UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K
 
 
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010
 
OR
 
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
COMMISSION FILE NUMBER:  0-9376
 
INNOVATIVE FOOD HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
FLORIDA
20-116776
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
3845 Beck Blvd., Suite 805 Naples, Florida
34114
(Address of Principal Executive Offices)
(Zip Code)
 
(239) 596-0204
(Registrant's telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
   COMMON STOCK, $0.0001 PAR VALUE PER SHARE
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   o    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨ No ¨
 
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer  o
 
Accelerated filer o
Non-accelerated filer     o
(Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   o    No   x
 
The aggregate market value of the voting and non-voting stock held by non-affiliates was approximately $1,032,807 as of  June 30, 2010, based upon a closing price of $0.0079 per share for the registrant’s common stock on such date.
 
On March 11, 2011, a total of 202,385,103 shares of our common stock were outstanding.
 
 
 
 
INNOVATIVE FOOD HOLDINGS, INC.
 
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
 
ITEMS IN FORM 10-K
 
 
PART I
PAGE
     
Item 1.
4
Item 2.
10
Item 3.
10
Item 4.
10
     
 
PART II
 
     
Item 5.
11
Item 6.
13
Item 7.
13
Item 8.
21
Item 9.
53
Item 9A.
53
Item 9B.
54
     
 
PART III
 
     
Item 10.
54
Item 11.
57
Item 12.
60
Item 13.
62
Item 14.
62
Item 15.
63
     
 
65
 
 
 
 
FORWARD LOOKING INFORMATION
MAY PROVE INACCURATE
 
 
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO US THAT ARE BASED ON THE BELIEFS OF MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO US. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," “SHOULD,” “PLAN,” AND "EXPECT" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. WE DO NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
 
 
 
 
 
 
 
PART I

ITEM 1.  Business
 
Our History
 
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. We changed our name to Fiber Application Systems Technology, Ltd in February 2003. In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (IVFH), a Florida corporation formed for that purpose. As a result of the merger we changed our name to that of Innovative Food Holdings, Inc. In January 2004 we also acquired Food Innovations, Inc., a Delaware corporation, for 25,000,000 shares of our common stock.
 
Our Operations
 
Our business is currently conducted by our subsidiaries, Food Innovations, Inc. (“FII” or “Food Innovations”), which was incorporated in the State of Delaware on January 9, 2002, 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.) and Gourmet Foodservice Group, Inc. Since its incorporation, Food Innovations, primarily through a relationship with U.S. Foodservice,  has been in the business of providing premium restaurants with the freshest origin-specific perishables and specialty products shipped directly from our network of vendors within 24 – 72 hours. Our customers include restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses.  Since its incorporation, For The Gourmet has been in the business of providing consumers with gourmet food products shipped directly from our network of vendors within 24 – 72 hours. Since its incorporation, Gourmet Foodservice Group has been in the business of providing premium restaurants with the freshest origin-specific perishables and specialty products shipped directly from our network of vendors within 24 – 72 hours.  In our business model, we receive orders from our customers and then work closely with our suppliers to have the orders fulfilled  .  In order to maintain freshness and quality , we carefully select our suppliers based upon, among other factors, their quality, uniqueness, reliability and access to overnight courier services.
  
Our Products
 
We distribute over 3,000 perishable and specialty food products, including origin-specific seafood, domestic and imported meats, exotic game and poultry, artisanal cheeses, caviar, wild and cultivated mushrooms, micro-greens, heirloom and baby produce, organic farmed and manufactured food products, estate-bottled olive oils and aged vinegars. We are constantly adding other products that food distributors cannot effectively warehouse, including organic products and specialty grocery items. We offer our customers access to the best food products available nationwide, quickly and cost-effectively. Some of our best-selling items include:
 
 
● 
 Seafood - Alaskan wild king salmon, Hawaiian sashimi-grade ahi tuna, Gulf of Mexico day-boat snapper, Chesapeake Bay soft shell crabs, New England live lobsters, Japanese hamachi
 
 
● 
 Meat & Game - Prime rib of American kurobuta pork, dry-aged buffalo tenderloin, domestic lamb, Cervena venison, elk tenderloin
 
 
● 
 Produce - White asparagus, baby carrot tri-color mix, Oregon wild ramps, heirloom tomatoes
 
 
● 
 Poultry - Grade A foie gras, Hudson Valley quail, free range and organic chicken, airline breast of pheasant
 
 
● 
 Specialty - Truffle oils, fennel pollen, prosciutto di Parma, wild boar sausage
 
 
● 
 Mushrooms - Fresh morels, Trumpet Royale, porcini powder, wild golden chanterelles
 
 
● 
 Cheese - Maytag blue, buffalo mozzarella, Spanish manchego, Italian gorgonzola dolce
 
In 2010, seafood accounted for 9% of sales, meat and game accounted for 15%   of sales, specialty items accounted for 57%  of sales, produce accounted for 6%  of sales, cheese accounted for 8% of sales, and poultry accounted for 5%  of sales.
 
 
Customer Service and Logistics
 
Our “live” chef-driven customer service department is available by telephone every weekday, from 7 a.m. to 7 p.m., Florida time. The team is made up of four chefs who are full-time employees of the Company, and who are experienced in all aspects of perishable and specialty products. By employing chefs to handle customer service, we are able to provide our customers with extensive information about our products, including:
 
●
 Flavor profile and eating qualities
 
●
 Recipe and usage ideas
 
●
 Origin, seasonality, and availability
 
●
 Cross utilization ideas and complementary uses of products
 
Our logistics team tracks every package to ensure timely delivery of products to our customers. The logistics manager receives tracking information on all products ordered, and packages are monitored from origin to delivery. In the event that delivery service is interrupted, our logistics department begins the process of expediting the package to its destination. The customer is then contacted before the expected delivery commitment time allowing the customer ample time to make arrangements for product replacement or menu changes. Our logistics manager works directly with our vendors to ensure our strict packaging requirements are in place at all times.

Relationship with U.S. Foodservice
 
In February 2010, our subsidiary, Food Innovations, signed a new contract with US Foodservices, Inc. (“USF”).  Under the current terms of the contract, FII supplies overnight delivered, perishable sea foods, fresh produce, and other exotic fresh foods. Such products are difficult for broadline food distributors to manage profitably and keep in warehouse stock due to their perishable nature and high-end limited customer base. Through USF’s sales associates, FII’s products are available to USF accounts nationwide, ensuring superior freshness and extended shelf life to their customers. This current contract with USF expires on December 31, 2012.  During the years ended December 31, 2010, and 2009, sales through USF’s sales associates accounted for 92% and 96% of total sales, respectively.    We believe that although a significant portion of our sales occurs through the USF sales force, the success of the program is less contingent on a contract then on the actual performance and quality of our products. Other than our business arrangements with USF, we are not affiliated with either USF or its subsidiary, Next Day Gourmet, L.P. (“Next Day Gourmet”).
 
Growth Strategy
 
Restaurant-industry sales on a typical day in 2010 were $1.5 billion and Restaurant industry sales are expected to reach a record and post positive growth in 2011 after a three-year period of negative real sales growth, according to the National Restaurant Association 2011 Restaurant Industry Forecast. Sales are projected to advance 3.6 percent over 2010 sales, which equals 1.1 percent in real (inflation-adjusted) terms.    
 
For our continued growth within the foodservice industry we rely heavily on the availability to our customers of our chefs' culinary skills, a high level of personal customer service, premium quality products, new product introductions and sales available through our relationship with USF.

We anticipate attempting to grow our current business both through increased sales of existing products to our existing foodservice customers, the introduction of new products to our foodservice customers, increasing our foodservice customer base, and through further entry into markets such as the direct to consumer market through a variety of potential sales channels, and sales partnerships and directly via the web.
 
 
In addition to attempting to grow our current business, we believe that there are lateral opportunities in the food industry generally and  we may look into  the possibility of acquiring a gourmet food manufacturer or gourmet distributor at some future point in time. We anticipate that, given our current cash flow situation, any acquisition could involve the issuance of additional shares of our common stock or third party financing, which may not be available on acceptable terms. No acquisition will be consummated without thorough due diligence. No assurance can be given that we will be able to identify and successfully conclude negotiations with any potential target.
 
General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-prepared-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, may continue to contribute   to a slow or declining growth in the foodservice market. We intend to continue our efforts to expand our market share and grow earnings by focusing on sales growth, margin management, productivity gains and supply chain management, and product and service differentiation.
 
Competition
 
While we face intense competition in the marketing of our products and services, it is our belief that there is no other single company in the United States that offers such a broad range of customer service oriented quality chef driven perishables for delivery in 24 to 72 hours. Our primary competition is from local purveyors that supply a limited local market and have a limited range of products and from other specialty gourmet distributors. However, many purveyors are well established, have reputations for success in the development and marketing of these types of products and services and have significantly greater financial, marketing, distribution, personnel and other resources. These financial and other capabilities permit such companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors such as us, to enter into new markets and introduce new products and services.
 
Insurance
 
We maintain a general liability insurance policy with a per occurrence limit of $1,000,000 and aggregate policy covering $2,000,000 of liability. In addition, we have non-owned automobile personal injury coverage with a limit of $1,000,000. Such insurance may not be sufficient to cover all potential claims against us and additional insurance may not be available in the future at reasonable costs.
 
Government Regulation
 
Various federal and state laws currently exist, and more are sure to be adopted, regulating the delivery of fresh food products. However, our business plan does not require us to deliver fresh food products directly, as third-party vendors ship the products directly to our customers. We require all third-party vendors to certify that they maintain at least $2,000,000 liability insurance coverage and compliance with Hazard Analysis and Critical Control Point (HACCP), an FDA- and USDA-mandated food safety program, or a similar standard. Any changes in the government regulation of delivering of fresh food products that hinders our current ability and/or cost to deliver fresh products, could adversely impact our net revenues and gross margins and, therefore, our profitability and cash flows could also be adversely affected.

Employees
 
We currently employ 15 full-time employees, including 4 chefs and 2 executive officers. We believe that our relations with our employees are satisfactory. None of our employees are represented by a union.
 
Transactions with Major Customers
 
Transactions with major customers and related economic dependence information is set forth under the heading Transactions with Major Customers in Note 14  to the Consolidated Financial Statements included in the Financial Statements section hereof and is incorporated herein by reference.
 
 
How to Contact Us
 
Our executive offices are located at  3845 Beck Blvd., Naples, Florida 34109; our Internet address is www.foodinno.com; and our telephone number is (239) 596-0204.  The contents of our website are not incorporated in or deemed to be a part of this Annual Report on Form 10-K.
 
Risk Factors
 
We Have a History Of Losses Which May Continue, Requiring Us To Seek Additional Sources of Capital Which May Not Be Available, Requiring Us To Curtail Or Cease Operations.
 
We had a net loss of $2,109,874   for the year ended December 31, 2010, including non-cash income of $396,718 from the gain on change in fair value of warrant liability, non-cash loss of  $1,244,239 from the loss on change in fair value of conversion option liability, and non-cash loss of $948,040 from the fair value of warrants in excess of discount on notes payable. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will incur losses. We will also incur losses if the fair value of warrants, options, etc changes unfavorably. We will incur operating losses until we are able to establish significant sales. Our possible success is dependent upon the successful development and marketing of our services and products, as to which we can give no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel, marketing and promotions, reduced margins caused by competitive pressures and other economic and non-economic factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations. In addition, we will require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges. We can give no assurance that financing will be available in amounts or on terms acceptable to us, if at all. Our inability to obtain sufficient funds from our operations or external sources could require us to curtail or cease operations.
 
If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution.
 
Additional capital will be required to effectively support our operations and to otherwise implement our overall business strategy. However, we can give no assurance that financing will be available when needed on terms that are acceptable to us. Our inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Any additional equity financing (or equity related financing such as convertible debt financing) may involve substantial dilution to our then existing shareholders.

Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, and We Concur With This Assessment
 
In their report dated March 14, 2011, our independent auditors stated that our financial statements for the year ended December 31, 2010 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our significant losses from operations since inception and our working capital deficiency. Our ability to continue as a going concern is subject to our ability to continue to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing our sales of product or services or obtaining loans and grants from various financial institutions where possible.
 
We Have Historically Derived Substantially All of Our Revenue From One Client and if We Were to Lose Such Client and  Be Unable to Generate New Sales to Offset Such Loss, We May Be Forced to Cease or Curtail Our Operations.
 
In 2003, Next Day Gourmet initially contracted with our subsidiary, Food Innovations, to handle the distribution of over 3,000 perishable and specialty food products to customers of USF. In February 2010 Food Innovations signed a new contract with USF that expires in December 2012. Our sales through USF’s sales force generated gross revenues for us of $9,107,504 in the year ended December 31, 2010, and $7,227,390 in the year ended December 31, 2009. Those amounts contributed 92% and 96%, respectively, of our total sales in those periods. Our sales efforts are for the most part substantially dependent upon the efforts of the USF sales force. Although we have generated revenues from additional customers other than USF, if our relationship with USF were to be materially changed and we are unable to generate substantial new sales to offset such loss, we may be forced to cease or curtail our operations.
 

We May Be Unable to Manage Our Growth Which Could Result in Our Being Unable to Maintain Our Operations.
 
Our strategy for growth is focused on continued enhancements and expansion to our existing business model, offering a broader range of services and products and affiliating with additional vendors and through possible joint ventures. Pursuing this strategy presents a variety of challenges. We may not experience an increase in our services to our existing customers, and we may not be able to achieve the economies of scale, or provide the business, administrative and financial services, required to sustain profitability from servicing our existing and future customer base. Should we be successful in our expansion efforts, the expansion of our business would place further demands on our management, operational capacity and financial resources. To a significant extent, our future success will be dependent upon our ability to maintain adequate financial controls and reporting systems to manage a larger operation and to obtain additional capital upon favorable terms. We can give no assurance that we will be able to successfully implement our planned expansion, finance its growth, or manage the resulting larger operations. In addition, we can give no assurance that our current systems, procedures or controls will be adequate to support any expansion of our operations. Our failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
 
The Foodservice Industry is Very Competitive, Which May Result in Decreased Revenue for Us as Well as Increased Expenses Associated With Marketing Our Services and Products.
 
We compete against other providers of quality foods, some of which sell their services globally, and some of these providers have considerably greater resources and abilities than we have. These competitors may have greater marketing and sales capacity, established distribution networks, significant goodwill and global name recognition. Furthermore, it may become necessary for us to reduce our prices in response to competition. This could impact our ability to be profitable.
 
Our Success Depends on Our Acceptance by the Chef Community and if the Chef Community Does Not Accept Our Products Then Our Revenue Will be Severely Limited.
 
The chef community may not embrace our products. Acceptance of our services will depend on several factors, including: cost, product freshness, convenience, timeliness, strategic partnerships and reliability. Any of these factors could have a material adverse effect on our business, results of operations and financial condition. We also cannot be sure that our business model will gain wide acceptance among chefs. If the market fails to continue to develop, or develops more slowly than we expect, our business, results of operations and financial condition will be adversely affected.
 
We Rely Upon Outside Vendors and Shippers for Our Specialty Food Products and Interruption in the Supply of Our Products May Negatively Impact Our Revenues.
 
Shortages in supplies of the food products we sell may impair our ability to provide our services. Our vendors are independent and we cannot guarantee their future ability to source the products that we sell. Many of our products are wild-caught, and we cannot guarantee their availability in the future. Unforeseen strikes and labor disputes as well as adverse weather conditions may result in our inability to deliver our products in a timely manner. Since our customers rely on us to deliver their orders within 24-72 hours, delivery delays could significantly harm our business.
 
We Are and May Be Subject to Regulatory Compliance and Legal Uncertainties.
 
Changes in government regulation and supervision or proposed Department of Agriculture reforms could impair our sources of revenue and limit our ability to expand our business. In the event any future laws or regulations are enacted which apply to us, we may have to expend funds and/or alter our operations to insure compliance.
 
The Issuance of Shares Upon Conversion of Convertible Notes and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to Our Existing Stockholders.
 
The issuance of shares upon conversion of convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the note/warrant holders may ultimately convert or exercise and sell the full amount of shares issuable on conversion/exercise. Although, for the most part, such note/warrant holders may not convert their convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock unless waived in writing by the investor with  61 day notice to the Company, this restriction does not prevent them from converting and/or exercising some of their holdings, selling off those shares, and then converting the rest of their holdings. In this way, they could sell more than this limit while never holding more than this limit. We anticipate that eventually, over time, the full amount of the convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes, which will cause significant dilution to our other shareholders.
 
 
If We Are Required for any Reason to Repay Our Outstanding Convertible Notes We Would Be Required to Deplete Our Working Capital, If Available, or Raise Additional Funds.
 
We can be required to repay certain of our convertible notes or other notes. If we are required to repay a significant amount of these notes, we would be required to use our limited working capital and/or raise additional funds (which may be unavailable) which would have the effect of causing further dilution and lowering shareholder value.
 
We Have a History of Being In Default Under Certain Convertible Notes Which Could Result in Legal Action Against Us, Which Could Require the Sale of Substantial Assets.
 
While we have not received a notice of default under any of our outstanding notes, we have a history of being in default under certain of our outstanding convertible notes, including but not limited to notes currently overdue, and possibly could received a notice of default in the future.. This could require the early repayment of the convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is acted upon by the note holders and not cured within the specified grace period.  In addition all our secured notes carry cross-default provisions.  If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action could require us to curtail or cease operations.
 
Our Revenues Can be Affected by Price Increases Imposed by our Carriers.

We deliver our products to our customers through third party overnight or express delivery carriers.  If the carriers we use raise their shipping rates or add charges such as fuel surcharges and other charges, we will either have to absorb the increased costs which will put pressure on our bottom line or pass on the cost to our customers which may result in reduced sales if our customers are unwilling to pay the higher prices.  Either way, such an increase in shipping costs will likely have a negative impact on our results of operations.
   
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
 
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share (post-reverse split) or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
 
 
● 
that a broker or dealer approve a person's account for transactions in penny stocks; and
 
 ● 
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
 
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
 
 
● 
obtain financial information and investment experience objectives of the person; and
 
 ● 
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
 
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
 
 
● 
sets forth the basis on which the broker or dealer made the suitability determination; and
 
● 
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
 
 
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
 
ITEM 2. Properties

On October 17, 2008, we entered into a three-year lease with Grand Cypress Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck Blvd., Naples, Florida.  The commencement date of the lease was  January 1, 2009.  The annual rent and fees under the lease is approximately $54,000.  The lease provides for a buyout option at the end of the lease with credit towards the purchase price received for the rental payments made during the term of the lease.

ITEM 3. Legal Proceedings
 
In September 2006 we commenced an action in New York Supreme Court, Nassau County, against Pasta Italiana, Inc., Robert Yandolino and Lloyd Braider (collectively “Pasta”) to collect on outstanding promissory notes totaling $360,000  (plus interest and collection expenses) of which $65,000 was  personally guaranteed by the two individual defendants.  The defendants counterclaimed for an unspecified amount of damages due to our alleged breach of an agreement to purchase the corporate defendant. 
 
On September 5, 2008, we reached a settlement agreement with Pasta.  The settlement   agreement (the “Pasta Settlement Agreement”) calls for Pasta to pay to the Company $165,000 of the principal amount of the note.  Pasta is to make 36  monthly payments in the amount of $4,500 beginning in September, 2008  and a final payment of $3,000  The first of these 36 payments was received by the Company during the third quarter of  2008.  Upon execution of the agreement, Pasta was also obligated to deliver to the Company 10% of its fully diluted common stock.  This stock is valued at $0 in the Company’s financial statements for the period ended September 30, 2008.    The Company was obligated to deliver to Pasta 1,500,000 shares of its common stock (valued at $9,000 at September 5, 2008) and warrants to purchase an additional 1,000,000 shares of common stock at a price of $0.012  (valued at $5,977 at September 5, 2008).  The Company recorded an impairment charge in the amount of $142,124 during the three months ended September 30, 2008, representing the difference between the net book value of the Pasta receivable prior to the Pasta Settlement Agreement and the amount of the new note receivable negotiated in the Pasta Settlement Agreement, plus the value of the Company’s common stock and warrants provided to Pasta.

