innfoods-10qsba3312006.htm




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


FORM 10-QSB/A
 


x Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the quarterly period ended March 31, 2006
 
o 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 Small Business Issuer as Specified in its Charter)

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

1923 Trade Center Way
Naples, Florida 34109
(Address of Principal Executive Offices)

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Issuer Exchange Act during the past 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 x NO o

Indicate by check mark whether the issuer is a shell company (as defined in Regulation 12b-2 of the Exchange Act:
 
YES o NO x

State the number of shares (post-reverse split) outstanding of each of the issuer's classes of Common equity, as of the latest practicable date:
 
171,787,638 Common Shares (post-reverse split) as of April 14, 2008

Transitional Small Business Disclosure Format:
 
YES o NO x
 



INNOVATIVE FOOD HOLDINGS, INC.

INDEX TO FORM 10-QSB/A

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
 
5
 
7
Item 2.
34
Item 3.
38
     
PART II.
OTHER INFORMATION
 
     
Item 1.
39
Item 2.
39
Item 3.
39
Item 4.
39
Item 5.
39
Item 6.
39
 
40
 



 PART I - FINANCIAL INFORMATION

Innovative Food Holdings, Inc.
Condensed Consolidated Balance Sheets
(unaudited)

   
March 31,
   
March 31,
   
March 31,
 
   
2006
   
2005
   
2004
 
ASSETS
 
(Restated)
   
(Restated)
   
(Restated)
 
Current assets
                 
Cash and cash equivalents
  $ 1,296     $ 218,065     $ 141,897  
Accounts receivable net of allowance
    331,458       265,723       244,551  
   Interest receivable
    7,147       -       -  
Prepaid expenses
    -       30,364       -  
Loan receivable, net of allowance
    275,000       -       -  
                         
      Total current assets
    614,901       514,152       386,448  
                         
Property and equipment, net of accumulated depreciation
    91,599       87,690       121,292  
                         
Total assets
  $ 706,500     $ 601,842     $ 507,740  
                         
LIABILITIES AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY
                       
Current liabilities
                       
                         
Accounts payable and accrued liabilities
    651,989       459,236       582,617  
Amount due under bank credit line
    24,251       -       24,200  
Accrued interest, net of discount
    51,069       3,557       64,754  
Accrued interest - related parties, net of discount
    58,035       13,074       2,100  
Notes payable, current portion
    934,000       275,000       -  
Loan payable, related party
    -       -       700,256  
Notes payable - related parties, current portion
    450,000       -       -  
Warrant liability
    7,187,917       -       -  
Conversion option liability
    8,740,910       -       -  
Penalty for late registration of shares
    1,739,640       -       -  
Total current liabilities
    19,837,811       750,867       1,373,927  
                         
Notes payable
    -       603,000       178,000  
Notes payable, related party
    -       175,000       210,000  
Total liabilities
    19,837,811       1,528,867       1,761,927  
                         
(Deficiency in) stockholder's equity
                       
Preferred stock authorized 10,000,000 shares
                       
Common stock, $0.0001 par value; 500,000,000 shares authorized;  108,342,037,
    -       -       -  
   78,742,037, and 40,157,037 shares issued and outstanding at March 31, 2006, 2005, and 2004, respectively (post reverse-split)
    10,834       7,874       4,015  
Common stock subscribed
    -       103,400       -  
Additional paid-in capital
    134,917       5,234,785       704,210  
Accumulated deficit
    (19,277,062 )     (6,273,084 )     (1,962,412 )
Total (deficiency in) stockholder's equity
    (19,131,311 )     (927,025 )     (1,254,187 )
                         
Total liabilities and (deficiency in) stockholders' equity
  $ 706,500     $ 601,842     $ 507,740  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Operations
 (unaudited)

   
For the Three
   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
March 31
   
March 31
   
March 31
 
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
 
Revenue
  $ 1,639,175     $ 1,170,253     $ 944,420  
                         
Cost of goods sold
    1,271,907       926,722       852,462  
                         
Gross margin
    367,268       243,531       91,958  
                         
Selling, General and administrative expenses
    449,684       378,497       819,477  
                         
      Total operating expenses
    449,684       378,497       819,477  
                         
Operating loss
    (82,416 )     (134,966 )     (727,519 )
                         
Other (income) expense:
                       
   Interest (income) expense
    71,767       374,370       506  
   Cost of penalty for late registration of shares
    665,632       -       -  
   Change in fair value of warrant liability
    1,171,664       -       -  
   Change in fair value of option liability
    1,637,635       -       -  
   Change in  fair value of penalty for late registration of shares
    147,288       -       -  
                         
      Total other (income) expense
    3,693,986       374,370       506  
                         
  Loss before income taxes
    (3,776,402 )     (509,336 )     (728,025 )
                         
  Income tax expense
    -       -       -  
                         
Net loss
  $ (3,776,402 )   $ (509,336 )   $ (728,025 )
                         
