innfood-10qsba06302006.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 June 30, 2006

¨ 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 ¨ NO x

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

State the number of shares 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 ¨ 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.
33
Item 3.
39
     
PART II.
OTHER INFORMATION
 
     
Item 1.
40
Item 2.
40
Item 3.
40
Item 4.
40
Item 5.
40
Item 6.
40
 
41
 
 
 

 
 PART I - FINANCIAL INFORMATION

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

   
June 30,
   
June 30,
   
June 30,
 
   
2006
   
2005
   
2004
 
ASSETS
 
(Restated)
   
(Restated)
   
(Restated)
 
Current assets
                 
                   
Cash and cash equivalents
  $ 4,827     $ 95,973     $ 6,109  
Accounts receivable net of allowance
    331,038       318,299       192,151  
Loan receivable, net of allowance
    285,000       -       -  
Interest receivable
    7,147       -       -  
Other current assets
    18,658       79,900       -  
                         
      Total current assets
    646,670       494,172       198,260  
                         
Property and equipment, net of accumulated depreciation
    121,554       73,699       175,510  
                         
Total assets
  $ 768,224     $ 567,871     $ 373,770  
                         
LIABILITIES AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY
                       
Current liabilities
                       
                         
Accounts payable and accrued liabilities
    742,500       522,119       417,979  
Amount due under bank credit line
    24,251       -       24,335  
Accrued interest, net of discount
    84,367       3,711       66,254  
Accrued interest - related parties, net of discount
    73,451       20,052       2,750  
Note payable, current portion  
    941,200       435,000       -  
Loan payable, related parties, current portion
    -       -       700,256  
Notes payable - related parties, current portion
    375,000       275,000       -  
Warrant liability
    6,577,232       -       -  
Conversion option liability
    7,470,856       -       -  
Penalty for late registration of shares
    2,154,880       537,600       -  
      Total current liabilities
    18,443,737       1,793,482       1,211,574  
                         
   Notes payable
    23,587       203,000       98,000  
   Notes payable - related parties
    -       175,000       290,000  
Total liabilities
    18,467,324       2,171,482       388,000  
                         
(Deficiency in) stockholder's equity
                       
   Common stock, $0.0001 par value; 500,000,000 shares authorized; 135,686,502,
                       
   81,542,037, and 60,142,037 shares issued and outstanding at June 30, 2006, 2005,
                       
   and 2004, respectively (post reverse-split)
    13,569       8,154       6,015  
                         
   Additional paid-in capital
    302,636       5,317,899       3,597,633  
   Common stock subscribed
    -       67,000       -  
   Accumulated deficit
    (18,015,305 )     (6,996,664 )     (4,829,452 )
      Total (deficiency in) stockholder's equity
    (17,699,100 )     (1,603,611 )     (1,225,804 )
                         
Total liabilities and (deficiency in) stockholders' equity
  $ 768,224     $ 567,871     $ 373,770  

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
   
For the Six
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2006
   
2005
   
2004
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
 
Revenue
  $ 1,840,270     $ 1,325,486     $ 1,121,550     $ 3,479,445     $ 2,495,739     $ 2,065,970  
                                                 
Cost of goods sold
    1,398,322       1,034,733       971,799       2,670,228       1,961,455       1,824,261  
                                                 
Gross margin
    441,948       290,753       149,751       809,217       534,284       241,709  
                                                 
Selling, General and administrative expenses
    586,954       409,918       2,710,035       1,036,639       788,415       3,529,512  
      Total operating expenses
    586,954       409,918       2,710,035       1,036,639       788,415       3,529,512  
                                                 
Operating loss
    (145,006 )     (119,165 )     (2,560,284 )     (227,422 )     (254,131 )     (3,287,803 )
                                                 
Other (income) expense:
                                               
   Interest (income) expense
    86,880       66,815       306,756       158,647       441,185       307,262  
                                                 