Interest will accrue at a rate of 8% on the unpaid portion of the $138,050.   The accrued interest is to be paid semi-annually in shares of common stock of Pasta (the “Pasta Interest Shares”).    The Pasta Interest Shares are valued at $0 in the financial statements of the Company, and no interest income is recorded by the Company for these shares during  the three months ended September 30, 2008.
 
Pasta made several  payments required by the settlement agreement, totaling $26,950.     Thereafter, Pasta defaulted on the next payment, and failed to cure its default within the required time period after a Notice of Default was sent to it.  We are continuing discussions with Pasta in regards to resuming payments and continue examine all legal remedies available to us to insure compliance with the agreement. We intend to pursue the monies owed to us under the Pasta Settlement Agreement in a cost-effective manner.
 
ITEM 4. Reserved by the SEC
 
 
 PART II

ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Prices for our common stock are quoted on the OTCQB. Since March 2004, our common stock has traded under the symbol "IVFH". Prior thereto, our common stock traded under the symbol "FBSN". 202,385,103 shares of our common stock were outstanding as of March 11, 2011. The following table sets forth the high and low closing sales prices of our common stock as reported in the OTCQB for each full quarterly period within the two most recent fiscal years.
   
Fiscal Year Ending December 31, 2010
 
HIGH
   
LOW
 
First Quarter
 
$
0.008
   
$
0.002
 
Second Quarter
   
0.008
     
0.007
 
Third Quarter
   
0.010
     
0.007
 
Fourth Quarter
   
0.009
     
0.005
 

Fiscal Year Ending December 31, 2009
 
HIGH
   
LOW
 
First Quarter
 
$
0.005
   
$
0.001
 
Second Quarter
   
0.008
     
0.001
 
Third Quarter
   
0.008
     
0.002
 
Fourth Quarter
   
0.006
     
0.001
 

The quotations listed above reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On March 10, 2011, the closing price of our common stock as reported by the OTC Bulleting Board was $0.007.

Security Holders

On March 10, 2011, there were approximately 315 record holders of our common stock. In addition, we believe there are at least 350 beneficial owners of our common stock whose shares are held in "street name."
 
Dividends
 
We have not paid dividends during the three most recently completed fiscal years, and have no current plans to pay dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business.
 
Recent Sales and Other Issuances of Our Equity Securities
 
During the twelve months ended December 31, 2010, the Company had the following transactions:

The Company issued 16,996,465 shares of common stock to note holders for the conversion of $35,953 of principal on convertible notes payable and $49,029 of accrued interest.
 
The Company issued 750,000 shares of common stock to a consultant for services.  The fair value of these shares in the amount of $6,000 was charged to operations during the year ended December 31, 2010.

All of the issuances described above were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 for the following reasons:  (1) none of the issuances involved a public offering or public advertising of the payment of any commissions or fees; (2) the issuances for cash were to “accredited investors”; (3) the issuances upon conversion of notes were for notes held at least 12 months and did not involve the payment of any other consideration; and (4) all issuances to affiliates and to non-affiliates holding the securities for less than  1 year carried restrictive legends.
 
 
Derivative Securities Currently Outstanding
 
As of December 31, 2010 and 2009, the Company has issued convertible notes payable in the aggregate principal amount of $1,655,291 and $1,771,244, respectively, with accrued interest of $844,662 and $747,078, respectively, which, if converted to common stock, will result in our issuance of approximately 323,058,200 and 346,248,800 shares of common stock, respectively, at conversion rates ranging from $0.005 to $0.010 per share.  The fair value of these embedded conversion options was $2,465,565 and $1,384,992 at December 31, 2010 and 2009, respectively.  The Company revalues the conversion options at each reporting period, and charges any change in value to operations. During the years ended December 31, 2010 and 2009, the Company recorded a loss of $1,244,239 and a gain of $83,492, respectively, due to the change in value of the conversion option liability.
 
The Company has issued warrants for holders to purchase an additional 273,200,000 shares of common stock at December 31, 2010 and 2009.   The fair value of these warrants  was $1,183,175 and $631,853 at December 31, 2010 and 2009, respectively.  The Company revalues the warrants  at each reporting period, and charges any change in value to operations. During the years ended December 31, 2010 and 2009, the Company recorded a gain of $396,718 and a gain of $756,434, respectively, due to the change in value of the warrants.
  
The Company also has outstanding stock options to purchase an additional 63,500,000  and 37,000,000 shares of common stock at December 31, 201 and 2009, respectively.  The fair value of these stock options   was $336,719 and $144,627 at December 31, 2010 and 2009, respectively.  The Company revalues the stock options  at each reporting period, and charges any change in value to operations. During the years ended December 31, 2010 and 2009, the Company recorded a loss of $23,683 and a gain of $38,058, respectively, due to the change in value of the stock options.

Securities Authorized for Issuance Under Equity Compensation Plans
 
We do not currently have any equity compensation plans. The following shares are issuable pursuant to individual employment arrangements:
 
               
Number of
 
   
Number of
         
securities
 
   
securities to be
         
remaining available
 
   
issued upon
   
Weighted-average
   
for future issuance
 
   
exercise of
   
exercise price of
   
under equity
 
   
outstanding
   
outstanding
   
compensation plans
 
   
options, warrants
   
options, warrants,
   
(excluding securities
 
Plan Category
 
and rights
   
and rights
   
reflected in column (a))
 
                   
Equity compensation
                 
plans approved by
                 
security holders
 
None
     
N/A
     
N/A
 
                       
Equity compensation
                     
plans not approved
                     
by security holders
                     
                       
Stock options
   
15,000,000
   
$
0.0050
     
N/A
 
Stock options
   
22,000,000
   
$
0.0070
     
N/A
 
Stock options
   
6,625,000
   
$
0.0076
     
N/A
 
Stock options
   
6,625,000
   
$
0.0095
     
N/A
 
Stock options
   
6,625,000
   
$
0.0090
     
N/A
 
Stock options
   
6,625,000
   
$
0.0096
     
N/A
 
Total
   
63,500,000
   
$ 
0.0073
     
N/A
 

 
ITEM 6. Selected Financial Data

Not Applicable.
 
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and operational references, appearing elsewhere in this document.
 
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 Private 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 3(a)(51-1) 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 business plan,
   
●
 Our ability to implement our business plan,
 
●
 Our ability to generate sufficient cash to pay our lenders and other creditors,
 
●
 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 current  or anticipated business,
 
●
 Changes in the demand for our services,
 
●
 The degree and nature of our competition,
 
●
 The lack of diversification of our business plan,
   
●
 The general volatility of the capital markets and the establishment of a market for our shares, 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 weather conditions.
 
 
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
 
Use of Estimates in the Preparation of Financial Statements

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to doubtful accounts receivable, stock-based services, valuation of financial instruments, and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

On August 25, 2005, the Company entered into contracts which obligated the company under certain circumstances to issue shares of common stock in excess of the number of shares of common stock authorized. Under accounting guidance provided by FASB ASC 815-40-05, effective August 25, 2005 the Company began to account for all derivative financial instruments, including warrants, conversion features embedded in notes payable, and stock options, via the liability method of accounting. Accordingly, all these instruments are valued at issuance utilizing the Black-Scholes valuation method, and are re-valued at each period ending date, also using the Black-Scholes valuation method.  Any gain or loss from revaluation is charged to operations during the period.

(a) Warrants:
 
The Company values warrants using the Black-Scholes valuation model.  Warrants are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December 31, 2010 and 2009:

   
December 31,
 
   
2010
   
2009
 
             
Number of warrants outstanding
   
273,200,000
     
273,200,000
 
Value at December 31
 
$
1,183,175
   
$
631,853
 
Number of warrants issued during the year
   
-
     
-
 
Value of warrants issued during the year
 
$
-
   
$
-
 
Revaluation gain (loss) during the year
 
$
396,718
   
$
756,434
 
                 
Black-Scholes model variables:
               
Volatility
   
119.60% - 336
%
   
302.87% - 386.12
%
Dividends
 
$
0
   
$
0
 
Risk-free interest rates
   
0.19 - 0.20
%
   
0.20% - 0.43
%
Term (years)
   
0.01 - 5.00
     
0.15-5.00
 
 

b.) Embedded conversion features of notes payable:

The Company accounts for conversion options embedded in convertible notes in accordance with ASC 815-10-05. ASC 815-10-05 generally requires companies to bifurcate conversion options embedded in convertible notes and preferred shares from their host instruments and to account for them as free standing derivative financial instruments in accordance with ASC 815-40-05.
 
The Company values embedded conversion features utilizing the Black-Scholes valuation model.  Warrants are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our warrants and warrant valuation assumptions at December 31, 2010 and 2009:

   
December 31,
 
   
2010
   
2009
 
             
Number of conversion options outstanding
   
323,058,200
     
346,248,800
 
Value at December 31
 
$
2,465,565
   
$
1,384,992
 
Number of options issued during the year
   
-
     
68,448,800
 
Value of options issued during the year
 
$
-
   
$
336,844
 
Number of options exercised or underlying
               
    notes paid during the year
   
23,190,600
     
7,200,000
 
Value of options exercised or underlying
               
    notes paid during the year
 
$
163,666
   
$
18,360
 
Revaluation gain (loss) during the year
 
$
(1,244,239
) 
 
$
83,492
 
                 
Black-Scholes model variables:
               
Volatility
 
119.60% to 336
% 
 
302.87% to 393.237
% 
Dividends
   
0
     
0
 
Risk-free interest rates
   
0.20
%
   
0.20% -0.43
%
Term (years)
   
10.00
     
1.00 – 10.00
 

c.)   Stock options:
 
The Company accounts for options in accordance FASB ASC 718-40.  Options are valued upon issuance, and re-valued at each financial statement reporting date, utilizing the Black-Scholes valuation model.   Option expense is recognized over the requisite service period of the related option award. Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our options and option assumptions at December 31, 2010 and 2009:

   
December 31,
 
   
2010
   
2009
 
             
Number of options outstanding
   
63,500,000
     
37,000,000
 
Value at December 31
 
$
349,344
   
$
144,627
 
Number of options issued during the year
   
26,500,000
     
2,000,000
 
Value of options issued during the year
 
$
167,850
     
7,993
 
Number of options recognized during the year
               
  pursuant to SFAS 123(R)
   
26,500,000
     
2,000,000
 
Value of options recognized during the year
               
   pursuant to SFAS 123(R)
 
$
167,850
   
$
7,993
 
Revaluation gain (loss) during the year
 
$
23,683
   
$
(38,058
) 
                 
Black-Scholes model variables:
               
Volatility
 
119.60% to 336%
   
302.87% to 386.12%
 
Dividends
   
0
     
0
 
Risk-free interest rates
   
0.19% - 0.20
%
   
0.20% - 0.43
%
Term (years)
   
0.15 - 5.00
     
0.15-5.00
 
 
 
Doubtful Accounts Receivable

The Company maintained an allowance in the amount of $22,061 for doubtful accounts receivable at December 31, 2010, and $3,574 at December 31, 2009. Actual losses on accounts receivable were $3,574 for 2010 and $0 for 2009. The Company has an operational relationship of several years with our major customers, and we believe this experience provides us with a solid foundation from which to estimate our expected losses on accounts receivable. Should our sales mix change or if we develop new lines of business or new customers, these estimates and our estimation process will change accordingly. These estimates have been accurate in the past.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair values approximate their carrying value because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates. These fair values also vary due to the market price of the Company’s stock at the date of valuation. Generally, these liabilities will increase as the price of the Company’s stock increases (with resultant gain), and decrease as the Company’s stock decreases (yielding a loss). These fluctuations are likely to continue as long as the Company has large financial instrument liabilities on its balance sheet. Should the Company succeed in removing these liabilities from its balance sheet, either by satisfying them or by reclassifying them as equity, the amount of gains and losses recognized will be reduced.

Income Taxes

The Company has a history of losses, and as such has recorded no liability for income taxes. Until such time as the Company begins to provide evidence that a continued profit is a reasonable expectation, management will not determine that there is a basis for accruing an income tax liability. These estimates have been accurate in the past.
 
Background
 
We were initially formed in June 1979 as Alpha Solarco Inc., a Colorado corporation. From June 1979 through February 2003, we were either inactive or involved in discontinued business ventures. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.
 
In January 2004, we changed our state of incorporation by merging into Innovative Food Holdings, Inc. (“IVFH”), a Florida shell corporation. As a result of the merger we changed our name to that of Innovative Food Holdings, Inc. In February 2004 we also acquired Food Innovations, Inc. (“FII”) a Delaware corporation incorporated on January 9, 2002 and through FII and our other subsidiaries we are in the business of national food distribution and sales using third-party shippers.
 
Transactions With a Major Customer
 
Transactions with a major customer and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources, (2) under the heading Transactions with Major Customers in Note 14 to the Consolidated Financial Statements, and (3) as the fourth item under Risk Factors .
 
RESULTS OF OPERATIONS
 
The following is a discussion of our financial condition and results of operations for the years ended December 31, 2010 and 2009.

This discussion may contain forward looking-statements that involve risks and uncertainties. Our future 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.
 
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Revenue
 
Revenue increased by $2,271,087 or approximately 30% to $9,862,726  for the year ended December 31, 2010 from $7,591,639 in  the prior year.  The increase was attributable to an increase in sales of specialty items, meat and game products, seafood products, and poultry products, partially offset by decrease in cheese products.  We continue to assess the potential of new revenue sources from the manufacture and sale of proprietary food products and additional sales channel opportunities and will implement that strategy if, based on our analysis, we deem it beneficial to us. 
 
Any changes in the food distribution operating landscape that materially hinders our current ability and/or cost to deliver our products to our customers could potentially cause a material impact on our net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.
 
Currently, a small portion of our revenues comes from imported products or international sales. Our current sales from such segments may be hampered and negatively impacted by any economic tariffs that may be imposed in the United States or in foreign countries.

See "Transactions with Major Customers" and the Securities and Exchange Commission's ("SEC") mandated FR-60 disclosures following the "Liquidity and Capital Resources" section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future results.
 
Cost of good sold
 
Our cost of goods sold for the year ended December 31, 2010 was $7,607,552, an increase of $1,763,456  or approximately 30%  compared to cost of goods sold  of $5,844,096  for the year ended December 31, 2009. Cost of goods sold is primarily made up of the following expenses for the year ended December 31, 2010: shipping expenses in the amount of $2,084,021; and cost of good of specialty, meat, game, cheese poultry and other sales categories in the amount of $5,212,579. 
 
In 2010 we continued to aggressively price our products in order to gain market share and increase the number of our end users. We were successful in doing so and increased the number of our end users by approximately 42% to more than 21,500 end users. We currently expect if market conditions remain constant that our cost of goods sold will stabilize and likely remain at historical levels in the first half of 2011.
 
Selling, general, and administrative expenses

Selling, general, and administrative expenses increased by $538,980 or approximately 35%, to $2,090,564  during the year ended December 31, 2010 compared to $1,551,584  for the year ended December 31, 2009.   Selling, general and administrative expenses were primarily made up of the following for the year ended December 31, 2010: payroll and related expenses, including employee benefits, in the amount of $1,022,090; consulting and professional fees in the amount of $344,685; non-cash compensation in the amount of $192,409; office expense in the amount of $125,872; facilities and related expenses in the amount of $93,628; insurance costs in the amount of $93,497; travel and entertainment expenses in the amount of $46,482; computer support expenses in the amount of $45,060; commissions expense in the amount of $36,346; and amortization and depreciation expense in the amount of $24,616. The increase in selling, general, and administrative expenses was primarily due to increases in non-cash compensation of $216,092 and consulting fees of $91,352 and payroll of $117,980 .  We expect our legal fees to slightly increase in 2011 and our accounting fees in 2011 to remain constant.  We do however expect to increase our spending on advertising and marketing and web development fees in 2011.

Interest expense, net
 
Interest expense, net of interest income, increased by $65,993 or approximately 16% to $478,923 during the twelve months ended December 31, 2010, compared to $412,930 during the twelve months ended December 31, 2009.  The primary reason for the increase was due to the acceleration of the amortization of the discount on the notes payable, due to the principal payments made.
 
 
(Gain) on extinguishment of debt
 
During the year ended December 31, 2009, the Company negotiated a settlement of the liability for the penalty shares  whereby the Company issued convertible notes payable in the amount of $328,744, and as a result the Company recorded a gain on the transaction in the amount of $222,656. There are no comparable costs during the year ended December 31, 2010.
 
Fair value of warrants issued in excess of discount on notes payable

During the year ended December 31, 2010, the Company extended the date of warrants to purchase an aggregate of 132,000,000 shares of common stock. The Company valued this extension at $134,216. During the year ended December 31, 2010, the Company extended the expiration date of warrants to purchase an aggregate of 200,200,000 shares of common stock.  The Company valued the extension of these warrants at $813,824, which the Company charged to operations during the year ended December 31, 2010.  There is no comparable activity for the year ended December 31, 2009.
 
Gain from change in fair value of warrant liability
 
At December 31, 2010, the Company had outstanding warrants to purchase an aggregate 273,200,000 shares (272,200,000 vested) of the Company’s common stock.  The Company valued the warrant liability at December 31, 2010 at $1,183,175.  This revaluation resulted in a gain of $396,718 which the Company included in operations during the year ended December 31, 2010.  This is a decrease of $359,716 or approximately 48% compared to a gain of $756,434 from the revaluation of the warrant liability which the Company recorded during the year ended December 31, 2009.
  
Loss (Gain) from change in fair value of conversion option liability
 
At December 31, 2010, the Company had outstanding a liability to issue an aggregate of 323,058,200 shares of the Company’s common stock pursuant to convertible notes payable.  The Company revalued this liability at December 31, 2010 at $2,465,565.  This revaluation resulted in a loss of $1,244,239 which the Company included in operations for the year ended December 31, 2010.  This is an increase of $1,327,731  or approximately 1,590% compared to a gain of $83,492 from the revaluation of the conversion option liability which the Company recorded during the year ended December 31, 2009.
 
Net (loss) Income
 
For the reasons above, the Company had a net loss for the year ended December 31, 2010 of $2,109,874, an increase of $2,955,485 compared to  net income of $845,611 during the twelve months ended December 31, 2009. 
 
Liquidity and Capital Resources at December 31, 2010
 
As of December 31, 2010, the Company had current assets of $1,141,768, consisting of cash of $518,082,  trade accounts receivable of $427,559,  loans receivable of $138,050, inventory of $52,657, and other current assets of  $5,420.    Also at December 31, 2010, the Company had current liabilities of  $7,257,488, consisting of accounts payable and accrued liabilities of $1,059,806 (of which $244,645 is payable to a related party); accrued interest of $646,876; accrued interest – related parties of $197,786; current portion of notes payable, net of discounts of $1,022,061; current portion of notes payable – related parties, net of discounts of $345,500; warrant liability of $1,183,175; option liability of $336,719; and conversion option liability of $2,465,565.
 
During the twelve months ended December 31, 2010, the Company had generated cash from operating activities of $468,930.  This consisted of the Company’s net loss of $2,109,874, offset by charges to operations $24,616 for depreciation and amortization, $192,409 for non-cash compensation,  $22,061 for the reserve of bad debt, $948,040 for the value of new warrants issued in excess of discount on notes payable, $197,297 for the amortization of the discount on notes payable, $130,170 for the amortization of the discount on accrued interest,  $396,718 gain for the revaluation of the warrant liability, $1,244,240 loss for the revaluation of the conversion option liability, and a $23,683 loss for the revaluation of the option liability.  The Company’s results also reflect a decrease in working capital deficiency of $193,006.
 
