innfood-10qsba06302006.htm

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

FORM 10-QSB/A
 

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

For the quarterly period ended June 30, 2006

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

Commission File Number: 0-9376

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

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

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

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

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

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

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

Transitional Small Business Disclosure Format:
 
YES ¨ NO x


 
Innovative Food Holdings, Inc.
Index to Form 10-QSB/A

   
Page
PART I.
FINANCIAL INFORMATION
  
     
Item 1.
3
 
3
 
4
 
5
 
7
Item 2.
33
Item 3.
39
     
PART II.
OTHER INFORMATION
  
     
Item 1.
40
Item 2.
40
Item 3.
40
Item 4.
40
Item 5.
40
Item 6.
40
 
41
 
 
 
 
 PART I - FINANCIAL INFORMATION

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

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

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

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

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

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

 
5
 
Innovative Food Holdings, Inc.
 Condensed Consolidated Statements of Cash Flows
(continued)

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

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
6
 
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

1 BASIS OF PRESENTATION
 
Basis of Presentation
 

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

Acquisition and Corporate Restructure

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

On January 26, 2004, through a share exchange, the shareholders of Food Holdings, Inc.,  (“FII”) converted 10,000 shares (post-reverse split) of FII common stock outstanding into 25,000,000 shares (post-reverse split) of IVFH. On January 29, 2004, in a transaction known as a reverse acquisition, the shareholders of IVFH exchanged 25,000,000 shares (post-reverse split) of IVFH for 25,000,000 shares (post-reverse split) of Fiber Application Systems, (formerly known as Alpha Solarco), (“Fiber”) a publicly-traded company.   The shareholders of IVFH thus assumed control of Fiber, and Fiber changed its name to Innovative Food Holdings, Inc.  The 25,000,000 shares (post-reverse split) of Innovative Food Holdings are shown on the Company’s balance sheet at December 31, 2003 as shares outstanding.  These shares are shown at par value of $2,500 as a decrease of additional paid-in capital at the acquisition date of January 29, 2004.   There were 157,037 shares (post-reverse split) outstanding in Fiber at the time of the reverse acquisition; the par value of these shares, or $16, was transferred from additional paid-in capital at the time of the reverse acquisition.
 
2. NATURE OF ACTIVITED AND SIGNIFICANT ACCOUNTING POLICIES
 
Business Activity
 
FII is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24-48 hours, except as stated hereafter, eliminating all wholesalers and distributors. We currently sell the majority of our products through a distributor relationship with Next Day Gourmet, L.P., and a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor owned by Dutch grocer Royal Ahold.

Interim Financial Information

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

Reclassification

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

7
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported a net income (loss) of $1,261,757, $(723,580) and $(2,867,040) for the three months ended June 30, 2006, 2005, and 2004, respectively; and $(2,514,645), $(1,232,916) and $(3,595,065) for the six months ended June 30, 2006, 2005 and 2004, respectively;  and $(7,417,910) for the year ended December 31, 2005.  The Company also  had an accumulated deficit of $18,015,305 and a working capital deficiency of $17,797,067 as of June 30, 2006.

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

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

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

Income Taxes

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

8
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
Disclosures about Fair Value of Financial Instruments

The carrying  amounts of the  Company's  financial  instruments,  which  include accounts  receivable and accounts  payable,  approximate fair value at June 30, 2006.
 
Inventories
 
The Company does not currently maintain any material amount of inventory.

Stock-Based Compensation

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

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

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

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

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

 
9
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 

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

10
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 
Aggregate intrinsic value of options outstanding and options exercisable at June 30, 2006, 2005, and 2004 was $0. Aggregate intrinsic value represents the difference between the company's  closing  stock price on the last  trading  day of the fiscal  period, which was $0.04, $0.08, and $0.40 (post-reverse split) as of June 30, 2006, 2005, and 2004, respectively, and the exercise  price  multiplied by the number  of  options  outstanding.  As  of  June 30,  2006, 2005, and 2004,  total  unrecognized stock-based compensation expense related to non-vested stock options was $0. The total fair value of options vested was $0 for the three-month periods ended June 30, 2006, 2005, and 2004.

Management Estimates

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

Comprehensive Income

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

3. PER SHARE INFORMATION

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

4. ACCOUNTS RECEIVABLE

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

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

5.  LOAN RECEIVABLE

The balance of loan receivable at June 30, 2006 consisted of a loan to Pasta Italiana, Inc. in the amount of $360,000.  This note bears interest in the amount of 8% per annum.  This note matures on August 24, 2006.  At June 30, 2006, this note receivable was in default and interest income was not taken on this loan for the three months ended June 30, 2006.  At June 30, 2006, the Company has reserved $75,000 of the loan receivable and recognized interest income from this loan in the amount of $7,147.
 
11
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

6. PROPERTY AND EQUIPMENT

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

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

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

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

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

8. ACCRUED INTEREST

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

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

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

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

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

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

Accrued interest on some of the Company’s notes payable is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) (note 9). There is a beneficial conversion feature embedded in this convertible accrued interest.  The Company is amortizing this beneficial conversion feature over the life of the related party notes payable.  During the three months ended June 30, 2006, 2005, and 2004, the amounts of $ $195,267, $67,415, and  $9,422 were credited to additional paid-in capital as a discount on accrued interest.  The Company amortized to interest expense a total of $40,347, $9,411, and $907 of these discounts  during the three months ended June 30, 2006, 2005, and 2004, respectively.
 
 
12
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

9. NOTES PAYABLE AND NOTES TO RELATED PARTIES

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

At June 30, 2006, 2005, and 2004, the Company has outstanding notes payable in the aggregate amount of $1,314,000, $1,088,000 and $388,000, respectively. Notes payable and notes payable to related parties at June 30, 2006, 2005, and 2004 consist of the following:

   
2006
    
2005
    
2004
  
Convertible note payable in the original amount of $350,000 to Alpha Capital Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note consists of $100,000 outstanding under a previous note payable which was cancelled on February 25, 2005, and $250,000 of new borrowings. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is entered technical default status on May 16, 2005.   The note originally carried  interest at the rate of 8% per annum, and is due in full on February 24, 2007.  Upon default, the note’s interest rate increased to 15% per annum, and the note became immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $250,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company  at a conversion price of $0.005 per share (post-reverse split). Interest in the amount of $2,901, $10,001, and $0 was accrued on this note during the three months ended June 30, 2006,   2005, and 2004 respectively. During the twelve months ended December 31, 2006 the note holder converted $5,000 into shares of common stock. During the twelve months ended December 31, 2006 the holder of the note converted $27,865 of accrued interest into common stock.   This note is in default at June 30, 2006 and 2005.
   $                                                                               345,000     $                                                                               350,000     $                                                                               -  
 
