innovativefood-10qsba9302006.htm



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

 
FORM 10-QSB/A
 

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

For the quarterly period ended September 30, 2006

o  Transition report pursuant to Section 13 or 15(d) of the Exchange
Act for the transition period from _________ to _________.

Commission File Number: 0-9376

INNOVATIVE FOOD HOLDINGS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)

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

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

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

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Issuer Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES x  NO o

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

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

Transitional Small Business Disclosure Format:
 
YES o    NO x
 
 



 
INNOVATIVE FOOD HOLDINGS, INC.
INDEX TO FORM 10-QSB/A

   
Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
 
5
 
7
Item 2.
28
Item 3.
34
     
PART II.
OTHER INFORMATION
 
     
Item 1.
34
Item 2.
35
Item 3.
35
Item 4.
35
Item 5.
35
Item 6.
35
 
36
 
  
 
EXPLANATORY NOTE
 
 
This amendment is being filed to correct the dilutive effective of securities  on the statements of operations, net loss to per share and the weighted average of shares outstanding .
 

 
 PART I - FINANCIAL INFORMATION

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


   
September 30,
 
   
2006
   
2005
   
2004
 
ASSETS
                 
Current assets
                 
                   
Cash and cash equivalents
 
$
12,695
   
$
17,663
   
$
24,423
 
Accounts receivable, net of allowance
   
249,015
     
302,476
     
148,140
 
Interest receivable
   
7,147
     
1,184
     
-
 
Loan receivable, net of allowance
   
285,000
     
75,000
     
-
 
Prepaid expenses
   
-
     
45,278
     
-
 
Other current assets
   
31,351
     
-
     
-
 
                         
      Total current assets
   
585,208
     
441,601
     
172,563
 
                         
Property and equipment, net of accumulated depreciation
   
107,091
     
71,489
     
163,510
 
                         
Total assets
 
692,299
   
$
513,090
   
336,073
 
                         
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                       
Current liabilities
                       
                         
Accounts payable and accrued liabilities
 
$
708,840
   
$
443,222
   
$
594,798
 
Amount due under bank credit line
   
24,255
     
15,154
     
24,400
 
Accrued interest, net of discount
   
137,503
     
15,260
     
28,195
 
Accrued interest - related parties, net of discount
   
94,975
     
29,352
     
4,520
 
Notes payable - current portion
   
934,443
     
585,000
     
-
 
Notes payable - related parties, current portion
   
375,000
     
275,000
     
-
 
Warrant liability
   
1,374,197
     
10,374,536
     
-
 
Conversion option liability
   
1,461,180
     
12,453,662
     
-
 
Penalty for late registration of shares
   
583,040
     
880,000
     
-
 
      Total current liabilities
   
5,693,433
     
25,071,186
     
651,913
 
                         
Notes payable
   
17,763
     
219,000
     
365,000
 
Notes payable - related parties
   
-
     
175,000
     
98,000
 
Total liabilities
   
5,711,196
     
25,465,186
     
1,114,913
 
                         
Stockholder's deficiency
                       
Common stock, $0.0001 par value; 500,000,000 shares authorized;
                       
   151,310,796, 103,742,037 and 65,052,037 at September 30, 2006,
                       
   2005, and 2004, respectively
   
15,130
     
10,374
     
6,506
 
   Additional paid-in capital
   
391,437
     
-
     
4,385,318
 
   Accumulated deficit
   
(5,425,464
)
   
(24,962,470
)
   
(5,170,664
)
      Total stockholder's deficiency
   
(5,018,897
)
   
(24,952,096
)
   
(778,840
)
                         
Total liabilities and stockholders' deficiency
 
$
692,299
   
$
513,090
   
$
336,073
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Operations
 (unaudited)

   
For the Three Months Ended September 30,
   
For the Nine months Ended September 30,
 
         
         
   
2006
   
2005
   
2004
   
2006
   
2005
   
2004
 
Revenue
 
$
1,564,653
   
$
1,303,593
   
$
1,171,484
   
$
5,044,098
   
$
3,799,332
   
$
3,237,454
 
                                                 
Cost of goods sold
   
1,167,832
     
1,002,958
     
918,392
     
3,838,060
     
2,964,413
     
2,742,653
 
     
396,821
     
300,635
     
253,092
     
1,206,038
     
834,919
     
494,801
 
                                                 
Selling, general and administrative expenses
   
484,171
     
516,051
     
503,191
     
1,520,810
     
1,304,466
     
4,032,703
 
      Total operating expenses
   
484,171
     
516,051
     
503,191
     
1,520,810
     
1,304,466
     
4,032,703
 
                                                 
Operating loss
   
(87,350
)
   