 
The Company had cash used by investing activities of $9,706, in 2010, which consisted of payments received on a loan receivable of $5,000 offset by acquisitions of property and equipment of $14,706.

The Company had cash used by financing activities of $85,907, in 2010, which consisted of principal payments on debt of $85,907.  
 
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.
  
The Company’s cash on hand may be insufficient to fund its planned operating needs.  Management is continuing to pursue new debt and/or equity financing and is continually evaluating the Company’s cash and capital needs.
 
The Company expects that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders.  The Company can give no assurance that it will be able to generate adequate funds from operations, that funds will be available, or the Company will be able to obtain such funds on favorable terms and conditions.  If the Company cannot secure additional funds it will not be able to continue as a going concern.
 
By adjusting its operation and development to the level of available resources, management believes it has sufficient capital resources to meet projected cash flow through the next twelve months. The Company also intends to focus on increasing market share and cash flow from operations by focusing its sales activities on specific market segments and new product lines. However, if thereafter, the Company is 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.  Currently, we do not have any material long-term obligations other than those described in Note 8 to the financial statements included in this report, nor have we identified any long-term obligations that we contemplate incurring in the near future. As we seek to increase our sales of perishables, as well as identify new and other consumer oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.

The independent auditors’ reports on our December 31, 2010 and 2009 financial statements included in this Annual Report states that our working capital deficiency raises substantial doubts about our ability to continue as a going concern.

2011 Plans

During 2011, in addition to our efforts to increase sales in our existing foodservice operations we  plan to expand our business by expanding our focus to additional Foodservice markets, exploring potential acquisition opportunities and continuing to extend our focus from a mainly  wholesale foodservice business directed towards chefs to commencing retail sales by making sales direct to consumers through a variety of direct to consumer sales channel relationships which are currently being explored. In addition we are currently exploring the introduction of a variety of new product categories and new product lines, to leverage our existing foodservice customer base.
 
As discussed above, we also expect to improve our financial position, especially with respect to cash flows, by reducing our expenditures for professional fees to our attorneys and accountants, and by further improving our selling efforts.

No assurances can be given that any of these plans will come to fruition or that if implemented that they will necessarily yield positive results.

Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 
Inflation
 
In the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its operations.
 
Transactions With Major Customers
 
The Company’s largest customer, USF and its affiliates, accounted for approximately 92% and  96% of total sales in the years ended December 31, 2010 and 2009, respectively.  A contract with USF, expires December 31, 2012.  No other customer accounted for more than 1% of our net revenue.
 
We continue to conduct business with U.S. Food Services.
 
Stock-based Compensation
 
Effective January 1, 2006, the Company adopted FASB ASC 718-40. This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.
 
In August 2005, the Company’s commitments to issue shares of common stock first exceeded its common stock authorized. At this time, the Company began to value its stock options via the liability method of accounting. Pursuant to guidance in ASC 718-40 the cost of these options are valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period.  The gain or loss from this revaluation is charged to compensation expense during the period.  
 

ITEM 8. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 
To the Board of Directors and Shareholders of
Innovative Food Holdings, Inc.
Naples, Florida
 
We have audited the accompanying consolidated balance sheet of Innovative Food Holdings, Inc., and subsidiaries (“the Company”) as of December 31, 2010 and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform, an audit of its Internal Control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010  and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1, the Company has incurred significant losses from operations since its inception and has a working capital deficiency.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ RBSM LLP              

New York, NY
March 14, 2011
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Innovative Food Holdings, Inc.
Naples, Florida
 
We have audited the accompanying consolidated balance sheet of Innovative Food Holdings, Inc., and subsidiaries (“the Company”) as of December 31, 2009 and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform, an audit of its Internal Control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1, the Company has incurred significant losses from operations since its inception and has a working capital deficiency.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

  
/s/ Bernstein & Pinchuk LLP                

New York, NY
March 26, 2010
 

Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
 
   
December 31,
 
   
2010
   
2009
 
 ASSETS
           
Current assets
           
             
     Cash and cash equivalents
 
$
518,082
   
$
144,765
 
     Accounts receivable, net
   
427,559
     
339,206
 
     Loan receivable
   
138,050
     
143,050
 
     Inventory
   
52,657
     
19,075
 
     Other current assets
   
5,420
     
6,120
 
          Total current assets
   
1,141,768
     
652,216
 
                 
Property and equipment, net
   
23,788
     
33,698
 
           Total
 
$
1,165,556
   
$
685,914
 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
Current liabilities
               
                 
 Accounts payable and accrued liabilities
 
$
815,161
   
$
695,361
 
     Accrued liabilities- related parties
   
244,645
     
160,845
 
     Accrued interest, net of discount
   
646,876
     
576,933
 
     Accrued interest - related parties, net of discount
   
197,786
     
170,144
 
     Notes payable, current portion, net of discount
   
1,022,061
     
918,907
 
     Notes payable - related parties, current portion, net of discount
   
345,500
     
345,500
 
     Warrant liability
   
1,183,175
     
631,853
 
     Option liability
   
336,719
     
144,627
 
     Conversion option liability
   
2,465,565
     
1,384,992
 
          Total current liabilities
   
7,257,488
     
5,029,162
 
                 
Note payable
   
-
     
27,718
 
     
7,257,488
     
5,056,880
 
Stockholders' deficiency
               
   Common stock, $0.0001 par value; 500,000,000 shares authorized;
               
       216,385,103 and 194,638,638 shares issued, and 202,385,103 and
               
       184,638,638 shares outstanding at December 31, 2010 and 2009, respectively
   
21,639 
     
19,464
 
   Additional paid-in capital
   
2,584,146
     
2,197,413
 
   Accumulated deficit
   
(8,697,717
)
   
(6,587,843
)
      Total stockholders' deficiency
   
(6,091,932
)
   
(4,370,966
)
                 
       Total
 
$
1,165,556
   
$
685,914
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
 
   
Year Ended December 31,
 
   
2010
   
2009
 
             
Revenue
 
$
9,862,726
   
$
7,591,639
 
                 
Cost of goods sold
   
7,607,552
     
5,844,096
 
  Gross margin
   
2,255,174
     
1,747,543
 
                 
Selling, general and Administrative expenses
   
2,090,564
     
1,551,584
 
                 
Operating income
   
164,610
     
195,959
 
                 
Other expense (income):
               
   Interest expense
   
478,923
     
412,930
 
   Gain on extinguishments of debt
   
-
     
(222,656
) 
Fair value of warrants issued in excess of discount on notes
   
948,040
     
-
 
   Gain from change in fair value of warrant liability
   
(396,718
) 
   
(756,434
) 
   Loss(gain) from change in fair value of conversion option liability
   
1,244,239
     
(83,492
) 
     
2,274,484
     
(649,652
) 
                 
( Loss) income before income tax expense
   
(2,109,874
) 
   
845,611
 
                 
  Income tax expense
   
-
     
-
 
                 
Net (loss) income
 
$
(2,109,874
) 
 
$
845,611
 
                 
Net (loss)  income  per share - basic
 
$
(0.011
) 
 
$
0.004
 
                 
Net (loss) income per share- diluted
 
$
(0.011
) 
 
$
0.002
 
                 
Weighted average number of shares outstanding - basic
   
196,674,996
     
191,032,491
 
                 
Weighted average number of shares outstanding- diluted
   
196,674,996
     
688,840,451
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

   
Year Ended December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
             
   Net (loss) income
 
$
(2,109,874
) 
 
$
845,611
 
  Adjustments to reconcile net (loss) income to  net
               
  cash provided by operating activities:
               
    Depreciation and amortization
   
24,616
     
32,392
 
    Non-cash compensation
   
192,409
     
15,450
 
    (Gain) on extinguishments of debt
   
-
     
(222,656
) 
    Fair value of warrants issued
   
948,040
     
-
 
    Fair value of stock options issued
   
-
     
7,993
 
    Amortization of discount on notes payable
   
197,297
     
118,001
 
    Amortization of discount on accrued interest
   
130,170
     
125,501
 
    Allowance for bad debt
   
22,061
     
-
 
    Change in fair value of warrant liability
   
(396,718
) 
   
(756,434
) 
    Change in fair value of option liability
   
23,682
     
(38,058
) 
    Change in fair value of conversion option liability
   
1,244,240
     
(83,492
) 
    Changes in operating assets and liabilities:
               
        Accounts receivable
   
(110,414
) 
   
(99,640
) 
        Prepaid expenses and other current assets
   
(32,881
) 
   
(16,195
) 
        Accounts payable and accrued expenses- related party
   
93,442
     
32,847
 
        Accounts payable and accrued expenses
   
242,859
     
47,785
 
   Net cash provided by operating activities
   
468,930
     
9,105
 
                 
Cash flows from investing activities:
               
   Principal payments received on loan
   
5,000
     
9,950
 
   Acquisition of property and equipment
   
(14,706
)
   
(13,470
)
   Net cash used in  by investing activities
   
(9,706
) 
   
(3,520
) 
                 
Cash flows from financing activities:
               
    Proceeds from issuance of debt
   
-
     
-
 
    Principal payments on debt
   
(85,907
)
   
(21,365
)
   Net cash used in financing activities
   
(85,907
)
   
(21,365
) 
                 
Net  increase (decrease)  in cash and cash equivalents
   
373,317
     
(15,780
) 
                 
Cash and cash equivalents at beginning of  year
   
144,765
     
160,545
 
                 
 Cash and cash equivalents at end of  year
 
$
518,082
   
$
144,765
 
 
See notes to consolidated financial statements.
 
 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
  
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
 
$
817
   
$
1,326
 
                 
Taxes
 
$
-
   
$
-
 
                 
Other items not affecting cash:
               
Common stock issued for conversion of notes payable and accrued interest
 
$
84,982
   
$
21,058
 
 
See notes to consolidated financial statements.

 
Innovative Food Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Deficiency
For the two years ended December 31, 2010
 
 
   
Common Stock
                   
   
Amount
   
Par Value
   
Additional Paid-In
Capital
   
Accumulated
Deficit
   
Total
 
Balance as of December 31, 2008
   
183,577,038
   
$
18,358
   
$
1,985,335
   
$
(7,433,454
)
 
$
(5,429,761
)
                                         
Common stock issued pursuant to consulting agreement
   
6,250,000
     
625
     
15,625
     
-
     
16,250
 
                                         
Common stock issued to employees
   
600,000
     
60
     
1,140
     
-
     
1,200
 
                                         
Common stock issued for conversion of note payable
   
4,211,600
     
421
     
20,637
     
-
     
21,058
 
                                         
Discount due to beneficial conversion feature of interest accrued on convertible notes payable
   
-
     
-
     
156,316
     
-
     
156,316
 
                                         
Reclassification from conversion options liability to equity
   
-
     
-
     
18,360
     
-
     
18,360
 
                                         
Net income for the year ended December 31, 2009
   
-
     
-
     
-
     
845,611
     
845,611
 
                                         
Balance as of December 31, 2009
   
194,638,638
   
$ 
19,464
   
$ 
2,197,413
   
$ 
(6,587,843
)
 
$ 
(4,370,966
)
                                         
Common stock issued for the conversion of notes payable and accrued interest
   
16,996,465
     
1,700
     
83,282
     
-
     
84,982
 
                                         
Common stock issued pursuant to consulting agreements
   
750,000
     
75
     
5,925
     
-
     
6,000
 
                                         
Common stock issued in error
   
4,000,000
     
400
     
(400
)
   
-
     
-
 
                                         
Discount due to beneficial conversion feature of interest accrued on convertible notes payable
   
-
     
-
     
134,260
     
-
     
134,260
 
                                         
Reclassification from conversion options liability to equity
   
-
     
-
     
163,666
     
-
     
163,666
 
                                         
Net loss for the year ended December 31, 2010
   
-
     
-
     
-
     
(2,109,874
)
   
(2,109,874
)
                                         
Balance as of December 31, 2010
   
216,385,103
   
$
21,639
   
$
2,584,146
   
$
(8,697,717
)
 
$
(6,091,932
)
 
See notes to consolidated financial statements.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business Activity
 
Primarily through our subsidiary, Food Innovations, Inc. (“FII”), we are in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24 - 72 hours, except as stated hereafter, eliminating all wholesalers and distributors. We currently sell the majority of our products through a distributor relationship between FII and Next Day Gourmet, L.P., a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiary, Food Innovations, Inc. and its other wholly-owned subsidiaries Food New Media Group, Inc., Gourmet Foodservice Group, Inc. and 4 The Gourmet, Inc. (d/b/a For The Gourmet, Inc.). All material intercompany transactions have been eliminated upon consolidation of these entities.
 
Revenue Recognition
 
The Company recognizes revenue upon product delivery. We ship all our products either overnight shipping terms or three day shipping terms to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
 
For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized:  (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling   price is fixed and   determinable; and (4) collectability is reasonably assured.  Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.  ASC 605-15-05 incorporates ASC 605-25-05 "Multiple-Deliverable Revenue Arrangements".   ASC 605-25-05 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.  The effect of implementing ASC 605-25-05 on the Company's consolidated financial position and results of operations was not significant.

This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.  ASC 605-25-05 became effective for revenue arrangements entered into in periods beginning after June 15, 2003.  For revenue arrangements occurring on or after August 1, 2003, the Company revised its revenue recognition policy to comply with the provisions of ASC 605-25-05.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Cost of goods sold
 
We have included in cost of good sold all costs which are directly related to the generation of revenue. These costs include primarily the cost of the product plus the shipping costs.
 
Selling, general, and administrative expenses
 
We have included in selling, general, and administrative expenses all other costs which support the Company’s operations but which are not includable as a cost of sales. These include primarily payroll, facility costs such as rent and utilities, selling expenses such as commissions and advertising, and other administrative costs including professional fees.  Advertising costs are expensed as incurred.
 
Cash and Cash Equivalents
 
Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
 
Accounts Receivable
 
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.  The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.  Accounts receivable are presented net of an allowance for doubtful accounts of $22,061 and $3,574 at December 31, 2010 and 2009, respectively.
 
Property and Equipment
 
Property and equipment are valued at cost.  Depreciation is provided over the estimated useful lives up to five years using the straight-line method.  Leasehold improvements are depreciated on a straight-line basis over the term of the lease.
 
The estimated service lives of property and equipment are as follows:
 
Computer Equipment                  3 years
Office Furniture and Fixtures     5 years
 
Inventories
 
Inventory is valued at the lower of cost or market and is determined by the first-in, first-out method.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
 
29
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
Fair Value of Financial Instruments
 
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, notes payable, line of credit, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
 
The Company adopted ASC 820-10, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP.  ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820-10 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
 

Long-Lived Assets
 
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
As of December 31, 2010, the Company’s management believes there is no impairment of its long-lived assets.  There can be no assurance, however, that market conditions will not change which could result in impairment of long-lived assets in the future.
 
Comprehensive Income
 
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances.  Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.  The Company does not have any items of comprehensive income in any of the periods presented.
  
Basic and Diluted Loss Per Share
 
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options to purchase common stock. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
 
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation. For the years ended December 31, 2010, diluted net loss per share does not include potential common shares derived from convertible notes payable, stock options and warrants because as a result of the Company incurring losses, their effect would have been anti-dilutive.
 


INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 

Anti-dilutive shares at December 31, 2010:
                                                                                                                                
For the year ended December 31, 2010, the Company excluded warrants to purchase 92,500,000 shares because the warrant exercise prices were greater than the average market price of the common shares.  In addition, the Company has excluded in the calculation of dilutive loss per share 7,467,720 shares issuable upon the conversion of debt and convertible interest;  48,500,000 shares issuable upon the exercise of options at $0.007-$0.0096 per share  and 3,000,000 shares of common stock the Company has committed to issue to its President.

Diluted earnings per share was computed as follows for the year ended December 31, 2009:

   
Income (Numerator)
   
Shares (Denominator)
   
Per-Share Amount
 
Basic earnings per share
 
$
845,611
     
191,032,491
   
$
0.004
 
Effect of Dilutive Securities
                       
Conversion of notes and interest into common stock:
                       
  Additional shares
           
492,807,960
         
  Decrease in interest expense due to conversion
   
402,950
                 
  Remove gain on revaluation of conversion option liability
   
(83,492
)
               
                         
Shares accrued, not yet issued
           
5,000,000
         
                         
Diluted earnings per share
 
$
1,165,069
     
688,840,451
   
$
0.002
 

Anti-dilutive shares at December 31, 2009:

Warrants to purchase 179,700,000 shares at $0.005 per share, 18,500,000 shares at $0.011 per share, and 74,000,000 shares at $0.0115 per share were not included in the computation of loss per share because the warrant exercise prices were greater than the average market price of the common shares and 37,5000,000 shares issuable upon the conversion of options. The Company has included additional shares for conversion of notes and interest even though the total assumed shares exceed the currently authorized shares by 188,840,451.
                                                                                                                          
Concentrations of Credit Risk
 
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash in investments with credit quality institutions. At times, such investments may be in excess of applicable government mandated insurance limit. At December 31, 2010 and 2009, trade receivables from the Company’s largest customer amount to 86% and 85%, respectively, of total trade receivables.
 
Reclassification
 
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

Stock-based Compensation

Effective January 1, 2006, the Company adopted FASB ASC 718-40. This statement requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost is recognized over the period in which the employee is required to provide service in exchange for the award, which is usually the vesting period.
 
In August 2005, the Company’s commitments to issue shares of common stock first exceeded its common stock authorized. At this time, the Company began to value its stock options via the liability method of accounting. Pursuant to guidance in ASC 718-40 the cost of these options are valued via the Black-Scholes valuation method when issued, and re-valued at each reporting period.  The gain or loss from this revaluation is charged to compensation expense during the period.  Options expense and gain or loss on revaluation during the twelve months ended December 31, 2010 and 2009 are summarized in the table below:

 
December 31,
 
 
2010
 
2009
 
         
Option expense
 
$
168,409
   
$
7,993
 
                 
(Gain) loss on revaluation of options
   
23,682
     
(38,058
) 
 
 
Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  The Company’s current liabilities exceeded its current assets by $6,115,720 as of December 31, 2010.   However, the Company has reported a net loss,  for the year ended December 31, 2010, due to non-cash charges primarily related to issuance of common stock warrants and changes in fair values of conversion features of debt.

The Company is working to manage its current liabilities while it continues to make changes in operations to further improve its cash flow and liquidity position. Management believes the Company will generate sufficient capital from operations and from debt and equity financing in order to satisfy current liabilities in the succeeding twelve months.  Management’s belief is based, if necessary, on the Company’s operating plans, which in turn is based on assumptions that may prove to be incorrect.  

If the Company’s the cash flow from operations is 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 expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The Company has not made any adjustments to the financial statements which would be necessary should the Company not be able to continue as a going concern.
 
Significant Recent Accounting Pronouncements
 
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 

2. ACCOUNTS RECEIVABLE
 
At December 31, 2010 and 2009, accounts receivable consists of:
 
   
2010
   
2009
 
Accounts receivable from customers
 
$
449,620
   
$
342,780
 
Allowance for doubtful accounts
   
(22,061
)
   
(3,574
)
Accounts receivable, net
 
$
427,559
   
$
339,206
 
 
3. LOAN RECEIVABLE AND INTEREST RECEIVABLE
 
The balance of loan receivable consists of a loan to Pasta Italiana, Inc. (“Pasta”) in the net carrying amount of $138,050 at December 31, 2010 and $143,050 at December 31, 2009, respectively.  This note bears interest at the rate of 15% per annum, payable in shares of Pasta stock.  