 

 
13
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Convertible note payable in the amount of $160,000 to Michael Ferrone, a board member and related party, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on March 11, 2006. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $160,000 was recorded as a discount to the note, and was amortized  to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $3,191 was accrued on this note during  each of  the three months ended June 30, 2006,   2005,  and 2004.
   $ 160,000     $                                         160,000     $ 160,000  

 Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion price of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $100,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)  Interest in the amount of $1,732,  $1,995, and $0 was accrued on this note during the three months ended June 30, 2006, 2005, and 2004, respectively.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock.
   $                                       25,000     $                                       100,000     $                                       -  
 
Convertible note payable in the amount of $85,000 to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in Full on March 11, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature  in the amount of $85,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004 Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $819, $1,696, and $1,696 was accrued on this note during the three  months ended March 30, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2005, the note holder converted $44,000 of the note payable into common stock.    During the twelve months ended December 31, 2006, the Company made a $3,000 cash payment on the principal amount of the note.
   $                                         41,000     $                                           85,000     $                                           85,000  

Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on March 11, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $80,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share (post-reverse split)   Interest in the amount of $1,596 was accrued on this note during each of the three months ended June 30, 2006, 2005,  and 2004.
   $ 80,000     $                               80,000     $ 80,000  
 
 
14
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
Convertible note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd. (“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisites numbers of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of May 16, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in Full on February 24, 2007. Upon default, the note’s interest rate increased to 15% per annum, and the note became due immediately. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split).  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the three months ended March 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,792, $1,429, and $0 was accrued on this note during the each of the three months ended June 30, 2006 and 2005, respectively.  During the twelve months ended December 31, 2006, $5,000 of principal was converted into common stock.  During the twelve months ended December 31, 2006 the holder of the note converted $5,000 of principal and $589 of accrued interest into shares of common stock.    This note is in default at June 30, 2006 and 2005.
   $                                                                     45,000     $                                                                       50,000     $                                                                       -  
 
 Convertible note payable in the amount of $50,000 to Oppenheimer & Co., / Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $998 was  accrued on this note during each of the three months ended June 30, 2006, 2005, and 2004.
   $ 50,000     $                                 50,000     $ 50,000  

Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share(post-reverse split)  Interest in the amount of $400, $342, and $0 was  accrued on this note during the three months ended June 30, 2006, 2005, and 2004, respectively. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.
   $ 20,000     $                                   30,000     $ -  
 
Convertible note payable in the original amount of $5,000 to Ke Du dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. This note was converted to common stock during the year ended December 31, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share(post-reverse split)  Interest in the amount of $57 was accrued on this note during the three months ended June  30, 2005.
   $                                -     $                               5,000     $                               -  
 
 
 
15
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $498, $498,. And $0 was accrued on this note during the three months ended June 30, 2006, 2005,  and 2004, respectively.
   $ 25,000     $                               25,000     $ -  
 
Convertible note payable in the amount of $25,000 to The Jay & Kathleen Morren Trust  dated January 25, 2005. The note bears interest at the rate of 6% per annum, and is due in full on January 25, 2007.  The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $373, $373, and $0 was accrued on this note during the three months ended June  30, 2006, 2005,  and 2004, respectively.
   $ 25,000     $                               25,000     $ -  

Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split). Interest in the amount of $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
   $                                           10,000     $                                           10,000     $                                       -  
 
Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share (post-reverse split) Interest in the amount of $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
   $                                         10,000     $                                           10,000     $                                   -  

Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of  8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split) Interest in the amount of $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
   $ 10,000     $                                           10,000     $ -  
 
 
 
16
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.01 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share  (post-reverse split Interest in the amount of $200 was accrued on this note during each of the  three months ended June 30, 2006 and 2005.  This note is in default at June 30,  2006. and 2005.
   $                                         10,000     $                                           10,000     $                                           -  

Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004.. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $160 was accrued on this note during the each of the three months ended June 30, 2006,  2005, and 2004.
   $ 8,000     $                             8,000     $ 8,000  
 
Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share  (post-reverse split). Interest in the amount of $100 was accrued on this note during the each of the three months ended June 30, 2006,  2005, and 2004.
   $                                 5,000     $                                  5,000     $                                 5,000  

Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note is in technical default as of November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $5,359 was accrued on this note during the three months ended June 30, 2006.   This note is in default at June 30, 2006.
   $ 120,000     $                                                       -     $ -  

 
 
 
17
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Convertible note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005.  We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $1,122 was accrued on this note during the three months ended June 30, 2006.   This note is in default at June 30, 2006.
   $                                                 30,000     $                                                       -     $                                                   -  
 
Convertible note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2006.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) Interest in the amount of $934 was accrued on this note during the three months ended June 30, 2006.   During the three months ended September 30, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock.   This note is in default at June 30, 2006.
   $                                                               25,000     $                                                               -     $                                                               -  
 
Convertible note payable in the original amount of $25,000 to Momona Capital, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $934 was accrued on this note during the three months ended June 30, 2006.   During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock. This note is in default at June 30, 2006.
   $                                                           25,000     $                                                               -     $                                                               -  
 
Convertible note payable in the amount of $10,000 to Lane Ventures dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default at November 13, 2005.  The note originally carried  interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company  at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split). Interest in the amount of $373 was accrued on this note during the three months ended June 30, 2006.  During the twelve months ended December 31, 2006, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock.  This note is in default at June 30, 2006.
   $                                                             10,000     $                                                               -     $                                                               -  

Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $5,359 was accrued on this note during the three months ended June 30, 2006. This note is in default at June 30, 2006.
   $                         120,000     $                         -     $                         -  
 
 
18
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Note payable in the amount of $30,000 to Whalehaven Capital dated February 7, 2006. The note originally  carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.  Interest in the amount of $1,340 was accrued on this note during the three months ended  June 30, 2006.   This note is in default at June 30, 2006.
 