(215,416
)
   
(250,099
)
   
(314,772
)
   
(469,547
)
   
(3,537,902
)
                                                 
Other (income) expense:
                                               
   Interest (income) expense
   
107,360
     
253,168
     
91,113
     
266,007
     
694,353
     
398,375
 
   Cost of penalty for late registration of shares
   
362,960
     
1,040,000
     
-
     
1,584,912
     
1,507,200
     
-
 
   Change in fair value of warrant liability
   
(5,203,035
)
   
-
     
-
     
(4,670,200
)
   
-
     
-
 
   Change in fair value of conversion option liability
   
(6,009,676
)
   
-
     
-
     
(5,642,095
)
   
-
     
-
 
   Change in value of penalty for late registration of shares
   
(1,934,800
)
   
(697,600
)
   
-
     
(1,928,592
)
   
(627,200
)
   
-
 
      Total other (income) expense
   
(12,677,191
)
   
595,568
     
91,113
     
(10,389,968
)
   
1,574,353
     
398,375
 
                                                 
  Income (Loss) before income taxes
   
12,589,841
     
(810,984
)
   
(341,212
)
   
10,075,196
     
(2,043,900
)
   
(3,936,277
)
                                                 
  Income tax expense
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Net Income (loss)
 
$
12,589,841
   
$
(810,984
)
 
$
(341,212
)
 
$
10,075,196
   
$
(2,043,900
)
 
$
(3,936,277
)
                                                 
Earnings (loss) per share - basic
 
$
0.09
   
$
(0.01
)
 
$
(0.02
)
 
$
0.08
   
$
(0.03
)
 
$
(0.14
)
                                                 
Earnings (loss) per share - diluted
 
$
0.03
   
$
(0.01
)
 
$
(0.02
)
 
$
0.02
   
$
(0.03
)
 
$
(0.14
)
                                                 
Weighted average shares outstanding - basic
   
136,912,804
     
87,659,428
     
17,994,416
     
120,338,009
     
81,506,689
     
28,825,062
 
                                                 
Weighted average shares outstanding - diluted
   
495,501,354
     
87,659,428
     
17,994,416
     
478,926,559
     
81,506,689
     
28,825,062
 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
 
 
   
For the Nine Months Ended September 30,
 
   
2006
   
2005
   
2004
 
Cash flows from operating activities:
                 
   Net income (loss)
 
$
10,075,196
   
$
(2,043,900
)
 
$
(3,936,277
)
  Adjustments to reconcile net income (loss) to net
                       
  cash provided by (used in) operating activities:
                       
    Depreciation
   
39,835
     
44,372
     
48,487
 
   Value of warrants issued
   
10,750
     
-
     
-
 
   Vale of options issued to officer
   
-
     
-
     
135,673
 
    Stock issued for services
   
-
     
45,400
     
2,420,000
 
    Stock issued for employee bonus
   
-
     
-
     
-
 
    Stock issued as bonuses to employees and board members
   
49,901
     
-
     
-
 
   Reserve for bad debt
   
-
     
75,000
     
-
 
    Amortization of discount and interest expense on notes payable
   
-
     
595,000
     
388,000
 
    Amortization of discount on convertible interest
   
-
     
-
     
-
 
   Cost of penalty for late registration
   
1,584,912
     
1,507,200
     
-
 
   Change in fair value of warrant liability
   
(4,652,805
)
   
-
     
-
 
   Change in fair value of conversion option liability
   
(5,642,095
)
   
-
     
-
 
   (gain) loss from marking to market-penalty
   
(1,928,592
)
   
(627,200
)
   
-
 
  Changes in assets and liabilities:
                       
        Accounts receivable, net
   
190,095
     
23,022
     
116,876
 
       Interest receivable
   
-
     
(1,184
)
   
-
 
        Prepaid expenses
   
(29,844
)
   
(45,278
)
   
-
 
        Other current liability
   
-
     
-
     
-
 
        Accounts payable and accrued expenses
   
371,584
     
(73,374
)
   
158,817
 
   Net cash provided by (used in) operating activities
   
68,937
     
(500,942
)
   
