innovativefood10q093010.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 September 30, 2010

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:  216,385,103 Common Shares outstanding at November 3, 2010.

 
 

 
INNOVATIVE FOOD HOLDINGS, INC.
TABLE OF CONTENTS TO FORM 10-Q

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
 
5-6
 
7 to 41
Item 2.
42
Item 4.
51
     
PART II.
OTHER INFORMATION
 
     
Item 1.
53
Item 2.
53
Item 3.
53
Item 4.
53
Item 5.
53
Item 6.
53
 
54
 
 
 

 
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(Unaudited)
       
Current assets
           
             
    Cash and cash equivalents
 
$
378,480
   
$
144,765
 
    Accounts receivable, net
   
340,646
     
339,206
 
    Loan receivable, net
   
138,050
     
143,050
 
    Inventory
   
36,095
     
19,075
 
    Other current assets
   
10,188
     
6,120
 
                 
      Total current assets
   
903,459
     
652,216
 
                 
Property and equipment, net
   
21,102
     
33,698
 
                 
  Total assets
 
$
924,561
   
$
685,914
 
                 
LIABILITIES AND  STOCKHOLDERS' DEFICIENCY
               
                 
Current liabilities
               
                 
     Accounts payable and accrued liabilities
 
$
822,195
   
$
695,361
 
     Accrued liabilities - related parties
   
169,844
     
160,845
 
     Accrued interest, net
   
613,576
     
576,933
 
     Accrued interest - related parties, net
   
190,822
     
170,144
 
     Notes payable, net of discount
   
916,544
     
918,907
 
     Notes payable - related parties
   
345,500
     
345,500
 
     Warrant liability
   
1,462,678
     
631,853
 
     Options liability
   
352,030
     
144,627
 
     Conversion option liability
   
2,442,844
     
1,384,992
 
          Total current liabilities
   
7,316,033
     
5,029,162
 
                 
   Note payable - long term portion
   
-
     
27,718
 
     Total liabilities
   
7,316,033
     
5,056,880
 
                 
 Stockholders’ deficiency
               
   Common stock, $0.0001 par value; 500,000,000 shares authorized;
               
     216,385,103 shares issued and 202,385,103 shares outstanding at
               
      September 30, 2010; 194,638,638 shares issued and 184,638,638
               
      shares outstanding at December 31, 2009
   
21,639
     
19,464
 
   Additional paid-in capital
   
2,516,418
     
2,197,413
 
   Accumulated deficit
   
(8,929,529
)
   
(6,587,843
)
      Total  stockholders’ deficiency
   
(6,391,472
)
   
(4,370,966
)
                 
  Total liabilities and stockholders’ deficiency
 
$
924,561
   
$
685,914
 
 See notes to the consolidated financial statements.
 
 
3

 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(UNAUDITED)
 
   
For the Three
   
For the Three
   
For the Nine
   
For the Nine
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
                         
Revenue
 
$
2,361,192
   
$
1,891,316
   
$
6,958,099
   
$
5,259,914
 
                                 
Cost of goods sold
   
1,867,714
     
1,451,934
     
5,452,502
     
4,024,294
 
Gross profit     
493,478
     
439,382
     
1,505,597
     
1,235,620
 
                                 
Selling, general and administrative expenses
   
459,843
     
275,887
     
1,553,481
     
1,070,052
 
      Total operating expenses
   
459,843
     
275,887
     
1,553,481
     
1,070,052
 
                                 
Operating profit (loss)
   
33,432
     
163,495
     
(48,087
)
   
165,568
 
                                 
Other (income) expense:
                               
   Interest expense, net
   
104,374
     
99,462
     
276,271
     
289,227
 
   Gain on extinguishment of debt
   
-
     
-
     
-
     
(222,656
)
   Fair value of warrants issued in excess of discount on notes
   
-
     
-
     
948,040
     
-
 
   Gain from change in fair value of warrant liability
   
(274,879
   
(777,595
   
(117,215
   
(523,312
   Loss (gain) from change in fair value of conversion option liability
   
(140,630
   
(732,928
   
1,186,706
     
(221,028
      Total other (income) expense
   
(311,135
   
(1,411,061
   
2,293,802
     
(677,769
                                 
 Income (loss) before income taxes
   
344,770
     
1,574,556
     
(2,341,686
)
   
843,337
 
                                 
  Income tax expense
   
-
     
-
     
-
     
-
 
                                 
Net income ( loss)
 
$
344,770
   
$
1,574,556
   
$
(2,341,686
)
 
$
843,337
 
                                 
Net income (loss) per share – basic
 
$
0.002
   
$
0.008
   
$
(0.012
)
 
$
0.004
 
                                 
Net income (loss) per share – diluted
 
$
0.000
   
$
0.001
   
$
(0.012
)
 
$
0.001
 
                                 
Weighted average shares outstanding – basic
   
199,615,538
     
194,638,638
     
194,750,711
     
189,817,233
 
                                 
Weighted average shares outstanding – diluted
   
706,607,190
     
684,679,238
     
194,750,711
     
679,857,833
 

See notes to the consolidated financial statements.