   $                            30,000     $                           -     $                           -  
Note payable in the amount of $75,000 to Michael Ferrone , dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005. Interest in the amount of $1,496 was accrued on this note during each of the three  months ended June 30, 2006 and  2005.   This note is in default at June 30, 2006 and 2005.
   $             75,000     $             75,000     $             -  

Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note bears interest at the rate of 15% per annum, and was due in full on November 19, 2006. Interest in the amount of $172 was accrued on this note  during the three months ended June 30, 2006.
   $          10,000     $         -     $         -  
                         
Note payable in the original amount of $25,787 to Microsoft Corporation dated May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is payable in 60 monthly payments of $557 beginning October 1, 2006.
   $ 25,787     $ -     $ -  
 
Total       $ 1,339,787     $ 1,088,000     $ 388,000  
Less: Current maturities     (1,314,000 )      (710,000 )      (- ) 
Long-term portion
   $  25,787     $ 378,000     $ 388,000  
                         
Total Non-related parties
   $ 964,787     $ 638,000     $ 178,000  
Total related parties
     375,000       450,000       210,000  
Total
   $ 1,339,787     $ 1,088,000     $ 388,000  
 
 
19
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Accounting for Conversion Options Embedded in Convertible Notes and Convertible Interest

The Company has certain convertible notes payable which contain embedded beneficial conversion features.  Through August 2005, the beneficial conversion features of these convertible notes were accounted for by the equity method, whereby the intrinsic value of the beneficial conversion features were considered discounts to the notes. These discounts were immediately amortized to interest expense. During September 2005, the number of shares of the Company’s common stock issued and issuable exceeded the number of shares of common stock the Company had authorized, and this triggered a change in the manner in which the Company accounts for these  beneficial conversion features.  In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), the debt features provision contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes.  Accordingly, the features qualified as embedded derivative instruments at September 30, 2005 and because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounting for separately from the debt instrument and recorded as derivative financial instruments.  In September 2005, the Company valued the  beneficial conversion features of its notes payable using the Black-Scholes valuation method, and arrived at an aggregate value of  $12,528,662.  Pursuant to Emerging Issues Task Force Issue  00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s  Own Stock” (“EITF 00-19”) “If a contract is reclassified from permanent  or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders’ equity.”  Accordingly, during the year ended December 31, 2005, the Company charged the amount of $12,445,576 to stockholders’ equity.  $5,665,290 of this amount was charged to additional paid-in capital, which brought the balance of additional paid-in capital to $0. The remainder, or $6,780,286, was charged to accumulated deficit.  During subsequent periods,  the conversion option liability will be revalued, and any change in value charged to operations.  At June 30, 2006, the conversion option liability was valued at $6,577,232.  The revaluation resulted in a gain during the  three months ended June  30, 2006  of $1,270,054.

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

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

10.  RELATED PARTY TRANSACTIONS

The Company engaged in the following transactions with related parties:

Three months ended June 30, 2006:

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

Three months ended June 30, 2005:

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

Three months ended June  30, 2004:

The Company issued 1,000,000 shares (post reverse-split) of common stock to Michael Ferrone, a board member, in exchange for current liabilities with a fair value of $261,346.
 
 
20
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

11. EQUITY

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

Common Stock

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

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

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

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

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

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

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

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

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

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

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

Warrants

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

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

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

There were no warrants outstanding at June 30, 2004.
 
 
 
21
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

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

     
Weighted
  
Weighted
   
Weighted
average
  
average
   
average
exercise
  
exercise
Range of
Number of
remaining
price of
Number of
price of
exercise
shares
contractual
outstanding
shares
exercisable
prices
outstanding
life (years)
warrants
exercisable
options
 $          0.005
  132,000,000
                    4.66
 $      0.005
  132,000,000
 $      0.005

The following table summarizes the warrants outstanding at June 30, 2006 (post reverse-split):

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

Transaction involving warrants are summarized as follows:

 
         
Weighted
  
         
Average
  
   
Number of
    
Exercise
  
   
Shares
    
Price
  
             
Warrants exercisable at December 31, 2003
     -     $ -  
                 
Granted
     -       -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at March 31, 2004
     -     $ -  
                 
Granted
     -       -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at June 30, 2004
     -     $ -  
                 
Granted
     -       -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at Sept 30, 2004
     -     $ -  
 
 
22
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 
         
Weighted
  
         
Average
  
   
Number of
    
Exercise
  
   
Shares
    
Price
  
             
Granted
     -       -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at December 31, 2004
     -     $ -  
                 
Granted
     132,000,000       0.005  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at March 31, 2005
     132,000,000     $ 0.005  
                 
Granted
             -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at June 30, 2005
     132,000,000     $ 0.005  
                 
Granted
     56,700,000       0.079  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at Sept 30, 2005
     188,700,000     $ 0.027  
                 
Granted
             -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at Dec 31, 2005
     188,700,000     $ 0.027  
                 
Granted
             -  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at March 31, 2006
     188,700,000     $ 0.027  
                 
                 
Granted
     300,000       0.005  
Exercised
     -          
Cancelled / Expired
     -       -  
                 
Warrants exercisable at June 30, 2006
     189,000,000     $ 0.027  

Options

In May 2004, the Company issued options to purchase 500,000 shares (post-reverse split)of common stock to an employee.  The options vest 100,000 annually over the next five years.  The Company expensed the value of the shares issued of $135,673 to operations during the twelve months ended December 31, 2004.
 
 
23
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

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

                 
Weighted
          
Weighted
  
           
Weighted
    
average
          
average
  
           
average
    
exercise
          
exercise
  
Range of
    
Number of
    
remaining
    
price of
    
Number of
    
price of
  
exercise
    
Options
    
contractual
    
outstanding
    
Options
    
exercisable
  
prices
    
outstanding
    
life (years)
    
options
    
exercisable
    
options
  
$ 0.50       500,000       2.88     $ 0.50       100,000     $ 0.500  
                                             
          500,000       2.88               100,000     $ 0. 500  

The following table summarizes the options  outstanding at June 30, 2005:

                 
Weighted
          
Weighted
  
           
Weighted
    
average
          
average
  
           
average
    
exercise
          
exercise
  
Range of
    
Number of
    
remaining
    
price of
    
Number of
    
price of
  
exercise
    
Options
    
contractual
    
outstanding
    
Options
    
exercisable
  
prices
    
outstanding
    
life (years)
    
options
    
exercisable
    
options
  
$ 0.50       500,000       3.88     $ 0.50       -     $ -  
                                             
          500,000       3.88               -       -  

The following table summarizes the options  outstanding at June 30, 2004:

                 
Weighted
          
Weighted
  
           
Weighted
    
average
          
average
  
           
average
    
exercise
          
exercise
  
Range of
    
Number of
    
remaining
    
price of
    
Number of
    
price of
  
exercise
    
Options
    
contractual
    
outstanding
    
Options
    
exercisable
  
prices
    
outstanding
    
life (years)
    
options
    
exercisable
    
options
  
$ 0.50       500,000       4.88     $ 0.50       -     $ -  
                                             
          500,000       3.88               -       -  
 
 
 
24

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

         
Weighted
  
         
Average
  
   
Number of
    
Exercise
  
   
Shares
    
Price
  
Options 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
     -       -  
                 
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  
 
 
25
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
(continued)
 

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

Granted
     -        -  
Exercised
     -       -  
Cancelled / Expired
     -       -  
                 
Options outstanding at 06.30.06
     500,000     $ 0.500  
Exercisable
     200,000     $ 0.500  
Not exercisable
     300,000     $ 0.500  

Accounting for Warrants and Freestanding Derivative Financial Instruments

The Company accounts for the issuance of common stock purchase warrants and other freestanding derivative financial instruments in accordance with the provisions of EITF 00-19.  Based on the provisions of EITF 00-19, 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).