Net loss per share - basic (post reverse-splits)
  $ (0.04 )   $ (0.01 )   $ (0.03 )
                         
Weighted average shares outstanding - basic (post reverse-splits)
    106,817,593       75,305,926       26,728,466  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4

 
 
Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
   
For the Three
   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
March 31
   
March 31
   
March 31
 
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
 
Cash flows from operating activities:
                 
   Net loss
  $ (3,776,402 )   $ (509,336 )   $ (728,025 )
  Adjustments to reconcile net loss to net
                       
  cash used in operating activities:
                       
    Depreciation and amortization
    11,331       16,131       17,291  
    Stock issued to consultants for services performed
    -       9,000       -  
    Amortization of discount on notes payable
    -       350,000       388,000  
   Cost of penalty due to late registration of shares
    665,632       -       -  
   Change in fair value of warrant liability
    1,171,665       -       -  
   Change in fair value of conversion option liability
    1,637,635       -       -  
   (gain) loss from marking to market-penalty
    147,288       -       -  
  Changes in assets and liabilities:
                       
        Accounts receivable, net
    107,652       59,775       20,465  
        Prepaids
    1,507       (30,364 )     -  
        Accounts payable and accrued expenses
    73,021       (97,632 )     93,731  
        Other current liabilities
    -       -       (340,626 )
   Net cash used in operating activities
    39,329       (202,426 )     (549,164 )
                         
Cash flows from investing activities:
                       
   Investment in loan to Pasta Italiana
    (180,000 )     -       -  
   Acquisition of property and equipment
    (8,236 )     -       (61,358 )
   Net cash used in investing activities
    (188,236 )     -       (61,358 )
                         
Cash flows from financing activities:
                       
    Proceeds from issuance of debt
    140,000       350,000       388,000  
    Payment of loans payable
    -       (24,520 )     62  
    Proceeds from sale of common stock
    -       67,000       320,225  
   Net cash provided by financing activities
    140,000       392,480       708,287  
                         
Increase in cash and cash equivalents
    (8,907 )     190,054       97,765  
                         
Cash and cash equivalents at beginning of period
    10,203       28,011       44,132  
                         
Cash and cash equivalents at end of period
  $ 1,296     $ 218,065     $ 141,897  
                         
Supplemental disclosure of cash flow information:
                       
                         
Cash paid during the period for:
                       
Interest
  $ -     $ -     $ -  
                         
Taxes
  $ -     $ -     $ -  
 
 
5

 
 
Innovative Food Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
 
 
   
For the Three
   
For the Three
   
For the Three
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
March 31
   
March 31
   
March 31
 
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
 
Additional shares of common stock issued for conversion of notes payable
  $ -     $ 500     $ -  
                         
Common stock to be issued for services performed
  $ -     $ 103,400     $ -  
                         
Common stock issued for services performed
  $ 45,400     $ 9,000     $ -  
                         
Common stock issued in share exchange to acquire subsidiary
  $ -     $ -     $ 125,000  
                         
Recapitalization of stock upon reverse merger
  $ -     $ -     $ 2,500  
                         
Revaluation of conversion option liability
  $ 1,637,635     $ -     $ -  
                         
Revaluation of warrant liability
  $ 1,171,664     $ -     $ -  
                         
Cost of penalty for late registration of shares
  $ 665,632     $ -     $ -  
                         
Revaluation of penalty for late registration of shares
  $ 147,288     $ -     $ -  
                         
Common stock issued for conversion of notes payable
  $ 49,000     $ -     $ -  
                         
Common stock issued as employee bonus
  $ 36,000     $ -     $ -  
                         
Charge to equity for change to liability method of warrant valuation
  $ 10,374,536     $ -     $ -  
                         
Charge to equity for change to liability method for value of
                       
    beneficial conversion feature of notes payable
  $ 12,453,662     $ -     $ -  
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
6

 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

1.  BASIS OF PRESENTATION
 
Basis of Presentation
 

The accompanying unaudited condensed consolidated financial statements of Innovative Food Holdings, Inc., (“IVFH”) and subsidiary (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial statement presentation. U.S. accounting principles also contemplate continuation of the Company as a going concern.

Acquisition and Corporate Restructure

We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2004, we were either inactive or involved in discontinued business ventures. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.

On January 26, 2004, through a share exchange, the shareholders of Food Innovations, Inc., (“FII”) converted 10,000 shares (post-reverse split) of FII common stock outstanding into 25,000,000 shares (post-reverse split) of IVFH. On January 29, 2004, in a transaction known as a reverse acquisition, the shareholders of IVFH exchanged 25,000,000 shares (post-reverse split) of IVFH for 25,000,000 shares (post-reverse split) of Fiber Application Systems (formerly known as Alpha Solarco( (“Fiber”), a publicly-traded company.   The shareholders of IVFH thus assumed control of Fiber, and Fiber changed its name to Innovative Food Holdings, Inc.  The 25,000,000 shares (post-reverse split) of Innovative Food Holdings are shown on the Company’s balance sheet at December 31, 2003 as shares outstanding.  These shares are shown at their par value of $2,500 as a decrease of additional paid-in capital at the acquisition date of January 29, 2004.   There were 157,037 shares (post-reverse split) outstanding in Fiber at the time of the reverse acquisition; the par value of these shares, or $16, was transferred from additional paid-in capital at the time of the reverse acquisition.

