania facility, operating cash flows are expected to continue to improve as facility costs and lower margin product sales roll off. We do not anticipate the need to raise additional capital. We are exploring new credit facility options to provide working capital flexibility. Remaining severance obligations are not expected to be material, and staffing levels are being managed to align with current business needs.

Cash Flow Analysis:

●

Net cash provided by operating activities was $375 thousand, primarily due to net income of $2.2 million, a decrease in inventory of $581 thousand primarily due to lowered cheese inventory balances associated with the wind down Pennsylvania of the facility, partially offset by the gain on disposition of assets of $2.7 million, a $609 thousand loss on the early extinguishment of debt, a decrease of $179 thousand primarily due to the collection of receivables related to discontinuing the cheese business, and a $700 thousand decrease in accounts payable and accrued liabilities primarily due to the sale of the Pennsylvania facility.

●

Net cash provided by investing activities was $8.8 million which was primarily due to cash received for the sale of the Pennsylvania land and building for $8.8 million, offset by the purchase of property and equipment for $31 thousand.

●

Net cash used in financing activities was $8.8 million, due to the payments on debt and financing leases.

Transactions with Major Customers

During the three months ended June 30, 2026 and 2025, U.S. Foods, Inc. and its affiliates accounted for approximately 40% and 34% of total revenue, respectively. Gate Gourmet accounted for approximately 18% and 15% of total revenue, respectively, during the three months ended June 30, 2026 and 2025.

During the six months ended June 30, 2026 and 2025, U.S. Foods, Inc. and its affiliates accounted for approximately 40% and 34% of total revenue, respectively. Gate Gourmet accounted for approximately 17% and 14% of total revenue, respectively, during the six months ended June 30, 2026 and 2025.

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 had a material effect on the Company's financial condition and results of its operations. The Company has seen the impact of inflation across its costs for fuel, shipping, cost of goods, and marketing. Balancing the management of these increases with the willingness of our customers to pay higher prices will continue to be a key focus for the Company this year. However, no assurance can be given that we will be successful and inflationary pressure on our profits will likely continue through 2026.

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, 2025 and its Current Reports on Form 8-K, all of which reports are available at no cost at www.sec.gov.