The fair value of these warrants 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, and this triggered a change in the manner in which the Company accounts for these  warrants and the Company began to account for these warrants utilizing the liability method.    Pursuant to 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  $10,374,536 to stockholders’ equity.    At the same time, the Company changed the way in which it accounts for the beneficial conversion feature of convertible notes payable (see note 8).

The accounting guidance shows that the warrants and options which are a derivative liability should be revalued  each reporting period. The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants and options, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants and options.  During the three months ended June 30, 2006, the Company recognized a loss  of $638,829  for the increase in the fair value of the warrant liability and recorded this loss in operations during the three months ended June 30, 2006.  The fair value of these instruments was estimated at June  30, 2006, using the Black-Scholes option pricing model with the following assumptions: risk free interest rate: 4.75%; expected dividend yield: 0%; expected option life: 5 years; and volatility: 152.50%.

26
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
Insufficient Authorized but Unissued Shares of Common Stock

The Company has a potential obligation to issue 625,310,118 and 423,147,877 shares (post-reverse split) of common stock upon the conversion of convertible notes and accrued interest, warrants and penalty shares issuable at June 30, 2006 and 2005, respectively. .  The Company  had 135,686,502, and 81,542,037 shares (post-reverse split) of common stock outstanding at June 30, 2006, and 2005, respectively , and  500,000,000 shares (post-reverse split) of common stock authorized at June 30, 2006 and 2005.   The Company has exceeded its shares authorized by 125,310,118  and 0 shares (post-reverse split) at June 30, 2006 and 2005, respectively.

12.  PENALTY FOR LATE REGISTRATION OF SHARES

At June 30, 2006, the Company had a liability in the amount of $2,154,880 for the issuance of 29,280,000 shares (post-reverse split) of the Company’s common stock pursuant to a penalty calculation with regard to the late registration of shares underlying convertible  notes payable.  The Company charged to operations the amount of $556,320 during the three months ended June 30, 2006 representing the fair value of these shares.  During the three months ended June 30, 2006, the Company also marked to market the value of these shares.  This resulted in a gain  $141,080)
 
13. AMENDMENTS TO FINANCIAL STATEMENTS

By letter dated January 19, 2006, the Company received comments to, amount other things, its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.  As such, the Company has amended its June 30, 2004, 2005, and 2006 financial statements included in this Form 10-QSB in order to address said comments.  Listed below are the areas in which major changes to the previously reported financials occurred, in some instances the numbers have been modified, but the change doe not have a material effect.

Below listed in tabular format are the major areas of  change for the three months ended June 30, 2006:

   
Previously Reported
    
Adjustment
    
Restated Amount
  
Balance Sheet:
                  
                   
Cash
   $ 4,827     $ -     $ 4,827  
Accounts Receivable
     359,159       (28,121 )     331,038  
Loans receivable
     419,302       (134,302 )     285,000  
Interest receivable
     -       7,147       7,147  
Inventory
     5,201       (5,201 )     -  
Prepaid expenses
     18,658       (18,658 )     -  
Other current assets
     -       18,658       18,658  
                         
                         
Total Current Assets
     807,147       (160,477 )     646,670  
                         
Property and equipment, net
     84,403       37,151       121,554  
                         
                         
Total assets
     891,550       (123,326 )     768,224  
                         
Warrant liability
   $ -     $ 6,577,232     $ 6,577,232  
Conversion option liability
     -       7,470,856       7,470,856  
Accounts payable and accrued liabilities (note11)
     -       742,500       742,500  
Accrued interest, net of discount
     -       84,367       84,367  
Accrued interest - related party, net of discount
     -       73,451       73,451  
Notes payable - related party, current portion (note 5)
     -       375,000       375,000  
Penalty for late registration of shares
     -       2,154,880       2,154,880  
Notes payable - current portion
     184,105       757,095       941,200  
Accounts payable
     621,767       (621,767 )     -  
Accrued taxes and expenses
     68,904       (68,904 )     -  
Accrued interest payable
     147,805       (147,805 )     -  
Loan payable bank
     24,247       4       24,251  
                         
                         
Total current liabilities
     1,046,828       17,396,909       18,443,737  
                         
Notes payable
     710,190       (686,603 )     23,587  
                         
Common stock
     11,169       2,400       13,569  
Additional paid-in capital
     2,273,151       (1,970,515 )     302,636  
Paid-in capital warrants
     294,101       (294,101 )     -  
Accumulated deficit
     (3,443,889 )     (14,571,416 )     (18,015,305 )
                         
                         
Total equity
     (865,468 )     (16,833,632 )     (17,699,100 )
                         
Total liabilities and owners equity
   $ 891,550     $ (123,326 )    $ 768,224  
 
 
27
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 
   
Previously Reported
    
Adjustment
    
Restated Amount
  
                         
Statement of Operations:
                  
                   
                   
Revenue - sales
   $ 1,825,309     $ 14,961     $ 1,840,270  
Other Income
     43,580       (43,580 )     -  
                         
                         
Total revenue
     1,868,889       (28,619 )     1,840,270  
                         
                         
Cost of good sold
     1,394,282       4,040       1,398,322  
Selling, general, and administrative expenses
     -       -       586,954  
Selling expenses
     249,194       (249,194 )     -  
General and administrative expenses
     246,156       (246,156 )     -  
                         
                         
Total expenses
     1,889,632       95,644       1,985,276  
                         
Loss before other expenses and income tax expense
     (20,743 )     (124,263 )     (145,006 )
                         
Cost of penalty for late registration
     -       556,320       556,320  
Change in fair value of warrant liability
     -       (638,829 )     (638,829 )
Change in fair value of option liability
     -       (1,270,054 )     (1,270,054 )
(gain) loss from mark to market - penalty
     -       (141,080 )     (141,080 )
Interest expense
     24,593       62,287       86,880  
Amortization of discount on debentures
     (33,634 )     33,634       -  
                         
                         
Net Loss
   $ (78,970 )   $ 1,340,727     $ 1,261,757  
 
 
 
28
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Below listed in tabular format are the major areas of  change for the three months ended June 30, 2005:
 

   
Previously Reported
    
Adjustment
    
Restated Amount
  
                         
Balance Sheet:
                  