4.   INVENTORY
 
Inventory consists of molecular gastronomy products, honey, and meat glue which is warehoused in Naples, Florida; and prepaid meat products held by our meat vendors. At December 31, 2010 and 2009, finished Goods inventory was $52,657 and $19,075, respectively.

 
5. PROPERTY AND EQUIPMENT
 
A summary of property and equipment at December 31, 2010 and 2009, is as follows:
 
   
2010
   
2009
 
Computer hardware and software
 
$
320,800
   
$
305,794
 
Furniture and fixtures
   
67,298
     
67,298
 
     
388,098
     
373,092
 
Less accumulated depreciation and amortization
   
(364,310
)
   
(339,394
)
Total
 
$
23,788
   
$
33,698
 
 
Depreciation and amortization expense for property and equipment amounted to $24,616 and $32,392 for the year ended December 31, 2010 and 2009, respectively.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 

 
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at December 31, 2010 and 2009 are as follows:

 
2010
 
2009
 
Trade payables
 
$
788,137
   
$
689,075
 
Accrued payroll and commissions
   
27,024
     
6,286
 
Total
 
$
815,161
   
$
695,361
 

At December 31, 2010 and 2009, accrued liabilities to related parties consisted of accrued payroll and payroll related benefits.

7.  ACCRUED INTEREST
 
Accrued interest on the Company’s convertible notes payable is convertible at the option of the note holders into the Company’s common stock at price ranging from of $0.005 to $0.010 per share.  There is a beneficial conversion feature embedded in the convertible accrued interest, which can be exercised at any time by the note holders. The Company is amortizing this beneficial conversion feature over the life of the related notes payable.  Certain of the notes payable have exceeded their stated terms, and are still outstanding; in those instances, the Company expenses the value of the beneficial conversion feature on the accrued interest immediately.

During the twelve months ended December 31, 2010 and 2009, the amounts of $134,260, and $156,316, respectively, were credited to additional paid-in capital as a discount on convertible interest.  The aggregate amount of discounts on convertible interest charged to operations during the twelve months ended December 31, 2010 and 2009 was $130,170 and $125,501, respectively.
 
At December 31, 2010, the Company has the following accrued interest on its balance sheet:
 
   
Gross
   
Discount
   
Net
 
Non-related parties
 
$
685,448
   
$
38,572
   
$
646,876
 
Related parties
   
197,786
     
-
     
197,786
 
Total
 
$
883,234
   
$
38,572
   
$
844,662
 
 
At December 31, 2009, the Company has the following accrued interest on its balance sheet:
 
  
 
Gross
   
Discount
   
Net
 
Non-related parties
 
$
611,416
   
$
34,483
   
$
576,933
 
Related parties
   
170,144
     
-
     
170,144
 
Total
 
$
781,560
   
$
34,483
   
$
747,077
 
 
Certain of the accrued interest is convertible in to shares of the Company’s common stock at prices ranging from $0.005 to $0.010 per share. At December 31, 2010, convertible accrued interest was $844,662 which was convertible into 165,053,920 shares of common stock; at December 31, 2009, convertible accrued interest was $747,077 which was convertible into 146,559,160 shares of common stock.
 
   
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES 
 
   
December 31, 2010
   
December 31, 2009
 
Convertible secured note payable in the original amount of $350,000 to Alpha Capital Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note consists of $100,000 outstanding under a previous note payable which was cancelled on February 25, 2005, and $250,000 of new borrowings. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note entered technical default status on May 16, 2005.  The note originally carried interest at the rate of 8% per annum, and  was due in full on February 24, 2007.  Upon default, the note’s interest rate increased to 15% per annum, and the note became immediately due. This note contains a cross default provision. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $250,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a conversion price of $0.005 per share . Interest in the amount of $25,597 and $33,552 was accrued on this note during the twelve months ended December 31, 2010   and 2009, respectively. During the twelve months ended December 31, 2006 the note holder converted $5,000 into shares of common stock. During the twelve months ended December 31, 2006 the holder of the note converted $27,865 of accrued interest into common stock.   In April 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also in April 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
   
$
345,000
   
$
345,000
 
Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion price of $0.005 per share .  A beneficial conversion feature in the amount of $100,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004 and 2005. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share.  Interest in the amount of $1,999 was accrued on this note during the twelve months ended December 31, 2010, and 2009.  During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. This note is past due at December 31, 2010 and  2009.
   
                                         
         
     
25,000
     
25,000
 
Convertible note in the amount of $85,000 originally payable to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on March 11, 2006. The note is convertible into common stock of the Company at a conversion price of  $0.005 per share. A beneficial conversion feature  in the amount of $85,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. On December 21, 2006, this note was transferred to Whalehaven Capital Fund, Ltd. (“Whalehaven”). Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share. Interest in the amount of $3,039  was accrued on this note during the twelve months ended December 31, 2010 and 2009. During the twelve months ended December 31, 2005, the note holder converted $44,000 of the note payable into common stock.    During the twelve months ended December 31, 2006, the Company made a $3,000 cash payment on the principal amount of the note.  During the year ended December 31, 2009,the noteholder agreed to extend the maturity date until February 15, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
   
                                             
         
     
38,000
     
38,000
 
Convertible note payable in the amount of $80,000 to Brown Door, Inc.,  dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on March 11, 2006. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $80,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share.  Interest in the amount of  $6,403 was accrued on this note during the twelve months ended December 31, 2010 and 2009. This note is past due at December 31, 2010 and 2009.
               
     
80,000
     
80,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Convertible note payable in the amount of $50,000 to Whalehaven dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite 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 was 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. This note contains a cross default provision. The note is convertible into common stock of the Company at a conversion price of $0.005 per share.  A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in May, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $3,201 and $3,892 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  During the twelve months ended December 31, 2006, $10,000 of principal and $589 of accrued interest was converted into common stock.   During the year ended December 31,2 009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  During the year ended December 31, 2009, the noteholder agreed to extend the maturity date until February 15, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
     
                 40,000
     
40,000
 
Convertible note payable in the amount of $50,000 to Oppenheimer & Co., / Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of  $4,003 was accrued on this note during the twelve months ended December 31, 2010 and 2009. This note is past due at December 31, 2010 and 2009.
               
     
50,000
     
50,000
 
Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006.  The note is convertible into common stock of the Company  at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005 and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $1,603 was accrued on this note during the twelve months ended December 31, 2010 and 2009. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock.  This note is past due at December 31, 2010 and 2009.
               
     
20,000
     
20,000
 
Convertible note payable in the amount of $25,000 to Joel Gold, a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on January 25, 2007.  The note is convertible into common stock of the Company at a conversion price of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005, 2006, and 2007. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $1,999 was accrued on this note during the twelve months ended December 31, 2010 and 2009.  This note is past due at December 31, 2010 and 2009.
               
     
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, has no provisions for a default or past due rate and was due in full on January 25, 2007.  The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005, 2006, and 2007. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of was $1,496 accrued on this note during the twelve months ended December 31, 2010 and 2009.   This note is past due at December 31, 2010 and 2009.
               
     
25,000
     
25,000
 
Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible note 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 price of $0.01 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $799 and $801 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  This note is past due at December 31, 2010 and 2009.
   
                                           
         
     
10,000
     
10,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible note 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 price of $0.01 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $799 and $801 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  This note is past due at December 31, 2010 and 2009.
   
                                               
         
     
10,000
     
10,000
 
Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible note 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 price of $0.01 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of $799 and $801 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  This note is past due at December 31, 2010 and 2009. 
               
     
10,000
     
10,000
 
Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible note 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 price of $0.01 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share. Interest in the amount of  $801 was accrued on this note during the twelve months ended December 31, 2010 and 2009.  This note is past due at December 31, 2010 and 2009.
   
                         
         
     
10,000
     
10,000
 
Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and is due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $639 was accrued on this note during the twelve months ended December 31, 2010, and 2009. This note is past due at December 31, 2010 and 2009.
               
     
8,000
     
8,000
 
Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, has no provisions for a default or past due rate and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004, 2005, and 2006. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $401 was accrued on this note during the twelve months ended December 31, 2010 and 2009.  This note is past due at December 31, 2010 and 2009.
   
                             
 
 
 
 
 
         
     
  5,000
     
5,000
 
Convertible secured 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 was 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. This note contains a cross default provision. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $8,336 and $11,670 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively. During the year ended December 31, 2010, the noteholder converted principal in the amount of $20,000 into common stock. During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also during the year ended December 31, 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010.  This note is past due at December 31, 2010.
               
     
100,000
     
120,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Convertible secured note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005.  We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2005.  The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. This note contains a cross default provision. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $2,312 and $4,870 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.   During the year ended December 31, 2010, the noteholder converted principal in the amount of $20,000 into common stock. During the year ended December 31, 2009, the noteholder agreed to extend the maturity date until February 15, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until June 15, 2010.  This note is past due at December 31, 2010.
               
     
27,047
     
30,000
 
Convertible secured note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance.  These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.  This note was in technical default as of November 13, 2005.  The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. This note contains a cross default provision.  The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share.  Interest in the amount of $1,249 and $1,858 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively. During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months ended December 31, 2008, the holder of the note converted an additional $3,000 of principal into common stock. During the year ended December 31, 2009, the noteholder converted $2,000 of principal and $1,058 of accrued interest into common stock. During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also, during the year ended December 31, 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010. During the year ended December 31, 2010 the noteholder converted $3,000 of principal and $1,043 of accrued interest into common stock.  Also, during the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
     
15,000
     
18,000
 
Convertible secured 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. This note contains a cross default provision.  The note is convertible into common stock of the Company at a conversion of $0.005 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $971 and $3,747 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively. During the twelve months ended December 31, 2006, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock, and during the twelve months need December 31, 2008, the holder of the note converted an additional $5,000 principal into common stock. During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also, during the year ended December 31, 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010.  During the year ended December 31, 2010, the noteholder converted $10,000 of principal into common stock. Also, during the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
     
8,000
     
18,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Convertible secured 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. This note contains a cross default provision. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense when the note entered default status in November, 2005.  Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. Interest in the amount of $480 and $582 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.   During the twelve months ended December 31, 2006, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock.  In April 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also in April 2009, the noteholder agreed to extend the maturity date of this note until January 1, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
     
 6,000
     
6,000
 
Secured note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company was not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended September 30, 2007, the Company extended the due date of the note one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholder to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007.  The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $95,588 and amortized this discount to interest expense when the note entered default status in October 2007. On March 12, 2008, the Company extended this note to March 4, 2009.  As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 24,000,000 shares of common stock at $0.0115 per share; 6,000,000shares of common stock at $0.011 per share; and 2,400,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $126,465. This transaction was accounted for as an extinguishment of debt, and a loss of $126,465 was charged to operations during the twelve months ended December 31, 2008.  Interest in the amount of $18,000 and $19,748 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively. In January 2009, the noteholder agreed to extend the maturity date of this note to April 16, 2009.     In April 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also in April 2009, the noteholder agreed to extend the maturity date of this note until April 16, 2009.  This note is past due at December 31, 2009. This note contains a cross default provision. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.
               
     
120,000
     
120,000
 
Secured note payable in the amount of $30,000 to Whalehaven dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company was not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable.   During the three months ended September 30, 2007, the Company extended the due date of the note one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholder to convert the note and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007.  The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $23,897 and amortized this discount to interest expense when the note entered default status in October 2007.    On March 12, 2008, the Company extended this note to March 4, 2009.  As consideration for the extension of this note, the Company issued five-year warrants as follows: warrants to purchase 6,000,000 shares of common stock at $0.0115 per share; 1,500,000 shares of common stock at $0.011 per share; and 600,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $31,616. This transaction was accounted for as an extinguishment of debt, and a loss of $31,616 was charged to operations during the twelve months ended December 31, 2008.  Interest in the amount of $4,524 and $2,917 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.   During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also, during the year ended December 31, 2009 the noteholder agreed to extend the maturity date until February 15, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011. This note contains a cross default provision.
               
     
       30,000
     
30,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Note payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005.  On September 30, 2008, this note was extended to December 31, 2009 in exchange for adding a convertibility feature to the note. This feature allows for conversion to common stock at a price of $0.005 per share. The Company valued this beneficial conversion feature at the amount of $89,945 using the Black-Scholes valuation model.  $75,000 of this amount was charged to discount on the note. Interest in the amount of $6,001 and $6,002 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively. This note is past due at December 31, 2010 and 2009.
               
     
75,000
     
75,000
 
Twenty-nine convertible notes payable in the amount of $4,500 each to Sam Klepfish, the Company’s CEO and a related party, dated the first of the month beginning on November 1, 2006, pursuant to the Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in salary is accrued each month to a note payable. These notes bear interest at the rate of 8% per annum and have no due date. These notes and accrued interest are convertible into common stock of the Company at a rate of $0.005 per share.  Beneficial conversion features in the aggregate amount of $9,000 for the year ended December 31, 2006, $39,190 for the year ended December 31, 2007, and $58,464 for the year ended December 31, 2008 was calculated using the Black-Scholes valuation model.  Since these notes are payable on demand, the value of these discounts were charged immediately to interest expense.   Interest in the aggregate amount of $10,442 and $10,270 was accrued on these notes during the twelve months ended December 31, 2010 and 2009, respectively.
               
     
130,500
     
130,500
 
Secured note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note originally carried interest at the rate of 15% per annum, and was originally due in full on November 19, 2006. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at February 20 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the three months ended September 30, 2007, the Company extended the due date of the note one year, to October 31, 2007; at the same time, the Company added a convertibility feature, allowing the noteholder to convert the notes and accrued interest into common stock of the Company at a rate of $0.005 per share. This note entered technical default on October 31, 2007. The Company recorded a discount to this note for the fair value of the conversion feature in the amount of $7,966 and amortized this discount to interest expense when the note entered default status in October 2007.  On March 12, 2008, the Company extended this note to March 4, 2009.  As consideration for the extension of this notes, the Company issued five-year warrants as follows: warrants to purchase 2,000,000 shares of common stock at $0.0115 per share; 500,000 shares of common stock at $0.011 per share; and 200,000 shares of common stock at $0.005 per share. These warrants were valued via the Black-Scholes valuation method at an aggregate amount of $10,539. This transaction was accounted for as an extinguishment of debt, and a loss of $10,539 was charged to operations during the twelve months ended December 31, 2008.  Interest in the amount of $1,496 and $1,620 was accrued on this note during the twelve months ended December 31, 2010 and 2009, respectively.  During the year ended December 31, 2009, the noteholder agreed to waive the default interest rate of 15%, and the note resumed accruing interest at the rate of 8% per annum.  Also, during the year ended December 31, 2009, the noteholder agreed to extend the maturity date until January 1, 2010. During the year ended December 31, 2010, the noteholder agreed to extend the maturity date of this note until April 15, 2011.  This note contains a cross default provision.
               
     
10,000
     
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.  Interest in the amount of $782 and $1,326 was capitalized to this note during the twelve months ended December 31, 2010 and 2009, respectively.  Principal and interest in the amounts of $6,681 were paid on this note during the twelve months ended December 31, 2010 and 2009.
               
     
4,815
     
10,723
 
Convertible secured note payable in the amount of $200,000 to Alpha Capital, dated December 31, 2008.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into common stock of the Company at the rate of $0.005 per share.  Also issued with this note are warrants to purchase 40,000,000 shares of the Company’s common stock at a price of $0.005 per share.  The Company calculated a discount to the note in the amount of $200,000, and recorded $21,591 and $11,428 amortization for the year ended December 31, 2010 and 2009, respectively.   Interest in the aggregate amount of $12,357 and $15,744 was accrued on this note during the years ended December 31, 2010 and 2009, respectively.  During the years ended December 31, 2010 and 2009, the Company made principal payments on this note in the amount of $80,000 and $16,000, respectively.  This note contains a cross default provision.
               
     
104,000
     
184,000
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Convertible secured note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $230,000 to Alpha Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest are convertible into shares of common stock of the Company at a rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $230,000, and recorded $68,206 and $11,428 amortization for this discount during the years ended December 31, 2010 and 2009, respectively.  Interest in the aggregate amount of $18,401 and $18,350 was accrued on this note during the year ended December 31, 2010 and 2009, respectively.  This note contains a cross default provision.
               
     
230,000
     
230,000
 
Convertible secured note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $38,000 to Whalehaven Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into shares of common stock of the Company at a rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $38,000, and recorded $11,269 and $1,888 amortization for this discount during the years ended December 31, 2010 and 2009, respectively.  Interest in the aggregate amount of $5,697 and $5,681 was accrued on this note during the years ended December 31, 2010 and 2009, respectively.   This note contains a cross default provision.
               
     
38,000
     
38,000
 
Convertible secured note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Asher Brand, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into shares of common stock of the Company at a rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $25,310, and recorded $7,506 and $1,258 amortization for this discount during the years ended December 31, 2010 and 2009, respectively.  Interest in the aggregate amount of $2,023 and $2,017 was accrued on this note during the years ended December 31, 2010 and 2009, respectively.   This note contains a cross default provision.
               
     
25,310
     
25,310
 
Convertible secured note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $25,310 to Momona Capital, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into shares of common stock of the Company at a rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $25,310, and $7,506 and $1,258 amortization for this discount during the years ended December 31, 2010 and 2009, respectively.  Interest in the aggregate amount of $2,023 and $2,017 was accrued on this note during the years ended December 31, 2010 and 2009, respectively.   This note contains a cross default provision.
               
     
25,310
     
25,310
 
Convertible secured note payable for the settlement of the amount owed for the penalty for the late registration of shares in the amount of $10,124 to Lane Ventures, dated January 1, 2009.  This note bears interest at the rate of 8% per annum, and is due in full on July 31, 2011.  Principal and accrued interest is convertible into shares of common stock of the Company at a rate of $0.005 per share.  The Company calculated a discount to the note in the amount of $10,124, and recorded $3,003 and $503 amortization for this discount during the years ended December 31, 2010 and 2009, respectively.  Interest in the aggregate amount of $813 and $811 was accrued on this note during the years ended December 31, 2010 and 2009, respectively.   This note contains a cross default provision.
               
     
10,124
     
10,124
 
   
$
1,660,106
   
$
1,781,967
 
  

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
   
Note
   
Unamortized
   
Net of
 
December 31, 2010:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
1,314,606
   
$
(292,545
) 
 
$
1,022,061
 
Notes payable - related parties, current portion
   
345,500
     
-
     
345,500
 
Notes payable
   
-
     
-
     
-
 
Total
 
$
1,660,106
   
$
(292,545
)
 
$
1,367,561
 
                         
   
Note
   
Unamortized
   
Net of
 
December 31, 2009:
 
Amount
   
Discounts
   
Discount
 
Notes payable - current portion
 
$
1,014,907
   
$
(96,000
) 
 
$
918,907
 
Notes payable - related parties, current portion
   
345,500
     
-
     
345,500
 
Notes payable
   
421,560
     
(393,842
) 
   
27,718
 
Total
 
$
1,781,967
   
$
(489,841
) 
 
$
1,292,126
 
  
   
Twelve months ended
 
   
December 31,
 
   
2010
   
2009
 
Discount on Notes Payable amortized to interest expense:
 
$
199,079
   
$
118,001
 

Conversion Options Embedded in Convertible Notes

The Company accounts for conversion options embedded in convertible notes in accordance with FASB ASC 815-10-05. ASC 815-10-05 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with ASC 815-40-05.
 