(668,424
)
                         
Cash flows from investing activities:
                       
   Loan to Pasta Italiana
   
(190,000
)
   
(150,000
)
   
-
 
   Acquisition of property and equipment
   
(26,445
)
   
(12,040
)
   
(134,772
)
   Net cash used in investing activities
   
(216,445
)
   
(162,040
)
   
(134,772
)
                         
Cash flows from financing activities:
                       
    Proceeds from issuance of long-term-debt
   
160,000
     
595,000
     
463,000
 
  Payments on bank credit line
   
- 
     
(9,366
)
   
-
 
   Cash from bank credit line
   
- 
     
-
     
262
 
   Principal payments on notes payable
   
(10,000
)
   
-
     
-
 
    Proceeds from sale of common stock
   
-
     
67,000
     
320,225
 
   Net cash provided by financing activities
   
150,000
     
652,634
     
783,487
 
                         
Increase in cash and cash equivalents
   
2,492
     
(10,348
)
   
(19,709
)
                         
Cash and cash equivalents at beginning of period
   
10,203
     
28,011
     
44,132
 
                         
Cash and cash equivalents at end of period
 
$
12,695
   
$
17,663
   
$
24,423
 
                         
Supplemental disclosure of cash flow information:
                       
                         
Cash paid during the period for:
                       
Interest
 
$
-
   
$
-
   
$
-
 
                         
Taxes
 
$
-
   
$
-
   
$
-
 



Innovative Food Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(continued)
 
   
For the Nine
MonthsEnded
September 30, 2006
   
For the Nine
MonthsEnded
September 30, 2005
   
For the Nine
Months Ended
September 30, 2004
 
Stock issued for services
 
$
85,901
   
$
45,400
   
$
2,420,000
 
                         
Notes payable issued for acquisition of computer equipment
 
$
25,385
   
$
-
   
$
-
 
                         
Common stock issued for conversion of notes payable
 
$
-
   
$
44,000
   
$
788,176
 
                         
Common stock issued for conversion of liability
 
$
-
   
$
-
   
$
339,750
 
                         
Value of warrants issued
 
$
10,750
   
$
-
   
$
-
 
                         
Common stock issued during recapitalization
 
$
-
   
$
-
   
$
2,500
 
                         
Common stock issued as penalty for late registration
 
$
-
   
$
537,600
   
$
-
 
                         
Common stock issued in share exchange to acquire subsidiary
 
$
-
   
$
-
   
$
125,000
 
                         
Charge to equity for change to liability method for value
                       
of beneficial conversion feature of notes payable
 
$
-
   
$
12,453,662
   
$
-
 
                         
Charge to equity for change to liability method of warrant valuation
 
$
-
   
$
10,374,536
   
$
-
 
                         
Value of warrants and options issued as compensation
 
$
10,750
   
$
-
   
$
-
 
                         
Value of shares issued as penalty for late registration
 
$
1,584,912
   
$
-
   
$
-
 
                         
Revaluation of conversion option liability
 
$
(5,642,095
)
 
$
-
   
$
-
 
                         
Revaluation of liability for warrants
 
$
(4,652,805
)
 
$
-
   
$
-
 
                         
Revaluation of penalty for late registration of shares
 
$
(1,928,592
)
 
$
-
   
$
-
 

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

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)

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

Acquisition and Corporate Restructure

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

On January 26, 2004, through a share exchange, the shareholders of FII converted 10,000 shares (post-reverse split) of FII common stock outstanding into 25,000,000 shares (post-reverse split) of IVFH. On January 29, 2004, in a transaction known as a reverse acquisition, the shareholders of IVFH exchanged 25,000,000 shares (post-reverse split) of IVFH for 25,000,000 shares (post-reverse split) of Fiber Application Systems (formerly known as Alpha Solarco) (“Fiber”), a publicly-traded company.   The shareholders of IVFH thus assumed control of Fiber, and Fiber changed its name to Innovative Food Holdings, Inc.  The 25,000,000 shares (post-reverse split) of Innovative Food Holdings are shown on the Company’s balance sheet at December 31, 2003 as shares outstanding.  These shares are shown at their par value of $2,500 as a decrease of additional paid-in capital at the acquisition date of January 29, 2004.   There were 157,037 shares (post-reverse split) outstanding in Fiber at the time of the reverse acquisition; the par value of these shares, or $16, was transferred from additional paid-in capital at the time of the reverse acquisition.
 
