innofood10q033109.htm


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

 
FORM 10-Q
 

 
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, 2009

r  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 Registrant as Specified in its Charter)

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

3845 Beck Blvd., Suite 805
Naples, Florida 34114
(Address of Principal Executive Offices)

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

Indicate by check mark whether the registrant : (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ  NO r

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES r  NO r
 
Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):
 
YES r  NO þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
(Check One):
 
Large Accelerated filer r
Accelerated filer                   r
Non-accelerated filer    r
(Do not check if a smaller reporting company)
Smaller reporting company þ
 
State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date:  178,577,038 Common Shares outstanding at May 13, 2009.
 


INNOVATIVE FOOD HOLDINGS, INC.
INDEX TO FORM 10-Q

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
 
5
 
6
Item 2.
34
Item 4T.
41
     
PART II.
OTHER INFORMATION
 
     
Item 1.
42
Item 2.
42
Item 3.
42
Item 4.
42
Item 5.
42
Item 6.
42
 
43
 



Innovative Food Holdings, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
   
   
March 31,
   
December 31,
 
   
2009
   
2008
 
ASSETS
 
(UNAUDITED)
   
(AUDITED)
 
             
Current assets
           
             
     Cash and cash equivalents
 
$
117,625
   
$
160,545
 
     Accounts receivable, net
   
233,868
     
239,566
 
     Loan receivable, current portion net
   
73,500
     
60,000
 
     Rent deposit
   
4,500
     
9,000
 
                 
          Total current assets
   
429,493
     
469,111
 
                 
Loan receivable, net
   
79,500
     
93,000
 
Property and equipment, net
   
50,610
     
52,620
 
                 
   
$
559,603
   
$
614,731
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities
               
                 
     Accounts payable and accrued liabilities
 
$
721,803
   
$
832,613
 
     Accrued liabilities- related parties
   
134,085
     
126,671
 
     Accrued interest, net of discount
   
505,462
     
437,269
 
     Accrued interest - related parties
   
149,311
     
173,471
 
     Notes payable, current portion, net of discount
   
938,495
     
938,364
 
     Notes payable - related parties, current portion, net of discount
   
279,244
     
261,002
 
     Warrant liability
   
677,876
     
1,388,287
 
     Option liability
   
87,267
     
174,692
 
     Conversion option liability
   
1,141,244
     
1,150,000
 
     Penalty for late registration of shares
   
-
     
551,400
 
          Total current liabilities
   
4,634,787
     
6,033,769
 
                 
Note payable
   
12,088
     
10,723
 
     
4,646,875
     
6,044,492
 
Stockholders' deficiency
               
   Common stock, $0.0001 par value; 500,000,000 shares authorized;
               
       188,577,038 and 183,577,038 shares issued, and  178,577,038 and
               
       173,577,038 shares outstanding at March 31, 2009 and December 31, 2008, respectively
   
18,858 
     
18,358 
 
   Additional paid-in capital
   
2,045,981
     
1,985,335
 
   Accumulated deficit
   
(6,152,111
)
   
(7,433,454
)
      Total stockholders' deficiency
   
(4,087,272
)
   
(5,429,761
)
                 
   
$
559,603
   
$
  614,731
 
 
See notes to consolidated financial statements.
 
3


 
Innovative Food Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
(UNAUDITED)
 
 
             
   
Three Months Ended March 31,
 
   
2009
   
2008
 
         
(Restated)
 
Revenue
 
$
1,600,675
   
$
1,603,378
 
                 
Cost of goods sold
   
1,187,694
     
1,286,893
 
  Gross margin
   
412,981
     
316,485
 
                 
Selling, general and administrative expenses
   
386,561
     
336,470
 
                 
Operating income (loss)
   
26,420
     
(19,985
)
                 
Other (income) expense:
               
   Interest  expense, net
   
111,169
     
85,371
 
   (Gain) loss on extinguishment of debt
   
(222,656
   
168,620
 
   Loss on revaluation of penalty shares
   
-
     
330,840
 
   (Gain) loss from change in fair value of warrant liability
   
(710,411
   
600,712
 
   Fair value of options issued
   
-
     
39,344
 
   (Gain) loss from change in fair value of option liability
   
(87,425
   
35,026
 
   (Gain) loss from change in fair value of conversion option liability
   
(345,600
   
669,741
 
     
(1,254,923
   
1,929,654
 
                 
  Income  before tax expense
   
1,281,343
     
(1,949,639
                 
  Income tax expense
   
-
     
-
 
                 
Net income (loss)
 
$
1,281,343
   
$
(1,949,639
                 
Net income (loss) per share - basic
 
$
0.007
   
$
(0.011
                 
Net income (loss) per share  diluted
 
$
0.002
   
$
(0.011
)
                 
Weighted average shares outstanding - basic
   
183,577,038
     
181,787,638
 
                 
Weighted average shares outstanding - diluted
   
670,267,558
     
181,787,638
 
 
See notes to consolidated financial statements.
 