At December 31, 2010 and 2009, the Company had outstanding $1,655,291 and $1,771,244 in principal, respectively, of various convertible notes with embedded conversion options accounted for as free standing derivative financial instruments in accordance with ASC 815-10-05 and ASC 815-40-05. The fair value of these embedded conversion options was $2,465,565 and $1,384,992 at December 31, 2010 and 2009, respectively.  The fair value of these embedded conversion options were estimated at December 31, 2010 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.20%; expected dividend yield of 0%; expected option life of 10; and volatility of 119.60%.  The fair value of these embedded conversion options were estimated at December 31, 2009 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.20%; expected dividend yield of 0%; expected option life of 10; and volatility of 302.87%.  The expected term of 10 years was used for all notes in both periods because several of the notes are currently or have been in default, and accordingly the term of the note is deemed not relevant as a variable for the Black-Scholes calculation.  The Company revalues the conversion options at each reporting period, and charges any change in value to operations. During the years ended December 31, 2010 and 2009, the Company recorded a loss of $1,244,239 and a gain of $83,492, respectively, due to the change in value of the conversion option liability.

When convertible notes payable are satisfied by payment or by conversion to equity, the Company revalues the related conversion option liability at the time of the payment or conversion.  The conversion option liability is then relieved by this amount, which is charged to additional paid-in capital.  During the years ended December 31, 2010 and 2009, conversion option liabilities in the amounts of $163,666 and $18,360 were transferred from liability to equity due to the conversion or payment of the related convertible notes payable.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Discounts on notes payable

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

Extension of notes payable

The Company accounts for modifications of its notes payable according to the guidance in FASB ASC 470-50-40. Pursuant to ASC 470-50-40, changes to an existing note should be accounted for as an extinguishment of the note with resultant gain or loss if the present value of the cash flows from the new note vary by  more than 10% from the present value of the cash flows from the original note.  ASC 470-50-40 provides an exception to this rule for the addition of conversion options accounted for as a derivative liability.
 
During the year ended December 31, 2009, the Company negotiated the extension of its notes payable in the aggregate amount of $587,000.  The Company extended the maturity date of these notes until January  1, 2010.  These notes, along with two additional notes payable in the aggregate amount of $150,000, contained certain provisions for a default interest rate.  The Company negotiated an agreement with the noteholders and the noteholders agreed to reinstate the original interest rate of 8% per annum.

During the year ended December 31, 2009, the Company negotiated the extension of certain of its notes payable in the aggregate amount of $138,000.  The Company extended the maturity date of these notes until February 15, 2010.  During the year ended December 31, 2010, as described below the Company negotiated the extension of these notes payable, and the maturity dates of these notes to either June 15, 2010 or April 15, 2011.

During the year ended December 31, 2010, the Company negotiated the extension of nine of its notes payable in the aggregate amount of $617,000, to April 15, 2011.  The Company also negotiated the extension of two of its notes payable in the aggregate amount of $130,000 until June 15, 2010.
 
Embedded conversion features of notes payable:

The Company values embedded conversion features utilizing the Black-Scholes valuation model.  Conversion options are valued upon issuance, and re-valued at each financial statement reporting date.  Any change in value is charged to income or expense during the period.  The following table illustrates certain key information regarding our conversion option valuation assumptions at December 31, 2010 and 2009:

   
December 31,
 
   
2010
   
2009
 
             
Number of conversion options outstanding
   
323,058,200
     
346,248,800
 
Value at December 31
 
$
2,465,565
   
$
1,384,992
 
Number of options issued during the year
   
-
     
68,448,800
 
Value of options issued during the year
 
$
-
   
$
336,844
 
Number of options exercised or underlying
               
    notes paid during the year
   
23,190,600
     
7,200,000
 
Value of options exercised or underlying
               
    notes paid during the year
 
$
163,666
   
$
18,360
 
Revaluation gain (loss) during the year
 
$
(1,244,239
) 
 
$
83,492
 
                 
Black-Scholes model variables:
               
Volatility
 
119.60% to 336
% 
 
302.87% to 393.237
% 
Dividends
   
0
     
0
 
Risk-free interest rates
   
0.20
%
   
0.20% -0.43
%
Term (years)
   
10.00
     
1.00 – 10.00
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
   
9.  RELATED PARTY TRANSACTIONS

For the year ended December 31, 2010:

In December 2009, the Company agreed to issue 8,000,000 options with five year terms to purchase additional shares of the Company’s common stock to each of the two non-employee directors for services related to the year ending December 31, 2010.  These options vest at the rate of 25% each quarter beginning March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the vesting date plus a 20% premium, but no lower than a price of $0.005 per share. During the year ended December 31, 2010, 8,000,000 options have vested to each of the non-employee directors under this agreement, with 2,000,000 options exercisable at $0.0076 per share, 2,000,000 options exercisable at $0.0095 per share, 2,000,000 options exercisable at $0.0090 per share, and 2,000,000 options exercisable at $0.0096 per share.

In January 2010, the Company issued 8,000,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 2,000,000 per quarter beginning with the quarter ended March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the vesting date plus a 20% premium, but no lower than $0.005 per share. During the year ended December 31, 2010, 8,000,000 options have vested with 2,000,000 options exercisable at $0.0076 per share, 2,000,000 options exercisable at $0.0095 per share, 2,000,000 options exercisable at $0.0090 per share, and 2,000,000 options exercisable at $0.0096 per share.

In January 2010, the Company issued 2,500,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 625,000 per quarter beginning with the quarter ended March 31, 2010 and have exercise prices equal to the closing price of the Company’s closing stock on the vest date plus a 20% premium, but no lower than $0.005 per share.   During the year ended December 31, 2010, 2,500,000 options have vested with 625,000 options exercisable at $0.0076 per share, 625,000 options exercisable at $0.0095 per share, 625,000 options exercisable at $0.0090 per share, and 625,000 options exercisable at $0.0096 per share.

The Company committed to issuing 679,557 shares of common stock to each of its two non-employee directors, for a total issuance of 1,359,114 shares of common stock.  The fair value of these shares in the amount of $12,000 was charged to operations during the year ended December 31, 2010.  As of December 31, 2010, these shares have not been issued and are shown in accrued liabilities due to related parties on the Company’s balance sheet.

The Company committed to issuing 250,000 shares of common stock to three new directors, for a total issuance of 750,000 shares of common stock.  The fair value of these shares in the amount of $6,000 was charged to operations during the year ended December 31, 2010.  As of December 31, 2010, these shares have not been issued and are shown in accrued liabilities dues to related parties on the Company’s balance sheet.

Pursuant to the terms of  an employment agreement, the Company is committed to make a cash payment of $21,140 and issue 2,856,757 shares of common stock to the Company’s President. The fair value of these shares in the amount of $21,140 was charged to operations during the year ended December 31, 2010.  The total value of the bonus of $42,280 is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2010.
  
Pursuant to the terms of an employment agreement, the Company is committed to make a cash payment of $21,140 and issue 2,856,757 shares of common stock to the Company’s Chief Executive Officer. The fair value of these shares in the amount of $21,140 was charged to operations during the year ended December 31, 2010. The total value of the bonus of $42,280 is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2010.

For the year ended December 31, 2009: 

The Company issued three convertible notes payable in the aggregate amount of $13,500 for salary due to the Company’s Chief Executive Officer, convertible at the rate of $0.005 per share into an aggregate of 2,700,000 shares of common stock.

The Company issued 2,000,000 options to purchase shares of common stock to two non-employee directors.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
The Company committed to issuing 1,000,000 shares of common stock to each of its two non-employee directors, for a total issuance of 2,000,000 shares of common stock.  The fair value of these shares in the amount of $8,000 was charged to operations during the year ended December 31, 2009.  As of December 31, 2009, these shares have not been issued and are shown in accrued liabilities due to related parties on the Company’s balance sheet.

Pursuant to the terms of  an employment agreement, the Company is committed to make a cash payment of $4,830 and issue 966,000 shares of common stock to the Company’s President. The fair value of these shares in the amount of $4,830 was charged to operations during the year ended December 31, 2009.  The total value of the bonus of $9,660 is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2009.
  
Pursuant to the terms of an employment agreement, the Company is committed to make a cash payment of $4,550 and issue 910,000 shares of common stock to the Company’s Chief Executive Officer. The fair value of these shares in the amount of $4,550 was charged to operations during the year ended December 31, 2009. The total value of the bonus of $9,100 is recorded on the Company’s balance sheet as a liability to related parties as of December 31, 2009.

10. INCOME TAXES

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

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $2,050,000, which will expire beginning in 2028.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.
 
A reconciliation between the actual income tax expense and income taxes computed by applying the statutory Federal and state income tax rates to income from continuing operations before income taxes is as follows:

   
Twelve Months Ended December 31, 2010
   
Twelve Months Ended December 31, 2009
 
             
Computed “expected” income tax expense at approximately 34%
 
$
85,000
   
$
288,000
 
                 
Change in valuation allowance
 
 
(85,000
)
   
(288,000
) 
                 
   
$
-
   
$
-
 
 
The Company’s above change in valuation allowance is primarily composed of utilization of net operating loss carryforwards.

The Company has not filed corporate income tax returns since December 31, 2009.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
11.  COMMON STOCK

During the year ended December 31, 2010, the Company had the following transactions:

The Company issued 16,996,465 shares of common stock for the conversion of notes payable in the amount of $35,953 and accrued interest in the amount of $49,029.

The Company issued 750,000 shares of common stock to a consultant for services provided.  The fair value of these shares in the amount of $6,000 was charged to operations during the year ended December 31, 2010.

The Company issued 4,000,000 shares of common stock in error due to an error by the transfer agent which resulted in the duplication of shares of common stock issued to a note holder for conversion.  The Company will return these shares for cancellation.

 During the year ended December 31, 2009, the Company had the following transactions:

The Company issued 600,000 shares of common stock to employees for services previously provided. The fair value of these shares in the amount of $1,200 was charged to operations during the year ended December 31, 2009.

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

During the year ended December 31, 2009, the Company issued 3,600,000 shares of common stock to an investor for the conversion of a note payable in the amount of $18,000.

During the year ended December 31, 2009, the Company issued 1,250,000 shares of common stock to a consultant for services. The fair value of these shares in the amount of $6,250 was charged to operations during the year ended December 31, 2009.

During the year ended December 31, 2009 the Company issued 611,600 shares of common stock to an investor for the conversion of $2,000 of principal of a convertible note and $1,058 of accrued interest on the convertible note.

Warrants

The following table summarizes the significant terms of warrants outstanding at December 31, 2010. These warrants may be settled in cash or via cashless conversion into shares of the Company’s common stock at the request of the warrant holder. These warrants were granted as part of a financing agreement:
 
                 
Weighted
         
Weighted
 
           
Weighted
   
average
         
average
 
           
average
   
exercise
         
exercise
 
Range of
   
Number of
   
remaining
   
price of
   
Number of
   
price of
 
exercise
   
warrants
   
contractual
   
outstanding
   
warrants
   
exercisable
 
prices
   
outstanding
   
life (years)
   
warrants
   
exercisable
   
warrants
 
$
0.0050
     
179,700,000
   
1.66
   
$
0.0050
   
179,700,000
   
$
0.0050
 
                                         
$
0.0110
     
18,500,000
   
1.29
   
$
0.0110
   
18,500,000
   
$
0.0110
 
                                         
$
0.0120
     
1,000,000
   
2.71
   
$
0.0120
   
-
   
$
-
 
                                         
$
0.0115
     
74,000,000
   
1.67
   
$
0.0115
   
74,000,000
   
$
0.0115
 
         
273,200,000
   
1.64
   
$
0.0072 
   
272,200,000
   
$
0.0072 
 
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 

Transactions involving warrants are summarized as follows:
 
         
Weighted
 
         
Average
 
   
Number of
   
Exercise
 
   
Shares
   
Price
 
Warrants outstanding at January 1, 2008
   
273,200,000
   
$
0.007
 
                 
Granted
   
-
     
-
 
Exercised
   
-
     
- 
 
Cancelled / Expired
   
-
     
-
 
Warrants outstanding at December 31, 2009
   
273,200,000
   
$
0.007
 
                 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled / Expired
   
-
     
-
 
Warrants outstanding at December 31, 2010
   
273,200,000
   
$
0.007
 
Exercisable at December 31, 2010
   
272,200,000
   
$
0.007
 
Not exercisable at December 31, 2010
   
1,000,000
   
$
0.012
 
 
Options
 
In December 2006, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors, pursuant to a board resolution for services performed in 2006 (a total of 15,000,000 options). These options have no alternative settlement provisions. The options were issued in April 2007. Compensation cost was recognized via the straight-line attribution method.
 
In January 2008, the Company agreed to issue 5,000,000 options with five year terms to purchase additional shares of common stock to each of the Company’s three directors and the Company’s President pursuant to a board resolution for services performed (a total of 20,000,000 options). The options were issued in January 2008.  Compensation cost was recognized via the straight-line attribution method as expensed to operations during the year ended December 31, 2008.

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

Also in December 2009, the Company agreed to issue 8,000,000 options with five year terms to purchase additional shares of common stock to each of the two non-employee directors for services related to the year ending December 31, 2010.  These options vest at the rate of 25% each quarter beginning March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the vesting date plus a 20% premium, but no lower than a price of $0.005 per share. During the year ended December 31, 2010, 8,000,000 options have vested to each of the non-employee directors under this agreement, with 2,000,000 options exercisable at $0.0076 per share, 2,000,000 options exercisable at $0.0095 per share, 2,000,000 options exercisable at $0.0090 per share, and 2,000,000 options exercisable at $0.0096 per share.
 
 
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
In January 2010, the Company issued 8,000,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 2,000,000 per quarter beginning with the quarter ended March 31, 2010 and have exercise prices equal to the closing price of the Company’s common stock on the vesting date plus a 20% premium, but no lower than $0.005 per share. During the year ended December 31, 2010, 8,000,000 options have vested with 2,000,000 options exercisable at $0.0076 per share, 2,000,000 options exercisable at $0.0095 per share, 2,000,000 options exercisable at $0.0090 per share, and 2,000,000 options exercisable at $0.0096 per share.

In January 2010, the Company issued 2,500,000 options with a five year term to purchase additional shares of common stock to an officer.  These options vest 625,000 per quarter beginning with the quarter ended March 31, 2010 and have exercise prices equal to the closing price of the Company’s closing stock on the vesting date plus a 20% premium, but no lower than $0.005 per share.   During the year ended December 31, 2010, 2,500,000 options have vested with 625,000 options exercisable at $0.0076 per share, 625,000 options exercisable at $0.0095 per share, 625,000 options exercisable at $0.0090 per share, and 625,000 options exercisable at $0.0096 per share.

The following table summarizes the changes outstanding and the related prices for the Company’s stock options:
 
                 
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
 
$
0.0005
     
15,000,000
     
0.89
   
$
0.0050
     
15,000,000
 
$
0.005
 
                                           
$
0.0070
     
22,000,000
     
2.41
   
$
0.0070
     
22,000,000
 
$
0.007
 
                                           
$
0.0076
     
6,625,000
     
4.25
   
$ 
0.0076
     
6,625,000
 
$
0.0076
 
                                           
$
0.0090
     
6,625,000
     
4.75
   
$
0.0090
     
6,625,000
 
$
0.0090
 
                                           
$
0.0095
     
6,625,000
     
4.50
   
$
0.0095
     
6,625,000
 
$
0.0095
 
                                           
$
0.0096
     
6,625,000
     
5.00
   
$
0.0096
     
6,625,000
 
$
0.0096
 
                                           
         
63,500,000
     
3.63
             
63,500,000
 
$
0.007
 
 
Options not vested are not exercisable.
 
  
INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
Transactions involving stock options issued to employees are summarized as follows:
 
   
Options
   
Weighted Average
Exercise Price
 
Outstanding at December 31, 2008
   
35,500,000
     
0.005
 
                 
Issued
   
18,000,000
     
0.005
 
Exercised
   
-
     
-
 
Forfeited or expired
   
(500,000
)
   
0.50
 
Outstanding as December 31,2009
   
53,000,000
   
$
0.007
 
                 
Issued
   
10,500,000
   
$
0.009
 
Exercised
   
-
     
-
 
Forfeited or expired
   
-
     
-
 
Outstanding at December 31, 2010
   
63,500,000
   
$
0.007
 
                 
Non-vested at December 31, 2010
   
-
   
$
-
 
Exercisable at December 31, 2010
   
63,500,000
   
$
0.007
 
 

Aggregate intrinsic value of options outstanding and exercisable at December 31, 2010 and 2009 was $64,930 and $0, respectively. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was  $0.008 and $0.004 as of December 31, 2010 and 2009, respectively, and the exercise price multiplied by the number of options outstanding. As of December 31, 2010 and 2009, total unrecognized stock-based compensation expense related to stock options was $0. During the years ended December 31, 2010 and 2009, the Company charged $168,409 and  $7,993, respectively, to operations related to recognized stock-based compensation expense for employee stock options.

Accounting for warrants and  stock options

The Company accounts for the issuance of common stock purchase warrants, stock options, and other freestanding derivative financial instruments in accordance with the provisions of FASB ASC 815-40-15. Based on the provisions of ASC 815-40-05, the Company classifies, as equity, any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contract that (i) require net-cash settlement or (ii) give the counterparty a choice of net-cash settlement in shares (physical or net-share settlement). At December 31, 2010 and 2009, the Company has no freestanding derivative financial instruments that require net cash settlement or give the counterparty a choice of net cash settlement or settlement in shares.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
The fair value of these warrants and stock options is determined utilizing the Black-Scholes valuation model. Through August 2005, these warrants were accounted for by the equity method, whereby the fair value of the warrants was charged to additional paid-in capital. During September, 2005, the number of shares of the Company's common stock issued and issuable exceeded the number of shares of common stock the Company had authorized. As the Company no longer had sufficient shares authorized to settle all of our outstanding contracts, this triggered a change in the manner in which the Company accounts for the warrants and stock options. The Company began to account for these warrants and stock options utilizing the liability method. Pursuant to ASC 815-40-15, “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 stock options which are a derivative liability should be revalued each reporting period. The recorded value of such warrants and stock options can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants and stock options, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants. During the twelve months ended December 31, 2010 and 2009, the Company recognized a gain of $396,718 and a gain of $756,434, respectively, for the change in the fair value of the warrant liability and recorded the change in operations during the twelve months ended December 31, 2010  and 2009.  During the twelve months ended December 31, 2010 and 2009, the Company recognized a loss of $23,683 and a gain of $38,058, respectively, for the change in the fair value of the stock option liability and recorded these amounts in operations during the twelve months ended December 31, 2010 and 2009.
 
The Company valued stock options and warrants using the Black-Scholes valuation model utilizing the following variables:

   
December 31,
 
   
2010
   
2009
 
Volatility
   
119.60% - 336
%
   
307.87% - 386.12
%
Dividends
 
$
0
   
$
0
 
Risk-free interest rates
   
0.19% - 0.20
%
   
0.18%-0.43
%
Term (years)
   
0.15 - 5.00
     
0.15-5.00
 
 
Insufficient Authorized but Unissued Shares of Common Stock
 
The Company has a potential obligation to issue 838,510,748 and 805,007,960 shares  of common stock upon the conversion of convertible notes and accrued interest, warrants and penalty shares issuable at December 31, 2010 and 2009, respectively.  The Company had 216,385,103 and 194,638,638 shares of common stock outstanding at December 31, 2010 and 2009, respectively, and 500,000,000 shares  of common stock authorized at December 31, 2010 and 2009.   The Company’s potential obligation to issue shares has exceeded its shares authorized by 554,895,851 and 499,646,598 shares at December 31, 2010 and 2009, respectively.  The Company has agreed that it will take the necessary steps to increase its authorized shares once it has 425,000,000 shares outstanding.
 