2. NATURE OF ACTIVITED AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
FII is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24-72 hours, except as stated hereafter, eliminating all wholesalers and distributors. We currently sell the majority of our products through a distributor relationship with Next Day Gourmet, L.P., and a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor owned by Dutch grocer Royal Ahold.

Interim Financial Information

The accompanying unaudited interim financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-B of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in form 10-KSB for the year ended December 31, 2006. In the opinion of management, the interim financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results of operations to be expected for the full year.

Reclassification

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

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported a net income (loss) of $12,589,741, $(810,984) and $(341,212) for the three months ended September 20, 2006, 2005, and 2004, respectively; and $10,075,196, $(2,043,900) and $(3,936,277) for the nine months ended September 30, 2006, 2005 and 2004, respectively;  and $(7,417,910) for the year ended December 31, 2005.  The Company also  had an accumulated deficit of $5,425,464 and a working capital deficiency of $5,108,225 as of September 30, 2006.

The Company cannot be certain that anticipated revenues from operations will be sufficient, to satisfy its ongoing capital requirements. Management's belief is based on the Company's operating plan, which in turn is based on assumptions that may prove to be incorrect. If the Company's financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for growth, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations.

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

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting  Bulletin ("SAB") No. 104,  "Revenue  Recognition,"  which superseded SAB No. 101, "Revenue  Recognition in Financial  Statements." SAB No. 101 requires that four basic criteria must be met before revenue can be recognized:  (1) persuasive  evidence of an arrangement exists; (2) delivery has occurred;   (3)  the  selling   price  is  fixed  and   determinable;   and  (4) collectibility is reasonably assured.  Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.  SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No. 00-21,  "Multiple-Deliverable Revenue Arrangements."  EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.  The effect of implementing EITF No. 00-21 on the Company's consolidated financial position and results of operations was not significant. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.  EITF No.  00-21 became effective for revenue arrangements entered into in periods beginning after June 15, 2003.  For revenue arrangements occurring on or after August 1, 2003, the Company revised its revenue recognition.

Income Taxes

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

Disclosures about Fair Value of Financial Instruments

The carrying  amounts of the  Company's  financial  instruments, which include accounts receivable and  accounts  payable,  approximate fair value at September 30, 2006.
 

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
Inventories
 
The Company does not currently maintain any material amount of inventory.

Stock-Based Compensation

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

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

Stock-based  compensation  expense  recognized during the period is based on the value of the portion of share-based  payment awards that is ultimately  expected to vest during the period.
 
A summary of option  activity as of September 30,  2006,  2005, and 2004, and changes during the periods then ended are presented below:
 
         
 Weighted
         
Average
   
Number of
   
Exercise
   
Shares
   
Price
Options exercisable at December 31, 2003
   
-
     
-
               
Granted
   
500,000
   
$
0.50
Exercised
   
-
       
Cancelled / Expired
   
-
     
-
               
Options outstanding at 12.31.04
   
500,000
   
$
0.50
Exercisable
   
-
   
$
-
Not exercisable
   
500,000
   
$
0.50
               
Granted
   
-
     
-
Exercised
   
-
     
-
Cancelled / Expired
   
-
     
-
               
Options outstanding at 03.31.05
   
500,000
   
$
0.50
Exercisable
   
-
   
$
-
Not exercisable
   
500,000
   
$
0.50
               
Granted
   
-
     
-
Exercised
   
-
     
-
Cancelled / Expired
   
-
     
-
 

 
           
         
Weighted
         
Average
   
Number of
   
Exercise
   
Shares
   
Price
           
Options outstanding at 06.30.05
    500,000     $ 0.50
Exercisable
    100,000     $ 0.50
Not exercisable
    400,000     $ 0.50
               
Granted
    -       -
Exercised
    -       -
Cancelled / Expired
    -       -
               
Options outstanding at 09.30.05
    500,000     $ 0.50
Exercisable
    100,000     $ 0.50
Not exercisable
    400,000     $ 0.50
               
Granted
    -       -
Exercised
    -       -
Cancelled / Expired
    -       -
               
Options outstanding at 12.31.05
    500,000     $ 0.50
Exercisable
    100,000     $ 0.50
Not exercisable
    400,000     $ 0.50
               
Granted
    -       0.005
Exercised
    -       -
Cancelled / Expired
    -       -
               