4


 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
 
   
Three Months Ended March 31,
 
   
2009
   
2008
 
Cash flows from operating activities:
       
(Restated)
 
             
   Net income (loss)
 
$
1,281,343
   
$
(1,949,639
  Adjustments to reconcile net loss to  net
               
  cash used in operating activities:
               
    Depreciation and amortization
   
9,550
     
10,016
 
    (Gain) loss on extinguishment of debt
   
(222,656
   
168,620
 
    Issuance of shares common stock to a consultant
   
10,000
     
-
 
    Fair value of warrants and options issued in excess of discount on notes
   
-
     
39,344
 
    Amortization of discount on notes payable
   
15,632
     
15,197
 
    Amortization of discount on accrued interest
   
44,608
     
30,990
 
    Change in fair value of warrant liability
   
(710,411
   
600,709
 
    Change in fair value of option liability
   
(87,425
)
   
35,026
 
    Change in fair value of conversion option liability
   
(345,600
   
669,741
 
    Revaluation of penalty for late registration of shares
   
-
     
330,836
 
  Changes in operating assets and liabilities:
               
        Accounts receivable
   
5,698
     
79,748
 
        Prepaid expenses and other current assets
   
4,500
     
-
 
        Accounts payable and accrued expenses- related party
   
34,400
     
20,692
 
        Accounts payable and accrued expenses
   
(73,726
   
(94,677
   Net cash used in operating activities
   
(34,087
   
(43,397
                 
Cash flows from investing activities:
               
   Acquisition of property and equipment
   
(7,540
)
   
-
 
   Net cash used in investing activities
   
(7,540
   
-
 
                 
Cash flows from financing activities:
               
    Principal payments on debt
   
(1,293
)
   
(1,673
)
   Net cash used in  financing activities
   
(1,293
   
(1,673
                 
Decrease in cash and cash equivalents
   
(42,920
   
(45,070
                 
Cash and cash equivalents at beginning of  year
   
160,545
     
74,610
 
                 
Cash and cash equivalents at end of  year
 
$
117,625
   
$
29,540
 
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
358
   
$
557
 
                 
 Income Taxes
 
$
-
   
$
-
 
 
 
See notes to consolidated financial statements.
 
5


INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, Food Innovations, Inc. (“FII”), Food New Media Group, Inc. (“FNM”)  and 4 The Gourmet, Inc (“ Gourmet”) (collectively, the “Company, or “IVFH”),  have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  FNM is currently inactive. 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 September 1979 as Alpha Solarco Inc., a Colorado corporation. From September 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 Innovative Food Holdings, Inc. (“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 IVFH.  The 25,000,000 shares (post-reverse split) of IVFH 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 ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
Food Innovations, Inc. (“FII”) is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty food 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., a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor.
 
6

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

Interim Financial Information

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited consolidated 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-K for the year ended December 31, 2008. In the opinion of management, the interim consolidated 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, 2009 are not necessarily indicative of the results of operations to be expected for the full year.

Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported periods. Actual results could materially differ from those estimates.

Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiary, Food Innovations, Inc.  and its other wholly-owned subsidiaries Food New Media Group, Inc.  and 4 The Gourmet, Inc.  All material intercompany transactions have been eliminated upon consolidation of these entities.

Revenue Recognition
 
The Company recognizes revenue upon product shipment.   We ship all our products either overnight shipping terms or three day shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is shipped.  Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
 
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. 104 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) collectability 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 collectability 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.
 
 
7

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

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 policy to comply with the provisions of EITF No. 00-21 and EITF 99-19.

Cost of goods sold
 
We have included in cost of good sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of the product plus the shipping costs.
 
Selling, general, and administrative expenses
 
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, and other administrative costs including professional fees.  Advertising costs are expensed as incurred.

Cash and Cash Equivalents
 
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

Accounts Receivable
 
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  Accounts receivable are presented net of an allowance for doubtful accounts of $3,071 and $15,877 at March 31, 2009 and December 31, 2008, respectively.

Property and Equipment
 
Property and equipment are valued at cost.  Depreciation is provided over the estimated useful lives up to five years using the straight-line method.  Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
 
The estimated service lives of property and equipment are as follows:
 
Computer Equipment                 
3 years
Office Furniture and Fixtures     
5 years

Inventories
 
The Company does not currently maintain any  amount of inventory.
 
 
8

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are   individually   classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,  it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Fair Value of Financial Instruments
 
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.

 Long-Lived Assets
 
The Company reviews its property and equipment and any  identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
As of March 31, 2009, the Company’s management believes there is no impairment of its long-lived assets.  There can be no assurance, however, that market conditions will not change which could result in impairment of long-lived assets in the future.
 
Comprehensive Income

Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances.  Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.  The Company does not have any items of comprehensive income in any of the periods presented.
 
9

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

Basic and Diluted Income (Loss) Per Share

In accordance with SFAS No. 128, "Earnings Per Share," the basic loss per common share is computed by dividing net income available to common stockholders less preferred dividends by the weighted average number of common shares outstanding. Diluted loss per common share is computed similarly to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were not anti-dilutive, and the numerator is changed to reflect any changes  to net loss that would have occurred had the dilutive shares been issued.

Diluted earnings per shares was computed as follows for the three months ended March 31, 2009:

   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share
  $ 1,281,343       183,577,038     $ 0.007  
                         
Effect of  Dilutive Securities:
                       
                         
Conversion of notes and interest to common stock:
                       
   Additional shares reserved interest for conversion
                       
   Decrease in interest expense due to conversion
    110,811       483,690,520          
   Remove gain on revaluation of conversion option liability
    (345,600 )                
                         
Shares accrued, not yet issued
    -       3,000,000          
                         
                         
                         
Diluted earnings per share
  $ 1,046,554       670,267,558     $ 0.002  

Diluted loss per share was not calculated for the three months ended March 31, 2008 as the effect would have been anti-dilutive.
 
Anti-dilutive shares at March 31, 2009:
The following warrants were not included in fully-diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company's common stock: 179,700,000 shares at an exercise price of $0.005 per share; 18,500,000 shares at an exercise price of $0.011 per share; 1,000,000 shares at an exercise price of $0.012 per share; and 74,000,000 shares at an exercise price of $0.0115 per share.
 