   Cost of penalty for late registration of shares
    556,320       467,200       -       1,221,952       467,200       -  
   Change in fair value of warrant liability
    (638,829 )     -       -       532,835       -       -  
   Change in fair value of conversion option liability
    (1,270,054 )     -       -       367,581       -       -  
   (gain) loss from marking to market
    (141,080 )     70,400       -       6,208       70,400       -  
      Total other (income) expense
    (1,406,763 )     604,415       306,756       2,287,223       978,785       307,262  
                                                 
  Gain (loss) before income taxes
    1,261,757       (723,580 )     (2,867,040 )     (2,514,645 )     (1,232,916 )     (3,595,065 )
                                                 
  Income tax expense
    -       -       -       -       -       -  
                                                 
Net income gain (loss)
  $ 1,261,757     $ (723,580 )   $ (2,867,040 )   $ (2,514,645 )   $ 1,232,916 )   $ (3,595,065 )
                                                 
Net gain (loss) per share - basic (post reverse-splits)
  $ 0.01     $ (0.01 )   $ (0.11 )   $ (0.02 )   $ (0.02 )   $ (0.10 )
                                                 
Net gain (loss) per share - diluted (post reverse-splits)
  $ 0.01     $ (0.01 )   $ (0.11 )   $ (0.02 )   $ (0.02 )   $ (0.10 )
                                                 
Weighted average shares outstanding - basic
    (post reverse-splits)
    116,952,912       81,418,601       25,565,714       111,913,251       78,379,330       34,299,894  
                                                 
Weighted average shares outstanding - diluted
    (post reverse-splits)
    157,300,738       81,418,601       25,545,714       114,588,245       78,379,330       34,299,894  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
Innovative Food Holdings, Inc.
 Condensed Consolidated Statements of Cash Flows

   
For the Six
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
   
June 30,
 
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
 
Cash flows from operating activities:
                 
   Net loss
  $ (2,514,645 )   $ (1,232,916 )   $ (3,595,065 )
  Adjustments to reconcile net loss to net
                       
  cash used in operating activities:
                       
    Depreciation
    25,372       32,326       28,023  
   Value of warrants issued
    17,394       -       -  
   Stock issued for services
    -       -       2,420,000  
   Value of options issued to officer
    -       9,000       135,673  
   Stock issued as bonuses to employees and board members
    49,901       -       -  
   Amortization of discount on NP to interest expense
    -       385,000       388,000  
   Cost of penalty for late registration
    1,221,952       467,200       -  
   Change in fair value of warrant liability
    543,586       -       -  
   Change in fair value of option liability
    -       -       -  
   Change in fair value of conversion option liability
    367,581       -       -  
   (gain) loss from marking to market-penalty
    6,208       70,400       -  
   Changes in assets and liabilities:
                       
        Accounts receivable, net
    108,072       7,199       72,865  
        Prepaid expenses
    (17,152 )     (79,900 )     -  
        Accounts payable and accrued expenses
    252,142       (15,623 )     (66,633 )
              -       -  
   Net cash provided by (used in) operating activities
    60,411       (357,314 )     (617,137 )
                         
Cash flows from investing activities:
                       
   Loan to Pasta Italiano
    (190,000 )     -       -  
   Acquisition of property and equipment
    (25,787 )     (2,204 )     (129,308 )
   Net cash used in investing activities
    (215,787 )     (2,204 )     (129,308 )
                         
Cash flows from financing activities:
                       
    Proceeds from issuance of long-term-debt
    160,000       385,000       388,000  
    Proceeds from (principal payments on) bank credit line
    -       (24,520 )     197  
    Principal payments on notes payable
    (10,000 )     -       -  
    Proceeds from sale of common stock
    -       67,000       320,225  
   Net cash provided by financing activities
    150,000       427,480       708,422  
                         
Increase in cash and cash equivalents
    (5,376 )     67,962       (38,023 )
                         
Cash and cash equivalents at beginning of period
    10,203       28,011       44,132  
                         
Cash and cash equivalents at end of period
  $ 4,827     $ 95,973     $ 6,109  
                         
Supplemental disclosure of cash flow information:
                       
                         
Cash paid during the period for:
                       