Options outstanding at 03.31.06
   
500,000
   
$
0.500
Exercisable
   
100,000
   
$
0.500
Not exercisable
   
400,000
   
$
0.500
               
Granted
   
-
     
-
Exercised
   
-
     
-
Cancelled / Expired
   
-
     
-
               
Options outstanding at 06.30.06
   
500,000
   
$
0.500
Exercisable
   
200,000
   
$
0.500
Not exercisable
   
300,000
   
$
0.500
               
Granted
   
-
     
-
Exercised
   
-
     
-
Cancelled / Expired
   
-
     
-
               
Options outstanding at 09.30.06
   
500,000
   
$
0.500
Exercisable
   
200,000
   
$
0.500
Not exercisable
   
300,000
   
$
0.500


 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
Aggregate intrinsic value of options outstanding and options exercisable at September 30, 2006, 2005, and 2004 was $0. Aggregate intrinsic value represents the difference between the company's  closing  stock price on the last  trading  day of the fiscal  period, which was $0.01, $0.06, and $0.04  (post-reverse split)as of September 30, 2006, 2005, and 2004, respectively,   and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  September 30,  2006, 2005, and 2004,  total  unrecognized stock-based compensation expense related to non-vested stock options was $0. The total fair value of options vested was $0 for the three-month periods ended September 30, 2006, 2005, and 2004.

Earnings (Loss) per Common Share

The Company computes earnings per share under SFAS 128.  Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year.  Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method).

Management Estimates

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

Comprehensive Income

The Company has no items of other comprehensive income  (loss) for the periods ended September 30, 2006, 2005,  and 2004.

3. PER SHARE INFORMATION

The Company computes earnings per share under Financial Accounting Standard No.128,  "Earnings Per Share" (SFAS 128).  Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year.  Dilutive common stock equivalents   consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method).

4. ACCOUNTS RECEIVABLE

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

   
2006
   
2005
   
2004
 
Accounts receivable from customers
 
$
249,015
   
$
367,476
   
$
148,140
 
Allowance for doubtful accounts
   
(0
)
   
(65,000
)
   
(0
)
Accounts receivable, net
 
$
249,015
   
$
302,476
   
$
148,140
 

5.  LOAN RECEIVABLE

The balance of loan receivable consisted of a loan to Pasta Italiana, Inc. in the amount of $360,000 and $150,000  as of September 30, 2006 and 2005, respectively.  This note bears interest in the amount of 8% per annum.  This note matured on August 24, 2006.  At September 30, 2006 and 2005, the Company has reserved $75,000 of the loan receivable.  The Company stopped accruing interest income on this note at December 31, 2005. At September 30, 2006 and 2005, interest receivable is $7,147 and $1,184, respectively.
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 

 6. PROPERTY AND EQUIPMENT

A summary of property and equipment at September 30, 2006, 2005, and 2004 is as follows:

   
2006
   
2005
   
2004
 
Computer equipment
 
$
214,507
   
$
150,574
   
$
197,635
 
Furniture and fixtures
   
82,213
     
63,315
     
61,275
 
     
296,720
     
213,889
     
258,910
 
Less accumulated depreciation and amortization
   
(189,629
)
   
(142,400
)
   
(95,400
)
Total
 
$
107,091
   
$
71,489
   
$
163,510
 

Depreciation and amortization expense amounted to $39,835, $44,372, and $48,487 respectively, for the nine months ended September 30, 2006, 2005 and 2004.
 
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

   
2006
   
2005
   
2004
 
Accounts payable and accrued expenses
 
$
681,838
   
$
420,928
   
$
440,972
 
Accrued commissions
   
3,183
     
2,907
     
2,250
 
Total
 
$
685,651
   
$
423,835
   
$
443,222
 

8. ACCRUED INTEREST
 
At September  30, 2006, the Company has the following accrued interest on its balance sheet:

   
Gross
   
Discount
   
Net
 
Non-related parties
 
$
162,223
   
$
24,720
   
$
137,503
 
Related parties
   
95,928
     
953
     
94,975
 
Total
 
$
258,151
   
$
25,673
   
$
232,478
 

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

   
Gross
   
Discount
   
Net
 
Non-related parties
 
$
41,205
   
$
25,945
   
$
15,260
 
Related parties
   
61,792
     
32,440
     
29,352
 
Total
 
$
102,997
   
$
58,385
   
$
44,612
 

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

   
Gross
   
Discount
   
Net
 
Non-related parties
 
$
38,812
   
$
10,617
   
$
28,195
 
Related parties
   
7,909
     
3,389
     
4,520
 
Total
 
$
46,721
   
$
14,006
   
$
32,715
 
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
Accrued interest on some of the Company’s notes payable is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) (note 9). There is a beneficial conversion feature embedded in this convertible accrued interest.  The Company is amortizing this beneficial conversion feature over the life of the related party notes payable.  During the three months ended September 30, 2006, 2005, and 2004, the amounts of $ $227,082, $96,026, and  $17,268 were credited to additional paid-in capital as a discount on accrued interest.  The Company amortized to interest expense a total of $34,060, $37,642, and $65,398 of these discounts  during the three months ended September 30, 2006, 2005, and 2004, respectively.
 
9. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

The Company has a line of credit with Wachovia Bank in the amount of $25,000.  The outstanding balance as of September 30, 2006 and 2005 was $24,255 and $15,154, respectively.  The Company has a loan payable outstanding for the purchase of a server, at September 30, 2006 the outstanding balance was $24,840.

At September 30, 2006, 2005 and 2004,, the Company has outstanding notes payable in the aggregate amount of $1,327,206 , $1,254,000, and $463,000, respectively.   Notes payable and notes payable to related parties at September  30, 2006, 2005, and 2004, consist of the following:

 
   
2006
   
2005
   
2004
 
Convertible note payable in the original amount of $350,000 to Alpha Capital Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note consists of $100,000 outstanding under a previous note payable which was cancelled on February 25, 2005, and $250,000 of new borrowings. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is entered technical default status on May 16, 2005.   The note originally carried  interest at the rate of 8% per annum, and is due in full on February 24, 2007.  Upon default, the note’s interest rate increased to 15% per annum, and the note became immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $250,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company  at a conversion price of $0.005 per share (post-reverse split). Interest in the amount of $13,233, $13,043 and $0 was accrued on this note during the three months ended September 30, 2006,   2005, and 2004, respectively.. During the twelve months ended December 31, 2006 the note holder converted $5,000 into shares of common stock. During the twelve months ended December 31, 2006 the holder of the note converted $27,865 of accrued interest into common stock.   This note is in default at September 30, 2006 and 2005.
 
$
                                                                                    345,000
   
$
                                                                                        350,000
   
$
                                                                                    -
 
 
 Convertible note payable in the amount of $160,000 to Michael Ferrone, a board member and related party, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on March 11, 2006. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $160,000 was recorded as a discount to the note, and was amortized  to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $3,226 was accrued on this note during  the each of the three  months ended September 30, 2006,   2005,  and 2004.
   
160,000
     
                                              160,000
     
160,000
 

Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion price of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $100,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $504, $2,016, and $0 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock.
   
                                            25,000
     
                                              100,000
     
                                            -
 

Convertible note payable in the amount of $85,000 to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in Full on March 11, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature  in the amount of $85,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004 Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $828, $1,310, and $1,715 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2005, the note holder converted $44,000 of the note payable into common stock. During the twelve months ended December 31, 2006, the Company made a $3,000 cash payment on the principal amount of the note.
   
                                              41,000
     
                                                  41,000
     
                                              85,000
 
 

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on March 11, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $80,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)   Interest in the amount of $1,614 was accrued on this note during each of the three months ended September 30, 2006, 2005,  and 2004..
   
80,000
     
                                  80,000
     
80,000
 

Convertible note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd. (“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisites numbers of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of May 16, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in Full on February 24, 2007. Upon default, the note’s interest rate increased to 15% per annum, and the note became due immediately. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the three months ended March 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,596, $1,890, and $0 was accrued on this note during the three months ended September 30, 2006 and 2005, respectively.  During the twelve months ended December 31, 2006, $5,000 of principal was converted into common stock.  During the twelve months ended December 31, 2006 the holder of the note converted $5,000 of principal and $589 of accrued interest into shares of common stock.    This note is in default at September 30, 2006 and 2005.
   
                                                                        40,000
     
                                                                              50,000
     
                                                                        -
 

Convertible note payable in the amount of $50,000 to Oppenheimer & Co., / Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,009 was  accrued on this note during each of the three months ended December 31, 2006, 2005, and 2004.
   