The following options were not included in fully-diluted earnings per share because the exercise prices of the options were greater than the average market price of the Company's common stock: 15,000,000 shares at $0.005 per share; 20,000,000 shares at $0.007 per share; and 500,000 shares at $0.50 per share.
 
Anti-dilutive shares at March 31, 2008:
The following warrants were not included in fully-diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company's common stock: 139,700,000 shares at an exercise price of $0.005 per share; 18,500,000 shares at an exercise price of $0.011 per share; and 74,000,000 shares at an exercise price of $0.0115 per share.
 
The following options were not included in fully-diluted earnings per share because the exercise prices of the options were greater than the average market price of the Company's common stock: 15,000,000 shares at $0.005 per share; 20,000,000 shares at $0.007 per share; and 500,000 shares at $0.50 per share.
 

10


Liquidity
 
As reflected in the accompanying consolidated financial statements, the Company had net income (loss) of $1,281,343  and ($1,949,639) for the three months ended March 31, 2009 and 2008, respectively.  This  variance was principally due to changes in fair values of warrant, conversion option and registration penalty liabilities rather to differences in actual operating results.  The Company  has an accumulated deficit of  $6,152,111  at  March 31, 2009.  In addition, the Company’s current liabilities exceeded its current assets by   $4,205,294  as of March 31, 2009.  Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

Historically, we have funded our operations from cash generated by operations and from the issuance of both debt and equity securities.  The Company’s cash on hand may be insufficient to fund its planned operating needs.  Management is continuing to pursue new debt and/or equity financing and is continually evaluating the Company’s cash and capital needs.

The Company expects that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders.  The Company can give no assurance that it will be able to generate adequate funds from operations, that funds will be available, or the Company will be able to obtain such funds on favorable terms and conditions.  It the Company cannot generate positive cash flow from operations or secure additional funds it will not be able to continue as a going concern.

By adjusting its operations and development to the level of available resources, management believes it has sufficient capital resources to meet projected cash flow through the next twelve months. The Company also intends to increase market share and cash flow from operations by focusing its sales activities on specific market segments. However, if thereafter, the Company is not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms it finds acceptable, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.  Currently, we do not have any material long-term obligations other than those described in Note 7 to the financial statements included in this report, nor have we identified any long-term obligations that we contemplate incurring in the near future. As we seek to increase our sales of perishables, as well as identify new and other consumer oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.
 
The independent auditors report on our December 31, 2008 financial statements state that our recurring losses raise substantial doubts about our ability as a going concern.

Concentrations of Credit Risk
 
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash  in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At March 31, 2009 and 2008, trade receivables from the Company’s largest customer amounted to 94.5 % and 78.0%  respectively, of total trade receivables.

Reclassification
 
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
 
11

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of SFAS 123R, Share-Based Payment (“SFAS 123R”). This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.

In August 2005, the Company’s commitments to issue shares of common stock first exceeded its common stock authorized. At this time, the Company began to value its stock options via the liability method of accounting. Pursuant to guidance in SFAS 123(R), the cost of these options are valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period.  The gain or loss from this revaluation is charged to compensation expense during the period.  Options expense and gain or loss on revaluation during the three months ended March 31, 2009 and 2008 are summarized in the table below:
 
   
Three Months ended March 31,
 
   
2009
   
2008
 
Option expense
  $ -     $ 39,344  
                 
(Gain) loss on revaluation of options
  $ (87,425 )   $ 35,026  
 
A summary of option activity as of December 31, 2008, and changes during the period ended March 31, 2009 are presented below:

         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Options outstanding at December 31, 2008
   
35,500,000
   
$
0.013
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled/Expired
   
-
     
-
 
                 
Options outstanding at March 31, 2009
   
35,500,000
   
$
0.013
 
Exercisable
   
35,400,000
   
$
0.012
 
Not exercisable
   
100,000
   
0.500
 
 

 
12

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)


Aggregate intrinsic value of options outstanding and options exercisable at March 31, 2009, 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 $0.003  at March 31, 2009, and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  March 31, 2009  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, 2009 and 2008.

Significant Recent Accounting Pronouncements
 
On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This staff position amends FASB Statement (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. This FSP will be effective for interim reporting periods ending after June 15, 2009. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. As this FSP provides for additional disclosure requirements only, the Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 9, 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which amends SFAS No. 157, “Fair Value Measurements” , to provide additional guidance on fair value measurements in inactive markets when the volume and level of activity for the asset and liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 will be effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which amends impairment guidance for certain debt securities and will require an entity to assess whether it (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, the entity must recognize an other-than-temporary impairment. If an entity is able to meet the criteria to assert that it will not have to sell the security before recovery, impairment charges related to credit losses would be recognized in earnings, while impairment charges related to non-credit losses (for example, liquidity risk) would be reflected in other comprehensive income. This FSP will be effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of this FSP to have an impact on the Company’s results of operations, financial position or cash flows.
 
On April 1, 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies” (“FSP FAS 141(R)-1”), to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under SFAS 141(R), “Business Combinations.” Under FSP FAS 141(R)-1, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should account for the acquired contingencies using existing guidance. FSP FAS 141(R)-1 is effective for the Company for business combinations finalized after January 1, 2009.