2. NATURE OF ACTIVITES AND SIGNIFICANT ACCOUNTING POLICIES

Business Activity

FII is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24-48 hours, except as stated hereafter, eliminating all wholesalers and distributors. We currently sell the majority of our products through a distributor relationship with Next Day Gourmet, L.P., and a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor owned by Dutch grocer Royal Ahold.

Interim Financial Information

The accompanying unaudited interim financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-B of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited 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 financial statements and related notes as contained in form 10-KSB for the year ended December 31, 2006. In the opinion of management, the interim 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 months ended March 31, 2006 are not necessarily indicative of the results of operations to be expected for the full year.

Reclassification

Certain reclassifications have been made to conform prior periods' data to the current presentation. These reclassifications had no effect on reported income.


7

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported a net income (loss) of ($3,776,402),  ($509,336),  and ($728,025)  for the three months ended March 31, 2006, 2005 and 2004, respectively and net income of $7,417,910 for the year ended December 31, 2005, and had an accumulated deficit of $19,277,062,  $6,273,084,  and $1,962,412  as of March 31, 2006, 2005, and 2004, respectively.

The Company cannot be certain that anticipated revenues from operations will be sufficient, to satisfy its ongoing capital requirements. Management's belief is based on the Company's operating plan, which in turn is based on assumptions that may prove to be incorrect. If the Company's financial resources are 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. In any of these events, the Company may be unable to implement its current plans for growth, 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.

Management plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue as a going concern. Management intends to raise financing through the sale of its stock or debt instruments in private placements to individual investors. Management may raise funds in the public markets, though there currently are no plans to do so. Management believes that with this financing, the Company will be able to generate additional revenues that will allow the Company to continue as a going concern. The Company expects that  will be accomplished by hiring additional personnel and focusing sales and marketing efforts on the distribution of product through key marketing channels currently being developed by the Company. The Company also intends to pursue the acquisition of certain strategic industry partners where appropriate.
 
Revenue Recognition
 
The Company recognizes revenue upon shipment of the product from the vendor.  Shipping and handling costs incurred by the Company are included in cost of goods sold.

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104, “Revenue Recognition,” which superseded SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 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) collectibility 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 collectibility 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.  SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No. 00-21,  "Multiple-Deliverable Revenue Arrangements."  EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.  The effect of implementing EITF No. 00-21 on the Company's consolidated financial position and results of operations was not significant. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.  EITF No.  00-21 became effective for revenue arrangements entered into in periods beginning after June 15, 2003.  For revenue arrangements occurring on or after August 1, 2003, the Company revised its revenue recognition.

Income Taxes

The Company accounts for income taxes using the liability method.  Under the liability method, deferred income taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities.  They are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws change.  Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.


8

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Disclosures about Fair Value of Financial Instruments

The carrying  amounts of the  Company's  financial  instruments,  which  include accounts  receivable and accounts  payable,  approximate fair value at March 31, 2006, 2005, and 2004.
 
Inventories
 
The Company does not currently maintain any material amount of inventory.

Stock-Based Compensation

On January 1, 2006 the company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123 (R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values. SFAS 123 (R) supersedes the company's previous accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" ("APB 25") for the periods beginning fiscal 2006.

The  company  adopted  SFAS 123 (R) using the  modified  prospective  transition method,  which required the application of the accounting standard as of January 1, 2006. The company's  Consolidated  Financial  Statements as of and for twelve months Ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the company's Consolidated Financial Statements  for the prior periods have not been restated to reflect,  and do not include the impact of SFAS 123 (R). Stock based compensation  expense recognized under SFAS 123 (R) for the three  months  ended March 31,  2006 was $0. Pro forma stock based compensation was $0 for the three months ended March 31, 2006.

Stock-based  compensation  expense  recognized during the period is based on the value of the portion of share-based  payment awards that is ultimately  expected to vest during the period.
 