 
4

 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED)
 
   
For the Nine
   
For the Nine
 
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
   Net income (loss)
 
$
(2,341,686
)
 
$
843,337
 
  Adjustments to reconcile net income (loss) to net
               
  cash provided by (used in) operating activities:
               
   Depreciation and amortization
   
20,674
     
24,632
 
   Gain on extinguishment of debt
   
-
     
(222,656
)
   Fair value of common stock issued to consultants
   
6,000
     
11,200
 
   Fair value of extension in term of warrants issued to noteholders
   
948,040
     
-
 
   Fair value of stock options vested by officers and directors
   
125,862
     
-
 
   Amortization of discount on notes payable
   
66,247
     
62,100
 
   Amortization of discount on accrued interest
   
95,707
     
97,093
 
   Allowance for bad debt
   
22,165
     
-
 
   Change in fair value of warrant liability
   
(117,215
   
(523,312
   Change in fair value of option liability
   
81,541
     
(49,268
   Change in fair value of conversion option liability
   
1,186,706
     
(221,028
  Changes in assets and liabilities:
               
        Accounts receivable
   
(23,605
)
   
(29,480
        Inventory and other current assets, net
   
(21,088
)
   
(39,965
        Accrued liability and accrued interest - related party, net
   
33,777
     
49,220
 
        Accounts payable and accrued interest
   
214,044
     
(2,879
)
   Net cash provided by (used in) operating activities
   
297,169
     
(1,006
)
                 
Cash flows from investing activities:
               
   Principal payments received on loan
   
5,000
     
3,950
 
   Acquisition of property and equipment
   
(8,078
)
   
(7,540
)
   Net cash used in investing activities
   
(3,078
)
   
(3,590
)
                 
Cash flows from financing activities:
               
    Principal payments on debt
   
(60,376
)
   
(11,976
)
   Net cash used in financing activities
   
(60,376
)
   
(11,976
)
                 
Net increase (decrease) in cash and cash equivalents
   
233,715
     
(16,572
)
                 
Cash and cash equivalents at beginning of period
   
144,765
     
160,545
 
                 
Cash and cash equivalents at end of period
 
$
378,480
   
$
143,973
 
 
See notes to the consolidated financial statements.
 
 
5

 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(UNAUDITED) (continued)

Supplemental disclosure of cash flow information:
           
             
Cash paid during the period for:
           
Interest
 
$
675
   
$
-
 
                 
Taxes
 
$
-
   
$
-
 
                 
Revaluation of conversion option liability
 
$
1,189,706
   
$
(221,028
                 
Revaluation of warrant liability
 
$
(117,215
 
$
(523,312
                 
Revaluation of option liability
 
$
81,541
   
$
(49,268
                 
Common stock issued for consulting contract
 
$
6,000
   
$
16,250
 
                 
Extension of the term of warrants held by note holders
 
$
948,040
   
$
-
 
                 
Conversion of notes payable and accrued interest to common stock
 
$
84,982
   
$
21,058
 
                 
Common stock issued in error, to be cancelled
 
$
400
   
$
-
 
                 
Common stock issued to employees
 
$
-
   
$
1,200
 
See notes to the consolidated financial statements.
 
 
6

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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”), Gourmet Foodservice Group, Inc. (“GFG”),  and 4 The Gourmet, Inc (d/b/a For 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  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  of IVFH for 25,000,000 shares  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  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  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
 
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. We currently sell approximately 90% 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.
 
For The Gourmet, through its website, and through additional sales channels, provides the highest quality gourmet food products to the retail consumer market under the For The Gourmet line at and to the professional chef market under the For The Gourmet Pro line.
 
 
7

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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, 2009. 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 and nine months ended September 30, 2010 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 FII, FNM, GFG and For The Gourmet. All material intercompany transactions have been eliminated upon consolidation of these entities.
 
Revenue Recognition
 
The Company recognizes revenue upon product delivery.  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 delivered.  Shipping charges to customers  are included in revenues.
 
 
8


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standard Codification “ASC” 605-15-05, which superseded SAB No. 101, Revenue Recognition. ASC 605-15-05 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. FASB ASC 605-15-05 incorporates ASC 605-25-05 “Multiple-Deliverable Revenue Arrangements”. ASC 605-25-05 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 ASC 605-25-05 on the Company's consolidated financial position and results of operations was not significant.
 
This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.  ASC 605-25-05 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 ASC 605-25-05  and ASC 605-45-05.

Cost of Goods Sold
 
We have included in cost of goods 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. Also included are non cash costs associated with  stock and options expense and option valuation expense.
 
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 $22,165 and $3,574 at September 30, 2010 and December 31, 2009, respectively.
 
 
9


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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 material amount of inventory. However, any such inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.

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.
 
 
10


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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 September 30, 2010, 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

FASB ASC 220-10-15, “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, ASC 220-10-15 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 other comprehensive income in any of the periods presented.

Advertising

The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred advertising costs in the amount of $8,727 and $991 for the three months ended September 30, 2010 and 2009, respectively. The Company incurred advertising costs in the amount of $18,293 and $9,116 for the nine months ended September 30, 2010 and 2009, respectively.
 
Basic and Diluted Income (Loss) Per Share

In accordance with FASB ASC 260-10-45, "Earnings Per Share," the basic income (loss) per common share is computed by dividing net income (loss) 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.
 
Diluted loss per share was not separately computed for the  nine months ended September 30, 2010 as the effect would be to reduce loss per share.
 