13

  
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
                                                                                                                              
3. ACCOUNTS RECEIVABLE

At March 31, 2009 and December 31, 2008, accounts receivable consists of:
 
   
March 31, 2009
   
December 31, 2008
 
Accounts receivable from customers
 
$
236,939
   
$
255,443
 
Allowance for doubtful accounts
   
(3,071
)
   
(15,877
)
Accounts receivable, net
 
$
233,868
   
$
239,566
 

4.  LOAN RECEIVABLE

The  loan receivable consists  of a loan to Pasta Italiana, Inc. (“Pasta”) in the net carrying amount of $153,000 at March 31, 2009 and December 31, 2008.  This  note bears interest at the rate of  15% per annum, payable in shares of Pasta stock.  The loan was renegotiated during the twelve months ended December 31, 2008, and resulted in the Company recognizing an impairment to the loan in the amount of $142,124, which was charged to operations during the year ended December 31, 2008.  This impairment was based upon the renegotiated principal and interest amount due the Company.  At  March 31, 2009, $73,500 of the amount due is classified as a current asset, and $79,500 is classified as a long term asset. At December 31, 2008, $60,000 was classified as a current asset, and $93,000 is classified as a long-term asset.  At May 13, 2009, Pasta is in default of the terms of the settlement agreement.
 
5. PROPERTY AND EQUIPMENT

A summary of property and equipment at March 31, 2009 and December 31, 2008, is as follows:

   
March 31, 2009
   
December 31, 2008
 
Computer equipment
 
$
301,812
   
$
292,608
 
Furniture and fixtures
   
65,650
     
67,298
 
     
367,462
     
359,906
 
Less accumulated depreciation and amortization
   
316,852
 
   
307,286
 
Total
 
$
50,610
   
$
52,620
 

Depreciation and amortization expense amounted to $9,550 and $10,016, respectively, for the three months ended March 31, 2009 and 2008.
 
14

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
  
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at March 31, 2009 and 2008 are as follows:

 
March 31,
 
December 31,
 
 
2009
 
2008
 
Trade payables
$ 715,182   $ 824,172  
Accrued payroll and commissions
  6,621     8,441  
             
  $ 721,803   $ 832,613  

At March 31, 2009 and December 31, 2008, accrued liabilities to related parties in the amount of $134,085 and $126,671, respectively, consisted of accrued payroll and payroll related benefits.

7. ACCRUED INTEREST
 
Accrued interest on the Company’s convertible notes payable is convertible at the option of the note holders into the Company’s common stock at prices ranging from of $0.005 to $0.010 per share.  Beneficial conversion features are  embedded in the convertible accrued interest.  The Company is amortizing these beneficial conversion features over the lives  of the related notes payable.  Certain of these notes payable have exceeded their stated terms, and are still outstanding; in those instances, the Company charges  the value of these beneficial conversion features to operations immediately, at the time the interest is accrued.

During the three months ended March 31, 2009 and 2008, the amounts of $51,146, and $33,364, respectively, were credited to additional paid-in capital as a discount on convertible interest. The aggregate amount of discounts on convertible interest charged to operations during the three months ended March 31, 2009 and 2008 was $44,608  and $30,990 , respectively.
 
At March 31, 2009 and December 31, 2008, the Company has the following accrued interest on its balance sheet:

March 31, 2009:
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
515,744
   
(10,282
 
$
505,462
 
Related parties
   
149,311
     
-
     
149,311
 
Total
 
$
665,055
   
$
(10,282
 
$
654,773
 

December 31, 2008:
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
441,013
   
(3,744
 
$
437,269
 
Related parties
   
173,471
     
-
     
173,471
 
Total
 
$
614,484
   
$
(3,744
 
$
610,740
 

Certain of the accrued interest is convertible in to shares of the Company’s common stock at prices ranging from $0.005 to $0.010 per share. At March 31, 2009, convertible accrued interest was $637,072 which was convertible into 124,645,120 shares of common stock; at December 31, 2008, convertible accrued interest was $587,981 which was convertible into 114,043,320 shares of common stock.
 
15

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
 
   
March 31,
2009
   
December 31,
2008
 
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  entered technical default status on 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 immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. 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. Interest in the amount of $12,760 and $12,902  was accrued on this note during the three months ended March 31, 2009   and 2008, 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, 2009 and December 31, 2008.
  $ 345,000     $ 345,000  
                 
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, has no provisions for a default or past due rate 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.  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 and 2005. 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.  Interest in the amount of $493  and $499 was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. This note was in default at March 31, 2009 and  December 31, 2008.
                                            25,000          25,000  
                 
Convertible note payable in the original amount of $85,000 to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate 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. 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, 2005, and 2006. Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share. Interest in the amount of $749 and $758  was accrued on this note during the three months ended March 31, 2009 and 2008, 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.  This note is in default at March 31, 2009 and December 31, 2008.
                                              38,000       38,000  
 
 
16

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
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, has no provisions for a default or past due rate 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. 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, 2005, and 2006. 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.  Interest in the amount of $1,579 and $1,596 was accrued on this note during the three months ended March 31, 2009,  and 2008, respectively. This note is in default at March 31, 2009 and December 31, 2008.
    80,000       80,000  
                 
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.  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in May, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $1,480  and $1,497 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.  During the twelve months ended December 31, 2006, $10,000 of principal and $589 of accrued interest was converted into common stock.   This note is in default at March  31, 2009 and December 31, 2008.
    40,000       40,000  
                 