Interest
  $ 265     $ -     $ -  
                         
Taxes
  $ -     $ -     $ -  

 
5

 
Innovative Food Holdings, Inc.
 Condensed Consolidated Statements of Cash Flows
(continued)

 
   
For the Six
   
For the Six
   
For the Six
 
   
Months Ended
   
Months Ended
   
Months Ended
 
   
June 30,
   
June 30,
   
June 30,
 
   
2006
   
2005
   
2004
 
   
(Restated)
   
(Restated)
   
(Restated)
 
Stock issued for services
  $ 85,901     $ 45,400     $ 2,420,000  
                         
Notes payable issued for acquisition of computer equipment
  $ 25,787     $ -     $ -  
                         
Common stock issued for conversion of notes payable
  $ -     $ -     $ 70,676  
                         
Common stock issued for conversion of liability
  $ -     $ -     $ 339,750  
                         
Common stock recapitalization during merger
  $ -     $ -     $ 2,500  
                         
Common stock issued in share  exchange to acquire subsidiary
                  $ 125,000  
                         
Value of warrants and options issued as compensation
  $ -     $ -     $ -  
                         
Value of shares issued as penalty for late registration
  $ -     $ 537,600     $ -  
                         
Revaluation of conversion option liability
  $ 367,581     $ -     $ -  
                         
Revaluation of liability for options and warrants
  $ 543,586     $ -     $ -  
                         
Revaluation of penalty for late registration of shares
  $ 6,208     $ -     $ -  

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 QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

1 BASIS OF PRESENTATION
 
Basis of Presentation
 
The accompanying unaudited 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 Holdings, 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 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 ACTIVITED 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 24-72 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 and six months ended June 30, 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 QUARTER ENDED
JUNE 30, 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 $1,261,757, $(723,580) and $(2,867,040) for the three months ended June 30, 2006, 2005, and 2004, respectively; and $(2,514,645), $(1,232,916) and $(3,595,065) for the six months ended June 30, 2006, 2005 and 2004, respectively;  and $(7,417,910) for the year ended December 31, 2005.  The Company also  had an accumulated deficit of $18,015,305 and a working capital deficiency of $17,797,067 as of June 30, 2006.

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 this 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 QUARTER ENDED
JUNE 30, 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 June 30, 2006.
 
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 June 30,  2006 was $0. Pro forma stock based compensation was $0 for the three months ended June 30, 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.

A summary of option  activity as of June 30,  2006, 2005, and 2004,  and changes during the period then ended are presented below (post-reverse split) :

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Options exercisable at December 31, 2003
    -     $ -  
                 
Granted
    500,000       0.50  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Options outstanding at 12.31.04
    500,000     $ 0.50  
Exercisable
    -     $ -  
Not exercisable
    500,000     $ 0.50  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
 
 
 

 
9

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
                 
Options outstanding at 03.31.05
    500,000     $ 0.50  
Exercisable
    -     $ -  
Not exercisable
    500,000     $ 0.50  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Options outstanding at 06.30.05
    500,000     $ 0.50  
Exercisable
    100,000     $ 0.50  
Not exercisable
    400,000     $ 0.50  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Options outstanding at 09.30.05
    500,000     $ 0.50  
Exercisable
    100,000     $ 0.50  
Not exercisable
    400,000     $ 0.50  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Options outstanding at 12.31.05
    500,000     $ 0.50  
Exercisable
    100,000     $ 0.50  
Not exercisable
    400,000     $ 0.50  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Options outstanding at 03.31.06
    500,000     $ 0.500  
Exercisable
    100,000     $ 0.500  
Not exercisable
    400,000     $ 0.500  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
 
Options outstanding at 06.30.06
    500,000     $ 0.500  
Exercisable
    200,000     $ 0.500  
Not exercisable
    300,000     $ 0.500  

10

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 
Aggregate intrinsic value of options outstanding and options exercisable at June 30, 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, $0.08, and $0.40 (post-reverse split) as of June 30, 2006, 2005, and 2004, respectively, and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  June 30,  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 June 30, 2006, 2005, and 2004.