 
9


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

A summary of option  activity as of March 31,  2006,  2005, and 2004, and changes during the periods then ended are presented below (post-reverse split):

   
Options
   
Weighted-Average
Exercise Price
 
Outstanding December 31, 2003
    -     $ -  
Issued
    -       -  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at March 31, 2004
    -     $ -  
Non-vested at March 31, 2004
    -     $ -  
Exercisable at March 31, 2004
    -     $ -  
                 
Issued
    500,000     $ 0.50  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at June 30, 2004
    500,000     $ 0.50  
Non-vested at June 30, 2004
    500,000     $ 0.50  
Exercisable at June 30, 2004
    -     $ -  
                 
Issued
    -       -  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at September 30, 2004
    500,000     $ 0.50  
Non-vested at September  30, 2004
    500,000     $ 0.50  
Exercisable at September  30, 2004
    -     $ -  
                 
Issued
    -       -  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at December 31, 2004
    500,000     $ 0.50  
Non-vested at December 31, 2004
    500,000     $ 0.50  
Exercisable at December  31, 2004
    -     $ -  
                 

 

 
10

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)
 
 

   
Options
   
Weighted-Average
Exercise Price
 
Outstanding at March 31, 2005
    500,000     $ 0.50  
Non-vested at March 31, 2005
    500,000     $ 0.50  
Exercisable at March 31, 2005
    -     $ -  
                 
Issued
    -       -  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at June 30, 2005
    500,000     $ 0.50  
Non-vested at June 30, 2005
    400,000     $ 0.50  
Exercisable at June 30, 2005
    100,000     $ 0.50  
                 
Issued
    -       -  
Exercised
    -       -  
Forfeited or expired
    -       -  
                 
Outstanding at September 30, 2005
    500,000     $ 0.50  
Non-vested at September  30, 2005
    400,000     $ 0.50  
Exercisable at September  30, 2005
    100,000     $ 0.50  
                 
Issued
               
Exercised
               
Forfeited or expired
               
                 
Outstanding at December 31, 2005
    500,000     $ 0.50  
Non-vested at December 31, 2005
    400,000     $ 0.50  
Exercisable at December  31, 2005
    100,000     $ 0.50  
                 
Outstanding at March 31, 2006
    500,000     $ 0.50  
Non-vested at March 31, 2006
    400,000     $ 0.50  
Exercisable at March 31, 2006
    100,000     $ 0.50  

Aggregate intrinsic value of options outstanding and options exercisable at March 31, 2006, 2005, and 2004  was $0. Aggregate intrinsic value represents the difference between the company's  closing  stock price on the last  trading  day of the fiscal  period, which was $0.04 (post reverse-split), $0.02 (post reverse-split), and $0.50 (post-reverse split) of March 31, 2006, 2005, and 2004, respectively, and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  March 31,  2006, 2005, and 2004,  total  unrecognized stock-based compensation expense related to non-vested stock options was $0. The total fair value of options vested was $0 for the three-month periods ended March 31, 2006, 2005, and 2004.
 

 
11


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Management Estimates

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income

The Company has no items of other comprehensive income  (loss) for the periods ended March 31, 2006, 2005, and 2004.

3. PER SHARE INFORMATION

The Company computes earnings per share under Financial Accounting Standard No.128,  "Earnings Per Share" (SFAS 128).  Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year.  Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method).  During the three months ended March 31, 2006, 2005,  and 2004,  common stock equivalents were not considered in the calculation of the weighted average number of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per common share.

4. ACCOUNTS RECEIVABLE

At March 31, 2006, 2005,  and 2004  accounts receivable consists of:

   
2006
   
2005
   
2004
 
Accounts receivable from customers
  $ 349,857     $ 330,723     $ 141,897  
Allowance for doubtful accounts
    (18,399 )     (65,000 )     -  
Accounts receivable, net
  $ 331,458     $ 265,723     $ 244,551  

5. PROPERTY AND EQUIPMENT

A summary of property and equipment at March 31, 2006, 2005,  and 2004 is as follows:

   
2006
   
2005
   
2004
 
Computer equipment
  $ 184,974     $ 163,099     $ 132,177  
Furniture and fixtures
    82,213       50,795       50,795  
      267,187       213,894       182,972  
Less accumulated depreciation and amortization
    (175,588 )     (126,204 )     (61,680 )
Total
  $ 91,599     $ 87,690     $ 121,292  

Depreciation and amortization expense amounted to $11,331 $16,131, and $17,291, respectively, for the three months ended March 31, 2006, 2005 and 2004.

During the three months ended March 31, 2006, the Company purchase additional fixed assets in the amount of $8,236.

6.  INTEREST RECEIVABLE AND LOAN RECEIVABLE

The balance of loan receivable consisted of a loan to Pasta Italiana, Inc. in the amount of $350,000.  This note bears interest in the amount of 8% per annum.  This note matures on August 24, 2006.  At March 31, 2006, the Company has reserved $75,000 of the loan receivable and recognized interest income from this loan in the amount of $7,147. The Company stopped accruing interest income on this note at December 31, 2005.
 

 
12


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at March 31, 2006 and 2005 are as follows:

   
2006
   
2005
   
2004
 
Accounts payable and accrued expenses
  $ 646,363     $ 455,104     $ 582,217  
Accrued commissions
    5,626       4,132       -  
Total
  $ 651,989     $ 459,236     $ 582,217  

8. ACCRUED INTEREST

Accrued interest on some of the Company’s notes payable is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) (note 9). There is a beneficial conversion feature embedded in this convertible accrued interest.  The Company is amortizing this beneficial conversion feature over the life of the related party notes payable.  During the three months ended March 31, 2006, 2005, and 2004, the amounts of $ $36,452, $18,381, and  $2,954 were credited to additional paid-in capital as a discount on accrued interest.  The Company amortized to interest expense a total of $ 34,609, $3,486, and $702 of these discounts  during the three months ended March 31, 2006, 2005, and 2004, respectively.