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, has no provisions for a default or past due rate 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. 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, 2004, 2005, and 2006.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $987 and $998 was  accrued on this note during the three months ended March 31, 2009, and 2008, respectively. This note is in default at March 31, 2009 and December 31, 2008.
    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, has no provisions for a default or past due rate 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. 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 and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $395 and $399 was  accrued on this note during the three months ended March 31, 2009 and 2008, respectively. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.  This note is in default at March 31, 2009 and December 31, 2008.
    20,000         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, has no provisions for a default or past due rate and was 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, 2006, and 2007. 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 $499 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.  This note is in default at March 31, 2009 and December 31, 2008.
    25,000           25,000  
 
 
17

 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
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, has no provisions for a default or past due rate and was 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. 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, 2006, and 2007. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $369 and was $373 accrued on this note during the three months ended March 31, 2009 and 2008, respectively.  This note is in default at March 31, 2009 and December 31, 2008.
    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, has no provisions for a default or past due rate 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 . 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, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $197 and $200 was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.     This note is in default at March 31, 2009 and December 31, 2008.
                                            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, has no provisions for a default or past due rate 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 . 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, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $197 and $200  was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.   This note is in default at March 31, 2009 and December 31, 2008.     
                                               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, has no provisions for a default or past due rate 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 . 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, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $197 and $200  was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.   This note is in default and March 31, 2009 and December 31, 2008.
    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, has no provisions for a default or past due rate 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 . 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, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $197 and $200  was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.    This note is in default at March 31, 2009 and December 31, 2008.
                                            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, has no provisions for a default or past due rate 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. 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, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $157 and $159 was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.  This note is in default at March 31, 2009 and December 31, 2008.
    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, has no provisions for a default or past due rate 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 . 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, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $99  and $100 was accrued on this note during the three months ended March 31, 2009, and 2008, respectively.  This note is in default at March 31, 2009 and December 31, 2008.
                                  5,000       5,000  
 
18

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
       
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. A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $4,439  and $4,488 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively. This note is in default at March 31, 2009 and December 31, 2008.
    120,000       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, 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. A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $1,109  and $1,122 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.  This note is in default at March 31, 2009 and December 31, 2008.
                                                            30,000       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, 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 . A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $740 and $860  was accrued on this note during the three months ended March  31, 2009 and 2008, respectively. 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, and during the twelve months ended December 31, 2008, the holder of the note converted an additional $3,000 of principal into common stock.  This note is in default at March 31, 2009 and December 31, 2008.
                                                                     20,000       20,000  
                 
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 . A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $665 and $860 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively. 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, and during the twelve months need December 31, 2008, the holder of the note converted an additional $5,000 principal into common stock. This note is in default at March 31, 2009 and December 31, 2008.
                                                                 18,000       18,000  
 
19

INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
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 . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $221 and $224 was accrued on this note during the  three months ended March 31, 2009 and 2008, 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, 2009 and December 31, 2008.
    6,000       6,000  
                   
Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company was 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. During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $95,588 and amortized this discount to interest expense when the note entered default status in October 2007. On March 12, 2008, the Company extended this note to March 4, 2009. As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 24,000,000 shares of common stock at $0.0115 per share; 6,000,000shares of common stock at $0.011 per share; and 2,400,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $126,465. This transaction was accounted for as an extinguishment of debt, and a loss of $126,465 was charged to operations during the twelve months ended December 31, 2008. Interest in the amount of $6,187 and $5,983 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.
    120,000       120,000  
 
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 was 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.   During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007.  The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $23,897 and amortized this discount to interest expense when the note entered default status in October 2007.    On March 12, 2008, the Company extended this note to March 4, 2009.  As consideration for the extension of this  notes, the Company issued five-year warrants as follows: warrants to purchase 6,000,000 shares of common stock at $0.0115 per share; 1,500,000 shares of common stock at $0.011 per share; and 600,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $31,616. This transaction was accounted for as an extinguishment of debt, and a loss of  $31,616 was charged to operations during the twelve months ended December 31, 2008.  Interest in the amount of $1,480  and $1,122 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.   
    30,000       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.  On September 30, 2008, this note was extended to December 31, 2009 in exchange for adding a convertibility feature to the note. This feature allows for conversion to common stock at a price of $0.005 per share. The Company valued this beneficial conversion feature at the amount of $89,945 using the Black-Scholed valuation model.  $75,000 of this amount was charged to discount on the note; $4,001 of this discount was amortized to interest expense during the year ended December 31, 2008. The balance of the beneficial conversion feature in the amount of $14,945 was  charged to interest expense during the year ended December 31, 2008.  Interest in the amount of $1,480 and $1,497  was accrued on this note  during the three months ended March 31, 2009,  and 2008, respectively.   
    75,000       75,000  
 
20

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The originally carried interest at the rate of 15% per annum, and was originally due in full on November 19, 2006. 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 February 20 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended September 30, 2007, the Company extended the due date of the notes one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholders to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $7,966 and amortized this discount to interest expense when the note entered default status in October 2007.  On March 12, 2008, the Company extended this note to March 4, 2009.  As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 2,000,000 shares of common stock at $0.0115 per share; 500,000 shares of common stock at $0.011 per share; and 200,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $10,539. This transaction was accounted for as an extinguishment of debt, and a loss of  $10,539 was charged to operations during the twelve months ended December 31, 2008.  Interest in the amount of $493  and $499 was accrued on this note during the three months ended March 31, 2009 and 2008, respectively.  
    10,000       10,000  
                 