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 June 30, 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).

4. ACCOUNTS RECEIVABLE

At June 30, 2006, 2005,  and 2004 accounts receivable consists of:

   
2006
   
2005
   
2004
 
Accounts receivable from customers
  $ 336,165     $ 383,299     $ 192,151  
Allowance for doubtful accounts
    (5,127 )     (65,000 )     (0 )
Accounts receivable, net
  $ 331,038     $ 318,299     $ 192,151  

5.  LOAN RECEIVABLE

The balance of loan receivable at June 30, 2006 consisted of a loan to Pasta Italiana, Inc. in the amount of $360,000.  This note bears interest in the amount of 8% per annum.  This note matures on August 24, 2006.  At June 30, 2006, this note receivable was in default and interest income was not taken on this loan for the three months ended June 30, 2006.  At June 30, 2006, the Company has reserved $75,000 of the loan receivable and recognized interest income from this loan in the amount of $7,147.
 
11

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

6. PROPERTY AND EQUIPMENT

A summary of property and equipment at June 30, 2006 and 2005 is as follows:

   
2006
   
2005
   
2004
 
Computer equipment
  $ 228,970     $ 163,614     $ 218,513  
Furniture and fixtures
    82,213       52,485       52,485  
      311,183       216,099       270,998  
Less accumulated depreciation and amortization
    (189,629 )     (142,400 )     (95,488 )
Total
  $ 121,554     $ 73,699     $ 175,510  

Depreciation and amortization expense amounted to $25,372, $32,326 , and $28,023, respectively, for the six months ended June 30, 2006,  2005, and 2004.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at June 30, 2006, 2005, and 2004 are as follows:

   
2006
   
2005
   
2004
 
Accounts payable and accrued expenses
  $ 731,474     $ 525,227     $ 420,729  
Accrued commissions
    11,026       3,108       2,750  
Total
  $ 742,500     $ 522,119     $ 417,979  

8. ACCRUED INTEREST

At June  30, 2006, the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 130,051     $ 45,684     $ 84,367  
Related parties
    86,751       13,300       73,451  
Total
  $ 216,802     $ 58,984     $ 157,818  

At  June  30, 2005,  the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 24,490     $ 20,779     $ 3,711  
Related parties
     44,607        24,555       20,052  
Total
  $ 69,097     $ 45,334     $ 23,763  

At  June  30, 2004,  the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
  $ 71,393     $ 2,139     $ 69,254  
Related parties
     9,075        6,325       2,750  
Total
  $ 80,468     $ 8,464     $ 72,004  

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 June 30, 2006, 2005, and 2004, the amounts of $ $195,267, $67,415, and  $9,422 were credited to additional paid-in capital as a discount on accrued interest.  The Company amortized to interest expense a total of $40,347, $9,411, and $907 of these discounts  during the three months ended June 30, 2006, 2005, and 2004, respectively.
 
 
12

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

9. NOTES PAYABLE AND NOTES TO RELATED PARTIES

The Company has a line of credit with Wachovia Bank in the amount of $25,000.  The outstanding balance as of June 30, 2006 and 2005 was $24,251 and $0, respectively.  The Company also has a loan payable for the purchase of a server in the amount of $25,385 and $0, as of June 30, 2006 and 2005, respectively.

At June 30, 2006, 2005, and 2004, the Company has outstanding notes payable in the aggregate amount of $1,314,000, $1,088,000 and $388,000, respectively. Notes payable and notes payable to related parties at June 30, 2006, 2005, and 2004 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 $2,901, $10,001, and $0 was accrued on this note during the three months ended June 30, 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 June 30, 2006 and 2005.
  $                                                                               345,000     $                                                                               350,000     $                                                                               -  
 
 