 
11


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Diluted earnings per shares was computed as follows for the three months ended September 30, 2010:

   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share
 
$
344,770
     
199,615,538
   
$
0.002
 
                         
Effect of  Dilutive Securities:
                       
                         
Conversion of notes and interest to common stock:
                       
   Additional shares reserved for assured conversion
           
503,991,652
         
   Decrease in interest expense due to assured conversion
   
104,171
                 
   Remove gain on revaluation of conversion option liability
   
(360,888
)
               
                         
Shares accrued, not yet issued
   
-
     
3,000,000
         
                         
                         
Diluted earnings per share
 
$
88,053
     
706,607,190
   
$
0.000
 

Anti-dilutive shares for the three months ended September 30, 2010:

The following warrants  were not included in fully diluted earning per share because the exercise prices of the warrants were greater than the average market price of the Company’s common stock:
 
18,500,000 shares at an exercise price of $0.011 per share; 74,000,000 shares at an exercise price of $0.0115 per share; and 1,000,000 shares at an exercise price of $0.012 per share.

The following options  were not included in fully diluted earning per share because the exercise prices of the options were greater than the average market price of the Company’s common stock:

20,000,000 shares at $0.007 per share; 6,625,000 shares at $0.008 per share; 6,625,000 shares at $0.009 per share; and 6,625,000 shares at $0.010.

 
12


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Diluted earnings per shares was computed as follows for the three months ended September 30, 2009:

   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share
 
$
1,574,556
     
194,638,638
   
$
0.008
 
                         
Effect of  Dilutive Securities:
                       
                         
Conversion of notes and interest to common stock:
                       
   Additional shares reserved for assured conversion
           
487,040,600
         
   Decrease in interest expense due to assured conversion
   
99,462
                 
   Remove gain on revaluation of conversion option liability
   
(732,928
)
               
                         
Shares accrued, not yet issued
   
-
     
3,000,000
         
                         
                         
                         
Diluted earnings per share
 
$
941,090
     
684,679,238
   
$
0.001
 

Anti-dilutive shares for the three months ended September 30, 2009:
 
The following warrants  were not included in fully diluted earning 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; 74,000,000 shares at an exercise price of $0.0115 per share; and 1,000,000 shares at an exercise price of $0.012 per share.

The following options  were not included in fully diluted earning 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 and 20,000,000 shares at $0.007 per share.

 
13


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
Diluted earnings per shares was computed as follows for the nine months ended September 30, 2009:

   
Income
   
Shares
   
Per-Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic earnings per share
 
$
843,337
     
189,817,233
   
$
0.004
 
                         
Effect of  Dilutive Securities:
                       
                         
Conversion of notes and interest to common stock:
                       
   Additional shares reserved interest for conversion
           
487,040,600
         
   Decrease in interest expense due to assured conversion
   
289,227
                 
   Remove gain on revaluation of conversion option liability
   
(221,028
)
               
                         
Shares accrued, not yet issued
   
-
     
3,000,000
         
                         
                         
                         
Diluted earnings per share
 
$
911,536
     
679,857,833
   
$
0.001
 
 
Anti-dilutive shares for the nine months ended September 30, 2009:

The following warrants and options were not included in fully diluted earnings per share because the effect would have been anti-dilutive:

Warrants:
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; 74,000,000 shares at an exercise price of $0.0115 per share; and 1,000,000 shares at an exercise price of $0.012 per share.

Options:
15,000,000 shares at an exercise price of $0.005 per share; and 22,000,000 shares at an exercise price of $0.007 per share.
 
Liquidity
 
As reflected in the accompanying consolidated financial statements, the Company had net income of $344,770 and $1,574,556 for the three months ended September 30, 2010 and 2009, respectively, and a net loss of $2,341,686 and net income of $843,337 for the nine months ended September 30, 2010 and 2009, respectively.  This  variance was principally due to non-cash adjustments made concerning the changes in the amount of liabilities related to the values of warrants, stock options, and conversion options rather than to differences in actual operating results. The Company had an accumulated deficit of $8,929,529  at September 30, 2010.  In addition, the Company’s current liabilities exceeded its current assets by  $6,412,574 as of September 30, 2010. Consequently, its operations are subject to all risks inherent in the operation of or insolvent business enterprise.
 
 
14

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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.  If the Company cannot generate sufficient positive cash flow from operations and /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 for operations through the next twelve months. The Company also intends to increase market share and cash flow from operations by focusing its sales activities although not to repay outstanding debt 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 9 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, 2009 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 FDIC insurance limit currently $250,000. At September 30, 2010 and 2009, trade receivables from the Company’s largest customer amounted to 97% and 93%, respectively, of total trade receivables.  During the nine months ended September 30, 2010 and 2009 over 96% of our revenues came from one customer.
  
Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10, Share-Based Payment. 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.
 
 
15


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 

 
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 ASC 780-10 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 and nine months ended September 30, 2010 and 2009 are summarized in the table below:
 
   
For the Three Months
   
For the Nine Months
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Option expense
 
$
46,420
   
$
-
   
$
125,862
   
$
-
 
                                 
Loss (gain) on revaluation of options
 
$
(42,817)
   
$
(84,314)
   
$
81,541
   
$
(49,267)
 

Options outstanding as of December 31, 2009, and changes during the nine months ended September 30, 2010 are presented below:

   
Number of
   
Weighted Average
 
   
Shares
   
 Exercise Price
 
Options outstanding at December 31, 2009
   
53,000,000
   
$
(a)
 
Granted
   
10,500,000
     
(b)
 
Exercised
   
-
     
-
 
Cancelled/Expired
   
-
     
-
 
                 
Options outstanding at September 30, 2010
   
63,500,000
   
$
(c)
 
Non-vested
   
6,625,000
     
(d)
 
Vested
   
56,875,000
   
$
   0.007
 
 
(a) Consists of options to purchase 15,000,000 shares at a price of $0.005 per share; 22,000,000 shares at a price of $0.007 per share; and unvested options to purchase 16,000,000 shares at a price of 120% of the closing market price on the date of vesting.