12. EMPLOYMENT AGREEMENTS 

SAM KLEPFISH

In 2008, the Company and its Chief Executive Officer Sam Klepfish were  parties to an oral agreement which provided, among other things:
 
● 
Mr. Klepfish is to receive a monthly salary in the amount of $10,833
 
● 
Mr. Klepfish received an additional monthly salary of $4,500 which is not paid in cash, but is recorded on a monthly basis as a convertible note payable. These notes payable are convertible into common stock of the Company at a rate of $0.005 per share.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
On December 31, 2008, the registrant entered into one year employment agreements with Sam Klepfish.  The agreement provides for, among other things, (i) average annual salary of $130,000;  (ii) bonuses (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones;  (iii) four month severance upon termination, and (iv) restrictions on confidentiality, competition and solicitation.
 
On January 6, 2010 (with an effective date of January 1, 2010), we entered into a three year employment agreement with Sam Klepfish.  The agreement provides for, among other things, (i) average annual salary of $151,000 from January 1, 2010 through December 31, 2010, of which $6,500 shall be accrued until June 20, 2010, and then payable in equal weekly installments until said $6,500 is paid in full by December 31, 2010;  (ii) $165,000 per annum from January 1, 2011 through December 31, 2011, provided, however that the increase of $14,000 shall only take affect if the Company’s gross annual sales for 2010 are at least $7.5 million; and (iii) the lesser of a 10% increase in salary above the salary in 2011 or $181,000 per annum from January 1, 2012 through December 31, 2012, provide, however the increase in 2012 shall only take effect if the Company’s gross annual sales for 2011 are at least $7.5 million.

Mr. Klepfish is also entitled to receive an annual bonus based upon the consolidated aggregate incremental revenues of the Company (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones.

JUSTIN WIERNASZ
 
In 2008, Mr. Wiernasz was under  an employment agreement dated May 18, 2007 that expired on September 13, 2008 pursuant to which he was compensated at an annual rate of $120,000. The agreement also provided for the earning of a bonus of 10% of his salary, up to 50%, for each $100,000 of incremental profits we make over the previous year.

On January 22, 2008, our Board approved the grant of an aggregate of 3 million restricted shares and 5 million options exercisable for five years at an exercise price of $0.007 per share to Mr. Wiernasz, upon his appointment as President of Innovative Food Holdings, all of which vested on December 31, 2008.

On December 31, 2008, the registrant entered into one year employment agreements with Justin Wiernasz. The agreement provided for, among other things, (i) average annual salary of $130,000; (ii) bonuses (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones; (iii) four month severance upon termination; and (iv) restrictions on confidentiality, competition and solicitation.
 
On January 6, 2010 (with an effective date of January 1, 2010) we entered into a three year employment agreement with Mr. Wiernasz.  The agreement provides for, among other things, (i) average annual salary of $151,000 from January 1, 2010 through December 31, 2010, of which $6,500 shall be accrued until June 20, 2010, and then payable in equal weekly installments until the $6,500 is paid in full by December 31, 2010;  (ii) $165,000 per annum from January 1, 2011 through December 31, 2011, provided, however that the increase of $14,000 shall only take affect if the Company’s gross annual sales for 2010 are at least $7.5 million; and (iii) the lesser of a 10% increase in salary above the salary in 2011 or $181,000 per annum from January 1, 2012 through December 31, 2012, provided, however, the increase in 2012 shall only take effect if the Company’s gross annual sales for 2011 are at least $7.5 million.

Mr. Wiernasz is also entitled to receive an annual bonus based upon the consolidated aggregate incremental revenues of the Company (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones.

13. COMMITMENTS AND CONTINGENCIES
 
On October 17, 2008, we entered into a three-year lease with Grand Cypress Communities, Inc. for new premises consisting of 4,000 square feet at 3845 Beck Blvd.,  Naples, Florida.  The commencement date of the lease is January 1, 2009.  The annual rent and fees under the lease is approximately $54,000.  The lease provides for a buyout option at the end of the lease with credit towards the purchase price received for the rental payments made during the term of the lease.
 

INNOVATIVE FOOD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
At December 31, 2010, commitments for minimum rental payments were as follows:
 
For the twelve months ended:
     
December 31, 2011
 
$
54,000
 
Thereafter
   
-
 
Total
 
$
54,000
 
 
14. MAJOR CUSTOMER
 
The Company’s largest customer, US Foodservice, Inc. and its affiliates, accounted for approximately  92% and 96% of total sales in the years ended December 31, 2010 and 2009, respectively.  A contract between our subsidiary, Food Innovations, and USF expires in December 2012.  We believe that although a significant portion of our sales occur through USF and it’s affiliates, the success of the program is less contingent on a contract then on the actual performance and quality of our products. 
 
15. FAIR VALUE MEASUREMENTS

Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value.   The fair value of the Company’s stock option, convertible debt features and warrant instruments is determined using option pricing models.
 
As a result of the adoption of ASC 815-40, the Company is required to disclose the fair value measurements required by ASC 820, “Fair Value Measurements and Disclosures.”  The other liabilities recorded at fair value in the balance sheet as of December 31, 2009 are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Hierarchical levels, defined by ASC 820 are directly related to the amount of subjectivity associated with the inputs to fair valuations of these liabilities are as follows:
 
Level 1 —
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
   
Level 2 — 
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
   
Level 3 — 
Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own assumptions.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
  
                   
Liabilities
 
   
Level 1
   
Level 2
   
Level 3
   
at fair value
 
Warrant liability
 
$
-
   
$
-
   
$
1,183,175
   
$
1,183,175
 
Option liability
 
$
-
   
$
-
   
$
336,719
   
$
336,719
 
Conversion option liability
 
$
-
   
$
-
   
$
2,465,565
   
$
2,465,565
 
 
 
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.

ITEM 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.  We concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act were effective as of December 31, 2010 to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in SEC rules and forms and our disclosure controls and procedures are also effective to ensure that the information required to be disclosed in reports that we file under the Exchange Act is accumulate and communicated to our principal executive and financial officers to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
(i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii)  provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth in Internal Control Over Financial Reporting — Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Subject to the inherent limitations described in the following paragraph, our management has concluded that our internal control over financial reporting was effective at December 31, 2010 at the reasonable assurance level.

Inherent Limitations Over Internal Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.  Accordingly, our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives.
 
 
Changes in Internal Control over Financial Reporting

We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report on Form 10-K.
 
ITEM 9B. Other Information

None.
 
PART III

ITEM 10. Directors , Executive Officers and Corporate Governance

Set forth below are the directors and executive officers of our Company, their respective names and ages, positions with our Company, principal occupations and business experiences during at least the past five years.
 
Name
 
Age
 
Position
Sam Klepfish
    40  
Chief Executive Officer and Director
Justin Wiernesz
    45  
President
Michael Ferrone
    64  
Director
Joel Gold
    70  
Director
Christopher Brown      49     Director
Solomon Mayer      53   Director
Hank Cohn       41    Director
 
Directors
 
Sam Klepfish
 
From November 2007 to present Mr. Klepfish is the CEO of Innovative Food Holdings and its subsidiaries. From March 2006  to November 2007 Mr. Klepfish was the interim president of the Company and its subsidiary. Since  February 2005 Mr. Klepfish was also a Managing Partner at ISG Capital, a merchant bank. From May 2004 through February 2005 Mr. Klepfish served as a Managing Director of Technoprises, Ltd.  From January 2001 to May 2004 he was a corporate finance analyst and consultant at Phillips Nizer, a New York law firm. Since January 2001 Mr. Klepfish has been a member of the steering committee of Tri-State Ventures, a New York investment group. From 1998 to December 2000, Mr. Klepfish was an asset manager for several investors in small-cap entities.
 
 
Joel Gold, Director
 
Joel Gold is currently an investment Banker at Buckman, Buckman and Reid located in New Jersey, a position he has held since May 2010.  Prior there to, from October 2004, he was head of investment banking of Andrew Garrett, Inc..  From January 2000 until September 2004, he served as Executive Vice President of Investment Banking of Berry Shino Securities, Inc., an investment banking firm also located in New York City. From January 1999 until December 1999, he was an Executive Vice President of Solid Capital Markets, an investment-banking firm also located in New York City.  From September 1997 to January 1999, he served as a Senior Managing Director of Interbank Capital Group, LLC, an investment banking firm also located in New York City.  From April 1996 to September 1997, Mr. Gold was an Executive Vice President of LT Lawrence & Co., and from March 1995 to April 1996, a Managing Director of Fechtor Detwiler & Co., Inc., a representative of the underwriters for the Company’s initial public offering.  Mr. Gold was a Managing Director of Furman Selz Incorporated from January 1992 until March 1995.  From April 1990 until January 1992, Mr. Gold was a Managing Director of Bear Stearns and Co., Inc. (“Bear Stearns”).  For approximately 20 years before he became affiliated with Bear Stearns, he held various positions with Drexel Burnham Lambert, Inc.  He is currently a director, and serves on the Audit and Compensation Committees, of Geneva Financial Corp., a publicly held specialty, consumer finance company.
 
Michael Ferrone, Director
 
Michael Ferrone was Executive Producer and Producer, Bob Vila TV Productions, Inc. from its founding in 1989 to 2000. Michael co-created and developed the T.V. show, "Bob Vila's Home Again". As Executive Producer, Michael managed all aspects of creation, production, and distribution of the Show. By integrating brand extension and sponsor relations, Michael managed the interrelationships between Bob Vila and business partners including senior executives at Sears, NBC, CBS, A&E, HGTV, General Motors, and Hearst Publications. In 2002 he co-founded Building Media, Inc., (BMI) a multimedia education, marketing and production company committed to promoting best building practices through better understanding of building science principles. As of 2005, BMI operates as an independently managed, wholly owned subsidiary of DuPont™.
 
Christopher Brown, Director

Dr. Brown has been an active investor for approximately 30 years and he has invested in numerous publicly traded and privately held companies, where he has served as an advisor and board member of such companies.  Dr. Brown also manages one of the most elite oral and cosmetic surgery centers in the United States.

Solomon Mayer, Director

Mr. Solomon Mayer has held various executive level positions, and has successfully overseen several businesses from conceptions to profitability.  Mr. Mayer is currently on the board of directors of the following private Companies: Mooney Airplane Corporation, Premier Store Fixtures and Supreme Construction and Development, a real estate development and investment firm.

Hank Cohn, Director

Hank Cohn is currently CEO of P1 Billing, LLC, a revenue cycle management services provider to ambulatory medical clinics.  P1 Billing is a spinoff of PracticeOne Inc., (formerly PractieXpert, Inc., an  OTCBB traded company), an integrated PMS and EMR software and services company for physicians.  Mr. Cohn served as President and Chief Executive Officer of PracticeOne from December 2009 until December 2009, at which time he sold the company to Francison Partners,  one of the largest, global technology focused, private equity firms in Silicon Valley.  Prior to that, Mr. Cohn worked with a number of public companies.  A partial list of his past and present board memberships include: Analytical Surveys, Inc., Kaching Kaching, Inc., and International Food and Wine, Inc., currently Evolution Resources Inc.  Mr. Cohn also served as the executive vice president of Galaxy Ventures, LLC a closely-held investment fund concentrating in the areas of bond trading and early stage technology investments, where he acted as portfolio manager for investments.
 

Executive Officers

Justin Wiernasz, President

Effective on July 31, 2008, Mr. Justin Wiernasz was promoted to the position of President of Innovative Food Holdings, Inc.    Prior thereto he was the Executive Vice President of Marketing and Sales and Chief Marketing Officer of our operating subsidiary, Food Innovations, Inc. since May 2007 and the President of Food Innovations and our Chief Marketing Officer since December 2007.  Prior thereto, he was at U.S. Foodservice, our largest customer, for 13 years. From 2005 to 2007 he was the Vice President of Sales & Marketing, U.S. Foodservice, Boston, and prior thereto, from 2003 to 2005 he was a National Sales Trainer at U.S. Foodservice, Charleston SC, from 1996 to 2003 he was the District Sales Manager at U.S. Foodservice, Western Massachusetts and from 1993 to 1996 he was Territory Manager, U.S. Foodservice, Northampton, Easthampton & Amherst, MA. Prior to that from 1989 to 1993 he was the owner and operator J.J.’s food and spirit, a 110 seat restaurant .
 
Key Employees

John McDonald

Mr. McDonald, age 48,  has been the Chief Information Officer of IVFH since November 2007 and our principal accounting officer since November 2007.  From 2004 through 2007,  Mr. McDonald worked as a consultant with Softrim Corporation of Estero, Florida where he created custom applications for a variety of different industries and assisted in building interfaces to accounting applications. Since 1999 he has also been President of McDonald Consulting Group, Inc. which provide consulting on accounts receivable, systems and accounting services.


Qualification of Directors

We believe that all of our directors are qualified for their positions and each brings a benefit to the board. Mr. Kelpfish, as our CEO, is uniquely qualified to bring management’s perspective to the board’s deliberations.  Mr. Gold, with his lengthy career working for broker/dealers, brings “wall Street’s” perspective. Mr. Ferrone, with his background, brings marketing experience to the board.  Dr. Brown, with his history of investments, is able to bring an investor perspective to the board.  Mr. Mayer, with his experience as an executive in start-up companies, brings that knowledge and insight to the board.  Mr. Cohn, with his prior history of being an executive and his experience as a director of other companies, brings a well-rounded background and wealth of experience to our board.

Committees
 
The Board of Directors does not currently have an Audit Committee, a Compensation Committee, a Nominating Committee or a Governance Committee. The usual functions of such committees are performed by the entire Board of Directors.  We are currently having difficulties attracting additional qualified directors, specifically to act as the audit committee financial expert, inasmuch as we  have only limited resources to purchase D & O insurance.  However, we believe that at least a majority of our directors are familiar with the contents of financial statements.
 
 
Attendance at Meetings
 
During 2010 the Board of Directors met formally one time and all Directors attended the meeting.

We are not currently subject to the requirements of any stock exchange with respect to having a majority of “independent directors” although we believe that we meet that standard inasmuch as Messrs. Gold, Ferrone, Mayer, Cohn, and Dr. Brown are “independent” and only Mr. Klepfish, by virtue of being our Chief Executive Officer, is not independent.
 
Code of Ethics
 
We have adopted a Code of Ethics that applies to each of our employees, including our principal executive officer and our principal financial officer, as well as members of our Board of Directors. A copy of such Code has been publicly filed with, and is available for free from, the Securities and Exchange Commission.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
During 2010, Mr. Weirnasz did not file one Form 4 to report the issuance of options to purchase 8,000,000 shares of common stock; Mr. Gold and Mr. Ferrone did not file two Form 4’s each to report the issuance of options to purchase 8,000,000 shares and 1,000,000 shares of common stock . Mr. Mayer did not file a Form 3 to report 4 becoming a director and a Form 4 to report the issuance of 250,000 shares of common stock.
  
ITEM 11. Executive Compensation
 
The following table sets forth information concerning the compensation for services in all capacities rendered to us for the year ended December 31, 2010, of our Chief Executive Officer and our other executive officers whose annual compensation exceeded $100,000 in the fiscal year ended December 31, 2010, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
 
SUMMARY COMPENSATION TABLE
 
 
Name and
Principal
Position
 
 
 
Year
 
Salary
($)
 
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
 
Non-Equity
Incentive Plan
Compensation
($)
   
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
Sam Klepfish
 
2010
 
$
151,000
   
$
42,280
 (a)
 
$
-
   
$
-
   
$
-
   
$
-
   
$
15,713
(b) 
 
$
208,993
 
CEO
 
2009
 
$
143,500
(c)
 
$
9,100
(d)
 
$
-
   
$
-
   
$
-
   
$
-
   
$
8,642
(b)
 
$
161,242
 
   
2008
 
$
184,000
(e)
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
184,000
 
                                                                     
Justin Wiernesz
 
2010
 
$
135,038
   
$
42,280
(a)
 
$
-
   
$
54,620
(f)
 
$
-
   
$
-
   
$
-
   
$
231,938
 
President
 
2009
 
$
135,000
   
$
9,660
(g)
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$ 
144,660
 
   
2008
 
$
114,000
   
$
-
   
$
24,000
(h)
 
$
10,000
(i) 
 
$
-
   
$
-
   
$
-
   
$
148,000
 
                                                                     
John McDonald
 
2010
  $ 118,124     $ -     $ -     $ 17,409 (j)   $ -     $ -     $ -     $ 135,173  
Chief Information  and
 
2009
  $  94,320     $  -     $ -     $ -     $ -     $ -     $ -     $ 94,320  
Principal Accounting Officer  
2008
  $  67,960     $  -     $ -     $ -     $ -     $ -     $ -     $  67,960  
                                                                     
                                                                     
                                                                     
 
 
(a)
Consists of a cash portion of $21,140 and 2,856,757 shares of common stock values at $0.0074 per share.
   
(b)
Consists of cash payments for health care benefits.
   
(c)
Consists of $130,000 cash salary paid and an additional $13,500 salary accrued, which is convertible into shares of common stock at the election of Mr. Klepfish at a rate of $0.005 per share.
 
 
(d)
Consist of a cash portion of $4,550 and 910,000 shares of common stock valued at a price of $0.005 per share, for a value of $4,550.
   
(e)
Consists of $130,000 cash salary paid and an additional $54,000 salary accrued, which is convertible into shares of common stock at the election of Mr. Klepfish at a rate of $0.005 per share.
 
 
(f)
Consists of 2,000,000 options to purchase shares of common stock at a price of $0.0076 per shares, 2,000,000 options to purchase shares of common stock as a price of $0.0095 per shares, 2,000,000 options to purchase shares of common stock as a price of $0.0090 per share, and 2,000,000 options to purchase shares of common stock at a price of $0.0096 per share.
 
 
(g)
Consist of a cash portion of $4,830 and 966,000 shares of common stock valued at a price of $0.005 per share, for a value of $4,830.
   
(h)
Consists of 3,000,000 shares of common stock to be issued pursuant to an employment agreement.
   
(i)
Consists of options to purchase 5,000,000 shares of the Company's common stock at a price of $0.007 per share.
   
(j)
Consists of 625,000 options to purchase shares of common stock at a price of $0.0076, 625,000 options to purchase shares of common stock at a price of $0.0095, 625,000 options to purchase shares of common stock at a price of $0.0090 per share, and 625,000 options to purchase shares of common stock at a price of $0.0096 per share.
 
Outstanding Equity Awards at Fiscal Year-End as of December 31, 2010
 
    Option Awards     Stock Awards  
Name  
Number of Securities Underlying Unexercised Options
(#)
Exercisable
    Number of Securities Underlying Unexercised Options (#) Unexercisable     Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)    
Option Exercise Price
($)
   
Option Expiration Date
   
Number of Shares or Units of Stock That Have Not Vested
(#)
   
Market Value of Shares or Units of Stock That Have Not Vested
($)
   
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
   
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
 
Justin Wiernesz
    8,000,000  (a)     -       -     $ -  (b)     -  (c)     -       -       -       -  
Justin Wiernesz     5,000,000       -       -     $ 0.007       03/31/2013       -       -       -       -  
Sam Klepfish     5,000,000       -       -     $ 0.005       11/20/2011       -       -       -       -  
Sam Klepfish     5,000,000        -        -     $  0.007       03/31/2013       -       -       -       -  
 
(a)  
Options vest at the rate of 25% each quarter beginning March 31, 2010
(b)  
(b) Exercise price is a 20% premium to the closing price of the Company’s common stock on the date of vesting, but no lower than a price of $0.005 per share.
(c)  
Option term is 5 years from the date of vesting.
 