                   
Cash
   $ 119,833       (23,860 )   $ 95,973  
Accounts Receivable
     318,299       -       318,299  
Inventory
     -       -       -  
Prepaid expenses
     84,564       (84,564 )     -  
Other current assets
     -       -       79,900  
                         
                         
Total Current Assets
     522,696       (28,524 )     494,172  
                         
Property and equipment, net
     63,270       10,429       73,699  
                         
                         
Total assets
     585,966       (18,095 )     567,871  
                         
                         
Accounts payable and accrued expenses
   $ -     $ 522,119     $ 522,119  
Accrued interest, net of discount
     -       3,711       3,711  
Accrued interest - related party, net of discount
     -       20,052       20,052  
Accounts payable
     521,754       (521,754 )     -  
Accrued taxes and expenses
     68,248       (68,248 )     -  
Notes and loans payable
     -       -       -  
Notes payable - current portion
     865,000       (430,000 )     435,000  
Notes payable - related party, current portion
     -       275,000       275,000  
Penalty for late registration of shares
     -       537,600       537,600  
                         
                         
Total current liabilities
     1,455,002       338,480       1,793,482  
                         
Notes payable
     215,000       (12,000 )     203,000  
Notes payable - related party
             175,000       175,000  
                         
Loans payable stockholders
     7,448       (7,448 )     -  
                         
Common stock
     8,154       -       8,154  
Common stock subscribed
     -       67,000       67,000  
Additional paid-in capital
     1,838,048       3,479,851       5,317,899  
Accumulated deficit
     (2,937,687 )     (4,058,977 )     (6,996,664 )
                         
                         
Total equity
     (1,094,484 )     (509,127 )     (1,603,611 )
                         
Total liabilities and owners equity
   $ 585,966     $ (18,095 )   $ 567,871  
                         
 
 
 
29
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)
 

   
Previously Reported
    
Adjustment
    
Restated Amount
  
                         
Statement of Operations:
                  
                   
                   
Revenue - sales
   $ 1,281,850     $ 43,636     $ 1,325,486  
Other Income
     43,964       (43,964 )     -  
                         
                         
Total revenue
     1,325,814       (328 )     1,325,486  
                         
                         
Cost of good sold
     1,034,733       -       1,034,733  
Selling, general, and administrative expenses
     -       409,918       409,918  
Selling expenses
     202,675       (202,675 )     -  
General and administrative expenses
     210,467       (210,467 )     -  
                         
                         
Total expenses
     1,447,875       (3,224 )     1,444,651  
                         
Loss before other expenses and income tax expense
     (122,061 )     2,896       (119,165 )
                         
Interest expense
     19,748       47,067       66,815  
Cost of penalty for late registration
     -       467,200       467,200  
(gain) loss from mark to market - penalty
     -       70,400       70,400  
                         
Net Loss
   $ (141,809 )   $ (581,771 )   $ (723,580 )
 
 
 
30
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Below listed in tabular format are the major areas of  change for the three months ended June 30, 2004:

(Note: The balance sheet at June 30, 2004 was not previously reported. The  statement of operations was previously reported on our Form 10-QSB for the three months
ended June  30, 2005):
 

   
Previously Reported
    
Adjustment
    
Restated Amount
  
Total liabilities and owners equity
   $ 891,550     $ (123,326 )    $ 768,224  
Statement of Operations:
                  
                   
                   
Revenue - sales
   $ 1,076,001       45,549     $ 1,121,550  
Other Income
     45,549       926,250       971,799  
                         
                         
Total revenue
     1,121,550       (971,799 )     149,751  
                         
                         
Cost of good sold
     971,799       -       971,799  
Sales, general, and administrative expenses
             2,710,035       2,710,035  
Selling expenses
     292,786       (292,786 )        
General and administrative expenses
     287,249       (287,249 )        
                         
                         
Total expenses
     1,551,834       2,130,000       3,681,834  
                         
Loss before other expenses and income tax expense
     (430,284 )     (2,130,000 )     (2,560,284 )
                         
Interest expense
     16,756       290,000       306,756  
                         
                         
Net Loss
   $ (447,040 )     (2,420,000 )   $ (2,867,040 )

The following changes were made to the footnote disclosures of our financial statements:

Accounting Policies

We have expanded our disclosures in our accounting policies footnote.

Valuation of Common Stock Shares Issued

The Company revalued the issuances of common stock, utilizing the closing market price for the fair value on the date of each issuance.  In a few instances, shares of the Company’s common stock were issued to consultants for services provided.  In these such occasions, the date on which the services were performed, was used to value the shares.  Any additional expenses from the revaluation have been expensed.

Dilutive Securities

We have added a disclosure regarding the total number of dilutive securities issuable in the equity footnotes.

Reverse Stock Splits

We have expanded the disclosure regarding the retroactive restatement of our financial statements for the effects of the reverse stock splits.
 
31
 
INNOVATIVE FOOD HOLDINGS, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED
JUNE 30, 2006, 2005 AND 2004
(Unaudited)
(Restated)

Statement of Cash Flows

We have revised the disclosure in the statement of cash flows to present any changes in the amount of principal owed on notes payable to be classified in the Financing Activities section.

We have also revised our disclosure in the statement of cash flows regarding the shares issued for the merger transaction.

Valuation of Common Stock Shares Issued

The Company revalued the issuances of common stock, utilizing the closing market price for the fair value on the date of each issuance.  In a few instances, shares of the Company’s common stock were issued to consultants for services provided.  In these such occasions, the date on which the services were performed, was used to value the shares.  Any additional expenses from the revaluation have been expensed.

Beneficial Conversion Feature of Notes Payable, Options, and Warrants

During the 3 months ended September 30, 2005, the number of shares of common stock that the Company has committed to issue via convertible notes, options, and warrants has exceeded the number of shares authorized.  Accordingly, the Company changed the way in which we account for these convertible instruments to comply with the provisions of EITF 00-19.  These instruments are now accounted for as liabilities, and the value of these liabilities will be adjusted every accounting period.  The value is calculated utilizing the Black-Scholes valuation model.

Insufficient Authorized but Unissued Shares of Common Stock

The Company has a potential obligation to issue shares of common stock, which exceed the number of shares that the Company currently has authorized.  The resulting affect is a liability to the Company, which is revalued at the end of each reporting period.  The gain or loss, resulting from the revaluation each quarter is expensed.

Penalty for Late Registration of Shares

The Company recorded a penalty associated with the late registration of shares pursuant to the terms in the underlying convertible notes payable.  The Company will continue to accrue the penalty until the shares are registered, and the shares are revalued at the end of each reporting period.  Any additional expense that is incurred is expensed in the period in which the expense is incurred.
 