(b) Consists of options to purchase 2,625,000 shares at a price of $0.076 per share; 2,625,000 shares as a price of $0.095 per share; and unvested options to purchase 5,250,000 shares at a price of 120% of the closing market price on the date of vesting.

(c) Consists of options to purchase 50,250,000 shares at a price of $0.007 per share, plus the shares described in note (d) below.

(d) Consists of unvested options to purchase 6,625,000 shares at a price of 120% of the closing market price on the date of vesting.
 
 
16


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Aggregate intrinsic value of options outstanding and options exercisable at September 30, 2010 was $46,263. Aggregate intrinsic value represents the difference between the company's closing stock price on the last trading day of the fiscal period, which was $0.0075 at September 30, 2010, and the exercise price multiplied by the number of options outstanding. The total fair value of options vested was $46,420 and $125,862 for the three and nine month periods ended September 30, 2010, respectively.  As of September 30, 2010, options to purchase 6,625,000 shares of common stock are unvested. The exercise price of these options will be 120% of the Company’s stock price on the date of vesting.  These shares would be valued at a total of $59,625 based upon the Company’s stock price at September 30, 2010.
 
Going Concern
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has reported net income of $344,770  and a net loss of $2,341,686  for the three and nine months ended September 30, 2010, respectively, and  had an accumulated deficit of  $8,929,529 as of September 30, 2010.  The Company’s net loss for the nine months ended September 30, 2010 of  $2,341,686 was generated primarily by non-cash transactions, including non-cash expenses of $1,186,706 for the revaluation of the conversion option liability, and $948,040  for the value of the discount on the convertible notes payable in excess of the fair value of the convertible notes payable. The Company cannot be certain that anticipated revenues from operations will be sufficient to satisfy its ongoing capital requirements.  Management believes the Company will generate sufficient capital from operations and from debt and equity financing in order to satisfy current liabilities in the succeeding twelve months.  Management’s belief is based on the Company’s operating plan, which in turn is based on assumptions that may prove to be incorrect.  If the Company’s financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern.  The Company cannot predict whether this additional financing will be in the form of equity or debt, or in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.  In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The Company has not made any adjustments to the financial statements which would be necessary should the Company not be able to continue as a going concern.

Significant Recent Accounting Pronouncements
 
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

3. ACCOUNTS RECEIVABLE
 
At September 30, 2010 and December 31, 2009, accounts receivable consists of:
 
   
September 30, 2010
   
December 31, 2009
 
Accounts receivable from customers
 
$
362,811
   
$
342,780
 
Allowance for doubtful accounts
   
(22,165
)
   
(3,574
)
Accounts receivable, net
 
$
340,646
   
$
339,206
 
 
 
17

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

4.  LOAN RECEIVABLE

The balance of loan receivable consisted of a loan to Pasta Italiana, Inc. (“Pasta”) in the net carrying amount of $138,050 at September 30, 2010 and $143,050 at December 31, 2009, which are classified as current asset in both periods, respectively.  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. During the three and nine months ended September 30, 2010, the Company received payments in the amount of $2,500 and $5,000 on this note.
 
5. INVENTORY

Inventory consists of molecular gastronomy products, honey, and meat glue which is warehoused in Naples, Florida; and prepaid Kobe products held by our meat vendors.

6. PROPERTY AND EQUIPMENT

A summary of property and equipment at September 30, 2010 and December 31, 2009, is as follows:

   
September 30, 2010
   
December 31, 2009
 
Computer equipment
 
$
314,173
   
$
305,794
 
Furniture and fixtures
   
67,298
     
67,298
 
     
381,471
     
373,092
 
Less accumulated depreciation and amortization
   
(360,369
   
(339,394
Total
 
$
21,102
   
$
33,698
 

Depreciation and amortization expense amounted to $4,970 and $7,305, respectively, for the three months ended September 30, 2010 and 2009. Depreciation and amortization expense amounted to $20,674 and $24,631, respectively, for the nine months ended September 30, 2010 and 2009.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at September 30, 2010 and December 31, 2009 are as follows:
 
   
September 30, 2010
   
December 31, 2009
 
Trade payables
 
$
802,222
   
$
689,075
 
Accrued payroll and commissions
   
19,973
     
6,286
 
Total accounts payable and accrued liabilities  - non-related parties
 
$
822,195
   
$
695,361
 
 
At September 30, 2010 and December 31, 2009, accrued liabilities to related parties in the amount of $169,845 and $160,845, respectively, consisted of accrued payroll and payroll related benefits.
 
 
18

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

8. 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 September 30, 2010 and 2009, the amounts of $33,492, and $35,252, 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 September 30, 2010 and 2009 was $33,482 and $26,998, respectively.
 
During the nine months ended September 30, 2010 and 2009, the amounts of $101,344, and $105,170, 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 nine months ended September 30, 2010 and 2009 was $95,707 and $97,125, respectively.