At March 31, 2006, the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 98,781     $ 47,712     $ 51,069  
Related parties
    76,440       18,405       58,035  
Total
  $ 175,221     $ 66,117     $ 109,104  

At  March 31, 2005,  the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 14,108     $ 10,551     $ 3,557  
Related parties
     34,033        20,958       13,074  
Total
  $ 48,141     $ 31,509     $ 16,631  

At  March 31, 2004,  the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 65,166     $ 412     $ 64,754  
Related parties
     3,318        1,218       2,100  
Total
  $ 68,484     $ 1,630     $ 66,854  

Accrued interest on the Company’s convertible notes payable is convertible at the options of the holder into the Company’s common stock at a price of $0.005 per share (post-reverse split). There is a beneficial conversion feature embedded in the convertible accrued interest. The Company is amortizing this beneficial conversion feature to expense over the life of the related notes payable.  During the three months ended  March 31, 2006,  2005, and 2004, the amount of $162,053, $44,179, and  $1,701, respectively,  was credited to additional paid-in capital as a discount on accrued interest.  Of this amount, a total of $95,936, $12,670, and  $71 was expensed to interest during the three months ended March 31, 2006, 2005, and 2004, respectively.

9. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

The Company has a line of credit with Wachovia Bank in the amount of $25,000.  The outstanding balance as of March 31, 2006, 2005 and 2004  was $24,251,  $0 and $0.

At March 31, 2006, the Company has outstanding notes payable in the aggregate amount of $1,384,000. Many of these notes, along with accrued interest, are convertible into common stock of the Company.
 

 
13


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Notes payable and notes payable to related parties at March 31, 2006 and 2005, consist of the following:

   
2006
   
2005
   
2004
 
Convertible note payable in the original amount of $350,000 to Alpha Capital Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note consists of $100,000 outstanding under a previous note payable which was cancelled on February 25, 2005, and $250,000 of new borrowings. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is entered technical default status on May 16, 2005.   The note originally carried  interest at the rate of 8% per annum, and is due in full on February 24, 2007.  Upon default, the note’s interest rate increased to 15% per annum, and the note became immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $250,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company  at a conversion price of $0.005 per share (post-reverse split). Interest in the amount of $12,896, $3,813, and $0 was accrued on this note during the three months ended  31, 2006,   2005, and 2004 respectively. During the twelve months ended December 31, 2006 the note holder converted $5,000 into shares of common stock. During the twelve months ended December 31, 2006 the holder of the note converted $27,865 of accrued interest into common stock.   This note is in default at March  31, 2006 and 2005.
  $                                                                                     345,000     $                                                                                         350,000     $                                                                                     -  


14


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

 Convertible note payable in the amount of $160,000 to Michael Ferrone, a board member and related party, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on March 11, 2006. On February 25, 2005, an amendment to the convertible note was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $160,000 was recorded as a discount to the note, and was amortized  to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $3,156, $3,156, and $701  was accrued on this note during  the three months ended March 31, 2006,   2005,  and 2004, respectively.
  $ 160,000     $                                                 160,000     $ 160,000  

Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion price of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $100,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $1,972,  $1,972, and $0 was accrued on this note during the three months ended March 31, 2006, 2005, and 2004, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock.
  $                                             100,000     $                                               100,000     $                                             -  
 
Convertible note payable in the amount of $85,000 to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in full on March 11, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature  in the amount of $85,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $810, $1,678, and $373 was accrued on this note during the three months ended March 31, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2005, the note holder converted $44,000 of the note payable into common stock.    During the twelve months ended December 31, 2006, the Company made a $3,000 cash payment on the principal amount of the note.
  $                                               41,000     $                                                   85,000     $                                               85,000  

Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on March 11, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $80,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)   Interest in the amount of $1,579, $1,579, and $351 was accrued on this note during the three months ended March 31, 2006, 2005,  and 2004, respectively.
  $ 80,000     $                                     80,000     $ 80,000  
 
 

 
15


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Convertible note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd. (“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisites numbers of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of May 16, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on February 24, 2007. Upon default, the note’s interest rate increased to 15% per annum, and the note became due immediately. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the three months ended March 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,849 and $373 was accrued on this note during the three months ended March 31, 2006, and 2005, respectively.  During the twelve months ended December 31, 2006, $5,000 of principal was converted into common stock.  During the twelve months ended December 31, 2006 the holder of the note converted $5,000 of principal and $589 of accrued interest into shares of common stock.    This note is in default at March  31, 2006 and 2005.
  $                                                                         50,000     $                                                                               50,000     $                                                                         -  
 