 
Director Compensation
 
Name
 
Fees Earned
or Paid in
Cash
($)
 
Stock
Awards
($)
   
Option
Awards
($)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Nonqualified
Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
Joel Gold
 
-
   
6,000
(a) 
   
54,538
(c)
   
-
     
-
     
-
     
60,538
 
Michael Ferrone
 
-
   
6,000
(a)
   
54,538
(c)
   
-
     
-
     
-
     
60,538
 
Sam Klepfish
 
-
   
-
     
-
     
-
     
-
     
-
     
-
 
Christopher Brown
(e)
-
   
2,000
(b)
   
-
     
-
     
-
     
-
     
2,000
 
Solomon Mayer
(e)
-
   
2,000
(b)
   
-
     
-
     
-
     
-
     
2,000
 
Hank Cohn
(e)
-
   
2,000
(b)
   
-
     
-
     
-
     
-
     
2,000
 
 
(a)
Consists of 198,413 shares of common stock at a price of $0.008 per share, 158,228 shares of common stock at a price of $0.009 per share, 166,667 shares of common stock at a price of $0.009 per share, 156,250 shares of common stock at a price of $0.01 per share.
 
 
(b)
Consists of 250,000 shares of common stock at a price of $0.008 per share.
   
(c)
Consists of 2,000,000 options to purchase shares of common stock at a price of $0.0076 per share, 2,000,000 options to purchase shares of common stock at a price of $0.0095 per share, 2,000,000 options to purchase shares of common stock at a price of $0.0090, and 2,000,000 options to purchase shares of common stock at a price of $0.0096 per share.
 
 
(e)
Appointed to the Board of Directors on October 29, 2010.
 
Employment Agreements
 
Our subsidiary, Food Innovations, has employment agreements with certain officers and certain employees.  The employment agreements provide for salaries and benefits, including stock grants and extend up to five years.  In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause.

SAM KLEPFISH

In 2008, the Company and its Chief Executive Officer Sam Klepfish were  parties to an oral agreement which provided, among other things:
 
● 
Mr. Klepfish is to receive a monthly salary in the amount of $10,028
 
● 
Mr. Klepfish received an additional monthly salary of $4,500 which is not paid in cash, but is recorded on a monthly basis as a convertible note payable. These notes payable are convertible into common stock of the Company at a rate of $0.005 per share.
 
 
On December 31, 2008, the registrant entered into one year employment agreements with Sam Klepfish.  The agreement provides for, among other things, (i) average annual salary of $130,000;  (ii) bonuses (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones;  (iii) four month severance upon termination, and (iv) restrictions on confidentiality, competition and solicitation.
 
On January 6, 2010 (with an effective date of January 1, 2010), we entered into a three year employment agreement with Sam Klepfish.  The agreement provides for, among other things, (i) average annual salary of $151,000 from January 1, 2010 through December 31, 2010, of which $6,500 shall be accrued until June 20, 2010, and then payable in equal weekly installments until said $6,500 is paid in full by December 31, 2010;  (ii) $165,000 per annum from January 1, 2011 through December 31, 2011, provided, however that the increase of $14,000 shall only take affect if the Company’s gross annual sales for 2010 are at least $7.5 million; and (iii) the lesser of a 10% increase in salary above the salary in 2011 or $181,000 per annum from January 1, 2012 through December 31, 2012, provide, however the increase in 2012 shall only take effect if the Company’s gross annual sales for 2011 are at least $7.5 million.

Mr. Klepfish is also entitled to receive an annual bonus based upon the consolidated aggregate incremental revenues of the Company (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones.

JUSTIN WIERNASZ
 
In 2008, Mr. Wiernasz was under  an employment agreement dated May 18, 2007 that expired on September 13, 2008 pursuant to which he was compensated at an annual rate of $120,000. The agreement also provided for the earning of a bonus of 10% of his salary, up to 50%, for each $100,000 of incremental profits we make over the previous year.

On January 22, 2008, our Board approved the grant of an aggregate of 3 restricted million shares and 5 million in options exercisable for five years at an exercise price of $0.007 per share to Mr. Wiernasz, upon his appointment as President of Innovative Food Holdings, all of which vested on December 31, 2008.

On December 31, 2008, the registrant entered into one year employment agreements with Justin Wiernasz . The agreement provide for, among other things, (i) average annual salary of $130,000; (ii) bonuses (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones; (iii) four month severance upon termination; and (iv) restrictions on confidentiality, competition and solicitation.
 
On January 6, 2010 (with an effective date of January 1, 2010 we entered into a three year employment agreement with Mr. Wiernasz.  The agreement provides for, among other things, (i) average annual salary of $151,000 from January 1, 2010 through December 31, 2010, of which $6,500 shall be accrued until June 20, 2010, and then payable in equal weekly installments until the $6,500 is paid in full by December 31, 2010;  (ii) $165,000 per annum from January 1, 2011 through December 31, 2011, provided, however that the increase of $14,000 shall only take affect if the Company’s gross annual sales for 2010 are at least $7.5 million; and (iii) the lesser of a 10% increase in salary above the salary in 2011 or $181,000 per annum from January 1, 2012 through December 31, 2012, provided, however, the increase in 2012 shall only take effect if the Company’s gross annual sales for 2011 are at least $7.5 million.

Mr. Wiernasz is also entitled to receive an annual bonus based upon the consolidated aggregate incremental revenues of the Company (payable one-half in cash and one-half in stock) in the range of 7%-50% of salary based upon the registrant meeting certain revenue and gross margin milestones.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth certain information as of March 10, 2011 with respect to the beneficial ownership of our common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock, (2) each of our directors, (3) each Named Officer, and (4) all our directors and executive officers as a group.  Unless otherwise stated, each person listed below uses the Company’s address.  Pursuant to SEC rules, includes shares that the person has the right to receive within 60 days from March 10, 2011.
 
 
Name and Address of
   
Number of Shares
   
Percent of
 
Beneficial Owners
   
Beneficially Owned
   
Class
 
               
Sam Klepfish
  (1)     42,921,107       17.5 %
Michael Ferrone
  (2)     87,116,496       35,4 %
Joel Gold
  (3)     47,516,756       19.2 %
Christopher Brown
  (4)     24,380,000       12.0 %
Solomon Mayer
  (5)     -       0.0 %
Hank Cohn
  (6)     -       0.0 %
Justin Wiernasz
  (7)     13,000,000       6.0 %
Joseph DiMaggio Jr.
  (8)     14,800,000       7.3 %
Wally Giakas
  (9)     24,893,836       11.0 %
                   
All officers and directors as a whole (7 persons)
  (10)     214,934,358       61.9 %

(1)  
Includes 350,000 shares of common stock held by Mr. Klepfish; options to purchase 10,000,000 shares of the Company's common stock, 26,100,000 shares issuable upon the conversion of notes payable; 6,471,107 shares issuable upon the conversion of accrued interest.  Does not include 910,000 shares issuable as of December 31, 2009 as Compensation for services performed in 2009, and 2,856,757 shares issuable as compensation for services performed in 2010, but not yet issued.  Upon the issuance of these shares, Mr. Klepfish will beneficially own 18.8% of the outstanding shares.
   
       
(2)  
Includes 43,600,000 shares of common stock held by Mr. Ferrone; 15,000,000 shares issuable upon conversion of notes held by of Mr. Ferrone; 9,516,496 shares issuable upon conversion of accrued interest; and options to purchase 19,000,000 shares of the Company's common stock held by Mr. Ferrone.  Does not include 1,000,000 shares to be issued to Mr. Ferrone for services as a board member in 2009, and 679,557 shares issuable for services as a board member in 2010, but not yet issued.  Upon the issuance of these shares, Mr. Ferrone will beneficially own 35.9% of the outstanding shares.
   
       
(3)  
Includes 1,920,000 shares of common stock held by Mr. Gold; options to purchase 19,000,000 shares of common stock; 16,000,000 shares issuable upon conversion of notes payable held by Mr. Gold, and an additional 10,596,756 shares issuable upon conversion of accrued interest on notes payable. Also includes 920,000 shares of common stock held by Mr. Gold's spouse. Does not include 1,000,000 shares to be issued to Mr. Gold for services as a board member in 2009, and 679,557 shares of common stock issuable to Mr. Gold for services as a board member during 2010, but not yet issued.  Upon the issuance of these shares, Mr. Gold will beneficially own 19.7 % of the outstanding shares.
   
       
(4)
Included 24,380,000 shares of common stock held by Mr. Brown.  Does not include 250,000 shares issuable for services as a board member for 2010, but not yet issued.  Upon issuance of these shares, Mr. Brown will beneficially own 12.2% of the shares outstanding.
   
       
(5)
Does not include 250,000 shares issuable for services as a board member for 2010, but not yet issued.  Upon issuance of these shares, Mr. Mayer will beneficially own 0.1% of the shares outstanding.
   
       
(6)
Does not include 250,000 shares issuable for services as a board member for 2010, but not yet issued.  Upon issuance of these shares, Mr. Cohn will beneficially own 0.1% of the shares outstanding.
   
       
(7)  
Includes options to purchase 13,000,000 shares of common stock.  Does not include 3,000,000 shares to be issued for services performed in 2008, 966,000 shares to be issued for services performed in 2009, and 2,856,757 shares to be issued for services performed in 2010. Upon the issuance of these shares, Mr. Wiernasz will beneficially own 8.9% of the outstanding shares.
   
       
(8)  
Includes 14,800,000 shares of common stock held by Mr. DiMaggio.
   
       
(9)  
Includes 16,000,000 shares issuable upon conversion of notes payable, and 8,893,836 shares issuable upon conversion of accrued interest on notes payable.
   
       
(10)  
Includes 175,614,353 shares underlying options, convertible notes or shares issuable as accrued interest upon outstanding notes.  Does not include an aggregate of an additional 14,698,628 shares committed by the Company to be issued.  Upon issuance of such shares the group will beneficially own 64.2% of the outstanding shares.
   
 
 
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
 
None

ITEM 14.   Principal Accountant Fees and Services

Audit Fees
 
The Company engaged RBSM LLP as our new independent registered public accounting firm as of January 25, 2011.  RBSM LLP will be billing us $36,500 for the audit of our annual consolidated financial statements for the year ended December 31, 2010 included in our Forms 10-K.

The aggregate fees billed for each of the last two fiscal years for professional services rendered by Bernstein & Pinchuk LLP (“B&P”) for the audit of our annual consolidated financial statements included in our Forms 10-K: 2010: $0;  and 2009: $36,000.
 
Audit-Related Fees
 
The aggregate fees billed in each of the last two fiscal years for assurance and related services by B&P that are reasonably related to the performance of the audit or review of our consolidated financial statements including our quarterly interim reviews on Form 10-Q and are not reported under Audit Fees above: 2010: $22,500 and 2009: $22,500.
 
Tax Fees
 
The aggregate fees billed in each of the last two fiscal years for professional services rendered by B&P are: 2010: $4,500 and 2009: $3,000.
 
All Other Fees
 
The aggregate fees billed in each of the last two fiscal years for services provided by B&P, other than the services reported above: $3,400.
 
 
ITEM 15 . Exhibits
 
EXHIBIT NUMBER
 
   
3.1
Articles of Incorporation (incorporated by reference to exhibit 3.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
3.2
   
4.1
Form of Convertible Note (incorporated by reference to exhibit 4.1 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
4.2
Form of Convertible Note (incorporated by reference to exhibit 4.2 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
4.3
Form of Warrant - Class A (incorporated by reference to exhibit 4.3 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
4.4
Form of Warrant - Class B (incorporated by reference to exhibit 4.4 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
4.5
Form of Warrant - Class C (incorporated by reference to exhibit 4.5 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
4.6
Secured Convertible Promissory Note dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
     
4.7
Class B Common Stock Purchase Warrant dated December 31, 2008 in favor of Alpha Capital Anstalt (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
     
4.8
Subscription Agreement between the Registrant and Alpha Capital Anstalt  dated December 31, 2008 (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
     
4.9
Amendment, Waiver, and Consent Agreement effective January 1, 2009 between the Registrant and Alpha Capital Anstalt (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
   
10.1 Lease of the Company's offices at Naples, Florida (incorporated by reference to exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on October 23, 2008).
  
 
10.2
Security and Pledge Agreement – IVFH (incorporated by reference to exhibit 10.2 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
10.3
Security and Pledge Agreement – FII (incorporated by reference to exhibit 10.3 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
10.4
Supply Agreement with Next Day Gourmet, L.P. with Next Day Gourmet, L.P. (incorporated by reference to exhibit 10.4 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
10.5
Subscription Agreement (incorporated by reference to exhibit 10.5 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
10.8
Agreement and Plan of Reorganization between IVFH and FII. (incorporated by reference to exhibit 10.6 of the Company’s annual report on Form 10-KSB for the year ended December 31, 2004 filed with the Securities and Exchange Commission on September 28, 2005).
   
10.9
Employment Agreement with Sam Klepfish dated as of December 31, 2008 ((incorporated by reference to exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
   
10.10
Employment Agreement with Justin Wiernasz dated as of December 31, 2008 (incorporated by reference to exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2009).
   
10.11
Employment Agreement with Sam Klepfish dated as of January 6, 2010 (incorporated by reference to exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2010).
   
10.12
Employment Agreement with Justin Wiernasz dated as of January 6, 2010 (incorporated by reference to exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2010).
   
14
Code of Ethics (incorporated by reference to exhibit 14 of the Company’s Form 10-KSB/A for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 31, 2008).
   
21
   
31.1
   
31.2
   
32.1
   
32.2

 
SIGN ATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
INNOVATIVE FOOD HOLDINGS, INC.
 
By:  /s/ Sam Klepfish                              
Sam Klepfish,
Chief Executive Officer and Director
 
Dated: March 16, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Name
 
Title
 
Date
         
/s/ Sam Klepfish                 
 
CEO and Director                                     
 
March 16, 2011
Sam Klepfish
 
(Chief Executive Officer)
   
         
/s/ John McDonald          
 
Principal Accounting Officer                 
 
March 16, 2011
John McDonald
 
(Principal Financial Officer)
   
         
/s/ Joel Gold                      
 
Director                                                     
 
March 16, 2011
Joel Gold
       
         
/s/ Michael Ferrone         
 
Director                                                     
 
March 16, 2011
Michael Ferrone
       
         
   
Director                                                     
   
Christopher Brown
       
         
/s/ Solomon Mayer         
 
Director                                                     
 
March 16, 2011
Solomon Mayer
       
         
/s/ Hank Cohn         
 
Director                                                     
 
March 15, 2011
Hank Cohn
       
 

 
Exhibit 3.2
 

 
BYLAWS OF INNOVATIVE FOOD HOLDINGS, INC .

Article I
Offices

1.          Business Offices. The corporation may have one or more offices at such place or places within or without the State of Florida as the Board of Directors may from time to time determine or as the business of the corporation may require.
 
2.          Registered Office. The registered office of the corporation shall be as set forth in the Articles of Incorporation, unless changed as provided by Florida statute.
 
Article II
Shareholder's Meetings
 
1.          Annual Meetings. The annual meetings of shareholders for the election of directors and for the transaction of such other business as may come before the meeting shall be held on the First Friday of September at 2:00 p.m. If the day so fixed for such annual meeting shall be a legal holiday at the place of the meeting, then such meeting shall be held on the next succeeding business day at the same how.
 
2.          Special Meetings.   Special meetings of shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called at any time by the President upon the request (which shall state the purpose or purposes therefore) of the Board of Directors or of the holders of not less than fifty percent (50%) of the number of shares of outstanding stock of the corporation entitled to vote at the meeting. Business transacted at any special meeting of shareholders shall be limited to the purpose or purposes stated in the notice.
 
3.          Place of Meeting. Meetings of the shareholders shall be held at such place or places, within or without the State of Florida, as may be designated from time to time by the Board of Directors and stated in the notice of the meeting.
 
4.         Notice of Meetings. Except as otherwise provided by statute, notice of each meeting of shareholders, whether annual or special, shall be given not less than ten (10) nor more than fifty (50) days prior thereto to each shareholder entitled to vote thereat by delivering written or printed notice thereof to such shareholder personally or by depositing the same in the United States mail, postage prepaid, directed to the shareholder at his address as it appears on the stock transfer books of the corporation. The notice of all meetings shall state the place, day and hour thereof. The notice of a special meeting shall, in addition, state the purposes thereof.
 
5.         Voting List. At least ten (10) days before every meeting of shareholders, a complete list of shareholders entitled to vote thereat or any adjournment thereof; arranged in alphabetical order, showing the address of each shareholder and the number of shares registered in the name of each, shall be prepared by the officer or agent of the corporation who has charge of the stock transfer books of the corporation. Such list shall be open at the principal office of the corporation to the inspection of any shareholder during usual business hours for a period of at least ten (10) days prior to such meeting. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any shareholder who may be present.
 
6.         Organization. The President shall call meetings of shareholders to order and act as chairman of such meetings. In the absence of said officer, any shareholder entitled to vote thereat, or any proxy of any such shareholder, may call the meeting to order and a chairman shall be elected by a majority of the shareholders entitled to vote thereat In the absence of the Secretary and Assistant Secretary of the corporation, any person appointed by the chairman shall act as secretary of such meetings.
 
7.         Agenda and Procedure.   The Board of Directors shall have the responsibility of establishing an agenda for each meeting of shareholders, subject to the rights of shareholders to raise matters for consideration which may otherwise properly be brought before the meeting although not included within the agenda. The chairman of the meeting (i.e., the President) shall be charged with the orderly conduct of all meetings of shareholders; provided, however, that in the event of any difference in opinion with respect to the proper course of action which cannot be resolved by reference to statute, the Articles of Incorporation or these By-Laws, Robert's Rules of Order (as last revised) shall govern the disposition of the matter. The ruling of the chairman on matters of procedure, made in good faith, shall be final.
 
 
 
 
 
8.          Quorum.   The holders of a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. In the absence of a quorum at any such meeting, a majority of the shareholders present in person or represented by proxy and entitled to vote thereat may adjourn the meeting from time to time without further notice (except as provided in paragraph 9 of this Article II) until a quorum shall be present or represented.
 
9.         Adjournment.   When a meeting is for any reason adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken and such adjournment is for less than thirty days. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. At the adjourned meeting, any business may be transacted which might have been transacted at the original, special or annual meeting.
 
10.      Inspectors. The chairman of the meeting may at any time appoint two (2) or more inspectors to serve at a meeting of the shareholders. Such inspectors shall decide upon the qualifications of voters, including the validity of proxies, accept and count the votes for and against the questions presented, report the results of such votes, and subscribe and deliver to the secretary of the meeting a certificate stating the number of shares of stock issued and outstanding and entitled to vote thereon and the number of shares voted for and against the questions presented. The inspectors need not be shareholders of the corporation, and any director or officer of the corporation may be an inspector on any question other than a vote for or on any other question, in which he may be directly interested.
 
11.      Voting . (a) Each shareholder shall at every meeting of shareholders, on all actions, including election of directors, or with respect to corporate action which may be taken without a meeting, be entitled to one vote for each share of stock having voting power held of record by such shareholder on the record date designated therefore pursuant to Section 3 of Article XI of these By-Laws (or the record date established pursuant to state law in the absence of such designation).
 
(b)   Each shareholder so entitled to vote at a meeting of shareholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by voting trust or proxy executed in writing by such shareholder (or by his duly authorized attorney in fact) and delivered to the secretary of the meeting (or if there is no meeting, to the Secretary of the corporation); provided that no such voting trust or proxy shall be voted or acted upon after three (3) years from the date of its execution, unless such voting trust or proxy expressly provides for a longer period.
 
(c)   When a quorum is present at any meeting of shareholders, the vote of the holders of a majority of the shares of stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of a statute, or the Articles of Incorporation or these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision on such question.
 
 (d) Any action required to be taken at any annual or special meeting of shareholders of the corporation, or any action which may be taken at any annual or special meeting of such shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who have not consented in writing.
 
Article III
Board of Directors
 
1.           Authoritv. The business and affairs of the corporation shall be managed by a Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders.
 