At September 30, 2010 and December 31, 2009, the Company has the following accrued interest on its balance sheet:

September 30, 2010:
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
655,350
   
(41,774
 
$
613,576
 
Related parties
   
190,822
     
-
     
190,822
 
Total
 
$
846,172
   
$
(41,774
 
$
804,398
 

December 31, 2009:
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
611,416
   
(34,483
 
$
576,933
 
Related parties
   
170,144
     
-
     
170,144
 
Total
 
$
781,560
   
$
(34,483
 
$
747,077
 

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 September 30, 2010, convertible accrued interest was $809,180 which is convertible into 158,105,360 shares of common stock; at December 31, 2009, convertible accrued interest was $749,055 which was convertible into 146,559,160 shares of common stock.

 
19

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
9. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

   
September 30, 2010
   
December 31, 2009
 
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. During the three months ended June 30, 2009, the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $6,956 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $20,641 and $26,596 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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 past due at December 31, 2008. This note was previously extended until January 1, 2010. During the three months ended June 30, 1010, the noteholder has agreed to further extend the maturity date of this note until April 15, 2011.
 
$
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 $504 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,495 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively. During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. This note is past due at September 30, 2010  and December 31, 2009.
   
25,000
     
25,000
 
 
 
20

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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.  On December 21, 2006, this note was transferred to Whalehaven Capital Fund, Ltd. (“Whalehaven”).  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 $766 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $2,273 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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. During the year ended December 31, 2009, the noteholder agreed to extend the maturity date to February 15, 2010.  During the three months ended June 30, 1010, the noteholder has agreed to extend the maturity date of this note until April 15, 2011.
   
38,000 
     
38,000 
 
                 
Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, 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 $1,614 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $4,789 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.   This note is past due at September 30, 2010  and December 31, 2009.
   
80,000
     
80,000
 
 
Convertible note payable in the amount of $50,000 to Whalehaven 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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $807 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $2,394 and $3,085 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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 past due at December 31, 2008. During the year ended December 31, 2009, the noteholder agreed to extend the maturity date to February 15, 2010. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date to April 15, 2011.
   
40,000
     
40,000
 
                 
 
 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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 $1,009 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of  $2,994 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.   This note is past due at September 30, 2010 and December 31, 2009.
    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 $404 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,199 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock. This note is past due at September 30, 2010 and December 31, 2009.
    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 $504 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,495 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
    25,000       25,000  
 
 
22

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

   
September 30, 2010
   
December 31, 2009
 
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 $377 was accrued on this note during the three months ended September  30, 2010 and 2009, respectively. Interest in the amount of $1,119 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
   
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 $202 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $599 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
   
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 $202 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $599 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
   
10,000
     
10,000
 
 
 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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 $202 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $599 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
    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 $202 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $599 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
    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 $161 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $478 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.   This note is past due at September 30, 2010 and December 31, 2009.
   
8,000
     
8,000
 
 
 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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 $101 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $300 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010 and December 31, 2009.
    5,000       5,000  
                 
Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note is in technical default as of November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $2,016 and $2,419 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $6,320 and $9,251 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  During the three months ended March 31, 2010, the noteholder converted principal in the amount of $20,000 into  common stock.  During the twelve months ended December 31, 2009, the  noteholder  agreed to extend the maturity date of this note until January 1, 2010.  In April 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010. This note is past due at September 30, 2010.
    100,000       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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $576 and $605 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,766 and $2,312 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  During the three months ended September 30, 2010, the Company issued 4,400,000 shares of common stock for the conversion of $19,047 of accrued interest and $2,953 of principal.  During the year ended December 31, 2009, the noteholder agreed to extend the maturity date until February 15, 2010. In April, 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010. This note was past due at September 30, 2010.
    27,047       30,000  

 
25


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

   
September 30, 2010
   
December 31, 2009
 
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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $303 and $362 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $949 and $1,496 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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. During the twelve  months ended December 31, 2009, the holder converted $2,000 of principal and $1,058 of accrued interest into common stock.  During the three months ended March 31, 2010, the holder converted $3,000 of principal and $1,043 of accrued interest into common stock. The noteholder has agreed to extend the maturity date of this note until January 1, 2010.   During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
15,000
     
18,000
 
                 
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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $213 and $362 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $810 and $1,385 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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.  During the three months ended March 31, 2010, the holder of the note converted $5,000 of principal into common stock. During the three months ended September 30, 2010, the Company issued 1,000,000 shares of common stock for the conversion of $5,000 of principal.  In April 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010.  During the three  months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
8,000
     
18,000
 
 
 
26

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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. During the three months ended June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $121 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $359 and $461 was accrued on this note during the nine months ended September 30, 2010 and 2009, 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. In April 2009, the noteholder has agreed to extend the maturity date of this note until January 1, 2010. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
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 June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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. In January 2009, the Company extended this note to April 16, 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; 6,000,000 shares 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 $4,537 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $13,463 and $15,211 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  In April 2009, the noteholder agreed to extend this note to April 1, 2009.  During the three  months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
120,000
     
120,000
 
 
 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
September 30, 2010
   
December 31, 2009
 
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 January 2009, the Company extended this note to April 16, 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 $1,134 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $3,390 and $3,736 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively. In April 2009, the noteholder agreed to extend this note to February 15, 2010. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
    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-Scholes 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. During the three and nine months ended September 30, 2009, $18,937 and $33,157 was amortized to interest expense, respectively. Interest in the amount of $1,513 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $4,489 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.  This note is past due at September 30, 2010.
    75,000       75,000  
 
 
28


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

   
September 30, 2010
   
December 31, 2009
 
Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note 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 June 30, 2009, the Company negotiated the default interest rate and the noteholder agreed to the application of the original interest rate, instead of the default rate beginning on April 1, 2009. 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 $377 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,119 and $1,243 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively. During the three months ended June 30, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
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 amount of $2,632 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $7,810 and $7,638 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.
   