Convertible note payable in the amount of $50,000 to Oppenheimer & Co., / Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $987, $987, and $219 was  accrued on this note during the three months ended March 31, 2006, 2005, and 2004, respectively.
  $ 50,000     $                                     50,000     $ 50,000  

Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share(post-reverse split)  Interest in the amount of $463 was  accrued on this note during the three months ended March 31, 2006. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.
  $ 20,000     $                                       -     $ -  
 
Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $493 and $356 was accrued on this note during the three months ended March 31, 2006 and 2005, respectively.
  $ 25,000     $                                 25,000     $ -  

Convertible note payable in the amount of $25,000 to The Jay & Kathleen Morren Trust  dated January 25, 2005. The note bears interest at the rate of 6% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $369 and $267 was accrued on this note during the three months ended December 31, 2006 and 2005, respectively.
  $ 25,000     $                                   25,000     $ -  


 
16


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split). Interest in the amount of $197 and $197 was accrued on this note during the three months ended March 31, 2006, and  2005,  respectively.   This note is in default at March 31, 2006 and 2005.
  $                                             10,000     $                                               10,000     $                                             -  

Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split).  Interest in the amount of $197 and $197 was accrued on this note during the three months ended March 31, 2006, and  2005,  respectively.   This note is in default at March 31, 2006 and 2005.             
  $                                                10,000     $                                               10,000     $                                               -  
 
Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of  8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split). Interest in the amount of $197 and $197 was accrued on this note during the three months ended March 31, 2006, and  2005,  respectively. This note is in default at March 31, 2006 and 2005.
  $ 10,000     $                                                 10,000     $ -  

Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split).  Interest in the amount of $197 and $197 was accrued on this note during the three months ended March 31, 2006, and  2005,  respectively. This note is in default at March 31, 2006 and 2005.
  $                                             10,000     $                                               10,000     $                                             -  

 

 
17


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $157, $157, and $35 was accrued on this note during the three months ended March 31, 2006,  2005, and 2004, respectively.
  $ 8,000     $                                   8,000     $ 8,000  

Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share  (post-reverse split). Interest in the amount of $99, $99, and $22 was accrued on this note during the three months ended March 31, 2006, 2005, and 2004, respectively.
  $                                   5,000     $                                  5,000     $                                 5,000  
 
Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $4,439  was accrued on this note during the three months ended March 31, 2006 and 2005, respectively.   This note is in default at March 31, 2006.
  $ 120,000     $                                                           -     $ -  
 
Convertible note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005.  We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,109 was accrued on this note during the three months ended March 31, 2006.  This note is in default at March 31, 2006.
  $                                                         30,000     $                                                             -     $                                                   -  


18


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Convertible note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $924 was accrued on this note during the three months ended March 31, 2006. During the three months ended September 30, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock.   This note is in default at March 31, 2006.
  $                                                                    25,000     $                                                                   -     $                                                                   -  
 
Convertible note payable in the original amount of $25,000 to Momona Capital, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $924 was accrued on this note during the three months ended March 31, 2006. During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock. This note is in default at March 31, 2006.
  $                                                                 25,000     $                                                                 -     $                                                                 -  
 
Convertible note payable in the amount of $10,000 to Lane Ventures dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $369 was accrued on this note during the  three months ended March 31, 2006 and 2005, respectively.  During the twelve months ended December 31, 2006, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock.  This note is in default at March 31, 2006.
  $                                                                 10,000     $                                                                 -     $                                                                 -  

Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $2,565 was accrued on this note during the three months ended March 31, 2006.   This note is in default at March 31, 2006.
  $                         120,000     $                         -     $                         -  


 
19


 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

Note payable in the amount of $30,000 to Whalehaven Capital dated February 7, 2006. The note originally  carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $641 was accrued on this note   during the three months ended March  31, 2006.   This note is in default at March 31, 2006.
  $ 30,000     $                         -     $ -  
                         
Note payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005. Interest in the amount of $1,479 and $1,479 was accrued on this note   during the three months ended March 31, 2006, 2005,  and 2004, respectively. This note is in default at December 31, 2006 and 2005.
  $ 75,000     $             75,000     $ -  

Total     $ 1,384,000     $ 1,053,000     $ 388,000  
Less: Current maturities     (1,384,000     (275,000     (-
Long-term portion
  $  -     $  778,000     $ 388,000  
                         
Total Non-related parties
  $ 934,000     $ 603,000     $ 178,000  
Total related parties
    450,000       450,000       210,000  
Total
  $ 1,384,000     $ 1,053,000     $ 378,000  

Accounting for Conversion Options Embedded in Convertible Notes and Convertible Interest