Twenty-nine  convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006.  Pursuant to the Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in salary is accrued each month to a note payable. These notes bear interest at the rate of 8% per annum and have no due date. These notes and accrued interest are convertible into common stock of the Company at a rate of $0.005 per share.  Beneficial conversion features in the aggregate amount of $9,000 for the year ended December 31, 2006, $39,190 for the year ended December 31, 2007, $58,464 for the year ended December 31, 2008 and $8,100 for the three months ended March 31, 2009 were calculated using the Black-Scholes valuation model.  Since these  notes are payable on demand, the value of these discounts were charged  immediately to interest expense.   Interest in the aggregate amount of $2,403  and $1,392 was accrued on these notes during the three months ended March 31, 2009 and 2008, respectively.
    130,500       117,000  
                 
Twelve one-year notes payable in the amount of $1,500 each for an aggregate amount of $18,000 to Mountain Marketing, for services.  A note in the amount of $1,500 is dated as of the last day of each month of the year ended December 31, 2008. These notes are convertible into common stock of the Company at the rate of $0.005 per share.  Discounts in the aggregate amount of $15,664 were amortized to interest during the year ended December 31, 2008.  These notes do not bear interest.
    18,000       18,000  
 
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. Negative interest in the amount of $358 and $557 was capitalized to this note during the three months ended March 31, 2009 and 2008, respectively. Principal and interest in the amounts of $1,293 and $1,673 were paid on this note during the three months ended March 31, 2009 and 2008, respectivel
14,794         16,087  
 
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
Convertible note payable  in the amount of $200,000 to Alpha Capital, dated December 31, 2008.  This note bears interest at the rate of 8% per annum, and is due in full on December 31, 2009.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  Also issued with this note are warrants to purchase 40,000,000 shares of the Company’s common stock at a price of $0.005 per share.  The Company calculated a discount to the note in the amount of $200,000, and recorded $938 amortization for this discount during the three months ended March 31, 2009. Interest in the aggregate amount of $3,945  and $0 was accrued on this  note during the three months ended March 31, 2009 and 2008, respectively.
    200,000       200,000
         
Convertible note payable  for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $230,000 to Alpha Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $230,000, and recorded $1,295 amortization for this discount during the three months ended March 31, 2009.    Interest in the aggregate amount of $4,487 was accrued on this  note during the three months ended March 31, 2009.
    230,000       -
         
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $38,000 to Whalehaven Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $38,000, and recorded $214 amortization for this discount during the three months ended March 31, 2009.   Interest in the aggregate amount of $1,389   was accrued on this  note during the three months ended March 31, 2009.
    38,000       -
         
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Asher Brand, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $25,310, and recorded $143 amortization for this discount during the three months ended March 31, 2009.    Interest in the aggregate amount of $493   was accrued on this  note during the three months ended March 31, 2009.
    25,310       -
 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Momona Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $25,310, and recorded $143 amortization for this discount during the three months ended March 31, 2009.  Interest in the aggregate amount of $493   was accrued on this   note during the three months ended March 31, 2009.
   
25,310
     
-
 
                 
Convertible note payable for the settlement of the amount owed for the penalty for the late registration of shares  in the amount of $10,124 to Lane Ventures, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $10,124, and recorded $57 amortization for this discount during the three months ended March 31, 2009.   Interest in the aggregate amount of $198   was accrued on this  note during the three months ended March 31, 2009.
   
10,124
     
-
 
   
$
1,822,038
   
$
1,481,087
 
 
 
22

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
   
Note
   
Unamortized
   
Net of
 
March 31, 2009:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
938,495
   
$
-
   
$
938,495
 
Notes payable - related parties, current portion
   
345,500
     
(66,256
)
   
279,244
 
Notes payable
   
538,043
     
(525,955
)
   
12,088
 
Total
 
$
1,822,038
   
$
(592,211
)
 
$
1,229,827
 
 
   
Note
   
Unamortized
   
Net of
 
December 31, 2008:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
938,364
   
$
-
   
$
938,364
 
Notes payable - related parties, current portion
   
332,000
     
(70,998
   
261,002
 
Notes payable
   
210,723
     
(200,000
   
10,723
 
Total
 
$
1,481,087
   
$
(270,998
 
$
1,210,089
 
 
   
Three months ended
 
   
March 31,
 
   
2009
   
2008
 
Discount on Notes Payable amortized to interest expense:
 
$
15,632
   
$
15,197
 

Conversion Options Embedded in Convertible Notes

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ (“SFAS 1333”)  and EITF 00-19 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19.

At March 31, 2009 and December 31, 2008, the Company had outstanding  $1,811,744 and $1,465,000 in principal, respectively, of various convertible notes with embedded conversion options accounted for as free standing derivative financial instruments in accordance with SFAS 133 and EITF 00-19.   The fair value of these embedded conversion options was $1,141,244 and $1,150,000 at March 31, 2009 and December 31, 2008, respectively.  The fair value of these embedded conversion options were estimated at March 31, 2009 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.43%; expected dividend yield of 0%; expected option life  of 10; and volatility of 364.61%.  The fair value of these embedded conversion options were estimated at December 31, 2008 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.27%; expected dividend yield of 0%; expected option life  of 10; and volatility of 332.67%.  The expected term of 10 years was used for all notes in both periods because several of the notes are currently or have been in default, and accordingly the term of the note is deemed not relevant as a variable for the Black-Scholes calculation.  The Company revalues the conversion options at each reporting period, and charges any change in value to operations. During the three months ended March 31, 2009 and 2008, the Company recorded a gain of $345,600 and a loss of $669,741, respectively, due to the change in value of the conversion option liability.