 

 
32

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENTS

Certain information contained in this discussion and elsewhere in this report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. The safe harbor created by the Securities Litigation Reform Act will not apply to certain “forward looking statements” because we issued "penny stock" (as defined in Section 3(a)(51) of the Securities  Exchange Act of 1934 and Rule  3a51-1  under the  Exchange  Act)  during the three  year  period preceding the date(s) on which those forward looking statements were first made, except to the extent  otherwise  specifically  provided by rule,  regulation  or order of the Securities and Exchange Commission. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on behalf of us. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may",  "will", "expect", "believe",  "explore",  "consider",  "anticipate",  "intend", "could", "estimate",  "plan", "propose" or "continue" or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:

·  
Our ability to raise capital necessary to sustain our anticipated operations and implement our proposed business plan,

·  
Our ability to implement our proposed business plan,

·  
The ability to successfully integrate the operations of businesses we have acquired, or may acquire in the future, into our operations.

·  
Our ability to generate sufficient cash to pay our lenders and other creditors,

·  
Our ability to identify and complete acquisitions and successfully integrate the businesses we acquire, if any,

·  
Our ability to employ and retain qualified management and employees,

·  
Our dependence on the efforts and abilities of our current employees and executive officers,

·  
Changes in government  regulations  that are applicable to our anticipated business,

·  
Changes in the demand for our services,

·  
The degree and nature of our competition,

·  
Our lack of diversification of our business plan,

·  
The general volatility of the capital markets and the establishment of a market for our shares,

·  
Our ability to generate sufficient cash to pay our creditors, and

·  
Disruption in the economic and financial conditions primarily from the impact of past terrorist attacks in the United States, threats of future attacks, police and military activities overseas and other disruptive worldwide political and economic events and natural disasters.
 
 
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We are also subject to other risks detailed from time to time in our other Securities and Exchange Commission filings and elsewhere in this report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Critical Accounting Policy and Estimates

Our Management’s Discussion and Analysis section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, management evaluates its estimates and judgments, including those related to revenue   recognition, accrued   expenses, financing   operations, and contingencies and litigation.  Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily  apparent  from other  sources.  Actual results may differ from these Estimates under different assumptions or conditions.  There are no significant accounting estimates inherent in the preparation of our financial statements.

Background

The following discussion should be read in conjunction with the financial statements of the company and related notes included elsewhere in this Report and in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

Business Overview
 
RESULTS OF OPERATIONS
 
The following is a discussion of our financial condition and results of operations for the quarters ended June 30, 2006 and 2005. This discussion may contain forward looking-statements that involve risks and uncertainties. Our actual results could differ materially from the forward looking-statements discussed in this report. This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report and in our other public filings.
 
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 
Revenue
 
Revenue increased by $514,784, or 39%, to $1,840,270 for the three months ended June 30, 2006 from $1,325,486 in the prior year. The substantial portion of the increase was attributable to increases in sales of specialty products, meats and game, the addition of cheeses to our product offerings, and an increase in the number of divisions of USF that offered our products to their customers.
 
Cost of Revenue
 
Cost of revenue was $1,398,322 for the three months ended June 30, 2006, an  increase of $363,589 or approximately 35% compared to cost of revenue of $1,034,733 for the three months ended June 30, 2005.  The increase in the cost of revenue was due primarily to increased sales volume during the current quarter.  Gross profit margin for the three months ended June 30, 2006 was approximately 22%, similar to the gross profit margin  for the three months ended June 30, 2005
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased by approximately $177,036, or approximately 43%, to  $586,954 during the three months ended June 30, 2006   from  $ 409,918 for the three months  ended June 30, 2005. The increase was attributable to professional and legal fees.  The primary components of selling, general, and administrative expenses for the three months ended June 30, 2006 were payroll and related costs of $263,155; consulting and professional fees of $111,021; commissions of $33,707;  facilities costs of $24,802; insurance of $15,434; amortization and depreciation of $14,042; investor relations of $8,339; and shipping and postage of $5,779.
 
 
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Penalty for Late Registration of Shares

During the three months ended June 30, 2006, the Company accrued the issuance of 14,640,000 shares (post-reverse split)of  common stock  pursuant to a penalty calculation with regard to the late registration of shares underlying convertible notes payable.  The Company charged to operations $556,320, during the three months ended June 30, 2006, representing the fair value of these shares.  During the three months ended June 30, 2006, the Company also marked to market the value of the 58,240,000 total shares (post-reverse split) issuable under this penalty. This resulted in a gain to operations of $141,080.

Interest expense, net

Interest expense, net of interest income, increased by approximately $20,065, or approximately 30%, from  $66,815 to $86,880 for the three months ended June 30, 2005 and 2006, respectively.  This increase was attributable to an increase in notes payable, and to the amortization of the beneficial conversion features associated with convertible notes payable during the three months ended June 30, 2006.

Change in Fair value of Warrant Liability

At  June 30, 2006, the Company had an accrued a liability of $6,577,232 for the warrants issued with the convertible notes.  The Company credited to operations the amount of $638,829 during the three months ended June 30, 2006, representing the change in fair value of these warrants.

Change in Fair value of the Conversion Option Liability

At June 30, 2006, the Company had an accrued a liability of $7,470,856, for the beneficial conversion feature of convertible notes payable.  The Company credited to operations the amount of $1,270,054 during the three months  ended June 30, 2006, representing the change in fair value of these options

Net Income

For the reasons stated above, net income for the three months ended June 30, 2006 of  $1,261,757 an increase in profit of $1,985,337 or approximately 274% compared to a net loss of $723,580 during the three months ended June 30, 2005. We note that these “profits” are the result of the application of various accounting rules as they apply to the Company and that these “Profits” have no impact on out cash flows. During the three month period ended June 30, 2006 and 2005 our operating loss was $145,006 and $119,165, respectively.

Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004

Revenue

Revenue increased by $203,936, or 18%, to $1,325,486 for the three months ended June 30, 2005 from $1,121,550 for the three months ended June 30, 2004. The substantial portion of the increase was attributable to increases in sales of specialty products, meats and game, the addition of cheeses to our product offerings, and an increase in the number of divisions of USF that offered our products to their customers.
 
Cost of Revenue

Cost of revenue was $1,034,733 for the three months ended June 30, 2005, an increase of $62,934 or approximately 7% compared to cost of revenue of  $971,799 for the three months ended June 30, 2004.  This increase in the cost of revenue was due primarily to the increased sales volume of the current quarter mitigated.  Gross profit margin for the three months ended June 30, 2005 was approximately 22%, compared to gross profit margin of approximately 13% for the three months ended June 30, 2004.  This increased gross margins for the current quarter was due primarily improved buying efficiencies and better Fedex rates.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses decreased by approximately $2,300,117 or 85%, from $2,710,035 to  $409,918 for the three months ended June 30, 2004 and 2005, respectively. The decrease was attributable to a one time adjustment of $2,418,130 to non-cash compensation for common stock issued to consultants for work done.  The primary components of selling, general, and administrative expenses for the three months ended June 30, 2005 were payroll and related costs of $154,266; consulting and professional fees of $104,022; facilities costs of $27,653; commissions of $18,977; amortization and depreciation of $16,196; insurance of $13,553; investor relations of $14,740; and shipping and postage of $11,554.
 