The Company has certain convertible notes payable which contain embedded beneficial conversion features.  Through August 2005, the beneficial conversion features of these convertible notes were accounted for by the equity method, whereby the intrinsic value of the beneficial conversion features were considered discounts to the notes. These discounts were immediately amortized to interest expense. During September 2005, the number of shares of the Company’s common stock issued and issuable exceeded the number of shares of common stock the Company had authorized, and this triggered a change in the manner in which the Company accounts for these  beneficial conversion features.  In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), the debt features provision contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes.  Accordingly, the features qualified as embedded derivative instruments at September 30, 2005 and because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounting for separately from the debt instrument and recorded as derivative financial instruments.  In September 2005, the Company valued the  beneficial conversion features of its notes payable using the Black-Scholes valuation method, and arrived at an aggregate value of  $12,528,662.  Pursuant to Emerging Issues Task Force Issue  00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s  Own Stock” (“EITF 00-19”) “If a contract is reclassified from permanent  or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders’ equity.”  Accordingly, during the year ended December 31, 2005, the Company charged the amount of $12,445,576 to stockholders’ equity.  $5,665,290 of this amount was charged to additional paid-in capital, which brought the balance of additional paid-in capital to $0. The remainder, or $6,780,286, was charged to accumulated deficit.  During subsequent periods,  the conversion option liability will be revalued, and any change in value charged to operations.  At December 31, 2006 and 2005, the conversion option liability was valued at $437,207 and $7,103,275, respectively.  The revaluations resulted in a gain during the years three months ended March  31, 2006  of $1,637,635.

 

 
20

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

The Company valued these embedded conversion options using the Black-Scholes option pricing model with the following assumptions:

   
Risk Free
   
Expected
   
Expected
       
   
Interest
   
Dividend
   
Option
       
   
Rate
   
Yield
   
Life
   
Volatility
 
March 31, 2006
    4.75 %     0       5       151.3 %

10.  RELATED PARTY TRANSACTIONS

Three months ended March 31, 2004:

The Company received a loan from and issued a convertible note payable in the amount of $160,000 to Michael Ferrone, a board member.

The Company received a loan from and issued a convertible note payable in the amount of $50,000 to Joel Gold, a board member.

Three months ended March 31, 2005:

The Company received a loan from and issued a convertible note payable in the amount of $25,000 to Joel Gold, a board member.

Three months ended March 31, 2006:

None.

11. EQUITY

Common Stock

On March 27, 2003 a 1-for-1,000 reverse stock split of the Company’s common stock was effected.  On March 8, 2004, a 1-for-200 reverse stock split of the Company’s common stock was effected.

The Company had the following common stock transactions during the three months ended March 31, 2006:

The Company committed to issue 600,000 shares (post-reverse split) of common stock to employees for services performed.  The fair value of these shares of $36,000 was charged to operations during the year ended December 31, 2005, and shown as Common Stock Subscribed on the Company’s balance sheet at December 31, 2005.

The Company recorded a discount related to the beneficial conversion feature of accrued interest on the notes payable in the amount of $36,649 and charged this amount to operations during the three months ended March 31, 2006.

The Company issued 2,000,000 shares (post-reverse split) of common stock pursuant to the partial conversion of a note payable in the amount of $10,000.

The Company issued 1,000,000 shares (post-reverse split) of common stock pursuant to the partial conversion of a note payable in the amount of $5,000.

The Company had the following common stock transactions during the three months ended March 31, 2005:

The Company issued 5,000,000 shares (post-reverse split) of common stock pursuant to the conversion of a note payable which occurred during the twelve months ended December 31, 2004.   The Company charged the par value of these shares of $500 to additional paid-in capital during the three months ended March 31, 2005.

The Company issued 750,000 shares (post-reverse split) of common stock to an officer of the Company as compensation and charged the fair value of $9,000 to operations during the three months ended March 31, 2005.


21

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

The Company committed to issue 2,500,000 shares (post-reverse split) of common stock to a board member for services performed. The fair value of these shares of $36,400 was charged to operations during the three months ended March 31, 2005, and shown as Common Stock Subscribed on the Company’s balance sheet at March 31, 2005.  These shares were issued during the three months ended June 30, 2005.

The Company sold 13,400,000 shares (post-reverse split) of common stock for cash of $67,000.  These shares were issued during the three months ended June 30, 2005, and the amount of $67,000 is shown as common stock subscribed on the Company’s balance sheet at March 31, 2005.

The Company had the following common stock transactions during the three months ended March 31, 2004:

The Company sold 15,000,000 shares (post reverse-split) of common stock for cash of $320,225.

The Company recorded the 157,037 shares (post reverse-split) outstanding at the time of the reverse merger as additional paid-in capital at the par value of the shares, or $16 (see note 1).

Warrants

During the three months ended March 31, 2005, the Company issued five year  warrants to purchase 80,000,000 shares (post reverse-split) of common stock at an exercise price equal to 115% of the closing stock price on the date of exercise to investors in conjunction with convertible note agreements (see note 9).  During the three months ended June 30, 2005, these warrants were re-priced to an exercise price of $0.005 per share (post reverse-split).  The Company also issued  five year warrants to purchase 20,000,000 (post reverse-split) shares of common stock at a price equal to 110% of the closing stock price on the date of exercise to investors in conjunction with convertible note agreements (see note 9).  During the three months ended June 30, 2005, these warrants were re-price to an exercise price of $0.005 per share (post reverse-split).  The Company also issued five year warrants to purchase 32,000,000 shares (post reverse-split) of common stock at a price of $0.005 per share (post reverse-split) to investors in conjunction with convertible note payable agreements (see note 9).