 
13

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 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 notes 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 $3,191 was accrued on this note during  each of  the three months ended June 30, 2006,   2005,  and 2004.
  $ 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 $1,732,  $1,995, and $0 was accrued on this note during the three months ended June 30, 2006, 2005, and 2004, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock.
  $                                       25,000     $                                       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 $819, $1,696, and $1,696 was accrued on this note during the three  months ended March 30, 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 $1,596 was accrued on this note during each of the three months ended June 30, 2006, 2005,  and 2004.
  $ 80,000     $                               80,000     $ 80,000  
 
 
14

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 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 $1,792, $1,429, and $0 was accrued on this note during the each of the three months ended June 30, 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 June 30, 2006 and 2005.
  $                                                                     45,000     $                                                                       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 $998 was  accrued on this note during each of the three months ended June 30, 2006, 2005, and 2004.
  $ 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 $400, $342, and $0 was  accrued on this note during the three months ended June 30, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.
  $ 20,000     $                                   30,000     $ -  
 
Convertible note payable in the original amount of $5,000 to Ke Du 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 $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. This note was converted to common stock during the year 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 $57 was accrued on this note during the three months ended June  30, 2005.
  $                                -     $                               5,000     $                               -  
 
 
 
15

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

 
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 $498, $498,. And $0 was accrued on this note during the three months ended June 30, 2006, 2005,  and 2004, 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 $373, $373, and $0 was accrued on this note during the three months ended June  30, 2006, 2005,  and 2004, respectively.
  $ 25,000     $                               25,000     $ -  

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 $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  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 $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  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 $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
  $ 10,000     $                                           10,000     $ -  
 
 
 
16

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

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 $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
  $                                         10,000     $                                           10,000     $                                           -  

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 $160 was accrued on this note during the each of the three months ended June 30, 2006,  2005, and 2004.
  $ 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 $100 was accrued on this note during the each of the three months ended June 30, 2006,  2005, and 2004.
  $                                 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 $5,359 was accrued on this note during the three months ended June 30, 2006.   This note is in default at June 30, 2006.
  $ 120,000     $                                                       -     $ -  

 
 
 
17

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

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 $1,122 was accrued on this note during the three months ended June 30, 2006.   This note is in default at June 30, 2006.
  $                                                 30,000     $                                                       -     $                                                   -  
 
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 $934 was accrued on this note during the three months ended June 30, 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 June 30, 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 $934 was accrued on this note during the three months ended June 30, 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 June 30, 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 $373 was accrued on this note during the three months ended June 30, 2006.  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 June 30, 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 $5,359 was accrued on this note during the three months ended June 30, 2006. This note is in default at June 30, 2006.
  $                         120,000     $                         -     $                         -  
 
 
18

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 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 $1,340 was accrued on this note during the three months ended  June 30, 2006.   This note is in default at June 30, 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 $1,496 was accrued on this note during each of the three  months ended June 30, 2006 and  2005.   This note is in default at June 30, 2006 and 2005.
  $             75,000     $             75,000     $             -  

Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note bears interest at the rate of 15% per annum, and was due in full on November 19, 2006. Interest in the amount of $172 was accrued on this note  during the three months ended June 30, 2006.
  $          10,000     $         -     $         -  
                         
Note payable in the original amount of $25,787 to Microsoft Corporation dated May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is payable in 60 monthly payments of $557 beginning October 1, 2006.
  $ 25,787     $ -     $ -  
 
Total       $ 1,339,787     $ 1,088,000     $ 388,000  
Less: Current maturities     (1,314,000     (710,000     (-
Long-term portion
  $  25,787     $ 378,000     $ 388,000  
                         
Total Non-related parties
  $ 964,787     $ 638,000     $ 178,000  
Total related parties
    375,000       450,000       210,000  
Total
  $ 1,339,787     $ 1,088,000     $ 388,000  
 
 
19

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

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 June 30, 2006, the conversion option liability was valued at $6,577,232.  The revaluation resulted in a gain during the  three months ended June  30, 2006  of $1,270,054.

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
 
June 30, 2006
    4.75 %     0       5       141.4 %

10.  RELATED PARTY TRANSACTIONS

The Company engaged in the following transactions with related parties:

Three months ended June 30, 2006:

The Company issued 350,000 shares (post reverse-split) of common stock with a fair value of $17,500 to Sam Klepfish, it’s CEO and a board member, as a bonus for services performed.