.
 
 
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Penalty for Late Registration of Shares

During the three months ended June 30, 2005, the Company incurred a penalty for the late registration of shares underlying certain convertible debt agreements. This penalty is payable in cash or in additional shares of stock. At June 30, 2005, the Company had  incurred a penalty in the amount of 6,400,000 shares (post-reverse split)of common stock.  The Company accrued the fair value of the stock payment of this penalty in the amount of $467,200.  There was no such penalty during the three months ended June 30, 2004.

Loss From Marking to Market - Penalty Shares

At June 30, 2005, the Company revalued the 6,400,000 shares (post-reverse split) issuable pursuant to the late registration penalty, and recorded an additional charge to operations in the amount of $70,400.

Interest Expense, net

Interest expense, net of interest income, decreased by approximately $307,262, or 78%, from  $306,756 during the three months ended June 30, 2004 to $66,815 for the three months ended June 30, 2005.  This decrease was attributable to a decrease in the amortization of the  beneficial ownership features of convertible notes payable.

Net Loss

For the reasons stated above, net loss for the three months ended June 30, 2005 was $723,580, a decrease of $ 2,143,460 or approximately 75% compared to a net loss of $2,867,040 during the three months ended June 30, 2004. Our operating loss for the three months ended  June 30, 2005 and 2004 was $2,562,284, and $1119,165, respectively.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Revenue

Revenue increased by $983,706, or approximately 39%, to $3,479,445 for the six months ended June 30, 2006 from $2,495,739 in the prior year. The substantial portion of the increase was attributable to increases in sales of meats and game, the addition of cheeses to our product offerings, and an increase in the number of divisions of USF that offered our products to their customers.

Cost of Revenue

Cost of revenue was $2,670,228 for the six months ended June 30, 2006, an  increase of $708,773 or approximately 36% compared to cost of revenue of $1,961,455 for the six months ended June 30, 2005.  The increase in the cost of revenue was due primarily to increased sales volume during the current quarter.  Gross profit margin for the six months ended June 30, 2006 was approximately 22%, compared to gross profit margin of approximately 21% for the six months ended June 30, 2005.  The increased gross margins for the current quarter were due primarily to better profit margins on specialty products and better Fedex rates.
 

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $248,224, or approximately 32%, to  $1,036,639 during the six months ended June 30, 2006   from  $ 788,415 for the six months  ended June 30, 2005. The increase was attributable to increase professional and legal fees, increased travel and increase in sales payroll. The primary components of selling, general, and administrative expenses for the six months ended June 30, 2006 were payroll and related costs of $475,524; consulting and professional fees of $223,689; facilities costs of $55,679; commissions of $51,457; insurance of $33,970; amortization and depreciation of $25,373;  investor relations of $12,456; information technology support of $12,089; and shipping and postage of $10,694.
 

Penalty for Late Registration of Shares

During the six months ended June 30, 2006, the Company accrued the issuance of 29,280,000 shares (post-reverse split) of  common stock pursuant to a penalty calculation with regard to the late registration of shares underlying convertible notes payable.  The Company charged to operations $1,221,952, during the six months ended June 30, 2006, representing the fair value of these shares.  During the six months ended June 30, 2006, the Company also marked to market the value of the  58,240,000 (post-reverse split)shares issuable under this penalty.  This resulted in a gain of $6,208.

36
 
Interest expense, net

Interest expense, net of interest income, decreased by approximately $282,538, or 64%, from  $441,185 to $158,647 for the six months ended June 30, 2005 and 2006, respectively.  This increase was attributable to an increase in notes payable, and to the increased amortization of the beneficial conversion features associated with convertible notes payable during the six months ended June 30, 2006.

Change in Fair value of Warrant Liability

During the six months ended June 30, 2006, the Company had an accrued a liability of $6,577,232, for the warrants issued with the convertible notes.  The Company charged to operations $532,835 during the six months ended June 30, 2006, representing the fair value of these warrants.

Change in Fair value of the Conversion Option Liability

During the six months ended June 30, 2006, the Company had an accrued a liability of $7,470,856, for the beneficial conversion feature of convertible notes payable.  The Company charged to operations $367,581 during the six months  ended June 30, 2006, representing the change in the fair value of these options

Net Loss

For the reasons stated above, net loss for the six months ended June 30, 2006 was $2,514,645, an increase of $1,281,729 or approximately 104% compared to a net loss of $1,232,916 during the six months ended June 30, 2005. Our operating loss for the six months ended June 30, 2006 and 2005 was $227,422 and $254,131, respectively.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

Revenue

Revenue increased by $429,769, or approximately 21%, to $2,495,739 for the six months ended June 30, 2005 from $2,065,970 for the six months ended June 30, 2004. The substantial portion of the increase was attributable to increases in sales of meats and game, the addition of cheeses to our product offerings, and an increase in the number of divisions of USF that offered our products to their customers.

Cost of Revenue

Cost of revenue was $1,961,455 for the six months ended June 30, 2005, an increase of $137,194 or approximately 8% compared to cost of revenue of $1,824,261 for the six months ended June 30, 2004. The increase in the cost of revenue was due primarily to increased sales volume during the current quarter. Gross profit margin for the six months ended June 30, 2005 was approximately 21%, compared to gross profit margin of approximately 12% for the six months ended June 30, 2004.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses decreased by  $2,741,097, or approximately 78%, from  $3,529,512 during the six months ended June 30, 2004 to $788,415 for the six months ended June 30, 2005. The decrease was attributable to a one time adjustment of $2,418,130 to non-cash compensation for common stock issued to consultants for work done. The primary components of selling, general, and administrative expenses for the six months ended June 30, 2005 were payroll and related costs of $379,291; consulting and professional fees of $125,301; facilities costs of $44,958; food show expenses of $41,365; commissions of $38,146; amortization and depreciation of $32,327; shipping and postage of $29,548;  insurance of $25,080;  investor relations of $18,852; and information technology support of $8,053.
 
Penalty for Late Registration of Shares

During the six months ended June 30, 2005, the Company incurred a penalty for the late registration of shares underlying certain convertible debt agreements. This penalty is payable in cash or in additional shares of stock. At June 30, 2005, the Company had  incurred a penalty in the amount of 6,400,000 shares (post-reverse split) of common stock.  The Company accrued the fair value of the stock payment of this penalty in the amount of $467,200.  There was no such penalty during the six months ended June 30, 2004.