130,500
     
130,500
 
                 
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. Principal and interest in the amounts of $1,672 and $5,017 were paid on this note during the three and nine months ended September 30, 2010 and 2009, respectively.
   
6,347
     
10,723
 
                 
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, 2011. 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 $5,591 and $10,943 amortization for this discount during the three and nine months ended September 30, 2010. Interest in the amount of $2,905 and $4,033 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $9,937 and $11,967 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively. During the twelve months ended December 31, 2009,  the Company made an $8,000 payment on the principle of this note. During the nine months ended September 30, 2010, the Company made $56,000 in principal payments on this note.
   
128,000
     
184,000
 
 
 
29


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

   
September 30, 2010
   
December 31, 2009
 
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 $18,882 and $38,692 amortization for this discount during the three and nine months ended September 30, 2009, respectively. Interest in the amount of $4,638 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $13,763 and $13,712 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.
   
230,000
     
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 $3,120 and $6,393 amortization for this discount during the three and nine months ended September 30, 2010.  Interest in the amount of $1,436 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $4,261 and $4,245 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.
   
38,000
     
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 $2,078 and $4,258 of amortization for this discount during the three and nine  months ended September 30, 2010. Interest in the amount of $510 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,513 and $1,507 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.
   
25,310
     
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 $2,078 and $4,258 of amortization for this discount during the three and nine months ended September 30, 2010. Interest in the amount of $510 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $1,513 and $1,507 was accrued on this note during the nine months ended September 30, 2010 and 2009, respectively.
   
25,310
     
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 $831 and $1,703 amortization for this discount during the three and nine months ended September 30, 2010, respectively. Interest in the amount of $205 was accrued on this note during the three months ended September 30, 2010 and 2009, respectively. Interest in the amount of $608 and $606 was accrued on this note during the nine months ended September, 2010 and 2009, respectively.
   
10,124
     
10,124
 
   
$
1,685,638
   
$
1,781,967
 
 
 
30

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
   
Note
   
Unamortized
   
Net of
 
September 30, 2010:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
1,340,138
   
$
(423,594)
   
$
916,544
 
Notes payable - related parties, current portion
   
345,500
     
-
     
345,500
 
Total
 
$
1,685,638
   
$
(423,594
)
 
$
1,262,044
 
 
   
Note
   
Unamortized
   
Net of
 
December 31, 2009:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
1,014,907
   
$
(96,000
 
$
918,907
 
Notes payable - related parties, current portion
   
345,500
     
-
     
345,500
 
Notes payable - maturity in the year 2011
   
421,560
     
(393,842
   
27,718
 
Total
 
$
1,781,967
   
$
(489,841
 
$
1,292,126
 
 
   
For the Three Months
   
For the Nine Months
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Discount on Notes Payable amortized to interest expense:
 
$
32,580
   
$
24,721
   
$
66,247
   
$
62,100
 

Conversion Options Embedded in Convertible Notes

The Company accounts for conversion options embedded in convertible notes in accordance with FASB ASC 815-10-05 ‘‘Accounting for Derivative Instruments and Hedging Activities’’ and FASB ASC 815-40-05 ‘‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. ASC 815-10-05 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 ASC 815-40-05.
 
 
31


 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

At September 30, 2010 and December 31, 2009, the Company had outstanding $1,679,291  and $1,771,244 in principal, respectively, of various convertible notes with embedded conversion options accounted for as free standing derivative financial instruments in accordance with ASC 815-10-05 and ASC 815-40-05 .  The fair value of these embedded conversion options was $2,442,844 and $1,384,992 at September 30, 2010 and December 31, 2009, respectively.  The fair value of these embedded conversion options were estimated at September 30, 2010 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.20%; expected dividend yield of 0%; expected option life  of 10; and volatility of 168%.  The fair value of these embedded conversion options were estimated at December 31, 2009 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.20%; expected dividend yield of 0%; expected option life  of 10; and volatility of 302.87%.  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 September 30, 2010 and 2009, the Company recorded a gain of $140,630 and $732,928, respectively, due to the change in value of the conversion option liability.  During the nine months ended September 30, 2010 and 2009, the Company recorded a loss of $1,186,706 and a gain of $221,028, respectively, due to the change in value of the conversion option liability.  If all convertible options were converted, 327,858,200 additional shares would be issuable.
  
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 September 30, 2010 and 2009, a conversion option in the amount of $51,028 and $5,760, respectively, was transferred from liability to equity due to the conversion or payment of the related convertible notes payable. During the nine months ended September 30, 2010 and 2009, a conversion option in the amount of $128,854 and $13,560, respectively, 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.
 
 
32


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Extension of notes payable

The Company accounts for modifications of its notes payable according to the guidance in FASB ASC 470-50-40, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and FASB ASC 470-50-40 Pursuant to ASC 470-50-40, 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.  ASC 470-50-40 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 ASC 470-50-40 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 new 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 ASC 470-50-40. 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.

During the year ended December 31, 2009, the Company negotiated further extensions of its notes payable in the aggregate amount of $587,000.  The Company extended the maturity dates to January 1, 2010.These notes, along with two additional notes payable in the aggregate amount of $150,000, contained certain provisions for a default interest rate.  The Company negotiated an agreement with the noteholders and the noteholders have agreed to the original interest rate of 8% per annum.