Three months ended June 30, 2005:

The Company issued 2,500,000 shares (post reverse-split) of common stock with a fair value of $32,500 to Michael Ferrone, a board member, in exchange for services performed.

Three months ended June  30, 2004:

The Company issued 1,000,000 shares (post reverse-split) of common stock to Michael Ferrone, a board member, in exchange for current liabilities with a fair value of $261,346.
 
 
20

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

11. EQUITY

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.

Common Stock

The Company had the following common stock transactions during the three months ended June 30, 2006:

The Company issued 10,000,000 (post reverse-split) shares of common stock for a proposed acquisition. The acquisition was not consummated, and these shares will be canceled. The par value of these shares of $1,000 was charged to additional paid-in capital during the three months ended June 30, 2006.

The Company issued 900,000 shares (post reverse-split) of common stock with a fair value of $32,400 to employees as a bonus.

The Company issued 1,094,465 shares (post reverse-split) of common stock pursuant to conversion of notes payable and accrued interest in the amount of $5,473.

The Company issued 350,000 shares (post reverse-split) of common stock with a fair value of $17,500 to an officer as bonus.

The Company had the following common stock transactions during the three months ended June 30, 2005:

The Company issued 300,000 shares (post reverse-split) of common stock with a fair value of $3,900 to consultants for services performed.

The Company issued 2,500,000 shares (post reverse-split) of common stock with a fair value of $32,500 to a board member for services performed.

The Company had the following common stock transactions during the three months ended June 30, 2004:

The Company issued 1,300,000 shares (post reverse-split) of common stock for conversion of liabilities in the amount of $339,750.

The company issued 700,000 shares (post reverse-split) of common stock in exchange for services performed in the amount of $70,000.

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 June 30, 2004.
 
 
 
21

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

The following table summarizes the warrants outstanding at June 30, 2005 (post reverse-split):

 
           
Weighted
     
Weighted
       
Weighted
 
average
     
average
       
average
 
exercise
     
exercise
Range of
 
Number of
 
remaining
 
price of
 
Number of
 
price of
exercise
 
shares
 
contractual
 
outstanding
 
shares
 
exercisable
prices
 
outstanding
 
life (years)
 
warrants
 
exercisable
 
options
$ 0.005       132,000,000       4.66      $ 0.005       132,000,000    
 $
0.005  
 
The following table summarizes the warrants outstanding at June 30, 2006 (post reverse-split):

           
Weighted
     
Weighted
       
Weighted
 
average
     
average
       
average
 
exercise
     
exercise
Range of
 
Number of
 
remaining
 
price of
 
Number of
 
price of
exercise
 
shares
 
contractual
 
outstanding
 
shares
 
exercisable
prices
 
outstanding
 
life (years)
 
warrants
 
exercisable
 
options
$ .0050       136,200,000       3.67     $ .0050       136,200,000     $ 0.0050  
$ .1100       10,500,000       4.15     $ .1100       10,500,000     $ 0.1100  
$ .1150       42,000,000       4.15     $ .1150       42,000,000     $ 0.1150  
          188,700,000       3.80     $ .0353       188,700,000     $ 0.0353  

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
    -     $ -  
 
 
22

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 
         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
             
Granted
    -       -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at December 31, 2004
    -     $ -  
                 
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       0.079  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Sept 30, 2005
    188,700,000     $ 0.027  
                 
Granted
            -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at Dec 31, 2005
    188,700,000     $ 0.027  
                 
Granted
            -  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at March 31, 2006
    188,700,000     $ 0.027  
                 
                 
Granted
    300,000       0.005  
Exercised
    -          
Cancelled / Expired
    -       -  
                 
Warrants exercisable at June 30, 2006
    189,000,000     $ 0.027  

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.
 
 
23

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

The following table summarizes the options  outstanding at June 30, 2006:

                 
Weighted
         
Weighted
 
           
Weighted
   
average
         
average
 
           
average
   
exercise