50,000
     
                                    50,000
     
50,000
 
 
Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share(post-reverse split)  Interest in the amount of $404, $605,  and $0 was  accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.
   
20,000
     
                                      30,000
     
-
 

 
Convertible note payable in the original amount of $5,000 to Ke Du dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. This note was converted to common stock during the year ended December 31, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share(post-reverse split)  Interest in the amount of $101 was accrued on this note during the thee months ended September 30, 2005.
   
                                 -
     
                                  5,000
     
                                  -
 
 
 

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $504, $504, and $0 was accrued on this note during the three months ended September 30, 2006, 2005,  and 2004, respectively.
   
25,000
     
                                  25,000
     
-
 

Convertible note payable in the amount of $25,000 to The Jay & Kathleen Morren Trust  dated January 25, 2005. The note bears interest at the rate of 6% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $377, $377, and $0 was accrued on this note during the three months ended September 301, 2006, 2005, and 2004, respectively.
   
25,000
     
                                  25,000
     
-
 

Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split). Interest in the amount of $202, $202, and $0 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively.   This note is in default at September 30, 2006 and 2005.
   
                                            10,000
     
                                                10,000
     
                                            -
 

Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split) . Interest in the amount of $202, $202, and $0 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively.   This note is in default at September 30, 2006 and 2005
   
                                               10,000
     
                                                10,000
     
                                             -
 
 
Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of  8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split). Interest in the amount of $202, $202, and $0 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively.   This note is in default at September 30, 2006 and 2005
   
10,000
     
                                                10,000
     
-
 
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split). Interest in the amount of $202, $202, and $0 was accrued on this note during the three months ended September 30, 2006, 2005, and 2004, respectively.     This note is in default at September 30, 2006 and 2005
   
                                            10,000
     
                                                10,000
     
                                            -
 

Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004.. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $161was accrued on this note during the each of the three months ended September  30, 2006,  2005, and 2004, respectively.
   
8,000
     
                                  8,000
     
8,000
 
 
Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share  (post-reverse split). Interest in the amount of $101was accrued on this note during the each of the three months ended September 30, 2006, 2005, and 2004, respectively.
   
                                  5,000
     
                                 5,000
     
                                5,000
 

Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $4,537, $947, and $0 was accrued on this note during the three months ended September 30, 2006,  2005, and 2004, respectively.   This note is in default at September 30, 2006 and 2005.
   
120,000
     
                                                                  120,000
     
-
 

Convertible note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005.  We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,134 and $236 was accrued on this note during the three months ended September 30, 2006 and 2005, respectively.  This note is in default at September 30, 2006 and 2005.
   
                                                            30,000
     
                                                                30,000
     
                                                           -
 
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
Convertible note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $938 and $197 was accrued on this note during the three months ended September 30, 2006 and 2005, respectively. During the three months ended September 30, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock.   This note is in default at September 30, 2006 and 2005.
   
                                                                   23,000
     
                                                                        25,000
     
                                                                  -
 

Convertible note payable in the original amount of $25,000 to Momona Capital, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split.  Interest in the amount of $938 and $197 was accrued on this note during the three months ended September 30, 2006 and 2005, 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. This note is in default at September 30, 2006 and 2005.
   
                                                                23,000
     
                                                                        25,000
     
                                                                -
 
 
Convertible note payable in the amount of $10,000 to Lane Ventures dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $364 and $79 was accrued on this note during the  three months ended September 30, 2006 and 2005, respectively.   During the twelve months ended December 31, 2006, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock.  This note is in default at September 30, 2006 and 2005.
   
                                                                6,000
     
                                                                        10,000
     
                                                                -
 

Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $6,049 was accrued on this note during the three months ended September 30, 2006.   This note is in default at September 30, 2006.
   
                        120,000
     
                       -
     
                        -
 

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
Note payable in the amount of $30,000 to Whalehaven Capital dated February 7, 2006. The note originally  carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $1,512 was accrued on this note   during the three months ended September 30, 2006.   This note is in default at September 30, 2006.
 
   
30,000
     
                         -
     
-
 
Note payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005. Interest in the amount of $1,512, $1,512, and $970 was accrued on this note   during the twelve months ended December 31, 2006, 2005,  and 2004, respectively.   This note is in default at September 30, 2006, 2005, and 2004.
   
75,000
     
                75,000
     
75,000
 

Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note bears interest at the rate of 15% per annum, and was due in full on November 19, 2006. Interest in the amount of $461 was accrued on this note  during the three months ended September 30, 2006.
   