Also during the year ended December 31, 2009, the Company negotiated the extension of its notes payable in the aggregate amount of $138,000.  The Company extended the maturity date of these notes until February 15, 2010. During the six months ended June 30, 2010, as described below, the Company negotiated the extension of these notes payable, and the maturity dates of these notes are June 15, 2010 and April 15, 2011.

During the three months ended June 30, 2010, the Company negotiated the extension of nine of its notes payable in the aggregate amount of $617,000 to April 15, 2011.  The Company also negotiated the extension of two its notes payable in the aggregate amount of $130,000 until June 15, 2010.
 
 
33

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

Embedded conversion features of notes payable:
 
The Company accounts for conversion options embedded in convertible notes in accordance with FASB ASC 815-10-05.  ASC 815-10-05 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 ASC 815-40-05. 
 
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 operations other (income) expense during the period.  The following table illustrates certain key information regarding our conversion option  valuation assumptions for the nine months ended September 30, 2010 and 2009:
 
   
September 30,
 
   
2010
   
2009
 
Number of options outstanding
   
327,858,200
     
349,448,800
 
Value at September 30,
 
$
2,442,844
   
$
1,252,256
 
Number of options issued during the period
   
-
     
-
 
Value of options issued during the period
 
$
-
   
$
-
 
Number of options exercised or underlying
               
    notes paid during the period
   
18,390,600
     
5,600,000
 
Value of options exercised or underlying
               
    notes paid during the period
 
$
128,854
   
$
13,560
 
Revaluation (loss) during the period
 
$
1,186,706
   
$
(221,028
                 
Black-Scholes model variables:
               
Volatility
 
167.99 – 266.73
 
364.6-390.59
Dividends
   
-
     
-
 
Risk-free interest rates
   
0.20
%
   
0.18-0.43
%
Term (years)
   
10
     
10
 
 
 
34

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
10. INCOME TAXES
 
No provision for Federal and State income taxes was required for the periods ended September 30, 2010 and 2009, due to the Company’s operating losses and increased deferred tax asset valuation allowance.  As of September 30, 2010 and 2009, the Company has unused net operating loss carry-forwards of approximately $2,700,000 and $6,700,000 which expire at various dates throughout 2030.  Some of this amount may be subject to annual limitations under certain provisions of the Internal Revenue Cods related to “changes in ownership”.

As of September 30, 2010 and 2009, the deferred tax assets related to the afore mentioned carry-forwards have been fully offset by valuation allowances, since significant utilization of such amounts is not presently expected in the foreseeable future.

Deferred tax assets and valuation allowances consist of:
 
   
Nine Months Ended September 30, 2010
   
Nine Months Ended
September 30, 2009
 
Net operating loss carry-forwards
 
$
(918,000
 
$
(1,471,000
                 
Valuation allowance
   
918,000
     
1,471,000
 
                 
Net deferred tax assets
 
 $
-
   
-
 
 
11. EQUITY

Common Stock

During the three  months ended March 31,  2010, the Company issued 750,000 shares of common stock to a consultant for services.  The fair value of these shares in the amount of $6,000 was charged to operations during the nine months ended September 30, 2010.
 
During the three months ended March 31, 2010, the Company issued 4,000,000 shares in error due to an error by the transfer agent which resulted in duplication of shares of common stock issued to a note holder for conversion.  The Company will return these shares for cancellation.
 
 
35

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
During the three  months ended September 30, 2010, the Company issued 4,400,000 shares of common stock to a note holder for the conversion of $2,953 of principal on a convertible note payable and $19,047 of accrued interest.

During the three  months ended September 30, 2010, the Company issued 1,000,000 shares of common stock to a note holder for the conversion of $5,000 of principal on a convertible note payable.
 
Warrants
 
During the three months ended March 31, 2010, the Company entered into an agreement whereby they expiration date of 132,000,000 warrants that were set to expire of February 24, 2010, were extended to April 7, 2010.  The extension of the expiration date resulted in an additional expense of $134,216, which was charged to operations during the three months ended March 31, 2010.

During the three months ended June 30, 2010, the Company entered into an agreement whereby they expiration date of 132,000,000 warrants that were set to expire of April 7, 2010, were extended to April 16, 2012.  The extension of the expiration date resulted in an additional expense of $818,824, which was charged to operations during the three months ended June 30, 2010.

The following table summarizes the significant terms of warrants outstanding at September 30, 2010. 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
     
1.91
   
$
0.0050
     
179,700,000
   
$
0.0050
 
                                             
$
0.0110
     
18,500,000
     
1.55
   
$
0.0110
     
18,500,000
   
$
0.0110
 
                                             
$
0.0120
     
1,000,000
     
2.96
   
$
0.0120
     
-
   
$
-
 
                                             
$
0.0115
     
74,000,000
     
1.93
   
$
0.0115
     
74,000,000
   
$
0.0115
 
         
273,200,000
     
1.90
   
$
0.0072 
     
272,200,000
   
$
0.0072
 
 
 
36

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
Transactions involving warrants are summarized as follows:

   
Number of
Warrants
   
Weighted Average
Exercise Price
 
Warrants exercisable at December 31, 2009
   
273,200,000
   
$
0.008
 
                 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
-
     
-
 
 
           
Warrants outstanding at September 30, 2010
   
 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.
 