 
37
 
Loss From Marking to Market - Penalty Shares

At June 30, 2005, the Company adjusted the value of the 6,400,000 penalty shares (post-reverse split) issuable to market value, and charged to operations the amount of $70,400.  There was no such charge during the six months ended June 30, 2004.

Interest Expense, net

Interest expense, net of interest income, increased by approximately $133,923, or 44%, from $307,262 during the six months ended June 30, 2004 to $441,185 for the six months ended June 30, 2005.  This increase was attributable to an  increase in notes payable, and to the amortization of the beneficial conversion features associated with convertible notes payable during the six months ended June 30, 2005.

Net Loss

For the reasons stated above, net loss for the six months ended June 30, 2005 was $1,232,916 a decrease of $2,362,149 or approximately 75% compared to a net loss of $3,595,065 during the six  months ended June 30, 2004. Our operating loss for the six months ended June 30, 2005 and 2004 was $254,131 and $3,287,803, respectively.

Liquidity and Capital Resources

As of June  30, 2006, the Company had cash on hand of $4,827,  a decrease of $91,146 from December 31, 2005. During the six months ended June 30, 2006, cash provided by operating activities were $60,411, consisting primarily of the loss of $2,514,645 offset by depreciation and amortization of $25,372, value of warrants issued of $17,394; Stock issued as bonus of $49,901; cost of penalty due to late registration of shares of $1,221,952, change in fair value of warrant liability of $543,586, change in fair value of conversion option liability of $367,581;  loss from  marking to market shares issuable due to penalty on late registration of shares  of $6,208, and changes in the components of working capital in the net amount of $343,062. Cash used in investing activities was $215,787 consisting a loan to Pasta Italiano of $190,000 and the purchase of property and equipment of $25,787.  Cash provided by financing activities was $150,000, consisting of $160,000 of proceeds from the issuance of notes payable offset by $10,000 in principal payments on notes payable.
 
Historically, our primary cash requirements have been used to fund the cost of operations, with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines.

Under current operating plans and assumptions, management believes that projected cash flows from operations and available cash resources will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. 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.
 
Critical Accounting Policy and Accounting Estimate Discussion

In accordance with the Securities and Exchange Commission's (the "Commission") Release Nos. 33-8040; 34-45149; and FR-60 issued in December 2001, referencing the Commission's statement "regarding the selection and disclosure by public companies of critical accounting policies and practices", we have set forth in Note 2 of the Notes to Consolidated Financial Statements what we believe to be the most pervasive accounting policies and estimates that could have a material effect on our results of operations and cash flows if general business conditions or individual customer financial circumstances change in an adverse way relative to the policies and estimates used in the attached financial statements or in any "forward looking" statements contained herein.
 
The Company’s cash on hand may be insufficient to fund its planned operating needs.  Innovative Food Holdings, Inc. continues to seek funding for working capital requirements, necessary equipment purchases, marketing costs, and other operations for the next year and foreseeable future by raising capital through the sale of equity and/or debt securities, issuing common stock in lieu of cash for services and by advances from shareholders.

We expect 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 to us from debt or equity financing, or that if available, the company will be able to obtain such funds on favorable terms and conditions. If the company cannot secure additional funds it may have to reduce its operations to be able to continue as a going concern.   The Company   currently has no definitive arrangements with respect to additional financing.

While we have raised capital to meet our working capital and financing needs in the past, additional financing may be  required in order to meet our current and projected cash flow deficits from operations and development.  We are seeking financing in the form of equity in order to provide the necessary working capital.  We currently have no commitments for financing.  There is no guarantee that we will be successful in raising the funds required.

By adjusting our operations and development to the level of capitalization, management believes we have sufficient capital resources to meet projected cash flow deficits through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.

The independent auditors report on our December 31, 2005 financial statements states that our recurring losses raise substantial doubts about our ability to continue as a going concern.

38
 
INFLATION

The impact of inflation on the costs of the Company, and the ability to pass on cost increases to its customers over time is dependent upon market conditions. The Company is not aware of any inflationary pressures that have had any significant impact on the Company’s operations over the past quarter, and the Company does not anticipate that inflationary factors will have a significant impact on future operations.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.

RISK FACTORS

The Company’s business and success is subject to numerous risk factors as detailed in its Annual Report on Form 10-KSB for the year ended December 31, 2006.

 ITEM 3 - CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of  the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

(a) Evaluation of disclosure controls and procedures

Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. This conclusion notwithstanding you are advised that no system is 100% foolproof.

(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
39
 
 PART II. - OTHER INFORMATION

 Item 1. Legal Proceedings

NONE 

 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

On May 10, 2006, the Company issued 900,000 shares (post reverse-split) of common stock with a fair value of $32,400 to employees as a bonus.

On May 23, 2006, the Company issued 1,094,465 shares (post reverse-split) of common stock pursuant to conversion of notes payable and accrued interest in the amount of $5,473.

On May 22, 2006, the Company issued 350,000 shares (post reverse-split) of common stock with a fair value of $17,500 to an officer as bonus.

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

On February 25, 2005, the Company issued 300,000 shares (post reverse-split) of common stock with a fair value of $3,900 to consultants for services performed.

On February 25, 2005, the Company issued 2,500,000 shares (post reverse-split) of common stock with a fair value of $32,500 to a board member for services performed.

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

On August 4, 2004, the Company issued 1,300,000 shares (post reverse-split) of common stock for conversion of liabilities in the amount of $339,750.

On May 26, 2004, the company issued 700,000 shares (post reverse-split) of common stock in exchange for services performed in the amount of $70,000.

Each of  the above listed issuances were exempt from the registration pursuant to the Section 4(2) of the Securities Act of 1933.

 Item 3. Defaults Upon Senior Securities

At June 30, 2006, 2005, and 2004, we were in default of the terms of notes  payable in the amount of $645,000, $475,000, and $0, respectively.  These defaults resulted from our failure to meet certain of our obligations under the loan documents relating to these notes. 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.

 Item 4. Submission of Matters to a Vote of Securities Holders

NONE 

 Item 5. Other Information

NONE 

 Item 6. Exhibits

31.1 Section 302 Certification
31.2 Section 302 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification 

40
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURE
  
TITLE
  
DATE
         
/s/  Sam Klepfish            
Sam Klepfish
  
 Chief Executive Officer
  
April 18, 2008
         
/s/ John McDonald         
John McDonald
  
Principal Financial Officer
  
April 18, 2008
 
 
 
 
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