During the three months ended September 30, 2005, the Company issued five year warrants to purchase 56,700,000 shares (post reverse-split) of common stock at prices ranging from $0.005 to $0.115 per share (post reverse-split) to investors in conjunction with convertible note payable agreements (see note 9).

During the three months ended June 30, 2006, the Company issued five year warrants to purchase 300,000 shares (post reverse-split) of common stock at $0.005 per share (post reverse-split) to investors in conjunction with convertible note payable agreements (see note 9).

There were no warrants outstanding at March 31, 2004.

The following table summarizes the warrants outstanding at March 31, 2005 (post-reverse split):

                 
Weighted
         
Weighted
 
Range of
   
Number of
   
Weighted
   
average
         
average
 
exercise
   
Warrants
   
average
   
exercise
         
exercise
 
Prices
   
Outstanding
   
remaining
   
price of
   
Number of
   
price of exercisable
 
(post reverse-split)
   
(post reverse split)
   
contractual life (years)
   
outstanding Warrants
   
Warrants Exercisable
   
 Options (post reverse-split)
 
$ 0.0050       132,000,000       4.91     $ 0.005       132,000,000     $ 0.005  
          132,000,000       4.91     $ 0.005       132,000,000     $ 0.005  

 

 
22

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

The following table summarizes the warrants outstanding at March 31, 2006 (post-reverse split):

                 
Weighted
         
Weighted
 
           
Weighted
   
average
         
average
 
           
average
   
exercise
         
exercise
 
Range of
   
Number of
   
remaining
   
price of
   
Number of
   
price of
 
exercise
   
Warrants
   
contractual
   
outstanding
   
Warrants
   
exercisable
 
prices
   
outstanding
   
life (years)
   
warrants
   
exercisable
   
options
 
$ 0.005       132,000,000       3.92     $ 0.005       136,200,000     $ 0.005  
$ 0.110       10,500,000       4.40     $ 0.110       10,500,000     $ 0.110  
$ 0.115       42,000,000       4.40     $ 0.115       42,000,000     $ 0.115  
          188,700,000       4.05     $ 0. 035       188,700,000     $ 0.035  

Transaction involving warrants are summarized as follows:

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Warrants exercisable at December 31, 2003
    -     $ -  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at March 31, 2004
    -     $ -  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at June 30, 2004
    -     $ -  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Sept 30, 2004
    -     $ -  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at December 31, 2004
    -     $ -  
 

 
23


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)
 

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Granted
    132,000,000       0.005  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at March 31, 2005
    132,000,000     $ 0.005  
                 
Granted
            -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at June 30, 2005
    132,000,000     $ 0.005  
                 
Granted
    56,700,000       0.106  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Sept 30, 2005
    188,700,000     $ 0.0353  
                 
Granted
            -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Dec 31, 2005
    188,700,000     $ 0.035  
                 
Granted
            -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at March 31, 2006
    188,700,000     $ 0.035  
                 
                 
Granted
    300,000       0.005  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at June 30, 2006
    189,000,000     $ 0.035  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  


24

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)
         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Warrants exercisable at Sept 30, 2006
    189,000,000     $ 0.035  
                 
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Dec 31, 2006
    189,000,000     $ 0.035  

The weighted-average fair value of stock options granted to non-employees during the three months and six months ended June 30, 2005 and the weighted average significant assumptions used to determine those fair values, using a Black-Scholes options pricing model are as follows:

   
Risk Free
   
Expected
   
Expected
       
   
Interest
   
Dividend
   
Option
       
   
Rate
   
Yield
   
Life
   
Volatility
 
March 31, 2006
    4.75 %     0       5       151.3 %
                                 
March 31, 2005
    4.75 %     0       5       229.6 %

Options

In May 2004, the Company issued options to purchase 500,000 shares (post-reverse split) of common stock to an employee.  The options vest 100,000 annually over the next five years.  The Company expensed the value of the shares issued of $135,673 to operations during the twelve months ended December 31, 2004.

The following table summarizes the changes outstanding and the related prices for the options of the Company’s common stock issued to employees of the Company at March 31, 2006:

                 
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
 
$ 0.50       500,000       3.13     $ 0.50       100,000     $ 0.500  
                                             
          500,000       3.13               100,000     $ 0. 500  

Options not vested are not exercisable.
 
 
25



INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006, 2005 AND 2004
 (Unaudited)
(Restated)

The following table summarizes the changes outstanding and the related prices for the options of the Company’s common stock issued to employees of the Company at March 31, 2005:

           
Weighted
     
Weighted