 
37


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

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 and expensed to operations during the year ended December 31, 2008.

In December 2009, the Company agreed to issue 1,000,000 options with a five year term to purchase additional shares of the Company’s common stock to each of the Company’s two non-employee directors pursuant to a board resolution for services performed during the year ended December 31, 2009.  The fair value of   these shares in the amount of $7,993 was charged to operations during the year ended December 31, 2009.

Also, in December 2009, the Company agreed to issue 8,000,000 options with a five year terms to purchase additional shares of common stock to each of the non-employee directors for services related to the year ended December 31, 2010.  These options vest at a rate of 25% each quarter beginning March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the grant date plus a 20% premium, but no lower than $0.005 per share. During the nine months ended September 30, 2010, 6,000,000 options have vested to each of the non-employee directors have vested under this agreement.

In January 2010, the Company issued 8,000,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 2,000,000 per quarter beginning with the quarter ended March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the grant date plus a 20% premium, but no lower than $0.005 per share.  During the nine months ended September 30, 2010, 6,000,000 options vested under this agreement.

In January 2010, the Company issued 2,500,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 625,000 per quarter beginning with the quarter ended March 31, 2010 and have exercises prices equal to the closing price of the Company’s common stock on the grant date plus a 20% premium, but no lower than $0.005 per share.  During the nine months ended September 30, 2010, 1,875,000 options vested under this agreement.
 
 
38


INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(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
 
 
(1)
     
6,625,000
     
-
     
-
     
-
     
-
 
                                             
$
0.005
     
15,000,000
     
1.14
   
$
0.005
     
15,000,000
   
$
0.005
 
                                             
$
0.007
     
22,000,000
     
2.66
   
$
0.007
     
22,000,000
   
$
0.007
 
                                             
$
0.008
     
6,625,000
     
4.50
   
$
0.008
     
6,625,000
   
0.008
 
                                             
$
0.009
     
6,625,000
     
5.00
   
$
0.009
     
6,625,000
   
$
0.009
 
                                             
$
0.010
     
6,625,000
     
4.75
   
$
0.010
     
6,625,000
   
$
0.010
 
                                             
         
63,500,000
     
3.61
   
$
0.009
     
56,875,000
   
$
0.007
 
 
(1) These options are issued, but vest on a quarterly basis beginning with the quarter ended March 31, 2010.  The options have five year terms and an exercise price equal to the closing price of the Company’s common stock on the grant date plus a 20% premium, but no lower than $0.005 per share.
 
 
39

 
INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
Transactions involving stock options are summarized as follows:
 
   
Number of
   
Weighted Average
 
   
Shares
   
Exercise Price
 
Options outstanding  at December 31, 2009
   
53,000,000
   
$
0.007
 
                 
 Granted
   
10,500,000
     
0.007
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
-
     
-
 
                 
Options outstanding at June 30, 2010
   
63,500,000
   
$
0.007
 
Exercisable
   
56,875,000
   
$
0.007
 
Non-exercisable
   
6,625,000
   
$
0.007
 
 
Accounting for warrants and stock options

The Company accounts for the issuance of common stock purchase warrants, stock options, and other freestanding derivative financial instruments in accordance with the provisions of FASB ASC 815-40-15. Based on the provisions of ASC 815-40-05  the Company classifies, as equity, any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contract that (i) require net-cash or (ii) give the counterparty a choice of net-cash settlement in shares (physical or net-share settlement). At September 30, 2010  and 2009, the Company had  no freestanding derivative financial instruments that require net cash settlement or give the counterparty a choice of net cash settlement or settlement in shares.
 
The fair value of these warrants and stock options is determined utilizing the Black-Scholes valuation model. Through August 2005, these warrants were accounted for by the equity method, whereby the fair value of the warrants was charged to additional paid-in capital. During September, 2005, the number of shares of the Company's common stock issued and issuable exceeded the number of shares of common stock the Company had authorized. As the Company no longer had sufficient shares authorized to settle all of our outstanding contracts, this triggered a change in the manner in which the Company accounts for the warrants and stock options. The Company began to account for these warrants  and stock options utilizing the liability method. Pursuant to ASC 815-40-05,"If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders' equity." Accordingly, during the year ended December 31, 2005, the Company charged the amount of $10,374,536 to stockholders' equity. At the same time, and from that time on, the Company changed the way in which it accounts for the beneficial conversion feature of convertible notes payable (see note 8).
 
 
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INNOVATIVE FOOD HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
 
The accounting guidance states that the warrants and stock options which are a derivative liability should be revalued each reporting period. The recorded value of such warrants and stock options can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants and stock options, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants. During the three months ended September 30, 2010 and 2009, the Company recognized a gain of $274,879 and a gain of $777,595, respectively, for the change in the fair value of the warrant liability and recorded the gains in operations during the three months ended September 30, 2010 and 2009. During the nine months ended September 30, 2010 and 2009, the Company recognized a gain of $117,215 and $523,312, respectively, for the change in the fair value of the warrant liability and recorded the gains in operations during the nine months ended September 30, 2010 and 2009. 
 
The Company valued warrants and options using the Black-Scholes valuation model utilizing the following variables:
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Volatility
   
167.99-266.73
%
   
302.87-386.12
%
Dividends
 
$
-
   
$
-
 
Risk-free interest rates
   
0.20
%
   
0.18-0.43
%
Term (years)