10,000
     
   -    
     
-
 
                         
Note payable in the original amount of $25,787 to Microsoft Corporation dated May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is payable in 60 monthly payments of $557 beginning October 1, 2006. Negative interest in the amount of $419 was capitalized to this note during the three months ended September 30, 2006.
   
26,206
     
-
   
$
-
 

Total  
 
$
1,327,206
   
$
1,254,000
   
$
463,000
 
Less: Current maturities
   
(1,309,443
   
(860,000
   
(75,000
Long-term portion
 
$
 17,763
   
$
 394,000
   
$
388,000
 
                         
Total Non-related parties
 
$
952,206
   
$
804,000
   
$
178,000
 
Total related parties
   
375,000
     
450,000
     
285,000
 
Total
 
$
1,327,206
   
$
1,254,000
   
$
463,000
 
 
Accounting for Conversion Options Embedded in Convertible Notes and Convertible Interest

The Company has certain convertible notes payable which contain embedded beneficial conversion features.  Through August 2005, the beneficial conversion features of these convertible notes were accounted for by the equity method, whereby the intrinsic value of the beneficial conversion features were considered discounts to the notes. These discounts were immediately amortized to interest expense. During September 2005, the number of shares of the Company’s common stock issued and issuable exceeded the number of shares of common stock the Company had authorized, and this triggered a change in the manner in which the Company accounts for these  beneficial conversion features.  In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), the debt features provision contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes.  Accordingly, the features qualified as embedded derivative instruments at September 30, 2005 and because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounting for separately from the debt instrument and recorded as derivative financial instruments.  In September 2005, the Company valued the  beneficial conversion features of its notes payable using the Black-Scholes valuation method, and arrived at an aggregate value of  $12,528,662.  Pursuant to Emerging Issues Task Force Issue  00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s  Own Stock” (“EITF 00-19”) “If a contract is reclassified from permanent  or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders’ equity.”  Accordingly, during the year ended December 31, 2005, the Company charged the amount of $12,445,576 to stockholders’ equity.  $5,665,290 of this amount was charged to additional paid-in capital, which brought the balance of additional paid-in capital to $0. The remainder, or $6,780,286, was charged to accumulated deficit.  During subsequent periods,  the conversion option liability will be revalued, and any change in value charged to operations.  At September 30, 2006, the conversion option liability was valued at $1,461,180.  The revaluation resulted in a gain during the  three months ended September  30, 2006  of $6,009,676.

 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
The Company valued these embedded conversion options using the Black-Scholes option pricing model with the following assumptions:

   
Risk Free
   
Expected
   
Expected
       
   
Interest
   
Dividend
   
Option
       
   
Rate
   
Yield
   
Life
   
Volatility
 
September 30, 2006
   
4.75
%
   
0
     
5
     
141.4
%

10.  RELATED PARTY TRANSACTIONS

The Company engaged in the following transactions with related parties:

Three months ended September 30, 2006:

None.

Three months ended September 30, 2005:

None.

Three months ended September  30, 2004:

The Company issued 230,000 shares of common stock to a director for services rendered.

11. EQUITY

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

Common Stock

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

The Company issued 1,117,778 shares (post reverse-split) of common stock for conversion of notes payable and accrued interest in the amount of $5,589.

The Company issued 8,933,358 shares (post reverse-split) of common stock for conversion of notes payable and accrued interest in the amount of $44,666;

The Company issued 5,573,158 shares of common stock for conversion of notes payable. The par value of $557 was charged to additional paid-in capital.

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

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

The Company issued 8,800,000 shares (post-reverse split)of common stock pursuant to the partial conversion of a note payable.  The Company charged the fair value of these shares of $44,000.

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

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

The Company issued 7,925,000 shares of common stock (post reverse-split)  with a fair value of $204,500 to employees and board members for services performed.
 

INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
 SEPTEMBER 30, 2006, 2005,  AND 2004
(Unaudited)
 
 
Warrants

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

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

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

There were no warrants outstanding at September 30, 2004.

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

                               
                 
Weighted
         
Weighted
           
Weighted
   
average
         
average
           
average
   
exercise
         
exercise
Range of
   
Number of
   
remaining
   
price of
   
Number of
   
price of
exercise
   
shares
   
contractual
   
outstanding
   
shares