When convertible notes payable are satisfied by payment or by conversion to equity, the Company revalues the related conversion option liability at the time of the payment or conversion.  The conversion option liability is then relieved by this amount, which is charged to additional paid-in capital.  During the three months ended March 31, 2009 and 2008, no conversion option was transferred from liability to equity due to the conversion or payment of the related convertible notes payable.

Discounts on notes payable

The Company calculates the fair value of any beneficial conversion features embedded in its convertible notes via the Black-Scholes valuation method. The Company also calculates the fair value of any detachable warrants offered with its convertible notes via the Black-Scholes valuation method.  The instruments are considered discounts to the notes, to the extent the aggregate value of the warrants and conversion features do not exceed the face value of the notes. These discounts are amortized to interest expense via the effective interest method over the term of the notes.  The fair value of these instruments is expensed as original issue discount to the extent that the value of these instruments exceeds the face value of the  notes.
 
23

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
Extension of notes payable

The Company accounts for modifications of its notes payable according to the guidance in EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”) and EITF 06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments” (“EITF 06-6”).  Pursuant to EITF 96-19, changes to an existing note should be accounted for as an extinguishment of the note with resultant gain or loss if the present value of the cash flows from the new note vary by  more than 10% from the present value of the cash flows from the original note.  EITF 06-6 provides an exception to this rule for the addition of conversion options accounted for as a derivative liability.

During the year ended December 31, 2007, the Company negotiated the extension of three of its notes payable in the aggregate amount of $160,000.  As consideration for the extension, the Company agreed to add a convertibility feature to the notes.  Because this note falls under the exception in EITF 06-6 regarding the addition of conversion options accounted for as a derivative liability, the Company accounted for this transaction as a modification of the existing note. The conversion option liability was valued at the amount of $127,450 at the date of the issuance of the extension via the Black-Scholes method. This amount was debited to discount on notes payable, and is being amortized via the effective interest method over the extended term of the related notes.

During the year ended December 31, 2008, the Company negotiated the further extension of these three notes payable in the aggregate amount of $160,000.  As consideration for the extension, the Company provided warrants to purchase an aggregate 43,200,000 shares of common stock.  The Company valued these warrants at the date of issuance via the Black-Scholes valuation method at $168,620.  The value of these warrants are considered a component of the 10% present value calculation under EITF 96-19. The Company accounted for this transaction as an extinguishment of debt, and recorded a loss on extinguishment in the amount of $168,620.  This amount was charged to operations during the year ended December 31, 2008.

Embedded conversion features of notes payable:

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 and EITF 00-19. SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes and preferred shares from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19.
 
The Company values embedded conversion features utilizing the Black-Scholes valuation model.  Conversion options are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our conversion option  valuation assumptions at March 31, 2009 and 2008:

   
March 31,
 
   
2009
   
2008
 
Number of options outstanding
   
350,748,800
     
220,800,000
 
Value at March 31
 
$
1,141,244
   
$
1,297,072
 
Number of options issued during the period
   
69,348,800
     
3,600,000
 
Value of options issued during the period
 
$
338,576
   
$
15,196
 
Number of options exercised or underlying
               
    notes paid during the period
   
-
     
-
 
Value of options exercised or underlying
               
    notes paid during the period
 
$
-
   
$
-
 
Revaluation gain (loss) during the period
 
$
(345,600
)
 
$
669,741
 
                 
Black-Scholes model variables:
               
Volatility
 
364.6
 
213.7
Dividends
   
-
     
-
 
Risk-free interest rates
   
0.43
%
   
1.51
%
Term (years)
   
10.00
     
10.00
 
 
24

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
9.  RELATED PARTY TRANSACTIONS

The Company engaged in the following transactions with related parties:

Three months ended March 31, 2009:

The Company issued three convertible notes payable in the amount of $4,500 each (a total of $130,500) for additional salary due to the Company’s Chief Executive Officer.

10. PENALTY FOR LATE REGISTRATION OF SHARES
 
During the twelve months ended December 31, 2008 and 2007, the Company accrued liabilities for the issuance of 0 and 22,760,000, respectively (the “Penalty Shares”), of the Company’s stock pursuant to a penalty calculation with regard to the late registration of shares underlying convertible notes payable.  At December 31, 2008 and 2007, there were a total of 110,280,000 Penalty Shares issuable.  The Company charged to operations $0 and $64,984 during the twelve months ended December 31, 2008 and 2007, respectively, representing the fair values of the Penalty Shares accrued.  During the  twelve  months ended December 31, 2008 and 2007, the Company  revalued  these 110,280,000 Penalty Shares.  This resulted in  losses of $ 220,564 and $3,296, respectively.  The liability carried on the Company’s balance sheets at December 31, 2008 and 2007 representing the value of the Penalty Shares is $551,400 and $330,840, respectively.

On January 1, 2009, the Company reached a settlement agreement (the “Registration Penalty Settlement” ) with the parties to whom the penalty for the late registration is owed.  The agreement was a cancellation of the liability for the registration of shares in exchange for convertible notes in the amount of $328,744.  At January 1, 2009, the Company valued the conversion option liability based upon the closing price of the Company’s common stock. This value was the same as the December 31, 2008 value of $551,400.  During the three months ended March 31, 2009, the Company recognized a gain on settlement of the conversion option liability in the amount of $222,656, representing the difference between the value of the conversion option of $551,400 and the notes payable issued  pursuant to the Registration Penalty Settlement of $328,744.

The registration rights which triggered the accrual of the penalty shares expired on November 27, 2008.  At December 31, 2008, the Company had accrued the maximum number of shares issuable under the registration rights agreement.