2.          Election and Tenure.   No fewer than one nor more than six directors (as determined by the shareholders at their annual meeting to elect directors) shall be elected at the annual meetings of the shareholders. Each director shall be elected to serve and to hold office until the next succeeding annual meeting and until his successor shall be elected and shall qualify, or until his earlier death, resignation or removal.  The directors may increase the size of the Board of Directors and appoint a person(s) to fill such newly created vacancy(ies).
 
 
 
 
 
3.         Organizational Meeting s   The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the shareholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so feted by the shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors.
 
4.         Regular Meetings.   Regular meetings of the Board of Directors shall be held at such time or times as may be determined by the Board of Directors and specified in the notice of such meeting.
 
5.          Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board (and if there is no Chairman then in office, by the highest ranked officer who is also a director) and shall be called by the Chairman of the Board on the written request of any director.
 
6.    Place of Meeting . Any meeting of the Board of Directors may be held at such place or places either within or without the State of Florida as shall from time to time be determined by the Board of Directors and as shall be designated in the notice of the meeting.
 
7.         Notice of Meetings.   Notice of each meeting of directors, whether organizational, regular or special, shall be given to each director. If such notice is given either (a) by delivering written or printed notice to a director personally or (b) by telephone personally to such director, it shall be so given at least two (2) days prior to the meeting. If such notice is given either (a) by depositing a written or printed notice in the United States mail, postage prepaid, or (b) by transmitting a cable or telegram, in all cases directed to such director at this residence or place of business, it shall be so given at least four (4) days prior to the meeting. The notice of all meetings shall state the place, date, and hour thereof.
 
8.        Quorum.   A majority of the number of directors fixed by paragraph 2 of this Article III shall constitute a quorum at all meetings of the Board of Directors, and except as set out in paragraph 16 of this Article III, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the event of a tie vote, the Chairman of the Board casts the deciding vote. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, other than announcement at the meeting, until a quorum shall be present
 
9.       Organization, Agenda and Procedures . The Chairman of the Board, or in his absence any director chosen by a majority of the directors present, shall act as chairman of the meetings of the Board of Directors. In the absence of the Secretary and Assistant Secretary, any person appointed by the chairman shall act as secretary of such meetings. The agenda of, and procedure for, such meetings shall be determined by the Board of Directors.
 
10.        Resignation.   Any director of the corporation may resign at any time by giving written notice of his resignation to the Board of Directors. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
 
11.        Removal. Except as otherwise provided in the Articles of Incorporation or in these By-Laws, any director may be removed, either with or without cause, at any time, by the affirmative vote of the holders of the percentage of stock required for his election. The vacancy in the Board of Directors caused by any such removal may be filled by such shareholders at such meeting, or, if the shareholders at such meeting shall fail to fill such vacancy, by the Board of Directors as provided in paragraph 12 of this Article.
 
12.       Vacancies. Except as provided in paragraph 11 of this Article III, any vacancy occurring for any reason in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by the affirmative vote of a majority of the directors then in office, though less than a quorum of the board of Directors. A director elected to fill a vacancy shall be elected for the un­expired term of his predecessor in office and shall hold office until the expiration of such term and until his successor shall be elected and shall qualify or until his earlier death, resignation or removal. A director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of shareholders and until his successor shall be elected and shall qualify, or until his earlier death, resignation or removal.
 
13.           Executive and Other Committees. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by paragraph 2 of this Article III, may designate two (2) or more directors to serve as an executive committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all the authority of the Board of Directors, but no such committee shall have the authority of the Board of Directors in reference to amending the Articles of Incorporation, adopting a plan of merger or consolidation, recommending to the shareholders the sale, lease, exchange, or other disposition of all or substantially all the property and assets of the corporation otherwise than the usual regular course of its business, recommending to the shareholders a voluntary dissolution of the corporation, or a revocation thereof, or amending these By-Laws of the corporation. Unless a Board of Directors resolution or the Articles of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
 
 
 
 
 
14.       Compensation of Directors . Each director may be allowed such amount per annum or such fixed sum for attendance at each meeting of the Board of Directors or any meeting of an executive or other committee,
 
or any combination thereof, as may be from time to time fixed by resolution of the Board of Directors, together with reimbursement for the reasonable and necessary expenses incurred by such director in connection with the performance of his duties. Nothing herein contained shall be construed to preclude any director from serving the corporation or any of its subsidiaries in any other capacity and receiving proper compensation therefore.
 
15 .       Manifestation of Dissent . A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporation matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written   dissent to such action   with the person acting as the secretary of the meeting   before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who acted in favor of such action.
 
 
Article IV
Notice Waiver and Action by Consent
 
1.        Notice . Whenever, under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, notice is required to be given to any director or shareholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or shareholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.
 
2.       Waiver of Notice . Whenever any notice whatever is required to be given under the provisions of a statute or the Articles of Incorporation, or by these By-Laws, a waiver thereof either in writing signed by the person entitled to said notice (or such person's agent or attorney in fact thereunto authorized) or by telegraph, cable or any other available method, whether before, at or after the time stated therein, or the appearance of such person or persons at such meeting in person or by proxy (except for the sole purpose of challenging the propriety of the meeting), shall be deemed equivalent to such notice.
 
3.       Action Without a Meeting.   Any action required or which may be taken at a meeting of the directors, shareholders or members of any   executive committee of the corporation, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by a simple majority of the directors, shareholders, or members of the executive committee, as the case may be, entitled to vote with respect to the subject matter thereof and the writing or writings are filed with minutes of the proceedings of the board, shareholders or committee.

 
Article V
Officers
 
1.         Election, Qualifications and Tenure. The Board of Directors annually, or at such lesser frequencies up to five year intervals as may be mandated by employment contracts entered into by and between any corporate officer and the Board of Directors, shall elect a Chairman of the Board, President, one or more Vice Presidents as may be determined from time to time by the Board of Directors, a Secretary and a Treasurer. The Board of Directors may also elect or appoint such other officers and assistant officers as may be determined by it. The Board of Directors may delegate to any such officer the power to appoint or remove subordinate officers, agents or employees. Any two or more offices may be held by the same person except that the same person may not occupy the Presidency and act as Secretary of the corporation at the same time. Each officer so elected or appointed shall continue in office until his successor shall be elected or appointed and shall qualify, or until his earlier death, resignation or removal. Officers need not be directors of the corporation.
 
2.         Resignation, Removal and Vacancies. Any officer may resign at any time by giving written notice thereof to the Board of Directors or to the President. Such resignation shall take effect on the date specified therein and no acceptance of the same shall be necessary to render the same effective. Any officer may at any time be removed by the affirmative vote of a majority of the number of directors specified in section 2 of Article III of these By-Laws, or by an executive committee thereunto duly authorized, such removal to be subject to the terms of any employment contract with such officer. If any office becomes vacant for any reason, the vacancy may be filled by the Board of Directors. An officer appointed to fill a vacancy shall continue in office until the earliest of his death, resignation or removal.
 
 
 
 
 
3.          Chairman of the Board. The Chairman of the Board of Directors shall preside over and assist the Board of Directors in the formulation of policies to be pursued by the executive management of the corporation. He shall study and make reports and recommendations with respect to major problems, policies, and activities of the corporation, and it shall be his responsibility to see that the policy established by the Board of Directors is carried into effect by the executive officers.
 
4.          President. The President shall be the chief executive and administrative officer of the corporation. He shall preside at all meetings of the shareholders. He shall see that all orders and resolutions of the Board of Directors are carried into effect and in general shall perform all duties as may from time to time be assigned to him by the Board of Directors and shall have general charge of the business of the corporation. He shall from time to time obtain information concerning the affairs and business of the corporation and shall promptly lay such information before the Board of Directors, or he shall communicate to the Board of Directors all matters presented by an officer of the corporation for its consideration and shall from time to time communicate to the officers such action of the Board of Directors as may in his judgment affect the performance of their official duties. He may sign, alone if authorized or with the Secretary or any other proper officer of the corporation authorized by the Board of Directors, and deliver on behalf of the corporation any deeds, mortgages, notes, bonds, contracts, powers of attorney, or other   instruments, including certificates for shares of capital stock of the corporation, which the Board of Directors has authorized to be executed. He may employ all agents and employees of the corporation and may discharge any such agent or employee and shall perform all other duties as may from time to time be delegated to him by the Chairman of the Board of Directors.
 
5.         Vice Presidents. The Vice Presidents shall perform such duties and possess such powers as from time to time may be assigned to them by the President. In the absence of the President or in the event of his inability or refusal to act, the Executive Vice President shall perform the duties of the President and, when so performing, shall have all the powers of and be subject to all the restrictions upon the President
 
6.    Secretary . The Secretary shall perform such duties and shall have such powers as may from time to time be assigned to him by the President. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of Secretary, including without limitation the duty and power to give notice of all meetings of shareholders and the Board of Directors, to attend all such meeting and keep a record of the proceedings, and to attest to the same on documents, the execution of which on behalf of the corporation is authorized by these By-Laws or by the action of the Board of Directors.
 
7.       Treasurer.   The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him by the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of Treasurer, including without limitation the duty and power to have custody of all funds and securities of the corporation, to keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-Laws, disburse such funds as ordered by the Board of Directors, making proper accounts thereof, and shall render as required by the Board of Directors statements of all such transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.
 
8.       Salaries .   Officers of the corporation shall be entitled to such salaries, perquisites, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.
 
9.       Transfer of Authority.   Notwithstanding the provisions of these By-Laws relating to the authority of specific officers, or of the provisions of any resolution of the Board of Directors granting such specific authority. In case of the absence or disability of any officer or any other reason, the Board of Directors may transfer the authority or duties of any officer to any other officer, or to any director or other agent or employee of the corporation, by vote of a majority of the full number of directors authorized to hold office.
 
Article VI
Indemnification
 
1.         Third Party Action.   The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not op posed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendre or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.
 
 
 
 
 
2.         Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability and in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.
 
3.        Extent of Indemnification. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in sections 1 and 2 of this Article VI, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith.
 
4.          Determination. Any indemnification under sections 1 and 2 of this Article VI (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the officer, director and employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in sections 1 and 2 of this Article VI, even if he has not been successful on the merits or in defense of such action. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the affirmative vote of the holders of a majority of the shares of the stock entitled to vote and represented at a meeting called for such purpose.
 
5.         Payment in Advance.   Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors as provided in section 4 of this Article VI upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article VI.
 
6.          Insurance.   The Board of Directors may exercise the corporation's power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability hereunder or otherwise.
 
7.          Other Coverage.   The indemnification provided in this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation, these By-Laws, agreement, vote of shareholders or disinterested directors, Florida statute, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.
 
8.          Severability.   The rights of indemnification herein provided for shall be severable, shall continue as to a person who has ceased to be an indemnified person and shall inure to the benefit of the heirs, executors, administrator and other legal representatives of such a person.
 
9. Contract. The provisions of this by-law shall be deemed to be a contract between the corporation and each director or officer who serves in such capacity of any time while such by-law is in effect.
 
Article VII
Execution of Instruments; Loans; Checks and
Endorsements; Deposits; Proxies

1.        Execution of Instruments.   The President or the Executive Vice President shall have power to execute and deliver on behalf and in the name of the corporation any instrument requiring the signature of an officer of the corporation, except as otherwise provided in these By-Laws or where the execution and delivery thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Unless authorized to do so by these By-Laws or by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation in any way, to pledge its credit or to render it liable peculiarly for any purpose or in any amount
 
 
 
 
 
2.        Plans. No loan shall be contracted on behalf of the corporation, and no evidence of indebtedness shall be issued, endorsed or accepted in its name, unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. When so authorized, the officer or officers thereunto authorized may effect loans at any time for the corporation from any bank or other entity and for such loans may execute and deliver promissory notes or other evidences of indebtedness of the corporation, and when authorized as aforesaid, as security for the payment of any and all loans (and any obligations incident thereto) of the corporation, may mortgage, pledge, or otherwise encumber any real or personal property, or any interest therein, at any time owned or held by the corporation, and to that end may execute and deliver such instruments as may be necessary or proper in the premises.
 
3.         Cheeks and Endorsements. All checks, drafts or other orders for the payment of money, obligations, notes or other evidences of indebtedness, bills of lading, warehouse receipts, trade acceptances, and other such instruments shall be signed or endorsed by such officers or agents of the corporation as shall from time to time be determined by resolution of the Board of Directors, which resolutions may provide for the use of facsimile signatures.
 
4.         Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the corporation's credit in such banks or other depositories as shall from time to time be determined by resolution of the Board of Directors, which resolution may specify the officers or agents of the corporation who shall have the power, and the manner in which such power shall be exercised, to make such deposits and to endorse, assign and deliver for collection and deposit checks, drafts and other orders for the payment of money payable to the corporation or its order.
 
5.        Proxies.   Unless otherwise provided by resolution adopted by the Board of Directors, the President or any Vice President may from time to time appoint one or more agents or attorneys in fact of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as the holder of stock or other securities in any other corporation, association or other entity, any of whose stock or other securities may be held by the corporation, at meetings of the holders of the stock or other securities of such other corporation, association or other entity; or to consent in writing, in the name of the corporation as such holder, to any action by such other corporation, association or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper.
 
Article VIII
Shares of Stock
 
1.        Certificates of Stock. (a) Every holder of stock of the corporation shall be entitled to have a certificate certifying the certificate number, the date of issuance, the name of the record holder of the shares represented thereby, the number of shares and a designation of the class of stock represented thereby, and any restriction or transfer on voting powers to which such shares are subject, which certificate shall otherwise be in such form as is required by law and the Board of Directors shall prescribe.
 
(b)   Each certificate shall be conspicuously marked on both sides thereof with a legend as appropriate under law indicating any and all restrictions and/or restraints or alienation including but not limited to restraints regarding pertinent securities laws, preemptive or other rights vesting in the corporation or shareholders of record and S corporation elections by the shareholders.
 
(c)   Each such certificate shall be signed by the President and the Secretary or an assistant Secretary of the corporation; provided, however, that where such certificate is countersigned by a transfer agent or registered by a registrar (other than the corporation's or any employee of the corporation) the signatures of such officers of the corporation may be in facsimile form. In case any officer who has signed or whose facsimile   signature has been placed upon such certificate shall have ceased to be such officer before such certificate shall have been issued by the corporation, such certificate may nevertheless be issued by the corporation with the same effect as if the person who signed such certificate, or whose facsimile signature shall have been placed thereon, had not ceased to be such officer of the corporation.
 
2.        Record. A record shall be kept of the name of each person or other entity holding the stock represented by each certificate for shares of the corporation issued, the number of shares represented by each such certificate, and the date thereof, and, in the case of cancellation, the date of cancellation. The person or other entity in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof, and thus a holder of record of such shares of stock, for all purposes as regards the corporation.
 
 
 
 
 
3.         Transfer of Stock. (a) Transfer of shares of the stock of the corporation shall be made on the books of the corporation upon notice only by the registered holder thereof, or by his attorney thereunto authorized, and on the surrender of the certificate or certificates for such shares properly endorsed. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Secretary shall notify all parties concerned if a proposed transfer would violate this By-Law and the transfer shall be null and void ab initio .
 
4.         Registered Shareholders . The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and, in the case of persons acting as trustees, to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares; and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Florida.
 
5.          Transfer Agents and Registrars; Regulations . The Board of Directors may appoint one or more transfer agents or registrars with respect to shares of stock of the corporation. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with these By-Laws, concerning the issue, transfer and registration of certificates for shares of the stock of the corporation.
 
6.        Lost, Destroyed or Mutilated Certificate. In case of the alleged loss, destruction or mutilation of a certificate representing stock of the corporation, a new certificate may be issued in place thereof, in such manner and upon such terms and conditions as the Board of Directors may prescribe, and shall be issued in such situations a required by law.
 
Article IX
Corporate Seal
 
The corporate seal shall be in such form as shall be approved by resolution of the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. The impression of the seal may be made and attested by either the Secretary or an Assistant Secretary for the authentication of contracts or other papers requiring the seal.
 
Article X
Fiscal Year
 
The fiscal year of the corporation shall be such year as shall be established by the Board of Directors.
 
Article XI
Corporate Books and Records
 
1.        Corporate Books.   The books and records of the corporation may be kept within or without the State of Florida at such place or places as may be from time to time designated by the Board of Directors.
 
2.         Addresses of Shareholders.   Each shareholder shall furnish to the Secretary of the corporation or the corporation's transfer agent an address to which notices from the corporation, including notices of meetings, may be directed and if any shareholder shall fail so to designate such an address, it shall be sufficient for any such notice to be directed to such shareholder at his address last known to the Secretary or transfer agent.
 
3.         Closing of Transfer Books_and Fixing Record Date. The Board of Directors may close the stock transfer books for a period not exceeding fifty (50) days and not less than ten (10) days immediately preceding any meeting of shareholders or payment of any dividend or other distribution, for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution. In lieu of closing the stock transfer books for such purposes, the Board of Directors may fix in advance a date as a record date for the determination of shareholders for any such purpose. Such record date shall not be more than fifty (50) nor less than ten (10) days before the date of any such meeting, nor more than fifty (50) days prior to any other action to which the same relates. Only such shareholders as shall be shareholders of record on the date so fixed, or fixed pursuant to these By-Laws, shall be so entitled with respect to the matter to which the same relates.
 
 
 
 
 
4.        Failure to Fix Record Date.   If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of, or to vote at, a meeting of shareholders, or of shareholders entitled to receive payment of a dividend, the date that notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired.
 
5.        Audit of Books and Accounts.   The corporation's books and accounts shall be audited at such times and by such auditors as shall be specified and designated by resolution of the Board of Directors .
 
6.         Annual Statement.   The Board of Directors shall represent at each annual meeting, and at any special meeting of the shareholders when called for by vote of the shareholders, a full and clear statement of the business and condition of the corporation.
 
Article XII
Amendments
 
All By-Laws of the corporation shall be subject to alteration, amendment or repeal, and new By-Laws may be added, by the affirmative vote of a majority of a quorum of the members of the Board of Directors present in person at any regular or special meeting.
 

Article XIII
Dividends
 
1.          Declaration. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles of Incorporation.
 
2.          Reserves., Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserves in the manner in which it was created.
 
Article IV
Adoption
 
The foregoing By-laws were duly adopted by the Directors of this Corporation on January 26, 2004 by the unanimous vote of the Directors.
 
/S/ RICHARD MULLER  
Richard Muller, Secretary
Exhibit 21
 

INNOVATIVE FOOD HOLDINGS, INC.
 
SCHEDULE OF SUBSIDIARIES

1.  Food Innovations, Inc.
2.  Food New Media Group, Inc.
3.  4 The Gourmet, Inc.
EXHIBIT 31.1                                           
Certifications

I, Sam Klepfish, certify that:
 
1. I have reviewed this annual report on Form 10-K of Innovative Food Holdings, Inc. ;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the vase of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: March 16, 2011
 
/s/ Sam Klepfish                           
Sam Klepfish, Chief Executive Officer
EXHIBIT 31.2
 
 
Certifications

I, John McDonald, certify that:
 
1. I have reviewed this annual report on Form 10-K of Innovative Food Holdings, Inc. ;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the vase of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Date: March 16, 2011
 
/s/ John McDonald                                               
John McDonald, Principle Accounting Officer
EXHIBIT 32.1
 
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
 
 
In connection with the Annual Report of Innovative Food Holdings, Inc. (the "Company") on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sam Klepfish, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/ Sam Klepfish                                      
Sam Klepfish
Chief Executive Officer and Director
 
March 16, 2011
 
 
 
 
EXHIBIT 32.2
 
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES OXLEY ACT OF 2002
CERTIFICATION
 
In connection with the Annual Report of Innovative Food Holdings, Inc. (the "Company") on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John McDonald, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/ John McDonald              
John McDonald
Principal Accounting Officer
 
March 16, 2011