Except for the penalties disclosed above for not registering the shares of common stock underlying certain convertible notes, there are no circumstances that would require the Company to transfer any consideration to the note holders.

11. INCOME TAXES

Deferred income taxes result from the temporary differences arising from the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial statement purposes, and an accumulation of Net Operating Loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes. 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $3,690,000,  which will expire beginning in 2028.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through March 31, 2009, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at March 31, 2009.  The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized.   In the event of  significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.
 
 
25

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
The income tax provision (benefit) for the three months ended March 31, 2009 and  2008 consists of the following:

   
March 31, 2009
   
March 31, 2008
 
Current
           
Federal
  $ --     $ --  
State
    --       --  
      --       --  
                 
Deferred
               
Federal
    --       --  
State
    --       --  
      --       --  
                 
    $ --     $ --  


A reconciliation between the actual income tax expense and income taxes computed by applying the statutory Federal and state income tax rates to income from continuing operations before income taxes is as follows:

   
Three Months Ended March 31, 2009
   
Three Months Ended March 31, 2008
 
Computed “expected” income tax expense at approximately 34%
 
$
437,000
   
$
(661,000
)
                 
Increase (decrease) in NOL carryforwards
   
(437,000
   
661,000
 
 
 
 
26

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of March 31, 2009 and 2008 are as follows:

   
March 31, 2009
   
March 31, 2008
 
Deferred tax assets:
           
Net operating loss
 
$
1,477,000
   
$
2,100,000
 
Allowance and accruals not recognized for    income tax purposes
   
-
     
-
 
Total gross deferred tax assets
   
1,477,000
     
2,100,000
 
Less : Valuation allowance
   
(1,477,000
)
   
(2,100,000
)
Net deferred tax assets
 
$
0
   
$
0
 
                 
Deferred tax liabilities:
               
                 
Total gross deferred tax liabilities:
               
Depreciation and amortization, net
   
(5,000
)
   
(14,000
)
Deferred state tax liability
   
-
     
-
 
Total net deferred tax liabilities
 
$
(5,000
)
 
$
(14,000
)
 
These amounts have been presented in the consolidated balance sheets as follows:

   
March 31, 2009
   
March 31, 2008
 
Current deferred tax asset
 
$
-
   
$
-
 
Non current deferred tax asset
   
-
     
-
 
Non current deferred tax liability
   
-
     
-
 
Total net deferred tax asset
 
$
-
   
$
-
 
 

 
27

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)
12. EQUITY

Common Stock

During the three months ended March 31, 2009, the Company issued  5,000,000 shares of common stock to a consultant for services previously provided. The fair value of these shares of $10,000 was charged to operations during the year ended December 31, 2008.

Warrants
 
The following table summarizes the significant terms of warrants outstanding at March 31, 2009. These warrants may be settled in cash or via cashless conversion into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:

Range of
exercise
prices
   
Number of
warrants outstanding
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price of
outstanding
warrants
   
Number of
warrants exercisable
   
Weighted
average
exercise
price of
exercisable
warrants
$
0.0050
     
179,700,000
     
1.82
   
$
0.0050
     
179,700,000
   
$
0.0050
                                           
$
0.0110
     
18,500,000
     
2.49
   
$
0.0110
     
18,500,000
   
$
0.0110
                                           
$
0.0120
     
1,000,000
     
4.46
   
$
0.0120
     
-
   
$
-
                                           
$
0.0115
     
74,000,000
     
2.49
   
$
0.0115
     
74,000,000
   
$
0.0115
         
273,200,000
     
2.06
   
$
0.072 
     
272,200,000
   
$
0.071
 
 
28


 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

Transaction involving warrants are summarized as follows:

   
Number of
warrants
   
Weighted
Average
Exercise
Price
 
Warrants exercisable at December 31, 2008
    273,200,000     $ 0.008  
                 
Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Warrants outstanding at March 31, 2009
    273,200,000     $ 0.007  
                 
Exercisable
    272,200,000     $ 0.007  
Not exercisable
    1,000,000     $ 0.012  

Options

In December 2006, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors, pursuant to a board resolution for services performed in 2006 (a total of 15,000,000 options). These options have no alternative settlement provisions. The options were issued in April 2007. Compensation cost was recognized via the straight-line attribution method.
 
In January 2008, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors and the Company’s President pursuant to a board resolution for services performed (a total of 20,000,000 options). The options were issued in January 2008.  Compensation cost was recognized via the straight-line attribution method as expensed to operations during the year ended December 31, 2008.
 
 
29

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
(Unaudited)

The following table summarizes the changes outstanding and the related prices for the options to purchase shares of the Company’s common stock issued by  the Company: 
 
                 
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
 
$ 0.005       15,000,000       2.64     $ 0.005       15,000,000     $ 0.005  
                                             
$ 0.007       20,000,000       4.00     $ 0.007       20,000,000     $ 0.007  
                                             
$ 0.500       500,000       0.13     $ 0.500       400,000     $ 0.500  
                                             
          35,500,000       3.37     $ 0.009       35,400,000     $ 0.008  
 
Options not vested are not exercisable.
 
Transactions involving stock options  are summarized as follows:
 
         
Weighted
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Options outstanding  at December 31, 2008
    35,500,000     $ 0.013  
                 
 Granted
    -       -  
Exercised
    -       -  
Cancelled / Expired
    -       -  
                 
Options outstanding at March 31, 2009
    35,500,000     $ 0.013  
Non-vested at March 31, 2009
    100,000     $ 0.500  
Vested at March 31, 2009
    35,400,000     $ 0.012